Court Sides With Minority View Concluding Intervention Under Section 1109(b) Does Not Apply to Adversary Proceedings

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Overview

In a recent decision in Dillworth v. Mahecha Diaz, Adv. No. 20-1079-SMG, 2022 WL 1123004 (Bankr. S.D. Fla. April 15, 2022), the Bankruptcy Court for the Southern District of Florida found that a post-confirmation creditors’ committee did not have a right to intervene in an adversary proceeding commenced by the liquidating trustee. The court concluded that Section 1109 of the Bankruptcy Code does not grant a creditors’ committee the unconditional right to intervene in an adversary proceeding. The court also found that the committee did not have a right to intervene under Federal Rules of Civil Procedure 24(a)(2) (intervention of right) or 24(b)(1)(B) (permissive intervention).

Background

The debtor’s confirmed plan created a liquidating trust to which certain causes of action were transferred to benefit the debtor’s general unsecured creditors. The plan and liquidating trust also created a post-confirmation creditors’ committee (the "Committee") to represent the interests of the trust beneficiaries while the trust existed. The liquidating trustee (the "Trustee") commenced an adversary proceeding in February 2020, but the defendants only filed their answer and affirmative defenses in January 2022. Shortly thereafter, the Committee moved to intervene.

Section 1109(b) of the Bankruptcy Code allows any “party in interest, including … a creditors’ committee” to “raise and … appear and be heard on any issue in a case under this chapter.”  (emphasis added).

A party may also seek to intervene as of right under the Federal Rules of Civil Procedure under Rule 24(a)(2) if it “claims an interest relating to the property or transaction that is the subject of the action, and is so situated that disposing of the action may as a practical matter impair or impede the movant’s ability to protect its interest, unless existing parties adequately represent that interest.” Alternatively, a party may seek permissive intervention under Rule 24(b)(1)(B), which allows courts to “permit anyone to intervene who … has a claim or defense that shares with the main action a common question of law or fact.” 

The Committee argued it had “an unconditional right to intervene” in the adversary proceeding under Section 1109(b), and alternatively, that it could intervene under Rule 24(a)(2) or Rule 24(b)(1)(B).

Opinion

Relying on cases from the First, Second and Third Circuits, as well as bankruptcy cases from the Middle and Southern District of Florida, the Committee argued that as a “creditors’ committee” it had an unconditional right to intervene. The court characterized this as the majority view. In contrast, the Fifth Circuit in Fuel Oil Supply & Terminaling v. Gulf Oil Corp., 762 F.2d 1283 (5th Circuit 1985), set forth the minority view that Section 1109(b) does not give a creditors’ committee the absolute right to intervene in an adversary proceeding. The court recognized the circuit split over whether the phrase “in a case under this chapter” in Section 1109(b) means only a main Chapter 11 bankruptcy case or whether it also encompasses adversary proceedings. The majority view interprets the phrase broadly to include adversary proceedings. For example, the Second Circuit has concluded that by using the term “case” rather than “proceeding,” Section 1109(b) grants a party in interest a right to raise and be heard on any issue, whether it arises in a contested matter or an adversary proceeding.

The court disagreed with the majority view and adopted the minority analysis of the Fifth Circuit in Fuel Oil, concluding also that the plain text of Section 1109(b) supports that view. The court compared the language of Section 1109(b) to that of Section 307 of the Bankruptcy Code, which allows the U.S. trustee to raise, appear and be heard on “any issue in any case or proceeding under this title.” (emphasis added). It concluded that where Congress wanted to give a party the right to raise, appear and be heard on any issue in a case “or proceeding,” it knew how to do so, as it did in Section 307. In contrast, Section 1109(b)’s text is limited to a Chapter 11 case and does not include related adversaries. The court found this was supported by practical realities, noting that under the majority view, any party in interest would have the unconditional right to intervene in an adversary proceeding, which would negatively affect procedural due process protections and case management. The court noted that even without the unconditional right to intervene, committees and other parties in interest are not without recourse, as they can seek derivative standing.

The court also found that the Committee had not satisfied the Eleventh Circuit requirements to intervene as of right under Rule 24(a)(2). The motion was not timely (it was filed more than two years after the adversary was commenced), and the Committee lacked any legally cognizable interest in the adversary’s outcome. Finally, the Committee failed to show how the disposition of the adversary might impede or impair its ability to protect its interest or how its interest would not be adequately represented by the Trustee.

Similarly, the court found the standard for permissive intervention under Rule 24(b)(1)(B) was not met because the motion was not timely, and the Committee had no claim or defense in its own right that it shared with the adversary proceeding as a common question of law or fact. Lastly, the court found that the Committee’s motion must be denied on the grounds that it failed to comply with Rule 24(c), which requires a motion to intervene be accompanied by a pleading.

Why This Case Is Interesting

With this decision, the Southern District of Florida Bankruptcy Court furthered the split among courts on whether Section 1109(b) provides an unconditional statutory right to intervene by adopting the minority view. Thus, a party in interest may not be able to rely solely on Section 1109 as a basis to intervene but instead should consider whether it may intervene under the Federal Rules. If a party does seek to intervene under the Federal Rules, it should ensure that it follows all applicable and technical requirements. This court found that the failure to adhere to such requirements, even those that courts have disregarded as “nonprejudicial technical defects,” was another basis to deny intervention, and thus, parties should be wary of courts that require strict compliance with the Federal Rules.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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