                                                                                                                           Opinions of the United
2003 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-29-2003

Cybergenics Corp v. Chinery
Precedential or Non-Precedential: Precedential

Docket 01-3805




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"Cybergenics Corp v. Chinery" (2003). 2003 Decisions. Paper 497.
http://digitalcommons.law.villanova.edu/thirdcircuit_2003/497


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                                 PRECEDENTIAL

                                             Filed May 29, 2003

           UNITED STATES COURT OF APPEALS
                FOR THE THIRD CIRCUIT


                          No. 01-3805


      THE OFFICIAL COMMITTEE OF UNSECURED
     CREDITORS OF CYBERGENICS CORPORATION,
     ON BEHALF OF CYBERGENICS CORPORATION,
              DEBTOR IN POSSESSION,
                                        Appellant
                                v.
 *KATHLEEN CHINERY, Executrix of the Estate of Scott
Chinery; L&S RESEARCH CORPORATION; LINCOLNSHIRE
MANAGEMENT INC.; LINCOLNSHIRE EQUITY FUND, L.P.;
           (*Amended per order dated 11/19/01)
             (Amended per order dated 3/21/02)

     On Appeal From the United States District Court
               For the District of New Jersey
           (D.C. Civil Action No. 98-3109 (GEB))
     District Judge: Honorable Garrett E. Brown, Jr.

                  Argued: February 19, 2003
  Before: BECKER,* Chief Judge, SLOVITER, SCIRICA,**
   ALITO, ROTH, McKEE, RENDELL, BARRY, AMBRO,
          FUENTES and SMITH, Circuit Judges.

* Judge Becker completed his term as Chief Judge on May 4, 2003.
** Judge Scirica succeeded to the position of Chief Judge on May 4,
2003.
                                   2


                      (Filed: May 29, 2003)
                          GARY D. SESSER (Argued)
                          JAMES GADSDEN
                          ROXANNA D. NAZARI
                          Carter, Ledyard & Milburn
                          2 Wall Street
                          New York, NY 10005
                          Counsel for Appellant
                          Official Committee of Unsecured
                          Creditors of Cybergenics Corp.
                          BRIAN J. MOLLOY (Argued)
                          LAUREN D. DALOISIO
                          Wilentz, Goldman & Spitzer
                          90 Woodbridge Center Drive
                          P.O. Box 10
                          Woodbridge, New Jersey 07095
                          Counsel for Appellees
                          Chinery and L&S Research
                          Corporation
                          BRUCE E. FADER (Argued)
                          SCOTT A. EGGERS
                          Proskauer Rose LLP
                          1585 Broadway
                          New York, NY 10036
                          Counsel for Appellees
                          Lincolnshire Management, Inc.
                          JONATHAN C. LIPSON***
                          Assistant Professor of Law
                          University of Baltimore School
                           of Law
                          1420 North Charles Street
                          Baltimore, MD 21201
                          Amicus Law Professors in support of
                          Appellant

*** Joining Professor Lipson on the brief are Professors Ralph Brubaker,
Daniel J. Brussel, Kenneth N. Klee, Stephen J. Lubben, Walter J.
Taggart, Elizabeth Warren, and William J. Woodward.
       3


G. ERIC BRUNSTAD, JR. (Argued)
JULIA FROST-DAVIES
RHEBA RUTKOWSKI
BRYAN D. SHORT
TANYA TYMCHENKO
MELISSA G. LIAZOS
JUSTIN M. O’SULLIVAN
SETH A SCHWARTZ
RACHEL A. VISCOMI
STEVEN M. ACKLEY-ORTIZ
SERENA D. MADAR
Bingham McCutchen LLP
150 Federal Street
Boston, MA 02110
Amicus in support of Appellant
TERESA K.D. CURRIER
ERIC LOPEZ SCHNABEL
JEFFREY R. WAXMAN
Klett Rooney Lieber & Schorling
The Brandywine Building
1000 West Street, Suite 1400
Wilmington, DE 19801
DANIEL H. GOLDEN
DAVID H. BOTTER
ROBERT J. STARK
Akin Gump Strauss Hauer &
 Feld LLP
590 Madison Avenue
New York, NY 10022
Counsel for Amicus Committee of
Unsecured Creditors of Hayes
Lemmerz International, Inc. in
support of Appellant
                                           4


                                LUC A. DESPINS
                                SUSHEEL KIRPALANI
                                ROY C. STUDNESS
                                Milbank, Tweed, Hadley &
                                 McCloy LLP
                                1 Chase Manhattan Plaza
                                New York, NY 10005
                                Counsel for Amicus Official
                                Committee of unsecured Creditors of
                                Safety-Kleen Corp. in support of
                                Appellant
                                GEORGE R. HIRSCH (Argued)
                                ELYSSA S. KATES
                                Bressler, Amery & Ross, P.C.
                                P.O. Box 1980
                                Morristown, NJ 07962
                                Counsel for Amicus Smurfit-Stone
                                Corp. in support of Appellees
                                KEITH SHARFMAN
                                Associate Professor of Law
                                Rutgers University School of Law
                                123 Washington Street
                                Newark, NJ 07102
                                Amicus in support of Appellees


                        OPINION OF THE COURT

BECKER, Circuit Judge.

                                   CONTENTS
I. Introduction ..............................................................        6
II. Facts and Procedural History ..................................                   7
III. How Does Hartford Underwriters Affect this Case?
     ................................................................................ 10
                                       5


      A. What happened in Hartford Underwriters? ...... 11
      B. Did Hartford Underwriters take place in an
         analogous context? .......................................... 14
IV. Do Derivative Suits under § 544(b) Survive Hartford
    Underwriters? ..........................................................   16
     A. The Code Itself .................................................      16
          1. The Need to Interpret Chapter 11 as a
             Whole .......................................................     17
          2. Section 1109(b) ........................................          19
          3. Section 1103(c)(5) .....................................          22
          4. Section 503(b)(3)(B) ..................................           23
          5. A Textual Conclusion ...............................              28
     B. Bankruptcy Courts as Courts of Equity ..........                       30
V. Pre-Code Practice ..................................................... 32
VI. Does Derivative Standing for Creditors’ Committees
    Advance Congress’s Goals? .....................................            37
     A. The Salutary Effects of Derivative Standing for
        Creditors’ Committees ......................................           38
     B. Potential Drawbacks of Derivative Standing for
        Creditors’ Committees ......................................           41
          1. Might derivative suits dissipate the value
             of the estate .............................................       41
          2. Might bankruptcy courts be unable to
             identify meritorious claims .......................               43
          3. Might derivative suits consume judicial
             resources ..................................................      44
     C. Possible Substitutes for Derivative Standing for
        Creditors’ Committees ......................................           45
          1. Appointment of a bankruptcy trustee ......                        45
          2. Appointment of an examiner with
             authority to sue .......................................          46
          3. Moving the court to order the debtor-in-
             possession to sue .....................................           48
          4. Converting the bankruptcy case to
             Chapter 7 .................................................       48
          5. Moving the bankruptcy court to authorize
             a committee to bring a post-confirmation
             avoidance action ......................................           49
          6. Summary .................................................         50
VII. Conclusion ............................................................. 50
                             6


                      I. Introduction
  This is an appeal from an Order of the District Court,
which set aside an Order of the Bankruptcy Court
authorizing a creditors’ committee (“the Committee”) to sue
on the estate’s behalf to avoid a fraudulent transfer in a
Chapter 11 proceeding. Before seeking derivative standing,
the Committee had unsuccessfully petitioned the debtor-in-
possession to pursue the avoidance claim. In granting
derivative standing, the Bankruptcy Court determined that
such a suit would be in the estate’s best interest. The
question on appeal is whether the decision of the United
States Supreme Court in Hartford Underwriters Ins. Co. v.
Union Planters Bank, 530 U.S. 1 (2000), a Chapter 7 case
which interpreted the text of 11 U.S.C. § 506(c) to foreclose
anyone other than a trustee from seeking to recover
administrative costs on its own behalf, operates to prevent
the Bankruptcy Court from authorizing the suit described
above.
   We conclude that it does not. While the question in
Hartford Underwriters was one of a nontrustee’s right
unilaterally to circumvent the Code’s remedial scheme, the
issue before us today concerns a bankruptcy court’s
equitable power to craft a remedy when the Code’s
envisioned scheme breaks down. We believe that Sections
1109(b), 1103(c)(5), and 503(b)(3)(B) of the Bankruptcy
Code evince Congress’s approval of derivative avoidance
actions by creditors’ committees, and that bankruptcy
courts’ equitable powers enable them to authorize such
suits as a remedy in cases where a debtor-in-possession
unreasonably refuses to pursue an avoidance claim. Our
conclusion is consistent with the received wisdom that
“[n]early all courts considering the issue have permitted
creditors’ committees to bring actions in the name of the
debtor in possession if the committee is able to establish”
that a debtor is neglecting its fiduciary duty. 7 Collier on
Bankruptcy ¶ 1103.05[6][a] (15th rev. ed. 2002).
  Accordingly, we will reverse the judgment of the District
Court and remit the case to the original Panel so that it
may consider the other grounds for the District Court’s
reversal of the Bankruptcy Court’s Order, which were not
argued before the en banc Court.
                                  7


               II. Facts and Procedural History
  Scott Chinery founded L&S Research Corporation (“L&S”)
in 1985.1 L&S, with Chinery as its sole shareholder,
marketed nutritional food supplements for bodybuilding
and weight loss under the brand name “Cybergenics.” In
1994, Lincolnshire Management, Inc. (“Lincolnshire”)
initiated negotiations with Chinery to buy L&S, and the
parties reached an agreement for an aggregate
consideration     of    approximately     $110.5   million.2
Lincolnshire established Cybergenics Acquisition, Inc., an
equity investment affiliate, which later became Cybergenics
Corporation (“Cybergenics”), to acquire substantially all of
L&S’s assets. Lincolnshire’s equity investment affiliate
provided the largest equity stake and became the majority
shareholder in Cybergenics, although several banks and
various other lenders (“the Lenders”) helped to finance the
asset purchase. These financiers also agreed to provide
working capital for Cybergenics after the acquisition. The
buyout was memorialized in a writing dated October 13,
1994.
   Cybergenics’s financial outlook soon worsened. Despite
increased equity investments by Lincolnshire and the
Lenders, in August 1996, Cybergenics filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy
Code. As is customary in Chapter 11 reorganizations, the
bankruptcy court allowed Cybergenics to remain in control
of its assets as a debtor-in-possession, so that no
bankruptcy trustee was appointed. As is also customary,
the United States trustee appointed a creditors’ committee
(“the Committee”) to represent the interests of Cybergenics’s
unsecured creditors.
  Although the traditional Chapter 11 case involves a
business reorganization rather than a liquidation,
Cybergenics soon determined that its situation was

1. Scott Chinery died on October 24, 2000. Kathleen Chinery, his wife
and the executrix of his estate, has been substituted as a defendant in
this case.
2. This amount was later reduced to $60 million in settlement of a
lawsuit by Lincolnshire against L&S and Chinery alleging fraud, breach
of fiduciary duty, and breach of contract relating to the sale.
                              8


unsalvageable, and it chose to sell its assets through a
court-supervised auction. At the auction, a third party
successfully bid $2.65 million for all of Cybergenics’s
assets, and the Bankruptcy Court approved the sale in
October 1996. Cybergenics then moved to dismiss the
bankruptcy case, but the Committee objected, asserting
that certain transactions relating to the leveraged buyout
could give rise to substantial fraudulent transfer actions
and that a debtor-in-possession has a fiduciary duty to
maximize the value of the estate.
   In June 1997, Cybergenics notified the bankruptcy court
that it would not pursue any fraudulent transfer claims,
arguing that the probability of recovery was sufficiently low
that the costs of litigation would likely outweigh any
benefits. The Committee responded by volunteering to bear
all of the costs so that the avoidance action would go
forward, but when Cybergenics still refused to pursue the
claims, the Committee sought leave from the Bankruptcy
Court to bring a derivative action to avoid the transfers for
the benefit of the estate. After a hearing, the Bankruptcy
Court concluded that the fraudulent transfer claims were
colorable and that Cybergenics’s refusal to prosecute them
was unreasonable given the Committee’s offer to bear the
litigation costs. It therefore authorized the Committee to
proceed derivatively. The Committee filed its complaint in
March 1998 under 11 U.S.C. § 544(b), seeking to avoid
fraudulent transfers to the Lenders, Lincolnshire, L&S, and
Chinery.
   The defendants filed motions to dismiss under Federal
Rule of Civil Procedure 12(b)(1), arguing, inter alia, that the
fraudulent transfer claims that the Committee asserted had
been sold in the 1996 bankruptcy asset sale. The District
Court granted the defendants’ motions and dismissed the
Committee’s complaint for lack of subject matter
jurisdiction. It held that the fraudulent transfer claims were
assets of the debtor, and that because the 1996 bankruptcy
asset sale disposed of all of Cybergenics’s assets, the claims
were no longer property of the bankruptcy estate, so the
Committee could not raise them on the estate’s behalf. On
appeal, we reversed and remanded, holding that while
sections 544 and 1107 combine to give a debtor the power
                                   9


to pursue these remedies normally reserved for creditors,
these causes of action are not “assets” of the debtor, and
therefore were not transferred in a sale of the debtor’s
assets. In re Cybergenics Corp., 226 F.3d 237, 245 (3d Cir.
2000).
   On remand, the defendants again moved to dismiss. They
raised several grounds for dismissal that they had asserted
in their previous motions to dismiss and that we had
declined to reach in Cybergenics. 226 F.3d at 241 n.5. They
also argued for the first time that, while fraudulent transfer
claims technically “belong” to creditors, § 544(b) states only
that “the trustee may” avoid fraudulent transfers — it does
not mention creditors’ committees. They further argued that
pursuant to the Supreme Court’s reasoning in Hartford
Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S.
1 (2000) (interpreting “the trustee may” in § 506(c) of the
Bankruptcy Code to exclude all parties except the trustee),
§ 544(b)’s grant of standing is exclusive and does not
extend to creditors’ committees.
  On October 31, 2001, the District Court granted the
defendants’ renewed motions to dismiss and held that the
Committee could not bring suit under § 544(b). It concluded
that the Supreme Court’s interpretation of “the trustee
may” in Hartford Underwriters governed the meaning of the
same language in § 544(b). In so doing, it rejected the
Committee’s argument that the holding in Hartford
Underwriters did not extend to analysis of derivative
standing, even though the Supreme Court had explicitly
noted that derivative standing was not at stake in that
case. See Hartford Underwriters, 530 U.S. at 13 n.5
(“Whatever the validity of [derivative standing], it has no
analogous application here . . . . Petitioner asserted an
independent right to use § 506(c), which is what we reject
today.”). The District Court also provided several alternative
grounds for dismissal.3

3. These include conclusions that: (1) the Committee could identify no
present creditor, a requirement for maintaining an action to avoid a
fraudulent transfer; (2) Cybergenics had no unpaid creditors holding
unsecured claims at the time of the alleged fraudulent transfer; (3) the
heightened pleading standard of Fed. R. Civ. Proc. 9(b) is applicable to
the Committee’s complaint, and it failed to plead with sufficient
particularity; (4) the Committee was not entitled to amend its complaint
under Fed. R. Civ. Proc. 17(a); and (5) the Committee abandoned its
claim of equitable subordination.
                             10


   The Committee timely appealed, and in an opinion dated
September 20, 2002, a Panel of this Court affirmed the
District Court’s holding that § 544(b) did not authorize
derivative standing for creditors’ committees to sue to avoid
allegedly fraudulent transfers. Official Committee of
Unsecured Creditors of Cybergenics Corporation v. Chinery,
304 F.3d 316 (3d Cir. 2002). The Panel’s analysis did not
reach the District Court’s alternate grounds for dismissal,
as those rationales assumed the existence of derivative
standing.
  On November 18, 2002, we granted the Committee’s
timely motion for rehearing en banc and accordingly
vacated the Panel decision. We have since accepted
extensive supplemental briefing, including a number of
amicus briefs, and heard oral argument by the parties and
amicus curiae.

