The target of a lawsuit financed by a litigation funding agreement has neither Article III standing nor prudential standing in the Eleventh Circuit to appeal the bankruptcy court’s order authorizing the funding.
The corporate debtor’s confirmed chapter 11 plan created a litigation trust, whose trustee sued the debtor’s bank for aiding and abetting a breach of fiduciary duty and to recover an allegedly $3 million fraudulent transfer.
Lacking funds to prosecute the suit, the liquidating trustee negotiated a litigation funding agreement with the debtor’s principal. Significantly, the trustee retained the power to settle or make settlement offers. However, the trustee was required to confer in good faith with the funder.
According to the Eleventh Circuit’s per curiam opinion on March 31, there evidently was animus between the bank and the debtor’s principal, who had threatened to sue the bank if it did not withdraw objections made to state insurance regulators.
The bank opposed approval of the funding agreement, arguing that the debtor’s principal could improperly influence settlement. The circuit court characterized the bank as claiming to preserve the fairness of the bankruptcy proceedings.
The bankruptcy court approved the funding agreement. The district court dismissed the bank’s appeal for lack of appellate standing. Reviewing the district court’s standing decision de novo, the Eleventh Circuit affirmed.
The circuit court separately addressed the bank’s dual hurdles: Article III (or “constitutional”) standing, and prudential (or “person aggrieved”) standing. Prudential standing is the higher standard that an appellant must meet.
To establish constitutional standing under Article III, the litigant must show injury in fact, causation and redressability, the circuit court said. Furthermore, the injury must be concrete and particularized, not conjectural or hypothetical. In addition, the injury must be “certainly impending.” Possible future injury won’t cut the mustard.
The appeals court said that the appellant must “at least demonstrate that he is in immediate danger of sustaining a direct injury, meaning that the anticipated injury must occur within a fixed time period in the future.”
Applying the standards to the case on appeal, the appeals court said that the bank’s “alleged injury is not imminent, and is instead based on a speculative, highly attenuated, chain of possibilities.”
The circuit court noted that no settlement offer had been made in the lawsuit. Indeed, discovery had not even begun. For there to be injury, there would need to be a settlement offer where the trustee, although having retained settlement authority, would have acquiesced improperly in the lender’s exhortations.
Because injury to the bank was “clearly based on a highly attenuated chain of possibilities,” the appeals court held that the bank lacked constitutional standing.
Turning to prudential standing to appeal, the circuit court said that the “person aggrieved” test “restricts a plaintiff’s standing more than Article III.” The appellant must be directly, pecuniarily and adversely affected by the bankruptcy court’s order.
Hoping to avoid liability in a lawsuit, the appeals court said, does not make a party “aggrieved,” because “orders allowing litigation to continue do not burden a party’s ability to defend against liability.”
Furthermore, the circuit court said that a party is not aggrieved unless “the interest he seeks to validate is not protected or regulated by the Bankruptcy Code.” In the case on appeal, the court said that the bank’s “interest in avoiding liability is ‘antithetical to the goals’ of the Bankruptcy Code.”
“Finally,” the appeals court said, the bank did “not meet the ‘person aggrieved’ doctrine simply by virtue of attacking the inherent fairness of the bankruptcy proceedings.”
The Eleventh Circuit upheld dismissal of the appeal. Even if the bank had constitutional standing, it lacked “person aggrieved” standing.
The target of a lawsuit financed by a litigation funding agreement has neither Article III standing nor prudential standing in the Eleventh Circuit to appeal the bankruptcy court’s order authorizing the funding.
The corporate debtor’s confirmed chapter 11 plan created a litigation trust, whose trustee sued the debtor’s bank for aiding and abetting a breach of fiduciary duty and to recover an allegedly $3 million fraudulent transfer.
Lacking funds to prosecute the suit, the liquidating trustee negotiated a litigation funding agreement with the debtor’s principal. Significantly, the trustee retained the power to settle or make settlement offers. However, the trustee was required to confer in good faith with the funder.
According to the Eleventh Circuit’s per curiam opinion on March 31, there evidently was animus between the bank and the debtor’s principal, who had threatened to sue the bank if it did not withdraw objections made to state insurance regulators.
The bank opposed approval of the funding agreement, arguing that the debtor’s principal could improperly influence settlement. The circuit court characterized the bank as claiming to preserve the fairness of the bankruptcy proceedings.