Official Committee of Unsecured Creditors of Cybergenics Corp. Ex Rel. Cybergenics Corp. v. Chinery

Opinions of the United

2003 Decisions States Court of Appeals

for the Third Circuit

5-29-2003

Cybergenics Corp v. Chinery

Precedential or Non-Precedential: Precedential

Docket 01-3805

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PRECEDENTIAL

Filed May 29, 2003

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

(D.C. Civil Action No. 98-3109 (GEB))

District Judge: Honorable Garrett E. Brown, Jr.

Argued: February 19, 2003

Before: BECKER,* Chief Judge, SLOVITER, SCIRICA,**

ALITO, ROTH, McKEE, RENDELL, BARRY, AMBRO,

FUENTES and SMITH, Circuit Judges.

* Judge Becker completed his term as Chief Judge on May 4, 2003.

** Judge Scirica succeeded to the position of Chief Judge on May 4,

2003.

2

(Filed: May 29, 2003)

GARY D. SESSER (Argued)

JAMES GADSDEN

ROXANNA D. NAZARI

Carter, Ledyard & Milburn

2 Wall Street

New York, NY 10005

Counsel for Appellant

Official Committee of Unsecured

Creditors of Cybergenics Corp.

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

Chinery and L&S Research

Corporation

BRUCE E. FADER (Argued)

SCOTT A. EGGERS

Proskauer Rose LLP

1585 Broadway

New York, NY 10036

Counsel for Appellees

Lincolnshire Management, Inc.

JONATHAN C. LIPSON***

Assistant Professor of Law

University of Baltimore School

of Law

1420 North Charles Street

Baltimore, MD 21201

Amicus Law Professors in support of

Appellant

*** Joining Professor Lipson on the brief are Professors Ralph Brubaker,

Daniel J. Brussel, Kenneth N. Klee, Stephen J. Lubben, Walter J.

Taggart, Elizabeth Warren, and William J. Woodward.

3

G. ERIC BRUNSTAD, JR. (Argued)

JULIA FROST-DAVIES

RHEBA RUTKOWSKI

BRYAN D. SHORT

TANYA TYMCHENKO

MELISSA G. LIAZOS

JUSTIN M. O’SULLIVAN

SETH A SCHWARTZ

RACHEL A. VISCOMI

STEVEN M. ACKLEY-ORTIZ

SERENA D. MADAR

Bingham McCutchen LLP

150 Federal Street

Boston, MA 02110

Amicus in support of Appellant

TERESA K.D. CURRIER

ERIC LOPEZ SCHNABEL

JEFFREY R. WAXMAN

Klett Rooney Lieber & Schorling

The Brandywine Building

1000 West Street, Suite 1400

Wilmington, DE 19801

DANIEL H. GOLDEN

DAVID H. BOTTER

ROBERT J. STARK

Akin Gump Strauss Hauer &

Feld LLP

590 Madison Avenue

New York, NY 10022

Counsel for Amicus Committee of

Unsecured Creditors of Hayes

Lemmerz International, Inc. in

support of Appellant

4

LUC A. DESPINS

SUSHEEL KIRPALANI

ROY C. STUDNESS

Milbank, Tweed, Hadley &

McCloy LLP

1 Chase Manhattan Plaza

New York, NY 10005

Counsel for Amicus Official

Committee of unsecured Creditors of

Safety-Kleen Corp. in support of

Appellant

GEORGE R. HIRSCH (Argued)

ELYSSA S. KATES

Bressler, Amery & Ross, P.C.

P.O. Box 1980

Morristown, NJ 07962

Counsel for Amicus Smurfit-Stone

Corp. in support of Appellees

KEITH SHARFMAN

Associate Professor of Law

Rutgers University School of Law

123 Washington Street

Newark, NJ 07102

Amicus in support of Appellees

OPINION OF THE COURT

BECKER, Circuit Judge.

CONTENTS

I. Introduction .............................................................. 6

II. Facts and Procedural History .................................. 7

III. How Does Hartford Underwriters Affect this Case?

................................................................................ 10

5

A. What happened in Hartford Underwriters? ...... 11

B. Did Hartford Underwriters take place in an

analogous context? .......................................... 14

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

Underwriters? .......................................................... 16

A. The Code Itself ................................................. 16

1. The Need to Interpret Chapter 11 as a

Whole ....................................................... 17

2. Section 1109(b) ........................................ 19

3. Section 1103(c)(5) ..................................... 22

4. Section 503(b)(3)(B) .................................. 23

5. A Textual Conclusion ............................... 28

B. Bankruptcy Courts as Courts of Equity .......... 30

V. Pre-Code Practice ..................................................... 32

VI. Does Derivative Standing for Creditors’ Committees

Advance Congress’s Goals? ..................................... 37

A. The Salutary Effects of Derivative Standing for

Creditors’ Committees ...................................... 38

B. Potential Drawbacks of Derivative Standing for

Creditors’ Committees ...................................... 41

1. Might derivative suits dissipate the value

of the estate ............................................. 41

2. Might bankruptcy courts be unable to

identify meritorious claims ....................... 43

3. Might derivative suits consume judicial

resources .................................................. 44

C. Possible Substitutes for Derivative Standing for

Creditors’ Committees ...................................... 45

1. Appointment of a bankruptcy trustee ...... 45

2. Appointment of an examiner with

authority to sue ....................................... 46

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

possession to sue ..................................... 48

4. Converting the bankruptcy case to

Chapter 7 ................................................. 48

5. Moving the bankruptcy court to authorize

a committee to bring a post-confirmation

avoidance action ...................................... 49

6. Summary ................................................. 50

VII. Conclusion ............................................................. 50

6

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 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 (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 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 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 ¶ 1103.05[6][a] (15th rev. ed. 2002).

Accordingly, we will reverse the judgment of the District

Court and remit the case to the original Panel so that it

may consider the other grounds for the District Court’s

reversal of the Bankruptcy Court’s Order, which were not

argued before the en banc Court.

7

II. Facts and Procedural History

Scott Chinery founded L&S Research Corporation (“L&S”)

in 1985.1 L&S, with Chinery as its sole shareholder,

marketed nutritional food supplements for bodybuilding

and weight loss under the brand name “Cybergenics.” In

1994, Lincolnshire Management, Inc. (“Lincolnshire”)

initiated negotiations with Chinery to buy L&S, and the

parties reached an agreement for an aggregate

consideration of approximately $110.5 million.2

Lincolnshire established Cybergenics Acquisition, Inc., an

equity investment affiliate, which later became Cybergenics

Corporation (“Cybergenics”), to acquire substantially all of

L&S’s assets. Lincolnshire’s equity investment affiliate

provided the largest equity stake and became the majority

shareholder in Cybergenics, although several banks and

various other lenders (“the Lenders”) helped to finance the

asset purchase. These financiers also agreed to provide

working capital for Cybergenics after the acquisition. The

buyout was memorialized in a writing dated October 13,

1994.

Cybergenics’s financial outlook soon worsened. Despite

increased equity investments by Lincolnshire and the

Lenders, in August 1996, Cybergenics filed a voluntary

petition for relief under Chapter 11 of the Bankruptcy

Code. As is customary in Chapter 11 reorganizations, the

bankruptcy court allowed Cybergenics to remain in control

of its assets as a debtor-in-possession, so that no

bankruptcy trustee was appointed. As is also customary,

the United States trustee appointed a creditors’ committee

(“the Committee”) to represent the interests of Cybergenics’s

unsecured creditors.

Although the traditional Chapter 11 case involves a

business reorganization rather than a liquidation,

Cybergenics soon determined that its situation was

1. 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.

2. This amount was later reduced to $60 million in settlement of a

lawsuit by Lincolnshire against L&S and Chinery alleging fraud, breach

of fiduciary duty, and breach of contract relating to the sale.

8

unsalvageable, and it 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 then moved to dismiss the

bankruptcy case, but the Committee objected, asserting

that certain transactions relating to the leveraged buyout

could give rise to substantial fraudulent transfer actions

and that a debtor-in-possession has a fiduciary duty to

maximize the value of the estate.

In June 1997, Cybergenics notified the bankruptcy court

that it would not pursue any fraudulent transfer claims,

arguing that the probability of recovery was sufficiently low

that the costs of litigation would likely outweigh any

benefits. The Committee responded by volunteering to bear

all of the costs so that the avoidance action would go

forward, but when Cybergenics still refused to pursue the

claims, the Committee sought leave from the Bankruptcy

Court to bring a derivative action to avoid the transfers for

the benefit of the estate. After a hearing, the Bankruptcy

Court concluded that the fraudulent transfer claims were

colorable and that Cybergenics’s refusal to prosecute them

was unreasonable given the Committee’s offer to bear the

litigation costs. It therefore authorized the Committee to

proceed derivatively. The Committee filed its complaint in

March 1998 under 11 U.S.C. § 544(b), seeking to avoid

fraudulent transfers to the Lenders, Lincolnshire, L&S, and

Chinery.

The defendants filed motions to dismiss under Federal

Rule of Civil Procedure 12(b)(1), arguing, inter alia, that the

fraudulent transfer claims that the Committee asserted 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. It held that the fraudulent transfer claims were

assets of the debtor, and that because the 1996 bankruptcy

asset sale disposed of all of Cybergenics’s assets, the claims

were no longer property of the bankruptcy estate, so the

Committee could not raise them on the estate’s behalf. On

appeal, we reversed and remanded, holding that while

sections 544 and 1107 combine to give a debtor the power

9

to pursue these remedies normally reserved for creditors,

these causes of action are not “assets” of the debtor, and

therefore were not transferred in a sale of the debtor’s

assets. In re Cybergenics Corp., 226 F.3d 237, 245 (3d Cir.

2000).

On remand, the defendants again moved to dismiss. They

raised several grounds for dismissal that they had asserted

in their previous motions to dismiss and that we had

declined to reach in Cybergenics. 226 F.3d at 241 n.5. They

also argued for the first time that, while fraudulent transfer

claims technically “belong” to creditors, § 544(b) states only

that “the trustee may” avoid fraudulent transfers — it does

not mention creditors’ committees. They further argued that

pursuant to the Supreme Court’s reasoning in Hartford

Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S.

1 (2000) (interpreting “the trustee may” in § 506(c) of the

Bankruptcy Code to exclude all parties except the trustee),

§ 544(b)’s grant of standing is exclusive and does not

extend to creditors’ committees.

On October 31, 2001, the District Court granted the

defendants’ renewed motions to dismiss and held that the

Committee could not bring suit under § 544(b). It concluded

that the Supreme Court’s interpretation of “the trustee

may” in Hartford Underwriters governed the meaning of the

same language in § 544(b). In so doing, it rejected the

Committee’s argument that the holding in Hartford

Underwriters did not extend to analysis of derivative

standing, even though the Supreme Court had explicitly

noted that derivative standing was not at stake in that

case. See Hartford Underwriters, 530 U.S. at 13 n.5

(“Whatever the validity of [derivative standing], it has no

analogous application here . . . . Petitioner asserted an

independent right to use § 506(c), which is what we reject

today.”). The District Court also provided several alternative

grounds for dismissal.3

3. These include conclusions that: (1) the Committee could identify no

present creditor, a requirement for maintaining an action to avoid a

fraudulent transfer; (2) Cybergenics had no unpaid creditors holding

unsecured claims at the time of the alleged fraudulent transfer; (3) the

heightened pleading standard of Fed. R. Civ. Proc. 9(b) is applicable to

the Committee’s complaint, and it failed to plead with sufficient

particularity; (4) the Committee was not entitled to amend its complaint

under Fed. R. Civ. Proc. 17(a); and (5) the Committee abandoned its

claim of equitable subordination.

10

The Committee timely appealed, and in an opinion dated

September 20, 2002, a Panel of this Court affirmed the

District Court’s holding that § 544(b) did not authorize

derivative standing for creditors’ committees to sue to avoid

allegedly fraudulent transfers. Official Committee of

Unsecured Creditors of Cybergenics Corporation v. Chinery,

304 F.3d 316 (3d Cir. 2002). The Panel’s analysis did not

reach the District Court’s alternate grounds for dismissal,

as those rationales assumed the existence of derivative

standing.

On November 18, 2002, we granted the Committee’s

timely motion for rehearing en banc and accordingly

vacated the Panel decision. We have since accepted

extensive supplemental briefing, including a number of

amicus briefs, and heard oral argument by the parties and

amicus curiae.

III. How Does Hartford Underwriters Affect this Case?

The District Court’s conclusion that the Code does not

permit creditors’ committees derivatively to prosecute

fraudulent transfer claims was grounded in its

determination that the language in § 544(b) vests exclusive

standing in the trustee. Section 544(b)(1) states that:

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. § 544(b) (emphasis added). The District Court’s

determination of exclusivity relied critically on Hartford

Underwriters, 530 U.S. 1 (2000), in which the Supreme

Court determined that identical language in § 506(c) of the

Code foreclosed the right of any nontrustee to prosecute

that particular action. The District Court concluded that

“there is no principled basis under which the Court can

apply different meanings to the words ‘the trustee may’ in

separate sections of the Code,” so it considered Hartford

Underwriters dispositive.

11

A. What happened in Hartford Underwriters?

In Hartford Underwriters, debtor Hen House Interstate,

Inc. obtained workers’ compensation insurance from

petitioner Hartford Underwriters as part of its Chapter 11

reorganization strategy. Although Hen House repeatedly

failed to pay its monthly premiums, Hartford, which knew

nothing of Hen House’s bankruptcy, continued to provide

insurance. When the reorganization attempt fell through,

Hen House converted its case to a Chapter 7 liquidation

and a trustee was appointed. Hartford, alerted to the

bankruptcy, sought to recover approximately $50,000 in

overdue premiums from the bankruptcy estate but found it

almost entirely without unencumbered assets.

Section 503(b)(1)(A) of the Bankruptcy Code provides that

“the actual, necessary costs and expenses of preserving the

estate” are treated as administrative expenses, and

§ 507(a)(1) provides that such administrative expenses are

entitled to priority over pre-petition unsecured claims.