III. How Does Hartford Underwriters Affect this Case?
   The District Court’s conclusion that the Code does not
permit creditors’ committees derivatively to prosecute
fraudulent transfer claims was grounded in its
determination that the language in § 544(b) vests exclusive
standing in the trustee. Section 544(b)(1) states that:
    Except as provided in paragraph (2), the trustee may
    avoid any transfer of an interest of the debtor in
    property or any obligation incurred by the debtor that
    is voidable under applicable law by a creditor holding
    an unsecured claim that is allowable under section 502
    of this title or that is not allowable only under section
    502(e) of this title.
11 U.S.C. § 544(b) (emphasis added). The District Court’s
determination of exclusivity relied critically on Hartford
Underwriters, 530 U.S. 1 (2000), in which the Supreme
Court determined that identical language in § 506(c) of the
Code foreclosed the right of any nontrustee to prosecute
that particular action. The District Court concluded that
“there is no principled basis under which the Court can
apply different meanings to the words ‘the trustee may’ in
separate sections of the Code,” so it considered Hartford
Underwriters dispositive.
                             11


A. What happened in Hartford Underwriters?
   In Hartford Underwriters, debtor Hen House Interstate,
Inc. obtained workers’ compensation insurance from
petitioner Hartford Underwriters as part of its Chapter 11
reorganization strategy. Although Hen House repeatedly
failed to pay its monthly premiums, Hartford, which knew
nothing of Hen House’s bankruptcy, continued to provide
insurance. When the reorganization attempt fell through,
Hen House converted its case to a Chapter 7 liquidation
and a trustee was appointed. Hartford, alerted to the
bankruptcy, sought to recover approximately $50,000 in
overdue premiums from the bankruptcy estate but found it
almost entirely without unencumbered assets.
   Section 503(b)(1)(A) of the Bankruptcy Code provides that
“the actual, necessary costs and expenses of preserving the
estate” are treated as administrative expenses, and
§ 507(a)(1) provides that such administrative expenses are
entitled to priority over pre-petition unsecured claims.
Hartford and Hen House agreed that the overdue premiums
constituted administrative expenses, but Hartford was
nevertheless stymied, for virtually all of Hen House’s assets
were held by secured creditors, whose claims are superior
to administrative claims. See 11 U.S.C. § 506. Hartford
then looked to § 506(c), which provides an important
exception to that priority. It 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.” 11 U.S.C. § 506(c) (emphasis
added). Hartford argued that this provision entitled it to
recover the premiums even though it was an administrative
claimant rather than a trustee. The bankruptcy court ruled
in favor of Hartford, and the district court and an Eighth
Circuit panel affirmed. In re Hen House Interstate, Inc., 150
F.3d 868 (8th Cir. 1998). The panel decision was
subsequently vacated, and the Eighth Circuit, sitting en
banc, held § 506(c) unavailable to an administrative
claimant like Hartford. 177 F.2d 719 (8th Cir. 1999) (en
banc).
  A unanimous Supreme Court affirmed the en banc
decision. It began “with the understanding that Congress
                             12


says in a statute what it means and means in a statute
what it says there,” Hartford Underwriters, 530 U.S. at 6
(quoting Connecticut Nat. Bank. v. Germain, 530 U.S. 249,
254 (1992)), and reiterated the longstanding maxim that,
“when the statute’s language is plain, the sole function of
the courts — at least where the disposition required by the
text is not absurd — is to enforce it according to its terms.”
Id. (citations omitted). Turning to § 506(c), the Court found
that it “appears quite plain[ly]” to mean that only the
trustee may recover administrative expenses ahead of
secured claims. Id. Although it acknowledged that the
statute does not expressly bar non-trustees from recovery,
it had “little difficulty” in inferring that “exclusivity is
intended.” Id.
   The Court’s first rationale was contextual. A bankruptcy
trustee’s role in Chapter 7 liquidation proceedings is central
by design, and this “unique role . . . makes it entirely
plausible that Congress would provide a power to him and
not to others.” Id. at 7. The Court further reasoned that,
“had no particular parties been specified [in § 506(c),] . . .
the trustee is the most obvious party who would have been
thought empowered to use the provision.” Id. The Court
therefore found little reason to doubt the maxim that “a
situation in which a statute authorizes specific action and
designates a particular party empowered to take it is surely
among the least appropriate in which to presume
nonexclusivity.” Id. (citing 2A N. Singer, Sutherland on
Statutory Construction § 47.23, p. 217 (5th ed. 1992)).
Buttressing this conclusion was the logic that, “had
Congress intended the provision to be broadly available, it
could simply have said so, as it did in describing the
parties who could act under other sections of the Code.” Id.
   Having determined from its textual inquiry that “by far
the most natural reading of § 506(c) is that it extends only
to the trustee,” the Court declared that Hartford’s “burden
of persuading us that the section must be read to allow its
use by other parties is ‘exceptionally heavy.’ ” Id. at 9
(quoting Patterson v. Shumate, 504 U.S. 753, 760 (1992)).
It then turned to Hartford’s arguments based on pre-Code
practice and policy considerations. Regarding pre-Code
practice, the Court found that Section 506(c)’s provision for
                              13


the charge of certain administrative expenses against
lienholders continued a practice that existed under the
Bankruptcy Act of 1898. Id. (citations omitted). Even then,
however, “[i]t was the norm that recovery of costs from a
secured creditor would be sought by the trustee,” rather
than by an administrative claimant. Id. (citations omitted).
Still, Hartford cited “a number of lower court cases [ ] in
which — without meaningful discussion of the point —
parties other than the trustee were permitted to pursue
such charges under the Act [of 1898], sometimes
simultaneously with the trustee’s pursuit of his own
expenses,” id. (citing cases), and the Court recognized that
some of its early decisions had allowed individual claimants
to seek recovery from secured assets. See, e.g., Louisville, E.
& St. L. R. Co. v. Wilson, 138 U.S. 501 (1891).
   The Court nevertheless concluded that “[i]t is
questionable whether these precedents establish a
bankruptcy practice sufficiently widespread and well
recognized to justify the conclusion of implicit adoption by
the Code. We have no confidence that the allowance of
recovery from collateral by nontrustees is the type of rule
that . . . Congress was aware of when enacting the code.”
Id. (quoting United States v. Ron Pair Enterprises, Inc., 489
U.S. 235, 246 (1989)). Cf. Kelly v. Robinson, 479 U.S. 36,
46 (1986) (giving weight to pre-Code practice that was
“widely accepted” and “established”). Indeed, the Court
strongly implied that even a more convincing historical
showing would not have carried the day for Hartford:
“Where the meaning of the Bankruptcy Code’s text is itself
clear . . . its operation is unimpeded by contrary . . . prior
practice. . . . In this case, we think the language of the
Code leaves no room for clarification by pre-Code practice,”
for it “cannot transform § 506(c)’s reference to ‘the trustee’
to ‘the trustee and other parties in interest.’ ” Id. at 11
(citations omitted).
  Finally, the Court engaged Hartford’s contention that its
interpretation was necessary as a matter of public policy.
Hartford argued that in some cases the trustee may lack an
incentive to pursue payment for administrative expenses,
so that if the Code is to encourage such lenders to finance
a corporation’s administrative needs throughout its
                             14


bankruptcy, it must allow those lenders later to bring their
own actions to recover their investments. Hartford also
suggested that affording standing to administrative
claimants might encourage the provision of post-petition
services to debtors on more favorable terms, since such
claimants would presumably always be willing vigorously to
defend their financial interests whereas a trustee might be
more reluctant. Id. at 11-12. The Court, however,
determined that “it is far from clear that the policy
implications favor petitioner’s position,” and even suggested
that Hartford’s interpretation might “itself lead to results
that seem undesirable as a matter of policy.” Id. at 12. It
ultimately declined to weigh the competing concerns,
explaining that “we do not sit to assess the relative merits
of different approaches to bankruptcy problems. It suffices
that the natural reading of the text produces the result we
announce. Achieving a better policy outcome — if what
petitioner urges is that — is a task for Congress, not the
courts.” Id. at 13-14.
B. Did Hartford Underwriters          take   place   in   an
   analogous context?
  Based on the above reasoning, the Hartford Underwriters
Court interpreted “the trustee may” in § 506(c) to mean that
only the trustee may bring an action. In the case at bar, the
District Court concluded that, faced with the same
language in § 544(b), the same conclusion must there
obtain. But the Hartford Underwriters Court expressly
reserved the question before us today. In a footnote critical
to understanding the scope of that decision, the Supreme
Court stated:
    We do not address whether a bankruptcy court can
    allow other interested parties to act in the trustee’s
    stead in pursuing recovery under § 506(c). Amici
    American Insurance Association and National Union
    Fire Insurance Co. draw our attention to the practice of
    some courts of allowing creditors or creditors’
    committees a derivative right to bring avoidance
    actions when the trustee refuses to do so, even though
    the applicable Code provisions, see 11 U.S.C. §§ 544,
    545, 547(b), 548(a), 549(a), mention only the trustee.
    See, e.g., In re Gibson Group, Inc., 66 F.3d 1436, 1438
                                  15


     (CA6 1995). Whatever the validity of that practice, it
     has no analogous application here, since petitioner did
     not ask the trustee to pursue payment under § 506(c)
     and did not seek permission from the Bankruptcy
     Court to take such action in the trustee’s stead.
     Petitioner asserted an independent right to use
     § 506(c), which is what we reject today.
Id. at 13 n.5. The District Court nevertheless concluded
that the Committee failed sufficiently to distinguish
Hartford Underwriters’s method of interpretation, which it
found to yield equally compelling results when applied to
§ 544(b).
  We agree that Hartford Underwriters is most useful for
the interpretive methodology it offers, but it is critical to
note the context in which that decision arose, for it is
materially unlike the one before us today. The petitioner in
Hartford Underwriters was an insurer who, by continuing
coverage despite Hen House’s failure to pay its premiums,
became an administrative lender with claims subordinate to
those of the secured creditors. When it learned of Hen
House’s bankruptcy, it attempted to use § 506(c) to recover
the premiums it was owed, but it did so in a strikingly
unilateral fashion. The insurance premiums were not costs
incurred by the trustee that, if recovered, would have
yielded a common benefit. Instead, they would have
satisfied only Hartford’s outstanding claim. Nor did
Hartford seek the court’s or the trustee’s permission to
recoup the expense, but rather it sued in its own name and
for its own direct benefit.
  The situation at bar is markedly different. When the
Committee discovered that certain transfers made by
Cybergenics were potentially avoidable as fraudulent, it first
petitioned the Cybergenics management to file an avoidance
action under § 544(b).4 But management refused to file that
action, claiming that the costs would likely outweigh the
benefits, and it maintained this position even after the
Committee volunteered to bear all litigation costs. The

4. As discussed more fully infra, section 1107 gives Chapter 11 debtors-
in-possession all powers normally associated with trustees in the usual
event that no trustee is appointed.
                            16


Committee, finding management’s stance unreasonable,
petitioned the bankruptcy court for permission to prosecute
a § 544(b) avoidance action in Cybergenics’s name and on
its behalf — any recovery would go not to the Committee,
but to the estate itself. The Bankruptcy Court concluded
that the fraud claims were colorable, and that the
Committee’s offer to bear the litigation costs insulated the
estate from risk. Noting that the debtor-in-possession has
a duty to maximize the value of the estate, the court
concluded that management’s refusal to act was
unreasonable even given the usual judicial deference to
business judgment, and it authorized the Committee to sue
in Cybergenics’s name.
  This difference in contexts is crucially important, for
while the question in Hartford Underwriters was one of a
nontrustee’s right unilaterally to circumvent the Code’s
remedial scheme, the issue before us today concerns a
bankruptcy court’s equitable power to craft a remedy when
the Code’s envisioned scheme breaks down. With this
perspective in mind, we turn to the question whether
derivative suits may be maintained under § 544(b) after
Hartford Underwriters.

