Standing is “an essential and unchanging part of the case-or-controversy requirement of Article III.”[1] In challenging a bankruptcy court order, the right of appellate review has historically been limited to “persons aggrieved.”[2] The Seventh Circuit stated that the “persons-aggrieved” standard is stricter than the “general Article III” standard in order to prevent protracted litigation by those not directly affected by a bankruptcy order.[3]
In In re Moran,[4] the Sixth Circuit revisited appellate-standing and persons-aggrieved standard issues when a third-party challenger contested the bankruptcy court order allowing an abandonment of stock by an estate back to its original debtor.[5] In denying the third-party challenger’s appeal, the Sixth Circuit provided clear standing guidelines for a third party seeking to challenge an abandonment order.
Judicial Standing in Bankruptcy
Initial Standing
Standing is a method of analysis used for determining who has a right to initially bring an action. [6] Whether or not a party has initial standing is based on law, not fact.[7] Each legal claim must be addressed independently and meet specific requirements in order to establish the party’s right to be in federal court.[8]
Initial standing requires the plaintiff to assert a claim that demonstrates “injury that is concrete, particularized and actual or imminent; fairly traceable to the defendant's challenged behavior; and likely to be redressed by a favorable ruling.”[9] The party must also show that it has a stake in the outcome of the suit when it is filed.[10]
In bankruptcy cases, initial standing indicates that the party bringing the claim is proper and has a stake in the claim.[11] After filing for bankruptcy, one will not have initial standing to bring a claim related to his or her property because bankruptcy releases the property interest to the trustee of the estate.[12] “Once a bankruptcy petition is filed, the debtor loses standing to pursue any cause of action that accrued prior to the filing of that petition.”[13]
In Wolfe v. Gilmore Mfg. Co., the debtor reopened her bankruptcy estate and named the trustee of her estate as plaintiff prior to bringing the claim in federal court.[14] The trustee, as the party with the property interest in the action, satisfied the initial standing requirements because it had a stake in the outcome of the suit.
Appellate Standing
Appellate standing, while not defined in the Code, is still an essential issue that must be addressed immediately on appeal.[15] As long as the relevant facts are not in dispute at the time the case is appealed, then that court can decide the standing issue.[16] The standing analysis is conducted according to a standard from § 39(c) of the Bankruptcy Act of 1898,[17] “which permitted only a ‘person aggrieved’ to appeal an order of the bankruptcy court.”[18] The persons-aggrieved doctrine in bankruptcy appeals is “more restrictive than the ‘case or controversy’ [initial] standing requirement of Article III.”[19]
To be a “person aggrieved,” an appellant must show that his or her rights or interests were “directly and adversely affected pecuniarily” by the bankruptcy court order.[20] This differs from initial standing in that the injury stemming from the court order must be a financial one.[21] “The rationale behind the ‘person aggrieved’ doctrine—‘prevent[ing] indirectly affected parties from stalling proceedings’—is ‘implicated in the context of an appeal from a district court to a court of appeals as much as in an appeal from a bankruptcy court to a district court.’”[22]
A bankruptcy court order that “directly and adversely affects pecuniarily” must diminish a party’s property, increase a party’s burden or detrimentally affect a party’s rights, which limits the number of parties with appellate standing,[23] as illustrated by the Third Circuit’s holding in In re Dykes.[24] The court decided that debtor-appellants lacked appellate standing because the bankruptcy court order modifying their chapter 13 plan did not adversely affect them pecuniarily.[25] The bankruptcy court order altered the original plan by directing the debtor-appellants to pay less money to their attorney and more to GMAC than was stated in the original plan. However, the overall amount that they had to pay did not change.[26] The debtor-appellants failed to show how this affected them directly and adversely pecuniarily because it did not diminish property, increase a burden or detrimentally affect their rights anymore than the original plan that was agreed on.[27]
Generally, third-party, unsuccessful bidders that object to a court-ordered sale of property are not considered “persons aggrieved.”[28] The Sixth Circuit held in Squire v. Scher[29] that an unsuccessful bidder of property lacked standing to challenge a bankruptcy court’s sale because he was neither within the “zone of interest” protected by the Code nor affected directly and adversely pecuniarily by the sale. After Squire, a shareholder in the SRI radio station, declared bankruptcy, his interest in SRI went to the trustee of his estate.[30] The bankruptcy court ordered a sale of SRI and Squire appealed to the district court, which dismissed his appeal.[31] The circuit court agreed with the district court’s conclusion that the debtor, Squire, was not conferred standing independent of the trustee of his estate;[32] therefore, Squire was an unsuccessful bidder.[33] “[Unsuccessful] bidders do not have standing to object to the sale of property.”[34]