Hartford and Hen House agreed that the overdue premiums

constituted administrative expenses, but Hartford was

nevertheless stymied, for virtually all of Hen House’s assets

were held by secured creditors, whose claims are superior

to administrative claims. See 11 U.S.C. § 506. Hartford

then looked to § 506(c), which provides an important

exception to that priority. It states that “[t]he 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. § 506(c) (emphasis

added). Hartford argued that this provision entitled it to

recover the premiums even though it was an administrative

claimant rather than a trustee. The bankruptcy court ruled

in favor of Hartford, and the district court and an Eighth

Circuit panel affirmed. In re Hen House Interstate, Inc., 150

F.3d 868 (8th Cir. 1998). The panel decision was

subsequently vacated, and the Eighth Circuit, sitting en

banc, held § 506(c) unavailable to an administrative

claimant like Hartford. 177 F.2d 719 (8th Cir. 1999) (en

banc).

A unanimous Supreme Court affirmed the en banc

decision. It began “with the understanding that Congress

12

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, 530 U.S. 249,

254 (1992)), and reiterated the longstanding maxim 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. (citations omitted). Turning to § 506(c), the Court found

that it “appears quite plain[ly]” to mean that only the

trustee may recover administrative expenses ahead of

secured claims. Id. Although it acknowledged that the

statute does not expressly bar non-trustees from recovery,

it had “little difficulty” in inferring that “exclusivity is

intended.” Id.

The Court’s first rationale was contextual. A bankruptcy

trustee’s role in Chapter 7 liquidation proceedings is central

by design, and this “unique role . . . makes it entirely

plausible that Congress would provide a power to him and

not to others.” Id. at 7. The Court further reasoned that,

“had no particular parties been specified [in § 506(c),] . . .

the trustee is the most obvious party who would have been

thought empowered to use the provision.” Id. The Court

therefore found little reason to doubt the maxim 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. (citing 2A N. Singer, Sutherland on

Statutory Construction § 47.23, p. 217 (5th ed. 1992)).

Buttressing this conclusion was the logic that, “had

Congress intended the provision to be broadly available, it

could simply have said so, as it did in describing the

parties who could act under other sections of the Code.” Id.

Having determined from its textual inquiry that “by far

the most natural reading of § 506(c) is that it extends only

to the trustee,” the Court declared that Hartford’s “burden

of persuading us that the section must be read to allow its

use by other parties is ‘exceptionally heavy.’ ” Id. at 9

(quoting Patterson v. Shumate, 504 U.S. 753, 760 (1992)).

It then turned to Hartford’s arguments based on pre-Code

practice and policy considerations. Regarding pre-Code

practice, the Court found that Section 506(c)’s provision for

13

the charge of certain administrative expenses against

lienholders continued a practice that existed under the

Bankruptcy Act of 1898. Id. (citations omitted). Even then,

however, “[i]t was the norm that recovery of costs from a

secured creditor would be sought by the trustee,” rather

than by an administrative claimant. Id. (citations omitted).

Still, Hartford cited “a number of lower court cases [ ] in

which — without meaningful discussion of the point —

parties other than the trustee were permitted to pursue

such charges under the Act [of 1898], sometimes

simultaneously with the trustee’s pursuit of his own

expenses,” id. (citing cases), and the Court recognized that

some of its early decisions had allowed individual claimants

to seek recovery from secured assets. See, e.g., Louisville, E.

& St. L. R. Co. v. Wilson, 138 U.S. 501 (1891).

The Court nevertheless concluded that “[i]t is

questionable whether these precedents establish a

bankruptcy practice sufficiently widespread and well

recognized to justify the conclusion of implicit adoption by

the Code. We have no confidence that the allowance of

recovery from collateral by nontrustees is the type of rule

that . . . Congress was aware of when enacting the code.”

Id. (quoting United States v. Ron Pair Enterprises, Inc., 489

U.S. 235, 246 (1989)). Cf. Kelly v. Robinson, 479 U.S. 36,

46 (1986) (giving weight to pre-Code practice that was

“widely accepted” and “established”). Indeed, the Court

strongly implied that even a more convincing historical

showing would not have carried the day for Hartford:

“Where the meaning of the Bankruptcy Code’s text is itself

clear . . . its operation is unimpeded by contrary . . . prior

practice. . . . In this case, we think the language of the

Code leaves no room for clarification by pre-Code practice,”

for it “cannot transform § 506(c)’s reference to ‘the trustee’

to ‘the trustee and other parties in interest.’ ” Id. at 11

(citations omitted).

Finally, the Court engaged Hartford’s contention that its

interpretation was necessary as a matter of public policy.

Hartford argued that in some cases the trustee may lack an

incentive to pursue payment for administrative expenses,

so that if the Code is to encourage such lenders to finance

a corporation’s administrative needs throughout its

14

bankruptcy, it must allow those lenders later to bring their

own actions to recover their investments. Hartford also

suggested that affording standing to administrative

claimants might encourage the provision of post-petition

services to debtors on more favorable terms, since such

claimants would presumably always be willing vigorously to

defend their financial interests whereas a trustee might be

more reluctant. Id. at 11-12. The Court, however,

determined that “it is far from clear that the policy

implications favor petitioner’s position,” and even suggested

that Hartford’s interpretation might “itself lead to results

that seem undesirable as a matter of policy.” Id. at 12. It

ultimately declined to weigh the competing concerns,

explaining that “we do not sit to assess the relative merits

of different approaches to 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.” Id. at 13-14.

B. Did Hartford Underwriters take place in an

analogous context?

Based on the above reasoning, the Hartford Underwriters

Court interpreted “the trustee may” in § 506(c) to mean that

only the trustee may bring an action. In the case at bar, the

District Court concluded that, faced with the same

language in § 544(b), the same conclusion must there

obtain. But the Hartford Underwriters Court expressly

reserved the question before us today. In a footnote critical

to understanding the scope of that decision, the Supreme

Court stated:

We do not address whether a bankruptcy court can

allow other interested parties to act in the trustee’s

stead in pursuing recovery under § 506(c). Amici

American Insurance Association and National Union

Fire Insurance Co. draw our attention to the practice of

some courts of allowing 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. §§ 544,

545, 547(b), 548(a), 549(a), mention only the trustee.

See, e.g., In re Gibson Group, Inc., 66 F.3d 1436, 1438

15

(CA6 1995). Whatever the validity of that practice, it

has no analogous application here, since petitioner did

not ask the trustee to pursue payment under § 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

§ 506(c), which is what we reject today.

Id. at 13 n.5. The District Court nevertheless concluded

that the Committee failed sufficiently to distinguish

Hartford Underwriters’s method of interpretation, which it

found to yield equally compelling results when applied to

§ 544(b).

We agree that Hartford Underwriters is most useful for

the interpretive methodology it offers, but it is critical to

note the context in which that decision arose, for it is

materially unlike the one before us today. The petitioner in

Hartford Underwriters was an insurer who, by continuing

coverage despite Hen House’s failure to pay its premiums,

became an administrative lender with claims subordinate to

those of the secured creditors. When it learned of Hen

House’s bankruptcy, it attempted to use § 506(c) to recover

the premiums it was owed, but it did so in a strikingly

unilateral fashion. The insurance premiums were not costs

incurred by the trustee that, if recovered, would have

yielded a common benefit. Instead, they would have

satisfied only Hartford’s outstanding claim. Nor did

Hartford seek the court’s or the trustee’s permission to

recoup the expense, but rather it sued in its own name and

for its own direct benefit.

The situation at bar is markedly different. When the

Committee discovered that certain transfers made by

Cybergenics were potentially avoidable as fraudulent, it first

petitioned the Cybergenics management to file an avoidance

action under § 544(b).4 But management refused to file that

action, claiming that the costs would likely outweigh the

benefits, and it maintained this position even after the

Committee volunteered to bear all litigation costs. The

4. As discussed more fully infra, section 1107 gives Chapter 11 debtors-

in-possession all powers normally associated with trustees in the usual

event that no trustee is appointed.

16

Committee, finding management’s stance unreasonable,

petitioned the bankruptcy court for permission to prosecute

a § 544(b) avoidance action in Cybergenics’s name and on

its behalf — any recovery would go not to the Committee,

but to the estate itself. The Bankruptcy Court concluded

that the fraud claims were colorable, and that the

Committee’s offer to bear the litigation costs insulated the

estate from risk. Noting that the debtor-in-possession has

a duty to maximize the value of the estate, the court

concluded that management’s refusal to act was

unreasonable even given the usual judicial deference to

business judgment, and it authorized the Committee to sue

in Cybergenics’s name.

This difference in contexts is crucially important, for

while the question in Hartford Underwriters was 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. With this

perspective in mind, we turn to the question whether

derivative suits may be maintained under § 544(b) after

Hartford Underwriters.

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

Hartford Underwriters?

A. The Code Itself

As did the 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., 503 U.S. at 254). 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. (citations omitted).

Chinery and Lincolnshire (“Lincolnshire”) contend that, as

the same language is used in §§ 544(b) and 506(c), there is

a presumption that it means the same thing in each

instance: “Undoubtedly, there is a natural presumption

that identical words used in different parts of the same act

are intended to have the same meaning.” Atlantic Cleaners

17

& Dyers, Inc. v. United States, 286 U.S. 427, 433 (1932).

That presumption may be overcome only when “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.” Id. Lincolnshire therefore submits that the

Committee’s “burden of persuading us that the section

must be read to allow its use by other parties is

exceptionally heavy.” Hartford Underwriters, 530 U.S. at 9

(citation omitted).

The Committee does not dispute this assessment — it

concedes that, as in Hartford Underwriters, “the trustee

may” cannot be read to mean “the trustee and other parties

in interest may.” But it submits that this point is neither

here nor there, for it does not seek to “use” § 544(b) in that

sense. In its estimation, § 544(b) is important only insofar

as it does not preclude the bankruptcy court from

authorizing the Committee to sue derivatively when the

trustee, the party explicitly empowered to use § 544(b),

improperly refuses to exercise its power. Of course, even

under this view we must determine whether such an

equitable remedy is consistent with the Bankruptcy Code’s

statutory scheme, of which § 544(b) is a part. We are

satisfied that it is.

1. The Need to Interpret Chapter 11 as a Whole

As the Supreme Court has often noted, “[s]tatutory

construction [ ] is a holistic endeavor,” United Savings Assn.

of Tex. v. Timbers of Inwood Forest Associates, Ltd., 484

U.S. 365, 371 (1988), and this is especially true of the

Bankruptcy Code. In United States v. Kelly, a case

interpreting § 523, the Court stated that “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.” 479 U.S. 36, 43 (1986) (citations omitted). The

Hartford Underwriters Court interpreted the Code

holistically in determining that “the trustee may” in § 506(c)

is exclusive, but in that case, there was no “whole law” to

interpret, for § 506(c) is effectively self-contained. This is

evident in two ways. First, there is no other provision in

Chapter 7 of the Code that even arguably authorizes a

party to “recover [administrative expenses] from property

18

securing an allowed secured claim,” so the Court saw no

need to look beyond § 506(c) to understand the mechanics

of the cause of action. Second, the Court concluded that

“the fact that the sole party named — the trustee — has a

unique role in bankruptcy proceedings makes it entirely

plausible that Congress would provide a power to him and

not to others.” Hartford Underwriters, 530 U.S. at 7. It

therefore saw no reason to look beyond § 506(c) to

determine standing to bring that cause of action.

In contrast, reading § 544(b) in isolation leads

immediately to incoherence. While, as the Court explained,

the trustee serves a “unique role” in Chapter 7, nothing

could be further from the truth in Chapter 11, where

trustees rarely exist. See In re Sharon Steel Corp., 871 F.2d

1217, 1226 (3d Cir. 1989) (“It is settled that appointment of

a trustee should be the exception, rather than the rule.”); 7

Collier on Bankruptcy ¶ 1104.02[1] (15th rev. ed. 1998)

(noting that appointment of a trustee in a Chapter 11 case

is an “extraordinary” remedy). Reading § 544(b) alone would

lead to the fatuous conclusion that Congress vested its

cause of action exclusively in a party that usually does not

exist. Only by looking beyond § 506(c) can one make sense

of this situation, in that § 1107(a) gives a Chapter 11

debtor-in-possession (here, Cybergenics) the rights and

powers of a trustee in the event that no trustee is

appointed.

It is therefore clear that § 544(b) must be viewed as

merely a part, albeit an important part, of the Chapter 11

framework that is designed to help debtors reorganize while

continuing as viable concerns.5 The Committee submits

that, just as one must read § 1107(a) in conjunction with

§ 544(b) to understand who “the trustee” is for § 544(b)

purposes, one must consider three other Chapter 11

sections — 1109(b), 1103(c)(5), and 503(b)(3)(B) — to

5. In this regard, the case at bar is the exception to the rule, for after

filing under Chapter 11, Cybergenics decided to liquidate rather than

reorganize. Critically, however, unlike the debtor in Hartford

Underwriters, Cybergenics never converted its case from Chapter 11 to

Chapter 7. Its bankruptcy therefore remains governed by the Chapter 11

“reorganization” rules.

19

determine whether derivative standing is a permissible

equitable remedy in cases where the court determines that

the trustee has unreasonably refused to bring an avoidance

claim under § 544(b). These sections shed light on the role

Congress intended creditors’ committees to play in the

reorganization process, and we will examine each in turn.

2. Section 1109(b)

Section 1109(b) provides that:

A party in interest, including the debtor, the trustee, a

creditor’s committee, an equity security holder’s

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].

11 U.S.C. § 1109(b) (emphasis added). The Committee

submits that, “[a]lthough 1109 would not provide an

independent right for the Committee to initiate a suit,

absent bankruptcy court approval, it does support the

authority of bankruptcy courts to permit creditors’

committees to bring claims on behalf of the debtor in

possession for the benefit of the estate.” (Committee’s Reply

Brief at 7.) There is precedent for this view. Collier explains

that, “consistent with the broad right of participation

conferred by § 1109(b), the court may authorize a party in

interest to commence litigation on behalf of the estate if

certain conditions are satisfied.” 7 Collier on Bankruptcy

¶ 1109.05 (citing Fogel v. Zell, 221 F.3d 955, 965-66 (7th

Cir. 2000)) (“If a trustee unjustifiably refuses a demand to

bring an action to enforce a colorable claim of a creditor,

the creditor may obtain the permission of the bankruptcy

court to bring the action in place of, and in the name of,

the trustee.”).

