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UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
August Term 2000
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Docket No. 00-5082
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Keywords: creditor committee, standing
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August 9, 2001
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IN RE: COMMODORE INTERNATIONAL LIMITED AND COMMODORE
ELECTRONICS LIMITED, DEBTORS.
COMMODORE INTERNATIONAL LIMITED, DEBTOR-IN-POSSESSION BY AND THROUGH THE
OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF COMMODORE INTERNATIONAL
LIMITED AND COMMODORE ELECTRONICS LIMITED, COMMODORE ELECTRONICS
LIMITED, DEBTOR-IN-POSSESSION BY AND THROUGH THE OFFICIAL COMMITTEE OF
UNSECURED CREDITORS OF COMMODORE INTERNATIONAL LIMITED AND COMMODORE
ELECTRONICS LIMITED, PLAINTIFFS-APPELLANTS,
v.
IRVING GOULD, MEHDI R. ALI, ALEXANDER M. HAIG, JR., RALPH D. SELIGMAN,
BURTON WINBERG, J. EDWARD GOFF, HOCK E. TAN, RONALD B. ALEXANDER, AND
ANTHONY D. RICCI, DEFENDANTS-APPELLEES.
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Curtis C. Mechling (Adam S. Grace, Of Counsel), Stroock
& Stroock & Lavan, Llp, New York, N.Y. (for
Plaintiffs-Appellants Creditors Committee). Jonathan D. Thier (Richard
C. Schoenstein, Of Counsel), Cahill Gordon & Reindel, New York, N.Y.
(for Defendants-Appellees).
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Before: Walker, Chief Judge, Cabranes and Straub,
Circuit Judges.
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The opinion of the court was delivered by: John M.
Walker, Jr., Chief Judge
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Argued: July 9, 2001
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The Official Committee of Unsecured Creditors of
Commodore International Limited and Commodore Electronics Limited
("the Creditors' Committee"), suing on behalf of the debtor
corporations, appeals from an October 6, 2000 judgment of the United
States District Court for the Southern District of New York (Richard C.
Casey, District Judge) that dismissed the Creditors' Committee's suit
against defendants-appellees, various directors and officers of the
debtor corporations.
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AFFIRMED.
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The Official Committee of Unsecured Creditors of
Commodore International Limited and Commodore Electronics Limited
("the Creditors' Committee"), suing on behalf of the debtor
corporations, appeals from an October 6, 2000 judgment of the United
States District Court for the Southern District of New York (Richard C.
Casey, District Judge) that dismissed the Creditors' Committee's suit
against defendants-appellees, various directors and officers of the
debtor corporations. For the reasons set forth below, that judgment is
affirmed.
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The background of this case has been substantially
detailed in In re Commodore Int'l, Ltd., 231 B.R. 175, 176-77 (Bankr.
S.D.N.Y. 1999) ("Commodore I"). Only the facts relevant to
this appeal are set out herein.
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This dispute concerns the bankruptcy of two Bahamian
corporations: Commodore International Limited and Commodore Electronics
Limited (collectively "Commodore"), a parent and its
subsidiary, respectively. Prior to its insolvency, Commodore was engaged
in the world-wide manufacture of personal computers and related products
under the "Commodore" and "Amiga" brand names.
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Bankruptcy proceedings involving Commodore are pending
before both the Supreme Court of the Commonwealth of The Bahamas
("Bahamian Court") and the United States Bankruptcy Court in
New York ("Bankruptcy Court"). Pursuant to an agreement
("Protocol") between the Creditors' Committee of the New York
action and Frank R. Wilson and MacGregor N. Robinson, the
court-appointed liquidators in the Bahamian action ("the
Liquidators"), the Bahamian Court and the Bankruptcy Court are
jointly administering Commodore's bankruptcy. *fn1
With court approval, the Liquidators have been granted the rights,
powers and duties of debtors in possession in the Bankruptcy Court
action. See 11 U.S.C. § 1107(a); see generally 3 Collier on Bankruptcy
§§ 1107.01 to 1107.04 (3d ed. 2001) [hereinafter "Collier"].
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In the normal course, the Liquidators--having the
powers and duties of a debtor in possession--would pursue Commodore's
viable legal claims in an effort to increase the size of the bankruptcy
estate. See generally 3 Collier, supra, at § 1107.02[3] (discussing
debtor in possession's fiduciary duties). However, on or about March 26,
1997, the Liquidators instead consented to the Creditors' Committee's
pursuing Commodore's claims for fraud, waste and mismanagement against
the defendants, various former officers and directors of Commodore. See
11 U.S.C. § 1109(b). The Bankruptcy Court entered a general order
approving of this arrangement.
