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United States Court of Appeals for the Third Circuit
February 19, 2003, Argued ; May 29, 2003, Filed
[*552] OPINION OF THE COURT
BECKER, Circuit Judge.
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
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).
Full case includes Shepard's, Headnotes, Legal Analytics from Lex Machina, and more.
330 F.3d 548 *; 2003 U.S. App. LEXIS 10703 **; Bankr. L. Rep. (CCH) P78,861; 41 Bankr. Ct. Dec. 98
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF CYBERGENICS CORPORATION, ON BEHALF OF CYBERGENICS CORPORATION, DEBTOR IN POSSESSION, Appellant v. 1 KATHLEEN CHINERY, Executrix of the Estate of Scott Chinery; L&S RESEARCH CORPORATION; LINCOLNSHIRE MANAGEMENT INC.; LINCOLNSHIRE EQUITY FUND, L.P.
Subsequent History: Court Ordered Rehearing En Banc on February 19, 2003.
US Supreme Court certiorari dismissed by Lincolnshire Mgmt., Inc. v. Official Comm. of Unsecured Creditors of Cybergenics Corp., 540 U.S. 1001, 157 L. Ed. 2d 406, 124 S. Ct. 530, 2003 U.S. LEXIS 8198 (U.S., Nov. 6, 2003)
US Supreme Court certiorari dismissed by Chinery v. Official Comm. of Unsecured Creditors of Cybergenics Corp., 540 U.S. 1002, 157 L. Ed. 2d 407, 124 S. Ct. 530, 2003 U.S. LEXIS 8347 (U.S., Nov. 7, 2003)
Prior History: [**1] On Appeal From the United States District Court For the District of New Jersey. (D.C. Civil Action No. 98-3109 (GEB)). District Judge: Honorable Garrett E. Brown, Jr.
Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 2001 U.S. Dist. LEXIS 24744 (D.N.J., Aug. 31, 2001)
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