Friday, June 1, 2018

FYI: 9th Cir Holds Party With Pecuniary Interest Has Standing to Appeal BK Order

The U.S. Court of Appeals for the Ninth Circuit held that a party with a pecuniary interest affected by a bankruptcy court order satisfies the "person aggrieved" requirement for appellate standing even where the party fails to appear and object in the bankruptcy proceeding.


Accordingly, the Ninth Circuit reversed the district court's dismissal of the appeal for lack of standing and remanded the case.


A copy of the opinion is available at:  Link to Opinion


The debtor in this action was an originator and servicer of residential mortgage loans ("Lender").  The Lender obtained funding for the loans through private investors.  In the event of a default, the Lender would initiate foreclosure proceedings, and if the Lender purchased the property at the foreclosure sale, then the Lender would create a limited liability company to hold title to the property.  The original loan investors would then get a membership interest in the newly created limited liability company.  


After a borrower defaulted on one such loan, the Lender formed a limited liability company ("Company") to hold title to the property.  The investors who provided money for the original loan exchanged their interest in the loan for membership interests in the Company.


The Company's operating agreement designated the Lender as manager of the Company. 


The Lender subsequently filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code, which proceeding was later converted to a Chapter 7 proceeding.  The bankruptcy trustee ("Trustee") was given a deadline to assume the or reject the Lender's executory contracts, which included the Company's operating agreement. 


The Trustee did not assume the operating agreement by the deadline, but it subsequently filed an assumption motion ("Assumption Motion") asking the bankruptcy court to enter an order authorizing him to, among other things, assume the operating agreement.


The Trustee provided a notice of motion to the members ("Members") of the Company.  The notice stated that any response to the Assumption Motion was be served at least 14 days prior to the hearing date.  No one filed an opposition to the Assumption Motion, and none of the Members appeared at the hearing. 


As none of the Members filed an opposition or appeared at the hearing, the bankruptcy court granted the Assumption Motion as unopposed.  The transcript from the hearing made it clear that the court contemplated that the Trustee's counsel would draft an order for the court's signature. 


One week later, before the court had issued an order on the Assumption Motion, the Members filed an emergency motion for reconsideration and sought an expedited hearing on the motion.  The bankruptcy court denied the Members' application for an order setting a hearing on the emergency motion and ruled that the Members had not shown either that the oral ruling granting the Trustee's motion was manifest error or that they were likely to prevail on appeal.


The Members appealed to the district court, where the Trustee moved to dismiss on the ground that the Members lacked standing to appeal because they did not file an objection to the Assumption Motion or attend the hearing despite having received adequate notice.  The district court granted the Trustee's motion and dismissed the appeal for lack of standing.  The matter was then appealed to the Ninth Circuit.


On appeal, the Ninth Circuit explained that "[a]ll circuits, including this one, limit standing to appeal a bankruptcy court order to 'person[s] aggrieved' by the order."  A "person aggrieved" is someone who is "directly or adversely affected pecuniarily" by a bankruptcy court's order. 


The Ninth Circuit noted that in ruling that the Members lacked standing, the "district court relied . . . on Brady v. Andrew (In re Commercial Western Finance Corp.), 761 F.2d 1329, 1335 (9th Cir. 1985), which stated in dicta that 'attendance and objection' at the bankruptcy court proceedings 'should usually' be prerequisites to meeting the 'person aggrieved' bankruptcy standing rule." 


However, the Court further noted that "[t]his court's suggestion In re Commercial Western Finance Corp. (Commercial) that 'attendance and objection should usually be prerequisites to the person aggrieved standard' was not a holding and does not bind us." 


Next, the Ninth Circuit observed that other circuits courts that had addressed the issue disagreed regarding whether attendance and objection are prerequisites for satisfying the "person aggrieved" standing requirement. 


In determining that attendance and objections are not prerequisites for standing, the Ninth Circuit stated that "[b]ankruptcy standing concerns whether an individual is 'aggrieved,' not whether one makes that known to the bankruptcy court," and "one need not have attended and made objections at the hearing to be directly and adversely affected by a bankruptcy court's decision." 


Thus, "an appellant's failure to attend and object at a bankruptcy court hearing has no bearing on the question of whether that appellant has standing to appeal a bankruptcy court order." 

Instead, "[f]ailure to attend and object may result in waiver or forfeiture of the right to make certain arguments or object to certain claims, but it does not present a jurisdictional standing issue." 


As a result, the Members did not "waive[] their challenge to the propriety of the underlying Assumption Order, though the question of forfeiture is open for determination on remand." 


The Ninth Circuit concluded that "[b]ecause there is no question that [the Members'] pecuniary interests are directly and adversely affected by the bankruptcy court order in question, we reverse the district court's dismissal of the appeal for lack of standing.  We therefore remand the case to the district court" where the "court may consider whether [the Members] forfeited their opposition to the Assumption Motion and, if so, whether the bankruptcy court's granting of the Motion should be reviewed for plain error."





Ralph T. Wutscher
Maurice Wutscher LLP
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