Mark D. Sherrill, to Knock First or Barge Right In: Is a Chapter 11 Committee's Right to Intervene in Adversary Proceedings Absolute or Permissive?

• Publication year: 2011

TO KNOCK FIRST OR BARGE RIGHT IN: IS A CHAPTER 11

COMMITTEE'S RIGHT TO INTERVENE IN ADVERSARY PROCEEDINGS ABSOLUTE OR PERMISSIVE?

Mark D. Sherrill^*

INTRODUCTION

The United States Bankruptcy Code¹grants broad rights and powers to an official committee of unsecured creditors in a chapter 11 bankruptcy case.²

Among the statutory entitlements of a creditors' committee is the right, pursuant to 11 U.S.C. Sec. 1109, to "raise and . . . appear and be heard on any issue in a case under . . . chapter [11]."³For over two decades, however, courts have grappled with the question of whether the creditors' committee's right to be heard in a chapter 11 case extends to adversary proceedings initiated in chapter 11 cases. On that issue, the circuits presently are split.⁴

In the seminal case of In re Marin Motor Oil, Inc. the court held that a creditors' committee has an absolute right to intervene in an adversary proceeding arising out of a chapter 11 bankruptcy case.⁵Initially, most courts followed the Marin holding.⁶Over time, however, a number of the courts of appeal developed a strong trend against the Marin holding with a series of opinions granting creditors' committees only a permissive right of intervention in adversary proceedings.⁷Over a period of seventeen years, each circuit court to consider the issue sided against Marin. In 2002, however, the Second

Circuit determined that a creditors' committee does enjoy an absolute right to intervene in an adversary proceeding in a chapter 11 case.⁸

It remains uncertain whether the Second Circuit's decision will turn the tide of judicial opinions back towards favoring the Marin holding. Whether a chapter 11 creditors' committee enjoys an absolute or a permissive right to intervene in an adversary proceeding is a difficult question, with persuasive arguments on both sides. This Article analyzes those arguments and ultimately concludes that the Marin holding, allowing an absolute right of intervention to all parties in interest in adversary proceedings arising in chapter 11 cases, is most sensible.

I. THE LANDMARK CASES

A. Marin: Allowing Absolute Intervention

In Marin, the bankruptcy court appointed a chapter 11 trustee soon after the petition date. The trustee initiated two adversary proceedings in the bankruptcy case. The first adversary proceeding sought to recover property purchased by principals of the debtor with money borrowed from the debtor. The second adversary proceeding sought to consolidate the principals and several nondebtor entities into the pending bankruptcy case.⁹

The creditors' committee grew dissatisfied with the trustee's prosecution of the adversary proceedings and of the bankruptcy case generally. It therefore sought to intervene in the adversary proceedings, claiming an absolute right to do so pursuant to Sec. 1109(b) of the Bankruptcy Code.¹⁰The bankruptcy court denied the committee's request to intervene, but granted it an amicus curiae status that allowed it to submit briefs on all factual and legal issues.¹¹The district court reversed the bankruptcy court's order, holding that the right of intervention under Sec. 1109(b) was absolute and mandatory.¹²

On appeal, the Third Circuit began by noting that application of Sec. 1109(b) is limited by its own terms to chapter 11 cases. The Marin court considered this a salient distinction, given the Congressional intention to give creditors' committees greater rights in reorganization cases than in liquidations:

In contrast to the advisory role of a creditors' committee in chapter 7 cases, the very nature of a chapter 11 case (the attempt to continue the debtor's business, generally the continuation of a debtor in possession, and the need to address both the determination of assets available for secured and unsecured creditors and equity security holders and the determination of the allocation of said assets among creditors' and equity security holders) dictates a much more active role for committees in chapter 11 cases.¹³

The Marin court rejected the appellants' argument that the statute's reference to a "case" was not intended to include an adversary proceeding.¹⁴

In part, the court relied on a treatise, Collier on Bankruptcy ("Collier"), which described the term "case" to have great breadth. Other terms, Collier suggested, are employed to "designate steps within the case."¹⁵Likewise, the court emphasized that the Advisory Committee notes to the Bankruptcy Rules indicated that "a 'proceeding' is generally a litigated matter in a 'case.'"¹⁶

The Marin court next noted that Sec. 1109(b) grants the right to appear not only "in 'a case'" but "'on any issue in a case.'"¹⁷The court opined that Congress would not have used such broad language if it had not intended "case" to be greatly inclusive.¹⁸

