Cybergenics Corp v. Chinery ( 2002 )

Opinions of the United
2002 Decisions States Court of Appeals
for the Third Circuit
9-20-2002
Cybergenics Corp v. Chinery
Precedential or Non-Precedential: Precedential
Docket No. 01-3805
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PRECEDENTIAL
Filed September 20, 2002
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-3805
THE OFFICIAL COMMITTEE OF UNSECURED
CREDITORS OF CYBERGENICS CORPORATION, ON
BEHALF OF CYBERGENICS CORPORATION, DEBTOR
IN POSSESSION,
Appellant
v.
*KATHLEEN CHINERY, Executrix of the Estate of Scott
Chinery; L&S RESEARCH CORPORATION; LINCOLNSHIRE
MANAGEMENT, INC.; LINCOLNSHIRE EQUITY FUND, L.P.
(*Amended per order dated 11/19/01)
(Amended per order dated 3/21/02)
On Appeal from the United States District Court
for the District of New Jersey
District Court Judge: The Honorable Garrett E. Brown, Jr.
(D.C. Civil No. 98-CV-03109)
Argued on July 15, 2002
Before: SCIRICA, ALITO, and FUENTES, Circuit Judges
(Opinion Filed: September 20, 2002)
Gary D. Sesser [ARGUED]
James Gadsen
Carter, Ledyard & Milburn
2 Wall Street
New York, New York 10005
Counsel for Appellant
Official Committee of Unsecured
Creditors of Cybergenics
Corporation
Brian J. Molloy [ARGUED]
Lauren D. Daloisio
Wilentz, Goldman & Spitzer
90 Woodbridge Center Drive
P.O. Box 10
Woodbridge, New Jersey 07095
Counsel for Appellees
Kathleen Chinery and
L&S Research Corporation
Bruce E. Fader [ARGUED]
Scott A. Eggers
Daniel F. Schiff
James H. Freeman
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Counsel for Appellees
Lincolnshire Management, Inc., and
Lincolnshire Equity Fund, L.P.
OPINION OF THE COURT
FUENTES, Circuit Judge:
In this appeal, we are asked to determine whether a
creditor’s committee may assert fraudulent transfer claims
under S 544 of the Bankruptcy Code ("Code"), or whether
only the trustee or debtor-in-possession may bring such
actions. In Hartford Underwriters Ins. Co. v. Union Planters
Bank, N.A., the Supreme Court considered whether an
2
administrative claimant of a Chapter 7 bankruptcy estate
has an independent right to bring suit under 11 U.S.C.
S 506(c) to recover payment of its claim. 530 U.S. 1, 3
(2000). Noting that S 506(c) states only that"[t]he trustee
may recover . . . ," the Court in Hartford Underwriters
considered "whether it is a proper inference that the trustee
is the only party empowered to invoke the provision." 530
U.S. at 6. The Court had "little difficulty" concluding, in a
unanimous opinion, that the phrase "the trustee may"
means that only the trustee may utilize the recovery power
granted in S 506(c). Id.1 The Court declined to decide
whether its analysis extended to Bankruptcy Code
fraudulent transfer provisions which contain the phrase
"the trustee may." Id. at 13 n.5. Specifically, the Court did
not address the validity of the practice under which some
courts grant "creditors or creditors’ committees a derivative
right to bring avoidance actions when the trustee refuses to
do so." Id.
Appellant in this case, the Official Committee of
Unsecured Creditors of Cybergenics Corporation
("Committee"), sued to reverse certain transactions as
fraudulent transfers in a Chapter 11 case under 11 U.S.C.
S 544(b), a provision of the Bankruptcy Code which
includes the identical "[t]he trustee may" phrase as that in
S 506(c). The Committee asked Cybergenics Corporation
("Cybergenics"), the debtor-in-possession, to prosecute the
fraudulent transfer claims, but Cybergenics refused to do
so. The Committee then successfully secured the
authorization of the bankruptcy court to bring the claims
derivatively, on behalf of the debtor-in-possession. On
defendants’ motions to dismiss, the District Court held that
the Supreme Court’s statutory interpretation ofS 506(c) in
Hartford Underwriters applied with equal force to S 544(b)
and dictated that only a trustee or debtor-in-possession
could bring claims under S 544(b). The court dismissed the
Committee’s complaint without appointing a trustee.
_________________________________________________________________
1. Under 11 U.S.C. S 1107(a), a debtor-in-possession has all the rights
and powers of a bankruptcy trustee. Where a trustee has not been
appointed, the debtor-in-possession assumes the role of a trustee, and
therefore a debtor-in-possession may bring suit under S 506(c). Hartford
Underwriters, 530 U.S. at 6 n.3.
3
Based on the plain statutory language and the Supreme
Court’s analysis in Hartford Underwriters, we hold that only
a trustee or debtor-in-possession has the power to invoke
S 544(b) to avoid fraudulent transfers, and that a court may
not authorize a creditor or creditors’ committee to bring
suit under S 544 derivatively. Therefore, we will affirm the
judgment of the District Court.
I
Scott Chinery founded L&S Research Corporation ("L&S")
in 1985.2 L&S, with Chinery as its sole shareholder,
marketed nutritional food supplements under the brand
name "Cybergenics" for body-building and weight-loss
programs. Lincolnshire Management, Inc. ("Lincolnshire"),
initiated negotiations in 1994 to buy L&S. In July 1994,
Lincolnshire reached an agreement with L&S and Chinery
for the leveraged buyout of L&S. Lincolnshire established
Cybergenics Acquisition, Inc., which later became
Cybergenics Corporation, to acquire substantially all of
L&S’s assets. Lincolnshire’s equity investment affiliate
provided the largest equity investment and was the majority
shareholder in Cybergenics. Several banks and other
entities ("Lenders") helped finance the asset purchase and
agreed to provide working capital for Cybergenics after the
acquisition through their equity affiliates. The agreement
was memorialized in a writing dated October 13, 1994.3
Cybergenics’s financial outlook soon faltered. Despite
increased equity investments by Lincolnshire and the
_________________________________________________________________
2. Scott Chinery died on October 24, 2000. Kathleen Chinery, his wife
and the executrix of his estate, has been substituted as a defendant in
this case.
3. The original purchase price was approximately $110.5 million. The
transaction made Cybergenics liable for more than $10.1 million in
various closing costs and fees. In March 1995, a dispute over the
amount of post-closing adjustments to the purchase price led
Cybergenics and Lincolnshire to file a lawsuit against L&S, Chinery, and
others, alleging fraud, breach of fiduciary duty, and breach of contract.
L&S and Chinery filed counterclaims, and the parties quickly settled.
Under the settlement, the purchase price for the leveraged buyout was
reduced to approximately $60 million.
4
Lenders, in August 1996 Cybergenics filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy
Code. Cybergenics remained in business as a debtor-in-
possession. No bankruptcy trustee was appointed. The
United States Trustee appointed the Committee, consisting
of representatives of seven of the unsecured creditors.
Rather than reorganize, Cybergenics chose to sell its
assets through a court-supervised auction. At the auction,
a third party successfully bid $2.65 million for all of
Cybergenics’s assets, and the bankruptcy court approved
the sale in October 1996. Cybergenics moved to dismiss the
bankruptcy case in March 1997, but the Committee
objected, contending that certain transactions relating to
the leveraged buyout could give rise to fraudulent transfer
actions.
