Academic journal article Stanford Journal of Law, Business & Finance

Creditor(s' Committee) Derivative Suits: A Reply to Professor Bussel

Academic journal article Stanford Journal of Law, Business & Finance

Creditor(s' Committee) Derivative Suits: A Reply to Professor Bussel

Article excerpt

I am grateful to Professor Bussel for commenting on my article1 and to the editors for giving me a chance to respond to his critique.2

Professor Bussel's defense of creditors' committee derivative standing3 rests on several propositions: (1) many courts have recognized creditor derivative standing;4 (2) the Bankruptcy Code may plausibly be read to contemplate the practice;5 (3) creditors, rather than a trustee or debtor-in-possession, are the "real parties in economic interest" in bankruptcy litigation;6 (4) creditors' committee derivative actions can add value to bankruptcy estates;7 (5) there is no evidence that creditors' committees would "abuse" the right to sue derivatively;8 (6) creditors' committee derivative standing is a "procedural device" rather than a newly-created substantive entitlement;9 and (7) courts can be relied upon to permit creditors' committees to prosecute derivative actions only in "appropriate" circumstances.10 I shall discuss each of these below.

Proposition (1) is true but misleading. Some court decisions (notably the majority opinion in Cybergenics)11 have indeed recognized creditor derivative standing. But other cases are to the contrary.12 And surely the fact that some courts have ruled a particular way does not in itself resolve the question. For otherwise, academic inquiry would be a rather pointless exercise. The objective of my article was precisely to criticize the position that many courts have taken on the issue of creditor derivative standing. The observation that courts have done what I criticize them for doing is no answer to my arguments. And by focusing attention on the cases with which he agrees while ignoring those that are adverse, Professor Bussel presents a misleadingly uniform picture of what in fact has been a mixed experience.13

As to proposition (2), I simply disagree. While the Bankruptcy Code does not explicitly forbid creditors' committee derivative suits, neither (as even the Cybergenics majority conceded)14 does it expressly authorize them. Indeed, it is precisely the Code's silence on the question that makes pre-Code practice and considerations of bankruptcy policy at all relevant to the interpretive analysis. Professor Bussel "strongly disagree[s]" with my "attempt to explain away" sections 503(b) and 105(a).15 But all I have done is identify situations other than when creditors assert derivative claims that the language of section 503(b) more naturally describes16 and pointed out that the open-ended language of Code section 105(a) cannot be invoked in isolation but only to implement an express bankruptcy policy embodied elsewhere in the Code.17 In truth, it is not I but rather those who favor creditors' committee derivative actions who have the real explaining to do. They must answer why if Congress intended to authorize derivative suits in bankruptcy it did not simply say so. The Third Circuit worked hard though unconvincingly in Cybergenics to address the Code-silence issue. Professor Bussel, however, does not face up to it, preferring instead to shift the burden onto me to "explain away" something that Congress in fact has never said.

Proposition (3)-that creditors are the real parties in interest in bankruptcy estate litigation-is largely true but also irrelevant. Parties with a stake in litigation will often not have standing themselves to litigate but will instead be represented by a nominal party with no real interest in the outcome. In bond litigation, for example, it is not the indenture trustee but rather the bondholders whose interests truly are implicated. But only the indenture trustee has standing to sue the bond issuer. I Similarly, in class action litigation it is often not the nominal plaintiffs but rather their lawyers who actually care about the result. But it is the plaintiffs and not their lawyers who have standing. A third example is the garden-variety trustee who, rather than the trust beneficiaries, has standing to litigate on the trust's behalf. …

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