Source: https://insolvencyintel.abi.org/bankruptcyarticles/committees-have-an-unconditional-right-to-intervene-subject-to-certain-caveats
Timestamp: 2019-04-23 07:00:40+00:00

Document:
On Sept. 22, 2017, the First Circuit issued a decision holding that the official unsecured creditors’ committee (UCC) appointed in the Commonwealth of Puerto Rico’s Title III debt-adjustment case has an unrestricted right to intervene in an associated adversary proceeding (AP). This decision joins similar opinions by the Second Circuit (permitting intervention by a term loan holder committee) and Third Circuit (permitting intervention by the appointed UCC in that case). Although Financial Management only addressed the UCC’s right to intervene in the AP, it can be read broadly to provide other parties in interest under § 1109(b) of the Bankruptcy Code — including, but not limited to, indenture trustees and equity committees — the unconditional right to intervene in any adversary proceeding associated with the bankruptcy case in which they are involved, subject to two important caveats.
Upon the commencement of the Title III case on May 3, 2017, three of Puerto Rico’s bonds insurers initiated the AP to, among other things, challenge the constitutionality of certain provisions of PROMESA. Shortly after its appointment, the UCC filed a motion to intervene in the AP. In support of its intervention request, the UCC asserted that Federal Rule of Civil Procedure (FRCP) 24(a)(1) requires courts to permit parties to intervene where a federal statute grants such party an unconditional right to intervene. The UCC argued that § 1109(b) grants such a right because it allows parties-in-interest, including creditors’ committees, a right to “appear and be heard on any issue in a case under this chapter.” The plaintiffs opposed the UCC’s request to intervene.
Chief Judge Jeffrey R. Howard, writing for the First Circuit panel, agreed with the UCC and reversed the order. The court noted that the district court was not bound by Thompson because its observation on the scope of § 1109(b) was “pure dicta.” In re Thompson arose from a chapter 7 case and thus, § 1109(b) was inapplicable on its face. Judge Howard further observed that the authority supporting the Thompson footnote, In re Fuel Oil, relied on other courts’ “general hesitation to find ‘unconditional statutory rights of intervention,’ as well as various statutory provisions and rules that “draw … distinctions between bankruptcy ‘cases’ and the proceedings related to them.” The Fuel Oil court so ruled, despite acknowledging the argument that § 1109(b) creates an absolute right to intervene in adversary proceedings appears strong.
Instead, noting the considerable shift in the weight of authority in the 32 years since Fuel Oil was decided, Judge Howard followed precedent set by the Second and Third Circuits in determining that § 1109(b) provides a statutory right to intervene under FRCP 24(a)(1). Section 1109(b) provides that “a creditor’s committee … may raise and appear and be heard on any issue in a case under this chapter.” Focusing on the language of the statute, the court reasoned that in the bankruptcy context the terms “case” and “proceeding” are terms of art with specialized meanings.
A case “refers to litigation ‘commenced by the filing with the bankruptcy court of a petition’ under the appropriate chapter of Title 11.” On the other hand, a proceeding refers to a “particular dispute or matter arising within a pending case — as opposed to the case as a whole.” Since every issue in a case may only be adjudicated in the context of some type of proceeding, “it is apparent that the reference to … ‘any issue in a case’ subsumes issues in a proceeding.” Given the broad language of § 1109(b), it is unlikely that Congress intended for “case” to be interpreted narrowly in § 1109(b), excluding the constituent proceedings that comprise a “case.” Further, the rights conveyed in §1109(b) to parties-in-interest are not subject to any conditions and are therefore unconditional.
The First Circuit’s grant of parties-in-interest with an unconditional right to intervene in adversary proceedings is subject to two important caveats.
First, while a party-in-interest’s right to intervene is unconditional, the scope of the intervention permitted remains within the broad discretion of the trial court. Judge Howard noted that “‘courts are not faced with an all-or-nothing choice between grant or denial’ of an intervention motion.” Such limitations might include denying or limiting the intervenor’s participation in discovery, not permitting intervenors to make or join dispositive motions, precluding an intervenor from settling disputes and restricting intervention to claims raised by the original parties. This permits the trial court to allow all interested parties into an action in hopes of reaching a fair solution, while preventing an expansion of the proceeding’s scope that threatens the trial court’s control over the matter. Judge Howard remanded the UCC’s intervention motion to the district court for a determination on the scope of such intervention.
