Litton Loan Servicing, L.P. v. Schubert (In re Schubert), 2023 WL 2663257 (6th Cir. 3/28/23)

The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), analyzing a recent decision of interest:

SUMMARY

In an unpublished but analytic opinion, the Sixth Circuit Court of Appeals (the Court) recently questioned prevailing precedent which requires an appellant of a Bankruptcy Court order to be a person aggrieved and provides that the person-aggrieved test represents a jurisdictional bar.  The Court expressed the view that after the Sixth Circuit had adopted the test, the Supreme Court in Lexmark Int’l, Inc. v Static Control Components, Inc., 572 U.S. 118 (2014) had clarified that courts may not limit their jurisdiction for prudential or policy reasons, which meant the person-aggrieved test should not be a jurisdictional bar.  However, because the appellants here did not request that the test be abrogated, the Court dismissed the appeal because they failed the test.  Litton Loan Servicing, L.P. v. Schubert (In re Schubert), 2023 WL 2663257 (6th Cir. 3/28/23). 

To view the opinion, click here.

FACTS

Prior to and during their bankruptcy case which concluded in 2006, the debtors Dennis and Sue Schubert assert that Litton Loan Servicing and other lenders collected more late fees from them than allowed.  The Schuberts were unaware of that overcharge during the bankruptcy and therefore failed to schedule it.  Since it would have been property of the bankruptcy estate but was not scheduled, it was not abandoned when the case was closed.  After the Schuberts discovered the overcharges almost ten years later, they sued the lenders in Ohio court for breach of contract. The lenders defended, asserting the claim belonged to the bankruptcy estate.  To remedy that circumstance, the Schuberts reopened the bankruptcy case to request the trustee to abandon the claim to them.  The lenders opposed the abandonment motion and filed an adversary proceeding to determine who owned the claim.  The bankruptcy court ruled the claim belonged to the estate but at the same time ordered the trustee to abandon it to the Schuberts.

The lenders appealed the abandonment order to the district court, which affirmed.  On further appeal to the Sixth Circuit, the Court dismissed the appeal for lack of appellate standing.

REASONING

Even though the Schuberts belatedly challenged the lenders standing, such challenged can be raised by the Court itself and because it is jurisdictional, the challenge is never waived.  The Court first concluded that the lenders had the requisite injury in fact for Constitutional standing since the concrete threat of impending litigation is sufficient for the test.  The Schubert’s action against the lender for the overcharges easily qualified as the necessary impending litigation.

Having cleared that hurdle, the Court then addressed the person-aggrieved standard for appellate standing in a bankruptcy appeal, as long adopted by the Sixth circuit as a jurisdictional bar.  This test basically says an appellant must have a direct financial stake in the appeal’s outcome.  After noting that the lenders did not ask the Court to abrogate the test, instead arguing that they met it, the Court of its own accord questioned whether the test could stand after the Supreme Court’s ruling in Lexmark.  In that case, the Supreme Court had clarified that Congress, not the courts, confers the right to sue and so long as Congress’s pronouncement of that right is consistent with the Constitution, a court may not take it away.  Lexmark, 572 U.S. at 125-27.  The Court concluded this basic rule likely doomed the person-aggrieved test as a jurisdictional bar.  It explored the roots of the test, noting that the Bankruptcy Act of 1898 granted circuit courts jurisdiction over bankruptcy appeals filed by “any party aggrieved,” which was the genesis of the test.  However, when the current Bankruptcy Code was enacted in 1978, Congress removed the “any person aggrieved” language and 28 U.S.C. § 158, which provides jurisdiction for bankruptcy appeals, contains no limiting language.  Therefore, the statutory basis for the test is gone. 

The Court did not end its analysis with that conclusion. It recognized that some courts have suggested that the person-aggrieved test might live on if viewed as a zone-of -interest test.  However, since the parties had not briefed whether a zone-of-interest test might enhance the questionable party-aggrieved test, the majority did not speculate on its application here.  Since the lenders did not ask the Court to decline precedent, the Court applied the person-aggrieved test and concluded the lenders did not meet it.  It recognized a line of cases, consistent with other circuits, that have held that the necessity to defend oneself against litigation does not suffice to make one a person aggrieved.  That defense was the lenders only claim of requisite jeopardy, so they failed the test and dismissal followed.

A lengthy concurrence added substance to the zone of interest discussion, as the concurring judge believed the person-aggrieved standard could reflect a zone-of-interest analysis that is consistent with Lexmark and therefore there was no need to overrule precedent.  Lexmark itself had characterized the zone-of -interest test as dictating that courts “presume that a statutory cause of action extends only to plaintiffs whose interests ‘fall within the zone of interests protected by the law invoked.’”  572 U.S. at 129.  The concurrence then noted that the test was not difficult to satisfy, referring in detail to a line of bankruptcy appeals where parties had passed the person-aggrieved test when they could demonstrate that they were among the parties which the law invoked (a section of the Bankruptcy Code) was intended to protect, i.e., within the statutory provision’s zone of interest.  The concurrence asserted that so long as the person-aggrieved test encompassed this zone-of-interest analysis, the precedent could stand.

AUTHOR’S COMMENTS

The Opinion states that at least two other court of appeals have already abrogated the person-aggrieved test, which would imply the others have not.  It certainly is the standard followed in the Ninth Circuit for appellate standing and is considered a jurisdictional bar, which is significant because the appellate courts may raise it on their own and it is never waived.  The test in most settings requires the appellant to have a financial stake in the outcome.  Courts regularly reject the notion that the need to defend litigation is a sufficient financial stake to establish standing.   The zone-of-interest test discussed by the concurrence seems to indicate that a person without a financial stake but affected by the implementation of a Bankruptcy Code section might qualify as a person-aggrieved.  If this extension of appellate standing becomes more viable in case law, it will be interesting to see how far it reaches.

This review was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., Ret.), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.