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The following sequence of events then occurred. On
April 2, 1997, the Creditors' Committee brought suit in the Bankruptcy
Court against the defendants. On June 2, 1997, the defendants moved to
dismiss the action based on, inter alia, forum non conveniens and
international comity grounds. Thereafter, on November 5, 1997, the
Liquidators filed suit in the Bahamian Court against the defendants
asserting identical claims to those set forth in the Creditors'
Committee's complaint in the Bankruptcy Court. *fn2
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On March 11, 1998, the Bankruptcy Court directed the
parties to address whether, in light of the Liquidators' Bahamian suit,
the Creditors' Committee still retained standing to prosecute an
identical suit in the Bankruptcy Court. After briefing and oral argument
on the issue, the Bankruptcy Court held that the Liquidators' suit
divested the Creditors' Committee of standing to pursue claims against
the defendants, and it therefore dismissed the action. See Commodore I,
231 B.R. at 180 (holding that "the Liquidators' commencement of the
Bahamian Litigation divests the Committee of standing to bring this
litigation"). The district court affirmed the dismissal on October
4, 2000, see In re Commodore Int'l Ltd., 253 B.R. 336, 339 (S.D.N.Y.
2000) ("Commodore II"), and this appeal followed.
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Before us the parties have joined issue on two
questions. The first is whether a creditors' committee can sue on behalf
of a debtor only where the debtor has unjustifiably refused to bring the
action, as defendants assert, cf. In re The Gibson Group, Inc., 66 F.3d
1436, 1443 (6th Cir. 1995); In re Nicolet, Inc., 80 B.R. 733, 739-40
(Bankr. E.D. Pa. 1988); In re Wesco Prods. Co., 22 B.R. 107, 109-10
(Bankr. N.D. Ill. 1982), or whether a creditors' committee can also
obtain standing with the debtor's consent and bankruptcy court approval,
as the plaintiff Creditors' Committee contends. The second is whether,
assuming a creditors' committee can obtain standing with the consent of
the trustee, debtor in possession, or court-approved representative with
similar authority such as the Liquidators here, that consent can be
withdrawn unilaterally, without court permission once the creditors'
committee has commenced suit. If consent cannot be unilaterally revoked,
the Creditors' Committee contends, then both the Bankruptcy Court and
the district court erred in treating the Liquidators' filing suit in The
Bahamas as an automatic withdrawal of the consent upon which its
standing was based.
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Because, as we explain below, our answer to the first
question is dispositive in light of the present posture of the dual
bankruptcy proceedings, we do not reach the second question and express
no view on it.
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On the first question, the district court agreed with
the defendants that "`creditors committees have an implied . . .
right . . . to initiate adversary proceedings . . . only when the
trustee or debtor in possession unjustifiably failed to bring suit or
abused its discretion in not suing to avoid a preferential
transfer.'" Commodore II, 253 B.R. at 339 (quoting In re STN
Enters., 779 F.2d 901, 904 (2d Cir. 1985)). In arriving at this
conclusion, the district court relied on this court's decision in STN
Enterprises. In STN Enterprises, this court held that while "[u]sually
. . . the debtor in possession initiates proceedings to recover" on
the debtor's legal claims, there is a "qualified right for
creditors' committees to initiate [such] adversary proceedings in the
name of the debtor in possession" with "the approval of the
bankruptcy court." In re STN Enters., 779 F.2d at 904. We noted
that courts have only so approved when the "debtor in possession
unjustifiably failed to bring suit or abused its discretion in not suing
to avoid a preferential transfer." Id.
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The district court read STN Enterprises as foreclosing
any other basis for creditors' committee standing. We disagree with this
reading, however. STN Enterprises neither presented nor required this
court's consideration of whether a creditors' committee can gain
standing in situations other than the unjustified failure of the debtor
in possession to bring suit.
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Therefore, we approach the question of whether a
creditors' committee may gain standing with the consent of a trustee,
debtor in possession, or court-approved representative having similar
authority, as a matter of first impression in this circuit. See
generally 3 Collier, supra, at § 1103.05[6] (noting debtors have
requested that creditors' committees prosecute actions against former
officers, important customers, and key suppliers). In doing so, we find
persuasive the reasoning of the Bankruptcy Appellate Panel of the Ninth
Circuit in Spauling Composites Co.:
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The [debtor in possession] has an obligation to pursue
all actions that are in the best interests of creditors and the estate.
