Cyberginics Redux: Derivative Standing Again Under Fire

In the October 2002 edition of the Business Restructuring Review (vol. 1, no. 7), we discussed a highly controversial decision handed down by the Court of Appeals for the Third Circuit addressing the power of a bankruptcy court to authorize a creditors' committee to commence avoidance litigation on behalf of a bankruptcy estate. In In re Cybergenics ("Cybergenics I") the Third Circuit ruled that only a bankruptcy trustee (and by implication, a chapter 11 debtor-in-possession ("DIP")) may prosecute estate claims to avoid fraudulent transfers. Rejecting an extensive body of contrary authority and longstanding bankruptcy practice, the Court reasoned that a creditors' committee cannot prosecute estate avoidance actions because the provision of the Bankruptcy Code authorizing such actions — section 544(b) — expressly refers to a "trustee" and, in accordance with U.S. Supreme Court precedent, should not be interpreted to encompass a committee.