On September 22, 2017, the First Circuit issued a decision[1] holding that the Official Committee of Unsecured Creditors (the “UCC”) appointed in the Commonwealth of Puerto Rico’s Title III debt adjustment case[2] (the “Title III Case”) has an unrestricted right to intervene in an associated adversary proceeding (the “AP”). This decision joins similar opinions by the Second Circuit[3] (permitting intervention by a term loan holder committee) and Third Circuit[4] (permitting intervention by the appointed unsecured creditors committee in that case). Although Financial Management only addressed the UCC’s right to intervene in the AP, it can be read broadly to provide other parties in interest under section 1109(b) of the Title 11 of the United States Code (the “Bankruptcy Code”)—including but not limited to indenture trustees and equity committees—the unconditional right to intervene in any adversary proceeding associated with the bankruptcy case in which they are involved, subject to two important caveats discussed below.

Background

Upon the commencement of the Title III Case on May 3, 2017, three of Puerto Rico’s bonds insurers initiated the AP to, among other things, challenge the constitutionality of certain provisions of PROMESA. Shortly after its appointment, the UCC filed a motion to intervene in the AP. In support of its intervention request, the UCC asserted that Federal Rule of Civil Procedure (“F.R.C.P.”) 24(a)(1)[5] requires courts to permit parties to intervene where a federal statute grants such party an unconditional right to intervene. The UCC argued that section 1109(b) grants such a right because it allows parties in interests, including creditor committees, a right to “appear and be heard on any issue in a case under this chapter.” The plaintiffs opposed the UCC’s request to intervene.

On August 10, 2017, District Court Judge Laura Taylor Swain entered an order denying the UCC’s intervention request.[6] The Court’s decision was based on a statement made by the First Circuit in a footnote in In re Thompson stating that “11 U.S.C. § 1109(b) . . . does not afford a right to intervene under Rule 24(a)(1), even though such ‘parties in interest’ enjoy the general right to ‘monitor’ the progress of the chapter 11 case.”[7]

Reasoning

Chief Judge Jeffrey R. Howard, writing for the First Circuit panel, agreed with the UCC and reversed the Order. The Court noted that the District Court was not bound by Thompson because it’s observation on the scope of section 1109(b) was “pure dicta.”[8] In re Thompson, arose from a chapter 7 bankruptcy case and, thus, section 1109(b) was inapplicable on its face. Judge Howard further observed that the authority supporting the Thompson footnote, In re Fuel Oil,[9] relied on other courts’ “general hesitation to find ‘unconditional statutory rights of intervention,’ as well as various statutory provisions and rules that “draw distinctions between bankruptcy ‘cases’ and the proceedings related to them.”[10] The Fuel Oil Court so ruled, despite acknowledging that the argument that section 1109(b) creates an absolute right to intervene in adversary proceedings appears strong.[11]

Instead, noting the considerable shift in the weight of authority in the thirty-two years since Fuel Oil was decided, the Judge Howard followed precedent set by the Second and Third Circuits in determining that section 1109(b) provides a statutory right to intervene under Rule 24(a)(1). Section 1109(b) provides that “a creditor’s committee . . . may raise and appear and be heard on any issue in a case under this chapter.”[12] Focusing on the language of the statute, the Court reasoned that, in the bankruptcy context the words ‘case’ and ‘proceeding’ are terms of art with specialized meanings.[13] A ‘case’ “refers to litigation ‘commenced by the filing with the bankruptcy court of a petition’ under the appropriate chapter of Title 11.”[14] A ‘proceeding’ on the other hand, refers to a “particular dispute or matter arising within a pending case—as opposed to the case as a whole.”[15] Since every issue in a case may only be adjudicated in the context of some type of proceeding, “it is apparent that the reference to . . . ‘any issue in a case’ subsumes issues in a proceeding.”[16] Given the broad language of section 1109(b), it is unlikely that Congress intended ‘case’ to be interpreted narrowly in 1109(b), excluding the constituent proceedings that comprise a ‘case.’ Further, the rights conveyed in section 1109(b) to parties in interest are not subject to any conditions and are, therefore, unconditional.

Two Caveats

The First Circuit’s grant of parties in interest an unconditional right to intervene in adversary proceedings is subject to two important caveats.

First, while a party in interest’s right to intervene is unconditional, the scope of the intervention permitted remains within the broad discretion of the trial court.[17] Judge Howard noted, “‘courts are not faced with an all-or-nothing choice between grant or denial’ of an intervention motion.”[18] Such limitations may include: denying or limiting the intervenor’s participation in discovery, not permitting intervenors to make or join dispositive motions, precluding an intervenor from settling disputes, and restricting intervention to claims raised by the original parties.[19] This permits the trial court to allow all interested parties into an action in hopes of reaching a fair solution, while preventing an expansion of the proceeding’s scope that threatens the trial court’s control over the matter.[20] Indeed, Judge Howard remanded the Committee’s intervention motion to the District Court for a determination on the scope of such intervention.[21]

Second, the standing requirement under Article III of the U.S. Constitution provides another possible limitation on a party in interest’s participation in an adversary proceeding.[22] Although Article III standing “is almost always satisfied with respect to any party in interest in a chapter 11 case,” some courts also require that “the interests of a party seeking to participate lie within the ‘zone of interests’ protected by the particular statute or legal rule implicated in the given proceeding.”[23] Judge Howard declined to address what impact, if any, Article III standing would have on a party in interest’s right to intervene because the District Court did not address it.[24]

Conclusion

In Financial Management, the First Circuit joined the Second and Third Circuits and held that the official committee of unsecured creditors may intervene in any adversary proceeding. Given that section 1109(b) also specifically includes indenture trustees (as with creditors’ committees), there is no reason the holding of this case cannot be extended to indenture trustees or even other parties. The decision can be used as a tool for committee’s and other parties in interest seeking intervention. Opponents of such intervention will be forced to focus on limiting and narrowing the scope of the participation as such decision remains within the discretion of the trial court. Further, the First Circuit left for another day the issue of whether Article III standing further limits a party’s right to intervention.