An unsecured creditors' committee has a close identity of interests with
the [debtor in possession] in this regard. Allowing the [debtor in
possession] to coordinate litigation responsibilities with an unsecured
creditors' committee can be an effective method for the [debtor in
possession] to manage the estate and fulfill its duties. . . . Rather
than a flat prohibition, impartial judicial balancing of the benefits of
a committee's representation better serves the bankruptcy estate. In re
Spaulding Composites Co., 207 B.R. 899, 904 (9th Cir. BAP 1997)
("Spaulding Composites") (internal citations omitted); see
also Coral Petro. v. Banque Paribas-London, 797 F.2d 1351, 1362-63 (5th
Cir. 1986) (same); In re Colfor, Inc., No. 96-60306, 1998 WL 70718, at
*2 (Bankr. N.D. Ohio Jan. 5, 1998).
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Based on this reasoning, the court in Spaulding
Composites held that a debtor in possession may stipulate to
representation by an unsecured creditors' committee "[s]o long as
the bankruptcy court exercises its judicial oversight and verifies that
the litigation is indeed necessary and beneficial." Spaulding
Composites, 207 B.R. at 904.
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We adopt an approach similar to that followed by the
court in Spaulding Composites: A creditors' committee may acquire
standing to pursue the debtor's claims if (1) the committee has the
consent of the debtor in possession or trustee, and (2) the court finds
that suit by the committee is (a) in the best interest of the bankruptcy
estate, and (b) is "necessary and beneficial" to the fair and
efficient resolution of the bankruptcy proceedings. Id. This approach
permits a reasoned and practicable division of labor between the
creditors' committee and the debtor in possession or trustee, while also
providing bankruptcy courts with significant authority both to manage
the litigation and to check any potential for abuse by the parties. Cf.
In re Gibson Group, Inc., 66 F.3d 1436, 1441 (6th Cir. 1995) ("A
debtor-in-possession often acts under the influence of conflicts of
interest and may be tempted . . . to favor certain creditors over others
. . . .").
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Turning to the facts of the instant case, to date
neither the Bankruptcy Court nor the district court has considered
whether suit by the Creditors' Committee (rather than the Liquidators)
is "necessary and beneficial" to the fair and efficient
resolution of Commodore's liquidation. Thus, the Creditors' Committee
has not yet gained standing. Ordinarily a remand might be in order to
permit the Bankruptcy Court or the district court to consider whether
suit by the Creditors' Committee is in fact "necessary and
beneficial." Cf. In re STN Enters., 779 F.2d at 906. However, we
believe the Liquidators' Bahamian suit--in which, as the Bankruptcy
Court noted, the Creditors' Committee "can petition . . . to
intervene"--has plainly made unnecessary suit by the Creditors'
Committee in the Bankruptcy Court in New York, thus foreclosing the
possibility of the Creditors' Committee gaining standing. *fn3
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To recap, we 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 debtor
in possession consents. In the latter situation, however, suit by the
creditors committee must be necessary and beneficial to the resolution
of the bankruptcy proceedings. Because the Creditors' Committee has not
yet gained standing and because suit by it is neither necessary nor
beneficial in light of the Liquidators' having filed an identical suit
in The Bahamas, we affirm the judgment of the district court dismissing
the action.
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CONCLUSION
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The district court's judgment is affirmed. Each side to
bear its own costs of the appeal.
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Opinion Footnotes |
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*fn1
It appears from the record before us that the Bankruptcy Court action is
a chapter 11 corporate reorganization, while the Bahamian Court action
is a corporate liquidation, which is more akin to a chapter 7 bankruptcy
proceeding under the United States Bankruptcy Code. See generally Samuel
A. Caulfield, Fraudulent and Preferential Conveyances of the Insolvent
Multinational Corporation, 17 N.Y.L. Sch. J. Int'l & Comp. L. 571,
577 (1997) (noting that one difficulty with dual bankruptcy proceedings
is that the two nations' policies may conflict regarding whether to
reorganize or liquidate the debtor corporation).
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*fn2
According to the Creditors' Committee, the Liquidators commenced the
Bahamian proceeding because the defendants' attack on th[e] [Bankruptcy
Court] proceeding gave them reason to fear a possible loss of the claims
(by virtue of the statute of limitations) . . . . See also Commodore I,
231 B.R. at 179-80.
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*fn3
Perhaps of equal (if not greater) moment is the fact that, since the
Liquidators first consented to the Creditors' Committee's suit,
"the [Bahamian] Court held that under Bahamian law, the Liquidators
erred in so consenting." Commodore I, 231 B.R. at 180. Given that
Commodore's bankruptcy is being jointly administered by both the
Bahamian Court and the Bankruptcy Court, we doubt that permitting the
Creditors' Committee to proceed on the basis of consent provided in
violation of Bahamian law (as interpreted by the Bahamian Court) would
be "beneficial" to the resolution of the joint proceedings.
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