Lincolnshire contends that, whatever the theoretical

appeal of this position, it does not survive Hartford

Underwriters, where Hartford argued “that § 1109(b)

evidences the right of a nontrustee to recover under

§ 506(c).” Hartford Underwriters, 530 U.S. at 8. While noting

that § 1109(b) was “by its terms inapplicable” because it

applied only to Chapter 11 reorganizations, and the debtor

had previously converted its case to Chapter 7, id., the

Court nonetheless stated in dictum that “we do not read

20

§ 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.” Id. Cf. 7 L. King, Collier on Bankruptcy

¶ 1109.05 (15th rev. ed. 1999) (“In general, section 1109

does not bestow any right to usurp the trustee’s role as

representative of the estate with respect to the initiation of

certain types of litigation that belong exclusively to the

estate.”). In Lincolnshire’s view, § 1109(b) allows a

committee to intervene in an adversary proceeding initiated

by a trustee, but it does not allow a committee to initiate or

prosecute an action independent of the trustee.

The Committee responds that § 1109(b) must mean

something more than a right to intervene, for “a general

right to be heard would be an empty grant unless those

who had such right were allowed to act when those who

should act did not.” (Committee’s Brief at 26) (quoting 5

Collier on Bankruptcy § 1109.02[3] (15th ed. 1986)). It

submits that we should not give great weight to the

Supreme Court’s interpretation in dictum of a provision

that the Court itself noted was “by its terms inapplicable,”

especially since the Committee here does not assert an

independent right of the sort the Hartford Underwriters

Court considered.

Although the Committee is doubtless correct that the

Supreme Court’s dicta are not binding on us, we do not

view it lightly. As we have stated:

[W]e 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

21

F.3d 649, 653 (7th Cir. 1998)). Nevertheless, we are

satisfied that the case at bar is not the situation the Court’s

dictum anticipated. The Court’s clear concern was that a

party might use § 1109(b) to “usurp[ ] the trustee’s role as

representative of the estate,” Hartford Underwriters, 530

U.S. at 8, thus defeating Congress’s intention that the

trustee act as a gatekeeper, weighing the potential benefits

of litigation against the costs it might incur. No risk of

usurpation exists here, for the Committee took no

unsanctioned action. Instead, it petitioned the Bankruptcy

Court for permission to sue in the estate’s name, and that

Court conferred such authority only after it determined that

the debtor was neglecting its statutory duty to act in the

estate’s interest. This exercise of judicial power does not

implicate the usurpation concerns expressed in Hartford

Underwriters. Yet it is precisely because the issue at bar

involves judicial power that § 1109(b) cannot, alone, provide

a definitive resolution. Read fairly, § 1109(b) addresses only

a committee’s direct rights — it says nothing whatever

about a court’s power to allow derivative standing to remedy

a violation of those rights.

Section 1109(b) is helpful to the Committee insofar as it

evinces Congress’s intent for creditors’ committees to play

a vibrant and central role in Chapter 11 adversarial

proceedings. Amicus G. Eric Brunstad offers an

etymological perspective on that intent. Section § 1109(b)

derives from Section 206 of the former Bankruptcy Act, 11

U.S.C. § 606, and former Chapter X Rule 10-210(a). See In

re Amatex Corp., 755 F.2d 1034, 1042 (3d Cir. 1985). These

two provisions were designed to broaden creditor

participation in reorganization proceedings in order to

remedy the deficiencies of prior procedures, which were

deemed to be unduly restrictive. See In re Marin Motor Oil,

Inc., 689 F.2d 445, 451 (3d Cir. 1982). Significantly,

however, § 1109(b) is broader than either of those

provisions — while they authorized creditors “to be heard

on all matters,” neither authorized creditors to “raise”

issues. Given our conclusion infra that derivative standing

for creditors’ committees was common in the pre-Code days

of Section 206 and Chapter X Rule 10-210(a), it would be

odd to conclude that Congress abolished derivative

22

standing at the same time as it broadened committees’

adversarial role through § 1109(b).

3. Section 1103(c)(5)

The Committee next turns for support to Section

1103(c)(5), which states: “A committee appointed under

section 1102 of this title may perform such other services

as are in the interest of those represented.” 11 U.S.C.

§ 1103(c)(5). Because the Bankruptcy Court found that the

assertion of fraudulent transfer claims would benefit the

estate, the Committee submits that it should be able to

represent the estate for the purpose of prosecuting those

claims.

Lincolnshire has several responses. It first represents

that the Committee’s interpretation of § 1103(c)(5) would

amount to a free-roving power for the Committee to do

whatever it considers to be in the estate’s interest, a role

that would eviscerate the debtor-in-possession’s role as

gatekeeper. It next notes that the powers granted to

committees in § 1103(c)(1)-(4) are very specific, including

the power to: (1) consult with the debtor concerning the

case; (2) investigate the debtor’s acts and financial

condition; (3) participate in the formulation of a plan; and

(4) request the appointment of a trustee or examiner.

Linconshire suggests that interpreting the (c)(5) catch-all

provision to allow committees to take any action in the

debtor’s interest would render superfluous the specific

grants in (1) to (4), and would also violate the interpretive

canon ejusdem generis, which states that “where general

words follow specific words in a statutory enumeration, the

general words are construed to embrace only objects

similar in nature to those objects enumerated by the

preceding specific words.” Circuit City Stores, Inc. v. Adams,

532 U.S. 105, 114-15 (2001) (quoting 2A N. Singer,

Sutherland on Statutes and Statutory Construction § 47.17

(1991)). Insofar as the grants of power in (1) to (4) are quite

narrow and non-adversarial, it concludes, the catch-all

power should be similarly confined.

We agree that § 1103(c)(5) does not confer the sort of

blanket authority necessary for the Committee

independently to initiate an adversarial proceeding,

23

including one under § 544(b). Like § 1109(b), however,

§ 1103(c)(5) suggests that Congress intended for creditors’

committees to perform services on behalf of the estate, and

that Congress consciously built a measure of flexibility into

the scope of those services. As the question before us today

is whether a bankruptcy court can authorize a creditors’

committee to represent the estate when the usual

representative is delinquent, the “flexible representation”

role evidenced in § 1103(c)(5) militates in the affirmative.

4. Section 503(b)(3)(B)

While Sections 1109(b) and 1103(c)(5) provide clear

evidence that Congress envisioned a central role for

creditors’ committees in Chapter 11 proceedings, their

focus on creditors’ committees themselves provides at best

indirect evidence that Congress granted bankruptcy courts

the power to confer derivative standing upon those

committees. A third Code section, however, provides far

more direct insight into bankruptcy courts’ powers. Section

503(b)(3)(B) allows for the priority payment of the expenses

of “a creditor that recovers, after the court’s approval, for

the benefit of the estate any property transferred or

concealed by the debtor.” 11 U.S.C. § 503(b)(3)(B). Brunstad

argues that the only explanation for this provision is that it

rewards monetarily the practice of permitting creditors,

with court authorization, to pursue causes of action on

behalf of bankrupt debtors. It would make little sense, he

urges, to provide for the reimbursement of a “creditor that

recovers,” if standing to recover is limited exclusively to the

trustee — that interpretation would render § 503(b)(3)(B)

entirely superfluous.

Amicus Official Committee of Unsecured Creditors of

Safety-Kleen Corp. (“The Safety-Kleen Committee”) agrees,

and it provides an historical perspective on § 503(b)(3)(B).

Derivative standing for creditors was recognized judicially

as early as 1900. See Chatfield v. O’Dwyer, 101 Fed. 797,

799 (8th Cir. 1900); 3A James Wm. Moore et al., Collier on

Bankruptcy ¶ 64.104 n.6 (14th ed. rev. 1975). In 1903,

Congress allowed for reimbursement for such services by

adding Section 64(a)(1) to the Bankruptcy Act of 1898:

The debts to have priority, in advance of the payment

of dividends to creditors, and to be paid in full out of

24

bankruptcy estates, and the order of payments shall

be: (1). . . where the property of the bankrupt,

transferred or concealed by him either before or after

the filing of the petition, is recovered for the benefit of

the estate of the bankrupt by the efforts and at the cost

and expense of one or more creditors, the reasonable

costs and expenses of such recovery. . .

11 U.S.C. § 104(a)(1) (redesignated from § 64 in 1938)

(repealed 1978) (emphasis added). Courts interpreted § 64

as not only allowing for recovery of expenses incurred while

suing derivatively, but also as authorizing derivative

standing in the first instance. See, e.g., In re Eureka

Upholstering Co., 48 F.2d 95, 96 (2d Cir. 1931) (allowing the

bankruptcy court to authorize derivative standing under

§ 64); In re Stearns Salt & Lumber Co., 225 Fed. 1, 3 (6th

Cir. 1915) (stating that a trustee could authorize derivative

standing under § 64). A creditor’s ability to sue derivatively

was, however, limited by the requirement that a creditor

obtain permission either from the trustee or the court

before acting, the rationale being that those entities served

a salutary gatekeeping function. See, e.g., In re Eureka, 48

F.2d at 96.

When Congress enacted the Bankruptcy Code in 1978, it

made clear its intent for the new § 503(b)(3)(B) to continue

the policies of § 64(a)(1) regarding the reimbursement of

expenses incurred while recovering property for the benefit

of the estate. See H.R. Doc. No. 93-137, 93d Cong. 1st

Sess., Pts I and II (1973), available in Collier 15th ed. at

App. Pt. 4(c) (explaining that the proposed § 503(b)(3)(B)

“continues the policy of § 64(a)(1) and allows a creditor to

recover expense incurred which actually benefits the

estate”). The Safety-Kleen Committee submits that the only

substantive modification contained in § 503(b)(3)(B) is a

clarification that only the bankruptcy court — not the

bankruptcy trustee — can authorize derivative suits.

(Safety-Kleen Committee Brief at 16) (citing In re Godon,

Inc., 275 B.R. 555, 562 (Bankr. E.D. CA. 2002)).

Lincolnshire, however, strongly disputes the notion that

§ 503(b)(3)(B) authorizes derivative standing. It observes

that “[f]ederal courts have consistently held that

§ 503(b)(3)(B) does not confer standing to creditors to sue

25

on behalf of the bankruptcy estate.” (Lincolnshire’s

Response to Amici at 15-16) (quoting Surf N Sun Apts., Inc.,

v. Dempsey, 253 B.R. 490, 492 (M.D. Fla. 1999)) (citing

cases). Lincolnshire instead contends that the provision

merely allows the recovery of expenses incurred in actions

that a creditor has a direct right to bring. For example, a

creditor might assist a debtor in locating assets owed to the

estate by conducting a Bankruptcy Rule 2004 examination

of a transferee, a step available to “any party in interest”

that obtains court approval. See Fed. R. Bankr. Proc. 2004.

Amicus Professor Keith Sharfman agrees, and offers by way

of example the situation where a creditor brings a state law

fraudulent transfer claim against a party to whom the

debtor had transferred the creditor’s collateral. He submits

that such an action would need “the court’s approval,” i.e.,

the grant of a motion to lift the automatic stay that would

otherwise block the action from proceeding. See 11 U.S.C.

§§ 362(d) and 362(f). Any surplus value recovered would

presumably be “for the benefit of the estate,” as it would

have to be turned over to the estate pursuant to 11 U.S.C.

§ 542.

Lincolnshire also asserts that, even if Section 503 does

recognize derivative standing, it “does not address, even

inferentially, the power of a creditors’ committee. It

addresses only the ability of a ‘a creditor,’ not ‘a creditors’

committee,’ to recover certain expenses. Congress obviously

knew the difference.” (Lincolnshire Reply to Amici at 16.)

For example, in § 1109(b), discussed at length supra,

Congress granted the right to appear and be heard to a

“party in interest, including the debtor, the trustee, a

creditors’ committee, an equity security holders’ committee,

[or] a creditor.” 11 U.S.C. § 1109(b) (emphasis added). This

contention is not merely semantic, for the Supreme Court

presumes “that Congress acts intentionally and purposely

when it includes particular language in one section of a

statute but omits it in another.” BFP v. Resolution Trust

Corp., 511 U.S. 531, 537 (1994).

Although Lincolnshire’s arguments are not without force,

we conclude that the most natural reading of § 503(b)(3)(B)

is that it recognizes and rewards monetarily the practice of

permitting creditors’ committees, with court authorization,

26

to pursue derivative actions. We are convinced that the

provision is not limited to direct causes of action, for

property recovered in a direct action is not recovered “for

the benefit of the estate.” The offered examples are not to

the contrary. While a creditors’ committee may certainly

assist a debtor in locating property under Bankruptcy Rule

2004, that investigative assistance would not implicate

§ 503(b)(3)(B) because the committee would not itself

recover the property. More promising is Professor

Sharfman’s suggestion of a creditor who independently

pursues a state law fraud claim and relinquishes to the

estate any surplus recovery. Yet this hypothetical fails as

well, for no surplus recovery is possible. Relevant law

provides that a transfer or obligation may be avoided only

“to the extent necessary to satisfy the creditor’s claim.” See

7A Uniform Laws Annotated, Uniform Fraudulent Transfer

Act § 8; 7A Uniform Laws Annotated, Uniform Fraudulent

Conveyance Act § 9. Because an oversecured creditor

cannot directly recover any property beyond that necessary

to satisfy its own claim, it cannot recover property for the

benefit of the estate unless it sues derivatively.

Generalizing from these examples, we “cannot conceive of

a situation in which a creditor has independent standing

which would allow it to pursue the recovery of property

transferred or concealed by the debtor.” In re Blount, 276

B.R. 753, 762 (Bankr. M.D. La. 2002). While it is possible

that such a situation exists, we are at all events unwilling

to interpret § 503(b)(3)(B) as anticipating obscure

possibilities when a far more natural interpretation is

apparent. Especially given the statutory history, we are

satisfied that Congress intended § 503(b)(3)(B) to allow

bankruptcy courts to reward derivative suits prosecuted by

creditors’ committees.6

6. The dissenting opinion suggests that because creditors’ committees

are typically represented by attorneys, their expenses are properly

reimbursed under sections 330(a)(1)(A) and (B), rather than under

section 503(b)(3)(B). Those sections provide for “reasonable

compensation” as well as “reimbursement for actual, necessary

expenses” incurred by a committee’s representative, such as an attorney.

11 U.S.C. § 330(a)(1)(A), (B). Also, under this view, section 503 properly

addresses only individual creditors, not creditors’ committees.

