872 F.3d 57
1st Cir.2017Background
- PROMESA authorized Title III bankruptcy-like proceedings for Puerto Rico and incorporated portions of the Bankruptcy Code and Bankruptcy Rules; the Financial Oversight Board filed Title III petitions for the Commonwealth and certain instrumentalities in May 2017.
- Insurer-plaintiffs filed an adversary proceeding challenging the Commonwealth’s Fiscal Plan and a statute implementing it, seeking declaratory relief, injunctions, and a stay of plan confirmation.
- An Official Committee of Unsecured Creditors (UCC) was appointed and moved to intervene in the adversary proceeding, invoking 11 U.S.C. § 1109(b) (made applicable by PROMESA) and Fed. R. Civ. P. 24(a)(1). The UCC sought limited participation (e.g., review discovery, attend depositions, file briefs).
- The district court denied intervention, relying on dicta in Thompson (Kowal v. Malkemus) stating § 1109(b) does not afford intervention under Rule 24(a)(1), and also denied permissive intervention.
- The First Circuit reviewed de novo whether § 1109(b) supplies an “unconditional right to intervene” under Rule 24(a)(1) and whether procedural defects (Rule 24(c)) barred intervention.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 1109(b) provides an unconditional statutory right to intervene under Fed. R. Civ. P. 24(a)(1) in an adversary proceeding | § 1109(b) does not create an unconditional right to intervene in adversary proceedings; it merely allows appearance and being heard | § 1109(b) grants a broad, unconditional right for parties in interest (including creditors’ committees) to appear and be heard on any issue in a case, which subsumes adversary proceedings | Court held § 1109(b) confers an unconditional right to intervene under Rule 24(a)(1) and reversed denial of intervention |
| Whether prior precedent (Thompson and Fuel Oil) forecloses reading § 1109(b) as applying to adversary proceedings | Reliance on Thompson/Fuel Oil: § 1109(b) was read as not supplying Rule 24 intervention in adversary proceedings | Those authorities were dicta or wrongly reasoned; other circuits (Second, Third) reason from statutory text that “case” includes adversary proceedings | Court held Thompson’s footnote was dicta and adopted the Second/Third Circuit approach that § 1109(b) applies to adversary proceedings |
| Scope of intervention and permissible court limitations once intervention is allowed | Plaintiffs urged limits beyond mere appearance; noted § 1109(b) says nothing about intervention scope | UCC sought limited participation; Board supported limited appearance subject to standing and prudential limits | Court held intervention as of right is established but the district court retains broad discretion to limit scope (discovery, litigation rights, issues) |
| Whether failure to attach a pleading under Rule 24(c) defeated the UCC’s motion | Plaintiffs argued procedural noncompliance warranted denial | UCC argued interests were clear and technical noncompliance should be excused | Court excused the technical Rule 24(c) defect given circumstances but allowed district court to require a pleading if appropriate |
Key Cases Cited
- Kowal v. Malkemus (In re Thompson), 965 F.2d 1136 (1st Cir.) (discussed but characterized as dicta about § 1109(b))
- Fuel Oil Supply & Terminaling v. Gulf Oil Corp., 762 F.2d 1283 (5th Cir. 1985) (earlier decision declining to treat § 1109(b) as an absolute right to intervene in adversary proceedings)
- Term Loan Holder Comm. v. Ozer Grp. (In re Caldor Corp.), 303 F.3d 161 (2d Cir. 2002) (held § 1109(b) supplies a statutory right to intervene in adversary proceedings)
- PharMor, Inc. v. Coopers & Lybrand, 22 F.3d 1228 (3d Cir. 1994) (recognized creditors’ committee role and cited as supporting statutory intervention under § 1109(b))
- Official Unsecured Creditors’ Comm. v. Michaels (In re Marin Motor Oil, Inc.), 689 F.2d 445 (3d Cir. 1982) (interpreted § 1109(b) broadly to allow appearance and participation)
- Hartford Underwriters Ins. v. Union Planters Bank, N.A., 530 U.S. 1 (U.S. Supreme Court) (noting § 1109(b) is by its terms limited to cases under a chapter)
- United States v. City of Detroit, 712 F.3d 925 (6th Cir. 2013) (explains that intervention of right may be subject to conditions to preserve efficient conduct of proceedings)