Opinion ID: 782113
Heading Depth: 1
Heading Rank: 3

Heading: How Does Hartford Underwriters Affect this Case?

Text: 14 The District Court's conclusion that the Code does not permit creditors' committees derivatively to prosecute fraudulent transfer claims was grounded in its determination that the language in § 544(b) vests exclusive standing in the trustee. Section 544(b)(1) states that: 15 Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title. 16 11 U.S.C. § 544(b) (emphasis added). The District Court's determination of exclusivity relied critically on Hartford Underwriters, 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000), in which the Supreme Court determined that identical language in § 506(c) of the Code foreclosed the right of any nontrustee to prosecute that particular action. The District Court concluded that there is no principled basis under which the Court can apply different meanings to the words `the trustee may' in separate sections of the Code, so it considered Hartford Underwriters dispositive. 17
18 In Hartford Underwriters, debtor Hen House Interstate, Inc. obtained workers' compensation insurance from petitioner Hartford Underwriters as part of its Chapter 11 reorganization strategy. Although Hen House repeatedly failed to pay its monthly premiums, Hartford, which knew nothing of Hen House's bankruptcy, continued to provide insurance. When the reorganization attempt fell through, Hen House converted its case to a Chapter 7 liquidation and a trustee was appointed. Hartford, alerted to the bankruptcy, sought to recover approximately $50,000 in overdue premiums from the bankruptcy estate but found it almost entirely without unencumbered assets. 19 Section 503(b)(1)(A) of the Bankruptcy Code provides that the actual, necessary costs and expenses of preserving the estate are treated as administrative expenses, and § 507(a)(1) provides that such administrative expenses are entitled to priority over pre-petition unsecured claims. Hartford and Hen House agreed that the overdue premiums constituted administrative expenses, but Hartford was nevertheless stymied, for virtually all of Hen House's assets were held by secured creditors, whose claims are superior to administrative claims. See 11 U.S.C. § 506. Hartford then looked to § 506(c), which provides an important exception to that priority. It states that [t]he trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim. 11 U.S.C. § 506(c) (emphasis added). Hartford argued that this provision entitled it to recover the premiums even though it was an administrative claimant rather than a trustee. The bankruptcy court ruled in favor of Hartford, and the district court and an Eighth Circuit panel affirmed. In re Hen House Interstate, Inc., 150 F.3d 868 (8th Cir.1998). The panel decision was subsequently vacated, and the Eighth Circuit, sitting en banc, held § 506(c) unavailable to an administrative claimant like Hartford. 177 F.3d 719 (8th Cir.1999) (en banc). 20 A unanimous Supreme Court affirmed the en banc decision. It began with the understanding that Congress says in a statute what it means and means in a statute what it says there, Hartford Underwriters, 530 U.S. at 6, 120 S.Ct. 1942 (quoting Connecticut Nat. Bank v. Germain, 503 U.S. 249, 254, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992)), and reiterated the longstanding maxim that, when the statute's language is plain, the sole function of the courts — at least where the disposition required by the text is not absurd — is to enforce it according to its terms. Id. (citations omitted). Turning to § 506(c), the Court found that it appears quite plain[ly] to mean that only the trustee may recover administrative expenses ahead of secured claims. Id. Although it acknowledged that the statute does not expressly bar non-trustees from recovery, it had little difficulty in inferring that exclusivity is intended. Id. 21 The Court's first rationale was contextual. A bankruptcy trustee's role in Chapter 7 liquidation proceedings is central by design, and this unique role ... makes it entirely plausible that Congress would provide a power to him and not to others. Id. at 7, 120 S.Ct. 1942. The Court further reasoned that, had no particular parties been specified [in § 506(c),] ... the trustee is the most obvious party who would have been thought empowered to use the provision. Id. The Court therefore found little reason to doubt the maxim that a situation in which a statute authorizes specific action and designates a particular party empowered to take it is surely among the least appropriate in which to presume nonexclusivity. Id. (citing 2A N. Singer, Sutherland on Statutory Construction § 47.23, p. 217 (5th ed.1992)). Buttressing this conclusion was the logic that, had Congress intended the provision to be broadly available, it could simply have said so, as it did in describing the parties who could act under other sections of the Code. Id. 22 Having determined from its textual inquiry that by far the most natural reading of § 506(c) is that it extends only to the trustee, the Court declared that Hartford's burden of persuading us that the section must be read to allow its use by other parties is `exceptionally heavy.' Id. at 9 (quoting Patterson v. Shumate, 504 U.S. 753, 760, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992)). It then turned to Hartford's arguments based on pre-Code practice and policy considerations. Regarding pre-Code practice, the Court found that Section 506(c)'s provision for the charge of certain administrative expenses against lienholders continued a practice that existed under the Bankruptcy Act of 1898. Id. (citations omitted). Even then, however, [i]t was the norm that recovery of costs from a secured creditor would be sought by the trustee, rather than by an administrative claimant. Id. (citations omitted). Still, Hartford cited a number of lower court cases [] in which — without meaningful discussion of the point — parties other than the trustee were permitted to pursue such charges under the Act [of 1898], sometimes simultaneously with the trustee's pursuit of his own expenses, id. (citing cases), and the Court recognized that some of its early decisions had allowed individual claimants to seek recovery from secured assets. See, e.g., Louisville, E. & St. L.R. Co. v. Wilson, 138 U.S. 501, 11 S.Ct. 405, 34 L.Ed. 1023 (1891). 