BAP Adheres to ‘Person Aggrieved’ Despite Dicta from the Sixth Circuit

The Sixth Circuit Bankruptcy Appellate Panel enforced the “person aggrieved” rule for appellate standing, even though more recent Supreme Court authority could be read to mean that “prudential standing” doctrines are headed for extinction.

The debtor was a coal producer aiming to sell its assets. The only buyer refused to purchase the assets without insulation from successor liability that it otherwise would have to make contributions for retirees’ health benefits under the 1992 Coal Act.

To satisfy the buyer’s demands, the debtor, the retirees’ committee and the union fund created under the Coal Act entered into a settlement insulating the buyer from liability for retiree benefits.

The former owner of the debtor’s coal business objected, contending that the settlement would increase its liability for retiree benefits. The bankruptcy court overruled the objection and approved the settlement. The court also confirmed the chapter 11 plan, which provided that the buyer would not assume any obligation to pay retiree benefits.

The prior owner appealed the settlement order but did not appeal confirmation.

In an opinion on February 1 for the Sixth Circuit Bankruptcy Appellate Panel, Bankruptcy Judge Tracey N. Wise dismissed the appeal for lack of appellate standing under the “person aggrieved” standard.

In some detail, Judge Wise explained how “person aggrieved” is “quite restrictive” and narrower than Article III standing, or constitutional standing. The “person aggrieved” standard is a principle known as prudential standing, meaning it is based on judge-made law, not on statute.

The “person aggrieved” standard requires the appellant to have a direct, pecuniary interest in the bankruptcy court’s order.

Judge Wise cited 2009 authority from the Sixth Circuit adhering to the “person aggrieved” standard and said it is designed to prevent parties from bringing appeals when they are only “indirectly affected” by a bankruptcy court’s order.

In a footnote, Judge Wise cited a recent opinion where the Sixth Circuit mused, in dicta, on the question of whether prudential standing survived the Supreme Court’s decision in Lexmark International Inc. v. Static Control Components Inc., 572 U.S. 118 (2014). See Carl F. Schier PLC v. Nathan (In re Capital Contracting Co.), 924 F.3d 890 (6th Cir. 2019). To read ABI’s report on Capital Contracting, click here.

In Capital Contracting, the Sixth Circuit surmised that the Supreme Court “jettisoned the label ‘prudential standing.’” Id. at 893. If the plaintiff shows injury, the appeals court went so far as to say in dicta that there is constitutional standing, and “courts lack discretion to decline to hear the claim.” Id. at 896.

Judge Wise did not ask whether Lexmark had impliedly overruled Sixth Circuit authority espousing the “aggrieved person” doctrine of prudential standing.

“[A]lthough the law in this area may be in flux,” Judge Wise said that “the Sixth Circuit has not eliminated the ‘person aggrieved’ doctrine and the Panel will continue to apply it.”

Applying the law to the facts, Judge Wise concluded that the settlement did not impose liability on the prior owner to pay retiree benefits, an issue to be decided by another court in another proceeding. Even if the settlement removed a defense that the prior owner could raise, “that defense is unrelated to an interest that the Bankruptcy Code seeks to protect,” she said.

The BAP dismissed the appeal for lack of appellate standing.

Observations

Should the Sixth Circuit adopt the BAP’s analysis, there is a split with the Ninth Circuit and possibly also with the Third Circuit. See Motor Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 677 F.3d 869 (9th Cir. 2012); and In re Combustion Eng’g, Inc., 391 F.3d 190 (3d Cir. 2004), as amended (Feb. 23, 2005).

The “person aggrieved” standard may be headed for the dustbin should the Supreme Court tackle the split.

Can a court create “prudential” principles to deny an appeal when there is no such limitation in the statute? May courts circumscribe their own appellate jurisdiction as decreed by statute?

The issue often arises when a party, such as a shareholder, has standing to litigate in bankruptcy court as a party in interest. However, the same shareholder will often be found to lack appellate standing to appeal the very issue litigated in bankruptcy court, because the outcome would not enhance the shareholder’s recovery in bankruptcy. In other words, the Bankruptcy Code confers standing on parties who may have no appellate standing on the same issue.

The prudential standard makes sense in obviating appeals that will have no practical, economic effect on the appellant. But should a court hear an appeal where reversal would affect the appellee but not the appellant? So long as there is constitutional standing, should courts hear appeals that only seek to vindicate legal principles?  

The notions of “aggrieved person” and equitable mootness are related. Created by courts, both doctrines enable an appellate court to dismiss an appeal for lack of prudential standing when the appellant would have constitutional standing.

If the Supreme Court eventually abolishes either doctrine, the other is likely to fall eventually, and for the same reason. After reviewing the appeal on the merits, the court could then invoke equitable powers to fashion relief that would be fair to creditors who were not parties in the appeal.