Second, the standing requirement under Article III of the U.S. Constitution provides another possible limitation on a party-in-interest’s participation in an adversary proceeding. Although Article III standing “is almost always satisfied with respect to any party in interest in a chapter 11 case,” some courts also require that “the interests of a party seeking to participate lie within the ‘zone of interests’ protected by the particular statute or legal rule implicated in the given proceeding.” Judge Howard declined to address what impact, if any, Article III standing would have on a party-in-interest’s right to intervene because the district court did not address it.
In Financial Management, the First Circuit joined the Second and Third Circuits, and held that the UCC may intervene in any adversary proceeding. Given that § 1109(b) also specifically includes indenture trustees (as with creditors’ committees), there is no reason that the holding of this case cannot be extended to indenture trustees or even other parties.
The decision can be used as a tool for committees and other parties-in-interest seeking intervention. Opponents of such intervention will be forced to focus on the limiting and narrowing the scope of the participation as such decision remains within the discretion of the trial court. Further, the First Circuit left for another day the issue of whether Article III standing further limits a party’s right to intervention.
 In re Fin. Mgmt. & Oversight Board for Puerto Rico, ___ F.3d. ___, 2017 WL 4216438, No. 17-1831 (1st Cir. Sept. 22, 2017) (“Fin. Mgmt.”).
 Commenced under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), 48 U.S.C. § 2101, et seq., and currently pending in the District of Puerto Rico (the “district court”). Title III of PROMESA incorporated several sections of the Bankruptcy Code, including § 1109. See 48 U.S.C. § 2161.
 In re Caldor Corp., 303 F.3d 161, 176 (2d Cir. 2002).
 Phar-Mor Inc. v. Coopers & Lybrand, 22 F.3d 1228, 1240 (3d Cir. 1994) (citing Matter of Marin Motor Oil Inc., 689 F.2d 445, 457 (3d Cir. 1982)).
 Made applicable in bankruptcy adversary proceedings by Federal Rule of Bankruptcy Procedure (FRBP) 7024.
 Mem. Op. and Order Den. Mot. to Intervene, Fin. Mgmt., No. 17-00125 (D.P.R. Aug. 10, 2017), ECF No. 50 (the “Order”).
 Id. at 2 (quoting In re Thompson, 965 F.2d 1136, 1140 (1st Cir. 1992), as amended (May 4, 1992)).
 Fin. Mgmt., 2017 WL 4216438 at *3.
 Fuel Oil Supply & Terminaling v. Gulf Oil Corp., 762 F.2d 1283, 1286 (5th Cir. 1985).
 Fin. Mgmt., 2017 WL 4216438, at *3 (quoting Fuel Oil, 762 F.2d at 1286-87).
 Fuel Oil, 762 F.2d at 1286.
 11 U.S.C. § 1109(b) (emphasis added).
 Fin. Mgmt., 2017 WL 4216438, at *3.
 Id. (citing Caldor, 303 F.3d at 168).
 Id. at *4 (citing 7 Collier on Bankruptcy ¶ 1109.04 [a][ii] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2016).
 Id. (quoting United States v. City of Detroit, 712 F.3d 925, 931-32 (6th Cir. 2013)).
 The plaintiffs dismissed the AP before the district court could hold a hearing on the UCC’s remanded motion. See Order Dismissing Case and Canceling Oral Arg., Fin. Mgmt., No. 17-00125 (D.P.R. Oct. 10, 2017), ECF No. 109.
 Id. (quoting Collier ¶ 1109.04).
This article was originally published in the December 2017 edition of the Business Reorganization Committee Newsletter. Participation in ABI's committees is one of the many benefits of becoming a member. Committees provide networking and leadership opportunities. For additional information on how you could become involved in ABI and our Committees please visit membership.abi.org.
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