Opinion ID: 3013106
Heading Depth: 1
Heading Rank: 9

Heading: Reliance on Equity to Confer Standing

Text: The majority writes that while “none of the three sections discussed—1109(b), 1103(c)(5), or 503(b)(3)(B)—seems directly to authorize . . . standing. . . . [w]e believe that the missing link is supplied by bankruptcy courts’ equitable power. . . .” To be sure, bankruptcy courts are equitable tribunals that apply equitable principles. But courts of equity must still follow the law. See Magniac v. Thomson, 56 U.S. 281, 299 (1853) (“[w]herever the rights or the situation of parties are clearly defined and established by law, equity has no power to change or unsettle those rights or that situation, but in all such instances the maxim equitas sequiter legem is strictly applicable.”). The Code is the law here and equity cannot be used to change the clear and plain language of a Code provision. This is especially true regarding a provision in which Congress explicitly specified the party authorized to act. As the Supreme Court has observed, whatever equitable powers bankruptcy courts have, they “must and can only be exercised within the 60 confines of the Bankruptcy Code.” Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988). In this regard, this Court has noted that equity does not “ ‘give the court the power to create substantive rights that would otherwise be unavailable under the Code.’ ” United States v. Pepperman, 976 F.2d 123, 131 (3d Cir. 1992) (quoting In re Morristown & Erie R.R. Co., 885 F.2d 98, 100 (3d Cir. 1989)); see also In re Jamo, 283 F.3d 392, 403 (1st Cir. 2002) (stating that equity may be invoked only if the equitable remedy dispensed by the court “is necessary to preserve an identifiable right conferred elsewhere in the Bankruptcy Code.”). What happens if we adopt the principle inherent in the majority’s reasoning, that a court may use its equitable power to confer standing to a party that is explicitly omitted from a statute? The Code contains nearly 40 provisions that authorize only the trustee to act.3 Could a bankruptcy 3. See, e.g., § 108 (extending time for suits brought by the trustee); § 327(b) (allowing a trustee authorized to operate the business of the debtor to retain or replace professional persons employed by the debtor); § 327(e) (allowing the trustee to employ for a special purpose an attorney who has represented the debtor); § 345(a) (allowing a trustee to invest money of the estate); § 363(b)(1) (allowing the trustee to use, sell, or lease property of the estate other than in the ordinary course of business, after notice and a hearing); § 363(c)(1) (allowing the trustee to enter into transactions, “including the sale or lease of property of the estate, in the ordinary course of business, without notice or a hearing”); § 363(f) (allowing the trustee to sell property free and clear of any interest in such property of an entity other than the estate); § 364 (allowing the trustee to incur secured and unsecured debt); § 365(a) (allowing the trustee to assume or reject executory contracts and unexpired leases; § 365(f)(1) (allowing a trustee to assign executory contracts and unexpired leases); § 505(b) (allowing a trustee to request a determination of unpaid tax liabilities of the estate); § 506(c) (allowing a trustee to surcharge property securing an allowed secured claim); § 545 (allowing the trustee to avoid statutory liens); § 547(b) (allowing the trustee to recover preferences); § 548(a)(1) (allowing the trustee to recover fraudulent transfers); § 549 (allowing the trustee to avoid post-petition transfers of estate property); § 550(a) (allowing the trustee to recover value of avoided transfers from initial and mediate transferees); § 554 (allowing the trustee to abandon property of the estate); § 1108 (allowing a trustee to operate the debtor’s business); § 1113(a) (allowing the trustee to assume or reject collective bargaining agreements); § 1114(e)(1) (instructing the trustee to pay retiree benefits); § 1146(b) (instructing the trustee to make State or local tax returns of income for the estate of individual debtors). 61 court broaden standing to act under one provision or narrow standing under a different provision depending on its view of the equities involved? I would say not. If it were otherwise, the Supreme Court might very well have thought it “equitable” to broaden the phrase “the trustee may” in § 506(c) and allow the administrative claimant to recover in Hartford Underwriters. It did not. If the language of the Code is not ambiguous, it seems to me simply wrong to use equity to confer derivative standing where the statute specifically names the parties who may act. For other reasons, I do not share the majority’s confidence in relying on equity as a basis for expanding § 544(b) to permit creditors’ committees to bring avoidance actions derivatively. In an analogous area, shareholder derivative actions, our jurisprudence demonstrates that equity should not be used to enlarge the category of eligible plaintiffs. In the historical development of shareholder derivative actions, federal courts had attempted to use equity as the basis for enlarging the category of eligible plaintiffs and to permit equitable owners of stock to bring suit. See, e.g., Arcola Sugar Mills Co. v. Burnham, 67 F.2d 981, 982 (5th Cir. 1933), cert. denied, 292 U.S. 630 (1934) (enlarging the category of plaintiffs to include a pledgee of stock who had the right to protect his interests and prevent the dissipation of corporate assets). However, following the Supreme Court’s decision in Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), this Court was the first to hold that, for purposes of derivative actions, state substantive law squarely controlled the definition of an eligible plaintiff. See Gallup v. Caldwell, 120 F.2d 90, 93 (3d Cir. 1941); see also Wright, Miller & Kane, FEDERAL PRACTICE AND PROCEDURE: CIVIL 2d § 1826, at 44 n. 10 (1986). Implicit in our decision in Gallup is the notion that, for purposes of shareholder derivative actions, federal courts were no longer permitted to broaden the concept of a “shareholder” on the grounds of equity or otherwise. Although there are significant differences between shareholder derivative actions and § 544(b) actions, our experience with the former is relevant in one critical respect: where the text of a statute is unambiguous as to who may bring suit, principles of equity do not provide a basis for enlarging the category of eligible plaintiffs. 62