The court commented that it "is hardly surprising" that Congress did not specifically refer to adversary proceedings in Sec. 1109(b).¹⁹First, the court stressed, Congress did not specifically refer to adversary proceedings anywhere in the Bankruptcy Code. Second, when Marin was decided, the new

Bankruptcy Rules, to accompany the Bankruptcy Code, had not yet been developed.²⁰According to the Marin court, "For all Congress knew, the Bankruptcy Rules that ultimately would be adopted under the Bankruptcy Reform Act of 1978 might render the expression 'adversary proceeding' obsolete by utilizing some new designation or designations for litigated matters in bankruptcy."²¹

The Marin court then turned to the legislative history of Sec. 1109(b), which it opined should dispel any doubt about the meaning of the statutory language. The court quoted the legislative history to state that Sec. 1109(b)

[p]rovides, in unqualified terms, that any creditor, equity security holder, or an indenture trustee shall have the right to be heard as a party in interest under this chapter in person, by an attorney, or by a committee. It is derived from section 206 of chapter X (11 U.S.C.

Sec. 606).²²

The Marin court emphasized the use of the term "unqualified" in the statement of legislative intent.²³If the right to intervene is unqualified, the court concluded, then surely it is not limited to "the general administrative aspects of the case."²⁴

The Marin court also pointed to the legislative history's reference to section 206 of chapter X of the Bankruptcy Act of 1898. That statute, the court recalled, provided a broad and absolute right to appear and be heard: "The debtor, the indenture trustee, and any creditor or stockholder of the debtor shall have the right to be heard on all matters arising in a [proceeding under this chapter]."²⁵The derivation of Sec. 1109(b) from section 206 of chapter X, the

Marin court opined, "suggests that Congress had no intention of upsetting the long line of section 206 cases granting a broad, absolute right to appear and be heard."²⁶

The Marin court noted that section 206 of chapter X had replaced another statute, section 77B, that had granted an absolute right of intervention to creditors and stockholders only in a limited set of circumstances. The court surveyed a number of authorities that confirmed the legislative intent to broaden the right of intervention when section 206 of chapter X was enacted.²⁷

The standing conferred by Section 206 of the Bankruptcy Act and Chapter X Rule 10-210(a)(1) was absolute and unlimited, and gave the debtor, creditors, stockholders and indenture trustees the same rights as if they were successful intervenors in the case, but without the necessity of a formal order of intervention . . . . Accordingly, it was clear that there was no need to seek intervention in order to be entitled to full participation . . . .²⁸

In light of the breadth and mandatory nature of section 206, the court concluded that Congress likely intended to maintain those characteristics in

Sec. 1109(b).²⁹

Finally, the Marin court found the history of section 206 pertinent because it undermined certain policy arguments made by the appellants. The appellants argued that allowing each creditor the right to intervene in an adversary proceeding would lead to "unthinkable" confusion and expenses.³⁰The court disagreed: "But the unqualified right of creditors and stockholders to intervene appears to have been the rule under Sec. 206 for approximately forty years, and the legislative history of Sec. 1109(b) shows no dissatisfaction with it."³¹

B. Fuel Oil: Restricting the Right of Intervention

The leading case for the position that a committee has only a permissive right to intervention is Fuel Oil Supply and Terminaling v. Gulf Oil Corp. (In re Fuel Oil Supply & Terminaling).³²In Fuel Oil, the creditors' committee filed an adversary complaint seeking to avoid allegedly preferential transfers.³³

The trial court dismissed the proceeding based on its conclusion that the creditors' committee lacked standing.³⁴The creditors' committee then filed a motion to intervene as of right in a separate adversary proceeding.³⁵The district court denied the motion to intervene.³⁶

The creditors' committee appealed to the Fifth Circuit the order denying its motion to intervene.³⁷On appeal, the committee argued that Sec. 1109(b) provides an unconditional right to intervene as contemplated in Rule 24(a)(1) of the Federal Rules of Civil Procedure.³⁸Rule 24(a) provides, in pertinent part: "Upon timely application anyone shall be permitted to intervene in an action: (1) when a statute of the United States confers an unconditional right to intervene."³⁹The committee also argued that the use of the term "case" in

Sec. 1109(b) was meant "to be an all-encompassing term, allowing a party in interest to intervene in any proceeding related to a case in bankruptcy."⁴⁰

The Fifth Circuit began by acknowledging that "prior bankruptcy practice and the legislative history of Sec. 1109(b) appear to support the view of the Third Circuit that Sec. 1109(b) requires a bankruptcy court automatically to allow a party in interest to intervene in adversary...