     IV. Do Derivative Suits under § 544(b) Survive
                Hartford Underwriters?
A. The Code Itself
  As did the Court in Hartford Underwriters, “we begin with
the understanding that Congress says in a statute what it
means and means in a statute what it says there.” Hartford
Underwriters, 530 U.S. at 6 (quoting Connecticut Nat.
Bank., 503 U.S. at 254). When “the statute’s language is
plain, the sole function of the courts — at least where the
disposition required by the text is not absurd — is to
enforce it according to its terms.” Id. (citations omitted).
Chinery and Lincolnshire (“Lincolnshire”) contend that, as
the same language is used in §§ 544(b) and 506(c), there is
a presumption that it means the same thing in each
instance: “Undoubtedly, there is a natural presumption
that identical words used in different parts of the same act
are intended to have the same meaning.” Atlantic Cleaners
                             17


& Dyers, Inc. v. United States, 286 U.S. 427, 433 (1932).
That presumption may be overcome only when “there is
such variation in the connection in which the words are
used as reasonably to warrant the conclusion that they
were employed in different parts of the act with different
intent.” Id. Lincolnshire therefore submits that the
Committee’s “burden of persuading us that the section
must be read to allow its use by other parties is
exceptionally heavy.” Hartford Underwriters, 530 U.S. at 9
(citation omitted).
  The Committee does not dispute this assessment — it
concedes that, as in Hartford Underwriters, “the trustee
may” cannot be read to mean “the trustee and other parties
in interest may.” But it submits that this point is neither
here nor there, for it does not seek to “use” § 544(b) in that
sense. In its estimation, § 544(b) is important only insofar
as it does not preclude the bankruptcy court from
authorizing the Committee to sue derivatively when the
trustee, the party explicitly empowered to use § 544(b),
improperly refuses to exercise its power. Of course, even
under this view we must determine whether such an
equitable remedy is consistent with the Bankruptcy Code’s
statutory scheme, of which § 544(b) is a part. We are
satisfied that it is.
  1. The Need to Interpret Chapter 11 as a Whole
   As the Supreme Court has often noted, “[s]tatutory
construction [ ] is a holistic endeavor,” United Savings Assn.
of Tex. v. Timbers of Inwood Forest Associates, Ltd., 484
U.S. 365, 371 (1988), and this is especially true of the
Bankruptcy Code. In United States v. Kelly, a case
interpreting § 523, the Court stated that “we must not be
guided by a single sentence or member of a sentence, but
look to the provisions of the whole law, and to its object
and policy.” 479 U.S. 36, 43 (1986) (citations omitted). The
Hartford Underwriters Court interpreted the Code
holistically in determining that “the trustee may” in § 506(c)
is exclusive, but in that case, there was no “whole law” to
interpret, for § 506(c) is effectively self-contained. This is
evident in two ways. First, there is no other provision in
Chapter 7 of the Code that even arguably authorizes a
party to “recover [administrative expenses] from property
                                   18


securing an allowed secured claim,” so the Court saw no
need to look beyond § 506(c) to understand the mechanics
of the cause of action. Second, the Court concluded that
“the fact that the sole party named — the trustee — has a
unique role in bankruptcy proceedings makes it entirely
plausible that Congress would provide a power to him and
not to others.” Hartford Underwriters, 530 U.S. at 7. It
therefore saw no reason to look beyond § 506(c) to
determine standing to bring that cause of action.
   In contrast, reading § 544(b) in isolation leads
immediately to incoherence. While, as the Court explained,
the trustee serves a “unique role” in Chapter 7, nothing
could be further from the truth in Chapter 11, where
trustees rarely exist. See In re Sharon Steel Corp., 871 F.2d
1217, 1226 (3d Cir. 1989) (“It is settled that appointment of
a trustee should be the exception, rather than the rule.”); 7
Collier on Bankruptcy ¶ 1104.02[1] (15th rev. ed. 1998)
(noting that appointment of a trustee in a Chapter 11 case
is an “extraordinary” remedy). Reading § 544(b) alone would
lead to the fatuous conclusion that Congress vested its
cause of action exclusively in a party that usually does not
exist. Only by looking beyond § 506(c) can one make sense
of this situation, in that § 1107(a) gives a Chapter 11
debtor-in-possession (here, Cybergenics) the rights and
powers of a trustee in the event that no trustee is
appointed.
   It is therefore clear that § 544(b) must be viewed as
merely a part, albeit an important part, of the Chapter 11
framework that is designed to help debtors reorganize while
continuing as viable concerns.5 The Committee submits
that, just as one must read § 1107(a) in conjunction with
§ 544(b) to understand who “the trustee” is for § 544(b)
purposes, one must consider three other Chapter 11
sections — 1109(b), 1103(c)(5), and 503(b)(3)(B) — to

5. In this regard, the case at bar is the exception to the rule, for after
filing under Chapter 11, Cybergenics decided to liquidate rather than
reorganize. Critically, however, unlike the debtor in Hartford
Underwriters, Cybergenics never converted its case from Chapter 11 to
Chapter 7. Its bankruptcy therefore remains governed by the Chapter 11
“reorganization” rules.
                              19


determine whether derivative standing is a permissible
equitable remedy in cases where the court determines that
the trustee has unreasonably refused to bring an avoidance
claim under § 544(b). These sections shed light on the role
Congress intended creditors’ committees to play in the
reorganization process, and we will examine each in turn.
  2. Section 1109(b)
  Section 1109(b) provides that:
    A party in interest, including the debtor, the trustee, a
    creditor’s committee, an equity security holder’s
    committee, a creditor, an equity security holder, or any
    indenture trustee, may raise and may appear and be
    heard on any issue in a case under [Chapter 11].
11 U.S.C. § 1109(b) (emphasis added). The Committee
submits that, “[a]lthough 1109 would not provide an
independent right for the Committee to initiate a suit,
absent bankruptcy court approval, it does support the
authority of bankruptcy courts to permit creditors’
committees to bring claims on behalf of the debtor in
possession for the benefit of the estate.” (Committee’s Reply
Brief at 7.) There is precedent for this view. Collier explains
that, “consistent with the broad right of participation
conferred by § 1109(b), the court may authorize a party in
interest to commence litigation on behalf of the estate if
certain conditions are satisfied.” 7 Collier on Bankruptcy
¶ 1109.05 (citing Fogel v. Zell, 221 F.3d 955, 965-66 (7th
Cir. 2000)) (“If a trustee unjustifiably refuses a demand to
bring an action to enforce a colorable claim of a creditor,
the creditor may obtain the permission of the bankruptcy
court to bring the action in place of, and in the name of,
the trustee.”).
   Lincolnshire contends that, whatever the theoretical
appeal of this position, it does not survive Hartford
Underwriters, where Hartford argued “that § 1109(b)
evidences the right of a nontrustee to recover under
§ 506(c).” Hartford Underwriters, 530 U.S. at 8. While noting
that § 1109(b) was “by its terms inapplicable” because it
applied only to Chapter 11 reorganizations, and the debtor
had previously converted its case to Chapter 7, id., the
Court nonetheless stated in dictum that “we do not read
                             20


§ 1109(b)’s general provision of a right to be heard as
broadly allowing a creditor to pursue substantive remedies
that other Code provisions make available only to other
specific parties.” Id. Cf. 7 L. King, Collier on Bankruptcy
¶ 1109.05 (15th rev. ed. 1999) (“In general, section 1109
does not bestow any right to usurp the trustee’s role as
representative of the estate with respect to the initiation of
certain types of litigation that belong exclusively to the
estate.”). In Lincolnshire’s view, § 1109(b) allows a
committee to intervene in an adversary proceeding initiated
by a trustee, but it does not allow a committee to initiate or
prosecute an action independent of the trustee.
   The Committee responds that § 1109(b) must mean
something more than a right to intervene, for “a general
right to be heard would be an empty grant unless those
who had such right were allowed to act when those who
should act did not.” (Committee’s Brief at 26) (quoting 5
Collier on Bankruptcy § 1109.02[3] (15th ed. 1986)). It
submits that we should not give great weight to the
Supreme Court’s interpretation in dictum of a provision
that the Court itself noted was “by its terms inapplicable,”
especially since the Committee here does not assert an
independent right of the sort the Hartford Underwriters
Court considered.
   Although the Committee is doubtless correct that the
Supreme Court’s dicta are not binding on us, we do not
view it lightly. As we have stated:
    [W]e should not idly ignore considered statements the
    Supreme Court makes in dicta. The Supreme Court
    uses dicta to help control and influence the many
    issues it cannot decide because of its limited docket.
    “Appellate courts that dismiss these expressions [in
    dicta] and strike off on their own increase the disparity
    among tribunals (for other judges are likely to follow
    the Supreme Court’s marching orders) and frustrate
    the evenhanded administration of justice by giving
    litigants an outcome other than the one the Supreme
    Court would be likely to reach were the case heard
    there.”
In re McDonald, 205 F.3d 606, 612-13 (3d Cir. 2000)
(brackets in original) (quoting United States v. Bloom, 149
                              21


F.3d 649, 653 (7th Cir. 1998)). Nevertheless, we are
satisfied that the case at bar is not the situation the Court’s
dictum anticipated. The Court’s clear concern was that a
party might use § 1109(b) to “usurp[ ] the trustee’s role as
representative of the estate,” Hartford Underwriters, 530
U.S. at 8, thus defeating Congress’s intention that the
trustee act as a gatekeeper, weighing the potential benefits
of litigation against the costs it might incur. No risk of
usurpation exists here, for the Committee took no
unsanctioned action. Instead, it petitioned the Bankruptcy
Court for permission to sue in the estate’s name, and that
Court conferred such authority only after it determined that
the debtor was neglecting its statutory duty to act in the
estate’s interest. This exercise of judicial power does not
implicate the usurpation concerns expressed in Hartford
Underwriters. Yet it is precisely because the issue at bar
involves judicial power that § 1109(b) cannot, alone, provide
a definitive resolution. Read fairly, § 1109(b) addresses only
a committee’s direct rights — it says nothing whatever
about a court’s power to allow derivative standing to remedy
a violation of those rights.
   Section 1109(b) is helpful to the Committee insofar as it
evinces Congress’s intent for creditors’ committees to play
a vibrant and central role in Chapter 11 adversarial
proceedings. Amicus G. Eric Brunstad offers an
etymological perspective on that intent. Section § 1109(b)
derives from Section 206 of the former Bankruptcy Act, 11
U.S.C. § 606, and former Chapter X Rule 10-210(a). See In
re Amatex Corp., 755 F.2d 1034, 1042 (3d Cir. 1985). These
two provisions were designed to broaden creditor
participation in reorganization proceedings in order to
remedy the deficiencies of prior procedures, which were
deemed to be unduly restrictive. See In re Marin Motor Oil,
Inc., 689 F.2d 445, 451 (3d Cir. 1982). Significantly,
however, § 1109(b) is broader than either of those
provisions — while they authorized creditors “to be heard
on all matters,” neither authorized creditors to “raise”
issues. Given our conclusion infra that derivative standing
for creditors’ committees was common in the pre-Code days
of Section 206 and Chapter X Rule 10-210(a), it would be
odd to conclude that Congress abolished derivative
                              22


standing at the same time as it broadened committees’
adversarial role through § 1109(b).
  3. Section 1103(c)(5)
   The Committee next turns for support to Section
1103(c)(5), which states: “A committee appointed under
section 1102 of this title may perform such other services
as are in the interest of those represented.” 11 U.S.C.
§ 1103(c)(5). Because the Bankruptcy Court found that the
assertion of fraudulent transfer claims would benefit the
estate, the Committee submits that it should be able to
represent the estate for the purpose of prosecuting those
claims.
   Lincolnshire has several responses. It first represents
that the Committee’s interpretation of § 1103(c)(5) would
amount to a free-roving power for the Committee to do
whatever it considers to be in the estate’s interest, a role
that would eviscerate the debtor-in-possession’s role as
gatekeeper. It next notes that the powers granted to
committees in § 1103(c)(1)-(4) are very specific, including
the power to: (1) consult with the debtor concerning the
case; (2) investigate the debtor’s acts and financial
condition; (3) participate in the formulation of a plan; and
(4) request the appointment of a trustee or examiner.
Linconshire suggests that interpreting the (c)(5) catch-all
provision to allow committees to take any action in the
debtor’s interest would render superfluous the specific
grants in (1) to (4), and would also violate the interpretive
canon ejusdem generis, which states that “where general
words follow specific words in a statutory enumeration, the
general words are construed to embrace only objects
similar in nature to those objects enumerated by the
preceding specific words.” Circuit City Stores, Inc. v. Adams,
532 U.S. 105, 114-15 (2001) (quoting 2A N. Singer,
Sutherland on Statutes and Statutory Construction § 47.17
(1991)). Insofar as the grants of power in (1) to (4) are quite
narrow and non-adversarial, it concludes, the catch-all
power should be similarly confined.
  We agree that § 1103(c)(5) does not confer the sort of
blanket   authority  necessary    for  the    Committee
independently to initiate an adversarial proceeding,
                              23


including one under § 544(b). Like § 1109(b), however,
§ 1103(c)(5) suggests that Congress intended for creditors’
committees to perform services on behalf of the estate, and
that Congress consciously built a measure of flexibility into
the scope of those services. As the question before us today
is whether a bankruptcy court can authorize a creditors’
committee to represent the estate when the usual
representative is delinquent, the “flexible representation”
role evidenced in § 1103(c)(5) militates in the affirmative.
  4. Section 503(b)(3)(B)
  While Sections 1109(b) and 1103(c)(5) provide clear
evidence that Congress envisioned a central role for
creditors’ committees in Chapter 11 proceedings, their
focus on creditors’ committees themselves provides at best
indirect evidence that Congress granted bankruptcy courts
the power to confer derivative standing upon those
committees. A third Code section, however, provides far
more direct insight into bankruptcy courts’ powers. Section
503(b)(3)(B) allows for the priority payment of the expenses
of “a creditor that recovers, after the court’s approval, for
the benefit of the estate any property transferred or
concealed by the debtor.” 11 U.S.C. § 503(b)(3)(B). Brunstad
argues that the only explanation for this provision is that it
rewards monetarily the practice of permitting creditors,
with court authorization, to pursue causes of action on
behalf of bankrupt debtors. It would make little sense, he
urges, to provide for the reimbursement of a “creditor that
recovers,” if standing to recover is limited exclusively to the
trustee — that interpretation would render § 503(b)(3)(B)
entirely superfluous.
  Amicus Official Committee of Unsecured Creditors of
Safety-Kleen Corp. (“The Safety-Kleen Committee”) agrees,
and it provides an historical perspective on § 503(b)(3)(B).
Derivative standing for creditors was recognized judicially
as early as 1900. See Chatfield v. O’Dwyer, 101 Fed. 797,
799 (8th Cir. 1900); 3A James Wm. Moore et al., Collier on
Bankruptcy ¶ 64.104 n.6 (14th ed. rev. 1975). In 1903,
Congress allowed for reimbursement for such services by
adding Section 64(a)(1) to the Bankruptcy Act of 1898:
    The debts to have priority, in advance of the payment
    of dividends to creditors, and to be paid in full out of
                             24