In June 1997, Cybergenics informed the bankruptcy
court that it declined to pursue any fraudulent transfer
claims. In September 1997, based on its own investigation
and on Cybergenics’s refusal to pursue the claims, the
Committee sought leave from the bankruptcy court to bring
a fraudulent transfer action itself on behalf of the debtor-
in-possession, under a theory commonly referred to as
"derivative standing". After a hearing, the bankruptcy court
authorized the Committee to bring the claims.
The Committee filed its complaint in March 1998, seeking
to avoid allegedly fraudulent transfers made by and
liabilities incurred by Cybergenics in connection with the
leveraged buyout and post-buyout transactions and to have
the value of the avoided transactions returned to the
bankruptcy estate. The three-count complaint includes one
count under 11 U.S.C. S 544(b) against each of three
groups of defendants: the Lenders; Lincolnshire; and L&S
and Chinery.4
The defendants filed motions to dismiss under Federal
_________________________________________________________________
4. In addition, the complaint appears to present a claim of equitable
subordination against Chinery and L&S, and a claim for recoupment of
professional fees directly from Lincolnshire. Both of these claims
depended on the successful avoidance of the allegedly fraudulent
transfers under S 544(b).
5
Rule of Civil Procedure 12(b)(1).5 Among other things, the
defendants contended that the fraudulent transfer claims
asserted by the Committee had been sold in the 1996
bankruptcy asset sale. The District Court granted the
defendants’ motions and dismissed the Committee’s
complaint for lack of subject matter jurisdiction. The court
held that the fraudulent transfer claims were assets of the
debtor, and that because the 1996 bankruptcy asset sale
sold off all of Cybergenics’s assets, the claims were no
longer property of the bankruptcy estate and the Committee
could not raise them on the estate’s behalf.
We reversed, holding that state law provides that
fraudulent transfer claims belong to the creditors, and that
the claims are not assets of the debtor. In re Cybergenics
Corp., 226 F.3d 237, 245 (3d Cir. 2000). Therefore, the
claims could not have been sold as part of Cybergenics’s
assets in the 1996 bankruptcy asset sale. Id. at 241-46.
Although the fraudulent transfer claims "belong" to the
creditors, S 544 of the Code expressly authorizes the
bankruptcy trustee to bring such claims as a representative
of the creditors. 11 U.S.C. S 544(b); Cybergenics, 226 F.3d
at 243-44.
After remand, the defendants again filed motions to
dismiss. They raised several grounds for dismissal which
they had asserted in their previous motion to dismiss and
which this Court declined to reach in Cybergenics.
Cybergenics, 226 F.3d at 241 n.5. They also argued, for the
first time, that under a plain reading of S 544(b) and the
reasoning of Hartford Underwriters, the Committee lacked
standing to bring the fraudulent transfer action because
only a trustee or debtor-in-possession has such standing.
On October 31, 2001, the District Court granted the
renewed motions to dismiss, and held that the Committee
could not bring suit under S 544. It found that the Code
does not authorize a creditors’ committee to bring a
fraudulent transfer avoidance action derivatively, and that
the Supreme Court’s interpretation of the "trustee may"
phrase in Hartford Underwriters applied to the use of the
_________________________________________________________________
5. In a consent order, the District Court withdrew the reference of this
adversary proceeding from the bankruptcy court.
6
same language in S 544. The court also provided several
alternative grounds for dismissal. The Committee timely
appealed.6
II
This Court has jurisdiction under 28 U.S.C. S 1291 over
the District Court’s final order granting the defendants’
motions to dismiss. We have plenary review over the
District Court’s interpretation of the Bankruptcy Code and
dismissal of the complaint. Official Comm. of Unsecured
Creditors v. R.F. Lafferty & Co., 267 F.3d 340, 346 (3d Cir.
2001); Anthony v. Interform Corp., 96 F.3d 692, 693 (3d Cir.
1996).
III
The Committee brings its fraudulent transfer claims
under 11 U.S.C. S 544(b), which states:
(b)(1) Except as provided in paragraph (2), the trustee
may avoid any transfer of an interest of the debtor in
property or any obligation incurred by the debtor that
is voidable under applicable law by a creditor holding
an unsecured claim that is allowable under section 502
of this title or that is not allowable only under section
502(e) of this title.
11 U.S.C. S 544(b)(1) (emphasis added). Under 11 U.S.C.
S 1107(a), when no trustee is appointed, a debtor-in-
possession such as Cybergenics here possesses all of the
powers and duties of a trustee.7
_________________________________________________________________
6. The Lenders are not participating in this appeal because they have
reached a settlement with the Committee. Shortly before we heard oral
argument in this case, the Committee reached a settlement with
Lincolnshire, but the settlement terms are contingent upon our decision,
so Lincolnshire remains a party to this appeal, along with Chinery and
L&S.
7. In our prior Cybergenics opinion, we noted:
The terms "trustee" and "debtor in possession," as used in the
Bankruptcy Code, are thus essentially interchangeable. Hence, by
virtue of being a debtor in possession, Cybergenics operated not
only as a business entity, but essentially as a trustee as well.
Cybergenics, 226 F.3d at 243 (3d Cir. 2000) (citations omitted).
7
In Hartford Underwriters, the Supreme Court considered
"whether 11 U.S.C. S 506(c) allows an administrative
claimant of a bankruptcy estate to seek payment of its
claim from property encumbered by a secured creditor’s
lien." 530 U.S. at 3. Section 506(c) states:
The trustee may recover from property securing an
allowed secured claim the reasonable, necessary costs
and expenses of preserving, or disposing of, such
property to the extent of any benefit to the holder of
such claim.
11 U.S.C. S 506(c) (emphasis added). In a unanimous
opinion authored by Justice Scalia, the Court concluded
that by using the phrase "the trustee may," Congress
granted the trustee or debtor-in-possession exclusive
authority to bring an action under the statute. Hartford
Underwriters, 530 U.S. at 6.
In an important footnote, the Hartford Underwriters Court
expressly limited its holding by declining to address
"whether a bankruptcy court can allow other interested
parties to act in the trustee’s stead in pursuing recovery
under S 506(c)" or other Code provisions. Id. at 13 n.5
("Footnote 5"). The court acknowledged the procedure
utilized by the Committee here under which "some courts
. . . allow[ ] creditors or creditors’ committees a derivative
right to bring avoidance actions when the trustee refuses to
do so, even though the applicable Code provisions, see 11
U.S.C. SS 544, 545, 547(b), 548(a), 549(a), mention only the
trustee." Id. (citing In re Gibson Group, Inc., 66 F.3d 1436,
1438 (6th Cir. 1995)). Because the facts of Hartford
Underwriters did not present the issue, the Court refrained
from assessing the legality of the practice:
Whatever the validity of that practice, it has no
analogous application here, since petitioner did not ask
the trustee to pursue payment under S 506(c) and did
not seek permission from the Bankruptcy Court to take
such action in the trustee’s stead. Petitioner asserted
an independent right to use S 506(c), which is what we
reject today. Cf. In re Xonics Photochemical, Inc., 841
F.2d 198, 202-203 (7th Cir. 1988) (holding that
creditor had no right to bring avoidance action
8
independently, but noting that it might have been able
to seek to bring derivative suit).