27

Of course, that determination does little to help the

Committee if only individual creditors may bring derivative

actions. Lincolnshire is correct in its observation that

§ 503(b)(3)(B) speaks only of a “creditor . . . that recovers,”

and says nothing about creditors’ committees. Amicus

Brunstad submits that this is a mere technicality, for under

section 102(7) of the Bankruptcy Act, “the singular includes

the plural.” He reasons that, if all of the creditors could

simultaneously bring an identical action, there is no reason

to disallow the simpler step of allowing a representative

committee to bring that same action, especially given the

flexible authority in § 1103(c)(5) for committees to “perform

such other services as are in the interest of those

represented.” (Transcript of Oral Argument at 33.)

To be sure, several Code provisions identify both

creditors and creditors’ committees as parties with

authority to take action, see, e.g., § 1109(b), and this lends

some weight to Linconshire’s suggestion that the absence of

“committees” in § 503(b)(3)(B) is meaningful. But we are

realists, and we recognize that if we disallow the

Committee’s derivative suit but sanction derivative suits by

individual creditors, the individual creditors could simply

substitute themselves as plaintiffs under Fed. R. Civ. Proc.

17(a) and move forward with litigation. Forcing that step

would be a make-work, for those individual cases would

likely be consolidated into one substantively identical to

We do not believe that it would be proper to embark sua sponte on a

lengthy analysis of Section 330(a)’s role in bankruptcy proceedings —

that section was not cited in any brief submitted in this case. Suffice it

to say that it is not obvious that section 330(a) displaces section

503(b)(3)(B) in this situation, as the two sections contain key differences.

One difference is that section 330(a) does not provide compensation for

a committee’s expenses that are not incurred by an attorney, and such

costs may be considerable. Another is that unlike section 503, section

330(a) contains no language limiting compensation to a creditor “that

recovers,” thus raising the specter of creditors’ committees seeking

reimbursement for failed attempts at recovery. As for the proposition

that section 503 addresses only individual creditors, not creditors’

committees, we set forth in the text infra our reasons for concluding

otherwise.

28

that at bar. Given the flexible role of committees evidenced

in § 1103(c)(5) and the Code’s general presumption that the

singular means the plural, we are satisfied that the purpose

of § 503(b)(3)(B) is served by allowing the Committee to

recover expenses incurred in pursuing a derivative suit.

Any other result would render that provision superfluous,

for absent a judicial power to authorize derivative suits by

creditors, it makes no sense to speak of rewarding a

creditor who sues, with court permission, to recover

property for the benefit of the estate.

5. A Textual Conclusion

For all of the foregoing reasons, we are satisfied that the

most natural reading of the Code is that Congress

recognized and approved of derivative standing for creditors’

committees. Sections 1109(b) and 1103(c)(5), taken

together, evince a Congressional intent for committees to

play a robust and flexible role in representing the

bankruptcy estate, even in adversarial proceedings. Several

cases decided after Hartford Underwriters have concluded

that these two sections alone are sufficient to confer upon

creditors’ committees the right to sue derivatively. In In re

Commodore Int’l Ltd., 262 F.3d 96 (2d Cir. 2001), the

Second Circuit outlined its requirements for derivative

standing, stating:

[W]e hold that a creditors’ committee may sue on

behalf of the debtors, with the approval and

supervision of a bankruptcy court, not only where the

debtor in possession unreasonably fails to bring suit

on its claims, but also where the trustee or the debtor

in possession consents.

Id. at 100. Lincolnshire submits that Commodore “has no

bearing on the present issue with regard to standing

because neither that Court nor the lower court even

acknowledged the [Hartford Underwriters] decision.”

(Lincolnshire Brief at 29.) The implication is that the

Second Circuit Court of Appeals, and the parties before it,

somehow failed to notice an on-point Supreme Court

decision issued less than a year earlier. We doubt that

explanation; more plausible is that the Second Circuit

thought Hartford Underwriters to be irrelevant insofar as it

29

did not address — indeed, it eschewed — derivative

standing. Any doubt on that score is erased by the Second

Circuit’s subsequent decision in Term Loan Holder Comm.

v. Ozer Group, L.L.C. (In re Caldor Corp.), 303 F.3d 161 (2d

Cir. 2002). There, the Court mentioned Hartford

Underwriters after stating its belief that Sections 1103(c)(5)

and 1109(b) “impl[y] a qualified right for creditors’

committees to initiate adversary proceedings where the

trustee or debtor in possession unjustifiably failed to bring

suit.” Id. at 166 (citing In re STN Enterprises, 779 F.2d 901,

904 (2d Cir. 1985)). The Second Circuit clearly believes that

Sections 1103(c)(5) and 1109(b) authorize derivative

standing even after Hartford Underwriters.

The Seventh Circuit reached a similar decision in Fogel,

221 F.3d at 955, a post-Hartford Underwiters case in which

it stated that:

If a trustee unjustifiably refuses a demand to bring an

action to enforce a colorable claim of a creditor, the

creditor may obtain the permission of the bankruptcy

court to bring the action in place of, and in the name

of, the trustee. . . . In such a suit, the creditor

corresponds to the shareholder, and the trustee to

management, in a shareholder derivative action.

Id. at 966 (citations omitted). Again, although Fogel does

not mention Hartford Underwriters, we doubt that it

escaped the court’s notice.

At all events, after an exhaustive examination of Hartford

Underwriters, we agree with the Second and Seventh

Circuits, except insofar as the Second Circuit in Term Loan

implied that the power to initiate derivative suits flows

entirely from Sections 1103(c)(5) and 1109(b). We do not

read those two sections so broadly, but when they are

paired with § 503(b)(3)(B), it becomes unmistakably clear

that Congress approved of creditors’ committees suing

derivatively to recover property for the benefit of the estate.

Avoiding fraudulent transfers through § 544(b) is a perfect

application of that function.

Yet a piece of the puzzle is missing. The Code clearly

demonstrates that Congress approved of derivative

standing, but none of the three sections discussed —

30

1109(b), 1103(c)(5), or 503(b)(3)(B) — seems directly to

authorize such standing. Section 503 comes closest, but

read fairly, that provision merely empowers bankruptcy

courts to reimburse creditors’ committees for the expenses

they incur while suing derivatively. It does not authorize

derivative actions in the first instance. To be sure, that

section would be meaningless unless authority existed, but

such reasoning by negative implication is less than

satisfying. We believe that the missing link is supplied by

bankruptcy courts’ equitable power to craft flexible

remedies in situations where the Code’s causes of action

fail to achieve their intended purpose.

B. Bankruptcy Courts as Courts of Equity

The Supreme Court has long recognized that bankruptcy

courts are equitable tribunals that apply equitable

principles in the administration of bankruptcy proceedings.

See Local Loan Co. v. Hunt, 292 U.S. 234, 240 (1934)

(“[C]ourts of bankruptcy are essentially courts of equity,

and their proceedings inherently proceedings in equity.”).

The enactment of the Code in 1978 increased the degree of

regulation Congress imposed upon bankruptcy proceedings,

but it did not alter bankruptcy courts’ fundamental nature.

See H.R. Rep. No. 95-595, at 359 (1977), reprinted in

U.S.C.C.A.N. 5963, 6315 (stating that, under the

Bankruptcy Code, “[t]he bankruptcy court will remain a

court of equity”) (citing Local Loan Co., 292 U.S. at 240).

Any lingering doubt on that point is dispelled by a string of

post-enactment Supreme Court decisions — see Young v.

United States, 543 U.S. 43, 50 (2002) (“[B]ankruptcy courts

[ ] are courts of equity and ‘apply the principles and rules

of equity jurisprudence.’ ”) (quoting Pepper v. Litton, 308

U.S. 295, 304 (1939)); United States v. Energy Resources

Co., 495 U.S. 545, 549 (1990) (“[B]ankruptcy courts, as

courts of equity, have broad authority to modify creditor-

debtor relationships.”) — and by the Code itself. See 11

U.S.C. § 105(a) (“The Court may issue any order, process,

or judgment that is necessary or appropriate to carry out

the provisions of this title. No provision of this title

providing for the raising of an issue by a party in interest

shall be construed to preclude the court from, sua sponte,

taking any action or making any determination necessary

31

or appropriate to enforce or implement court orders or

rules, or to prevent an abuse of process.”).

The concept of derivative standing arose when, despite a

lack of express statutory authorization, courts of equity

allowed shareholders to pursue valuable actions when the

nominal plaintiff (the corporation) unreasonably refused to

do so. See generally Bert S. Prunty, Jr., The Shareholders’

Derivative Suit: Notes on Its Derivation, 32 N.Y.U. L. Rev.

980 (1957) (tracing the historical development of derivative

suits). In Ross v. Bernhard, 396 U.S. 531 (1970), the

Supreme Court explained the utility of derivative standing

as a means of providing equitable redress, not only from

“faithless officers and directors,” but also directly from

“third parties who had damaged or threatened the

corporate properties and whom the corporation through its

managers refused to pursue.” 396 U.S. at 534. It also

addressed the doctrine’s standards, including the

requirement “that the corporation itself [must have] refused

to proceed after suitable demand, unless excused by

extraordinary conditions.” 396 U.S. at 534.

We believe that the ability to confer derivative standing

upon creditors’ committees is a straightforward application

of bankruptcy courts’ equitable powers. In § 544(b),

Congress made clear that it intended for the estate to

recover property fraudulently transferred by the debtor. The

mechanism Congress designed to ensure this recovery was

to vest in the trustee (or the debtor-in-possession) both the

power to bring an avoidance action and the duty to bring

one if it would likely benefit the estate. See, e.g., In re

Cybergenics, 226 F.3d at 243 (“A paramount duty of a

trustee or debtor in possession in a bankruptcy case is to

act on behalf of the bankruptcy estate, that is, for the

benefit of the creditors.”). Congress clearly envisioned that

the trustee or debtor would avoid fraudulent transfers, thus

maximizing the value of the estate and allowing creditors to

recover their claims from that estate.

The problem at bar is that the intended system broke

down. The debtor refused to bring an action that the

Bankruptcy Court found would benefit the estate, and

thereby violated its fiduciary duty to maximize the estate’s

value. It is in precisely this situation that bankruptcy

32

courts’ equitable powers are most valuable, for the courts

are able to craft flexible remedies that, while not expressly

authorized by the Code, effect the result the Code was

designed to obtain. As the Supreme Court has noted,

“[e]quity eschews mechanical rules; it depends on

flexibility,” Holmberg v. Armbrecht, 327 U.S. 392, 396

(1946), and “there is inherent in the Courts of Equity a

jurisdiction to . . . give effect to the policy of the

legislature.” Mitchell v. Robert DeMario Jewelry, Inc., 361

U.S. 288, 292 (1960) (quoting Clark v. Smith, 13 Pet. 195,

203 (1839)).

The policy concern evident in § 544(b) is the need to

channel avoidance actions through the trustee, who acts as

a gatekeeper and prevents independent avoidance actions

by creditors that might prejudice the estate and rival

creditors. The Supreme Court stated as much in Hartford

Underwriters when it expressed concern about parties

“usurp[ing] the trustee’s role as representative of the

estate.” 530 U.S. at 8-9. This representative role explains

why § 544(b) allows the trustee, but not a creditors’

committee, to bring an avoidance action on its own

authority, i.e., without court permission. But that provision

does not foreclose a bankruptcy court’s equitable power to

substitute itself as gatekeeper when the trustee is

delinquent, and to allow a creditors’ committee to pursue

an avoidance action for the estate’s direct benefit rather

than its own. The end result of this equitable remedy — the

estate’s recovery of fraudulently transferred property — is

precisely what Congress envisioned, and Code Sections

1109(b), 1103(c)(5), and 503(b)(3)(B) anticipate the court’s

means of achieving that result.

We are therefore satisfied that the Bankruptcy Court

acted within its power in conferring derivative standing

upon the Committee. As further evidence that its decision

was provident, however, we observe that there is a lengthy

history of bankruptcy courts conferring derivative standing

in analogous situations.

V. Pre-Code Practice

In Hartford Underwriters, Hartford urged that

administrative claimants have a right to bring direct actions

33

under § 506(c). As evidence of this power, it cited a string

of cases purporting to demonstrate that such actions were

common in the years before the Bankruptcy Code, and

noted the Supreme Court’s declaration that, “[w]hen

Congress amends the bankruptcy laws, it does not write ‘on

a clean slate.’ ” Dewsnup v. Timm, 502 U.S. 410, 419

(1992). See Cohen v. De La Cruz, 523 U.S. 213, 221 (1998)

(“We [ ] will not read the Bankruptcy Code to erode past

bankruptcy practice absent a clear indication that Congress

intended such a departure.”) (citations omitted). See also

Midlantic National Bank v. New Jersey Department of

Environmental Protection, 474 U.S. 494 (1986) (relying on

clear pre-Code practice). After surveying Hartford’s cases,

however, the Court concluded that:

It is questionable whether these precedents establish a

bankruptcy practice sufficiently widespread and well

recognized to justify the conclusion of implicit adoption

by the Code. We have no confidence that the allowance

of recovery from collateral by nontrustees is the type of

rule that . . . Congress was aware of when enacting the

Code.

Hartford Underwriters, 530 U.S. at 9 (quoting Ron Pair

Enterprises, Inc., 489 U.S. at 246). It also explained that, at

all events, the text of § 506(c) was so clear as to “leave[ ] no

room for clarification by pre-Code practice.” Id. at 10.

Compared to the evidence offered in Hartford

Underwriters, the pre-Code tradition of allowing courts to

confer derivative standing upon creditors is compelling.

Indeed, it is precisely the sort of practice of which Congress

would have been aware when drafting the Code. Of course,

as was true in Hartford Underwriters, even the most

compelling pre-Code practice cannot overcome clear text,

but we do not look to it for that purpose — as explained

supra, we believe that the most natural reading of the Code

itself is that it allows bankruptcy courts equitably to confer

derivative standing on creditors in this situation. While that

favorable text is alone sufficient, we believe that it is

instructive to explore the prevalence of derivative standing

in pre-Code years, for it confirms that the Bankruptcy

Court’s decision was not only proper, but also prudent.

34

The concept of derivative standing was first applied in the

bankruptcy context in the case of Chatfield v. O’Dwyer, 101

Fed. 797 (8th Cir. 1900), where the Eighth Circuit

explained:

[W]e recognize the right of a creditor to apply to the

bankrupt[cy] court for an order permitting him to

prosecute an appeal in the name of the trustee, when

he has called upon the trustee to take an appeal from

the allowance of a claim against the bankrupt’s estate,

and the latter has declined to appeal. As the trustee is

an officer of the bankrupt[cy] court, and subject to its

orders, that court has an undoubted power either to

direct the trustee to appeal when it entertains doubts

of the verity of its judgment, or to make an order

permitting a creditor who so desires to appeal from the

allowance in the name of the trustee when the latter

declines to appeal.

