Upholding confirmation of an “opt-out” chapter 11 plan’s nondebtor releases, a decision by a district court in Cedar Rapids, Iowa, underscores the need for an appellate court, somewhere, to decide whether the Truck Insurance decision last term in the Supreme Court extinguished the “person aggrieved” standard for appellate standing in bankruptcy cases.

A Catholic hospital sold the assets and confirmed a chapter 11 plan with two categories of nondebtor releases. In the first category, the debtor and creditors released the major players in the reorganization, such as official committees and their members, bondholder representatives and a related order of nuns.

The second category of releases ran in favor of the major players’ current and former officers, directors, affiliates, employees, agents, financial advisors and consultants. In his March 3 opinion, Chief District Judge C.J. Williams referred to the second group as the Remote Released Parties.

The plan enabled creditors to opt out of releases by checking a box on the ballot. However, the plan provided that creditors who voted in favor of the plan or who did not vote would grant the releases, including the Remote Released Parties.

The hospital’s former corporate manager had a general unsecured claim for more than $30,000. The former manager opted out and opposed confirmation, contending that the Supreme Court’s Purdue decision precluded releases in favor of the Remote Released Parties. Chief Bankruptcy Judge Thad J. Collins overruled the objection and confirmed the plan.

The former manager appealed and was denied a stay pending appeal by both Judge Collins and the magistrate judge. On appeal, the former manager only challenged the releases in favor of the Remote Released Parties.

Standing to Appeal

Together, District Judge Williams considered both the merits and the debtor’s motion to dismiss the appeal based on the former manager’s lack of appellate standing.

In bankruptcy appeals, the Eighth Circuit historically employs the “person aggrieved” standard for deciding whether the appellant has standing to appeal. To be a person aggrieved, Judge Williams said that the appellant must be “directly and adversely affected pecuniarily.” More particularly, he said that the “possibility of harm” is not enough.

Because the former manager had opted out, Judge Williams said that it never gave up its claims against the released parties. As a result, he said, “Any decision by this Court about the Third-Party Releases will not alter [the former manager’s] ability to go after claims that it never lost in the first place.”

Even so, the former manager contended that it had the right to appeal, alleging that the releases were not permissible following Harrington v. Purdue Pharma L.P., 602 U.S. 204 (2024). To read ABI’s report, click here. Responding, Judge Williams said, “The ‘person aggrieved’ standard, however, requires something more than a general objection that a plan is not confirmable.”

More particularly, Judge Williams said that “only … those parties who have been directly harmed by a bankruptcy court’s order” have appellate standing. “A general objection to a plan as unconfirmable, without showing how the party was harmed, does not meet this standard.”

On that basis, Judge Williams concluded that the former manager had no appellate standing.

Nonetheless, the former manager contended that its recovery from the liquidating trust would be greater had the debtor not released the Remote Released Parties. Judge Williams said that the former manager had not identified a single claim against Remote Released Parties that could have increased the recovery. Consequently, he held that the “abstract possibility of a claim that might increase [the former manager’s] recovery does not satisfy the person aggrieved standard.”

For a last stab at standing, the former manager argued that its status as an impaired creditor by itself conferred appellate standing.

Judge Williams responded by saying that the Eighth Circuit “does not appear to have adopted a per se rule that grants an impaired creditor standing based on its status as an impaired creditor alone because, unlike the broad right of participation reflected in bankruptcy level standing, the ‘person aggrieved’ standard is much more restrictive and does not automatically apply to an entire class.”

For lack of appellate standing, Judge Williams granted the motion to dismiss.

The Merits

To cover all bases, Judge Williams reviewed the merits in case it were later held that the former manager had appellate standing. The former manager took the position that releases in favor of the Remote Released Parties were impermissible following Purdue.

Judge Williams said that Purdue went to “great lengths” to say that the decision was narrow and that the Court was not addressing what consensual releases might be. Furthermore, he said, the Purdue plan had been stayed pending appeal, but the hospital’s plan “has been at least partially consummated.”

Even if Purdue were controlling, Judge Williams said that the releases “are permissible because they are consensual releases,” citing bankruptcy court decisions from the Southern and Northern Districts of New York.

Judge Williams closed his opinion by deciding that releasing the Remote Released Parties was permissible under the five-part test followed by courts in the Eighth Circuit as set forth in In re Master Mortgage Investment Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994). He granted the motion to dismiss the appeal and said he “would still affirm” if the former manager had standing.

Observations

With regard to standing, Judge Williams did not mention Truck Insurance Exchange v. Kaiser Gypsum Company, Inc., 602 U.S. 268 (June 6, 2024), where the Supreme Court broadly defined parties in interest who have standing to appear and be heard in chapter 11 cases under Section 1109(b). In proceedings in bankruptcy court, someone has standing who might be “potentially” affected by the reorganization. To read ABI’s report, click here.

Truck Insurance did not address appellate standing. The Court held that an insurance company had standing in bankruptcy court to challenge a chapter 11 plan even though the plan was “insurance neutral” and did not impair the insurance company’s rights as an insurer.

Nonetheless, did Truck Insurance address person aggrieved sub silentio? As a matter of constitutional law under Article III, may courts contrive prudential notions of standing to narrow the scope of who may appeal?

Remember, in Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014), the Supreme Court decried the use of “prudential standing” and more recently said that federal courts have a “virtually unflagging obligation” to exercise Article III jurisdiction. See, e.g., Colorado River Water Conservation Dist. v. U.S., 424 U.S. 800, 817 (1976); and FBI v. Fikre, 601 U.S. 234, 240 (March 19, 2024).

Needless to say, there’s good reason to narrow the scope of appellate standing, otherwise anyone associated with a chapter 11 case could appeal despite the lack of financial interest in the outcome. Is it possible that the constitutional requirement of a case or controversy becomes more narrow when ascending the appellate ladder? Would an appeal be a mere advisory opinion or theoretical conjecture if the outcome of the appeal would not affect the rights of the appellant?