Seventh Circuit Closes Chapter On Creditor Price Fixing Claims Against Bankruptcy Software Provider
On September 5, 2019, the U.S. Court of Appeals for the Seventh Circuit affirmed a decision by the Northern District of Illinois dismissing Illinois state antitrust claims brought by a bankruptcy creditor against the bankruptcy trustee’s software services provider. McGarry & McGarry, LLC v. Bankr. Mgt. Sols., Inc., 18-2619, 2019 WL 4197546 (7th Cir. Sept. 5, 2019). Plaintiff alleged that defendant entered into a price-fixing conspiracy with other bankruptcy software providers. Judge Diane S. Sykes, writing for a unanimous panel, ruled that plaintiff lacked antitrust standing because it did not meaningfully participate in the relevant market for bankruptcy software services and, accordingly, its alleged injury was too remote from the claimed price-fixing violation.
Plaintiff-appellant is an Illinois law firm that was an unsecured creditor of a company in Chapter 7 bankruptcy. Defendant-appellee is the largest provider of bankruptcy software services in the United States. When a company files Chapter 7 bankruptcy, a bankruptcy estate is created and a trustee is assigned to administer the estate, manage its assets, and prepare reports for the bankruptcy court and the U.S. Trustee (a DOJ officer overseeing the bankruptcy process). Typically, the trustee uses a specialized software to document assets and claims in a liquidation and to prepare the required reports. Defendant and two other companies are the primary suppliers of specialized bankruptcy software in the country.
Plaintiff alleged that defendant conspired with its two major competitors to fix their fee structure. Prior to 2011, defendant provided its software services in partnership with banks where bankruptcy trustees deposited estate assets; these partner banks paid fees to defendant from profits they made on interest earned by loaning estate funds to borrowers. However, this model became unworkable after significant declines in interest rates following the 2008 financial crisis. Defendant proposed a new arrangement whereby the partner bank charges the estate a set percentage of the funds in its account for combined banking and software services, and the bankruptcy software-service provider receives a portion of the fee paid by the estate. According to plaintiff, defendant coordinated with its competitors to adopt a similar billing structure. Defendant also allegedly coordinated with its competitors to successfully lobby the Executive Office of the U.S. Trustee to suspend a rule prohibiting trustees from using estate funds to pay bank fees.
Plaintiff claimed it was injured because defendant charged inflated fees under this the new structure and the inflated fees reduced the bankruptcy estate funds paid out to unsecured creditors. Plaintiff filed claims under the Illinois state antitrust statute as an indirect purchaser. However, the Seventh Circuit found that as an unsecured creditor of a bankruptcy debtor, plaintiff was neither a direct nor indirect purchaser of defendant’s services.
Plaintiff asserted that it was a proper antitrust plaintiff even if it did not purchase defendant’s services. Plaintiff claimed it satisfied the Supreme Court’s multi-factor test articulated in Associated General Contractors v. Carpenters. Under this test, a non-purchaser may bring antitrust claims if it shows a “necessary ‘direct link’ between the alleged antitrust violation and the claimed antitrust injury” it suffered. Plaintiff argued that, “absent the conspiracy, [defendant] would not have been able to charge a percentage of the estate’s funds as a fee for its bankruptcy software services,” and defendant would have received a larger payout.
Citing Supreme Court and Seventh Circuit precedent, the Court emphasized that it is “not enough to allege that the injury is merely causally linked to the alleged anticompetitive behavior.” Rather, antitrust standing is satisfied only by those “who can most efficiently vindicate the purposes of the antitrust laws.” Judge Sykes concluded that plaintiff failed to allege the type of injury that the antitrust laws were meant to prevent, as plaintiff’s injury was too remote from the claimed anticompetitive conduct. Per the Supreme Court’s decision in Blue Shield of Virginia v. McCready, non-purchaser plaintiffs in price-fixing cases may be afforded antitrust standing only in exceptional circumstances where such plaintiffs’ injuries are “inextricably intertwined with the injury the conspirators sought to inflict” in the target market. As an unsecured creditor of a bankruptcy debtor, plaintiff was not directly harmed by and never participated in the market targeted by defendant’s alleged conspiracy at all. The Court found that plaintiff’s alleged injury was entirely derivative of the bankruptcy estate’s injury, and any potential antitrust claim would be more appropriately pursued by the estate’s trustee. Consequently, the Seventh Circuit affirmed the district court’s decision and dismissed plaintiff’s claims for lack of antitrust standing.