Id. at 800. In 1915, the Sixth Circuit recognized a trustee’s

power to confer derivative standing upon creditors, see In re

Stearns Salt & Lumber Co., 225 Fed. 1, 3 (6th Cir. 1915),

and in 1931, the Second Circuit recognized the bankruptcy

court’s power to do so. See In re Eureka Upholstering Co.,

48 F.2d 95 (2d Cir. 1931). As Judge Hand explained:

The receiver is responsible for the collection of the

assets . . . and he alone can authorize any charges

against them. If any creditor, petitioning or other,

learns facts which lead him to suppose that property

has been concealed, he may, and indeed he should,

advise the receiver, and if the receiver prove slack, he

may apply to the referee [the bankruptcy judge] to stir

him to action. The referee or the [district] judge may

then authorize the creditor to proceed, and he will be

entitled to his reward under [§ 64], but not otherwise.

Id. at 96. Cases adhering to this view are legion, and we set

forth further examples in the margin.7

7. See Ohio Valley Bank Co. v. Mack, 163 Fed. 155, 156 (6th Cir. 1906)

(“[W]hen the trustee refuses to appeal . . . the better practice would be

to order the trustee to appeal or to allow the dissatisfied creditor to

appeal in his name.”); In re Roadarmour, 177 Fed. 379, 381 (6th Cir.

35

We also place great weight on the fact that the 1978

version of the authoritative Collier on Bankruptcy, in

summarizing practice under the pre-Code Bankruptcy Act,

references in six different volumes creditors’ ability to

obtain court permission to pursue actions on behalf of the

estate. See 4B Collier on Bankruptcy (14th ed. 1978)

¶ 70.92 (“If the creditors then believe that a suit or other

proper proceeding should be commenced for avoidance or

recovery, they have the right to petition the bankruptcy

court wherein the proceedings are pending for an order

compelling the trustee to act, or for leave to prosecute the

suit in the name of the trustee and on behalf of the

estate.”); 3 Collier on Bankruptcy (14th ed. 1978) ¶ 60.57[2]

(“The right of creditors to maintain an action for the

1910) (“[W]here the trustee in bankruptcy refuses to appeal . . such

court may, in its discretion, allow an appeal to be taken by creditors.”);

In re Patterson-MacDonald Shipbuilding Co., 288 Fed. 546, 548 (9th Cir.

1923) (same); In re Flanders, 32 F.2d 654, 655 (6th Cir. 1929) (same);

Fred Reuping Leather Co. v. Fort Greene National Bank of Brooklyn, 102

F.2d 372, 373 (3d Cir. 1939) (same); Gochenour v. Cleveland Terminals

Bldg. Co., 118 F.2d 89, 95 (6th Cir. 1941) (if the court deems proper, it

can give creditors the right to bring suit in the name of the debtor);

Rooke v. Reliable, 195 F.2d 667, 668 (4th Cir. 1952) (noting the well-

established rule that a general creditor has no right to contest another

creditor’s claim or to appeal from the refusal of the court to disallow it

unless, upon application, the trustee has refused to do so and the

district court has authorized the creditor to proceed in the trustee’s

name); Dallas Cabana, Inc. v. Hyatt Corp., 441 F.2d 865, 868 (5th Cir.

1971) (if the trustee or debtor-in-possession refuses to bring an action,

creditors have the right to ask leave of the court to prosecute the action

for and in the name of the trustee or debtor-in-possession); Casey v.

Baker, 212 F. 247, 254 (N.D.N.Y. 1914) (same); In re Cook’s Motors, Inc.,

52 F. Supp. 1007, 1009 (D. Mass. 1943) (allowing recovery of expenses

for any party that “acts in the place of the trustee in bankruptcy and not

merely for his individual interest”), rev’d on other grounds, 142 F.2d 369

(1st Cir. 1944) (granting a creditor compensation under Section 64(a)(1)

for justifiably and successfully acting in the place of the trustee in

bankruptcy and for the benefit of the estate); In re Macloskey, 66 F.

Supp. 610, 612 (D.N.J. 1946) (after the trustee declines to bring suit, the

court can compel the trustee to proceed or allow the creditor to sue if the

suit is maintained in the name of the trustee and by the order of the

court).

36

recovery of a preference prior to the appointment of a

trustee is impliedly recognized in § 64a(1) of the Act.”); 4

Collier on Bankruptcy (14th ed. 1978) ¶ 67.48[2] (“If the

creditor is permitted to act in the name of the trustee, it

will be noted that the trustee, in whom the right . . . vests

under the Act, will be plaintiff . . . and any recovery would

inure to the estate. In the case of recovery this would be a

proper situation for the application of § 64a(1).”); 2A Collier

on Bankruptcy (14th ed. 1978) ¶ 47.03 (“If the trustee fails

to do his duty, any interested creditor may make demand

on him for appropriate action, and if he fails to act

promptly, the creditor may, with permission of the court,

act on behalf of the estate and in the name of the trustee.”);

3A Collier on Bankruptcy (14th ed. 1978) ¶ 64.104 (“After

appointment of a trustee, a condition upon the creditor’s

right to sue and receive reimbursement therefor is an

application to him or to the court. Until the trustee’s

appointment, however, and in the absence of a receiver —

or if the trustee has refused or is unable to act — this

provision entitles creditors to initiate proceedings without

any condition precedent.”); 13 Collier on Bankruptcy (14th

ed. 1978) ¶ 610.09 (“Creditors may ask the court to compel

the trustee to act, or for leave to prosecute the action in the

trustee’s name.”). Collier’s view is persuasive on such

matters, for the Supreme Court has itself cited to it as

evidence that a particular practice was “widely accepted”

under the Bankruptcy Act. See Kelly, 479 U.S. at 46

(determining that criminal penalties under the Act were

non-dischargeable).

Amicus Professor Keith Sharfman submits, however, that

later pre-Code caselaw rejected derivative standing for

creditors. For example, in Klebanow v. New York Produce

Exchange, the court held that limited partners of a

bankruptcy debtor are more like shareholders, who may

maintain derivative suits, than like “mere creditors,” who

may not sue derivatively. 344 F.2d 294, 297 (2d Cir. 1965).

Given the dictum in that case, Professor Sharfman

contends that “it would be inaccurate to suggest that the

Bankruptcy Code was enacted in an environment where

derivative standing was a well-established norm.”

(Sharfman Brief at 9.) Interestingly, however, in 1985, the

Second Circuit in In re STN Enterprises cited pre-Code

37

practice in recognizing the qualified right of creditors’

committees to initiate avoidance suits, with the approval of

the bankruptcy court, when the trustee or debtor-in-

possession unjustifiably failed to bring suit to avoid a

transfer. In re STN Enterprises, 779 F.2d at 904. See also

Mediators, Inc. v. Manney (In re The Mediators, Inc.), 105

F.3d 822 (2d Cir. 1997). If the Second Circuit meant what

it said in dictum in Klebanow, it changed its mind

thereafter.

At all events, complete doctrinal uniformity in caselaw is

hardly to be expected where powers of equity are

concerned. Especially given Collier’s sense of the law, we

are satisfied that the overwhelming balance of pre-Code

opinion supports courts’ power to confer derivative standing

upon creditors. See Midlantic Nat’l Bank, 474 U.S. at 500-

01 (finding that three cases constituted “clear” pre-Code

practice.) The historical record here is far more compelling

than it was in Hartford Underwriters, a relatively easy case

in which, at most, the cases supporting Hartford’s ability to

sue under § 506(c) slightly outnumbered those rejecting

that ability. Therefore, to the extent that we do “not read

the Bankruptcy Code to erode past bankruptcy practice

absent a clear indication that Congress intended such a

departure,” Cohen, 523 U.S. at 221 (1998), we believe a

presumption exists in favor of courts’ power to confer

derivative standing in this instance.

Our decision today, however, does not depend on this

presumption, for the Code itself anticipates the existence of

derivative standing. We believe that the historical

acceptance of derivative standing is most valuable for the

accumulated experience it evidences, i.e., that derivative

standing is a prudent way for bankruptcy courts to remedy

lapses in a trustee’s execution of its fiduciary duty. The

Bankruptcy Court’s decision in this case is in perfect

harmony with that received wisdom.

VI. Does Derivative Standing for Creditors’

Committees Advance Congress’s Goals?

Lincolnshire submits that the Bankruptcy Code provides

many explicit remedies for situations where, as here, a

38

debtor unreasonably refuses to pursue an action on behalf

of the estate. Its implication is that, by providing

bankruptcy courts with a range of remedies, Congress

intended for that range to be comprehensive, and it notes

that it is not for courts to substitute their policy judgment

for Congress’s. See Hartford Underwriters, 530 U.S. at 13-

14 (“[W]e do not sit to assess the relative merits of different

approaches to various bankruptcy problems. . . . Achieving

a better policy outcome — if what petitioner urges is that —

is a task for Congress, not the courts.”). We agree, at least

insofar as policy rationales cannot override contrary text.

But as explained supra, there is no text to override because

the Code itself anticipates derivative standing.

The critical question is thus whether bankruptcy courts’

equitable powers are sufficient to allow them to confer the

derivative standing that the Code anticipates. For the

reasons set forth above, we believe that they are. Indeed,

the very fact that equitable powers are at issue renders

public policy concerns more important than they were in

Hartford Underwriters, for as the Supreme Court has said,

“there is inherent in the Courts of Equity a jurisdiction to

. . . give effect to the policy of the legislature.” Mitchell, 361

U.S. at 292 (emphasis added). See also 11 U.S.C. § 105(a)

(empowering a bankruptcy court to “issue any order,

process, or judgment that is necessary or appropriate to

carry out the provisions of this title”). Put another way,

although we concluded above that bankruptcy courts have

equitable power to confer derivative standing upon

creditors’ committees to avoid fraudulent transfers in this

situation, it is important to support that conclusion by

assessing the public policy concerns underpinning Chapter

11.

Despite the existence of other potential remedies, we are

satisfied that derivative standing in this instance achieves

Congress’s policy goals. We will proceed first by exploring

those goals, and then by assessing the adequacy of the

other remedies Lincolnshire identifies.

A. The Salutary Effects of Derivative Standing for

Creditors’ Committees

Before bankruptcy, a debtor’s management and its most

powerful creditors typically try to “work out” the debtor’s

39

financial distress. In this process, managers frequently

experience pressure to take extreme measures to protect

the company. (Brief of Amicus Law Professors at 9.) They

may make extraordinary concessions to providers of critical

services, such as granting new liens on unencumbered

property, agreeing to an excessive rate of interest,

committing to lavish retention bonuses, or doing virtually

anything else to avoiding filing for bankruptcy. See, e.g.,

Eduardo Porter & Mitchell Pacelle, Judge Increases

Severance Pay to Former Enron Employees, Wall St. J., Aug.

29, 2002, at A3 (discussing multi-million dollar retention

bonuses paid by Enron insiders before bankruptcy).

Whether or not these radical actions are ultimately

successful, they often reduce the assets available to the

debtor’s creditors.

The Bankruptcy Code’s avoidance powers are intended,

inter alia, to deter this kind of managerial overreaching and

to encourage creditors to allow a debtor a measure of

breathing room. See H.R. Rep. No. 95-595, at 177 (1977)

(“By permitting the trustee to avoid prebankruptcy transfers

that occur within a short period before bankruptcy,

creditors are discouraged from racing to the courthouse to

dismember the debtor during [its] slide into bankruptcy.”).

Fraudulent avoidance actions, such as those provided for in

§ 544(b), are intended to afford unsecured creditors peace

of mind, for those creditors are usually the principal victims

of managerial misfeasance.

Although fraudulent transfers are of concern in many

chapters of the Bankruptcy Code, including in Chapter 7

liquidations, they present a particularly vexing problem in

reorganizations conducted under Chapter 11. The premise

of a reorganization is to ensure that the debtor emerges

from bankruptcy as a viable concern. This explains why

trustees are a fixture in Chapter 7 liquidations, but they

are exceptional in Chapter 11 — it is thought that a

debtor’s existing management will be more familiar with the

company than would be a court-appointed trustee, and that

it would therefore be better able to guide the debtor back

into solvency. See Sharon Steel Corp., 871 F.2d at 1226 (“It

is settled that appointment of a trustee should be the

exception, rather than the rule.”); 7 Collier on Bankruptcy

40

¶ 1104.02[1] (15th rev. ed. 1998) (noting that appointment

of a trustee in a Chapter 11 case is an “extraordinary”

remedy). In Chapter 11 cases where no trustee is

appointed, § 1107(a) provides that the debtor-in-possession,

i.e., the debtor’s management, enjoys the powers that

would otherwise vest in the bankruptcy trustee. Along with

those powers, of course, comes the trustee’s fiduciary duty

to maximize the value of the bankruptcy estate.

This situation immediately gives rise to the proverbial

problem of the fox guarding the henhouse. If no trustee is

appointed, the debtor — really, the debtor’s management —

bears a fiduciary duty to avoid fraudulent transfers that it

itself made. One suspects that if managers can devise any

opportunity to avoid bringing a claim that would amount to

reputational self-immolation, they will seize it. See, e.g.,

Louisiana World Exposition v. Fed. Ins. Co., 858 F.2d 233

(5th Cir. 1988). For that reason, courts and commentators

have acknowledged that the debtor-in-possession “often

acts under the influence of conflicts of interest.” Canadian

Pa. Forest Prod. Ltd. v. J.D. Irving, Ltd. (In re Gibson Group,

Inc.), 66 F.3d 1436, 1441 (6th Cir. 1995). These conflicts of

interest can arise even in situations where there is no

concern that a debtor’s management is trying to save its

own skin. For example, a debtor may be unwilling to

pursue claims against individuals or businesses, such as

critical suppliers, with whom it has an ongoing relationship

that it fears damaging. Id. at 1439. Finally, even if a

bankrupt debtor is willing to bring an avoidance action, it

might be too financially weakened to advocate vigorously for

itself. In any of these situations, the real losers are the

unsecured creditors whose interests avoidance actions are

designed to protect.

