Florida Bankruptcy Court: Chapter 11 Creditors' Committee Has No Unconditional Right To Intervene In Adversary Proceeding

• Published date: 29 July 2022
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Law Firm: Jones Day
• Author: Mr Dan Moss and Mark Douglas

Bankruptcy and appellate courts disagree over whether a creditors' committee has the unconditional right to intervene in an adversary proceeding commenced during a chapter 11 case. The issue has created a split among the circuit courts of appeals, a majority of which have concluded that the Bankruptcy Code does provide for such a right.

The U.S. Bankruptcy Court for the Southern District of Florida recently weighed in on the controversy in Dillworth v. Diaz (In re Bal Harbour Quarzo, LLC), 638 B.R. 660 (Bankr. S.D. Fla. 2022). The court rejected the majority approach, ruling that a creditors' committee established under a chapter 11 liquidating trust did not have an unconditional right to intervene in an adversary proceeding commenced by the liquidating trustee to avoid fraudulent transfers. The court also denied the committee's request for permissive intervention, finding that the committee's interests as well as the interests of the trust's beneficiaries were adequately represented by the trustee in the litigation.

Right to Be Heard in a Chapter 11 Case

Section 1109(b) of the Bankruptcy Code provides 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 this chapter."

This provision expressly provides any party in interest, including a creditors' committee, with an unconditional right to participate in a chapter 11 "case." "Case" refers to "litigation commenced by the filing with the bankruptcy court of a petition under the appropriate chapter of Title 11." Term Loan Holder Comm. v. Ozer Grp., L.L.C. (In re Caldor Corp.), 303 F.3d 161, 167 (2d Cir. 2002) (internal quotation marks and citations omitted). By contrast, an "adversary proceeding" in bankruptcy is discrete litigation commenced during a bankruptcy case to, among other things: recover money or property (e.g., avoid fraudulent or preferential transfers); determine the validity, priority, or extent of a lien or other interest in property; revoke an order confirming a chapter 11 plan; or obtain injunctive relief. See Fed. R. Bankr. P. 7001.

Intervention

"Intervention" is a procedure that permits a nonparty to join ongoing litigation, either as a matter of right or at the discretion of the court, without the permission of the original litigants, generally because a judgment in the case may impact the rights of the nonparty intervenor. The ability to intervene in federal litigation is generally governed by Fed. R. Civ. P. 24, which is made applicable in its entirety to adversary proceedings commenced in a bankruptcy case by Fed. R. Bankr. P. 7024.

Fed. R. Civ. P. 24(a) provides that, on timely motion, the court must permit anyone to intervene who:

• is given an unconditional right to intervene by a federal statute; or
• claims an interest relating to the property or transaction that is the subject of the action, and is so situated that disposing of the action may as a practical matter impair or impede the movant's ability to protect its interest, unless existing parties...