Id. The Committee stresses that, unlike the petitioner in
Hartford Underwriters, it does not claim a unilateral right to
sue under S 544(b), but that it instead followed the
derivative suit procedure upon which the Court expressly
refused to pass judgment.
Therefore, we must decide in this case whether the plain
language of S 544 and the holding of Hartford Underwriters
invalidates the rather well-established practice of allowing
creditors and creditors’ committees to bring avoidance
actions derivatively.8
A.
The procedure followed by the Committee here has been
adopted in varying forms by several of our sister circuits,
and we recognized this practice in our prior Cybergenics
opinion. Cybergenics, 226 F.3d at 240 n.3 ("[C]ourts have
at times authorized individual creditors or creditors’
committees to exercise avoidance powers under certain
circumstances, particularly when the debtor in possession
is unwilling to pursue a colorable claim that would benefit
the bankruptcy estate.").
The fraudulent transfer provisions of Chapter 11 of the
Bankruptcy Code all utilize the phrase, "the trustee may."
11 U.S.C. SS 544, 545, 547(b), 548(a), 549(a). Several courts
of appeals and many bankruptcy courts have nonetheless
held that creditors or creditors’ committees, if they meet
certain requirements and with bankruptcy court approval,
may bring avoidance actions and other adversary
proceedings in Chapter 11 cases under "the trustee may"
provisions. See, e.g., Gibson Group, 66 F.3d at 1440; In re
Sufolla, Inc., 2 F.3d 977, 979 n.1 (9th Cir. 1993); In re
Vitreous Steel Products Co., 911 F.2d 1223, 1231 (7th Cir.
_________________________________________________________________
8. In In re: PWS Holding Corp., (3d Cir. 2002), we noted that after
Hartford Underwriters, "there is some doubt as to whether a creditor can
act derivatively in the debtor’s stead to invokeS 544(b)." Id. at n.6.
Because the creditor in PWS did not seek to invoke S 544(b), we were not
faced with this issue in that case.
9
1990); Louisiana World Exposition v. Federal Ins. Co., 858
F.2d 233, 247 (5th Cir. 1988); In re STN Enters. , 779 F.2d
901, 904 (2d Cir. 1985); In re Nicolet, Inc., 80 B.R. 733,
737-39 (Bankr.E.D.Pa. 1987) (collecting cases).
Other courts of appeals have recognized that a derivative
suit is at least an option for creditors or creditors’
committees wishing to pursue fraudulent transfer claims
when the debtor-in-possession refuses to prosecute the
claims. See, e.g., Nebraska State Bank v. Jones, 846 F.2d
477, 478 (8th Cir. 1988) (holding that individual creditor
lacked standing to bring avoidance action on its own under
S 544, but noting that "[w]here no trustee has been
appointed and the debtor in possession has not exercised
its avoidance powers, a dissatisfied creditor has several
options [including] . . . gain[ing] court permission to
institute the action itself "); In re Xonics Photochemical Inc.,
841 F.2d 198, 203 (7th Cir. 1988) (holding that individual
creditor lacked standing to bring avoidance action but
observing that an "alternative route" for the creditor would
be "to ask the bankruptcy court to allow it to bring a form
of derivative suit in the name of the debtor"). All of these
cases were decided before Hartford Underwriters , but some
courts have reaffirmed the practice post-Hartford
Underwriters as well. See, e.g., In re Commodore Int’l Ltd.,
262 F.3d 96, 100 (2d Cir. 2001).
In the instant case, the bankruptcy court drew upon
these precedents in requiring the Committee to show that:
1) it presented colorable fraudulent transfer claims; 2)
Cybergenics refused to bring the claims; and 3)
Cybergenics’s refusal was unjustified in relation to its duty
as a debtor-in-possession to maximize the value of the
bankruptcy estate for the creditors. The court found that
the Committee satisfied all these requirements, and granted
it authorization to bring suit.9
_________________________________________________________________
9. The bankruptcy court, consistent with the guidance of several courts
of appeals, held that "where the debtor-in-possession refuses to assert
claims that would maximize the value of the estate, that refusal, without
more, is unjustified." App. at 250 (citing Gibson Group, 66 F.3d at 1442;
Louisiana World Exposition, 858 F.2d at 245-46; STN Enters., 779 F.2d
at 905-06). The court found that Cybergenics’s refusal here was
unjustified because the S 554(b) claims would maximize the estate’s
value. Id. at 251. It rejected Cybergenics’s litigation costs rationale
because the Committee’s attorneys were working on a contingency fee
basis and would look only to the bankruptcy estate for recovery. Id.
10
B.
We must determine whether this practice of allowing
creditors and creditors’ committees to initiate derivative
avoidance actions survives Hartford Underwriters . As did
the Supreme Court in Hartford Underwriters,"we begin
with the understanding that Congress ‘says in a statute
what it means and means in a statute what it says there.’ "
Hartford Underwriters, 530 U.S. at 6 (quoting Connecticut
Nat. Bank v. Germain, 503 U.S. 249, 254 (1992)). The Court
further observed that:
when "the statute’s language is plain, ‘the sole function
of the courts’ " -- at least where the disposition
required by the text is not absurd -- " ‘is to enforce it
according to its terms.’ "
Id. (quotations omitted).
The Court’s reasoning in interpreting the words"the
trustee may" in S 506(c) applies with equal force to the
identical words used in S 544(b). The Court first recognized
the statutory construction maxim that " ‘[w]here a statute
. . . names the parties granted [the] right to invoke its
provisions, . . . such parties only may act,’ " and observed
that "a situation in which a statute authorizes specific
action and designates a particular party empowered to take
it is surely among the least appropriate in which to
presume nonexclusivity." Id. at 6-7 (quoting Norman J.
Singer, Sutherland on Statutory ConstructionS 47.23, at 217
(5th ed. 1992)). Like S 506(c), S 544(b)"authorizes specific
action" -- the avoidance of a transfer -- and"designates a
particular party [who is] empowered to take it" -- the
bankruptcy trustee.
The Court then focused on the special role played by the
trustee in bankruptcy proceedings. Because "the sole party
named -- the trustee -- has a unique role in bankruptcy
proceedings," the Court reasoned that it is "entirely
plausible that Congress would provide a power to him and
not to others." Hartford Underwriters, 530 U.S. at 7.
Furthermore, the Court stated that if no particular party
had been specified in S 506(c), "the trustee is the most
obvious party who would have been thought empowered to
use the provision." Id. The trustee fills the same unique role
11
no matter which Code provision is at issue, and that role
raises the same presumption that Congress meant to
provide the trustee an exclusive right in both statutes.
The Court noted that if Congress intended "the trustee
may" to mean "the trustee and other parties in interest
may," "it could simply have said so, as it did in describing
the parties who could act under other sections of the Code."
