Academic journal article Stanford Journal of Law, Business & Finance

Creditors' Committees as Estate Representatives in Bankruptcy Litigation

Academic journal article Stanford Journal of Law, Business & Finance

Creditors' Committees as Estate Representatives in Bankruptcy Litigation

Article excerpt

Bankruptcy courts, with some frequency and for a long time, and with the express approval of the lower federal courts, have determined that in particular Chapter 11 cases, a creditors' committee, rather than a trustee or debtor-inpossession, may prosecute certain estate causes of action.1 Circumstances supporting the authorization of a committee to act in this capacity include cases where (i) the estate is insolvent; (ii) there exists a well-represented and properly functioning creditors' committee representative of the holders of the residual economic interest; (iii) the debtor remains in possession but has relationships with the potential defendants that create conflicts of interest; (iv) the debtor appears to be unwilling or unable to properly prosecute the causes of action; and (v) appointing a disinterested trustee is not otherwise warranted and may be costly.2

Authorizing a creditors' committee to prosecute particular causes of action is , part and parcel of a wider recognition that in most bankruptcy cases, creditors, rather than equity holders or corporate management or a trustee, are the real parties in economic interest in such litigation. Accordingly, creditors' committees are commonly permitted to intervene in such litigation even where the debtor-inpossession or trustee is actively pursuing the case.3 Moreover, it has become hornbook law that in considering motions to approve settlements of such cases under Rule 9019,4 a primary consideration is the paramount interests of creditors,5 and that significant deference is commonly paid to a creditors' committee decision to support or oppose such a settlement.6

Given the recognition that creditors are often the real parties in economic interest with respect to estate litigation, it is a small leap indeed to acknowledge that a bankruptcy court may in appropriate instances authorize the statutory creditors' committee to actually bring the suit. The Third Circuit sitting en banc in Cybergenics II,7 and the lengthy briefs of the parties and the amid on both sides, amply set forth the various arguments as to whether the Bankruptcy Code as it exists today grants bankruptcy courts the discretion to appoint a statutory creditors' committee as the representative of the estate for purposes of prosecuting particular causes of action. While I strongly disagree with Professor Sharfman's attempt to explain away section 503(b),8 section 105(a),9 and the substantial line of contrary authorities pre- and postCode stretching back many decades,10 the Supreme Court's rigid statutory literalism in Hartford Underwriters11 raises a litigable question on the actual scope of existing authority to confer standing on creditors' committees.12 I take some comfort in that, following exhaustive briefing and argument, the majority of the Third Circuit sitting en bane, in a fully and well-reasoned opinion found that authority does exist.13 I have no new light to shed on that question.

Professor Sharfman, however, argues not only as the dissenters in Cybergenics II did, that the Hartford Underwriters decision denies bankruptcy courts this discretion, but that sound bankruptcy policy requires courts to deny standing. Even the Third Circuit panel that denied committee standing in the first Cybergenics decision acknowledged that as a matter of policy, it makes perfect sense to grant statutory committees standing to prosecute claims in appropriate circumstances.14 Accordingly, and understandably, the normative question raised by Professor Sharfman received far less attention in the Cybergenics II litigation than the narrower question of statutory interpretation that actually divided the Third Circuit.

Notwithstanding his normative claims against committee standing, Professor Sharfman fails to identify any particular instance where a creditors' committee has abused its court-approved standing. He acknowledges candidly that, in particular cases, value is maximized by conferring standing to bring suit on the creditors' committee and that doing so may facilitate the reorganization effort. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.