Opinion ID: 512405
Heading Depth: 3
Heading Rank: 2

Heading: Beneficiaries of the Lawsuit

Text: 67 The appellees argue that the debtor-in-possession's refusal to initiate this lawsuit was not unjustified because only the creditors represented by the Committee would benefit from it; in effect, the appellees have reframed their earlier argument that the Committee is merely attempting to recover the debts of the corporation from LWE's officers and directors. The appellees complain that [a]lthough the Creditors' Committee disingeniously asserts that it filed the instant action on behalf of the LWE, defendants herein submit that various LWE creditors represented by the Creditors' Committee are the only persons who would benefit from any recovery in this action. They also note that the Committee has unabashedly characterized this lawsuit as a 'quest to get money for the creditors of the Debtor.'  While we are uncertain as to why such a quest would be either unlawful or immoral, we most assuredly reject their proposition that this lawsuit will only benefit the Committee. 68 There can be no serious dispute that the Committee and its member creditors are not the only creditors with a conceivable interest in seeing the value of the estate maximized. The appellees have admitted that there are other interested parties with a pecuniary interest in the estate. These include: lending institutions which have extended funds to LWE; corporate sponsors/guarantors; city, state and federal tax authorities; and creditors holding priority claims arising from the operation of the business as well as for professional fees arising in a Chapter 11 case. See, e.g., 11 U.S.C. Secs. 504, 507, 1129. In addition, we must disagree with the appellees' intimation that any recovery will flow directly to the Committee. As the Committee has noted, if there is any money that is produced as a result of this lawsuit it will go not to the creditors who are represented by the Creditors' Committee but to LWE itself which will distribute those funds in accordance with the usual bankruptcy principles and after a plan of reorganization has been filed. 69 Insofar as the appellees argue that we should adopt as a matter of law the peculiar proposition that a debtor-in-possession need never pursue property of the estate which will ultimately go only to satisfy the claims of creditors, their argument deserves short shrift. In the vast majority of reorganization cases, the debtor corporation is insolvent and, upon confirmation of a plan of reorganization or liquidation, equity holders will receive nothing. In almost every case, all of the property of the estate will ultimately go to the creditors. Indeed, in an analogous situation, the Supreme Court recognized that: 70 One of the painful facts of bankruptcy is that the interests of shareholders become subordinated to the interests of creditors. In cases in which it is clear that the estate is not large enough to cover any shareholder claims, the trustee's exercise of the corporation's attorney-client privilege will benefit only creditors, but there is nothing anomalous in this result; rather, it is in keeping with the hierarchy of interests created by the bankruptcy laws. See generally 11 U.S.C. Sec. 726(a). 71 Weintraub, 471 U.S. at 355, 105 S.Ct. at 1994. The appellees' argument would free Chapter 11 trustees and debtors-in-possession from their express duty to collect the property of the estate whenever the corporation's debts are greater than its assets. That stands the Bankruptcy Code on its head. 72 Finally, we note that where a debtor-in-possession possesses a cause of action--and, because the estate will benefit as a result, must assert that cause of action--yet is unable, because of a conflict of interest, to bring that action, allowing a creditors' committee to pursue the suit on the debtor-in-possession's behalf will often prove beneficial to the estate. Inherent conflicts in the debtor-in-possession's relationship with its management and creditors may constitute a basis for the appointment of a trustee. It takes but little imagination to discern the benefits of permitting a creditors' committee to proceed in lieu of appointing a trustee for that purpose: 73 In cases in which the debtor-in-possession is conducting its affairs without objection but for its failure to prosecute a handful of claims against insiders, granting leave to the creditors' committee to pursue these actions may be less expensive than the appointment of a trustee and the awarding of his commission ... and it is also less disruptive than conversion of a Chapter 11 proceeding to Chapter 7. 74 In re Philadelphia Light Supply Co., 39 B.R. 51, 52 (Bankr. E.D.Penn.1984) (citation omitted); see also In re Nicolet, 80 B.R. at 739 (allowing a Committee to maintain an action on behalf of a [debtor-in-possession] is [a] less drastic and hence we believe initially preferable course to that of requiring appointment of a trustee simply to prosecute a meritorious cause of action which the [debtor-in-possession] chooses not to pursue). 18