Id. at 7.10 As the Supreme Court itself noted, all of the
avoidance provisions in Chapter 11 utilize the language
"the trustee may" and do not refer to other parties. Id. at 13
n.5. Section 546, which sets forth limitations on the
avoidance power, repeatedly refers to "[t]he rights and
powers of [a] trustee" under the avoidance provisions. 11
U.S.C. S 546(b)(1), (c), (d), (g). The Court concluded that
S 506(c) cannot sensibly be read to extend to all parties in
interest, even though it "do[es] not contain an express
exclusion." Id. at 8. We similarly cannot read S 544(b) to
extend to all parties in interest.11
We agree with the analysis of the District Court in this
case that "there is no principled basis under which the
_________________________________________________________________
10. "Section 502(a), for example, provides that a claim is allowed unless
‘a party in interest’ objects, and S 503(b)(4) allows ‘an entity’ to file a
request for payment of an administrative expense. The broad phrasing of
these sections, when contrasted with the use of‘the trustee’ in S 506(c),
supports the conclusion that entities other than the trustee are not
entitled to use S 506(c)." Hartford Underwriters, 530 U.S. at 7 (citing
Russello v. United States, 464 U.S. 16, 23 (1983)).
11. Section 1123(b)(3)(B) authorizes a Chapter 11 bankruptcy plan of
reorganization to "provide for . . . the retention and enforcement by the
debtor, by the trustee, or by a representative of the estate appointed for
such purpose" of any claim of the debtor or the estate. 11 U.S.C.
S 1123(b)(3)(B) (emphasis added). In Cybergenics, we recognized that this
provision "permits a plan of reorganization to designate a representative
to enforce certain claims, such as avoidance claims, for the estate’s
benefit." Cybergenics, 226 F.3d at 245 n.12 (emphasis in original). This
provision does not aid the Committee here because no plan of
reorganization was ever proposed in this case. Furthermore,
S 1123(b)(3)(B) suggests that Congress was aware of the issue of proper
estate representation and could have incorporated language allowing a
non-trustee estate representative to bring claims under S 544. Congress
did not do so, just as it did not allow for the prosecution of a case under
S 506(c) by a party that is not a trustee.
12
Court can apply different meanings to the words‘the
trustee may’ in separate sections of the Code." App. at 11.
"Where a word or phrase is used in different parts of the
same statute, it will be presumed to have the same
meaning throughout. The need for uniformity becomes
more imperative where the same word or term is used in
different statutory sections that are similar in purpose and
content . . . ." C.I.R. v. Ridgeway’s Estate , 291 F.2d 257,
259 (3d Cir. 1961) (citations omitted); see also Reich v.
Gateway Press, Inc., 13 F.3d 685, 700 n.18 (3d Cir. 1994).
This presumption may be overcome "whenever there is
such variation in the connection in which the words are
used as reasonably to warrant the conclusion that they
were employed in different parts of the act with different
intent." Atlantic Cleaners & Dyers, Inc. v. United States, 286
U.S. 427, 433 (1932). However, the words "the trustee may"
as used in both S 506(c) and S 554(b) are used for the same
purpose and in the same context: they are a description of
the powers of the trustee and the avenues for relief
available under the Code for the benefit of creditors and the
estate.
The Committee conceded at oral argument that no Code
provision explicitly authorizes a creditors’ committee to
prosecute an avoidance action, and even the courts that
have allowed derivative fraudulent transfer actions have
recognized that "[t]he circumstances in which a creditors’
committee may sue on behalf of the trustee or debtor-in-
possession are not spelled out in the Bankruptcy Code." In
re Louisiana World Exposition, Inc., 832 F.2d 1391, 1397
(5th Cir. 1987); see also STN Enterps., 779 F.2d at 904
("The Bankruptcy Code . . . contains no explicit authority
for creditors’ committees to initiate adversary
proceedings."). In light of the Supreme Court’s reading of
"the trustee may" in S 506(c), and in the absence of clear
statutory authority to the contrary, we cannot interpret the
same phrase in S 544 any differently.
C.
Rather than engage with the Court’s interpretation, the
Committee advances several distinctions between Hartford
Underwriters and the instant case. The Committee
13
emphasizes that Hartford Underwriters is a Chapter 7 case,
whereas Cybergenics filed under Chapter 11. Chapter 11,
which deals with reorganizations, provides creditors’
committees with rights unavailable in Chapter 7, which
deals with liquidations. See In re Marin Motor Oil, Inc., 689
F.2d 445, 450 (3d Cir. 1982) (noting that "Congress
intended a creditors’ committee to have more extensive
rights in a reorganization than in a liquidation").12
Some of the courts that allow creditors’ committees to
bring derivative fraudulent transfer suits in Chapter 11
cases have overcome the absence of explicit statutory
authority by relying on 11 U.S.C. SS 1103(c)(5) and 1109(b).
See, e.g., Louisiana World Exposition, 858 F.2d at 247; STN
Enters., 779 F.2d at 904. While both of these provisions are
wide-ranging, they do not authorize a creditors’ committee
to act derivatively to prosecute an avoidance action.
Section 1109(b) states that a "party in interest, including
the debtor, the trustee, a creditors’ committee , an equity
security holders’ committee, a creditor, an equity security
holder, or any indenture trustee, may raise and may
appear and be heard on any issue in a case under[Chapter
11]." (emphasis added). This Court has liberally construed
S 1109(b) to grant a creditors’ committee a broad right to be
heard, including, among other powers, an unconditional
right to intervene in a Chapter 11 adversary proceeding
that has been initiated by a trustee. See Marin Motor Oil,
689 F.2d at 446; Phar-Mor, Inc. v. Coopers & Lybrand, 22
F.3d 1228, 1232 (3d Cir. 1994).
However, the Committee conceded at oral argument that
this provision does not confer authority upon a creditors’
committee to initiate an action when the trustee or debtor-
in-possession declined to bring suit. Section 1109(b) only
establishes a right to be heard by way of intervention as a
party plaintiff when a proceeding has already been brought
by the statutorily-authorized party. Courts that have found
authority for creditors to bring avoidance actions under this
provision have noted that "a general right to be heard
_________________________________________________________________
12. In this case however, even though Cybergenics filed under Chapter
11, it chose to sell its assets in a court-approved auction rather than
reorganize.
14
would be an empty grant unless those who had such right
were allowed to act when those who should act did not."
Coral Petroleum, Inc. v. Banque Paribas-London, 797 F.2d
1351, 1363 (5th Cir. 1986) (quoting 5 Collier on Bankruptcy
P 1109.02(3) (15th ed. 1986)). Yet S 544(b), read in light of
Hartford Underwriters, grants an exclusive right of action to
the trustee, and a broad "right to be heard" provision may
not expand the intent evidenced by the plain, specific
language used by Congress in S 544(b).
Any doubt on this question is assuaged by the Supreme
Court’s statement in Hartford Underwriters, albeit in dicta,
indicating that the Court would not read S 1109(b) to allow
a non-trustee to bring suit under a provision stating only
that "the trustee may." After acknowledging that S 1109(b)
was "by its terms inapplicable" in Hartford Underwriters
because the case was under Chapter 7 rather than Chapter
11, the Court stated, "[i]n any event, we do not read
S 1109(b)’s general provision of a right to be heard as
broadly allowing a creditor to pursue substantive remedies
that other Code provisions make available only to other
specific parties." Hartford Underwriters, 530 U.S. at 8. This
is consistent with our prior interpretation of S 1109(b) and
it strengthens our view of the statute.
