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The Bankruptcy StrategistLJN NewslettersNewsSections

Sigh of Relief: Derivative Actions Safe for Now

By Scott D. Cousins and Luis Salazar
September 23, 2003

Much to the relief of many in the Third Circuit, its long-awaited en banc ruling in the Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, (en banc) No. 01-3805 (May 29, 2003) disagreed with the decision of one of its panels and upheld the right of parties other than a debtor or trustee to pursue avoidance actions under the Bankruptcy Code on a derivative basis. In doing so, the court supported the well-established practice allowing these derivative actions, and eschewed a slavish plain-language interpretation of Section 544(b) in favor of a broader, multi-section reading.

The Circuit's analysis of that Section employs a 'holistic' approach that is arguably quite at odds with the now decade-old Supreme Court trend of plain-language interpretation. In fact, the circuit court took great pains to demonstrate why the plain-language holding of Hartford Underwriter Ins. Co. v. Union Planters Bank ' a case appellees and the dissent argued was controlling ' was inapplicable. With the rumored retirement of Chief Justice Rehnquist, plain-language's champion, will Cybergenics signal the end of an era, or merely a narrow exception created by necessity? Or, if appealed to the Supreme Court, will it offer a final, conclusive opportunity to establish plain language as the sole interpretive mechanism for the Code?

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