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

Heading: Might derivative suits dissipate the value of the estate?

Text: 99 Despite these clear benefits stemming from derivative standing, amicus Professor Sharfman identifies reasons why it might be harmful from a policy perspective. He first argues that, although the purpose of derivative suits is presumably to maximize the value of the estate, academic research has shown that such suits frequently result in awards only large enough to pay the litigants' legal bills. See Roberta Romano, The Shareholder Suit: Litigation Without Foundation?, 7 Journal of Law, Economics and Organization 55 (1991); Jonathan R. Macey & Geoffrey P. Miller, The Plantiffs' Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. Chi. L.Rev. 1 (1991). Sharfman submits that creditors' derivative suits are even less likely to add value than are shareholders' derivative suits, for the possibility of setting aside transfers as fraudulent would make it riskier for financially distressed firms to persuade potential lenders and suppliers to do business. (Sharfman Brief at 14.) The Supreme Court recognized this concern in Hartford Underwriters, where it stated that [t]he possibility of being targeted ... by various administrative claimants could make secured creditors less willing to provide postpetition financing. 530 U.S. at 13, 120 S.Ct. 1942. 100 We are untroubled by this argument. To be sure, there are situations where derivative suits recover only enough to pay the lawyers, but that concern is lessened by the need to obtain bankruptcy court approval before pursuing an action. There is no inherent reason why a debtor would be able to prosecute an avoidance claim more cheaply than a creditors' committee could, so there is no reason why a creditor suing derivatively would dissipate more value than would a debtor suing directly. Likewise, although the possibility of an avoidance action might trouble a prospective supplier or lender, that is an argument not against derivative standing, but against avoidance actions generally. Congress, however, has clearly decided that such actions are valuable to the Chapter 11 process, and we will not second-guess that judgment. The concern that derivative suits might be value-dissipating is adequately served by affording a debtor the deference normally accorded pursuant to the business judgment rule. When a debtor's action is beyond the scope of that deference, however, Congress's intent is best served by ensuring that an action is filed, even if by a creditors' committee. At all events, the Bankruptcy Court in this case concluded that the estate ought to have brought the avoidance claim in question. 101