Ninth Circuit Removes Requirement to Attend Hearing and Object to Confer Standing to Appeal Bankruptcy Court Orders

On Behalf of | May 31, 2018 | Uncategorized |

In In re Point Center Financial, Inc., No. 16-56321, slip op. (9th Cir. May 29, 2018) the Ninth Circuit Court of Appeals decided whether attendance at a hearing and an objection to a bankruptcy court ruling are prerequisites to having standing to appeal the same. Generally, only a person aggrieved by a bankruptcy court order may appeal entry of the same. A person aggrieved is someone who is directly and adversely affected pecuniarily by a bankruptcy court order, such as when an order diminishes one’s property, increases one’s burdens, or detrimentally affects one’s rights. Duckor Spradling & Metzger v. Baum Tr. (In re P.R.T.C., Inc.), 177 F.3d 774, 777 (9th Cir. 1999); Fondiller v. Roberson (In re Fondiller), 707 F.3d 441, 443 (9th Cir. 1983).

The debtor in the case is an originator and servicer of residential and commercial loans. Its business model was to make loans through funding by private investors and to grant those investors shares of the repayment proceeds and deeds of trust securing the same. If properties subject to the debtor’s loan went into default, the debtor would then acquire the properties through foreclosure and set up a limited liability company to take title to those properties. Investors would then exchange their loan interests for membership interests in the companies, and the debtor served as manager of each property-holding LLC.

More than two years after Point Center Financial’s case was converted from Chapter 11 to Chapter 7 and the deadline passed for the trustee to assume or reject executory contracts, the trustee filed a motion to assume the management agreement over an LLC in which the appellants (the company president, and the members) held an interest. In addition to exercising the LLC’s management authority, the trustee sought to assume all management authority back to the date of the bankruptcy petition and compel delivery to him of all company records and property. A hearing was held on the assumption motion and, stating that there was no opposition, the bankruptcy court granted the motion. No one for the appellants attended the hearing. Before the court could enter the order approving the assumption motion, the appellant LLC members filed a detailed emergency motion for reconsideration, which the bankruptcy court denied on the merits.

Appellants appealed to the U.S. District Court, which ultimately granted the trustee’s motion to dismiss for lack of standing because they were not “persons aggrieved” by the order. Brady v. Andrew (In re Commercial Wester Finance Corp.), 761 F.2d 1329, 1335 (9th Cir. 1985) (“[A]ttendance and objection should usually be prerequisites to fulfilling the ‘person aggrieved’ standard.”). After referencing a number of its unpublished decisions disagreeing with the “attend-and-object” requirement to confer standing to appeal bankruptcy court orders, the court explained that the Commercial commentary was dicta and not binding precedent.

After noting a circuit split on the issue, the court ultimately distinguishes between the underlying purposes of prudential standards for exercising jurisdiction and procedural standards which serve the interest of judicial economy. Referring to the Fourth Circuit’s analysis in White v. Univision of Va Inc. (In re Urban Broad. Corp.), 401 F.3d 236, 244 (4th Cir. 2005), the court agreed that to require attendance and objection before an appellant can be understood to be a “person aggrieved” is to conflate basic notions of standing with notions of waiver and forfeiture. Because “there is no question that Appellants’ pecuniary interests are directly and adversely affected by the bankruptcy court order in question,” the court reversed the district court order dismissing the appeal and remanded for further findings, including whether the LLC members forfeited their opposition to the assumption motion.

While the Point Center Financial decision puts appellees on notice that “attend-and-object” will no longer be the basis of a speedy dismissal of a bankruptcy appeal based on an untimely objection, the court leaves open the possibility that arguments based on procedure (e.g., forfeiture) may ultimately serve the same purpose.

FindLaw Network