The possibility of a derivative suit by a creditors’

committee provides a critical safeguard against lax pursuit

of avoidance actions. Amicus Law Professors explain that

parties to bankruptcy workouts are typically sophisticated,

and that they understand that their actions will likely be

scrutinized after the fact. (Law Professors’ Brief at 10.) They

also understand that, even though a debtor’s management

may be reluctant to pursue an avoidance action, a

creditors’ committee will not be so hesitant. Therefore, the

41

mere threat of a creditors’ committee suit is often a potent

deterrent to overreaching by creditors and insiders. See In

re W. Pac. Airlines, Inc., 219 B.R. 575, 577-78 (Bankr. D.

Colo. 1998) (discussing a creditors’ committee’s “watchdog”

role). This deterrent effect remains important even after

commencement of the bankruptcy case itself.8

B. Potential Drawbacks of Derivative Standing for

Creditors’ Committees

1. Might derivative suits dissipate the value of the

estate?

Despite these clear benefits stemming from derivative

standing, amicus Professor Sharfman identifies reasons

8. Large corporate debtors routinely seek so-called “first-day” orders, in

which they ask the bankruptcy court to approve such urgent matters as

key-employee retention plans, the payment of pre-petition claims of

critical vendors, and, most important, going-forward financing for the

case. (Law Professors’ Brief at 11.) The parties affected by these orders

(e.g., the key employees, critical vendors and lenders) often demand that

the debtor waive other claims that it might have against them, such as

avoidance actions. Post-petition financing orders in particular can

present difficult problems for bankruptcy courts because they are

extremely complex, often including provisions that cross-collateralize or

“white wash” prepetition security interests. See David Kurtz & Rena

Samole, Bankruptcy Law & Practice Update: New Developments in an

Uncertain Economy: A Satellite Program, First Day Orders, at 2 (PLI

Commercial Law Practice Course Handbook Series No. A0-00, 2001).

Similarly, major vendors will often demand that the debtor release

preference or comparable claims as the quid pro quo for doing business

with the debtor.

A court facing motions for first-day orders has a difficult choice. If it

disapproves of the order, it could simply refuse to issue it on the theory

that the parties would renegotiate and eliminate any offending

provisions. Alternatively, it could table the motion and explore the

claim’s underlying merits. But either choice is problematic, for first-day

orders are by their nature extremely urgent — without an order

approving financing for critical vendors, for example, the debtor might

collapse before reorganization can occur. The possibility of a derivative

suit by a creditors’ committee serves Congress’s goals when, by granting

fist-day orders, bankruptcy courts nevertheless reserve to the creditors’

committees the right to investigate and pursue claims that would

otherwise be released in those orders. (Law Professors’ Brief at 13.).

42

why it might be harmful from a policy perspective. He first

argues that, although the purpose of derivative suits is

presumably to maximize the value of the estate, academic

research has shown that such suits frequently result in

awards only large enough to pay the litigants’ legal bills.

See Roberta Romano, The Shareholder Suit: Litigation

Without Foundation?, 7 Journal of Law, Economics and

Organization 55 (1991); Jonathan R. Macey & Geoffrey P.

Miller, The Plantiffs’ Attorney’s Role in Class Action and

Derivative Litigation: Economic Analysis and

Recommendations for Reform, 58 U. Chi. L. Rev. 1 (1991).

Sharfman submits that creditors’ derivative suits are even

less likely to add value than are shareholders’ derivative

suits, for the possibility of setting aside transfers as

fraudulent would make it riskier for financially distressed

firms to persuade potential lenders and suppliers to do

business. (Sharfman Brief at 14.) The Supreme Court

recognized this concern in Hartford Underwriters, where it

stated that “[t]he possibility of being targeted . . . by various

administrative claimants could make secured creditors less

willing to provide postpetition financing.” 530 U.S. at 13.

We are untroubled by this argument. To be sure, there

are situations where derivative suits recover only enough to

pay the lawyers, but that concern is lessened by the need

to obtain bankruptcy court approval before pursuing an

action. There is no inherent reason why a debtor would be

able to prosecute an avoidance claim more cheaply than a

creditors’ committee could, so there is no reason why a

creditor suing derivatively would dissipate more value than

would a debtor suing directly. Likewise, although the

possibility of an avoidance action might trouble a

prospective supplier or lender, that is an argument not

against derivative standing, but against avoidance actions

generally. Congress, however, has clearly decided that such

actions are valuable to the Chapter 11 process, and we will

not second-guess that judgment. The concern that

derivative suits might be “value-dissipating” is adequately

served by affording a debtor the deference normally

accorded pursuant to the business judgment rule. When a

debtor’s action is beyond the scope of that deference,

however, Congress’s intent is best served by ensuring that

an action is filed, even if by a creditors’ committee. At all

43

events, the Bankruptcy Court in this case concluded that

the estate ought to have brought the avoidance claim in

question.

2. Might bankruptcy courts be unable to identify

meritorious claims?

Professor Sharfman also takes issue with the idea that a

bankruptcy court can serve as a competent gatekeeper for

the purpose of deciding when to authorize derivative

standing. He submits that the idea that “judges in

bankruptcy cases will permit only value enhancing

derivative litigation to go forward (rather than all litigation

that is merely colorable) is more wishful thinking than

serious argument. It is often hard to tell at the outset when

permission to prosecute derivative litigation is sought

whether a claim is meritorious, and judges understandably

can make mistakes.” (Sharfman Brief at 15) (citing Frank

H. Easterbrook & Daniel R. Fischel, The Economic Structure

of Corporate Law 102 (1991)). From this observation, he

concludes that “creditors could well recover more in the

aggregate if creditor derivative suits were impermissible

across the board.” (Id. at 16.)

It is doubtless true that judges, like trustees or debtors,

sometimes lack sufficient information to determine ex ante

whether a claim is value-enhancing or merely colorable.

But it does not follow that creditors would likely recover

more if derivative suits were impermissible. First, this

assumes that the debtor-in-possession would be better able

to identify valuable claims than a bankruptcy court would

be. There is no reason this should be true, for, as discussed

above, conflicts of interest can often cloud debtors’

judgment — it is difficult objectively to determine whether

a potential action is meritorious when one would be a

defendant in that action.

Second, this argument assumes that creditors’

committees are rather unsophisticated, for it predicts that

the estate, and hence its creditors, would be better off if no

avoidance actions took place. If that were true, presumably

creditors’ committees would know it, and would not seek to

bring the sort of action at issue today. Third, this critique

overlooks the fact that the choice at hand is not between

44

derivative actions and no actions. Instead, if a bankruptcy

court cannot authorize a derivative suit when it concludes

that a debtor is unreasonably refusing to pursue an action,

it will likely take the alternative step of ordering the debtor

itself to pursue that action. That step is unlikely to yield a

vigorous prosecution of the claim, yet it would incur all of

the costs of a derivative suit.

Most fundamentally, however, the problem with the

“courts cannot identify meritorious claims” critique is that

it is one of futility. The proposition that a bankruptcy court

cannot reliably determine when a debtor is not maximizing

value is, at bottom, an argument that bankruptcy courts

are not capable of doing many of the things we depend on

them to do. They are, for example, instrumental in

approving the bankruptcy plan itself and determining

whether to appoint an examiner or trustee, and they are

frequently called upon to weigh the merits of proposed first-

day orders. It seems to us that we have no choice but to

presume the competency of bankruptcy courts throughout

the process, and we are therefore unwilling to place much

stock in the claim that they are unable to determine when

a debtor is unreasonably refusing to pursue an avoidance

action.

3. Might derivative suits consume judicial resources?

Lastly, amicus Professor Sharfman warns that

determining whether a derivative suit should be maintained

and, if so, who should maintain it, takes time and effort on

the part of the court. The Court in Hartford Underwriters

was concerned about this cost, observing that “the

possibility of multiple [ ] claimants” created by “[a]llowing

recovery to be sought at the behest of parties other than

the trustee could [ ] impair the ability of the bankruptcy

court to coordinate proceedings, as well as the trustee to

manage the estate.” 530 U.S. at 12-13. Professor Sharfman

points out that in the case at bar, the issue of whether the

Committee could pursue a derivative claim consumed

significant judicial time and effort that would not have been

necessary if creditors lacked derivative standing. We

disagree. Rather, we believe that the cost that Sharfman

laments arises from uncertainty regarding the propriety of

derivative suits, a matter resolved by this appeal. If

45

derivative standing is unambiguously permissible, it is not

unduly burdensome to determine whether any particular

creditor or committee should have that standing.

In general, although we agree that derivative standing

does not come without costs, we are satisfied that on the

whole it is an immensely valuable tool for bankruptcy

courts and creditors alike. It helps to deter fraudulent

transfers in the first instance, and it provides courts with

a viable remedy when those transfers nonetheless occur.

C. Possible Substitutes for Derivative Standing for

Creditors’ Committees

Lincolnshire does not deny that derivative standing for

creditors’ committees is potentially beneficial, but it

contends that such standing is not as critical as the

Committee suggests because bankruptcy courts, and

committees themselves, have many other remedies

available. We explore these in turn.

1. Appointment of a bankruptcy trustee

Lincolnshire first argues that, although the usual

Chapter 11 case proceeds without a bankruptcy trustee, a

creditors’ committee can move to appoint one pursuant to

§ 1104. That provision allows any “party in interest”

(including a creditors’ committee) to request appointment of

a trustee “for cause,” or if the appointment would be “in the

interests of creditors.” 11 U.S.C. § 1104(a). “Cause” to

appoint a trustee may include “fraud, dishonesty,

incompetence, or gross mismanagement . . . either before or

after commencement of the case.” Id. § 1104(a)(1).

Lincolnshire posits that a trustee’s independent nature

would allow it to pursue avoidance claims without the

conflicts of interest that can affect debtors-in-possession.

Amici Law Professors aptly respond that disallowing

derivative suits and forcing creditors’ committees to move to

appoint trustees would amount to “replac[ing] the scalpel of

derivative suit with a chainsaw.” (Law Professors’ Brief at

13.) Appointing a trustee in a Chapter 11 case is an

“extraordinary” remedy, 7 Collier on Bankruptcy ¶ 11402[1]

(15th rev. ed. 1998), and there is a corresponding “strong

presumption” that the debtor should be permitted to

46

remain in possession. In re Marvel Entertainment Group,

Inc., 140 F.3d 463, 471 (3d Cir. 1991). The problem is that

appointing a trustee amounts to replacing much of a

debtor’s high-level management, and that creates immense

costs in two ways. First, there is a statutory fee (which can

be substantial) to which trustees are entitled for their

services. See 11 U.S.C. §§ 326(a) (setting forth fee

schedule), 330(a) (setting forth trustee’s right to

compensation); cf. 11 U.S.C. § 1107(a) (providing that

debtors-in-possession are not entitled to statutory trustee’s

fees).9 More important, however, is the cost implicit in

replacing current management with a team that is less

familiar with the debtor specifically and its market

generally. The idea that existing management is best

positioned to rescue a debtor from bankruptcy is precisely

the reason why the appointment of a trustee is exceptional

in Chapter 11 reorganizations, but occurs immediately in

Chapter 7 liquidations. See Kenneth N. Klee & K. John

Shaffer, Creditors’ Committees Under Chapter 11 of the

Bankruptcy Code, 44 S.C. L. Rev. 995, 1045, 1049 (1993)

(observing generally that “the incremental costs” of a

trustee usually “outweigh[ ] the benefits,” and that

“maximization of value rarely lies down this path.”).

In short, we believe that appointing a trustee is too

drastic a step to constitute a serious alternative to allowing

derivative suits by creditors’ committees. Indeed, because

much of Chapter 11 is premised on allowing current

management to remain in control of the debtor, it is

unlikely that Congress intended to force a court to displace

that management in the relatively commonplace event that

a debtor makes a questionable decision not to prosecute a

fraudulent avoidance claim.

2. Appointment of an examiner with authority to sue

Amicus Smurfit-Stone Corporation submits that, if

appointing a trustee is too radical an alternative, a

creditors’ committee might instead move the court to

9. Of course, even a creditors’ committee suing derivatively is entitled to

recover its costs pursuant to § 503(b)(3)(B), discussed supra. But unlike

a trustee, a creditors’ committee is not entitled to a statutory fee in

addition to those expenses.

47

appoint an examiner under § 1104(c). That provision states

that “a party in interest” may request the appointment of

an examiner “to conduct such an investigation of the debtor

as is appropriate,” and that the court may order an

appointment after notice and a hearing. An examiner’s

duties include investigation of the debtor, the debtor’s

business, and “any other matter relevant to the case or to

the formation of a plan. See § 1106(b). Smurfit-Stone

observes that a debtor’s management remains in place

when an examiner is appointed. Perhaps most important,

however, is the fact that an examiner has all “of the duties

of a trustee that the court orders the debtor in possession

not to perform.” 11 U.S.C. § 1106(b). At least one court has

interpreted this language to mean that an examiner may

initiate and pursue causes of action on behalf of the debtor.

See In re Carnegie International Corp., 51 B.R. 252, 256

(Bankr. S.D. Ind. 1984).

Although this alternative is less drastic than the

appointment of a trustee, we nevertheless harbor doubts

about its ability to substitute for derivative suit. One

concern is that, like a trustee, an examiner would incur

direct costs through its fees, so to that extent this remedy

is inferior to the alternative of derivative suit by a creditors’

committee. The more serious problem, however, is that it is

less than obvious that § 1106(b) actually does permit

examiners to initiate actions on the debtor’s behalf. The full

text of that section states:

An examiner appointed under section 1104(d) of this

title shall perform the duties specified in paragraphs (3)

and (4) of subsection (a) of this section, and, except to

the extent that the court orders otherwise, any other

duties of the trustee that the court orders the debtor in

possession not to perform.

11 U.S.C. § 1106(b). Although this catch-all language is

expansive, it is subject to the interpretive canon ejusdem

generis, which states that “where general words follow

specific words in a statutory enumeration, the general

words are construed to embrace only objects similar to

those enumerated by the preceding specific words.” Circuit

City Stores, 532 U.S. at 114-15 (citation omitted). Sections

(3) and (4) allow the examiner to “investigate the acts,

48

conduct, assets, liabilities, and financial condition of the

debtor, the operation of the debtor’s business and the

desirability of the continuance of such business, and any

other [relevant] matter,” and also to “file a statement of

investigation.” 11 U.S.C. §§ 1106(a)(3)-(4). Critically, these

sections permit only investigating and reporting on that

investigation — they stop far short of authorizing examiners

to litigate based on their findings.

