Thakkar v. Good Gateway LLC (N.D. Ga.)
The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLP, analyzing a recent decision of interest:
In Thakkar v. Good Gateway, LLC, 2022 WL 552743 (Nos. 20-4792 and 20-4800) (N.D. Ga. January 12, 2022) (“Thakkar”), the United States District Court for the Northern District of Georgia (the “Court”) rule that because he did not have a direct pecuniary interest in the matter, an LLC member of the debtors lacked standing to appeal the Bankruptcy Court’s ruling denying the debtors’ motions against a creditor for sanctions for allegedly violating the automatic stay and a mediation order in their bankruptcy cases.
Thakkar can be found by clicking here.
Thakkar was a member of a number of LLCs. He and some of the LLCs (the “Debtors”) were sued by two related creditors (the “Creditors”) in state court. These lawsuits were among many between Thakkar and various parties, including a number of appeals involving issue similar to those in Thakkar. The Creditors got substantial judgments against the Debtors and Thakkar and began to execute on them, including obtaining a lien on certain property owned by Thakkar. Thakkar put the Debtors into bankruptcy. The Bankruptcy Court ordered Debtors and the Creditors to mediation. The two-day mediation failed. In the meantime, the Creditors had continued to pursue their remedies. However, eventually they stopped their enforcement efforts and had matters restored to the status quo ante.
Thakkar then moved the Bankruptcy Court in the Debtors’ cases to hold the Creditors in contempt and impose sanctions against them for violating the stay and for some unspecified violation of the mediation order. The Bankruptcy Court denied the motions, finding both that Thakkar lacked standing and that the Creditors were not in contempt. Thakkar appealed to the Court, which affirmed the Bankruptcy Court’s decision on standing and therefore declined to reach the merits on the issue of contempt, dismissing the appeal.
The standard for whether a person has standing to appeal a final bankruptcy court order is whether he is “a person aggrieved”. A party is a person aggrieved only if he has a “direct pecuniary interest” in the proceeding. (Emphasis added.) Looking in the first instance to state law, and some bankruptcy decisions characterizing it, the Court explained Thakkar lacked a direct pecuniary interest because his membership in the Debtors did not give him an interest in their property (just as a shareholder’s shares or a partner’s partnership interest do not give the such an investor any interest in the entity’s property). The Court rejected Thakkar’s contention that he had the necessary direct pecuniary interest because at the very least he had a right to any surplus the Debtors might spin off after paying their creditors. According to the Court, that prospect did not satisfy the standing requirement because it was not an interest in the Debtors’ (current) property.
In reaching its conclusion, the Court relied on rulings in similar cases involving Thakkar by other courts which reached the same result about Thakkar’s standing. But rather than simply adverting to those decisions, the Court took the time to analyze the issue, using the other cases to confirm its analysis, taking a moment in the process to implicitly reprove Thakkar for being litigious, as those other cases reflected.
The decision in Thakkar is not controversial. In fact, the outcome seems so obvious that it is to the Court’s credit that it laid out an analysis rather than ruling summarily or just relying on the related decisions in other courts that it discusses.
On the issue of the possibility of a dividend for Thakkar at the end of the rainbow, the Court said, in essence, that a contingent, undifferentiated financial interest in the Debtors did not make Thakkar a person aggrieved. Nor is this a particularly troubling doctrine. What Thakkar was seeking in bringing the contempt motions was, at heart, something akin to derivative standing to sue on behalf of the LLCs. Derivative standing is a completely different animal than party standing. It not only employs a completely different set of standards, but typically requires advance judicial or statutory permission.
N.B. The opinion includes a thorough statement of the standards of review governing the various issues the Court faced, but since the Court did not then actually analyze the application of those standards to those issues, this Report does not recount those standards, useful as the Court’s exposition of them is.
These materials were authored by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLP, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (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.