Ruling on an expedited appeal involving Puerto Rico’s debt restructuring, the First Circuit took sides in a circuit split and held that an official creditors’ committee has an unqualified right to intervene in an adversary proceeding under F.R.C.P. 24(a)(1).
Immediately after Puerto Rico began the courtroom phase of its debt restructuring under the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA (48 U.S.C. §§ 2161 et. seq.), several bond insurers initiated an adversary proceeding contending that Puerto Rico’s fiscal plan violates PROMESA and the federal Constitution.
The official creditors’ committee filed a motion to intervene, which the district court denied on Aug. 10.
Reversing on Sept. 22, Chief Circuit Judge Jeffrey R. Howard said that the “able district court” understandably rested her decision “exclusively” on a footnote in Kowal v. Malkemus (In re Thompson), 965 F.2d 1136, 1142 n.8 (1st Cir. 1992), which says that Section 1109(b) of the Bankruptcy Code “does not afford a right to intervene under Rule 24(a)(1).”
Section 1109(b) provides that a creditors’ committee “may raise and may appear and be heard on any issue in a case under this chapter.” That section is among many provisions of the Bankruptcy Code incorporated into PROMESA.
Judge Howard said the footnote did not even involve a chapter 11 case and was “pure dicta” not binding on the circuit court.
Judge Howard said that Thompson relied primarily on a 1985 Fifth Circuit opinion holding that Section 1109(b) did not give a committee a right of intervention in an adversary proceeding. Two other circuits, he said, agreed with the Fifth Circuit in dicta.
Later, Judge Howard said, the Second and Third Circuits rejected the Fifth Circuit’s approach by holding that Section 1109(b) bestows a committee with a statutory right of intervention under Rule 24(a)(1).
Not bound by Thompson, Judge Howard looked afresh at Section 1109(b) and observed that the language was “quite broad” by giving a committee intervention rights “on any issue in a case.” Following the Collier treatise, he said that “any issue” subsumes adversary proceedings.
Although holding that Section 1109(b) grants a committee unconditional intervention rights, the section does not “dictate the scope of that participation,” he said.
Because the district court had not reached the scope question, Judge Howard remanded the case with instructions to consider the extent of the committee’s participation in the adversary proceeding. However, he said that the committee’s own recommendations about limited participation “fit comfortably” within rules laid down by other courts.