Belatedly purchasing a claim will not bestow appellate standing, according to an erudite opinion by newly appointed Fifth Circuit Judge Don R. Willett.
The chapter 7 trustee for a corporate debtor filed an application to hire special counsel for a suit against the debtor’s owner, among other defendants. The owner opposed the retention, contending that the lawyer had a conflict because the lawyer also represented the debtor’s primary creditor.
The bankruptcy court approved the retention, ruling that the owner lacked standing to object. The owner appealed, and the district court dismissed the appeal for lack of appellate standing. So did Judge Willett in a June 20 opinion after the owner went to the Fifth Circuit.
Perhaps sensing that his appeal was doomed to dismissal for lack of standing, the owner purchased a claim while his appeal was pending in district court. The owner aimed to take advantage of Section 327(c), which provides that a lawyer is not disqualified from representing a chapter 7 trustee “solely because of such person’s employment by or representation of a creditor.”
If “there is objection by another creditor,” the subsection goes on to say that the court “shall disapprove such employment if there is an actual conflict of interest.”
According to Judge Willett, the owner contended that Section 327(c) bestows standing on a creditor who might otherwise lack a pecuniary interest to confer appellate standing.
To assert “standing because he is now a creditor . . . proves too little, too late. Now matters not. Standing is ‘determined as of the commencement of the suit.’ And [the owner] was not a creditor at the time the trustee sought to employ [the firm] or at the time the bankruptcy court held a hearing on his objection,” Judge Willett said. [Emphasis in original.]
Given that the owner purchased a claim while his appeal was pending in district court, Judge Willett held, “Timing matters, though, and [the owner] cannot belatedly claim creditor status and establish standing retroactively.”
The opinion is also noteworthy for Judge Willett’s summary of Fifth Circuit jurisprudence on appellate standing in the bankruptcy context. However, we recommend reading the six-page opinion for his delightful use of the English language. Here are some examples:
“In bankruptcy litigation, the mishmash of multiple parties and multiple claims can render things labyrinthine, to say the least. To dissuade umpteen appeals . . . .”
“Because the order does not reach [the owner’s] wallet, he cannot reach this court.”
“Allowing each and every party to appeal each and every order would clog up the system and bog down the courts. Given the specter of such sclerotic litigation, standing to appeal a bankruptcy court order is, of necessity, quite limited.”
A former justice of the Texas Supreme Court, Judge Willett was nominated to the circuit court by President Trump. He received his commission in January 2018 following a 50-47 vote in the Senate.