by Wendell H. Adair, Jr., Sayan Bhattacharyya, A. Victor Glaser
A trustee or, more commonly, the debtor-in-possession in the case
of a Chapter 11 corporate reorganization acts as an estate’s representative
after commencement of a bankruptcy case. The Bankruptcy Code delineates the
representative’s powers and duties, granting the individual the ability to sue
and to be sued on behalf of the estate and imparting a fiduciary obligation to
the estate and its creditors.
Despite this obligation, disagreements often arise in bankruptcy
proceedings as to whether the trustee or debtor-in-possession truly is acting in
the best interests of the estate. In many cases, creditors allege that the
estate’s representative is not pursuing claims that could add value to the
In such cases,
bankruptcy courts historically have granted creditors a qualified right to bring
actions on the estate’s behalf. Although no specific provision in the Bankruptcy
Code covers this practice, courts conferring derivative standing on creditors
have generally cited pre-Bankruptcy Code practice and various policy
considerations for their decisions. 
The ‘Hen House’
The U.S. Supreme Court’s 2000 decision in
Hartford Underwriters Ins. Co. v. Union Planters Bank
addressed the validity of a creditor’s
derivative standing. Also known as the “Hen House” case,
arose out of the bankruptcy of Hen House Interstate, Inc. In
that case, Hartford Underwriters Insurance Co., unaware of Hen House’s pending
Chapter 11 proceeding, provided Hen House with workers’ compensation insurance
during its attempted reorganization. When the reorganization failed and the case
was converted to Chapter 7 liquidation, Hartford found itself with more than
$50,000 of unpaid insurance premiums.
Subsequently, Hartford sought to charge the premiums to Hen House’s
primary secured creditor under Section 506(c) of the Bankruptcy Code, which
states that “[t]he trustee may recover from property securing an allowed secured
claim the reasonable, necessary costs and expenses of preserving, or disposing
of, such property to the extent of any benefit to the holder of such claim.”
Hartford argued that its provision of insurance had preserved the value of the
secured creditor’s collateral and it should therefore be able to recover on its
claim as an administrative expense.
In considering the case, the Supreme Court focused narrowly on the issue
of whether the Bankruptcy Code, under Section 506(c), gave an administrative
claimant authority to seek recovery unilaterally. Rejecting arguments based on
prior practice, as well as general policy considerations, the court directed its
attention to the specific language of the provision and, in particular, the
phrase “the trustee may.” Espousing a “plain meaning approach” to interpreting
the statute, the court found that the power to invoke Section 506(c) lay
exclusively with the trustee, and thus, no other party had the right to pursue
holding seemed to be limited to the
issue of whether creditors have independent standing to use the collateral
surcharge provisions of Section 506(c) of the Bankruptcy Code rather than
raising a question as to the continued legitimacy of creditors’ derivative
standing. Indeed, the Supreme Court specifically reserved judgment on the
practice of conferring derivative standing on creditors to pursue avoidance
actions, despite the fact that similar language giving the right to commence
such actions solely to “the trustee” is found in the Bankruptcy Code’s avoidance
The issue of creditors’ derivative standing to bring
avoidance actions on behalf of a bankruptcy estate came to a head two years
later in the Chapter 11 proceeding of Cybergenics Corporation. 
the creditors’ committee sought permission from the
bankruptcy court to pursue certain fraudulent transfers that the
debtor-in-possession had refused to pursue. After the bankruptcy court granted
the request, the U.S. District Court reversed.
The District Court,
and subsequently a three-judge panel of the 3d Circuit Court of Appeals,
concluded that the “rather well established” practice of permitting creditors to
initiate derivative avoidance actions could not survive the Supreme Court’s
reasoning in Hartford Underwriters.  Following the
rationale from Hartford Underwriters,
the 3d Circuit rejected prior practice and policy
considerations in determining that the plain meaning of the Bankruptcy Code
provisions that grant “the trustee” the power to commence an avoidance action
are an exclusive grant of power belonging to the debtor, and as such, no other
party in interest –– including a creditor or a creditors’ committee –– could
exercise these powers.
decision raised a stir throughout the bankruptcy bar and was squarely in
conflict with more than a decade of established case law from various circuits
across the country, including decisions of the 2d, 5th, 6th, 7th, and 9th
Circuit Courts of Appeals. 
the 3d Circuit vacated the panel opinion after voting to rehear the case en
banc. On May 29, 2003, the 3d Circuit reversed itself and concluded that
Hartford Underwriters should be construed narrowly to its circumstances
and that the language of the avoidance power sections of the Bankruptcy Code did
not preclude a creditors’ committee from commencing an avoidance action in the
debtor’s name. 
