The sole beneficiary of a trust lacks standing as a “party in interest” under Section 1109(b) to participate in a bankruptcy court dispute between the trust and the debtor, the Ninth Circuit held.
A man was the sole beneficiary of a trust created by his father. The trust sold property to the debtor and provided seller financing. The buyer confirmed a plan that modified the debt. A dispute later arose, resulting in a settlement between the trustees and the debtor.
In bankruptcy court, the beneficiary objected unsuccessfully to the settlement. The bankruptcy court found that the beneficiary was a party in interest, although it was a close question, the judge said.
The beneficiary appealed the approval of the settlement, but the district judge dismissed the appeal, saying the beneficiary lacked standing. The Ninth Circuit upheld dismissal on Sept. 28 in an opinion by Circuit Judge Jay S. Bybee.
For standing, a litigant must satisfy three criteria, Judge Bybee said. First, the litigant must be a party in interest under Section 1109(b). Second, the litigant must satisfy the constitutional minimum required by Article III. Third, the litigant must satisfy the federal court’s prudential standards. “Party in interest” is not defined in the Bankruptcy Code.
Because the beneficiary did not qualify under Section 1109(b), Judge Bybee did not address the other issues.
Although the Ninth Circuit has said that “party in interest” must be “construed broadly,” the appeals court previously ruled that suffering “collateral damage” does not give rise to a “legally protected interest” that confers standing. Judge Bybee adopted the Second Circuit’s 2007 Refco opinion, which denies standing to someone whose rights “are purely derivative of another party’s.” Although the beneficiary might suffer damage, the injury was derivative and therefore did not confer standing.