The Not-so-Certain Right of Intervention Under 11 U.S.C. § 1109(b)

Does an unsecured creditors’ committee have an unconditional right to intervene in an adversary proceeding related to a chapter 11 case? Courts are undecided — and just last year, the U.S. Bankruptcy Court for the Southern District of Florida widened the split.

In Dillworth v. Diaz (In re Bal Harbour Quarzo, LLC), a chapter 11 plan created a liquidating trust for the benefit of the estate’s general unsecured creditors and appointed a liquidating trustee. [1] Vested with the authority to pursue the estate’s causes of action, the liquidating trustee filed an adversary proceeding against the debtor’s former officers and directors to recover fraudulent transfers and assert other tort claims. [2]

The plan also created a post-petition unsecured creditors’ committee to represent the interests of the trust’s beneficiaries. Over two years after the adversary was filed, the creditors’ committee sought to intervene, arguing that it had an unconditional right to do so under § 1109(b) of the Bankruptcy Code. The defendants opposed, arguing that the statute provided no such right.

Section 1109(b) of the Bankruptcy Code provides that “[a] party in interest, including . . . a creditors’ committee . . . may appear and be heard on any issue in a case under this chapter.” [3] But does the phrase “in a case” include an adversary proceeding filed in a chapter 11 case, or does it mean that a party in interest may only intervene in the chapter 11 case itself and not a separately filed adversary proceeding?

That question has divided the circuit courts of appeals. One view is that § 1109(b) grants a creditors’ committee an unconditional right to intervene in adversary proceedings. These courts — which include the First, Second and Third Circuits [4] — interpret the phrase “case” broadly. They note that the word “case” is a term of art in the Bankruptcy Code that “refers to litigation commenced by the filing with the bankruptcy of a petition under the appropriate chapter of Title 11.” [5] The word “proceeding,” however, “refers to a particular dispute or matter arising within a pending case — as opposed to the case as a whole.” [6] Thus, these courts hold that the phrase “in a case” necessarily includes subsidiary adversary proceedings filed in connection with that case. [7]

Another line of cases holds the opposite view. [8] These courts emphasize that statutes and rules that confer an unconditional right to intervene — such as Federal Rule of Civil Procedure 24(a)(1) — are narrowly construed by federal courts. [9] In addition, these rules and statutes typically grant an unconditional right of intervention only to the U.S. and its agencies, and not to private parties, such as a creditors’ committee. [10] With those principles in mind, these courts hold that by including the word “case” and not “proceeding” in § 1109(b), Congress intended to exclude adversary proceedings from the statute. [11]

The bankruptcy court in Dillworth agreed with that narrow interpretation. The court also found the § 307 of the Bankruptcy Code further supported that view. Section 307 provides that “[t]he United States Trustee may raise and may appear and be heard on any issue in any case or proceeding under this title but may not file a plan pursuant to section 1121(c) of this title.” [12] In enacting that section, Congress used both “case” and “proceeding” to set out the U.S. Trustee’s rights. The Dillworth court reasoned that had Congress intended the word “case” to include the word “proceeding,” it would not have created a redundancy by including both words in § 307: “where Congress [intends] to give a party the right to raise and appear and be heard on any issue in a case or proceeding, it [knows] how to do so and in fact did so in [§] 307 . . . .” [13] By excluding “proceeding” from § 1109(b), the Dillworth court opined, Congress excluded adversary proceedings from the statute’s ambit. [14]

Dillworth widens the split among courts on a creditors’ committee’s intervention rights under § 1109(b). In doing so, the Dillworth court even departed from decisions within the Eleventh Circuit. [15] The issue, then, appears destined to be headed to the U.S. Supreme Court in the not-too-distant future.

[1] 638 B.R. 660, 664 (S.D. Fla. 2022).

[2] See Adversary Complaint to Avoid and Recover Transfers and for Tort Damages, ECF No. 1, Dillworth v. Diaz (In re Bal Harbour Quarzo, LLC), 20-01079-SMG.

[3] 11 U.S.C. § 1109(b) (emphasis added).

[4] Assured Guaranty Corp. v. Fin. Oversight & Mgmt. Bd for Puerto Rico, 872 F.3d 57 (1st Cir. 2017); Term Loan Holder Comm. v. Ozer Grp. L.L.C. (In re Caldor Corp.), 303 F.3d 161, 167 (2d Cir. 2002); Official Unsecured Creditors’ Comm. v. Michaels (In re Marin Motor Oil, Inc.), 689 F.2d 445 (3d Cir. 1982).

[5] In re Caldor Corp., 303 F.3d at 63 (internal quotations omitted).

[6] Id. (internal quotations omitted).

[7] Id.

[8] Fuel Oil Supply and Terminaling v. Gulf Oil Corp., 762 F.2d 1283 (5th Cir. 1985). See also Vermejo Park Corp. v. Kaiser Coal Corp. (In re Kaiser Steel Corp.), 998 F.2d 783, 790 (10th Cir. 2001) (agreeing with Fuel Oil Supply in dicta); Richman v. First Woman’s Bank (In re Richman), 104 F.3d 654, 659 (4th Cir. 1996) (same).

[9] Fuel Oil Supply, 762 F.2d at 1286 (citing Wright & Miller, Federal Practice and Procedure, Civil § 1906 (1972 & Supp. 1984); United States v. Allegheny-Ludlum Industries Inc., 517 F.2d 826, 842–43 (5th Cir. 1975)).

[10] Fuel Oil Supply, 762 F.2d at 1286.

[11] Id. at 1286–87.

[12] 11 U.S.C. 307 (emphasis added).

[13] Dillworth, 638 B.R. at 666.

[14] Id. at 666–67.

[15] Asbestos Settlement Trust v. Port Authority of New York and New Jersey (In re Celotex Corp.), 377 B.R. 345 (Bankr. M.D. Fla. 2006); Gleason v. Commonwealth Cont'l Health Care (In re Golden Glades Reg'l Med. Ctr. Ltd.), 147 B.R. 813 (Bankr. S.D. Fla. 1992).