As noted above, some courts have also found support for
derivative creditor suits in 11 U.S.C. S 1103(c)(5), a "catch-
all" provision which provides that a creditors’ committee
may "perform such other services as are in the interest of
those represented." 11 U.S.C. S 1103(c)(5). The Committee
suggests that S 1103(c)(5) demonstrates that the power to
initiate a suit under S 544(b) is not inconsistent with the
Code’s purposes because performing "other services" could
include commencing suit. However, if S 1103 is given the
extremely broad scope urged by the Committee, this"roving
grant of power" (as Lincolnshire terms it) to undertake any
action in a committee’s interest would swallow all other
conflicting Code provisions and any limitations contained in
them.
Lincolnshire points us to S 1103(c)(1)-(4), which details
rather specific powers granted to the Committee, such as
the authority to "consult with the trustee,"investigate . . .
the debtor," "participate in the formulation of a plan," and
15
"request the appointment of a trustee." 11 U.S.C.
S 1103(c)(1)-(4). Furthermore, while 11 U.S.C.S 323(a)
declares a trustee to be the "representative of the estate"
and S 323(b) grants a trustee the "capacity to sue and be
sued," there are no analogous provisions for a creditors’
committee, either in S 1103 or elsewhere. Under "a familiar
canon of statutory construction," catch-all provisions "are
to be read as bringing within a statute categories similar in
type to those specifically enumerated." Federal Maritime
Comm’n v. Seatrain Line, Inc., 411 U.S. 726, 734 (1973); see
also Norfolk and Western Ry. v. American Train Dispatchers
Ass’n, 499 U.S. 117, 129 (1991) ("Under the principle of
ejusdem generis, when a general term follows a specific one,
the general term should be understood as a reference to
subjects akin to the one with specific enumeration.") (citing
Arcadia v. Ohio Power Co., 498 U.S. 73, 84-85 (1990)).
Because Congress expressly authorized only limited,
discrete rights of participation for a committee in
S 1103(c)(1)-(4), we will not read S 1103(c)(5) to grant a
broad, implied power to initiate a suit under general
language regarding "other services as are in the interests of
those represented."
Neither S 1103(b)(5) nor S 1109(b), taken separately or
together, provide sufficient statutory authority for the
practice followed by the Committee and approved by the
bankruptcy court in this case. Because these Chapter 11
provisions granting significant authority to creditors’
committees do not go so far as to allow such committees to
initiate avoidance actions, no matter whether the trustee
fails to act and/or the committee secures court approval,
we cannot distinguish Hartford Underwriters on the basis
that Hartford Underwriters was a Chapter 7 case while here
we consider a case under Chapter 11. The Committee urges
us to go beyond a "cursory reading" of S 544(b) and
examine other provisions of the Code. We have done so,
and can find no provision which grants the Committee the
authority denied to it in S 544(b).
IV
We are well aware that most courts to consider a creditor
or creditors’ committee’s power to act derivatively under the
16
avoidance provisions in the wake of Hartford Underwriters
have reaffirmed so-called "derivative standing" and
distinguished Hartford Underwriters by relying on Footnote
5 of the Court’s opinion. After examining these cases and
the Supreme Court’s unanimous opinion, however, we find
that the opinions relying on Footnote 5 fail to give
appropriate weight to the Court’s strict interpretation of the
Code. In the cases that overlook Hartford Underwriters, the
issue of whether a derivative creditor suit is valid was not
presented to the court. Because that issue is now before us,
we must account for the impact of the Hartford
Underwriters decision now that it has been brought to our
attention.
A.
The courts that have relied on Footnote 5 to allow a
creditor or creditor’s committee to bring a derivative
fraudulent transfer suit under the Code distinguish
Hartford Underwriters without much analysis of the Court’s
reasoning in that case. For example, one bankruptcy court,
recognizing its authority to allow such a derivative suit,
simply stated:
At footnote 5 of the opinion, the Supreme Court cites
both Xonics and The Gibson Group and expressly
declines to decide whether creditors may bring
avoidance actions under either Section 547 or 548. As
the Supreme Court found that those cases were not
analogous, it follows that Hartford Underwriters
Insurance is not analogous here.
In re Dur Jac Ltd., 254 B.R. 279, 286 n.7 (Bankr.M.D.Ala.
2000) (applying Gibson Group to deny derivative authority
to an individual creditor).
Another bankruptcy court provided a more extensive
analysis of why Hartford Underwriters should not bar a
creditors’ committee from acting derivatively to bring
fraudulent transfer claims under SS 547(b) and 547(d),
finding that such actions were authorized by SS 1103(c)(5)
and 1109(b), the same provisions we have rejected as
statutory bases for a creditors’ derivative suit. In re
Together Development Corp., 262 B.R. 586, 589 (Bankr.D.
17
Mass. 2001). While we are not bound to follow the decision
of a bankruptcy court, we address the Together case
because the court considered many of the arguments also
advanced by the Committee here.
Ultimately, the Together court found that"the specter of
the [Hartford Underwriters] decision as applied to this
Adversary Proceeding is no more than a red herring." Id. at
591. The court observed that "no provision of the Code . . .
prohibits the Committee’s action herein." Id. (emphasis in
original). We find it more significant, however, that no
provision of the Code allows a Committee to act derivatively
under the avoidance provisions either. Hartford
Underwriters makes clear that this lack of positive
authorization is key. The Together court stated that its case
was "clearly distinct from [that] in [ Hartford Underwriters]
because the Plaintiff herein is the Debtor seeking recovery
for all the creditors of the bankruptcy estate, not a lone
creditor seeking recovery for its sole benefit, as was the
case in Hartford Underwriters." Id. at 591. This is indeed
true: the Supreme Court concluded that the derivative
practice had "no analogous application" in Hartford
Underwriters, because the claimant in that case"asserted
an independent right to use S 506(c)," which the court
rejected. Hartford Underwriters, 530 U.S. at 13 n.5.
The Supreme Court declined to decide the derivative suit
practice in Footnote 5 because the facts of Hartford
Underwriters did not present this issue to the Court.
Because "petitioner did not ask the trustee to pursue
payment under S 506(c) and did not seek permission from
the Bankruptcy Court to take such action in the trustee’s
stead," the derivative suit practice had "no analogous
application" to petitioner’s case in Hartford Underwriters.
Id. Although the practice had no application to the facts of
that case, it does not necessarily follow that the Court’s
analysis of the "trustee may" phrase as used in the Code
has "no analogous application" to other Code provisions
containing that phrase.
In contrast to Together, several post-Hartford
Underwriters opinions have noted that Hartford
Underwriters casts serious doubt on the validity of
creditors’ derivative suits. In In re Blount, 276 B.R. 753,
18
761-62 (Bankr.M.D.La.), a bankruptcy court found
authority for derivative creditor action in a Chapter 7 case
under 11 U.S.C. S 503(b)(3)(B), a provision which notably
does not contain the key phrase "the trustee may" in
establishing a cause of action for recovery of various
administrative expenses. In so holding, the court observed
that the Supreme Court "at least question[ed] the validity of
a judicially created standing doctrine designed to get
around the plain language of the Bankruptcy Code." Id. at
760. The court commented:
Although [Hartford Underwriters] specifically dealt with
only the question of whether a creditor has
independent standing to use the collateral surcharge
provisions of S 506(c), the language and rationale of the
opinion seemingly have application to all provisions of
the Bankruptcy Code wherein the party authorized to
seek recovery (to act) is limited to the trustee. Indeed,
the [Hartford Underwriters] rationale has been
expanded beyond the confines of S 506(c).
