Tenth Circuit BAP Disagrees with the Fourth Circuit on Inapplicability of Article III

The Tenth Circuit Bankruptcy Appellate Panel disagreed with Kiviti v. Bhatt, 80 F.4th 520, 535 (4th Cir. 2023), where the Fourth Circuit held that Article III of the Constitution and its “case or controversy” jurisdictional requirements “do not apply to [bankruptcy courts] as a matter of constitutional law.” In short, the Fourth Circuit said that bankruptcy courts can preside over matters that are moot and may presumably issue advisory opinions.

In his November 15 opinion for the BAP, Bankruptcy Judge Robert H. Jacobvitz noted that the holding in Kiviti is contrary to prior holdings in the Fourth Circuit, although the Fourth Circuit did not sit en banc to issue Kiviti. To read ABI’s report on Kiviti, click here.

Differing with Kiviti, Judge Jacobvitz held that “Article III standing limits the jurisdiction of bankruptcy courts . . . based on the derivative nature of bankruptcy court jurisdiction.”

Wyoming Charging Orders

The individual chapter 7 debtor had a 3% interest in a Wyoming limited liability corporation. The bankruptcy judge held that the trustee could not sell the debtor’s interest in the LLC in view of the LLC’s operating agreement prohibiting transfer to non-members of the LLC.

The trustee altered his strategy by offering to sell a so-called charging order under Wyoming law.

In Wyoming, a charging order is the only remedy available against an owner of a Wyoming LLC. Issued by a court, a charging order instructs the LLC to forward all income to the judgment holder that would otherwise go to the LLC owner. 

Over the debtor’s objection, the bankruptcy court authorized the issuance and sale of a charging order. Finding that the estate was grossly insolvent, the bankruptcy court held that the debtor had no standing to challenge issuance of the charging order. If there were standing, the bankruptcy court ruled that issuance of the charging order was permissible.

The debtor appealed to the BAP. Judge Jacobvitz overturned the ruling on standing but upheld the charging order.

The Split on Article III

Judge Jacobvitz first confronted the question of whether parties in a bankruptcy dispute “must have Article III standing.” He found a split among the circuits.

According to Judge Jacobvitz:

The Seventh and Eighth Circuits have reasoned that Article III standing requirements apply in proceedings before bankruptcy courts because Article III limitations apply to federal courts and bankruptcy courts are federal courts, without analyzing the issue further.

On the other side of the fence, Judge Jacobvitz cited the Fourth and Fifth Circuits. The Fourth Circuit, he said, has “concluded that Article III standing requirements do not apply to bankruptcy courts because bankruptcy courts are not authorized by Article III.”

For the proposition in the Fifth Circuit that Article III does not limit a bankruptcy court’s jurisdiction, Judge Jacobvitz cited In re Highland Cap. Mgmt., L.P., 74 F.4th 361 (5th Cir. July 28, 2023). To read ABI’s report, click here. He said that the statement about the inapplicability of Article III is “arguably dicta” because the circuit court went on to find that the appellant failed to satisfy the more stringent requirements in the “person aggrieved” standard for appellate standing.

Judge Jacobvitz explained how the Fourth Circuit found in Kiviti that “Article III case-or-controversy constraints do not apply to bankruptcy courts as a matter of constitutional law because bankruptcy courts are not Article III courts; and Article III case-or-controversy constraints do not apply to bankruptcy courts by statute because no statute imposes Article III constraints on bankruptcy courts.”

Judge Jacobvitz said that Kiviti was “contrary to the Fourth Circuit’s earlier opinion in Kaiser Gypsum that a party seeking to object to confirmation of a chapter 11 plan must have ‘Article III standing to press its objections’ because ‘Article III standing is still required in every case.’” See Truck Insurance Exchange v. Kaiser Gypsum Co. (In re Kaiser Gypsum Co.), 60 F.4th 73 (4th Cir. Feb. 14, 2023). cert. granted sub nom. Truck Ins. Exch. v. Kaiser Gypsum Co., No. 22-1079, 2023 WL 6780372 (Oct. 13, 2023). To read ABI’s reports on the February decision and the grant of certiorari, click here and here.

Which Side to Follow on the Split?

The Tenth Circuit has not taken sides on the split, but Judge Jacobvitz agreed with the Seventh and Eighth Circuits, “based on the derivative nature of bankruptcy court jurisdiction.”

Judge Jacobvitz said that 28 U.S.C. § 1334 grants bankruptcy jurisdiction to district courts, but that Section 157 “does not grant jurisdiction to bankruptcy courts.” Rather, all federal districts have adopted local rules referring all bankruptcy cases and proceedings to the bankruptcy courts “to the fullest extent permitted” by Section 157.

Because “§ 157 does not itself grant any jurisdiction to bankruptcy courts, nor does any other statute,” Judge Jacobvitz held that “bankruptcy court jurisdiction is entirely derivative of district court jurisdiction and cannot extend beyond the jurisdiction of the district court.” Therefore, he held that “bankruptcy court jurisdiction is also so limited to adjudicating cases and controversies.”

The Debtor Had Standing in Bankruptcy Court

Having established that Article III notions of standing are applicable in bankruptcy cases, Judge Jacobvitz analyzed whether the debtor had standing even though the estate was grossly insolvent. Typically, debtors with insolvent estates lack standing to object to sales.

The question in bankruptcy court was whether the court could issue and sell a charging order. If there were no such power, the trustee would ultimately abandon the debtor’s interest in the LLC, returning ownership and control to the debtor. The possibility of recovering ownership satisfied the requirements of Article III jurisdiction.

Judge Jacobvitz found that the debtor had satisfied Article III because (1) the debtor had suffered an injury; (2) the injury was concrete and particularized; (3) the injury was “fairly traceable” to the trustee’s conduct; and (4) the injury was “likely to be addressed” by a favorable outcome.

Having found Article III jurisdiction and the debtor’s standing to appeal, Judge Jacobvitz ruled on the merits by holding that the trustee had the right to issue and sell a charging order given the trustee’s status as a hypothetical judicial lien creditor under Section 544(a).