A Solvent Estate Must Be ‘Likely’ to Confer Standing on an Individual Chapter 7 Debtor

For standing to appeal, an individual chapter 7 debtor must substantiate allegations that the estate is solvent. “Speculative support” for the value of the assets will not suffice, the Seventh Circuit said.

Before bankruptcy, the debtor had sued his former employer in state court. The former employer lodged counterclaims. When the debtor filed an individual chapter 7 petition, discovery was still in its early stages.

In his original schedules, the debtor listed liabilities between $6.5 million and $10.5 million. For assets, he showed $8.5 million, including a recovery between $5 million and $7.5 million from the lawsuit.

The chapter 7 trustee negotiated a settlement where the former employer would pay $550,000 for dismissal of the suit. The trustee filed a motion for bankruptcy court approval of the settlement.

The debtor objected to the settlement. At the same time, the debtor filed amended schedules.

In the new schedules, the debtor showed liabilities of about $20 million. He claimed $43 million in assets. The assets included a recovery of $16 million from the lawsuit and $24 million in “other assets.” The debtor said he found an attorney to pursue the lawsuit against the former employer for a 50% contingency.

The “other assets” included $20 million in claims against third parties. The debtor offered no evidence to support the estimates.

The bankruptcy court approved the settlement. The district court dismissed the debtor’s appeal for lack of standing. The debtor appealed to the Seventh Circuit.

In an opinion on August 11, Circuit Judge Candace Jackson-Akiwumi dismissed the appeal for lack of appellate standing. Because there was no jurisdiction, Judge Jackson-Akiwumi did not consider whether the appeal was equitably or statutorily moot under Section 363(m).

In the Seventh Circuit, Judge Jackson-Akiwumi said, someone has appellate standing “‘only if he can allege personal injury fairly traceable to the defendant’s allegedly unlawful conduct and likely to be redressed by the requested relief.’ Pavlock v. Holcomb, 35 F.4th 581, 588 (7th Cir. 2022) (quoting California v. Texas, 141 S. Ct. 2104, 2113 (2021)).”

Judge Jackson-Akiwumi went on to say there is no standing if the redressable injury to the appellant is “speculative,” as opposed to “likely.” As a question of jurisdiction, the burden to show standing is on the appellant.

The debtor gave “only speculative support that he would recover from the estate after creditor distribution, such that reversing the bankruptcy court’s decision would likely redress his injury,” Judge Jackson-Akiwumi said. She explained why.

The debtor listed liabilities of $20 million. Even if the debtor were to recover $16 million from his lawsuit, the net to the estate would be $8 million after paying the lawyer’s contingency.

Judge Jackson-Akiwumi dismissed the $20 million in claims against third parties because the debtor “fails to provide any support for these estimates.”

“At most,” Judge Jackson-Akiwumi said, the debtor had $15 million in assets, not enough to cover creditors’ claims and produce a surplus for the debtor. She dismissed the appeal for lack of standing because the debtor “cannot explain how it is ‘likely’ that any distributions from the estate will ultimately flow to him.”