Id. (emphasis added). The court noted that"[a]ccepting the
[Hartford Underwriters] rationale[,] . . . standing to recover
property transferred or concealed by the debtor, as
established by these code provisions, is limited solely to ‘the
trustee.’ " Id.
In addition, the Fifth Circuit relied in part on Hartford
Underwriters in a Chapter 13 bankruptcy case to find that
a non-trustee could not assert the power to avoid a federal
tax lien under 11 U.S.C. S 545(2), which includes the
operative phrase "the trustee may." In re Stangel, 219 F.3d
498, 501 (5th Cir. 2000). The court noted that "[a]lthough
S 506(c) is a different provision than the one at issue here,
and a Chapter 11 case is different from a Chapter 13 case,
the Court’s mode of reasoning is fully applicable" because
Hartford Underwriters involved a Code provision"that
stated that trustees had certain powers" and"rejected
interpretations that extended those powers to other parties
in interest." Id.; see also In re McLeroy, 250 B.R. 872, 880-
82 (N.D.Tex. 2000) (finding in Chapter 7 case that under
the avoidance provision of 11 U.S.C. S 548, the reasoning of
Hartford Underwriters applies to limit the authority to bring
suit to the trustee).
19
Although the scope of the holding in Hartford
Underwriters is limited to S 506(c), we must consider the
Court’s reasoning in interpreting the identical language of
S 544(b). The Court’s analysis in Hartford Underwriters is
far from a "red herring." As we have stated:
we should not idly ignore considered statements the
Supreme Court makes in dicta. The Supreme Court
uses dicta to help control and influence the many
issues it cannot decide because of its limited docket.
"Appellate courts that dismiss these expressions[in
dicta] and strike off on their own increase the disparity
among tribunals (for other judges are likely to follow
the Supreme Court’s marching orders) and frustrate
the evenhanded administration of justice by giving
litigants an outcome other than the one the Supreme
Court would be likely to reach were the case heard
there."
In re McDonald, 205 F.3d 606, 612-13 (3d Cir. 2000)
(brackets in original) (quoting United States v. Bloom, 149
F.3d 649, 653 (7th Cir. 1998)). While no other court of
appeals has applied Hartford Underwriters to bar a Chapter
11 derivative creditor suit, we conclude that failing to do so
would yield "an outcome other than the one the Supreme
Court would be likely to reach were the case heard there."
As the District Court in this case suggested in a footnote
dismissing the relevance of Dur Jac, those opinions which
distinguish Hartford Underwriters by relying on Footnote 5
are "unpersuasive" because they simply "failed to reconcile
the divergent interpretations of the phrase ‘the trustee may’
necessary to reach [their] conclusion[s]." App. at 11.13
_________________________________________________________________
13. We note that some courts have indicated that under Footnote 5, the
Supreme Court did not preclude the possibility of a creditor’s derivative
suit even under S 506(c). See, e.g., In re Debbie Reynolds Hotel & Casino,
Inc., 255 F.3d 1061, 1068 (9th Cir. 2001) (implying that a non-trustee
could bring suit under S 506(c) if that party"convince[s] the trustee to
seek a S 506(c) surcharge or get leave from the Bankruptcy Court to do
so") (citing Hartford Underwriters, 530 U.S. at 13 n.5); In re Concord
Mktg., Inc., 268 B.R. 415, 429 (Bankr.D.N.J. 2001) (finding that alleged
assignment of debtor’s rights under S 506(c) to the appellant "does not
meet the threshold requirements for derivative standing that the
Supreme Court in Hartford mandates").
20
B.
In our previous Cybergenics decision, we noted that
courts have at times authorized such creditors and
creditors’ committees’ derivative suits, without any
reference to Hartford Underwriters, or our Court’s case law.
Cybergenics, 226 F.3d at 240 n.3. In several other opinions
issued after Hartford Underwriters, this Court and other
courts have implicitly approved of the derivative suit
practice which we reject today. See Commodore , 262 F.3d
at 96 (reaffirming and specifying the standards for a
creditor or creditor’s committee derivative fraudulent
transfer suit without citing Hartford Underwriters); Lafferty,
267 F.3d at 345 (accepting a stipulation approved by the
Bankruptcy Court that authorized a creditors’ committee to
commence and prosecute litigation on behalf of the debtor
under 11 U.S.C. S 541 and noting that the committee
"effectively acquired all the attributes of a bankruptcy
trustee for purposes of this case"); Buncher Co. v. Official
Comm. of Unsecured Creditors of GenFarm Ltd. P’ship IV,
229 F.3d 245, 250 (3d Cir. 2000) (considering an appeal in
fraudulent transfer adverse proceeding initiated by
creditors’ committee without commenting on committee’s
capacity to bring the claims).
In all of these cases, however, it appears that the validity
of creditor derivative suits was not raised to the court by
any of the parties. In this Cybergenics litigation,
Lincolnshire, L&S, and Chinery first raised the Hartford
Underwriters issue after we remanded the case to the
District Court. In the first appeal, none of the parties
questioned the capacity of the Committee to bring its claims.14
_________________________________________________________________
We do not read Footnote 5 to approve derivative creditor suits, either
explicitly or implicitly. The Court did not reach the derivative suit issue
with regard to S 506(c) or other provisions because it simply was not
presented in Hartford Underwriters.
14. Our holding that a creditor or creditors’ committee may not act
derivatively to initiate an action under S 544(b) does not depend on or
contradict our main holding in Cybergenics that fraudulent transfer
claims are the property of creditors, not the debtor. We explained that
our holding in Cybergenics was not altered by the fact that "a debtor in
21
In Lafferty, the parties stipulated to the authority of the
creditors’ committee to assert the trustee’s claims. In
addition, Hartford Underwriters was not argued to us in
that case. In the Second Circuit’s Commodore case, the
creditors’ committee obtained the consent of the parties to
bring suit; the defendants apparently conceded that a
derivative suit was an available option but contested the
standards under which such a suit could be authorized.
Commodore, 262 F.3d at 98. In none of these cases did the
parties appear to contest the underlying validity of a
creditor or creditors’ committee derivative fraudulent
transfer action. Now that we are squarely faced with that
question, we reiterate that we cannot ignore the Supreme
Court’s reasoning. To the extent that we have previously
held that creditors may bring derivative suits under the
Code’s avoidance provisions, those holdings may no longer
stand in light of Hartford Underwriters." ‘[A] panel of this
court is bound to follow the holdings of published opinions
of prior panels of this court unless overruled by the court
en banc or the holding is undermined by a subsequent
Supreme Court case.’ " In re Continental Airlines, 134 F.3d
536, 542 (3d Cir. 1998) (quoting Nationwide Ins. Co. v.
Patterson, 953 F.2d 44, 46 (3d Cir. 1991)) (emphasis
added).
