In Re: Commodore International Limited and Commodore Electronics Limited, Debtors. Commodore International Limited, Debtor-In-Possession by and Through the Official Committee of Unsecured Creditors of Commodore International Limited and Commodore Electronics Limited, Commodore Electronics Limited, Debtor-In-Possession by and Through the Official Committee of Unsecured Creditors of Commodore International Limited and Commodore Electronics Limited v. Irving Gould, Mehdi R. Ali, Alexander M. Haig, Jr., Ralph D. Seligman, Burton Winberg, J. Edward Goff, Hock E. Tan, Ronald B. Alexander, and Anthony D. Ricci

Citations: 262 F.3d 96; 46 Collier Bankr. Cas. 2d 1120; 2001 U.S. App. LEXIS 17880; 38 Bankr. Ct. Dec. (CRR) 72Docket: 2000

Court: Court of Appeals for the Second Circuit; August 9, 2001; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

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The Official Committee of Unsecured Creditors of Commodore International Limited and Commodore Electronics Limited (the Creditors' Committee) appealed an October 6, 2000 judgment from the U.S. District Court for the Southern District of New York, which dismissed their lawsuit against various directors and officers of Commodore. The Second Circuit Court of Appeals affirmed the judgment. The case involves the bankruptcy of two Bahamian corporations, Commodore International Limited and Commodore Electronics Limited, which manufactured computers and related products. Bankruptcy proceedings are ongoing in both the Bahamian Court and the U.S. Bankruptcy Court in New York, with joint administration of the cases under an agreement between the Creditors' Committee and the court-appointed liquidators. The liquidators were granted the rights and responsibilities of debtors in possession, typically responsible for pursuing the corporation's legal claims to enhance the bankruptcy estate. However, in March 1997, the liquidators permitted the Creditors' Committee to pursue claims of fraud, waste, and mismanagement against the former officers and directors, which the Bankruptcy Court subsequently approved.

On April 2, 1997, the Creditors' Committee filed a lawsuit in Bankruptcy Court against the defendants. The defendants responded on June 2, 1997, with a motion to dismiss, citing forum non conveniens and international comity. Subsequently, on November 5, 1997, the Liquidators initiated a parallel lawsuit in Bahamian Court against the defendants, asserting the same claims as the Creditors' Committee. On March 11, 1998, the Bankruptcy Court directed the parties to discuss the impact of the Liquidators' suit on the Creditors' Committee's standing. Following briefs and oral arguments, the Bankruptcy Court concluded that the Liquidators' action stripped the Creditors' Committee of standing, resulting in the dismissal of the complaint. The district court affirmed this dismissal on October 4, 2000, leading to the current appeal.

The appeal raises two primary issues: First, whether a creditors' committee can sue on behalf of a debtor only if the debtor unjustifiably refuses to act, as argued by the defendants, or whether the committee can also obtain standing with the debtor's consent and bankruptcy court approval, as posited by the Creditors' Committee. Second, if a creditors' committee can gain standing with consent, can that consent be unilaterally withdrawn without court approval once litigation has commenced?

The court determined that the resolution of the first question is critical and chose not to address the second. The district court supported the defendants' view that a creditors' committee's implied right to initiate litigation arises only when the debtor unjustifiably fails to act. This interpretation relied on the precedent set in STN Enterprises, which acknowledged a qualified right for committees to initiate adversary proceedings with bankruptcy court approval under specific circumstances. However, the current court disagrees with the district court's interpretation, asserting that STN Enterprises did not preclude other bases for a creditors' committee to obtain standing.

A creditors' committee may gain standing to pursue a debtor's claims with the consent of the debtor in possession or trustee, provided the bankruptcy court determines that such action is in the best interest of the bankruptcy estate and is necessary and beneficial for the efficient resolution of the bankruptcy proceedings. This approach, aligned with the rationale of the Bankruptcy Appellate Panel in Spaulding Composites, facilitates cooperation between the debtor in possession and the creditors' committee, allowing for effective management of litigation while also granting the bankruptcy court oversight to prevent potential abuses. In the current case, the standing of the Creditors' Committee has not been established as neither the Bankruptcy Court nor the district court has evaluated the necessity and benefits of the committee's involvement. Although remand could be considered to allow for such evaluation, the existence of an ongoing suit by the Liquidators in the Bahamas has rendered the committee's action unnecessary, thereby precluding the committee from gaining standing in the New York Bankruptcy Court.

A creditors' committee can initiate lawsuits on behalf of debtors with bankruptcy court approval, either when the debtor in possession unreasonably fails to act or with the trustee's consent. However, for the latter situation, the lawsuit must be necessary and beneficial to the bankruptcy resolution. In this case, the creditors' committee lacks standing, and their lawsuit is deemed neither necessary nor beneficial given that identical litigation has already been initiated by the Liquidators in The Bahamas. Consequently, the district court's dismissal of the action is upheld. Notably, the bankruptcy case involves a Chapter 11 reorganization, while the Bahamian case pertains to liquidation, reflecting potential conflicts in policy. The Liquidators' initial consent for the creditors' committee to sue has been deemed erroneous under Bahamian law, suggesting that allowing the committee to proceed would not be advantageous for the joint bankruptcy proceedings. Each party is responsible for its own appeal costs.