Fifth Circuit Expounds on Constitutional Standing for a Creditor to Appeal

Like the Tenth Circuit earlier this month, the Fifth Circuit ruled on January 14 that a creditor must demonstrate a likelihood of benefit to the estate before having standing to appeal. Where the Tenth Circuit dealt with prudential standing, the Fifth Circuit focused on constitutional standing, also known as Article III standing.

To file a lawsuit or to mount an appeal, the plaintiff or appellant must have both constitutional and prudential standing. Constitutional standing emanates from the Article III requirement of a case or controversy. If the appellant or plaintiff lacks constitutional standing, the court is without subject matter jurisdiction and must dismiss. The court cannot assume the existence of constitutional standing and proceed to examine the merits.

Among other things, constitutional standing requires an “injury in fact.” As the Supreme Court said in Spokeo Inc. v. Robins, 136 S. Ct. 1540, 1547 (Sup. Ct. 2016), the appellant or plaintiff must show an invasion of a legally protected right that is “concrete and particularized.” To be “particularized,” it “must affect the plaintiff in a personal and individual way.” Id. at 1458.

Just because there is constitutional standing does not mean there is also prudential standing, which has a higher threshold.

In his concurring opinion in Slovak Republic v. Loveridge (In re Eurogas Inc.), 17-4197, 2019 US App Lexis 197 (10th Cir. Jan. 4, 2019), Circuit Judge Robert E. Bacharach explained that “our requirements for [prudential] standing exceed those of Article III,” or constitutional standing. “Generally,” he said, unsecured creditors have a direct pecuniary interest in an order transferring assets and thus possess prudential standing. To read ABI’s discussion of Eurogas, click here.

The Fifth Circuit, however, dealt with constitutional standing to appeal, which is usually easy to show. But that’s not always true, as demonstrated by the January 14 nonprecedential opinion by Circuit Judge Gregg Costa.

The Fifth Circuit appeal arose from the maelstrom of litigation erupting after the bankruptcy of O.W. Bunker Group, a worldwide supplier of bunkers, the name given to fuel for ocean-going vessels. When the Danish parent failed to reorganize in Denmark, U.S. subsidiaries filed chapter 11 petitions in Connecticut and confirmed a liquidating chapter 11 plan in December 2015.

The O.W. Bunker bankruptcy led to a quartet of important circuit court opinions dealing with the ability of the physical supplier of bunkers to assert a valid U.S. maritime lien. Suffice it to say that subcontractors who were the physical suppliers of bunkers were held not to have valid maritime liens because they had not supplied fuel on order of the owner of the vessel, but rather on order of O.W. Bunker.

O.W. Bunker, however, was entitled to the maritime liens because it provided the bunkers (through third-party subcontractors) on order of the vessels’ owners. O.W. Bunker had pledged its receivables and its maritime liens to secure bank lenders owed some $700 million.

The four opinions in the courts of appeals, including the Fifth Circuit, ruled in substance that the vessel owners should pay the secured bank lenders because the physical suppliers had no maritime liens. Having no maritime liens, the physical suppliers were left with unsecured claims in bankruptcy. To read ABI’s discussions of the four circuit court opinions, click here, here, here and here.

But we digress. Let’s return to the Fifth Circuit appeal.

A subcontractor had supplied physical bunkers to a vessel but was not paid before O.W. Bunker went bankrupt. Not knowing whom to pay, the vessel owner put the price for the bunkers into the registry of the court, allowing the subcontractor and the bank lenders to fight it out.

The subcontractor sued O.W. Bunker’s bank lenders in district court, contending that its maritime lien was valid and the bank’s was not. Following recent Fifth Circuit authority, the district court ruled that the subcontractor was not entitled to a maritime lien but that the lender’s lien was valid. The subcontractor appealed.

Under Valero Marketing & Supply Co. v. M/V Almi Sun, 893 F.3d 290, 295 (5th Cir. 2018), Judge Costa ruled that the district court was correct with regard to the invalidity of the subcontractor’s maritime lien. For ABI’s discussion of Valero, click here.

The subcontractor also appealed the district court’s conclusion that the bank’s lien was valid. Ruling that the subcontractor lacked constitutional standing to appeal, Judge Costa dismissed the appeal without deciding whether the bank’s lien was valid or not.

Judge Costa explained that a plaintiff can have standing to sue yet lack standing to appeal, depending on how the trial court rules.

To have constitutional standing to appeal, Judge Costa said the subcontractor was obliged to show that “it would be better off” if the district court were wrong about the validity of the bank’s lien.

In substance, the subcontractor argued that it would benefit by invalidating the bank’s lien given its status as an unsecured creditor in the O.W. Bunker U.S. bankruptcy.

Of significance in terms of the legal issues, Judge Costa said there was “no meaningful probability” or “substantial likelihood” that the price for the bunkers would end up in the U.S. bankruptcy estate. Carefully analyzing the financial and contractual arrangements between the banks and the O.W. Bunker companies, he said there was “a good chance” that the price of the bunkers would end up in the banks’ hands even if the lien were invalid.

Because the subcontractor did not stand a realistic chance of benefitting as a creditor in the U.S. bankruptcy of O.W. Bunker, Judge Costa held that the subcontractor lacked constitutional standing to appeal, even though it had standing to bring the lawsuit originally.

Judge Costa’s opinion is nonprecedential, but it shows the standard that an appellant must satisfy to have constitutional standing. The opinion also proves the exception to the rule: Status as a creditor does not ensure the right to appeal absent a “substantial likelihood” that reversal will benefit the bankrupt estate.