V
Finally, the Committee highlights prior practice and
policy reasons supporting the validity of creditor and
_________________________________________________________________
possession is empowered to pursue those fraudulent transfer claims for
the benefit of all creditors." Cybergenics , 226 F.3d at 245. We explained
that the debtor’s (and trustee’s) power to avoid pre-petition transfers for
the benefit of creditors is tantamount to a "legal fiction" which puts the
debtor in the "overshoes" of the creditor and allows the debtor to "carry
out its trustee-related duties" much like a "public official [who] has
certain powers upon taking office as a means to carry out the functions
bestowed by virtue of the office or public trust." Id. at 243-44. Therefore,
ownership of the claims and the capacity to bring those claims are two
distinct issues, and S 544(b) dictates that only the trustee or debtor-in-
possession has this capacity. As we discuss below, the Committee and
its creditor members could have exercised several alternative options in
pursuing their fraudulent transfer allegations, but they failed to do so.
22
creditors’ committee derivative avoidance suits. The
Committee makes reference to Kelly v. Robinson , 479 U.S.
36 (1986), in which the Supreme Court stated that"[i]n
expounding a statute, we must not be guided by a single
sentence or member of a sentence, but look to the
provisions of the whole law, and to its object and policy."
Id. at 43 (citations and quotations omitted).
The Court in Hartford Underwriters observed that
"[b]ecause we believe that by far the most natural reading
of S 506(c) is that it extends only to the trustee, petitioner’s
burden of persuading us that the section must be read to
allow its use by other parties is ‘exceptionally heavy.’ " 530
U.S. at 9 (quoting Patterson v. Shumate, 504 U.S. 753, 760
(1992) (quoting Union Bank v. Wolas, 502 U.S. 151, 156
(1991)). The Committee faces the same heavy burden here
in seeking to overcome the plain language of S 544(b).
The Committee emphasizes that the validity of the
creditor derivative suit under the Code’s fraudulent transfer
provisions was well-established prior to enactment of the
Code and continues to be so today. In Hartford
Underwriters, the Court considered the prior history of a
creditor’s independent right to sue under S 506(c). 530 U.S.
at 9-11. Although the history of the creditor fraudulent
transfer derivative suit is more compelling than that
associated with S 506(c), the Court’s assessment of the
relevance of prior practice still applies here. The Court
concluded:
In any event, while pre-Code practice "informs our
understanding of the language of the Code," it cannot
overcome that language. It is a tool of construction, not
an extratextual supplement. We have applied it to the
construction of provisions which were "subject to
interpretation," or contained "ambiguity in the text."
"[W]here the meaning of the Bankruptcy Code’s text is
itself clear . . . its operation is unimpeded by contrary
. . . prior practice."
Id. at 10 (citations omitted) (brackets in original). The Court
concluded that "we think the language of the Code leaves
no room for clarification by pre-Code practice. . . . Pre-Code
practice cannot transform S 506(c)’s reference to ‘the
23
trustee’ to ‘the trustee and other parties in interest.’ " Id. at
11. Section S 544(b), using the same operative language as
S 506(c), is just as clear and unambiguous, and the
provision’s meaning may not be altered by prior practice.
Many of the courts that have approved of derivative
fraudulent transfer actions have relied upon public policy
considerations. For example, the Sixth Circuit in Gibson
Group, assessing whether a creditor could bring avoidance
claims under SS 547 and 548, dismissed the argument that
the Code bars the "judicially created" creditor derivative
suit because allowing such actions would "further
Congress’s intent that a debtor’s assets be marshaled and
preserved when to do so would further the goal of
reorganization." Gibson Group, 66 F.3d at 1442. Among
other rationales, the Sixth Circuit stressed policy reasons
for implying Congressional intent to allow creditors to bring
derivative avoidance actions under the Code, stating:
A debtor-in-possession often acts under the influence
of conflicts of interest and may be tempted to use its
discretion under Sections 547 and 548 as a sword to
favor certain creditors over others, rather than as a
tool to further its reorganization for the benefit of all
creditors as Congress intended. Given this reality, we
do not believe Congress intended to exclude creditors
from seeking to avoid preferential or fraudulent
transfers where the debtor-in-possession abuses its
discretion.
Id. at 1441; see also Together, 262 B.R. at 591 (holding that
derivative suits are warranted "where debtor’s counsel has
some reason not to pursue all potential assets of the estate
due to a conflict").
We recognize that entrusting the decision to bring
avoidance claims to the debtor-in-possession (in the
absence of a trustee) creates the potential for a conflict of
interest between the debtor and the creditors who stand to
benefit from those claims.15 In granting the Committee
_________________________________________________________________
15. "The purpose of chapter 11 reorganization is the salvage and
rehabilitation of the financially distressed business. The
management may be unwilling to set aside an avoidable transfer
24
authority to assert the claims, the bankruptcy court
essentially relied on policy considerations. Although the
Committee alleges no conflict of interest on the part of
Cybergenics, the bankruptcy court found that the
avoidance claims were "colorable" and Cybergenics’s refusal
to assert the claims was "unjustified" because they would
benefit the estate. Yet the Supreme Court also weighed
policy rationales with regard to its reading ofS 506(c). The
Court first questioned the petitioner’s policy arguments, but
then concluded:
In any event, we do not sit to assess the relative merits
of different approaches to various bankruptcy
problems. It suffices that the natural reading of the
text produces the result we announce. Achieving a
better policy outcome -- if what petitioner urges is that
-- is a task for Congress, not the courts.
Hartford Underwriters, 530 U.S. at 13-14 (citations
omitted). The District Court below echoed this view in
commenting that to the extent that allowing the Committee
to proceed might be beneficial in this case, "it is a task for
Congress, and not the courts, to fashion a new procedure
allowing derivative action by a creditor or committee of
creditors." App. at 11-12. It might well be sound policy to
allow a creditors’ committee to bring fraudulent transfer
claims with careful court approval if the trustee or debtor-
in-possession unjustifiably refuses to assert the claims. Yet
this is a policy decision for Congress, not this Court. The
"natural reading of the text produces the result we
announce." Hartford Underwriters, 530 U.S. at 13.
_________________________________________________________________
with a supplier or lender with whom it intends to do future business
after the business is successfully reorganized. Friendships develop
in business which may make the debtor in possession hesitant to
sue. Therefore, a major problem in chapter 11 cases is assuring that
the debtor in possession performs the duties with the same faithful
concern for the interests of creditors as would be expected of an
independent trustee.’ "
In re Sweetwater, 884 F.2d 1323, 1329 n.7 (10th Cir. 1989) (quoting
Richard Aaron, Bankruptcy Law Fundamentals S 10.01).
25
In light of the plain meaning of S 544(b) and the
reasoning of Hartford Underwriters, we hold that a creditor
or creditors’ committee may not initiate a fraudulent
transfer action under S 544. Neither may a bankruptcy
court authorize such an arrangement. The District Court
did not err in holding that the Committee could not
prosecute the avoidance claims arising from the leveraged
buyout in this case.16
VI
Our holding today leaves a creditor or creditors’
committee with several options should they desire that
fraudulent transfer claims be prosecuted where the debtor-
in-possession declines to do so. The District Court
dismissed the Committee’s complaint outright, but it listed
several alternatives provided by the Code to protect
creditors’ interests when "creditors and the Bankruptcy
Court conclude that a debtor in possession is not acting in
the best interests of the creditors in declining to prosecute
a claim under S 544(b)." App. at 11. Section 1103(c)(4)
expressly authorizes a creditors’ committee to move for the
appointment of a trustee under S 1104. In addition, as "a
party in interest," the Committee could have moved to
dismiss the bankruptcy petition under S 1112 so that it
could pursue its state law avoidance claims in state court.
