Expanding a split among circuit courts, the First Circuit recently set precedent promoting the unconditional right of creditors’ committees to participate in all aspects of bankruptcy cases.  Reversing a lower court, in In Re: The Financial Oversight and Management Board for Puerto Rico, the First Circuit held that 11 U.S.C. 1109 (b) gives creditors’ committees an unconditional right to intervene in a bankruptcy adversary proceeding.  At issue was whether bankruptcy courts should give a broad or narrow reading to Bankruptcy Code section 1109(b) which provides that “a party in interest”, which includes a creditors’ committee, “may raise and may appear and be heard on any issue in a case under this chapter.” (emphasis added).

The appeal arose in Puerto Rico’s debt adjustment case under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”). Congress enacted PROMESA in June 2016 to address an ongoing financial crisis in the Commonwealth.  Title III expressly incorporates large parts of the Bankruptcy Code, and all of the Federal Rules of Bankruptcy Procedure.  PROMESA also established a Financial Oversight and Management Board (the “Board”), which, among things, can initiate quasi-bankruptcy proceedings to restructure Puerto Rico’s debt under Title III of the statute.

The Board filed a Title III petition initiating such proceedings, and plaintiffs—companies that insure Puerto Rico’s municipal bonds—commenced an adversary proceeding within the Title III action seeking (i) to enjoin the Commonwealth and the Board from executing a Fiscal Plan and (ii) a stay of the confirmation of any plan of adjustment in the Title III case.  The Official Committee of Unsecured Creditors appointed in the case filed a motion seeking to intervene in the adversary proceeding so that it might review discovery, attend depositions, file briefs and be heard at arguments.

The UCC argued, among other things, that Bankruptcy Code section 1109(b) conferred upon the UCC an “unconditional right” to intervene which was applicable in the adversary proceedings.  Intervention in adversary proceedings is governed by Rule 7024 of the Federal Rules of Bankruptcy Procedure (FRBP), makes Rule 24 of the Federal Rules of Civil Procedure (FRCP) applicable in adversary proceedings.  Pursuant to FRCP 24 “the court must permit any party to intervene who … is given an unconditional right to intervene by a federal statute.” However, relying on a footnote in an earlier First Circuit decision (Thompson) which states that section 1109(b) “does not afford a right to intervene under Rule 24(a)(1),” the District Court denied the UCC’s motion to intervene.  Although the District Court “[a]ssum[ed] without deciding that [the] adversary proceeding[] is indeed a ‘case’ within the meaning of” the statute, the District Court held that the rights provided for in section 1109(b) were narrower than right of intervention included in FRCP 24.

The UCC appealed the District Court’s decision, and the First Circuit reversed, finding Thompson inapplicable.  As an initial matter, the First Circuit held that the footnote in Thomspson is not controlling authority because Thompson involved a Chapter 7 bankruptcy case in which section 1109(b) was not implicated.  Moreover, the First Circuit noted that Thompson cited the Fifth Circuit’s decision in Fuel Oil, a case that has not been universally accepted.

In Fuel Oil, the Fifth Circuit adopted the view that section 1109(b) should be read narrowly and does not apply in adversary proceedings because of various statutory provisions and rules that distinguish between bankruptcy cases and the proceedings related to them.  However, the Second and Third Circuits have taken a different view and have held that section 1109(b) provides a statutory right for a committee to intervene under FRCP 24(a)(1).

Interpreting the specific language of the statutes at issue, the Second and Third Circuits have reasoned that a “case” encompasses “litigation commenced by the filing with the bankruptcy court of a petition under the appropriate chapter of Title 11.”  A “proceeding” refers to “a particular dispute or matter arising within a pending case – as opposed to the case as a whole.”  Hence, because a “proceeding” is a subset of, and arises within, a larger “case,” and section 1109(b) conveys broad and unconditional rights that apply to the entire case, without limitation as to the types of proceedings that may arise within a case, the Second and Third Circuits have held that right to intervene provided by section 1109 must also apply to adversary proceedings pursuant to FRCP 24.

Considering the issue as a matter of first impression in the First Circuit, the Court turned to the crux of the issue—whether section 1109(b) confers an unconditional right to intervene in an adversary proceeding.  The First Circuit found the Second and Third Circuit’s approach more persuasive and held that the UCC was entitled to intervene under both section 1109(b) and FRCP 24(a)(1).  The First Circuit explained that since issues in a case can only be raised in a proceeding, then “any issue in a case subsumes issues in a proceeding.”

The First Circuit decision adds weight to a committee’s rights to actively participates in all aspects of a debtor’s bankruptcy case.  Although it must be noted that bankruptcy courts may still exercise discretion to limit the role of a committee, the decision advances the important role of unsecured creditors’ committees.  The decision also expands an important circuit court split and provides another important jurisdictional consideration for debtors and interested parties.