Taking sides with the minority view, Bankruptcy Judge Scott M. Grossman ruled that the right of a creditors’ committee to “appear and be heard” under Section 1109(b) does not allow a committee to intervene in an adversary proceeding commenced after confirmation by a liquidating trust.
The facts were not conducive to permitting intervention by the committee, but the April 15 opinion by Judge Grossman, of Fort Lauderdale, Fla., stands for the proposition that a committee lacks the statutory right to intervene even in an adversary proceeding before confirmation. However, Bankruptcy Rule 7024 might still permit intervention.
The confirmed chapter 11 plan created a liquidating trust and continued the life of the official creditors’ committee to “represents the interests of” the creditors during the existence of the trust.
The trustee of the liquidating trust filed an avoidance action that was evidently a major, contingent asset. The trustee had difficulty serving process abroad. About two years after the complaint was filed, the committee filed a motion to intervene not long after the defendants answered the complaint. The committee did not attach a proposed pleading to the intervention motion.
The liquidating trustee did not oppose intervention. Instead, the trustee and the committee negotiated a stipulation that would have given the trustee the right to prosecute the adversary proceeding while compelling the trustee to consult with the committee and permitting the committee to attend all depositions and hearings.
The defendants opposed intervention. Concerned about additional administrative costs, a creditor also opposed intervention. Judge Grossman denied the motion, both under Section 1109(b) and Rule 24.
Intervention Under Section 1109(b)
The principal basis for the committee’s intervention was Section 1109(b), which provides 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 this chapter.
Judge Grossman said that the First, Second and Third Circuits have interpreted the section as giving a committee “an unconditional right” to intervene in an adversary proceeding. He said that the minority view, taken by the Fifth Circuit, holds that Section 1109(b) “does not give a creditors’ committee the absolute statutory right to intervene in an adversary proceeding under Rule 24(a)(1).”
The split arises from the circuits’ differing interpretations of the statutory language, “in a case under this chapter,” and whether it is broad enough to encompass adversary proceedings.
For the majority, the Second Circuit said that the phrase “plainly grants a right” to be heard in both adversary proceedings and contested matters. Term Loan Holder Comm. v. Ozer Grp., L.L.C. (In re Caldor Corp.), 303 F.3d 161, 169 (2d Cir. 2002). Judge Grossman “respectfully” disagreed with Caldor and took sides with the Fifth Circuit in Fuel Oil Supply & Terminaling v. Gulf Oil Corp., 762 F.2d 1283 (5th Cir. 1985).
Judge Grossman said that the “plain text . . . actually supports the minority view espoused by Fuel Oil.” Pointing to Section 307, he reasoned that Congress “knows how to distinguish between a case and a proceeding.” That section allows the U.S. Trustee to “appear and be heard on any issue in any case or proceeding under this title.”
Because “section 1109(b) does not create an unconditional right to intervene by a creditors’ committee,” Judge Grossman held that “the committee may not intervene of right under Rule 24(a)(1).”
Intervention Under Rule 24
Although the committee had no statutory right to intervene under Section 1109(b), the committee still might have the ability to intervene under Federal Rule 24, made applicable by Bankruptcy Rule 7024.
Judge Grossman held that the committee did not satisfy the tests for intervention as of right under Rule 24(a)(2). The motion came two years after the complaint was filed, and the committee had a “mere economic interest,” not the required “legally cognizable interest” in the outcome.
A “mere economic interest,” Judge Grossman said, “does not give a party the right to intervene.”
Under the plan, the liquidating trustee was given the power and duty to represent the interests of creditors. The committee therefore “has failed to show how disposition of this action may impede or impair its ability to protect its interest, or that its interest would not be represented adequately by [the trustee],” Judge Grossman said.
The committee had no intervention of right under Rule 24(a)(2).
The committee fared no better regarding permissive intervention under Rule 24(b)(1)(B), which allows intervention by someone who has a claim or defense sharing a common question of law or fact.
Judge Grossman held that the committee had no right of permissive intervention because the committee “has no claim or defense in its own right that it shares with the adversary proceeding as a common question of law or fact.”
Finally, Rule 24(c) requires the proposed intervenor to submit a proposed pleading alongside the intervention motion. The committee had not filed a pleading.
Because the rule requires submission of a pleading, Judge Grossman denied the motion “on this basis as well.”
Taking sides with the minority view, Bankruptcy Judge Scott M. Grossman ruled that the right of a creditors’ committee to “appear and be heard” under Section 1109(b) does not allow a committee to intervene in an adversary proceeding commenced after confirmation by a liquidating trust.
The facts were not conducive to permitting intervention by the committee, but the April 15 opinion by Judge Grossman, of Fort Lauderdale, Fla., stands for the proposition that a committee lacks the statutory right to intervene even in an adversary proceeding before confirmation. However, Bankruptcy Rule 7024 might still permit intervention.