Arlington Capital, LLC v. Bainton McCarthy LLC, et al. (In re GT Automation Group, Inc.)

In re GT Automation Group, Inc., No. 1:14-CV-98 (7th Cir. July 8, 2016) (unpublished).
In the bankruptcy context, an appellant lacks standing if it is unable to realize any economic benefit from a potential reversal.
Procedural context:
Arlington purchased the assets of a debtor. The debtor had a secured lender owed $7.8 million, which creditor agreed to extinguish its lien in connection with a sale of debtor’s assets. The bankruptcy trustee believed that there may have been an inside ballgame that depressed the sale price, allowing Arlington to buy the assets for $2.7 million, when the Trustee believed the assets to be worth $5 million. The Trustee hired counsel and brought a § 363(n) suit against Arlington and the “insiders”. The insiders settled, while Arlington won the suit and then objected to the fee application filed by the Trustee’s law firms (“Law Firms”). Arlington became an unsecured creditor of the estate by being awarded $5,000 in litigation costs in connection with the suit. Arlington’s objection was based on the fact that even if the Trustee had won the case and determined that the true value of debtor’s assets was $5 million, all of the money would have been paid to the secured lender and the creditors would have received no benefit from the Trustee’s action. This is a point fully supported by 11 U.S.C § 330(a)(4)(A)(ii)(I). However, the Law Firms stated that the secured creditor’s lien disappeared with the auction so that any award in this action would inure to the benefit of the estate. The bankruptcy court and district court both agreed with the Law Firms, and Arlington appealed. The Seventh Circuit never reached the merits of the claim because Arlington failed to demonstrate that the Court had jurisdiction. “In the bankruptcy context we have said that an appellant lacks standing if it is unable to realize any economic benefit from a potential reversal.” Regardless of how the estate’s assets are distributed, no asset would ever revert to the benefit of the debtor. Because it failed to allege jurisdiction and because Arlington did not respond to that jurisdictional challenge raised by the Law Firms, the Seventh Circuit vacated the judgment entered below and remanded the case to the district court with instructions to dismiss Arlington’s objection for want of jurisdiction.
: GT Automation Group, Inc. (the “Debtor”) owed a secured lender about $7.8 million. After the Debtor filed for bankruptcy, the lender agreed to extinguish its liens in connection with a sale of Debtor’s assets. If sold for over $7.8 million, the excess would be transferred to the Debtor’s estate. If sold under $7.8 million, the lender would obtain an unsecured claim for the difference. Arlington Capital, LLC, the appellant, purchased the assets of the bankrupt Debtor for $2.7 million. The trustee believed that there was collusion that depressed the sale price. The trustee hired the appellees, the Law Firms, to file a § 363(n) suit to undo or recover the price difference. Arlington prevailed at trial and recovered $5,000 in litigation costs, making it a creditor of the estate; an estate that the Law Firms alleged would have no distribution to creditors.
Posner, Williams, and Pallmeyer (District Judge of the Northern District of Illinois, sitting by designation.)

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