    bankruptcy estates, and the order of payments shall
    be: (1). . . where the property of the bankrupt,
    transferred or concealed by him either before or after
    the filing of the petition, is recovered for the benefit of
    the estate of the bankrupt by the efforts and at the cost
    and expense of one or more creditors, the reasonable
    costs and expenses of such recovery. . .
11 U.S.C. § 104(a)(1) (redesignated from § 64 in 1938)
(repealed 1978) (emphasis added). Courts interpreted § 64
as not only allowing for recovery of expenses incurred while
suing derivatively, but also as authorizing derivative
standing in the first instance. See, e.g., In re Eureka
Upholstering Co., 48 F.2d 95, 96 (2d Cir. 1931) (allowing the
bankruptcy court to authorize derivative standing under
§ 64); In re Stearns Salt & Lumber Co., 225 Fed. 1, 3 (6th
Cir. 1915) (stating that a trustee could authorize derivative
standing under § 64). A creditor’s ability to sue derivatively
was, however, limited by the requirement that a creditor
obtain permission either from the trustee or the court
before acting, the rationale being that those entities served
a salutary gatekeeping function. See, e.g., In re Eureka, 48
F.2d at 96.
  When Congress enacted the Bankruptcy Code in 1978, it
made clear its intent for the new § 503(b)(3)(B) to continue
the policies of § 64(a)(1) regarding the reimbursement of
expenses incurred while recovering property for the benefit
of the estate. See H.R. Doc. No. 93-137, 93d Cong. 1st
Sess., Pts I and II (1973), available in Collier 15th ed. at
App. Pt. 4(c) (explaining that the proposed § 503(b)(3)(B)
“continues the policy of § 64(a)(1) and allows a creditor to
recover expense incurred which actually benefits the
estate”). The Safety-Kleen Committee submits that the only
substantive modification contained in § 503(b)(3)(B) is a
clarification that only the bankruptcy court — not the
bankruptcy trustee — can authorize derivative suits.
(Safety-Kleen Committee Brief at 16) (citing In re Godon,
Inc., 275 B.R. 555, 562 (Bankr. E.D. CA. 2002)).
   Lincolnshire, however, strongly disputes the notion that
§ 503(b)(3)(B) authorizes derivative standing. It observes
that “[f]ederal courts have consistently held that
§ 503(b)(3)(B) does not confer standing to creditors to sue
                              25


on behalf of the bankruptcy estate.” (Lincolnshire’s
Response to Amici at 15-16) (quoting Surf N Sun Apts., Inc.,
v. Dempsey, 253 B.R. 490, 492 (M.D. Fla. 1999)) (citing
cases). Lincolnshire instead contends that the provision
merely allows the recovery of expenses incurred in actions
that a creditor has a direct right to bring. For example, a
creditor might assist a debtor in locating assets owed to the
estate by conducting a Bankruptcy Rule 2004 examination
of a transferee, a step available to “any party in interest”
that obtains court approval. See Fed. R. Bankr. Proc. 2004.
Amicus Professor Keith Sharfman agrees, and offers by way
of example the situation where a creditor brings a state law
fraudulent transfer claim against a party to whom the
debtor had transferred the creditor’s collateral. He submits
that such an action would need “the court’s approval,” i.e.,
the grant of a motion to lift the automatic stay that would
otherwise block the action from proceeding. See 11 U.S.C.
§§ 362(d) and 362(f). Any surplus value recovered would
presumably be “for the benefit of the estate,” as it would
have to be turned over to the estate pursuant to 11 U.S.C.
§ 542.
   Lincolnshire also asserts that, even if Section 503 does
recognize derivative standing, it “does not address, even
inferentially, the power of a creditors’ committee. It
addresses only the ability of a ‘a creditor,’ not ‘a creditors’
committee,’ to recover certain expenses. Congress obviously
knew the difference.” (Lincolnshire Reply to Amici at 16.)
For example, in § 1109(b), discussed at length supra,
Congress granted the right to appear and be heard to a
“party in interest, including the debtor, the trustee, a
creditors’ committee, an equity security holders’ committee,
[or] a creditor.” 11 U.S.C. § 1109(b) (emphasis added). This
contention is not merely semantic, for the Supreme Court
presumes “that Congress acts intentionally and purposely
when it includes particular language in one section of a
statute but omits it in another.” BFP v. Resolution Trust
Corp., 511 U.S. 531, 537 (1994).
   Although Lincolnshire’s arguments are not without force,
we conclude that the most natural reading of § 503(b)(3)(B)
is that it recognizes and rewards monetarily the practice of
permitting creditors’ committees, with court authorization,
                                   26


to pursue derivative actions. We are convinced that the
provision is not limited to direct causes of action, for
property recovered in a direct action is not recovered “for
the benefit of the estate.” The offered examples are not to
the contrary. While a creditors’ committee may certainly
assist a debtor in locating property under Bankruptcy Rule
2004, that investigative assistance would not implicate
§ 503(b)(3)(B) because the committee would not itself
recover the property. More promising is Professor
Sharfman’s suggestion of a creditor who independently
pursues a state law fraud claim and relinquishes to the
estate any surplus recovery. Yet this hypothetical fails as
well, for no surplus recovery is possible. Relevant law
provides that a transfer or obligation may be avoided only
“to the extent necessary to satisfy the creditor’s claim.” See
7A Uniform Laws Annotated, Uniform Fraudulent Transfer
Act § 8; 7A Uniform Laws Annotated, Uniform Fraudulent
Conveyance Act § 9. Because an oversecured creditor
cannot directly recover any property beyond that necessary
to satisfy its own claim, it cannot recover property for the
benefit of the estate unless it sues derivatively.
  Generalizing from these examples, we “cannot conceive of
a situation in which a creditor has independent standing
which would allow it to pursue the recovery of property
transferred or concealed by the debtor.” In re Blount, 276
B.R. 753, 762 (Bankr. M.D. La. 2002). While it is possible
that such a situation exists, we are at all events unwilling
to interpret § 503(b)(3)(B) as anticipating obscure
possibilities when a far more natural interpretation is
apparent. Especially given the statutory history, we are
satisfied that Congress intended § 503(b)(3)(B) to allow
bankruptcy courts to reward derivative suits prosecuted by
creditors’ committees.6

6. The dissenting opinion suggests that because creditors’ committees
are typically represented by attorneys, their expenses are properly
reimbursed under sections 330(a)(1)(A) and (B), rather than under
section   503(b)(3)(B).   Those     sections   provide   for   “reasonable
compensation” as well as “reimbursement for actual, necessary
expenses” incurred by a committee’s representative, such as an attorney.
11 U.S.C. § 330(a)(1)(A), (B). Also, under this view, section 503 properly
addresses only individual creditors, not creditors’ committees.
                                    27


   Of course, that determination does little to help the
Committee if only individual creditors may bring derivative
actions. Lincolnshire is correct in its observation that
§ 503(b)(3)(B) speaks only of a “creditor . . . that recovers,”
and says nothing about creditors’ committees. Amicus
Brunstad submits that this is a mere technicality, for under
section 102(7) of the Bankruptcy Act, “the singular includes
the plural.” He reasons that, if all of the creditors could
simultaneously bring an identical action, there is no reason
to disallow the simpler step of allowing a representative
committee to bring that same action, especially given the
flexible authority in § 1103(c)(5) for committees to “perform
such other services as are in the interest of those
represented.” (Transcript of Oral Argument at 33.)
   To be sure, several Code provisions identify both
creditors and creditors’ committees as parties with
authority to take action, see, e.g., § 1109(b), and this lends
some weight to Linconshire’s suggestion that the absence of
“committees” in § 503(b)(3)(B) is meaningful. But we are
realists, and we recognize that if we disallow the
Committee’s derivative suit but sanction derivative suits by
individual creditors, the individual creditors could simply
substitute themselves as plaintiffs under Fed. R. Civ. Proc.
17(a) and move forward with litigation. Forcing that step
would be a make-work, for those individual cases would
likely be consolidated into one substantively identical to

  We do not believe that it would be proper to embark sua sponte on a
lengthy analysis of Section 330(a)’s role in bankruptcy proceedings —
that section was not cited in any brief submitted in this case. Suffice it
to say that it is not obvious that section 330(a) displaces section
503(b)(3)(B) in this situation, as the two sections contain key differences.
One difference is that section 330(a) does not provide compensation for
a committee’s expenses that are not incurred by an attorney, and such
costs may be considerable. Another is that unlike section 503, section
330(a) contains no language limiting compensation to a creditor “that
recovers,” thus raising the specter of creditors’ committees seeking
reimbursement for failed attempts at recovery. As for the proposition
that section 503 addresses only individual creditors, not creditors’
committees, we set forth in the text infra our reasons for concluding
otherwise.
                             28


that at bar. Given the flexible role of committees evidenced
in § 1103(c)(5) and the Code’s general presumption that the
singular means the plural, we are satisfied that the purpose
of § 503(b)(3)(B) is served by allowing the Committee to
recover expenses incurred in pursuing a derivative suit.
Any other result would render that provision superfluous,
for absent a judicial power to authorize derivative suits by
creditors, it makes no sense to speak of rewarding a
creditor who sues, with court permission, to recover
property for the benefit of the estate.
  5. A Textual Conclusion
  For all of the foregoing reasons, we are satisfied that the
most natural reading of the Code is that Congress
recognized and approved of derivative standing for creditors’
committees. Sections 1109(b) and 1103(c)(5), taken
together, evince a Congressional intent for committees to
play a robust and flexible role in representing the
bankruptcy estate, even in adversarial proceedings. Several
cases decided after Hartford Underwriters have concluded
that these two sections alone are sufficient to confer upon
creditors’ committees the right to sue derivatively. In In re
Commodore Int’l Ltd., 262 F.3d 96 (2d Cir. 2001), the
Second Circuit outlined its requirements for derivative
standing, stating:
    [W]e hold that a creditors’ committee may sue on
    behalf of the debtors, with the approval and
    supervision of a bankruptcy court, not only where the
    debtor in possession unreasonably fails to bring suit
    on its claims, but also where the trustee or the debtor
    in possession consents.
Id. at 100. Lincolnshire submits that Commodore “has no
bearing on the present issue with regard to standing
because neither that Court nor the lower court even
acknowledged the [Hartford Underwriters] decision.”
(Lincolnshire Brief at 29.) The implication is that the
Second Circuit Court of Appeals, and the parties before it,
somehow failed to notice an on-point Supreme Court
decision issued less than a year earlier. We doubt that
explanation; more plausible is that the Second Circuit
thought Hartford Underwriters to be irrelevant insofar as it
                              29


did not address — indeed, it eschewed — derivative
standing. Any doubt on that score is erased by the Second
Circuit’s subsequent decision in Term Loan Holder Comm.
v. Ozer Group, L.L.C. (In re Caldor Corp.), 303 F.3d 161 (2d
Cir. 2002). There, the Court mentioned Hartford
Underwriters after stating its belief that Sections 1103(c)(5)
and 1109(b) “impl[y] a qualified right for creditors’
committees to initiate adversary proceedings where the
trustee or debtor in possession unjustifiably failed to bring
suit.” Id. at 166 (citing In re STN Enterprises, 779 F.2d 901,
904 (2d Cir. 1985)). The Second Circuit clearly believes that
Sections 1103(c)(5) and 1109(b) authorize derivative
standing even after Hartford Underwriters.
   The Seventh Circuit reached a similar decision in Fogel,
221 F.3d at 955, a post-Hartford Underwiters case in which
it stated that:
    If a trustee unjustifiably refuses a demand to bring an
    action to enforce a colorable claim of a creditor, the
    creditor may obtain the permission of the bankruptcy
    court to bring the action in place of, and in the name
    of, the trustee. . . . In such a suit, the creditor
    corresponds to the shareholder, and the trustee to
    management, in a shareholder derivative action.
Id. at 966 (citations omitted). Again, although Fogel does
not mention Hartford Underwriters, we doubt that it
escaped the court’s notice.
  At all events, after an exhaustive examination of Hartford
Underwriters, we agree with the Second and Seventh
Circuits, except insofar as the Second Circuit in Term Loan
implied that the power to initiate derivative suits flows
entirely from Sections 1103(c)(5) and 1109(b). We do not
read those two sections so broadly, but when they are
paired with § 503(b)(3)(B), it becomes unmistakably clear
that Congress approved of creditors’ committees suing
derivatively to recover property for the benefit of the estate.
Avoiding fraudulent transfers through § 544(b) is a perfect
application of that function.
  Yet a piece of the puzzle is missing. The Code clearly
demonstrates that Congress approved of derivative
standing, but none of the three sections discussed —
                             30


1109(b), 1103(c)(5), or 503(b)(3)(B) — seems directly to
authorize such standing. Section 503 comes closest, but
read fairly, that provision merely empowers bankruptcy
courts to reimburse creditors’ committees for the expenses
they incur while suing derivatively. It does not authorize
derivative actions in the first instance. To be sure, that
section would be meaningless unless authority existed, but
such reasoning by negative implication is less than
satisfying. We believe that the missing link is supplied by
bankruptcy courts’ equitable power to craft flexible
remedies in situations where the Code’s causes of action
fail to achieve their intended purpose.
B. Bankruptcy Courts as Courts of Equity
   The Supreme Court has long recognized that bankruptcy
courts are equitable tribunals that apply equitable
principles in the administration of bankruptcy proceedings.
See Local Loan Co. v. Hunt, 292 U.S. 234, 240 (1934)
(“[C]ourts of bankruptcy are essentially courts of equity,
and their proceedings inherently proceedings in equity.”).
The enactment of the Code in 1978 increased the degree of
regulation Congress imposed upon bankruptcy proceedings,
but it did not alter bankruptcy courts’ fundamental nature.
See H.R. Rep. No. 95-595, at 359 (1977), reprinted in
U.S.C.C.A.N. 5963, 6315 (stating that, under the
Bankruptcy Code, “[t]he bankruptcy court will remain a
court of equity”) (citing Local Loan Co., 292 U.S. at 240).
Any lingering doubt on that point is dispelled by a string of
post-enactment Supreme Court decisions — see Young v.
United States, 543 U.S. 43, 50 (2002) (“[B]ankruptcy courts
[ ] are courts of equity and ‘apply the principles and rules
of equity jurisprudence.’ ”) (quoting Pepper v. Litton, 308
U.S. 295, 304 (1939)); United States v. Energy Resources
Co., 495 U.S. 545, 549 (1990) (“[B]ankruptcy courts, as
courts of equity, have broad authority to modify creditor-
debtor relationships.”) — and by the Code itself. See 11
U.S.C. § 105(a) (“The Court may issue any order, process,
or judgment that is necessary or appropriate to carry out
the provisions of this title. No provision of this title
providing for the raising of an issue by a party in interest
shall be construed to preclude the court from, sua sponte,
taking any action or making any determination necessary
                             31


