Opinion ID: 2676
Heading Depth: 2
Heading Rank: 1

Heading: Whether Investors Have Party-In-Interest Standing

Text: Investors claim they had standing to appear before the bankruptcy court and object to the Settlement because they are a party in interest within the meaning of § 1109(b) of the Bankruptcy Code. That section, Investors argue, is to be construed broadly to allow all parties affected by the case to be heard. Bankruptcy Code § 1109(b) was not intended to exclude injured parties from the judicial process, but instead to underscore that in bankruptcy, which so directly concerns issues of property rights, all affected entities should have access to justice. Investors Br. at 27. Section 1109(b) provides that the term party in interest [ ] includ[es] the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee. [8] We previously explored the contours of the term party in interest in a slightly different context in Comcoach, 698 F.2d at 573-74. [9] There, we stated that [w]hen interpreting the meaning of Code terms such as `party in interest', we are governed by the Code's purposes. Id. at 573 (citation omitted). One of those purposes is to convert the bankrupt's estate into cash and distribute it among creditors. Id. Bankruptcy courts, we noted, were established to provide a forum where creditors and debtors could settle their disputes and thereby effectuate the objectives of the statute. Id. We acknowledged in Comcoach that the term party in interest is not defined by the Code. Id. But we noted that a `real party in interest' is the one who, . . ., has the legal right which is sought to be enforced or is the party entitled to bring suit, and we rejected as incompatible with the purposes of the Code the notion that any particular creditor's interest may be asserted by anyone other than that creditor. Id. [10] In reaffirming Comcoach 's underlying principle, we see no need to limit standing in the § 1109(b) context solely to the class of creditors and debtors permitted by Comcoach in the quite different context of § 362(d)(1). [11] See supra note 8. For, even granting § 1109(b) the benefit of somewhat greater breadth  breadth that might be warranted by the additional parties listed in the text of § 1109(b) but not in the text of § 362(d)(1)  Investors' equity argument still reads into § 1109(b) a degree of separation from the primary parties in a bankruptcy proceeding that we are unwilling to countenance. To the extent that the rights of a party in interest are asserted, those rights must be asserted by the party in interest, not someone else. The principle set forth in Comcoach therefore applies with equal force to this case. We reaffirm it today. Investors cannot claim that they seek to enforce any rights distinct from those of Sphinx as a creditor and a defendant in an adversary proceeding. The record establishes that Sphinx is a single legal entity, and that the individual cells are not legally separate entities from Sphinx. By investing in Sphinx, Investors placed control of their funds entirely within the hands of the Sphinx directors (or managers acting on behalf of the directors). Only Sphinx, not individual Investors, or even Investors as a group, could assert a claim against the Refco estate, and only Sphinx was permitted to negotiate a settlement with the Committee. Investors maintain a financial interest in Sphinx, but they are not a party in interest within the meaning of the Bankruptcy Code. The party in interest in the bankruptcy sense, representing the Investors' financial interest, is Sphinx. Investors spend many pages of their brief arguing passionately for an expansive interpretation of § 1109(b) to ensure that fraud will not prevail, that substance will not give way to form, that technical considerations will not prevent substantial justice from being done. Investors Br. at 31 (quoting Pepper v. Litton, 308 U.S. 295, 305, 60 S.Ct. 238, 84 L.Ed. 281 (1939)). Laudable goals, to be sure. But one cannot avoid the conclusion that bankruptcy court is not the appropriate forum in which to resolve Investors' disputes with the Sphinx board. It may be that the Sphinx directors violated their fiduciary duties by entering a settlement that was not in the best interests of Investors. [12] That issue, however, is not for the bankruptcy court. Bankruptcy courts are primarily courts of equity, but they are not empowered to address any equitable claim tangentially related to the bankruptcy proceeding. Bankruptcy court is a forum where creditors and debtors can settle their disputes with each other. Any internal dispute