Squire, as an unsuccessful bidder, lacked an “interest” in the proceeding protected by the Code because he was a third party and not a creditor with a direct, pecuniary interest in the property.[35] His failure to prove “interest” in the proceeding directly contributed to his inability to establish that he was aggrieved by the “[s]ale Order because [he] was not ‘directly and adversely affected’ pecuniarily by the order.”[36] He failed to satisfy the persons-aggrieved standard because he did not prove that the “[s]ale Order diminished [his] property rights, increased [his] burden or impaired [his] rights.”[37]
In re Moran
The debtor, Moran, filed for bankruptcy in December 2001 and discharged his debts in 2002.[38] Later, the estate’s trustee discovered that Moran failed to disclose ownership of one-third of a company known as Airpack Inc.[39] Moran, Stark and another individual each owned one-third of the shares of the corporation.[40]
After the trustee discovered the undisclosed stock, he reopened Moran’s case to determine how to dispose of the newly found assets. Creditors filed proofs of claim amounting to $20,000.[41] Stark offered to purchase the stock from the trustee for the same price, but the trustee decided to abandon the stock back to Moran, provided that Moran satisfied the creditors and paid the estate’s administrative fees.[42] Stark increased his offer beyond the price that the trustee requested from Moran, but the trustee still refused to accept his offer.[43] The trustee reasoned that it did not matter who received the money as long as the creditors and the trustee were all financially satisfied.[44]
The bankruptcy court granted the trustee’s motion permitting the estate to abandon the stock and allowing Moran to reclaim it. The court took into account the lack of objections from creditors and Moran’s willingness to satisfy all debts.[45] It did not consider Stark’s objections to the abandonment of stock because he did not have standing to make objections. [46]
Stark appealed, only to have it affirmed by the Sixth Circuit Bankruptcy Appellate Panel (BAP) and then by the Sixth Circuit. [47] Ultimately, the Sixth Circuit dismissed Stark’s claim due to lack of standing, stating that Stark did not have standing to appeal the order to the BAP because his interests were not adversely affected by the order.[48]
Stark failed to show that he was directly and adversely affected pecuniarily, in accordance with the persons-aggrieved standard, by the bankruptcy court’s order abandoning Moran’s shares in Airpack back to Moran.[49] The order did not directly diminish his property, increase his burden or impair his rights because he never owned Moran’s shares of Airpack and his shares of the Airpack stock were not affected in any way by the order.[50] Finally, Stark’s interest as a potential purchaser is not in the Bankruptcy Code’s “zone of interest” because his purchase had nothing to do with the Code’s objective of minimizing injury to creditors.[51] Stark failed to prove that he had standing to appeal the bankruptcy court’s order.
Practical Advice from In re Moran
The Sixth Circuit’s opinion in In re Moran provides guidance for a third party seeking to challenge a bankruptcy court decision that allows for the transfer of property. The party needs to satisfy the appellate-standing requirement by showing that it was “directly and adversely affected pecuniarily by the order.” To do this, it must meet the persons-aggrieved standard by showing that the order directly diminished its property, increased its burden or impaired its rights. Establishing a challenger’s right to appellate standing requires a clear showing that its interest in the property in question satisfies and coincides with interests that the Code was seeks to protect: minimizing injury to creditor. Without meeting these requirements, the challenger will not have standing to appeal a court order related to a sale of property.
Conclusion
The In re Moran decision demonstrates that appellate standing furthers the Bankruptcy Code’s goals by preventing endless bankruptcy litigation among those lacking direct interest in a bankruptcy court order, as well as establishing a strict standard that challengers must satisfy to appeal a bankruptcy court’s transfer of property. This case also shows how appellate standing and the “persons aggrieved” standard create a substantial hurdle that challengers must overcome in order to appeal a bankruptcy court’s transfer of property.
1. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992).
2. See In re El San Juan Hotel, 809 F.2d 151, 154 (1st Cir. 1987); see also In re Thompson, 965 F.2d 1136, 1142 n.9 (1st Cir. 1992); Holmes v. Silver Wings Aviation Inc., 881 F.2d 939, 940 (10th Cir. 1989); Kane v. Johns-Manville Corp., 843 F.2d 636, 641 (2d Cir. 1988); In re Cosmopolitan Aviation Corp., 763 F.2d 507, 513 (2d Cir. 1985).
3. In re Andreuccetti, 975 F.2d 416-17 (7th Cir. 1992).
4. 566 F.3d 676 (6th Cir. 2009).
5. See id.
6. See U.S. CONST. art. III, § 2, cl. 1.
7. 1000 Friends of Maryland v. Browner, 265 F.3d 216, 227 (4th Cir. 2001); see Fund for Animals v. Babbitt, 89 F.3d 128, 132 (2d Cir. 1996).