23 The Court nevertheless concluded that [i]t is questionable whether these precedents establish a bankruptcy practice sufficiently widespread and well recognized to justify the conclusion of implicit adoption by the Code. We have no confidence that the allowance of recovery from collateral by nontrustees is the type of rule that ... Congress was aware of when enacting the code. Id. (quoting United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 246, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)). Cf. Kelly v. Robinson, 479 U.S. 36, 46, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986) (giving weight to pre-Code practice that was widely accepted and established). Indeed, the Court strongly implied that even a more convincing historical showing would not have carried the day for Hartford: Where the meaning of the Bankruptcy Code's text is itself clear ... its operation is unimpeded by contrary ... prior practice.... In this case, we think the language of the Code leaves no room for clarification by pre-Code practice, for it cannot transform § 506(c)'s reference to `the trustee' to `the trustee and other parties in interest.' Id. at 11, 120 S.Ct. 1942 (citations omitted). 24 Finally, the Court engaged Hartford's contention that its interpretation was necessary as a matter of public policy. Hartford argued that in some cases the trustee may lack an incentive to pursue payment for administrative expenses, so that if the Code is to encourage such lenders to finance a corporation's administrative needs throughout its bankruptcy, it must allow those lenders later to bring their own actions to recover their investments. Hartford also suggested that affording standing to administrative claimants might encourage the provision of post-petition services to debtors on more favorable terms, since such claimants would presumably always be willing vigorously to defend their financial interests whereas a trustee might be more reluctant. Id. at 11-12, 120 S.Ct. 1942. The Court, however, determined that it is far from clear that the policy implications favor petitioner's position, and even suggested that Hartford's interpretation might itself lead to results that seem undesirable as a matter of policy. Id. at 12, 120 S.Ct. 1942. It ultimately declined to weigh the competing concerns, explaining that we do not sit to assess the relative merits of different approaches to bankruptcy problems. It suffices that the natural reading of the text produces the result we announce. Achieving a better policy outcome — if what petitioner urges is that — is a task for Congress, not the courts. Id. at 13-14, 120 S.Ct. 1942. 25
26 Based on the above reasoning, the Hartford Underwriters Court interpreted the trustee may in § 506(c) to mean that only the trustee may bring an action. In the case at bar, the District Court concluded that, faced with the same language in § 544(b), the same conclusion must there obtain. But the Hartford Underwriters Court expressly reserved the question before us today. In a footnote critical to understanding the scope of that decision, the Supreme Court stated: 27 We do not address whether a bankruptcy court can allow other interested parties to act in the trustee's stead in pursuing recovery under § 506(c). Amici American Insurance Association and National Union Fire Insurance Co. draw our attention to the practice of some courts of allowing creditors or creditors' committees a derivative right to bring avoidance actions when the trustee refuses to do so, even though the applicable Code provisions, see 11 U.S.C. §§ 544, 545, 547(b), 548(a), 549(a), mention only the trustee. See, e.g., In re Gibson Group, Inc., 66 F.3d 1436, 1438 (6th Cir.1995). Whatever the validity of that practice, it has no analogous application here, since petitioner did not ask the trustee to pursue payment under § 506(c) and did not seek permission from the Bankruptcy Court to take such action in the trustee's stead. Petitioner asserted an independent right to use § 506(c), which is what we reject today. 28 Id. at 13 n. 5, 120 S.Ct. 1942. The District Court nevertheless concluded that the Committee failed sufficiently to distinguish Hartford Underwriters 's method of interpretation, which it found to yield equally compelling results when applied to § 544(b). 29 We agree that Hartford Underwriters is most useful for the interpretive methodology it offers, but it is critical to note the context in which that decision arose, for it is materially unlike the one before us today. The petitioner in Hartford Underwriters was an insurer who, by continuing coverage despite Hen House's failure to pay its premiums, became an administrative lender with claims subordinate to those of the secured creditors. When it learned of Hen House's bankruptcy, it attempted to use § 506(c) to recover the premiums it was owed, but it did so in a strikingly unilateral fashion. The insurance premiums were not costs incurred by the trustee that, if recovered, would have yielded a common benefit. Instead, they would have satisfied only Hartford's outstanding claim. Nor did Hartford seek the court's or the trustee's permission to recoup the expense, but rather it sued in its own name and for its own direct benefit. 30 The situation at bar is markedly different. When the Committee discovered that certain transfers made by Cybergenics were potentially avoidable as fraudulent, it first petitioned the Cybergenics management to file an avoidance action under § 544(b). 4 But management refused to file that action, claiming that the costs would likely outweigh the benefits, and it maintained this position even after the Committee volunteered to bear all litigation costs. The Committee, finding management's stance unreasonable, petitioned the bankruptcy court for permission to prosecute a § 544(b) avoidance action in Cybergenics's name and on its behalf — any recovery would go not to the Committee, but to the estate itself. The Bankruptcy Court concluded that the fraud claims were colorable, and that the Committee's offer to bear the litigation costs insulated the estate from risk. Noting that the debtor-in-possession has a duty to maximize the value of the estate, the court concluded that management's refusal to act was unreasonable even given the usual judicial deference to business judgment, and it authorized the Committee to sue in Cybergenics's name. 31 This difference in contexts is crucially important, for while the question in Hartford Underwriters was one of a nontrustee's right unilaterally to circumvent the Code's remedial scheme, the issue before us today concerns a bankruptcy court's equitable power to craft a remedy when the Code's envisioned scheme breaks down. With this perspective in mind, we turn to the question whether derivative suits may be maintained under § 544(b) after Hartford Underwriters.