Debtor Lacked Standing to Appeal Order Approving Agreement between Trustee and Creditor

Posted by NCBRC - December 13, 2021

The debtor lacked standing to appeal the bankruptcy court’s order approving an agreement between the chapter 7 trustee and a creditor under which the creditor agreed to fund litigation on behalf of the bankruptcy estate, where the order would not have a direct, adverse, financial effect on the debtor. Dean v. Seigel (In re Dean), No. 21-10468 (5th Cir. Dec. 7, 2021).

Lacking funds to pursue litigation on behalf of the bankruptcy estate, the chapter 7 trustee entered into an agreement with one of the debtor’s creditors, Reticulum Management, LLC, under which Reticulum supplied the funds for the litigation in exchange for a percentage of any recovery the trustee might make. The debtor objected on the grounds that the arrangement unfairly altered distribution of the estate in favor of Reticulum to the detriment of other creditors. The bankruptcy court approved the agreement and the district court affirmed. The debtor appealed to the Fifth Circuit.

The Fifth Circuit found the debtor lacked standing to bring the appeal. The court applied the “person aggrieved” test, which it described as more exacting than traditional constitutional standing. Under this test the appellant must show that he was “directly, adversely, and financially impacted by a bankruptcy court order.” While a debtor may have standing to challenge an order that impacts his discharge, he does not generally have standing to challenge the way the chapter 7 trustee distributes the estate. Specifically, “Appellants cannot demonstrate bankruptcy standing when the court order to which they are objecting does not directly affect their wallets.”

Citing In re Mandel, 641 F. App’x 400, 402 (5th Cir. 2016) (unpublished), the debtor argued that because there was separate pending litigation between Reticulum and the debtor over Reticulum’s objection to discharge of its claim, the requisites for standing were established. The Mandel court found that “a debtor in a Chapter 7 bankruptcy proceeding . . . has standing to appeal an order by the bankruptcy court allowing claims against his bankruptcy estate by the Appellees.”

The court, here, found Mandel to be inapplicable as, in this appeal, the order being challenged had nothing to do with the separate litigation over the issue of discharge.

The court dismissed the appeal for lack of standing.

Dean 5th Cir Dec 2021


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