between a creditor and that creditor's investors belongs elsewhere. Investors point out that bankruptcy courts have declared that § 1109(b) should be construed broadly. [13] They argue that a broad construction of § 1109(b) means that  whenever a party has an interest that is affected by a Bankruptcy Court determination, equity will allow that party to be heard, will require the court to consider that party's complaint in ascertaining whether the order sought is appropriate, and will allow an appeal of the court's determination. Investors Br. at 40. Even when a statute is broadly construed, however, it still has its limits. The term `party in interest' [in § 1109(b)] is broadly interpreted, but not infinitely expansive. S. Blvd., Inc. v. Martin Paint Stores (In re Martin Paint Stores), 207 B.R. 57, 61 (S.D.N.Y.1997). As Chief Judge Lifland of the Bankruptcy Court for the Southern District of New York has stated: [I]t is important that a bankruptcy court is not too facile in granting applications for standing. Overly lenient standards may potentially over-burden the reorganization process by allowing numerous parties to interject themselves into the case on every issue, thereby thwarting the goal of a speedy and efficient reorganization. . . . Granting peripheral parties status as parties in interest thwarts the traditional purpose of bankruptcy laws which is to provide reasonably expeditious rehabilitation of financially distressed debtors with a consequent distribution to creditors who have acted diligently. Ionosphere, 101 B.R. at 850-51 (internal citations and quotation marks omitted). This admonition is pertinent to the matter at hand. Had the bankruptcy court permitted Investors to object to the Settlement and conduct discovery on the numerous factual issues that, according to Investors, would prove that the Settlement was the product of tortious misconduct, collusion, and fraud by a faithless fiduciary, Investors Br. at 14, the Code's goal of a speedy and efficient reorganization, Refco, 2006 WL 3409088, at  (quoting Ionosphere, 101 B.R. at 850), would have been frustrated. Investors sought to prove that the Settlement was not a properly authorized corporate act by Sphinx; that the board members who approved the Settlement on behalf of Sphinx, and the lawyers representing Sphinx, were subject to conflicts of interest; and that the debtor actually controlled Sphinx and therefore the Settlement was not the product of arms' length bargaining. Investors Br. at 14-15. This litany of wrongs allegedly wrought by the officers and directors of Sphinx upon Investors is fodder for a lengthy trial itself. It surely would have caused a substantial delay in the Refco bankruptcy proceeding. In any event, a bankruptcy court's obligation is to determine whether a settlement is in the best interests of the estate, not to ensure that the creditors' representatives are honoring their fiduciary duties. See Nellis v. Shugrue, 165 B.R. 115, 121 (S.D.N.Y.1994) (Sotomayor, J. ); In re Drexel Burnham Lambert Group, Inc., 134 B.R. 499, 505 (Bankr.S.D.N.Y.1991); see also In re Energy Co-op., Inc., 886 F.2d 921, 927 (7th Cir.1989). We agree with the bankruptcy court's astute observation that to permit Investors to lodge objections to the Settlement on the basis of their fiduciaries' appropriate approval would entirely skew the task of Bankruptcy Court, and that it would be extremely unfair to debtors to force them to negotiate not only with the legal representatives of creditors, but also with any interest holders of a creditor. Refco, 2006 WL 3409088, at  (quoting Bankruptcy Court Transcript). We hold, therefore, that Investors are not a party in interest within the meaning of § 1109(b) of the Bankruptcy Code, and affirm the district court's holding that the bankruptcy court did not abuse its discretion by approving the settlement without ruling on the merits of the Investors' objections, allowing them to intervene, or affording them any opportunity for discovery. We note that although they are not parties in interest entitled to object to the Settlement and conduct discovery, Investors may still have remedies for fraud perpetrated by their fiduciaries. Counsel for Investors indicated at oral argument that they intended to file suit against the Sphinx directors alleging breach of fiduciary duty. Assuming they file their claim within the appropriate jurisdiction, and overcome any pre-trial hurdles, they may then be permitted to conduct discovery on the issues they sought to investigate in bankruptcy court, and seek redress before a judge or jury. [14]