See, e.g., Nebraska State Bank v. Jones, 846 F.2d 477, 478
(8th Cir. 1988).17
_________________________________________________________________
16. Because the Committee’s other claims depended on the success of its
fraudulent transfer claims, these other claims were also properly
dismissed.
17. The avoidance power under S 544(b) may be used to avoid transfers
that are "voidable under applicable law by a creditor holding an
[allowable] unsecured claim," i.e. "if there is an unsecured creditor of the
debtor that actually has the requisite nonbankruptcy cause of action."
Cybergenics, 226 F.3d at 243 (quoting 11 U.S.C.S 544(b)). Here, the
"applicable law" is New Jersey’s version of the Uniform Fraudulent
Transfer Act ("UFTA"), N.J.Stat.Ann. S 25:2-20 et seq.
After Cybergenics declined to pursue the avoidance claims, it moved to
dismiss the bankruptcy case, which would have allowed the creditors to
pursue their New Jersey state law fraudulent transfer remedies in state
court. However, the Committee objected to dismissal of the bankruptcy
26
On appeal, the Committee belatedly attempts to pursue
one of these options by urging us (if we reject the validity
of its derivative suit) to remand for the appointment of a
trustee as a proper party in interest so that the trustee may
consider whether to assert the claims. It relies on the final
sentence of Federal Rule of Civil Procedure 17(a), which
states that "[n]o action shall be dismissed on the ground
that it is not prosecuted in the name of the real party in
interest until a reasonable time has been allowed" for the
substitution of the real party in interest. Fed. R. Civ. P.
17(a). The Advisory Committee’s note to Rule 17(a) states
that the rule is "intended to prevent forfeiture when
determination of the proper party to sue is difficult or when
an understandable mistake has been made." Fed. R. Civ. P.
17(a) advisory committee’s note.
In making its argument under Rule 17(a), the Committee
contends that the question in this case is not one of
standing in the strictest sense, but rather one regarding the
proper party in interest, specifically the proper estate
representative to pursue the claims. "The real party in
interest rule ensures that under the governing substantive
law, the plaintiffs are entitled to enforce the claim at issue."
HB General Corp. v. Manchester Partners, L.P. , 95 F.3d
1185, 1196 (3d Cir. 1996). Although most courts have
_________________________________________________________________
case. We have explained that the federal bankruptcy avoidance action
has a significant advantage over avoidance claims brought under state
law: "once avoidable pursuant to this [federal] provision, the transfer is
avoided in its entirety for the benefit of all creditors, not just to the
extent necessary to satisfy the individual creditor actually holding the
avoidance claim [as under state law]." Cybergenics, 226 F.3d at 243.
Section 544(b), often referred to as a strong-arm provision, thus allows
an entire conveyance to be set aside no matter how small the claim of
the "individual creditor actually holding the avoidance claim." Id. at 245.
Therefore, it is understandable that the unsecured creditors here
preferred to utilize S 544(b)’s strong-arm powers rather than pursue their
state claims in state court. Yet the state law route was still an available
option for the Committee. Cf. In re: PWS Holding Corp., (3d Cir. 2002)
(recognizing that creditor may bring avoidance claims under state law in
state court but precluding such action because claims were found to be
extinguished).
27
labeled the practice we reject today "derivative standing,"
we agree with the Committee that the issue here is the
Committee’s capacity to sue -- whether"the plaintiffs are
entitled to enforce the claim at issue" -- rather than its
standing per se.
Notably, the Supreme Court did not frame Hartford
Underwriters as presenting a question of standing. Indeed,
the Court did not even use the word "standing" or cite to
precedent regarding the elements of standing. Instead, the
Court formulated the question presented by Hartford
Underwriters as "whether petitioner -- an administrative
claimant -- is a proper party to seek recovery under
S 506(c)." Hartford Underwriters, 530 U.S. at 5-6 (emphasis
added). The decision of the Eighth Circuit which the Court
affirmed in Hartford Underwriters expressly grounded its
analysis in standing and concluded that the non-trustee
appellee "lacks standing to assert aS 506(c) claim." In re
Hen House Interstate, Inc., 177 F.3d 719, 721 (8th Cir.
1999) (en banc) (emphasis added). In describing the Eighth
Circuit’s holding, however, the Court refrained from using
the word "standing," instead merely stating that the Eighth
Circuit concluded that "S 506(c) could not be invoked by an
administrative claimant." Hartford Underwriters, 530 U.S.
at 4.
The Committee satisfies constitutional and prudential
requirements for standing in this case. However, it is not
the real party in interest because it is not entitled to
enforce the avoidance claims under S 544(b). Therefore, we
may consider whether remand for substitution of the real
party in interest by the appointment of a trustee is
appropriate.
Appellees argue that the Committee never asked the
court to appoint a trustee -- neither in its briefs in
response to the second motion to dismiss nor at oral
argument on that motion-- and therefore we should not
entertain this issue on appeal. At oral argument before this
Court, counsel for the Committee conceded that it never
asked, even in the alternative, for a trustee to be named.
The Committee did request twice in its brief in opposition to
the second motion to dismiss that it be allowed to replead
28
and correct any deficiencies the court might find in the
complaint as an alternative to dismissal.
We conclude that the Committee’s decision to pursue its
claims on its own, rather than seek appointment of a
trustee at any stage of the proceedings, was not an
"understandable mistake" which would favor a finding that
the proper party be substituted under Rule 17(a). It is
indeed understandable that the Committee would initially
decline to seek the appointment of a trustee, since before
Hartford Underwriters, the derivative suit procedure opted
for by the Committee was reasonably well-established.
However, even if the Committee could not foresee the
change in the law wrought by Hartford Underwriters, its
choice to bring a derivative suit with itself as plaintiff, on
behalf of the debtor-in-possession, was not a simple
"mistake" in identifying the proper party plaintiff due to the
difficulty of such identification. See Wieburg v. GTE
Southwest, Inc., 272 F.3d 302, 308 (5th Cir. 2001) ("In
accordance with the Advisory Committee’s note, most
courts have interpreted the last sentence of Rule 17(a) as
being applicable only when the plaintiff brought the action
in her own name as the result of an understandable
mistake, because the determination of the correct party to
bring the action is difficult."). Instead, it was a litigation
choice made based on the prevailing law at the time. After
we remanded this case to the District Court in 2000, the
defendants filed their second motion to dismiss, in which
they argued at length that Hartford Underwriters applied to
deny the Committee the authority to bring its fraudulent
transfer claims. Yet even with this notice that its capacity
was an issue, the Committee did not move for the
appointment of a trustee, and did not even argue for such
an appointment in the alternative.
Because the Committee never argued for the appointment
of a trustee below, we need not consider that request on
appeal. See, e.g., Queen City Pizza, Inc. v. Domino’s Pizza,
Inc., 124 F.3d 430, 443 (3d Cir. 1997).
VII
We hold that the plain language of S 544 and the holding
of Hartford Underwriters allow only the trustee or debtor-in-
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possession to assert fraudulent transfer claims, and a
creditor or creditors’ committee may not bring such
avoidance actions derivatively.
For the foregoing reasons, we AFFIRM the judgment of
the District Court.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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