8. See James v. City of Dallas, 254 F.3d 551, 562 (5th Cir. 2001), cert. denied, 534 U.S. 1113 (2002).
9. Davis v. Fed. Election Comm’n, 128 S.Ct. 2759, 2768 (2008) (citing Lujan v. Defenders of Wildlife, 112 S.Ct. 2130 (1992); see, e.g., McConnell, v. Fed. Election Comm’n, 124 S.Ct. 619 (2003).
10. See Davis, 128 S.Ct. at 2769 (citing Friends of the Earth Inc. v. TOC Inc., 120 S.Ct. 693 (2000)).
11. See Official Comm. Unsecured Creditors of Color Tile, Inc. v. Coopers & Lybrand LLP, 322 F.3d 147, 156 (2d Cir. 2003); Matter of Pointer, 952 F.2d 82 (5th Cir. 1992).
12. See Wolfe v. Gilmore Mfg. Co., 143 F.3d 1122 (8th Cir. 1998).
13. See Wolfe, 143 F.3d at 1126.
14. See id.
15. See Kabro Assoc. of W. Islip v. Colony Hill Assoc. (In re Colony Hill Assoc.), 111 F.3d 269, 273 (2d Cir. 1997)
16. See In re Wintz Co., 230 B.R. at 859 (citing Marlow v. Rollins Cotton Co. (In re Julien Co.), 146 F.3d 420, 423 (6th Cir. 1998)).
17. See Bankruptcy Act § 39(c), 30 Stat. 552 (1898).
18. See, e.g., In re Colony Hill Assoc., 111 F.3d at 273; Kane v. Johns-Manville Corp., 843 F.2d 636, 641-42 (2d Cir. 1988) (“These decisions reflect the understandable concern that if appellate standing is not limited, bankruptcy litigation will become mired in endless appeals brought by the myriad of parties who are indirectly affected by every bankruptcy court order.”); Cosmopolitan Aviation Corp. v. New York State Dep’t of Transp. (In re Cosmopolitan Aviation Corp.), 763 F.2d 507, 513 (2d Cir. 1985).
19. Travelers Ins. Co. v. H.K. Porter Co., 45 F.3d 737, 741 (3d Cir. 1995); see Kane, 843 F.2d at 642 n.2 (2d Cir. 1988).
20. See In re Trailer Source Inc., 555 F.3d 231 (6th Cir. 2001).
21. See In re Congoleum Corp., 426 F.3d 675, 685 (3d Cir. 2005)
22. See Moran v. LTV Steel Co. (In re LTV Steel Co.), 560 F.3d 449, 453 (6th Cir. 2009) (citing Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair Inc. (In re Trailer Source Inc.), 555 F.3d 231, 247 (6th Cir. 2009).
23. See In re Congoleum Corp., 426 at 685 (citing Travelers Ins. Co., 45 F.3d at 742).
24. 10 F.3d 184 (3d Cir. 1993).
25. See In re Dykes, 10 F.3d at 188 (citing Holmes v. Silver Wings Aviation, 881 F.2d 939 (10th Cir. 1989)).
26. See id.
27. See id.
28. See Dick’s Clothing & Sports Goods Inc. v. Phar-Mor Inc., 212 B.R. 283,
29. Squire v. Scher (In re Squire), 282 Fed.Appx. 413 (6th Cir. 2008).
30. Id. at 413-14.
31. Id.
32. Id. at 416.
33. Id. The court described Squire as “a disappointed bidder seeking a new auction.”
34. Id. (citing In re Planned Sys. Inc., 82 B.R. 919, 922 (Bankr. S.D. Ohio 1988).
35. Id.; see Fidelity Bank, Nat’l Ass’n v. M.M. Group Inc., 77 F.3d 880, 882 (6th Cir. 1996) (stating primary purpose of bankruptcy standing principles is to promote efficient and orderly administration of estates for benefit of creditors).
36. Id.
37. Id.
38. See id. at 679.
39. See id.
40. See id.
41. See id.
42. See In re Moran, 566 F.3d at 679-80.
43. See id. at 679.
44. See id.
45. See id. at 680.
46. See id.
47. In re Moran, 566 F.3d 676 (6th Cir. 2009); In re Moran, 385 B.R. 799 (6th Cir. B.A.P. 2008).
48. See In re Moran, 566 F.3d at 681.
49. See id. at 682.
50. See id.
51. See id. (“[A]llowing such an appeal does not serve the purposes of the bankruptcy proceeding when the alleged wrongdoing cannot possibly harm any creditor.”).