or appropriate to enforce or implement court orders or
rules, or to prevent an abuse of process.”).
   The concept of derivative standing arose when, despite a
lack of express statutory authorization, courts of equity
allowed shareholders to pursue valuable actions when the
nominal plaintiff (the corporation) unreasonably refused to
do so. See generally Bert S. Prunty, Jr., The Shareholders’
Derivative Suit: Notes on Its Derivation, 32 N.Y.U. L. Rev.
980 (1957) (tracing the historical development of derivative
suits). In Ross v. Bernhard, 396 U.S. 531 (1970), the
Supreme Court explained the utility of derivative standing
as a means of providing equitable redress, not only from
“faithless officers and directors,” but also directly from
“third parties who had damaged or threatened the
corporate properties and whom the corporation through its
managers refused to pursue.” 396 U.S. at 534. It also
addressed the doctrine’s standards, including the
requirement “that the corporation itself [must have] refused
to proceed after suitable demand, unless excused by
extraordinary conditions.” 396 U.S. at 534.
  We believe that the ability to confer derivative standing
upon creditors’ committees is a straightforward application
of bankruptcy courts’ equitable powers. In § 544(b),
Congress made clear that it intended for the estate to
recover property fraudulently transferred by the debtor. The
mechanism Congress designed to ensure this recovery was
to vest in the trustee (or the debtor-in-possession) both the
power to bring an avoidance action and the duty to bring
one if it would likely benefit the estate. See, e.g., In re
Cybergenics, 226 F.3d at 243 (“A paramount duty of a
trustee or debtor in possession in a bankruptcy case is to
act on behalf of the bankruptcy estate, that is, for the
benefit of the creditors.”). Congress clearly envisioned that
the trustee or debtor would avoid fraudulent transfers, thus
maximizing the value of the estate and allowing creditors to
recover their claims from that estate.
  The problem at bar is that the intended system broke
down. The debtor refused to bring an action that the
Bankruptcy Court found would benefit the estate, and
thereby violated its fiduciary duty to maximize the estate’s
value. It is in precisely this situation that bankruptcy
                             32


courts’ equitable powers are most valuable, for the courts
are able to craft flexible remedies that, while not expressly
authorized by the Code, effect the result the Code was
designed to obtain. As the Supreme Court has noted,
“[e]quity eschews mechanical rules; it depends on
flexibility,” Holmberg v. Armbrecht, 327 U.S. 392, 396
(1946), and “there is inherent in the Courts of Equity a
jurisdiction to . . . give effect to the policy of the
legislature.” Mitchell v. Robert DeMario Jewelry, Inc., 361
U.S. 288, 292 (1960) (quoting Clark v. Smith, 13 Pet. 195,
203 (1839)).
  The policy concern evident in § 544(b) is the need to
channel avoidance actions through the trustee, who acts as
a gatekeeper and prevents independent avoidance actions
by creditors that might prejudice the estate and rival
creditors. The Supreme Court stated as much in Hartford
Underwriters when it expressed concern about parties
“usurp[ing] the trustee’s role as representative of the
estate.” 530 U.S. at 8-9. This representative role explains
why § 544(b) allows the trustee, but not a creditors’
committee, to bring an avoidance action on its own
authority, i.e., without court permission. But that provision
does not foreclose a bankruptcy court’s equitable power to
substitute itself as gatekeeper when the trustee is
delinquent, and to allow a creditors’ committee to pursue
an avoidance action for the estate’s direct benefit rather
than its own. The end result of this equitable remedy — the
estate’s recovery of fraudulently transferred property — is
precisely what Congress envisioned, and Code Sections
1109(b), 1103(c)(5), and 503(b)(3)(B) anticipate the court’s
means of achieving that result.
  We are therefore satisfied that the Bankruptcy Court
acted within its power in conferring derivative standing
upon the Committee. As further evidence that its decision
was provident, however, we observe that there is a lengthy
history of bankruptcy courts conferring derivative standing
in analogous situations.

                   V. Pre-Code Practice
  In   Hartford    Underwriters,   Hartford    urged     that
administrative claimants have a right to bring direct actions
                              33


under § 506(c). As evidence of this power, it cited a string
of cases purporting to demonstrate that such actions were
common in the years before the Bankruptcy Code, and
noted the Supreme Court’s declaration that, “[w]hen
Congress amends the bankruptcy laws, it does not write ‘on
a clean slate.’ ” Dewsnup v. Timm, 502 U.S. 410, 419
(1992). See Cohen v. De La Cruz, 523 U.S. 213, 221 (1998)
(“We [ ] will not read the Bankruptcy Code to erode past
bankruptcy practice absent a clear indication that Congress
intended such a departure.”) (citations omitted). See also
Midlantic National Bank v. New Jersey Department of
Environmental Protection, 474 U.S. 494 (1986) (relying on
clear pre-Code practice). After surveying Hartford’s cases,
however, the Court concluded that:
    It is questionable whether these precedents establish a
    bankruptcy practice sufficiently widespread and well
    recognized to justify the conclusion of implicit adoption
    by the Code. We have no confidence that the allowance
    of recovery from collateral by nontrustees is the type of
    rule that . . . Congress was aware of when enacting the
    Code.
Hartford Underwriters, 530 U.S. at 9 (quoting Ron Pair
Enterprises, Inc., 489 U.S. at 246). It also explained that, at
all events, the text of § 506(c) was so clear as to “leave[ ] no
room for clarification by pre-Code practice.” Id. at 10.
   Compared to the evidence offered in Hartford
Underwriters, the pre-Code tradition of allowing courts to
confer derivative standing upon creditors is compelling.
Indeed, it is precisely the sort of practice of which Congress
would have been aware when drafting the Code. Of course,
as was true in Hartford Underwriters, even the most
compelling pre-Code practice cannot overcome clear text,
but we do not look to it for that purpose — as explained
supra, we believe that the most natural reading of the Code
itself is that it allows bankruptcy courts equitably to confer
derivative standing on creditors in this situation. While that
favorable text is alone sufficient, we believe that it is
instructive to explore the prevalence of derivative standing
in pre-Code years, for it confirms that the Bankruptcy
Court’s decision was not only proper, but also prudent.
                                   34


  The concept of derivative standing was first applied in the
bankruptcy context in the case of Chatfield v. O’Dwyer, 101
Fed. 797 (8th Cir. 1900), where the Eighth Circuit
explained:
     [W]e recognize the right of a creditor to apply to the
     bankrupt[cy] court for an order permitting him to
     prosecute an appeal in the name of the trustee, when
     he has called upon the trustee to take an appeal from
     the allowance of a claim against the bankrupt’s estate,
     and the latter has declined to appeal. As the trustee is
     an officer of the bankrupt[cy] court, and subject to its
     orders, that court has an undoubted power either to
     direct the trustee to appeal when it entertains doubts
     of the verity of its judgment, or to make an order
     permitting a creditor who so desires to appeal from the
     allowance in the name of the trustee when the latter
     declines to appeal.
Id. at 800. In 1915, the Sixth Circuit recognized a trustee’s
power to confer derivative standing upon creditors, see In re
Stearns Salt & Lumber Co., 225 Fed. 1, 3 (6th Cir. 1915),
and in 1931, the Second Circuit recognized the bankruptcy
court’s power to do so. See In re Eureka Upholstering Co.,
48 F.2d 95 (2d Cir. 1931). As Judge Hand explained:
     The receiver is responsible for the collection of the
     assets . . . and he alone can authorize any charges
     against them. If any creditor, petitioning or other,
     learns facts which lead him to suppose that property
     has been concealed, he may, and indeed he should,
     advise the receiver, and if the receiver prove slack, he
     may apply to the referee [the bankruptcy judge] to stir
     him to action. The referee or the [district] judge may
     then authorize the creditor to proceed, and he will be
     entitled to his reward under [§ 64], but not otherwise.
Id. at 96. Cases adhering to this view are legion, and we set
forth further examples in the margin.7

7. See Ohio Valley Bank Co. v. Mack, 163 Fed. 155, 156 (6th Cir. 1906)
(“[W]hen the trustee refuses to appeal . . . the better practice would be
to order the trustee to appeal or to allow the dissatisfied creditor to
appeal in his name.”); In re Roadarmour, 177 Fed. 379, 381 (6th Cir.
                                    35


   We also place great weight on the fact that the 1978
version of the authoritative Collier on Bankruptcy, in
summarizing practice under the pre-Code Bankruptcy Act,
references in six different volumes creditors’ ability to
obtain court permission to pursue actions on behalf of the
estate. See 4B Collier on Bankruptcy (14th ed. 1978)
¶ 70.92 (“If the creditors then believe that a suit or other
proper proceeding should be commenced for avoidance or
recovery, they have the right to petition the bankruptcy
court wherein the proceedings are pending for an order
compelling the trustee to act, or for leave to prosecute the
suit in the name of the trustee and on behalf of the
estate.”); 3 Collier on Bankruptcy (14th ed. 1978) ¶ 60.57[2]
(“The right of creditors to maintain an action for the

1910) (“[W]here the trustee in bankruptcy refuses to appeal . . such
court may, in its discretion, allow an appeal to be taken by creditors.”);
In re Patterson-MacDonald Shipbuilding Co., 288 Fed. 546, 548 (9th Cir.
1923) (same); In re Flanders, 32 F.2d 654, 655 (6th Cir. 1929) (same);
Fred Reuping Leather Co. v. Fort Greene National Bank of Brooklyn, 102
F.2d 372, 373 (3d Cir. 1939) (same); Gochenour v. Cleveland Terminals
Bldg. Co., 118 F.2d 89, 95 (6th Cir. 1941) (if the court deems proper, it
can give creditors the right to bring suit in the name of the debtor);
Rooke v. Reliable, 195 F.2d 667, 668 (4th Cir. 1952) (noting the well-
established rule that a general creditor has no right to contest another
creditor’s claim or to appeal from the refusal of the court to disallow it
unless, upon application, the trustee has refused to do so and the
district court has authorized the creditor to proceed in the trustee’s
name); Dallas Cabana, Inc. v. Hyatt Corp., 441 F.2d 865, 868 (5th Cir.
1971) (if the trustee or debtor-in-possession refuses to bring an action,
creditors have the right to ask leave of the court to prosecute the action
for and in the name of the trustee or debtor-in-possession); Casey v.
Baker, 212 F. 247, 254 (N.D.N.Y. 1914) (same); In re Cook’s Motors, Inc.,
52 F. Supp. 1007, 1009 (D. Mass. 1943) (allowing recovery of expenses
for any party that “acts in the place of the trustee in bankruptcy and not
merely for his individual interest”), rev’d on other grounds, 142 F.2d 369
(1st Cir. 1944) (granting a creditor compensation under Section 64(a)(1)
for justifiably and successfully acting in the place of the trustee in
bankruptcy and for the benefit of the estate); In re Macloskey, 66 F.
Supp. 610, 612 (D.N.J. 1946) (after the trustee declines to bring suit, the
court can compel the trustee to proceed or allow the creditor to sue if the
suit is maintained in the name of the trustee and by the order of the
court).
                              36


recovery of a preference prior to the appointment of a
trustee is impliedly recognized in § 64a(1) of the Act.”); 4
Collier on Bankruptcy (14th ed. 1978) ¶ 67.48[2] (“If the
creditor is permitted to act in the name of the trustee, it
will be noted that the trustee, in whom the right . . . vests
under the Act, will be plaintiff . . . and any recovery would
inure to the estate. In the case of recovery this would be a
proper situation for the application of § 64a(1).”); 2A Collier
on Bankruptcy (14th ed. 1978) ¶ 47.03 (“If the trustee fails
to do his duty, any interested creditor may make demand
on him for appropriate action, and if he fails to act
promptly, the creditor may, with permission of the court,
act on behalf of the estate and in the name of the trustee.”);
3A Collier on Bankruptcy (14th ed. 1978) ¶ 64.104 (“After
appointment of a trustee, a condition upon the creditor’s
right to sue and receive reimbursement therefor is an
application to him or to the court. Until the trustee’s
appointment, however, and in the absence of a receiver —
or if the trustee has refused or is unable to act — this
provision entitles creditors to initiate proceedings without
any condition precedent.”); 13 Collier on Bankruptcy (14th
ed. 1978) ¶ 610.09 (“Creditors may ask the court to compel
the trustee to act, or for leave to prosecute the action in the
trustee’s name.”). Collier’s view is persuasive on such
matters, for the Supreme Court has itself cited to it as
evidence that a particular practice was “widely accepted”
under the Bankruptcy Act. See Kelly, 479 U.S. at 46
(determining that criminal penalties under the Act were
non-dischargeable).
   Amicus Professor Keith Sharfman submits, however, that
later pre-Code caselaw rejected derivative standing for
creditors. For example, in Klebanow v. New York Produce
Exchange, the court held that limited partners of a
bankruptcy debtor are more like shareholders, who may
maintain derivative suits, than like “mere creditors,” who
may not sue derivatively. 344 F.2d 294, 297 (2d Cir. 1965).
Given the dictum in that case, Professor Sharfman
contends that “it would be inaccurate to suggest that the
Bankruptcy Code was enacted in an environment where
derivative standing was a well-established norm.”
(Sharfman Brief at 9.) Interestingly, however, in 1985, the
Second Circuit in In re STN Enterprises cited pre-Code
                             37


practice in recognizing the qualified right of creditors’
committees to initiate avoidance suits, with the approval of
the bankruptcy court, when the trustee or debtor-in-
possession unjustifiably failed to bring suit to avoid a
transfer. In re STN Enterprises, 779 F.2d at 904. See also
Mediators, Inc. v. Manney (In re The Mediators, Inc.), 105
F.3d 822 (2d Cir. 1997). If the Second Circuit meant what
it said in dictum in Klebanow, it changed its mind
thereafter.
  At all events, complete doctrinal uniformity in caselaw is
hardly to be expected where powers of equity are
concerned. Especially given Collier’s sense of the law, we
are satisfied that the overwhelming balance of pre-Code
opinion supports courts’ power to confer derivative standing
upon creditors. See Midlantic Nat’l Bank, 474 U.S. at 500-
01 (finding that three cases constituted “clear” pre-Code
practice.) The historical record here is far more compelling
than it was in Hartford Underwriters, a relatively easy case
in which, at most, the cases supporting Hartford’s ability to
sue under § 506(c) slightly outnumbered those rejecting
that ability. Therefore, to the extent that we do “not read
the Bankruptcy Code to erode past bankruptcy practice
absent a clear indication that Congress intended such a
departure,” Cohen, 523 U.S. at 221 (1998), we believe a
presumption exists in favor of courts’ power to confer
derivative standing in this instance.
  Our decision today, however, does not depend on this
presumption, for the Code itself anticipates the existence of
derivative standing. We believe that the historical
acceptance of derivative standing is most valuable for the
accumulated experience it evidences, i.e., that derivative
standing is a prudent way for bankruptcy courts to remedy
lapses in a trustee’s execution of its fiduciary duty. The
Bankruptcy Court’s decision in this case is in perfect
harmony with that received wisdom.

