Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery

Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery

Opinion

 [*552] OPINION OF THE COURT

BECKER, Circuit Judge.

CONTENTS

I. Introduction

II. Facts and Procedural History

III. How Does Hartford Underwriters Affect this Case?

A. What happened in Hartford Underwriters?

B. Did Hartford Underwriters take place in an analogous context?

IV. Do Derivative Suits under § 544(b) Survive Hartford Underwriters

A. The Code Itself

1. The Need to Interpret Chapter 11 as a Whole

2. Section 1109(b) 

3. Section 1103(c)(5) 

4. Section 503(b)(3)(B) 

5. A Textual Conclusion

B. Bankruptcy Courts as Courts of Equity

V. Pre-Code Practice

VI. Does Derivative Standing for Creditors' Committees Advance Congress's Goals?

A. The Salutary Effects of Derivative Standing for Creditors' Committees

B. Potential Drawbacks of Derivative [**4]  Standing for Creditors' Committees

1. Might derivative suits dissipate the value of the estate

2. Might bankruptcy courts be unable to identify meritorious claims

3. Might derivative suits consume judicial resources

C. Possible Substitutes for Derivative Standing for Creditors' Committees

1. Appointment of a bankruptcy trustee

2. Appointment of an examiner with authority to sue

3. Moving the court to order the debtor-in-possession to sue

4. Converting the bankruptcy case to Chapter 7

5. Moving the bankruptcy court to authorize a committee to bring a post-confirmation avoidance action

6. Summary

VII. Conclusion

I. Introduction

This is an appeal from an Order of the District Court, which set aside an Order of the Bankruptcy Court authorizing a creditors' committee ("the Committee") to sue on the estate's behalf to avoid a fraudulent transfer in a Chapter 11 proceeding. Before seeking derivative standing, the Committee had unsuccessfully petitioned the debtor-in-possession to pursue the avoidance claim. In granting derivative standing, the Bankruptcy Court determined that such a suit would be in the estate's [**5]  best interest. The question on appeal is whether the decision of the United States Supreme Court in  Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1, 147 L. Ed. 2d 1, 120 S. Ct. 1942 (2000), a Chapter 7 case which interpreted the text of 11 U.S.C. § 506(c) to foreclose anyone other than a trustee from seeking to recover administrative costs on its own behalf, operates to prevent the Bankruptcy Court from authorizing the suit described above.

We conclude that it does not. While the question in Hartford Underwriters was [*553]  one of a nontrustee's right unilaterally to circumvent the Code's remedial scheme, the issue before us today concerns a bankruptcy court's equitable power to craft a remedy when the Code's envisioned scheme breaks down. We believe that Sections 1109(b), 1103(c)(5), and 503(b)(3)(B) of the Bankruptcy Code evince Congress's approval of derivative avoidance actions by creditors' committees, and that bankruptcy courts' equitable powers enable them to authorize such suits as a remedy in cases where a debtor-in-possession unreasonably refuses to pursue an avoidance claim. Our conclusion is consistent [**6]  with the received wisdom that "[n]early all courts considering the issue have permitted creditors' committees to bring actions in the name of the debtor in possession if the committee is able to establish" that a debtor is neglecting its fiduciary duty. 7 Collier on Bankruptcy P 1103.05[a] (15th rev. ed. 2002).

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