Therefore, although an examiner’s proper role in Chapter

11 proceedings is hardly at issue in this case, we conclude

that § 1106(b)’s broad grant is most naturally interpreted to

authorize only acts relating directly to investigation. This

conclusion comports with Congress’s evident understanding

of the examiner’s role, for the sponsors of the Code stated:

“The investigation of the examiner is to proceed on an

independent basis from the procedure of the reorganization

under chapter 11 in order to ensure that the examiner’s

report will be expeditious and fair.” 124 Cong. Rec.

H11,103 (daily ed. Sept. 28, 1978), reprinted in 1978

U.S.C.C.A.N. 6472-73. This independent role would likely

be jeopardized by an examiner’s litigation against a debtor,

and we therefore do not believe that an examiner can serve

as a substitute for either a trustee or a creditors’ committee

for the purpose of avoiding fraudulent transfers.

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

to sue

The third option advanced is that a creditors’ committee

could move the bankruptcy court to order the debtor to file

an avoidance action. In the case at bar, the Bankruptcy

Court would no doubt have granted the Committee’s motion

to compel that action, for it made a finding of fact that the

debtor’s refusal to bring suit was unreasonable. But this

solution is not realistic — given management’s sometimes

severe conflicts of interest, a court order to file an

avoidance action would frequently amount to instructing

management to sue itself. To put it mildly, that is unlikely

to result in vigorous prosecution of the claim.

4. Converting the bankruptcy case to Chapter 7

The District Court observed that if the Committee could

not bring a derivative avoidance action, it might instead

49

convert the case to a Chapter 7 liquidation or dismiss the

petition pursuant to 11 U.S.C. § 1112. These solutions are

far more radical than even the appointment of a trustee.

Converting the case to Chapter 7 would cause the

immediate appointment of a trustee, the option rejected

supra, and would cause dissolution of the Committee. More

importantly, though, Chapter 7 proceedings are

liquidations, and this option would amount to instructing

management: “Pursue this action, or we will move to

dissolve your company.” While that might yield results,

such coercion is unlikely to yield a zealous prosecution of

the claim. It also washes out the baby with the bath water,

for the principal purpose of Chapter 11 is to avoid

liquidating viable businesses.

Moving to dismiss the bankruptcy petition makes no

more sense. Bankruptcy brings with it many advantages for

a debtor, such as the power to avoid union contracts and

to defer or even avoid short-term financial commitments.

Dismissing a bankruptcy petition might therefore be the

equivalent of forcing a company to close its doors. That, of

course, is hardly an alternative to derivative standing.

5. Moving the bankruptcy court to authorize a

committee to bring a post-confirmation avoidance

action

Finally, amicus Smurfit-Stone notes that a creditors’

committee might be authorized to bring a post-confirmation

avoidance action in a plan of reorganization. See 11 U.S.C.

§ 1123(b)(3)(B). It submits that this would give a creditors’

committee the ability to protect its interest in a variety of

ways. First, although § 1121(b) provides a debtor-in-

possession with 120 days of exclusivity in which to file a

plan of reorganization, any extension of that period requires

leave of court. See 11 U.S.C. § 1121(d). Smurfit-Stone

suggests that a committee might object to any motion to

extend that period unless the debtor-in-possession agrees

to pursue the action itself, or to file a plan permitting the

committee to pursue the action. Alternatively, a committee

may safeguard its interests by filing its own plan of

reorganization once the exclusivity period expires. Finally,

the committee might move to terminate the exclusivity

period in order to expedite the filing of its own plan.

50

These are indeed options open to committees, but like the

other alternatives discussed supra, they would be far more

disruptive to the reorganization process than the simple

step of allowing a creditors’ committee to sue derivatively.

The problem with ending exclusivity, either by moving

immediately or objecting to an extension of the initial 120-

day window, is that it would lead immediately to a sea of

direct claims that were previously channeled through the

debtor. In other words, although a particular creditor might

be able to sue to recover its fraudulently conveyed property,

so too might every other creditor and claimant. To the

extent Congress has determined that exclusivity is valuable

to a reorganization, this would be a highly disruptive

substitute. There is no reason to suppose that Congress

intended to leave only this option available to creditors’

committees when a debtor unreasonably refuses to pursue

an avoidance action.

6. Summary

We conclude that, on balance, derivative standing is a

valuable tool for creditors and courts alike in Chapter 11

proceedings, and we do not believe that any of the proffered

alternatives could serve as a realistic substitute for that

standing. Because it helps to ensure that creditors’ claims

are not frustrated by fraudulent transfers, derivative

standing seems clearly to “give effect to the policy of the

legislature.” Mitchell, 361 U.S. at 292, and bankruptcy

courts’ equitable powers therefore allow them to confer

such standing upon creditors’ committees.

VII. Conclusion

For the foregoing reasons, we are satisfied that

bankruptcy courts can authorize creditors’ committees to

sue derivatively to avoid fraudulent transfers for the benefit

of the estate. We will therefore reverse the District Court’s

decision denying the Committee derivative standing. We will

remit to the original Panel of this Court the issues whether:

(1) the Committee was required to identify a present

creditor in order to sustain its fraudulent transfer claims;

(2) Cybergenics had at least one unpaid creditor at the time

of the alleged fraudulent transfer; (3) the heightened

51

pleading standard of Fed. R. Civ. Proc. 9(b) is applicable to

the Committee’s complaint; (4) the Committee was entitled

to amend its complaint under Fed. R. Civ. Proc. 17(a); and

(5) the Committee has abandoned its claim of equitable

subordination.

52

FUENTES, Circuit Judge, with whom Circuit Judges

Sloviter, Alito and Smith join, dissenting:

In this case, the majority interprets the phrase “the

trustee may,” in § 544(b)(1) of the Bankruptcy Code, to

mean that the trustee and a creditors’ committee may seek

recovery under the statute. Although the majority does not

conclude that the phrase is ambiguous or that its meaning

is in any way obscure, it has, nonetheless, broadened the

statute to add a party that Congress specifically omitted.

The majority reasons that, while no specific statutory

authority grants a creditors’ committee standing, several

Code provisions, pre-Code practice, public policy, and the

bankruptcy court’s equitable powers all combine to afford a

creditors’ committee “derivative” standing under § 544(b)(1).

I respectfully disagree. The majority’s view is inconsistent

with the plain and natural reading of § 544, is not

supported by the Code provisions it cites, is not adequately

grounded in prior practice and, perhaps more importantly,

is inconsistent with the Supreme Court’s plain meaning

analysis of the identical phrase in Hartford Underwriters.

Accordingly, I respectfully dissent.

I.

The central question here is whether the Committee has

standing to seek relief under § 544(b)(1). I begin, as did the

Supreme Court in Hartford Underwriters, with the

observation that “Congress ‘says in a statute what it means

and means in a statute what it says there.’ ” 530 U.S. 1, 6

(2000) (quoting Connecticut Nat. Bank v. Germain, 503 U.S.

249, 254 (1992)). I note as well that the “analysis of any

statute, including the Bankruptcy Code, must not begin

with external sources, but with the text itself.” Bank of

America Nat. Trust and Sav. Ass’n v. 203 North LaSalle

Street Partnership, 526 U.S. 434, 459 (1999) (Thomas, J.,

concurring) (citing Germain, 503 U.S. at 253-54; Union

Bank v. Wolas, 502 U.S. 151, 154 (1991)).

Section 544(b)(1) contains no textual ambiguity. The

statute, by its express terms, provides for specific action

and authorizes only the trustee to act. In Hartford

Underwriters, the Supreme Court recognized that, “ ‘[w]here

53

a statute . . . names the parties granted [the] right to invoke

its provisions, . . . such parties only may act.’ ” 530 U.S. at

6-7 (quoting 2A N. Singer, Sutherland on Statutory

Construction § 47.23, p. 217 (5th ed.1992)). The Court also

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. That is precisely the

circumstance here. Section 544 provides for the avoidance

of “any transfer of an interest” of the debtor’s property and

it designates the trustee, and only the trustee, as the party

who may act under the statute. We should not, therefore,

presume that we have a free hand to broaden a right which

Congress has made exclusive.

Clearly if Congress had wanted to authorize a party other

than the trustee to invoke the remedies of § 544, it could

simply have done so as it has in many other provisions of

the Bankruptcy Code.1 Since Congress has specifically

1. See, e.g., § 110(h)(3) (naming the debtor, the trustee, a creditor, or the

United States trustee); § 328(a) (naming the trustee or a committee

appointed under § 1102, i.e. creditors’ and equity security holders’

committees); § 330(a)(2) (naming the court, the United States trustee, the

United States Trustee for the District or Region, the trustee for the

estate, or any other party in interest); § 331 (naming a trustee, an

examiner, a debtor’s attorney, or any professional person employed

under §§ 327 or 1103); § 343 (naming creditors, any indenture trustee,

any trustee or examiner in the case, or the United States trustee);

§ 501(a)-(c) (naming creditors, an indenture trustee, an equity security

holder, an entity liable to the debtor’s creditor or that has secured such

creditor, the debtor, and the trustee); § 503(b)(3)(D) (naming a creditor,

an indenture trustee, an equity security holder, or a committee

representing creditors or equity security holders other than a committee

appointed under § 1102); § 707(b) (naming the court and the United

States trustee, and excluding any party in interest); §§ 727 (c)(1) and (d)

(naming the trustee, a creditor, or the United States trustee); §§ 1104(a)

& 1105 (naming a party in interest or the United States trustee);

§ 1110(b) (naming the trustee and the secured party, lessor or

conditional vendor whose rights are protected under § 1110(a)); § 1112(b)

(naming a party in interest and the United States trustee or bankruptcy

administrator); § 1121(c) (naming any 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

54

authorized a creditors’ committee to act in various other

provisions of the Code, but has not done so with regard to

§ 544, we should “ ‘presume[ ] that Congress act[ed]

intentionally and purposely in the disparate . . .

exclusion.’ ” Duncan v. Walker, 533 U.S. 167, 173 (2001)

(quoting Bates v. United States, 522 U.S. 23, 29-30 (1997)).

Indeed, as the Court noted in Hartford Underwriters, “the

fact that the sole party named—the trustee—has a unique

role in bankruptcy proceedings makes it entirely plausible

that Congress would provide a power to him and not to

others.” 530 U.S. at 7.2

As the Supreme Court stated, when the language of a

statute is plain, as it is here, “ ‘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.’ ”

Hartford Underwriters, 530 U.S. at 6 (quoting United States

v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989)

(quoting Caminetti v. United States, 242 U.S. 470, 485

(1917)). The plain text of § 544 makes clear that only the

trustee may invoke the remedies under the statute.

II. Other Code Provisions

The majority does not contend that enforcing § 544 as

written would produce an absurd result. Nevertheless, the

majority looks beyond the text of § 544 to determine

whether a creditors’ committee has “derivative” standing.

Specifically, the majority asserts that §§ 1109(b) and

1103(c)(5) of the Bankruptcy Code, paired with

trustee); § 1164 (naming the Surface Transportation Board, the

Department of Transportation, and any State or local commission having

regulatory jurisdiction over the debtor); § 1224 (naming a party in

interest, the trustee, or the United States trustee); § 1229(a) (naming the

debtor, the trustee, or the holder of an allowed unsecured claim);

§ 1307(c) (naming a party in interest or the United States trustee);

§ 1329(a) (naming the debtor, the trustee, or the holder of an allowed

unsecured claim).

2. Congress has extended the rights and powers vested in a trustee to a

debtor in possession, but has made no analogous provision for a

creditors’ committee. See 11 U.S.C. § 1107(a).

55

§ 503(b)(3)(B), make it “unmistakably clear that Congress

approved of creditors’ committees suing derivatively to

recover property for the benefit of the estate.” I respectfully

disagree. The majority also contends that § 544 must be

considered in light of the equitable powers of the

bankruptcy courts, pre-Code practice, and policy concerns.

I address these arguments in turn.

A. Section 1109(b)

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].” 11 U.S.C. § 1109(b) (emphasis added). This Court has

liberally construed § 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 Phar-Mor, Inc. v. Coopers & Lybrand, 22 F.3d 1228,

1232 (3d Cir. 1994); Matter of Marin Motor Oil, Inc., 689

F.2d 445, 446 (3d Cir. 1982), cert. denied, 459 U.S. 1207

(1983).

However, this provision does not confer authority upon a

creditors’ committee to initiate an action when the trustee

or debtor-in-possession declines 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 would be an empty grant unless

those who had such a 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 ¶ 1109.02(3) (15th ed.

1986)). Yet § 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 § 544(b).

56

Any doubt on this question is eliminated by the Supreme

Court’s statement in Hartford Underwriters, albeit in dicta,

indicating that the Court would not read § 1109(b) to allow

a non-trustee to bring suit under a provision stating only

that “the trustee may.” After acknowledging that § 1109(b)

was “by its terms inapplicable” in Hartford Underwriters

because the case arose under Chapter 7 rather than

Chapter 11, the Court stated, “[i]n any event, we do not

read § 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 specific

parties.” 530 U.S. at 8-9 (citing 7 L. King, Collier on

Bankruptcy & ¶ 1109.05 (rev. 15th ed. 1999) (“In general,

section 1109 does not bestow any right to usurp the

trustee’s role as representative of the estate with respect to

the initiation of certain types of litigation that belong

exclusively to the estate.”)). This is consistent with our prior

interpretation of § 1109(b), and it strengthens my view of

the statute.

B. Section 1103(c)(5)

Section 1103(c)(5) of the Bankruptcy Code provides that

“[a] committee appointed under section 1102 of this title

may perform such other services as are in the interest of

those represented.” 11 U.S.C. § 1103(c)(5). This section does

not, as the majority acknowledges, confer express authority

for the Committee “independently to initiate an adversary

proceeding, including one under § 544(b).” Nonetheless the

majority argues that such authority may be found in the

“flexible representation” role of a creditors’ committee

evidenced by § 1103(c)(5). I do not read § 1103(c)(5) to

suggest, in any way, a committee’s authority to file a

lawsuit.

The powers granted to committees under § 1103(c)(1)-(4)

are very specific. They include the power to (1) consult with

the trustee or debtor, (2) investigate the debtor’s acts and

financial condition, (3) participate in the bankruptcy plan,

and (4) request the appointment of an examiner.

