Opinion ID: 796935
Heading Depth: 2
Heading Rank: 2

Heading: Independent Right to an Avoidance Action

Text: 32 The trustee next argues that he inherited the unexhausted right retained by the creditors' committee to bring an avoidance action. Akamai responds that the trustee could not inherit any rights from the creditors' committee that he did not inherit from the debtor-in-possession. 33 This is a matter of first impression for this circuit: whether a Chapter 7 trustee can succeed to the rights of a Chapter 11 creditors' committee upon conversion. The district court concluded the trustee did not succeed to the creditors' committee right because the committee was dissolved upon conversion. It found the trustee bound by the acts of the debtor-in-possession and, as MSHOW was barred from bringing suit against Akamai, the trustee is similarly bound. We agree on the latter ground. 34 Chapter 11 expressly provides for the creation of an unsecured creditors' committee, 11 U.S.C. § 1102, but is less clear about the dissolution of a committee. Most courts have concluded that conversion of a Chapter 11 case to a Chapter 7 case results in dissolution of a Chapter 11 committee. See, e.g., 4 Norton Bankr.L. & Prac.2d § 78:10.5. And with dissolution of the committee, its rights also expire. Official Comm. of Unsecured Creditors v. Belgravia Paper Co. (In re Great Northern Paper, Inc.), 299 B.R. 1, 5 (D.Me.2003) (Once the Chapter 11 case was converted to a Chapter 7 case, the Creditors Committee ceased to exist; the Creditors Committee's attorney therefore had no authority to make an assignment, nor did the Creditors Committee have any rights to assign.). The trustee argues here that the right to bring an avoidance action is not a right of the creditors' committee, but rather derivative of the rights of the debtor and the estate. Thus, he contends the rights have not expired. Akamai concedes as much: Akamai does not contend ... that avoidance actions ... `evaporate' when a case is converted to Chapter 7. Aple. Brief at 19-20. 35 As a preliminary matter, we do not quarrel that the right of the creditors' committee to bring an avoidance action is derivative. But that conclusion does not affect the result here. Even though the avoidance action rights have not expired, the committee no longer exists to enforce those rights. 36 The trustee is also prevented from bringing a claim on the existing derivative rights. As we already explained, a Chapter 7 trustee succeeds only to the rights of the debtor-in-possession, so the trustee is bound by prior actions of the debtor-in-possession to the extent approved by the bankruptcy court. In Paul v. Monts, 906 F.2d 1468 (10th Cir.1990), we concluded: 37 The trustee, as successor to the debtor in possession, is bound by his predecessor's authorized actions. When asserting rights of action against another, the bankruptcy trustee has no greater rights than the debtor has. The trustee is ... subject to the same defenses as could have been asserted by the defendant had the action been instituted by the debtor .... He may not maintain a position regarding a transaction wholly inconsistent with his previous acts in connection with that same transaction. 38 Id. at 1473 (emphasis added) (internal quotations & citations omitted). Thus, the trustee—like the debtor-in-possession MSHOW—is also barred from bringing an avoidance action, even if such an action has not been extinguished. The trustee's authority is curtailed by the terms agreed to by MSHOW and approved by the court in the financing order. 8 39 The only authority cited by the trustee that suggests he might succeed to the rights of the creditors' committee is In re Rachles, Inc., 131 B.R. 782 (Bankr.D.N.J. 1991), a case deserving some discussion. In Rachles, the debtor made fraudulent transfers while under Chapter 11 protection. The creditors' committee filed an adversary proceeding against the transferee to avoid the transfers. The petition was subsequently converted to Chapter 7, and the trustee also filed an adversary proceeding setting forth identical claims. After a question arose as to the timeliness of the trustee's complaint, the trustee sought to consolidate its case with the committee's earlier filed action. Allowing the consolidation, the court concluded: 40 Upon conversion and appointment, a trustee steps into the shoes of the debtor-in-possession with respect to all rights, responsibilities and liabilities. Logically then, it is entirely appropriate for the Chapter 7 Trustee to be substituted as plaintiff in the instant adversary proceeding in the place of the Creditors' Committee which initially filed the adversary complaint on behalf of the Debtor and this estate. 41 Id. at 785 (emphasis added). Thus, the creditors' committee claims were really claims of the debtor and his estate—claims that still belonged to the estate after conversion—so it was logical to permit the trustee to carry forward the cause of action initiated by the committee. The trustee was permitted to take hold of the reins and litigate the derivative rights previously asserted by the committee. 42 Rachles should not be read to stand for a proposition that the creditors' committee has independent avoidance claims of its own to which the trustee inevitably succeeds. The trustee in Rachles was not succeeding to the independent rights of the creditors' committee, but rather joining the committee's already initiated derivative claim of the debtor's rights in a case where the trustee was not otherwise barred by previous arrangements made by the debtor-in-possession. 43 As a matter of law, a creditors' committee does not have its own right to bring avoidance actions. See, e.g. Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 563 (3d Cir.2003) (stating that  § 1103(c)(5) does not confer the sort of blanket authority necessary for the Committee independently to initiate an adversarial proceeding, including one under § 544(b)). But courts have permitted creditors' committees to bring actions in the name of the debtor,  usually only in connection with actions against insiders or other persons that the debtor in possession has refused or is reluctant to sue. Collier on Bankruptcy ¶ 1103.05[6][a] (emphasis added). Thus, as the trustee noted, any rights the creditors' committee has to an avoidance action are derivative of the debtor and the estate's claims. 9 In Rachles, the trustee succeeded to just such derivative estate claims. To the extent the creditors' committee had been bringing those claims on behalf of the debtor, the trustee remained free to direct the claims forward. 44 In re Great Northern Paper, Inc., 299 B.R. 1, also turned on the derivative nature of the rights asserted by the creditors' committee. According to Great Northern, where the interests of the creditors' committee were allied with the debtor so that the committee was simply bringing claims on behalf of the debtor, the trustee was free to continue directing the claims forward—essentially taking over the reins of the estate's claim as was done in Rachles, Id. at 7-8. But in Great Northern, the interests of the estate, as represented by the debtor, and the creditors' committee were not aligned. As the creditors' committee wished to steer its claim contrary to the debtor's intentions, the committee could not be said to act on behalf of the debtor and the estate, so the committee was not bringing rights derivative of the debtor. And, as we discussed, a trustee acts only on claims derivative of the debtor's rights so the trustee in Great Northern could not guide the creditors' committee claims forward. 45 Great Northern is inapplicable in this case. The creditors' committee claims here are derivative of the debtor because MSHOW specifically granted them to the committee in the financing agreement, so the trustee could normally bring those claims forward after conversion as in Rachles. But MSHOW also used the financing agreement to bar itself and, postconversion, the trustee from taking over the reins and acting on those derivative rights. 46 In sum, the only rights a trustee inherits from a creditors' committee to bring an avoidance action are derivative of the debtor's rights. In this case, the trustee is barred from acting on those derivative rights because the debtor-in-possession was barred in the financing order. The derivative rights exist like a sword in a stone, but there is no Arthur to claim them.