Opinion ID: 512405
Heading Depth: 3
Heading Rank: 1

Heading: Impairment of Rights

Text: 59 As an initial matter, the appellees maintain that the debtor-in-possession's refusal to initiate this lawsuit was not unjustified because the creditors' interests--as opposed to the debtor's interests--were not impaired by that refusal. Relying on Coral Petroleum and Fuel Oil Supply, the appellees argue that there was no unjustified refusal here because Louisiana law precludes injured creditors of an insolvent corporation from bringing the suit themselves. The appellees contend that [t]he interests and rights of LWE creditors are not impaired by the refusal to grant them a right of action that they are not entitled to under substantive State law. Therefore, they conclude, the Committee has no right to maintain the instant action. 60 In Fuel Oil Supply, we had occasion to address the intervention rights of a creditors' committee. In that case, we held that section 1109(b) of the Code does not create an automatic right to intervention; rather, it places intervention under the Code on the same footing as Federal Rule of Civil Procedure 24(a)(2), which permits intervention when a party with an interest in the proceeding would have its rights impaired if it were not allowed to intervene and those rights are not protected by the parties in the suit. Coral Petroleum, 797 F.2d at 1363; Fuel Oil Supply, 762 F.2d at 1285-87. We expressly stated in Fuel Oil Supply that bankruptcy cases concerning a creditors' committee's right to intervene are analogous to cases concerning its right to initiate adversary proceedings. Fuel Oil Supply, 762 F.2d at 1287; see also Coral Petroleum, 797 F.2d at 1363. In both Fuel Oil Supply and Coral Petroleum, we noted that the creditors' committee's right to initiate adversary proceedings depends on whether the trustee or the debtor-in-possession has failed to act to protect the creditors' interests. Id. 61 It is at this point in the analysis, however, that we must part ways with the appellees. The appellees assert that Fuel Oil Supply and Coral Petroleum bar the Committee's suit here. They assert that the creditors' rights are fully protected if the debtor-in-possession only asserts those causes of action which creditors could have maintained prior to bankruptcy. 16 Neither case stands for that proposition, however, and the appellees' reliance on them is misplaced. A creditor's interests in a Chapter 11 context are not protected where the debtor-in-possession fails to fulfill its obligation to collect property of the estate. If a valid--and potentially profitable--cause of action exists under state law which the debtor-in-possession may assert on behalf of the corporation, all creditors are harmed when the debtor-in-possession refuses to pursue it. The value of the estate is not maximized and the ultimate recovery of all creditors is diminished. As we noted in Coral Petroleum: 62 Here, Coral refused to sue, yet the Committee desired to bring an action. If a preference were to exist, then under section 547 the unsecured creditors' interests (which the Committee represents) are not protected. See 5 Collier, supra, Sec. 1109.-0213) (a general right to be heard would be an empty grant unless those who had such rights were allowed to act when those who should act did not). 63 797 F.2d at 1363. 64 The appellees' argument seems premised on the bizarre notion that a debtor-in-possession is under no obligation to act in the best interests of the creditors. The appellees' position ignores the fact that bankruptcy causes fundamental changes in the nature of corporate relationships. See Weintraub, 471 U.S. at 355, 105 S.Ct. at 1994. As the Court noted in Weintraub: 65 Respondents also ignore that if a debtor remains in possession--that is, if a trustee is not appointed--the debtor's directors bear essentially the same fiduciary obligation to creditors and shareholders as would the trustee for a debtor out of possession. Wolf v. Weinstein, 372 U.S. 633, 649-652 [83 S.Ct. 969, 979-981, 10 L.Ed.2d 33] (1963). Indeed, the willingness of courts to leave debtors-in-possession is premised upon an assurance that the officers and managing employees can be depended upon to carry out the fiduciary responsibilities of a trustee. Id., at 651 [83 S.Ct. at 980]. 66 471 U.S. at 355, 105 S.Ct. at 1994; see also In re Hughes, 704 F.2d at 822 (debtor-in-possession holds its powers in trust for the benefit of creditors; creditors have the right to require the debtor-in-possession to exercise those powers for their benefit); Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 462 n. 8 (6th Cir.1982) (A trustee in bankruptcy or a debtor-in-possession, as a fiduciary, represents both the secured and unsecured creditors of the debtor.). Here, the debtor-in-possession effectively could not act to maximize the value of the estate. As a result, the creditors' interests were not protected. Far from barring the Committee's action, as the appellees assert, Coral Petroleum and Fuel Oil Supply command this action to go forward. 17