The 3d Circuit
acknowledged that the Bankruptcy Code does not explicitly empower a bankruptcy
court to confer derivative standing on a creditors’ committee to pursue an
avoidance action. Nevertheless, it concluded that the legislators’ intent to
encourage creditor participation in the bankruptcy proceeding and the
longstanding practice of authorizing creditors to bring avoidance actions on
behalf of an estate, together with the bankruptcy court’s equitable powers,
provided sufficient grounds to allow bankruptcy courts to confer derivative
standing on creditors in these circumstances. The court noted that “derivative
standing is a prudent way for bankruptcy courts to remedy lapses in a trustee’s
execution of its fiduciary duty.” 
The en banc
brought the 3d Circuit
back in line with the majority of circuits and seemed to ensure the continued
viability of creditors’ derivative standing in avoidance actions.
In a decision that once again raises the issue that had
seemed to be laid to rest, the 10th Circuit’s Bankruptcy Appellate Panel (BAP)
recently held that a creditor seeking to prosecute an avoidance action on behalf
of a debtor’s estate had no standing to do so and that the only party with such
standing was the debtor-in-possession itself.  In In re
, an individual debtor transferred real estate to his wife and then filed
a Chapter 11 petition. When the debtor refused to prosecute a fraudulent
transfer action against his wife to recover property for the benefit of his
estate, one of Fox’s creditors tried to sue to recover the property on behalf of
the estate. The bankruptcy court held that the creditor could not commence such
an action, and the 10th Circuit BAP affirmed that decision.
The Fox court
held that it was constrained by the language of Section 548 of the Bankruptcy
Code, which states that “the trustee” may avoid fraudulent transfers. The court
recognized that the 3d Circuit en banc
decision in Cybergenics
other courts, had stretched the statute to confer standing on creditors’
committees, especially when the debtor-in-possession had refused to prosecute
legitimate fraudulent transfer claims.
However, noting a lack
of authority in the 10th Circuit, the BAP held that the Supreme Court’s decision
in Hartford Underwriters was controlling. Accordingly, the BAP turned
once again to a literal construction of the Bankruptcy Code’s use of the term
“the trustee.” The Fox
that the plain language of the statute arguably conflicted with public policy.
The court determined, however, that public policy concerns alone were not
sufficient reasons to ignore the statutory language:
Cybergenics discusses many reasons why it
would be good policy for parties other than the trustee to bring derivative
complaints, and it is hard to disagree with the reasons set forth by the
majority [in that case]. We, however, believe this reasoning is best
considered by Congress, and it is not up to us to create a remedy for
creditors it has not granted to them, especially when that right is given
exclusively to the trustee. Here the statute is absolute and allows us no
discretion to vary from what it says. 
The Fox decision, like the vacated
Cybergenics decision before it, is clearly at odds with the majority’s
thinking on this issue. It remains to be seen if other courts will follow the
lead, forming a split between the circuits that could result in the Supreme
Court taking on the issue. Until such time, creditors and creditors’ committees
must once again be on guard for the possibility that a request to commence a
derivative avoidance action will be denied.
 See, e.g., Unsecured Creditors
Committee v. Noyes (In re STN Enterprises), 779 F.2d 901, 904 (2d Cir.
1985); In re Toledo Equipment Co., Inc., 35 B.R. 315, 317 (Bankr.
N.D.Ohio 1983); In re Monsour Medical Center,
5 Bankr. 715, 718 (Bankr. W.D.Pa. 1980).
530 U.S. 1 (2000).
Underwriters , 530 U.S. at 13 n. 5.
 In re Cybergenics Corp
., No. 96-37203 (Bankr.
D.N.J. August 19, 1996).
 Official Committee of Unsecured
Creditors of Cybergenics Corp. v. Chinery, 304 F.3d 316 (3d Cir. 2002),
vacated, reh’g en banc
granted, 310 F.3d 785 (3d Cir. 2002).
 See, e.g., In re Commodore Intern.
Ltd., 262 F.3d 96, 100 (2d Cir. 2001); In re Gibson Group, Inc.,
66 F.3d 1436, 1440 (6th Cir. 1995); In re Sufolla, Inc., 2 F.3d 977,
979 n.1, (9th Cir. 1993); Matter of Vitreous Steel Products Co., 911
F.2d 1223, 1231 (7th Cir. 1990); Louisiana World Exposition v. Federal Ins.
Co., 858 F.2d 233, 247 (5th Cir. 1988); In re STN Enterprises, 779
F.2d 901 (2d Cir. 1985). In fact, within two months of the Cybergenics
decision, the 2d Circuit Court of Appeals reaffirmed the validity of the
practice within the 2d Circuit of a creditors’ committee having standing to
commence avoidance actions in its decision in In re Housecraft Industries
USA, Inc., 310 F.3d 64 (2d Cir. 2002). It should be noted that
Housecraft makes no reference at all to the Hartford
decision, thereby establishing a
split between two of the most prominent bankruptcy circuits.
Official Committee of Unsecured Creditors v.
Chinery (In re Cybergenics Corp.),
330 F.3d 548 (3d Cir. 2003).
Id. at 572.
 In re Fox
, 305 B.R. 912 (B.A.P. 10th Cir.
Id. at 916.