A party has “standing” (the right to challenge the conduct of another in court) when that person or entity has suffered an “injury in fact.” “Derivative standing” is when a person or entity other than the harmed party steps in to assert the claim in place of the harmed party. In a case under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”), a bankruptcy court may grant derivative standing to a creditors’ committee or similar body, rather than the bankruptcy estate itself, to bring a claim on behalf of a debtor’s estate. This often occurs when a debtor or bankruptcy trustee is unwilling or unable to assert the claim itself. Courts support granting derivative standing to a creditors’ committee when doing so will generate value for the estate from litigation recoveries.
In 2000, when the Supreme Court of the United States had the opportunity to answer whether granting derivative standing to a creditors’ committee was allowable, the Court did not directly answer the question. There, the Court analyzed section 506(c) of the Bankruptcy Code and denied granting a creditor standing to surcharge collateral. According to the Court, section 506(c) should be read narrowly to apply only to the party listed in the statute, not to other interested parties. Thus, only a trustee could surcharge collateral. However, the Court added that its decision “[did] not address whether a bankruptcy court can allow other interested parties to act in the trustee's stead in pursuing recovery[,]” leaving the question of derivative standing unanswered. The Court’s dicta has led many courts to interpret the Bankruptcy Code broadly. These courts, starting with the Eighth Circuit Court of Appeals, have used a four-part test (laid out in Part I of this Memo) to analyze when to grant derivative standing to a creditors’ committee. Other courts have reasoned, consistent with the holding of Hartford, that the Bankruptcy Code should be narrowly construed to prevent an interested party from asserting standing on behalf of a debtor in possession.
This memorandum discusses the justifications accepted by an overwhelming majority of circuits for granting derivative standing in two parts. Part I lays out the requirements for a creditors’ committee seeking to assert derivative standing on a debtor in possession and a breakdown of the most contestable of those requirements. Part II examines bankruptcy courts’ usage of sections 1109(b) and 503(b)(3)(B) to support derivative standing, providing the historical and contextual foundations of these sections. Ultimately, these parts will highlight that most circuits favor granting derivative standing to increase judicial economy, efficiency, and returns for stakeholders and debtors.