If injury to the appellant is “too conjectural and hypothetical,” the Ninth Circuit says there is no appellate standing, even under the less demanding standard for Article III or constitutional standing as opposed to the more exacting “person aggrieved” test.
In his May 8 opinion, Circuit Judge Ryan D. Nelson dismissed the appeal because the chapter 11 plan promised full payment to the appealing creditor. Although the debtor was behind in making plan payments, the injury remained “conjectural at best,” given the effusive findings of fact by the bankruptcy court assuring payment in full.
Note: Judge Ryan Nelson is not to be confused with Senior Circuit Judge Dorothy W. Nelson, also of the Ninth Circuit.
The Full Payment Plan
The chapter 11 debtor confirmed a plan promising payment in full, with interest, to unsecured creditors, even to creditors whose claims were subordinated. To assure full payment, the plan was backstopped with a $10 million contribution by a plan proponent. In addition, creditors were given collateral security in the form of a lien on all assets.
Bankruptcy Judge Sheri Bluebond of Los Angeles found that the debtor was emerging from chapter 11 with $23.4 million in net equity in its assets. Judge Nelson said the net equity “far” exceeded the claims to be paid under the plan.
The debtor had been under the command of a chapter 11 trustee. After confirmation, the trustee filed an application for payment of about $1.16 million in compensation, the maximum commission under Section 326(a).
The requested compensation represented about $760,000 at the trustee’s usual hourly rate of $450 per hour. The trustee justified the additional $400,000 as an enhancement for “exceptional services.”
Bankruptcy Judge Bluebond granted the requested compensation in full, saying that the commission in itself was presumptively reasonable and that the results of the reorganization were exceptional, justifying enhancement over the lodestar.
A subordinated creditor appealed the allowance of the trustee’s compensation. The district court held that the creditor was an “aggrieved party” given the possibility of it not being paid in full. On the merits, however, the district court affirmed the award.
The subordinated creditor appealed to the circuit.
The Critique of ‘Person Aggrieved’
For appellate jurisdiction, Article III of the Constitution requires the existence of a case or controversy. Judge Nelson said that appellate courts have been imposing the higher “person aggrieved” standard to justify appellate standing in bankruptcy cases.
Judge Nelson’s opinion is a lesson in history. He explained how “person aggrieved” was a “prudential requirement” found in the Bankruptcy Act of 1898. It was adopted to restrict appeals to those who would be affected by the outcome.
Although the Bankruptcy Act was repealed in 1978 on adoption of the Bankruptcy Code, Judge Nelson said, “we continued to apply the ‘person aggrieved’ standard.” Moreover, he said:
It is unclear why we continued to apply the person aggrieved rule in the absence of the statute providing the basis for doing so. We appear to have recast the pre-1978 statutory standard and applied it as a principle of prudential standing.
“But,” Judge Nelson said, “the Supreme Court has since questioned prudential standing,” finding tension with federal courts’ “virtually unflagging” obligation to hear cases within their jurisdictions. See Susan B. Anthony List v. Dreihaus, 573 U.S. 149, 167 (2014).
“Still,” Judge Nelson said, “our bankruptcy cases have historically addressed prudential standing with little attention to Article III.”
No Article III Appellate Jurisdiction
Judge Nelson examined the facts to determine whether the subordinated creditor had Article III standing. The required showing is (1) an “injury in fact” that is concrete, particularized and actual or imminent; (2) an injury “fairly traceable” to the defendant’s conduct; and (3) an injury that can be addressed by a favorable decision. The “foremost” requirement is injury in fact, Judge Nelson said.
The subordinated creditor claimed injury because it had not yet been paid in full, and the extra compensation for the trustee diminished the likelihood of full payment. The debtor countered by saying there was no harm because the creditor would be paid in full, the only question being when or how soon.
Judge Nelson examined the plan and the facts in detail. He noted that the plan did not have a limited fund because there was “no finite amount of assets from which all creditors could be paid.” Indeed, he said there was a 35% equity cushion protecting the payment of claims in full.
Given that payment in full was assured, Judge Nelson said in substance that any delay in payment would not give rise to injury. He held that the creditor’s “alleged injury is too conjectural and hypothetical to establish injury in fact for Article III standing.
Judge Nelson reversed the district court and remanded with instructions to dismiss the appeal for lack of appellate standing.
Equitable Mootness
Judge Nelson’s opinion is another indication that the doctrine of equitable mootness would not withstand scrutiny in the Supreme Court.
When a consummated chapter 11 plan is found to be equitably moot, there is typically a case or controversy establishing Article III or constitutional jurisdiction in the appellate court, because the parties disagree about the legal principle underlying the appeal. Equitable mootness is a higher, judge-made standard employed by appellate courts to dismiss appeals when the appellate court nonetheless has jurisdiction.
Judge Nelson’s opinion recites the Supreme Court’s admonition that courts are obliged to exercise their jurisdiction.
Weaving the notions together, the Supreme Court one day might say that appellate courts must resolve the case or controversy arising from disputed confirmation and remand for the bankruptcy court to identify relief that is available, if any.
If injury to the appellant is “too conjectural and hypothetical,” the Ninth Circuit says there is no appellate standing, even under the less demanding standard for Article III or constitutional standing as opposed to the more exacting “person aggrieved” test.
In his May 8 opinion, Circuit Judge Ryan D. Nelson dismissed the appeal because the chapter 11 plan promised full payment to the appealing creditor. Although the debtor was behind in making plan payments, the injury remained “conjectural at best,” given the effusive findings of fact by the bankruptcy court assuring payment in full.
Note: Judge Ryan Nelson is not to be confused with Senior Circuit Judge Dorothy W. Nelson, also of the Ninth Circuit.