Opinion ID: 782113
Heading Depth: 3
Heading Rank: 4

Heading: Converting the bankruptcy case to Chapter 7

Text: 123 The District Court observed that if the Committee could not bring a derivative avoidance action, it might instead convert the case to a Chapter 7 liquidation or dismiss the petition pursuant to 11 U.S.C. § 1112. These solutions are far more radical than even the appointment of a trustee. Converting the case to Chapter 7 would cause the immediate appointment of a trustee, the option rejected supra, and would cause dissolution of the Committee. More importantly, though, Chapter 7 proceedings are liquidations, and this option would amount to instructing management: Pursue this action, or we will move to dissolve your company. While that might yield results, such coercion is unlikely to yield a zealous prosecution of the claim. It also washes out the baby with the bath water, for the principal purpose of Chapter 11 is to avoid liquidating viable businesses. 124 Moving to dismiss the bankruptcy petition makes no more sense. Bankruptcy brings with it many advantages for a debtor, such as the power to avoid union contracts and to defer or even avoid short-term financial commitments. Dismissing a bankruptcy petition might therefore be the equivalent of forcing a company to close its doors. That, of course, is hardly an alternative to derivative standing. 125 5. Moving the bankruptcy court to authorize a committee to bring a post-confirmation avoidance action 126 Finally, amicus Smurfit-Stone notes that a creditors' committee might be authorized to bring a post-confirmation avoidance action in a plan of reorganization. See 11 U.S.C. § 1123(b)(3)(B). It submits that this would give a creditors' committee the ability to protect its interest in a variety of ways. First, although § 1121(b) provides a debtor-in-possession with 120 days of exclusivity in which to file a plan of reorganization, any extension of that period requires leave of court. See 11 U.S.C. § 1121(d). Smurfit-Stone suggests that a committee might object to any motion to extend that period unless the debtor-in-possession agrees to pursue the action itself, or to file a plan permitting the committee to pursue the action. Alternatively, a committee may safeguard its interests by filing its own plan of reorganization once the exclusivity period expires. Finally, the committee might move to terminate the exclusivity period in order to expedite the filing of its own plan. 127 These are indeed options open to committees, but like the other alternatives discussed supra, they would be far more disruptive to the reorganization process than the simple step of allowing a creditors' committee to sue derivatively. The problem with ending exclusivity, either by moving immediately or objecting to an extension of the initial 120-day window, is that it would lead immediately to a sea of direct claims that were previously channeled through the debtor. In other words, although a particular creditor might be able to sue to recover its fraudulently conveyed property, so too might every other creditor and claimant. To the extent Congress has determined that exclusivity is valuable to a reorganization, this would be a highly disruptive substitute. There is no reason to suppose that Congress intended to leave only this option available to creditors' committees when a debtor unreasonably refuses to pursue an avoidance action. 6. Summary 128 We conclude that, on balance, derivative standing is a valuable tool for creditors and courts alike in Chapter 11 proceedings, and we do not believe that any of the proffered alternatives could serve as a realistic substitute for that standing. Because it helps to ensure that creditors' claims are not frustrated by fraudulent transfers, derivative standing seems clearly to give effect to the policy of the legislature. Mitchell, 361 U.S. at 292, 80 S.Ct. 332, and bankruptcy courts' equitable powers therefore allow them to confer such standing upon creditors' committees.