Ninth Circuit Rebuffs Attack on a Committee’s Derivative Standing to Sue

The Ninth Circuit summarily rejected an attack on the long-accepted principle that a creditors’ committee can obtain derivative standing to prosecute a claim belonging to the estate if the debtor refuses to do so or the debtor grants derivative standing to the committee.

In the appeal before the Ninth Circuit, the committee had obtained an order on stipulation with the debtor allowing the committee to prosecute an avoidance action against a particular defendant. Once the committee sued, the bankruptcy court granted the defendant’s motion to dismiss. The defendant had alleged that the committee lacked constitutional standing and that the Bankruptcy Code authorizes no party other than the debtor or trustee to bring avoidance actions.

The district court reversed, but the defendant appealed. The Ninth Circuit affirmed in a nonprecedential, per curiam opinion on February 28.

Standing

The defendant contended in the circuit that the committee lacked constitutional standing, because the committee had suffered no “injury in fact.”

The appeals court rejected the standing argument, saying, “The Committee was not required to establish Article III [or constitutional] standing.”

For authority, the appeals court tersely quoted the Ninth Circuit Bankruptcy Appellate Panel for holding that a suit filed on behalf of the debtor by virtue of derivative standing obviates the requirement that a committee demonstrate standing in its own right. See Liberty Mut. Ins. Co. v. Off. Unsecured Creditors’ Comm. (In re Spaulding Composites Co., Inc.), 207 B.R. 899, 903 (B.A.P. 9th Cir. 1997).

Derivative Standing

The defendant argued that the Bankruptcy Code contains no authority allowing a chapter 11 debtor to confer derivative standing on an official committee, or for a committee to pursue a claim belonging to the estate. The debtor contended that authorities from the Ninth Circuit and the circuit’s BAP allowing derivative standing were all handed down before the so-called BAPCPA amendments in 2005.

With regard to the statute, the defendant pointed out that Sections 544 and 548 both say that a “trustee” may pursue avoidance actions. The defendant also claimed that the trustee or debtor alone has fiduciary duties to all interested parties.

In 1993, the Ninth Circuit conceded that the Code has “no explicit authorization” for a committee to sue on behalf of the estate. Nonetheless, the appeals court said that a committee has “a qualified implied authorization [under] 11 U.S.C. § 1103(c)(5),” which allows a committee to “perform such other services as are in the interest of those represented.” Off. Unsecured Creditors Comm. v. U.S. Nat’l Bank of Or. (In re Suffolla, Inc.), 2 F.3d 977, 979 n.1 ⁽9th Cir. 1993).

The appeals courts pointed out how the circuit followed Suffolla two years later by rejecting the idea that creditors have no standing based on the idea that a trustee alone may bring adversary proceedings. Avalanche Maritime Ltd. v. Parekh (In re Parmetex, Inc.), 199 F.3d 1029, 1030 (9th Cir. 1999).

The Ninth Circuit affirmed the district court’s order reversing dismissal of the committee’s complaint.

Observations

It is well understood that a committee may obtain permission to pursue a claim belonging to the estate either by stipulation with the debtor or by motion demonstrating that the debtor has refused to prosecute a colorable estate claim. This writer submits, however, that a court may someday question long-standing practice by reference to Law v. Siegel, 571 U.S. 415 (2014), and Jevic Holding Corp. (In re Jevic Holding Corp.), 137 S. Ct. 973 (2017).

In Law, the Supreme Court held that a bankruptcy court may not use its equitable powers under Section 105(a) to contravene express provisions of the Bankruptcy Code. In Jevic, the Court held that a so-called structured settlement ending a chapter 11 case cannot include a distribution to creditors in violation of the priorities in Section 507(a).

Uncontestably, Sections 544, 547 and 548 give a “trustee” the power to prosecute avoidance actions. In a chapter 11 case, of course, the debtor in possession is given the powers of a trustee by Section 1107(a).

Section 1103(c)(5) comes close to giving power of suit to a committee when it says that a committee “may . . . perform such other services as are in the interest of those represented.”

In substance, courts over the years have given committees the power of suits as a seemingly necessary or convenient alternative to appointing a trustee to oust a chapter 11 debtor in possession when the debtor cannot or will not sue.

The Supreme Court has been reading the Bankruptcy Code restrictively, finding answers in the language of the statute. After Law and Jevic, the Court even said that “cases in which federal courts may engage in common lawmaking are few and far between.” Rodriguez v. Federal Deposit Insurance Corp., 40 S. Ct. 713, 716 (Sup. Ct. Feb. 25, 2020).

Is bestowing the power of suit on a committee a creation of federal common law, or does it fall within the broad grant in Section 1103(c)(5)? Perhaps allowing a committee to sue is such an obvious necessity that courts may make federal common law. Perhaps also, allowing a committee to sue is simply a construction of the statute and not a creation of federal common law.

Here’s a more difficult question: Even if a committee can be given standing, what about an individual creditor? Can a debtor authorize one creditor to prosecute an estate claim?