       VI. Does Derivative Standing for Creditors’
        Committees Advance Congress’s Goals?
 Lincolnshire submits that the Bankruptcy Code provides
many explicit remedies for situations where, as here, a
                               38


debtor unreasonably refuses to pursue an action on behalf
of the estate. Its implication is that, by providing
bankruptcy courts with a range of remedies, Congress
intended for that range to be comprehensive, and it notes
that it is not for courts to substitute their policy judgment
for Congress’s. See Hartford Underwriters, 530 U.S. at 13-
14 (“[W]e do not sit to assess the relative merits of different
approaches to various bankruptcy problems. . . . Achieving
a better policy outcome — if what petitioner urges is that —
is a task for Congress, not the courts.”). We agree, at least
insofar as policy rationales cannot override contrary text.
But as explained supra, there is no text to override because
the Code itself anticipates derivative standing.
   The critical question is thus whether bankruptcy courts’
equitable powers are sufficient to allow them to confer the
derivative standing that the Code anticipates. For the
reasons set forth above, we believe that they are. Indeed,
the very fact that equitable powers are at issue renders
public policy concerns more important than they were in
Hartford Underwriters, for as the Supreme Court has said,
“there is inherent in the Courts of Equity a jurisdiction to
. . . give effect to the policy of the legislature.” Mitchell, 361
U.S. at 292 (emphasis added). See also 11 U.S.C. § 105(a)
(empowering a bankruptcy court to “issue any order,
process, or judgment that is necessary or appropriate to
carry out the provisions of this title”). Put another way,
although we concluded above that bankruptcy courts have
equitable power to confer derivative standing upon
creditors’ committees to avoid fraudulent transfers in this
situation, it is important to support that conclusion by
assessing the public policy concerns underpinning Chapter
11.
  Despite the existence of other potential remedies, we are
satisfied that derivative standing in this instance achieves
Congress’s policy goals. We will proceed first by exploring
those goals, and then by assessing the adequacy of the
other remedies Lincolnshire identifies.
A. The Salutary Effects of Derivative Standing for
   Creditors’ Committees
  Before bankruptcy, a debtor’s management and its most
powerful creditors typically try to “work out” the debtor’s
                             39


financial distress. In this process, managers frequently
experience pressure to take extreme measures to protect
the company. (Brief of Amicus Law Professors at 9.) They
may make extraordinary concessions to providers of critical
services, such as granting new liens on unencumbered
property, agreeing to an excessive rate of interest,
committing to lavish retention bonuses, or doing virtually
anything else to avoiding filing for bankruptcy. See, e.g.,
Eduardo Porter & Mitchell Pacelle, Judge Increases
Severance Pay to Former Enron Employees, Wall St. J., Aug.
29, 2002, at A3 (discussing multi-million dollar retention
bonuses paid by Enron insiders before bankruptcy).
Whether or not these radical actions are ultimately
successful, they often reduce the assets available to the
debtor’s creditors.
   The Bankruptcy Code’s avoidance powers are intended,
inter alia, to deter this kind of managerial overreaching and
to encourage creditors to allow a debtor a measure of
breathing room. See H.R. Rep. No. 95-595, at 177 (1977)
(“By permitting the trustee to avoid prebankruptcy transfers
that occur within a short period before bankruptcy,
creditors are discouraged from racing to the courthouse to
dismember the debtor during [its] slide into bankruptcy.”).
Fraudulent avoidance actions, such as those provided for in
§ 544(b), are intended to afford unsecured creditors peace
of mind, for those creditors are usually the principal victims
of managerial misfeasance.
   Although fraudulent transfers are of concern in many
chapters of the Bankruptcy Code, including in Chapter 7
liquidations, they present a particularly vexing problem in
reorganizations conducted under Chapter 11. The premise
of a reorganization is to ensure that the debtor emerges
from bankruptcy as a viable concern. This explains why
trustees are a fixture in Chapter 7 liquidations, but they
are exceptional in Chapter 11 — it is thought that a
debtor’s existing management will be more familiar with the
company than would be a court-appointed trustee, and that
it would therefore be better able to guide the debtor back
into solvency. See Sharon Steel Corp., 871 F.2d at 1226 (“It
is settled that appointment of a trustee should be the
exception, rather than the rule.”); 7 Collier on Bankruptcy
                              40


¶ 1104.02[1] (15th rev. ed. 1998) (noting that appointment
of a trustee in a Chapter 11 case is an “extraordinary”
remedy). In Chapter 11 cases where no trustee is
appointed, § 1107(a) provides that the debtor-in-possession,
i.e., the debtor’s management, enjoys the powers that
would otherwise vest in the bankruptcy trustee. Along with
those powers, of course, comes the trustee’s fiduciary duty
to maximize the value of the bankruptcy estate.
   This situation immediately gives rise to the proverbial
problem of the fox guarding the henhouse. If no trustee is
appointed, the debtor — really, the debtor’s management —
bears a fiduciary duty to avoid fraudulent transfers that it
itself made. One suspects that if managers can devise any
opportunity to avoid bringing a claim that would amount to
reputational self-immolation, they will seize it. See, e.g.,
Louisiana World Exposition v. Fed. Ins. Co., 858 F.2d 233
(5th Cir. 1988). For that reason, courts and commentators
have acknowledged that the debtor-in-possession “often
acts under the influence of conflicts of interest.” Canadian
Pa. Forest Prod. Ltd. v. J.D. Irving, Ltd. (In re Gibson Group,
Inc.), 66 F.3d 1436, 1441 (6th Cir. 1995). These conflicts of
interest can arise even in situations where there is no
concern that a debtor’s management is trying to save its
own skin. For example, a debtor may be unwilling to
pursue claims against individuals or businesses, such as
critical suppliers, with whom it has an ongoing relationship
that it fears damaging. Id. at 1439. Finally, even if a
bankrupt debtor is willing to bring an avoidance action, it
might be too financially weakened to advocate vigorously for
itself. In any of these situations, the real losers are the
unsecured creditors whose interests avoidance actions are
designed to protect.
  The possibility of a derivative suit by a creditors’
committee provides a critical safeguard against lax pursuit
of avoidance actions. Amicus Law Professors explain that
parties to bankruptcy workouts are typically sophisticated,
and that they understand that their actions will likely be
scrutinized after the fact. (Law Professors’ Brief at 10.) They
also understand that, even though a debtor’s management
may be reluctant to pursue an avoidance action, a
creditors’ committee will not be so hesitant. Therefore, the
                                    41


mere threat of a creditors’ committee suit is often a potent
deterrent to overreaching by creditors and insiders. See In
re W. Pac. Airlines, Inc., 219 B.R. 575, 577-78 (Bankr. D.
Colo. 1998) (discussing a creditors’ committee’s “watchdog”
role). This deterrent effect remains important even after
commencement of the bankruptcy case itself.8
B. Potential Drawbacks of                Derivative      Standing       for
   Creditors’ Committees
  1. Might derivative suits dissipate the value of the
     estate?
  Despite these clear benefits stemming from derivative
standing, amicus Professor Sharfman identifies reasons

8. Large corporate debtors routinely seek so-called “first-day” orders, in
which they ask the bankruptcy court to approve such urgent matters as
key-employee retention plans, the payment of pre-petition claims of
critical vendors, and, most important, going-forward financing for the
case. (Law Professors’ Brief at 11.) The parties affected by these orders
(e.g., the key employees, critical vendors and lenders) often demand that
the debtor waive other claims that it might have against them, such as
avoidance actions. Post-petition financing orders in particular can
present difficult problems for bankruptcy courts because they are
extremely complex, often including provisions that cross-collateralize or
“white wash” prepetition security interests. See David Kurtz & Rena
Samole, Bankruptcy Law & Practice Update: New Developments in an
Uncertain Economy: A Satellite Program, First Day Orders, at 2 (PLI
Commercial Law Practice Course Handbook Series No. A0-00, 2001).
Similarly, major vendors will often demand that the debtor release
preference or comparable claims as the quid pro quo for doing business
with the debtor.
   A court facing motions for first-day orders has a difficult choice. If it
disapproves of the order, it could simply refuse to issue it on the theory
that the parties would renegotiate and eliminate any offending
provisions. Alternatively, it could table the motion and explore the
claim’s underlying merits. But either choice is problematic, for first-day
orders are by their nature extremely urgent — without an order
approving financing for critical vendors, for example, the debtor might
collapse before reorganization can occur. The possibility of a derivative
suit by a creditors’ committee serves Congress’s goals when, by granting
fist-day orders, bankruptcy courts nevertheless reserve to the creditors’
committees the right to investigate and pursue claims that would
otherwise be released in those orders. (Law Professors’ Brief at 13.).
                               42


why it might be harmful from a policy perspective. He first
argues that, although the purpose of derivative suits is
presumably to maximize the value of the estate, academic
research has shown that such suits frequently result in
awards only large enough to pay the litigants’ legal bills.
See Roberta Romano, The Shareholder Suit: Litigation
Without Foundation?, 7 Journal of Law, Economics and
Organization 55 (1991); Jonathan R. Macey & Geoffrey P.
Miller, The Plantiffs’ Attorney’s Role in Class Action and
Derivative      Litigation:     Economic      Analysis        and
Recommendations for Reform, 58 U. Chi. L. Rev. 1 (1991).
Sharfman submits that creditors’ derivative suits are even
less likely to add value than are shareholders’ derivative
suits, for the possibility of setting aside transfers as
fraudulent would make it riskier for financially distressed
firms to persuade potential lenders and suppliers to do
business. (Sharfman Brief at 14.) The Supreme Court
recognized this concern in Hartford Underwriters, where it
stated that “[t]he possibility of being targeted . . . by various
administrative claimants could make secured creditors less
willing to provide postpetition financing.” 530 U.S. at 13.
  We are untroubled by this argument. To be sure, there
are situations where derivative suits recover only enough to
pay the lawyers, but that concern is lessened by the need
to obtain bankruptcy court approval before pursuing an
action. There is no inherent reason why a debtor would be
able to prosecute an avoidance claim more cheaply than a
creditors’ committee could, so there is no reason why a
creditor suing derivatively would dissipate more value than
would a debtor suing directly. Likewise, although the
possibility of an avoidance action might trouble a
prospective supplier or lender, that is an argument not
against derivative standing, but against avoidance actions
generally. Congress, however, has clearly decided that such
actions are valuable to the Chapter 11 process, and we will
not second-guess that judgment. The concern that
derivative suits might be “value-dissipating” is adequately
served by affording a debtor the deference normally
accorded pursuant to the business judgment rule. When a
debtor’s action is beyond the scope of that deference,
however, Congress’s intent is best served by ensuring that
an action is filed, even if by a creditors’ committee. At all
                              43


events, the Bankruptcy Court in this case concluded that
the estate ought to have brought the avoidance claim in
question.
  2. Might bankruptcy courts be unable to identify
     meritorious claims?
  Professor Sharfman also takes issue with the idea that a
bankruptcy court can serve as a competent gatekeeper for
the purpose of deciding when to authorize derivative
standing. He submits that the idea that “judges in
bankruptcy cases will permit only value enhancing
derivative litigation to go forward (rather than all litigation
that is merely colorable) is more wishful thinking than
serious argument. It is often hard to tell at the outset when
permission to prosecute derivative litigation is sought
whether a claim is meritorious, and judges understandably
can make mistakes.” (Sharfman Brief at 15) (citing Frank
H. Easterbrook & Daniel R. Fischel, The Economic Structure
of Corporate Law 102 (1991)). From this observation, he
concludes that “creditors could well recover more in the
aggregate if creditor derivative suits were impermissible
across the board.” (Id. at 16.)
  It is doubtless true that judges, like trustees or debtors,
sometimes lack sufficient information to determine ex ante
whether a claim is value-enhancing or merely colorable.
But it does not follow that creditors would likely recover
more if derivative suits were impermissible. First, this
assumes that the debtor-in-possession would be better able
to identify valuable claims than a bankruptcy court would
be. There is no reason this should be true, for, as discussed
above, conflicts of interest can often cloud debtors’
judgment — it is difficult objectively to determine whether
a potential action is meritorious when one would be a
defendant in that action.
  Second, this argument assumes that creditors’
committees are rather unsophisticated, for it predicts that
the estate, and hence its creditors, would be better off if no
avoidance actions took place. If that were true, presumably
creditors’ committees would know it, and would not seek to
bring the sort of action at issue today. Third, this critique
overlooks the fact that the choice at hand is not between
                              44


derivative actions and no actions. Instead, if a bankruptcy
court cannot authorize a derivative suit when it concludes
that a debtor is unreasonably refusing to pursue an action,
it will likely take the alternative step of ordering the debtor
itself to pursue that action. That step is unlikely to yield a
vigorous prosecution of the claim, yet it would incur all of
the costs of a derivative suit.
   Most fundamentally, however, the problem with the
“courts cannot identify meritorious claims” critique is that
it is one of futility. The proposition that a bankruptcy court
cannot reliably determine when a debtor is not maximizing
value is, at bottom, an argument that bankruptcy courts
are not capable of doing many of the things we depend on
them to do. They are, for example, instrumental in
approving the bankruptcy plan itself and determining
whether to appoint an examiner or trustee, and they are
frequently called upon to weigh the merits of proposed first-
day orders. It seems to us that we have no choice but to
presume the competency of bankruptcy courts throughout
the process, and we are therefore unwilling to place much
stock in the claim that they are unable to determine when
a debtor is unreasonably refusing to pursue an avoidance
action.
  3. Might derivative suits consume judicial resources?
   Lastly,   amicus     Professor   Sharfman     warns    that
determining whether a derivative suit should be maintained
and, if so, who should maintain it, takes time and effort on
the part of the court. The Court in Hartford Underwriters
was concerned about this cost, observing that “the
possibility of multiple [ ] claimants” created by “[a]llowing
recovery to be sought at the behest of parties other than
the trustee could [ ] impair the ability of the bankruptcy
court to coordinate proceedings, as well as the trustee to
manage the estate.” 530 U.S. at 12-13. Professor Sharfman
points out that in the case at bar, the issue of whether the
Committee could pursue a derivative claim consumed
significant judicial time and effort that would not have been
necessary if creditors lacked derivative standing. We
disagree. Rather, we believe that the cost that Sharfman
laments arises from uncertainty regarding the propriety of
derivative suits, a matter resolved by this appeal. If
                             45


