A bankruptcy court’s later interpretation of an earlier order approving a sale under Section 363 is reviewed for abuse of discretion, not de novo, according to the Bankruptcy Appellate Panel for the Sixth Circuit.
For a second holding in its June 6 opinion, the BAP ruled that a creditor can have no derivative standing, thus divesting the court of jurisdiction, if the bankruptcy trustee has previously sold the claim.
The holdings may be difficult to fathom without knowing the facts. Condensed, here’s what happened.
A trustee and a creditor jointly sued the debtor and several other defendants. The suit sought denial of the debtor’s discharge and recovery of property allegedly belonging to the defendants, principally on an alter ego theory.
With the bankruptcy court’s approval, the creditor purchased all of the claims in the suit but left the trustee to pursue the discharge objection. On consent, the bankruptcy court dismissed the portion of the suit purchased by the creditor without prejudice, on the notion that the bankruptcy court lacked jurisdiction because the outcome would have no conceivable effect on the estate since all recovery would go to the creditor.
The creditor pursued the purchased claims in state court, but the state court dismissed the suit because it alleged causes of action that did not exist under state law.
After losing in state court on the purchased claims, the creditor drafted a new complaint, alleging much the same facts but this time seeking recovery under a different legal theory. The bankruptcy court signed an order approving a stipulation with the trustee granting the creditor derivative standing to pursue the new suit in bankruptcy court in the name of the trustee, although any recovery would flow to the creditor alone.
The defendants filed a motion to dismiss, contending that neither the trustee nor the creditor had standing. Interpreting its prior sale order, the bankruptcy court concluded that the new claims previously had been sold, divesting the trustee and the creditor of standing. The bankruptcy court therefore granted the dismissal motion, and the creditor appealed.
For the BAP, Bankruptcy Judge Tracey N. Wise of Lexington, Ky., upheld dismissal.
Standard of Review
Is a court’s order interpreting its own prior sale order reviewed for abuse of discretion or de novo? The standard of review depends on the nature of the order the court was interpreting, Judge Wise said.
Judge Wise cited Sixth Circuit authority for the proposition that the standard of review depends on the nature of the action undertaken by the bankruptcy court. If the bankruptcy court did not rely upon or interpret the Bankruptcy Code but interpreted the prior order and breathed life into it, the appellate court reviews interpretation of the prior order “with full deference,” applying an abuse of discretion standard to the exercise of the bankruptcy court’s equitable powers.
In the case at bar, Judge Wise said that the bankruptcy court did not construe the Bankruptcy Code when interpreting the prior sale-approval order. Review was for abuse of discretion, she said, because the bankruptcy court “was in the best position to construe the scope of assets intended to be sold.”
Judge Wise said that BAPs in other circuits have applied the same appellate standard to the review of interpretations of sale orders.
Lack of Standing
Because the new suit was based on the same facts, the bankruptcy court might have dismissed on res judicata, or claim preclusion. However, a court should establish its own jurisdiction before reaching the merits. Therefore, the bankruptcy court began by analyzing the creditor’s standing to pursue the new suit.
Although the creditor was asserting a new legal theory in the new suit, the bankruptcy judge concluded that the new claims nevertheless had been sold previously by the trustee, because the trustee retained only discharge claims.
The conclusion that the trustee had previously sold the claim was not clearly erroneous.
Since the trustee previously had sold the claims, the trustee had no standing and thus no ability to confer derivative standing on the creditor.
Since the trustee did not have standing, and because there would be no jurisdiction in bankruptcy court since there could be no effect on the estate to the extent that the claim belonged to the creditor, the bankruptcy court properly dismissed the new suit for lack of jurisdiction.
The BAP’s June 6 opinion is not to be confused with an opinion bearing the same name, handed down by the BAP on May 3. The prior opinion dealt with the same parties but a different dispute in bankruptcy court where the creditor also lost. To read ABI’s discussion of the prior case, click here.