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:
In a case which signals the death of the “person aggrieved” test for standing for bankruptcy appeals, the Ninth Circuit Court of Appeals (the Court) ruled that a large unsecured creditor lacked Article III standing to appeal the bankruptcy court’s enhanced fee award to the Chapter 11 trustee. Matter of E. Coast Foods, Inc., 66 F.4th 1214 (9th Cir. 2023).
To view the opinion, click here.
Debtor East Coast Foods (the debtor) is the manager of Roscoe’s House of Chicken & Waffles, a nationally known landmark restaurant in Los Angeles. The entry of a $3.2 million racial discrimination judgment against Roscoe’s caused the debtor to file a Chapter 11 petition in 2016. After the United States Trustee appointed a Creditors Committee, Clifton Capital Group, LLC (Clifton) was named chair. The court subsequently appointed Bradley Sharp as trustee after an examiner found the debtor could not meet its fiduciary obligations. Sharp and the debtor submitted a Chapter 11 plan (the Plan), confirmed by the bankruptcy court, that guaranteed the creditors full payment with interest secured by a “Collateral Package” which included all the debtor’s assets and up to a $10 million contribution from the restaurant’s founder, who also guaranteed full payment. An appraiser valued the debtor’s assets at $39 million with $23.4 million of net equity. The Plan also provided that Sharp would be paid $450 an hour plus expenses.
In his final fee application, Sharp requested the statutory cap under 11 U.S.C. § 326(a) of almost $1,156,000. which included a lodestar calculation based on hours billed of $759,000 and a 65% enhancement for exceptional services, approximately $400,000. Clifton objected, asserting the fee cap was not presumptively reasonable and the enhancement unwarranted. The bankruptcy court overruled the objection, concluding the fee cap was presumptively reasonable and, in the alternative, that the exceptional result in the case merited the enhancement.
Clifton appealed to the district court, where Sharp challenged its standing. The district court found Clifton was a “person aggrieved” because there was insufficient capital in the estate to pay all creditors. It then vacated the award, concluding the lodestar calculation was the presumptively reasonable fee and an enhancement could only be awarded with detailed findings; it then remanded the matter to the bankruptcy court. On remand, the bankruptcy court made the necessary findings and awarded the same fee, which was then upheld on appeal by the district court.
Clifton appealed to the Court, which dismissed the appeal for lack of Article III standing.
The Court recognized that the Ninth Circuit had “historically” bypassed an Article III inquiry regarding standing in favor of the “person aggrieved” test, a prudential standing concept. It stated that this standard initially was established by the Bankruptcy Act of 1898, which permitted appeals by a “person aggrieved by an order of a referee.” 11 U.S.C. § 67(c) (1976, repealed 1978). Even though the Act was replaced in 1978 by the Bankruptcy Code, which no longer designated that appellate standard, the courts continued to use the old test as a principle of prudential standing. However, the Court noted that the Supreme Court had called prudential standing into question in Susan B. Anthony List v. Driehaus, 573 U.S. 149, 167 (2014). Since that time, the Court has placed increased emphasis on determining Article III jurisdiction before any prudential considerations. Therefore, in this matter, the Court chose to examine Article III standing first, which it found lacking.
For Article III standing, a party must show that it has (1) suffered an “injury in fact” that is concrete, particularized, and actual or imminent; (2) the injury is “fairly traceable” to the defendant’s conduct; and (3) the injury can be “redressed by a favorable decision” as articulated in Lujan v Defs. of Wildlife, 504 U.S. 555, 560 (1992). The Court concluded that Clifton failed to assert the necessary first element, an injury in fact. Clifton argued that the enhanced fee would put in jeopardy its full recovery on its claim or at least cause a delay in the payment. The Court found this argument wanting. After all, the Plan guaranteed full payment with interest to all creditors, back by the Collateral Package and the $10 contribution and guarantee from the founder. Moreover, Clifton’s assertions that the delay in timing was a qualifying injury was illusory. A number of provisions in the Plan made it clear that the timing for payment could be longer or shorter depending on allowed amounts owed to senior creditors and other factors. In addition, the right to interest on the claims until paid covered any delayed timing.
Concluding that Clifton lacked an injury in fact and therefore Article III standing, the Court dismissed the appeal for lack of jurisdiction.
The prudential doctrine of “person aggrieved” has been the gold standard for bankruptcy appellate standing in the Ninth Circuit and many others for more than 100 years. However, this is the second circuit court to call the principle into question in the last couple of months. In March 2023, the Sixth Circuit in Litton Loan Servicing, L.P. v. Schubert (In re Schubert), 2023 WL 2663257 (6th Cir. 2023), applied the “person aggrieved” test to dismiss a bankruptcy appeal, but in doing so questioned the circuit precedent that compelled that result because recent Supreme Court authority had clarified that courts may not limit their jurisdiction for prudential reasons. Although the panel in this Ninth Circuit case did not deliberate en banc to change its accepted precedent and therefore did not outright abolish its use, by its own words it need not do so. Because Article III standing is always required in any federal court, the decision to look there first does not run asunder of accepted practices.
I strongly suggest that practitioners be prepared in all federal matters, bankruptcy appeals included, to address the elements of Article III standing rather than “person aggrieved.” Since the Supreme Court called into question prudential standing as a bar to federal jurisdiction in List and two recent circuit court opinions have noted the only basis for the “person aggrieved” doctrine was a statute rendered ineffective in 1978, I believe it will be long forgotten soon.
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.