Capital Cartridge, LLC v. J. Michael Issa, as Trustee of the HMT Liquidating Trust

These cases present a significant question of federal bankruptcy law that has squarely divided the lower courts: the validity and scope of the “judicially-created doctrine of derivative standing.” The Bankruptcy Code has multiple provisions authorizing “the trustee” to bring avoidance litigation to claw back funds that belong to the estate. Even though Congress explicitly granted that authority to the trustee alone, multiple courts have authorized creditors’ committees to litigate those claims in a “derivative” capacity. These courts have recognized that the Code’s text does not affirmatively authorize this practice; they have instead invoked “equitable” power to revamp the Code and redline its provisions—all to better effectuate these courts’ view of Congress’s intent. This practice has produced multiple conflicts among lower courts—including whether the doctrine exists at all, and if it does, when a creditors’ committee is allowed to invoke it. The district court below (acting in its appellate capacity) flagged the core conflict, and the same split has been identified by multiple courts and commentators nationwide. The question is substantial: it arises constantly in bankruptcy courts, implicates litigation with massive stakes, and consumes countless hours and resources as courts debate whether to authorize derivative standing— conducting extensive “cost-benefit” analyses to decide whether a party not listed in the Code is permitted to replace the single party that is. The question presented is: Under the Bankruptcy Code’s avoidance provisions, whether a creditors’ committee has “derivative standing” to bring suit on behalf of the estate, and if so, under what conditions derivative standing is permitted. (I)