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STANDING IN BANKRUPTCY

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Article from ABI – 5/2019

SIXTH CIRCUIT MUSES ON WHETHER ‘PRUDENTIAL STANDING’ APPLIES IN BANKRUPTCY

In re Capital Contracting Company, 6th Cir Ct. Appeals 5/1/19,  New judge on the Sixth Circuit raises a host of questions about the requisites of standing in bankruptcy court.

Upholding dismissal of an appeal, the Sixth Circuit posed a plethora of questions about standing that would be “worthy of inclusion in a final exam for a federal-courts class,” the appeals court said.

The case itself was not difficult, but Circuit Judge Eric E. Murphy used his May 21 opinion to ruminate on standing issues that must have been bugging him for years. Judge Murphy received his commission to the Sixth Circuit in March.

A lawyer defended a company before bankruptcy. The suit “did not turn out well,” Judge Murphy said, because the plaintiff won a $5 million judgment that forced the company into chapter 7. The lawyer filed a claim for his unpaid legal fees.

The trustee countered with a legal malpractice suit against the lawyer. They settled. In return for a release, the lawyer paid $600,000 and withdrew his claim with prejudice. The bankruptcy court approved the settlement.

Later, the trustee filed his final report. The lawyer objected, contending that the trustee should have pursued the appeal he filed from the $5 million judgment. The bankruptcy court overruled the objection, saying that the lawyer was not a party in interest because he had withdrawn his claim.

The district court affirmed, ruling that the lawyer lacked standing to appeal.

Judge Murphy upheld dismissal of the appeal, because the lawyer lacked Article III standing.

Because the bankruptcy court is an Article I court, there is some question as to whether Article III standing applies in bankruptcy court. Nonetheless, “parties must at least satisfy Article III rules in appeals to Article III courts,” Judge Murphy said. By analogy, he said that someone appealing from an administrative agency must have Article III standing.

Judge Murphy explained that Article III standing requires an “injury in fact,” which is an invasion of a legally protected interest that is “concrete and particularized,” not “conjectural or hypothetical.”

The lawyer lacked Article III standing, Judge Murphy said, because he could not suffer financial harm since he had withdrawn his claim. Merely vindicating the rule of law, the judge said, does not provide the “basis for harm without alleging an actual injury from the purported violation.”

The Dicta

Judge Murphy’s opinion is about nine pages in length. He ruled on the case at hand in the last three pages in the opinion. Much of the remainder of the opinion represents his musings about unresolved questions of standing.

Most prominently, Judge Murphy surmises that the Supreme Court “jettisoned the label ‘prudential standing’” in Lexmark International, Inc. v. Static Control Components Inc., 572 U.S. 118 (2014). If the plaintiff shows injury, there is constitutional standing, and “courts lack discretion to decline to hear the claim,” he said.

Rather than invoke prudential standing, the court must decide whether the statute gives the plaintiff a right to bring the suit, Judge Murphy said.

Judge Murphy said that his circuit has not ruled on “Lexmark’s effect, if any, on the person-aggrieved test governing prudential standing in bankruptcy appeals.”

Judge Murphy raised a host of other unresolved questions. Do principles of Article III standing apply in bankruptcy courts, which are Article I courts? Does Article III apply because bankruptcy courts are “units” of district courts?

Is “party in interest” the standard for standing throughout the Bankruptcy Code, remembering that “party in interest” is only the standard in chapter 11? See Section 1109(b). For objecting to a final report, Judge Murphy noted that the Bankruptcy Code does not require someone to be a “party in interest.”

We recommend reading the opinion in full text. For those law professors who read the opinion, we urge them not to inflict students with a standing question on a final exam. It’s simply too complex.