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Abstract

On September 20, 2002, the U.S. Court of Appeals for the Third Circuit issued a panel opinion concluding that a court may not authorize a creditors' committee to commence an avoidance action in the trustee's name, on behalf of a bankruptcy estate. The decision shocked the bankruptcy bar and raised such a stir that many commentators raised it to the status of one of the “top cases of the year.” Furthermore, within two months, the Second Circuit came down with a squarely contrary decision, reaffirming the validity of the practice within the Second Circuit and failing to even acknowledge recent events in the Third Circuit. The resulting circuit split “pit[] two powerhouse bankruptcy jurisdictions against one another in a battle” of bankruptcy law, policy and statutory construction. The Third Circuit, in reaching its conclusion, adopted a “plain meaning” interpretation of the Bankruptcy Code, purporting to follow the recent directive of the Supreme Court towards strict construction of the Bankruptcy Code. The court found that the express language of the Bankruptcy Code gives the trustee, and only the trustee, the authority to bring avoidance actions on behalf of the bankruptcy estate. In contrast, the Second Circuit employed a “best interest of the estate” approach, asserting that courts have the authority to actualize the broad policies and purposes of the Bankruptcy Code. Accordingly, a court may authorize creditors to pursue avoidance actions in the trustee's name, for the benefit of the estate, when such a suit is “necessary and beneficial” to the “fair and efficient” resolution of bankruptcy proceedings. The Third Circuit panel premised Cybergenics II upon Hartford Underwriters Insurance Co. v. Union Planters Bank, issued by the Supreme Court in 2000. Hartford Underwriters espoused a “plain meaning approach” to the Bankruptcy Code, interpreting the language “the trustee may” to be an exclusive grant of power. In this case, an individual creditor had unilaterally commenced an action seeking direct compensation for services that it performed for the benefit of a bankruptcy estate. The Supreme Court foreclosed this action because the right to pursue administrative claims is specifically conferred to the trustee and to no other party; the language the trustee may did not imply that the trustee and any other party in interest may. The Court found that an exclusive grant of authority could not be implicitly extended to any party other than the grantee. In Cybergenics II, the Third Circuit applied the reasoning of Hartford Underwriters to the provisions of the Code that grant a bankruptcy trustee the power to commence adversarial proceedings, known as the trustee's “strong arm” powers. These provisions all begin with the language “the trustee may.” Accordingly, the court concluded that there is no implicit statutory authority for any other party in interest to exercise these powers. In Cybergenics III, the Third Circuit sitting en banc, ultimately determined that Hartford Underwriters should be narrowly construed, appropriately considered in circumstances where a nontrustee tries “unilaterally to circumvent the Code's remedial scheme.” The appellate court found that, in contrast, Cybergenics IIIconcerned “a bankruptcy court's equitable power to craft a remedy when the Code's envisioned scheme breaks down.” The court determined that the two settings were not analogous. Therefore, the Supreme Court's construction of the language “the trustee may” was inapposite. However, Judge Fuentes, the author of Cybergenics II and the Cybergenics III dissent, has argued that the Supreme Court's strict construction of language “the trustee may” in Hartford Underwriters forecloses any other interpretation of that plain statutory language irrespective of the factual setting at hand, because, “when the language of a statute 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.” The differences between Cybergenics II and III call attention to an ideological tension between two competing styles of Bankruptcy Code construction: one that allows the text to be construed in order to give effect to the broad purposes and policies of bankruptcy, as opposed to one that adheres to a strict reading of the text, giving effect to the plain meaning of the words as set forth by Congress. This Comment explores the competing approaches.

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