November 27, 2002
Cybergenics: A Corporate Solution to a Bankruptcy Problem
Coauthored by Neil B. Glassman
The United States Court of Appeals for the Third Circuit recently rendered a decision that has thrown bankruptcy practice in Delaware into disarray. Contrary to longstanding bankruptcy practice in this (and virtually ever other) district, the Third Circuit held that a creditors' committee cannot initiate or prosecute avoidance actions under the Bankruptcy Code prior to confirmation of a plan of reorganization, even if authorized to do so by a bankruptcy court. See The Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 2002 WL 31102712 (3d Cir. Sept. 20, 2002) ("Cybergenics"). The purpose of avoidance actions is to recover, on behalf of a debtor's estate, fraudulent transfers or preferential payments made by the debtor to third parties prior to the debtor's bankruptcy petition. Bankruptcy courts have frequently authorized creditors' committees to bring such actions "derivatively" on behalf of debtors when the debtors refused to bring the claims themselves or the claims involved "insiders" of the debtors. In barring creditors' committees from bringing such actions, Cybergenics is having, and will continue to have, a significant impact on bankruptcy practice in this busy district, as there are literally hundreds of pre-confirmation avoidance actions pending in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") that were initiated by creditors' committees with authorization from the Bankruptcy Court.
As recognized in Cybergenics itself, there is a split of authority among the circuit courts of appeals on whether creditors' committees can bring avoidance actions under the Bankruptcy Code, with the Third Circuit holding that the committees cannot do so and all other circuit courts that have addressed the issue holding to the contrary. Indeed, the Second Circuit just rendered a decision that directly contradicts the Cybergenics holding on this very point (albeit without citing Cybergenics). See In re Housecraft Indus. USA, Inc. (Glinka v. Murad), 2002 WL 31388883 (2d Cir. Oct. 24, 2002) ("Housecraft"). The creditors' committee in Cybergenics has filed a petition for a rehearing by the Third Circuit en banc. If nothing else, in light of the Second Circuit's decision in Housecraft, Cybergenics could well end up before the United States Supreme Court if the Third Circuit refuses to rehear the matter or lets the decision stand.
Whatever the ultimate fate of Cybergenics, for the moment at least it is the law in this district, and it applies to the myriad pending avoidance actions filed by creditors' committees in the Bankruptcy Court and otherwise binds all creditors' committees in this district. Accordingly, the purpose of this article is not to question the rationale of Cybergenics -- there will be ample opportunity for that in the appellate proceedings -- but to suggest at least one means of dealing with the implications of the decision.
Cybergenics was based entirely on the statutory language of the avoidance provisions of the Bankruptcy Code (Sections 544, 545, 547(b), 548(a) and 549(a)). The Third Circuit held that, under the "plain language" of those provisions, only a trustee or debtor-inpossession is permitted to bring avoidance actions, and therefore a creditors' committee cannot do so. It follows, therefore, that Cybergenics does not bar a creditors' committee from obtaining bankruptcy court authorization to bring claims other than avoidance claims on behalf of debtors' estates.
In searching for other types of claims that could be asserted by creditors' committees during the pendency of a chapter 11 case after Cybergenics, the opinion itself suggests an analogy to corporate law
The United States Court of Appeals for the Third Circuit recently rendered a decision that has thrown bankruptcy practice in Delaware into disarray. Contrary to longstanding bankruptcy practice in this (and virtually ever other) district, the Third Circuit held that a creditors' committee cannot initiate or prosecute avoidance actions under the Bankruptcy Code prior to confirmation of a plan of reorganization, even if authorized to do so by a bankruptcy court. See The Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 2002 WL 31102712 (3d Cir. Sept. 20, 2002) ("Cybergenics"). The purpose of avoidance actions is to recover, on behalf of a debtor's estate, fraudulent transfers or preferential payments made by the debtor to third parties prior to the debtor's bankruptcy petition. Bankruptcy courts have frequently authorized creditors' committees to bring such actions "derivatively" on behalf of debtors when the debtors refused to bring the claims themselves or the claims involved "insiders" of the debtors. In barring creditors' committees from bringing such actions, Cybergenics is having, and will continue to have, a significant impact on bankruptcy practice in this busy district, as there are literally hundreds of pre-confirmation avoidance actions pending in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") that were initiated by creditors' committees with authorization from the Bankruptcy Court.
As recognized in Cybergenics itself, there is a split of authority among the circuit courts of appeals on whether creditors' committees can bring avoidance actions under the Bankruptcy Code, with the Third Circuit holding that the committees cannot do so and all other circuit courts that have addressed the issue holding to the contrary. Indeed, the Second Circuit just rendered a decision that directly contradicts the Cybergenics holding on this very point (albeit without citing Cybergenics). See In re Housecraft Indus. USA, Inc. (Glinka v. Murad), 2002 WL 31388883 (2d Cir. Oct. 24, 2002) ("Housecraft"). The creditors' committee in Cybergenics has filed a petition for a rehearing by the Third Circuit en banc. If nothing else, in light of the Second Circuit's decision in Housecraft, Cybergenics could well end up before the United States Supreme Court if the Third Circuit refuses to rehear the matter or lets the decision stand.
Whatever the ultimate fate of Cybergenics, for the moment at least it is the law in this district, and it applies to the myriad pending avoidance actions filed by creditors' committees in the Bankruptcy Court and otherwise binds all creditors' committees in this district. Accordingly, the purpose of this article is not to question the rationale of Cybergenics -- there will be ample opportunity for that in the appellate proceedings -- but to suggest at least one means of dealing with the implications of the decision.
Cybergenics was based entirely on the statutory language of the avoidance provisions of the Bankruptcy Code (Sections 544, 545, 547(b), 548(a) and 549(a)). The Third Circuit held that, under the "plain language" of those provisions, only a trustee or debtor-inpossession is permitted to bring avoidance actions, and therefore a creditors' committee cannot do so. It follows, therefore, that Cybergenics does not bar a creditors' committee from obtaining bankruptcy court authorization to bring claims other than avoidance claims on behalf of debtors' estates.
In searching for other types of claims that could be asserted by creditors' committees during the pendency of a chapter 11 case after Cybergenics, the opinion itself suggests an analogy to corporate law