None of these provisions support the authority to initiate

a lawsuit. Since the grants of power in (1) to (4) are quite

57

narrow and non-adversarial, the catch-all power should be

similarly confined. See 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.”). Because Congress

authorized only limited, discrete rights of participation for

a committee in § 1103(c)(1)-(4), we should not read

§ 1103(c)(5) to grant a broad, implied power to initiate a

suit under general language regarding “other services as

are in the interest of those represented.”

C. Section 503(b)(3)(B)

The majority argues that, while §§ 1109 and 1103 provide

“at best indirect evidence that Congress granted

bankruptcy courts the power to confer derivative standing”

upon creditors’ committees, a third section, 503(b)(3)(B),

provides “far more direct insight into bankruptcy courts’

powers.” I disagree on this point as well.

Federal courts have consistently held that § 503(b)(3)(B)

does not itself confer standing. Instead, this section merely

authorizes the recovery of certain administrative expenses

incurred by “a creditor that recovers, after the court’s

approval, for the benefit of the estate any property

transferred or concealed by the debtor.” 11 U.S.C.

§ 503(b)(3)(B). Thus, this section “only authorizes recovery

of expenses to a creditor who successfully recovered

property, which is to say, a creditor who had standing in

the first place.” In re SRJ Enterprises, Inc., 151 B.R. 189,

193 n.1 (Bankr. N.D. Ill. 1993). See also In re Vogel Van &

Storage, Inc., 210 B.R. 27, 32 n.4 (N.D.N.Y. 1997); Surf N

Sun Apts., Inc. v. Dempsey, 253 B.R. 490, 492 (M.D. Fla.

1999). If a creditor does not have standing to prosecute a

claim under § 503(b)(3)(B), there would seem to be even less

support for the idea that this section confers derivative

standing on a committee of creditors.

Nevertheless, the majority argues that “the most natural

reading of § 503(b)(3)(B) is that it recognizes and rewards

58

monetarily the practice of permitting creditors’ committees

. . . to pursue derivative actions.” I again disagree. The

plain reading of § 503(b)(3)(B) is that it permits “a creditor,”

not a creditors’ committee, to recover expenses. Indeed, the

most prevalent use of § 503(b)(3)(B), based on my review of

the cases citing this provision, is to compensate individual

creditors who object to discharge and then successfully

locate and bring into the estate assets that had been

transferred or concealed by the debtor. See, e.g., In re

George, 23 B.R. 686, 687 (Bankr. S.D. Fla. 1982); In re

Antar, 122 B.R. 788, 791 (Bankr. S.D. Fla.1990); In re

Spencer, 35 B.R. 280, 281 (Bankr. N.D. Ga. 1983); In re

Rumpza, 54 B.R. 107, 108 (Bankr. D. S.D. 1985); In re

Humphrey’s Pest Control Co., Inc., 1990 WL 191859, at *2

(Bankr. E.D. Pa. Nov. 30, 1990), aff ’d, 1991 WL 136195

(E.D. Pa. July 18, 1991). See also Judy Simmons Henry,

Recovery of Creditors’ Costs from the Bankruptcy Estate:

Reasonable, Necessary, and . . . Uncertain, 18 U. ARK. LITTLE

ROCK L.J., 199, 208-19 (1996) (discussing cases in which

individual creditors have been allowed to recover their

expenses under § 503(b)(3)(B)); Gregg D. Johnson,

Recovering a Creditor’s Expenses and Legal and Accounting

Fees as an Administrative Claim, 5 BANKR. DEV. J. 463, 470-

79 (1988) (same). In light of the plain language of the

statute and its prevalent use, the majority’s view that

§ 503(b)(3)(B) rewards creditors’ committees for pursuing

derivative actions is unpersuasive.

In fact, committees recover expenses under a different

Code provision. That is because creditors’ committees are

typically represented by an attorney and § 330 of the Code

specifically provides compensation for fees and expenses of

the committee’s representative. Sections 330(a)(1)(A) and (B)

allow for “reasonable compensation” as well as

“reimbursement for actual, necessary expenses” incurred

by the committee’s representative. 11 U.S.C. §§ 330(a)(1)(A),

(B). In sum, § 503(b)(3)(B) is not the proper provision for

awarding creditors’ committees expenses and is not an

appropriate basis from which to infer that Congress

authorized creditors’ committee derivative actions under

§ 544. See In re S.W.G. Realty Associates, II, L.P., 265 B.R.

534, 539 (E.D. Pa. 2001) (explaining that creditors’

committees’ eligibility for compensation is based on

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§ 330(a), not § 503(b)(3)(B)); In re UNR Industries, Inc., 736

F.2d 1136, 1139 (7th Cir. 1984) (stating that § 330

“provides for reimbursement of expenses incurred by

professional persons hired by the Committee with court

approval . . .”).

Neither §§ 1109(b), 1103(c)(5), or 503(b)(3)(B), taken

separately or together, provide sufficient statutory authority

for the practice invoked 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 as far as to allow such committees to

initiate avoidance actions, no matter whether the trustee

fails to act and/or the creditors secure court approval, I

cannot distinguish Hartford Underwriters, as the majority

does, simply on the basis that Hartford Underwriters was a

Chapter 7 case while here we consider a case under

Chapter 11. The Committee urges this Court to go beyond

a “cursory reading” of § 544(b) and examine other

provisions of the Code. I have done so, and can find no

provision which grants the Committee the authority denied

to it in § 544(b).

III. Reliance on Equity to Confer Standing

The majority writes that while “none of the three sections

discussed—1109(b), 1103(c)(5), or 503(b)(3)(B)—seems

directly to authorize . . . standing. . . . [w]e believe that the

missing link is supplied by bankruptcy courts’ equitable

power. . . .” To be sure, bankruptcy courts are equitable

tribunals that apply equitable principles. But courts of

equity must still follow the law. See Magniac v. Thomson,

56 U.S. 281, 299 (1853) (“[w]herever the rights or the

situation of parties are clearly defined and established by

law, equity has no power to change or unsettle those rights

or that situation, but in all such instances the maxim

equitas sequiter legem is strictly applicable.”). The Code is

the law here and equity cannot be used to change the clear

and plain language of a Code provision. This is especially

true regarding a provision in which Congress explicitly

specified the party authorized to act. As the Supreme Court

has observed, whatever equitable powers bankruptcy courts

have, they “must and can only be exercised within the

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confines of the Bankruptcy Code.” Norwest Bank

Worthington v. Ahlers, 485 U.S. 197, 206 (1988). In this

regard, this Court has noted that equity does not “ ‘give the

court the power to create substantive rights that would

otherwise be unavailable under the Code.’ ” United States v.

Pepperman, 976 F.2d 123, 131 (3d Cir. 1992) (quoting In re

Morristown & Erie R.R. Co., 885 F.2d 98, 100 (3d Cir.

1989)); see also In re Jamo, 283 F.3d 392, 403 (1st Cir.

2002) (stating that equity may be invoked only if the

equitable remedy dispensed by the court “is necessary to

preserve an identifiable right conferred elsewhere in the

Bankruptcy Code.”).

What happens if we adopt the principle inherent in the

majority’s reasoning, that a court may use its equitable

power to confer standing to a party that is explicitly omitted

from a statute? The Code contains nearly 40 provisions

that authorize only the trustee to act.3 Could a bankruptcy

3. See, e.g., § 108 (extending time for suits brought by the trustee);

§ 327(b) (allowing a trustee authorized to operate the business of the

debtor to retain or replace professional persons employed by the debtor);

§ 327(e) (allowing the trustee to employ for a special purpose an attorney

who has represented the debtor); § 345(a) (allowing a trustee to invest

money of the estate); § 363(b)(1) (allowing the trustee to use, sell, or lease

property of the estate other than in the ordinary course of business, after

notice and a hearing); § 363(c)(1) (allowing the trustee to enter into

transactions, “including the sale or lease of property of the estate, in the

ordinary course of business, without notice or a hearing”); § 363(f)

(allowing the trustee to sell property free and clear of any interest in

such property of an entity other than the estate); § 364 (allowing the

trustee to incur secured and unsecured debt); § 365(a) (allowing the

trustee to assume or reject executory contracts and unexpired leases;

§ 365(f)(1) (allowing a trustee to assign executory contracts and

unexpired leases); § 505(b) (allowing a trustee to request a determination

of unpaid tax liabilities of the estate); § 506(c) (allowing a trustee to

surcharge property securing an allowed secured claim); § 545 (allowing

the trustee to avoid statutory liens); § 547(b) (allowing the trustee to

recover preferences); § 548(a)(1) (allowing the trustee to recover

fraudulent transfers); § 549 (allowing the trustee to avoid post-petition

transfers of estate property); § 550(a) (allowing the trustee to recover

value of avoided transfers from initial and mediate transferees); § 554

(allowing the trustee to abandon property of the estate); § 1108 (allowing

a trustee to operate the debtor’s business); § 1113(a) (allowing the

trustee to assume or reject collective bargaining agreements); § 1114(e)(1)

(instructing the trustee to pay retiree benefits); § 1146(b) (instructing the

trustee to make State or local tax returns of income for the estate of

individual debtors).

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court broaden standing to act under one provision or

narrow standing under a different provision depending on

its view of the equities involved? I would say not. If it were

otherwise, the Supreme Court might very well have thought

it “equitable” to broaden the phrase “the trustee may” in

§ 506(c) and allow the administrative claimant to recover in

Hartford Underwriters. It did not. If the language of the

Code is not ambiguous, it seems to me simply wrong to use

equity to confer derivative standing where the statute

specifically names the parties who may act.

For other reasons, I do not share the majority’s

confidence in relying on equity as a basis for expanding

§ 544(b) to permit creditors’ committees to bring avoidance

actions derivatively. In an analogous area, shareholder

derivative actions, our jurisprudence demonstrates that

equity should not be used to enlarge the category of eligible

plaintiffs.

In the historical development of shareholder derivative

actions, federal courts had attempted to use equity as the

basis for enlarging the category of eligible plaintiffs and to

permit equitable owners of stock to bring suit. See, e.g.,

Arcola Sugar Mills Co. v. Burnham, 67 F.2d 981, 982 (5th

Cir. 1933), cert. denied, 292 U.S. 630 (1934) (enlarging the

category of plaintiffs to include a pledgee of stock who had

the right to protect his interests and prevent the dissipation

of corporate assets). However, following the Supreme

Court’s decision in Erie R.R. Co. v. Tompkins, 304 U.S. 64

(1938), this Court was the first to hold that, for purposes of

derivative actions, state substantive law squarely controlled

the definition of an eligible plaintiff. See Gallup v. Caldwell,

120 F.2d 90, 93 (3d Cir. 1941); see also Wright, Miller &

Kane, FEDERAL PRACTICE AND PROCEDURE: CIVIL 2d § 1826, at 44

n. 10 (1986). Implicit in our decision in Gallup is the notion

that, for purposes of shareholder derivative actions, federal

courts were no longer permitted to broaden the concept of

a “shareholder” on the grounds of equity or otherwise.

Although there are significant differences between

shareholder derivative actions and § 544(b) actions, our

experience with the former is relevant in one critical

respect: where the text of a statute is unambiguous as to

who may bring suit, principles of equity do not provide a

basis for enlarging the category of eligible plaintiffs.

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IV. Pre-Code Practice and Policy Concerns

After completing its comprehensive textual analysis in

Hartford Underwriters, the Supreme Court concluded:

“[b]ecause we believe that by far the most natural reading

of § 506(c) is that it extends only to the trustee, petitioner’s

burden of persuading [the Court] that the section must be

read to allow its use by other parties is ‘exceptionally

heavy.’ ” 530 U.S. at 9 (citations omitted). The Supreme

Court also explained that, while pre-Code practice informs

the interpretation of statutory provisions that have

“ambiguity in the text,” pre-Code practice may not to be

used as “an extratextual supplement.” Id. at 10. Based on

these principles, the Supreme Court held that the phrase

“the trustee may” in § 506, the identical phrase found in

§ 544(b)(1) and under review here, “leaves no room for

clarification by pre-Code practice” and that “[p]re-Code

practice cannot transform § 506(c)’s reference to ‘the

trustee’ to ‘the trustee and other parties in interest.’ ” Id. at

11.4

I do not believe that the phrase “the trustee may,” which

the Supreme Court found to be unambiguous in one

section of the Code, becomes ambiguous simply because it

appears in a different Code provision. The fact that Hartford

Underwriters involved a Chapter 7 proceeding while the

present case involves a Chapter 11 proceeding is of no

consequence because, as previously explained, no other

Code provision under either chapter renders the phrase

ambiguous or alters its meaning to allow courts to

authorize derivative suits. Because the language of § 544 is

clear, a review of pre-Code practice is totally unnecessary.

The same is true with regard to the public policy concerns

discussed by the majority. In light of the clear import of the

language of § 544 and because the result that language

commands is not absurd, there is no need to explore the

public policy implications of derivative standing.

4. Amicus Brunstad conceded at oral argument that, were we to look to

all circuit court decisions decided under the Bankruptcy Act, we would

find only four or five that recognize derivative action by creditors’

committees. A handful of cases do not suffice to meet appellants’

“exceptionally heavy” burden of persuasion.

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One final point. At oral argument, the Court and the

parties explored other possibilities which may be available

to creditors’ committees, such as: (1) seeking appointment

of a trustee or an examiner to pursue allegedly fraudulent

transfers; (2) requesting a bankruptcy court order

compelling the debtor in possession to act; or (3) seeking an

order lifting the automatic stay to allow a creditors’

committee to pursue a fraudulent transfer action in state

court on the condition that any assets recovered are

brought back to the estate. We are not called upon, in this

case, to decide the viability of these or other possibilities.

However, the many possibilities raised demonstrate that

holding that creditors’ committees lack derivative standing

to pursue § 544 actions will not necessarily result in

forfeiture of potentially valuable causes of action.

V. Conclusion

The Bankruptcy Code does not authorize bankruptcy

courts to grant derivative standing to creditors’ committees

and the Supreme Court has rejected the notion that the

federal courts have any policy-making role in construing

clear statutory language. If it is a good idea for creditors’

committees to have standing, that is a matter for Congress,

not the courts, to decide. Hartford Underwriters, 530 U.S.

at 13-14. For the foregoing reasons, I would affirm the

judgment of the District Court dismissing the Committee’s

complaint for lack of standing.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit