Dean v. Seidel

Case Type:
Business
Case Status:
Dismissed
Citation:
No. 21-10468 (5th Circuit, Dec 07,2021) Published
Tag(s):
Ruling:
In this appeal of a bankruptcy court order, the debtor objects to a litigation funding arrangement entered into by the trustee and a creditor. The court found that the Debtor did not have Standing to object to this arrangement and dismissed his appeal.
Procedural context:
Debtor-Appellant William Berry Dean, III filed a Chapter 7 voluntary petition in 2019. Appellee Scott M. Seidel was appointed trustee for the estate. Reticulum Management, LLC (“Reticulum”) is one of the creditors. Seidel did not have sufficient unencumbered funds to retain counsel to pursue claims for the estate and potentially reclaim money for creditors. Consequently, Seidel and Reticulum entered into a Litigation Funding Agreement in which Reticulum “agreed to provid[e] funding to the Trustee and the Debtor’s bankruptcy estate to fund the Trustee’s litigation against the [f]uture [d]efendants in exchange for a share of any of the [l]itigation [p]roceeds.” In June 2020, the bankruptcy court held a hearing in which it granted Seidel’s motion to approve the Agreement. The district court affirmed that decision of the bankruptcy court, holding that it had not committed clear error. Dean appealed, contending that such an agreement undermines the statutory ranking system for distribution of the estate’s property by allowing Reticulum to move ahead of other creditors in the order of payment.
Facts:
Standing to appeal a bankruptcy court order is, of necessity, quite limited. To determine whether a party has standing to appeal a bankruptcy court order, the court uses the ‘person aggrieved’ test. This test “is an even more exacting standard than traditional constitutional standing. The appellant must show that he is “directly, adversely, and financially impacted by a bankruptcy order.” Such standing must be connected to the exact order being appealed as opposed to the proceedings more generally. The order of the bankruptcy court must directly and adversely affect the appellant pecuniarily. In a Chapter 7 bankruptcy, “the debtor-out-of-possession typically has no concrete interest in how the bankruptcy court divides up the estate. Once a trustee is appointed, “the trustee, not the debtor or the debtor’s principal, has the capacity to represent the estate and to sue and be sued. However, a debtor may retain bankruptcy standing by showing “that defeat of the order on appeal . . . would affect his bankruptcy discharge. Appellants cannot demonstrate bankruptcy standing when the court order to which they are objecting does not directly affect their wallets. For instance, courts have held that the owner of a debtor company in a Chapter 7 bankruptcy could not object to an order approving the hiring of special counsel because such an order would not affect the debtor company’s discharge. Courts have also held that a creditor did not have bankruptcy standing to object to an order approving the sale of assets because the creditor would be in the same position financially, whether or not the bankruptcy court approved the sale. Dean contends that the pending related action in which Reticulum objects to the discharge of its claim shows he can still be affected by this order. He points to the decision in In re Mandel in which the debtor retained bankruptcy standing because his claim had not yet been discharged. In that case, the debtor had standing to object to an order that allowed claims for compensation for legal services against his bankruptcy estate. But Mandel does not stand for the general proposition that the simple existence of a pending debt creates bankruptcy standing for the debtor. The order at issue in Mandel specifically related to whether a debt would be discharged. The Court held that “a debtor in a Chapter 7 bankruptcy proceeding . . . has standing to appeal an order by the bankruptcy court allowing claims against his bankruptcy estate by the Appellees. Here, the order on appeal — approval of a litigation funding agreement — does not affect whether Dean’s debts will be discharged. Neither does it affect Reticulum’s related pending case in which it “objected to Dean’s bankruptcy discharge and to discharge of its claims against Dean.” Dean thus does not have bankruptcy standing because he cannot show how the order approving the litigation funding agreement would directly, adversely, and financially impact him.
Judge(s):
Weiner, Graves and Ho

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