derivative standing is unambiguously permissible, it is not
unduly burdensome to determine whether any particular
creditor or committee should have that standing.
  In general, although we agree that derivative standing
does not come without costs, we are satisfied that on the
whole it is an immensely valuable tool for bankruptcy
courts and creditors alike. It helps to deter fraudulent
transfers in the first instance, and it provides courts with
a viable remedy when those transfers nonetheless occur.
C. Possible Substitutes for Derivative Standing for
   Creditors’ Committees
  Lincolnshire does not deny that derivative standing for
creditors’ committees is potentially beneficial, but it
contends that such standing is not as critical as the
Committee suggests because bankruptcy courts, and
committees themselves, have many other remedies
available. We explore these in turn.
  1. Appointment of a bankruptcy trustee
   Lincolnshire first argues that, although the usual
Chapter 11 case proceeds without a bankruptcy trustee, a
creditors’ committee can move to appoint one pursuant to
§ 1104. That provision allows any “party in interest”
(including a creditors’ committee) to request appointment of
a trustee “for cause,” or if the appointment would be “in the
interests of creditors.” 11 U.S.C. § 1104(a). “Cause” to
appoint a trustee may include “fraud, dishonesty,
incompetence, or gross mismanagement . . . either before or
after commencement of the case.” Id. § 1104(a)(1).
Lincolnshire posits that a trustee’s independent nature
would allow it to pursue avoidance claims without the
conflicts of interest that can affect debtors-in-possession.
  Amici Law Professors aptly respond that disallowing
derivative suits and forcing creditors’ committees to move to
appoint trustees would amount to “replac[ing] the scalpel of
derivative suit with a chainsaw.” (Law Professors’ Brief at
13.) Appointing a trustee in a Chapter 11 case is an
“extraordinary” remedy, 7 Collier on Bankruptcy ¶ 11402[1]
(15th rev. ed. 1998), and there is a corresponding “strong
presumption” that the debtor should be permitted to
                                    46


remain in possession. In re Marvel Entertainment Group,
Inc., 140 F.3d 463, 471 (3d Cir. 1991). The problem is that
appointing a trustee amounts to replacing much of a
debtor’s high-level management, and that creates immense
costs in two ways. First, there is a statutory fee (which can
be substantial) to which trustees are entitled for their
services. See 11 U.S.C. §§ 326(a) (setting forth fee
schedule), 330(a) (setting forth trustee’s right to
compensation); cf. 11 U.S.C. § 1107(a) (providing that
debtors-in-possession are not entitled to statutory trustee’s
fees).9 More important, however, is the cost implicit in
replacing current management with a team that is less
familiar with the debtor specifically and its market
generally. The idea that existing management is best
positioned to rescue a debtor from bankruptcy is precisely
the reason why the appointment of a trustee is exceptional
in Chapter 11 reorganizations, but occurs immediately in
Chapter 7 liquidations. See Kenneth N. Klee & K. John
Shaffer, Creditors’ Committees Under Chapter 11 of the
Bankruptcy Code, 44 S.C. L. Rev. 995, 1045, 1049 (1993)
(observing generally that “the incremental costs” of a
trustee usually “outweigh[ ] the benefits,” and that
“maximization of value rarely lies down this path.”).
   In short, we believe that appointing a trustee is too
drastic a step to constitute a serious alternative to allowing
derivative suits by creditors’ committees. Indeed, because
much of Chapter 11 is premised on allowing current
management to remain in control of the debtor, it is
unlikely that Congress intended to force a court to displace
that management in the relatively commonplace event that
a debtor makes a questionable decision not to prosecute a
fraudulent avoidance claim.
  2. Appointment of an examiner with authority to sue
  Amicus Smurfit-Stone Corporation submits that, if
appointing a trustee is too radical an alternative, a
creditors’ committee might instead move the court to

9. Of course, even a creditors’ committee suing derivatively is entitled to
recover its costs pursuant to § 503(b)(3)(B), discussed supra. But unlike
a trustee, a creditors’ committee is not entitled to a statutory fee in
addition to those expenses.
                               47


appoint an examiner under § 1104(c). That provision states
that “a party in interest” may request the appointment of
an examiner “to conduct such an investigation of the debtor
as is appropriate,” and that the court may order an
appointment after notice and a hearing. An examiner’s
duties include investigation of the debtor, the debtor’s
business, and “any other matter relevant to the case or to
the formation of a plan. See § 1106(b). Smurfit-Stone
observes that a debtor’s management remains in place
when an examiner is appointed. Perhaps most important,
however, is the fact that an examiner has all “of the duties
of a trustee that the court orders the debtor in possession
not to perform.” 11 U.S.C. § 1106(b). At least one court has
interpreted this language to mean that an examiner may
initiate and pursue causes of action on behalf of the debtor.
See In re Carnegie International Corp., 51 B.R. 252, 256
(Bankr. S.D. Ind. 1984).
   Although this alternative is less drastic than the
appointment of a trustee, we nevertheless harbor doubts
about its ability to substitute for derivative suit. One
concern is that, like a trustee, an examiner would incur
direct costs through its fees, so to that extent this remedy
is inferior to the alternative of derivative suit by a creditors’
committee. The more serious problem, however, is that it is
less than obvious that § 1106(b) actually does permit
examiners to initiate actions on the debtor’s behalf. The full
text of that section states:
    An examiner appointed under section 1104(d) of this
    title shall perform the duties specified in paragraphs (3)
    and (4) of subsection (a) of this section, and, except to
    the extent that the court orders otherwise, any other
    duties of the trustee that the court orders the debtor in
    possession not to perform.
11 U.S.C. § 1106(b). Although this catch-all language is
expansive, it is subject to the interpretive canon ejusdem
generis, which states that “where general words follow
specific words in a statutory enumeration, the general
words are construed to embrace only objects similar to
those enumerated by the preceding specific words.” Circuit
City Stores, 532 U.S. at 114-15 (citation omitted). Sections
(3) and (4) allow the examiner to “investigate the acts,
                             48


conduct, assets, liabilities, and financial condition of the
debtor, the operation of the debtor’s business and the
desirability of the continuance of such business, and any
other [relevant] matter,” and also to “file a statement of
investigation.” 11 U.S.C. §§ 1106(a)(3)-(4). Critically, these
sections permit only investigating and reporting on that
investigation — they stop far short of authorizing examiners
to litigate based on their findings.
  Therefore, although an examiner’s proper role in Chapter
11 proceedings is hardly at issue in this case, we conclude
that § 1106(b)’s broad grant is most naturally interpreted to
authorize only acts relating directly to investigation. This
conclusion comports with Congress’s evident understanding
of the examiner’s role, for the sponsors of the Code stated:
“The investigation of the examiner is to proceed on an
independent basis from the procedure of the reorganization
under chapter 11 in order to ensure that the examiner’s
report will be expeditious and fair.” 124 Cong. Rec.
H11,103 (daily ed. Sept. 28, 1978), reprinted in 1978
U.S.C.C.A.N. 6472-73. This independent role would likely
be jeopardized by an examiner’s litigation against a debtor,
and we therefore do not believe that an examiner can serve
as a substitute for either a trustee or a creditors’ committee
for the purpose of avoiding fraudulent transfers.
  3. Moving the court to order the debtor-in-possession
     to sue
  The third option advanced is that a creditors’ committee
could move the bankruptcy court to order the debtor to file
an avoidance action. In the case at bar, the Bankruptcy
Court would no doubt have granted the Committee’s motion
to compel that action, for it made a finding of fact that the
debtor’s refusal to bring suit was unreasonable. But this
solution is not realistic — given management’s sometimes
severe conflicts of interest, a court order to file an
avoidance action would frequently amount to instructing
management to sue itself. To put it mildly, that is unlikely
to result in vigorous prosecution of the claim.
  4. Converting the bankruptcy case to Chapter 7
  The District Court observed that if the Committee could
not bring a derivative avoidance action, it might instead
                             49


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.
  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.
  5. Moving the bankruptcy court to authorize a
     committee to bring a post-confirmation avoidance
     action
   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.
                             50


  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
   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, and bankruptcy
courts’ equitable powers therefore allow them to confer
such standing upon creditors’ committees.

                      VII. Conclusion
   For the foregoing reasons, we are satisfied that
bankruptcy courts can authorize creditors’ committees to
sue derivatively to avoid fraudulent transfers for the benefit
of the estate. We will therefore reverse the District Court’s
decision denying the Committee derivative standing. We will
remit to the original Panel of this Court the issues whether:
(1) the Committee was required to identify a present
creditor in order to sustain its fraudulent transfer claims;
(2) Cybergenics had at least one unpaid creditor at the time
of the alleged fraudulent transfer; (3) the heightened
                             51


pleading standard of Fed. R. Civ. Proc. 9(b) is applicable to
the Committee’s complaint; (4) the Committee was entitled
to amend its complaint under Fed. R. Civ. Proc. 17(a); and
(5) the Committee has abandoned its claim of equitable
subordination.
                             52


FUENTES, Circuit Judge, with whom Circuit Judges
Sloviter, Alito and Smith join, dissenting:
   In this case, the majority interprets the phrase “the
trustee may,” in § 544(b)(1) of the Bankruptcy Code, to
mean that the trustee and a creditors’ committee may seek
recovery under the statute. Although the majority does not
conclude that the phrase is ambiguous or that its meaning
is in any way obscure, it has, nonetheless, broadened the
statute to add a party that Congress specifically omitted.
The majority reasons that, while no specific statutory
authority grants a creditors’ committee standing, several
Code provisions, pre-Code practice, public policy, and the
bankruptcy court’s equitable powers all combine to afford a
creditors’ committee “derivative” standing under § 544(b)(1).
I respectfully disagree. The majority’s view is inconsistent
with the plain and natural reading of § 544, is not
supported by the Code provisions it cites, is not adequately
grounded in prior practice and, perhaps more importantly,
is inconsistent with the Supreme Court’s plain meaning
analysis of the identical phrase in Hartford Underwriters.
Accordingly, I respectfully dissent.

                              I.
  The central question here is whether the Committee has
standing to seek relief under § 544(b)(1). I begin, as did the
Supreme Court in Hartford Underwriters, with the
observation that “Congress ‘says in a statute what it means
and means in a statute what it says there.’ ” 530 U.S. 1, 6
(2000) (quoting Connecticut Nat. Bank v. Germain, 503 U.S.
249, 254 (1992)). I note as well that the “analysis of any
statute, including the Bankruptcy Code, must not begin
with external sources, but with the text itself.” Bank of
America Nat. Trust and Sav. Ass’n v. 203 North LaSalle
Street Partnership, 526 U.S. 434, 459 (1999) (Thomas, J.,
concurring) (citing Germain, 503 U.S. at 253-54; Union
Bank v. Wolas, 502 U.S. 151, 154 (1991)).
  Section 544(b)(1) contains no textual ambiguity. The
statute, by its express terms, provides for specific action
and authorizes only the trustee to act. In Hartford
Underwriters, the Supreme Court recognized that, “ ‘[w]here
                                     53


a statute . . . names the parties granted [the] right to invoke
its provisions, . . . such parties only may act.’ ” 530 U.S. at
6-7 (quoting 2A N. Singer, Sutherland on Statutory
Construction § 47.23, p. 217 (5th ed.1992)). The Court also
observed that “a situation in which a statute authorizes
specific action and designates a particular party empowered
to take it is surely among the least appropriate in which to
presume nonexclusivity.” Id. at 6. That is precisely the
circumstance here. Section 544 provides for the avoidance
of “any transfer of an interest” of the debtor’s property and
it designates the trustee, and only the trustee, as the party
who may act under the statute. We should not, therefore,
presume that we have a free hand to broaden a right which
Congress has made exclusive.
  Clearly if Congress had wanted to authorize a party other
than the trustee to invoke the remedies of § 544, it could
simply have done so as it has in many other provisions of
the Bankruptcy Code.1 Since Congress has specifically

1. See, e.g., § 110(h)(3) (naming the debtor, the trustee, a creditor, or the
United States trustee); § 328(a) (naming the trustee or a committee
appointed under § 1102, i.e. creditors’ and equity security holders’
committees); § 330(a)(2) (naming the court, the United States trustee, the
United States Trustee for the District or Region, the trustee for the
estate, or any other party in interest); § 331 (naming a trustee, an
examiner, a debtor’s attorney, or any professional person employed
under §§ 327 or 1103); § 343 (naming creditors, any indenture trustee,
any trustee or examiner in the case, or the United States trustee);
§ 501(a)-(c) (naming creditors, an indenture trustee, an equity security
holder, an entity liable to the debtor’s creditor or that has secured such
creditor, the debtor, and the trustee); § 503(b)(3)(D) (naming a creditor,
an indenture trustee, an equity security holder, or a committee
representing creditors or equity security holders other than a committee
appointed under § 1102); § 707(b) (naming the court and the United
States trustee, and excluding any party in interest); §§ 727 (c)(1) and (d)
(naming the trustee, a creditor, or the United States trustee); §§ 1104(a)
& 1105 (naming a party in interest or the United States trustee);
§ 1110(b) (naming the trustee and the secured party, lessor or
conditional vendor whose rights are protected under § 1110(a)); § 1112(b)
(naming a party in interest and the United States trustee or bankruptcy
administrator); § 1121(c) (naming any party in interest, including the
debtor, the trustee, a creditors’ committee, an equity security holders’
committee, a creditor, an equity security holder, or any indenture
                                    54


authorized a creditors’ committee to act in various other
provisions of the Code, but has not done so with regard to
§ 544, we should “ ‘presume[ ] that Congress act[ed]
intentionally and purposely in the disparate . . .
exclusion.’ ” Duncan v. Walker, 533 U.S. 167, 173 (2001)
(quoting Bates v. United States, 522 U.S. 23, 29-30 (1997)).
Indeed, as the Court noted in Hartford Underwriters, “the
fact that the sole party named—the trustee—has a unique
role in bankruptcy proceedings makes it entirely plausible
that Congress would provide a power to him and not to
others.” 530 U.S. at 7.2
  As the Supreme Court stated, when the language of a
statute is plain, as it is here, “ ‘the sole function of the
courts’—at least where the disposition required by the text
is not absurd—‘is to enforce it according to its terms.’ ”
Hartford Underwriters, 530 U.S. at 6 (quoting United States
v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989)
(quoting Caminetti v. United States, 242 U.S. 470, 485
(1917)). The plain text of § 544 makes clear that only the
trustee may invoke the remedies under the statute.

                    II. Other Code Provisions
  The majority does not contend that enforcing § 544 as
written would produce an absurd result. Nevertheless, the
majority looks beyond the text of § 544 to determine
whether a creditors’ committee has “derivative” standing.
Specifically, the majority asserts that §§ 1109(b) and
1103(c)(5) of the Bankruptcy Code, paired with

trustee); § 1164 (naming the Surface Transportation Board, the
Department of Transportation, and any State or local commission having
regulatory jurisdiction over the debtor); § 1224 (naming a party in
interest, the trustee, or the United States trustee); § 1229(a) (naming the
debtor, the trustee, or the holder of an allowed unsecured claim);
§ 1307(c) (naming a party in interest or the United States trustee);
§ 1329(a) (naming the debtor, the trustee, or the holder of an allowed
unsecured claim).
2. Congress has extended the rights and powers vested in a trustee to a
debtor in possession, but has made no analogous provision for a
creditors’ committee. See 11 U.S.C. § 1107(a).
                              55


§ 503(b)(3)(B), make it “unmistakably clear that Congress
approved of creditors’ committees suing derivatively to
recover property for the benefit of the estate.” I respectfully
disagree. The majority also contends that § 544 must be
considered in light of the equitable powers of the
bankruptcy courts, pre-Code practice, and policy concerns.
I address these arguments in turn.

                     A. Section 1109(b)
   Section 1109(b) states that a “party in interest, including
the debtor, the trustee, a creditors’ committee, an equity
security holders’ committee, a creditor, an equity security
holder, or any indenture trustee, may raise and may
appear and be heard on any issue in a case under [Chapter
11].” 11 U.S.C. § 1109(b) (emphasis added). This Court has
liberally construed § 1109(b) to grant a creditors’ committee
a broad right to be heard, including among other powers,
an unconditional right to intervene in a Chapter 11
adversary proceeding that has been initiated by a trustee.
See Phar-Mor, Inc. v. Coopers & Lybrand, 22 F.3d 1228,
1232 (3d Cir. 1994); Matter of Marin Motor Oil, Inc., 689
F.2d 445, 446 (3d Cir. 1982), cert. denied, 459 U.S. 1207
(1983).
   However, this provision does not confer authority upon a
creditors’ committee to initiate an action when the trustee
or debtor-in-possession declines to bring suit. Section
1109(b) only establishes a right to be heard by way of
intervention as a party plaintiff when a proceeding has
already been brought by the statutorily authorized party.
Courts that have found authority for creditors to bring
avoidance actions under this provision have noted that “a
general right to be heard would be an empty grant unless
those who had such a right were allowed to act when those
who should act did not.” Coral Petroleum, Inc. v. Banque
Paribas-London, 797 F.2d 1351, 1363 (5th Cir. 1986)
(quoting 5 Collier on Bankruptcy ¶ 1109.02(3) (15th ed.
1986)). Yet § 544(b), read in light of Hartford Underwriters,
grants an exclusive right of action to the trustee, and a
broad “right to be heard” provision may not expand the
intent evidenced by the plain, specific language used by
Congress in § 544(b).
                              56


  Any doubt on this question is eliminated by the Supreme
Court’s statement in Hartford Underwriters, albeit in dicta,
indicating that the Court would not read § 1109(b) to allow
a non-trustee to bring suit under a provision stating only
that “the trustee may.” After acknowledging that § 1109(b)
was “by its terms inapplicable” in Hartford Underwriters
because the case arose under Chapter 7 rather than
Chapter 11, the Court stated, “[i]n any event, we do not
read § 1109(b)’s general provision of a right to be heard as
broadly allowing a creditor to pursue substantive remedies
that other Code provisions make available only to specific
parties.” 530 U.S. at 8-9 (citing 7 L. King, Collier on
Bankruptcy & ¶ 1109.05 (rev. 15th ed. 1999) (“In general,
section 1109 does not bestow any right to usurp the
trustee’s role as representative of the estate with respect to
the initiation of certain types of litigation that belong
exclusively to the estate.”)). This is consistent with our prior
interpretation of § 1109(b), and it strengthens my view of
the statute.

                    B. Section 1103(c)(5)
   Section 1103(c)(5) of the Bankruptcy Code provides that
“[a] committee appointed under section 1102 of this title
may perform such other services as are in the interest of
those represented.” 11 U.S.C. § 1103(c)(5). This section does
not, as the majority acknowledges, confer express authority
for the Committee “independently to initiate an adversary
proceeding, including one under § 544(b).” Nonetheless the
majority argues that such authority may be found in the
“flexible representation” role of a creditors’ committee
evidenced by § 1103(c)(5). I do not read § 1103(c)(5) to
suggest, in any way, a committee’s authority to file a
lawsuit.
   The powers granted to committees under § 1103(c)(1)-(4)
are very specific. They include the power to (1) consult with
the trustee or debtor, (2) investigate the debtor’s acts and
financial condition, (3) participate in the bankruptcy plan,
and (4) request the appointment of an examiner.
  None of these provisions support the authority to initiate
a lawsuit. Since the grants of power in (1) to (4) are quite
                             57


narrow and non-adversarial, the catch-all power should be
similarly confined. See Federal Maritime Comm’n v. Seatrain
Line, Inc., 411 U.S. 726, 734 (1973); see also Norfolk and
Western Ry. v. American Train Dispatchers Ass’n, 499 U.S.
117, 129 (1991) (“Under the principle of ejusdem generis,
when a general term follows a specific one, the general term
should be understood as a reference to subjects akin to the
one with specific enumeration.”). Because Congress
authorized only limited, discrete rights of participation for
a committee in § 1103(c)(1)-(4), we should not read
§ 1103(c)(5) to grant a broad, implied power to initiate a
suit under general language regarding “other services as
are in the interest of those represented.”

                  C. Section 503(b)(3)(B)
  The majority argues that, while §§ 1109 and 1103 provide
“at best indirect evidence that Congress granted
bankruptcy courts the power to confer derivative standing”
upon creditors’ committees, a third section, 503(b)(3)(B),
provides “far more direct insight into bankruptcy courts’
powers.” I disagree on this point as well.
   Federal courts have consistently held that § 503(b)(3)(B)
does not itself confer standing. Instead, this section merely
authorizes the recovery of certain administrative expenses
incurred by “a creditor that recovers, after the court’s
approval, for the benefit of the estate any property
transferred or concealed by the debtor.” 11 U.S.C.
§ 503(b)(3)(B). Thus, this section “only authorizes recovery
of expenses to a creditor who successfully recovered
property, which is to say, a creditor who had standing in
the first place.” In re SRJ Enterprises, Inc., 151 B.R. 189,
193 n.1 (Bankr. N.D. Ill. 1993). See also In re Vogel Van &
Storage, Inc., 210 B.R. 27, 32 n.4 (N.D.N.Y. 1997); Surf N
Sun Apts., Inc. v. Dempsey, 253 B.R. 490, 492 (M.D. Fla.
1999). If a creditor does not have standing to prosecute a
claim under § 503(b)(3)(B), there would seem to be even less
support for the idea that this section confers derivative
standing on a committee of creditors.
  Nevertheless, the majority argues that “the most natural
reading of § 503(b)(3)(B) is that it recognizes and rewards
                              58


monetarily the practice of permitting creditors’ committees
. . . to pursue derivative actions.” I again disagree. The
plain reading of § 503(b)(3)(B) is that it permits “a creditor,”
not a creditors’ committee, to recover expenses. Indeed, the
most prevalent use of § 503(b)(3)(B), based on my review of
the cases citing this provision, is to compensate individual
creditors who object to discharge and then successfully
locate and bring into the estate assets that had been
transferred or concealed by the debtor. See, e.g., In re
George, 23 B.R. 686, 687 (Bankr. S.D. Fla. 1982); In re
Antar, 122 B.R. 788, 791 (Bankr. S.D. Fla.1990); In re
Spencer, 35 B.R. 280, 281 (Bankr. N.D. Ga. 1983); In re
Rumpza, 54 B.R. 107, 108 (Bankr. D. S.D. 1985); In re
Humphrey’s Pest Control Co., Inc., 1990 WL 191859, at *2
(Bankr. E.D. Pa. Nov. 30, 1990), aff ’d, 1991 WL 136195
(E.D. Pa. July 18, 1991). See also Judy Simmons Henry,
Recovery of Creditors’ Costs from the Bankruptcy Estate:
Reasonable, Necessary, and . . . Uncertain, 18 U. ARK. LITTLE
ROCK L.J., 199, 208-19 (1996) (discussing cases in which
individual creditors have been allowed to recover their
expenses under § 503(b)(3)(B)); Gregg D. Johnson,
Recovering a Creditor’s Expenses and Legal and Accounting
Fees as an Administrative Claim, 5 BANKR. DEV. J. 463, 470-
79 (1988) (same). In light of the plain language of the
statute and its prevalent use, the majority’s view that
§ 503(b)(3)(B) rewards creditors’ committees for pursuing
derivative actions is unpersuasive.
   In fact, committees recover expenses under a different
Code provision. That is because creditors’ committees are
typically represented by an attorney and § 330 of the Code
specifically provides compensation for fees and expenses of
the committee’s representative. Sections 330(a)(1)(A) and (B)
allow for “reasonable compensation” as well as
“reimbursement for actual, necessary expenses” incurred
by the committee’s representative. 11 U.S.C. §§ 330(a)(1)(A),
(B). In sum, § 503(b)(3)(B) is not the proper provision for
awarding creditors’ committees expenses and is not an
appropriate basis from which to infer that Congress
authorized creditors’ committee derivative actions under
§ 544. See In re S.W.G. Realty Associates, II, L.P., 265 B.R.
534, 539 (E.D. Pa. 2001) (explaining that creditors’
committees’ eligibility for compensation is based on
                               59


§ 330(a), not § 503(b)(3)(B)); In re UNR Industries, Inc., 736
F.2d 1136, 1139 (7th Cir. 1984) (stating that § 330
“provides for reimbursement of expenses incurred by
professional persons hired by the Committee with court
approval . . .”).
   Neither §§ 1109(b), 1103(c)(5), or 503(b)(3)(B), taken
separately or together, provide sufficient statutory authority
for the practice invoked by the Committee and approved by
the bankruptcy court in this case. Because these Chapter
11 provisions granting significant authority to creditors’
committees do not go as far as to allow such committees to
initiate avoidance actions, no matter whether the trustee
fails to act and/or the creditors secure court approval, I
cannot distinguish Hartford Underwriters, as the majority
does, simply on the basis that Hartford Underwriters was a
Chapter 7 case while here we consider a case under
Chapter 11. The Committee urges this Court to go beyond
a “cursory reading” of § 544(b) and examine other
provisions of the Code. I have done so, and can find no
provision which grants the Committee the authority denied
to it in § 544(b).

       III. Reliance on Equity to Confer Standing
   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


        IV. Pre-Code Practice and Policy Concerns
   After completing its comprehensive textual analysis in
Hartford Underwriters, the Supreme Court concluded:
“[b]ecause we believe that by far the most natural reading
of § 506(c) is that it extends only to the trustee, petitioner’s
burden of persuading [the Court] that the section must be
read to allow its use by other parties is ‘exceptionally
heavy.’ ” 530 U.S. at 9 (citations omitted). The Supreme
Court also explained that, while pre-Code practice informs
the interpretation of statutory provisions that have
“ambiguity in the text,” pre-Code practice may not to be
used as “an extratextual supplement.” Id. at 10. Based on
these principles, the Supreme Court held that the phrase
“the trustee may” in § 506, the identical phrase found in
§ 544(b)(1) and under review here, “leaves no room for
clarification by pre-Code practice” and that “[p]re-Code
practice cannot transform § 506(c)’s reference to ‘the
trustee’ to ‘the trustee and other parties in interest.’ ” Id. at
11.4
   I do not believe that the phrase “the trustee may,” which
the Supreme Court found to be unambiguous in one
section of the Code, becomes ambiguous simply because it
appears in a different Code provision. The fact that Hartford
Underwriters involved a Chapter 7 proceeding while the
present case involves a Chapter 11 proceeding is of no
consequence because, as previously explained, no other
Code provision under either chapter renders the phrase
ambiguous or alters its meaning to allow courts to
authorize derivative suits. Because the language of § 544 is
clear, a review of pre-Code practice is totally unnecessary.
The same is true with regard to the public policy concerns
discussed by the majority. In light of the clear import of the
language of § 544 and because the result that language
commands is not absurd, there is no need to explore the
public policy implications of derivative standing.

4. Amicus Brunstad conceded at oral argument that, were we to look to
all circuit court decisions decided under the Bankruptcy Act, we would
find only four or five that recognize derivative action by creditors’
committees. A handful of cases do not suffice to meet appellants’
“exceptionally heavy” burden of persuasion.
                              63


  One final point. At oral argument, the Court and the
parties explored other possibilities which may be available
to creditors’ committees, such as: (1) seeking appointment
of a trustee or an examiner to pursue allegedly fraudulent
transfers; (2) requesting a bankruptcy court order
compelling the debtor in possession to act; or (3) seeking an
order lifting the automatic stay to allow a creditors’
committee to pursue a fraudulent transfer action in state
court on the condition that any assets recovered are
brought back to the estate. We are not called upon, in this
case, to decide the viability of these or other possibilities.
However, the many possibilities raised demonstrate that
holding that creditors’ committees lack derivative standing
to pursue § 544 actions will not necessarily result in
forfeiture of potentially valuable causes of action.

                       V. Conclusion
   The Bankruptcy Code does not authorize bankruptcy
courts to grant derivative standing to creditors’ committees
and the Supreme Court has rejected the notion that the
federal courts have any policy-making role in construing
clear statutory language. If it is a good idea for creditors’
committees to have standing, that is a matter for Congress,
not the courts, to decide. Hartford Underwriters, 530 U.S.
at 13-14. For the foregoing reasons, I would affirm the
judgment of the District Court dismissing the Committee’s
complaint for lack of standing.

A True Copy:
        Teste:

                   Clerk of the United States Court of Appeals
                               for the Third Circuit
