A chapter 7 trustee sought c0urt approval to sell several investment properties. The debtors objected, arguing that the sales should be suspended until a pending state court appeal was resolved. The bankruptcy court overruled the objection, and the debtors appealed to the bankruptcy appellate panel. The decision on appeal turned on whether the debtors had standing.
Prior to bankruptcy, the debtors had been sued in state court for injuries from an automobile accident caused by their grandson while he was using a vehicle owned by the debtors. The plaintiff (Silverio) obtained a pretrial attachment against both debtors for $15.6 million. Although the litigation eventually resulted in jury verdicts against both debtors, the trial court reversed the verdict against one of them, and they appealed. The state court appeal was pending at the time the debtors filed a chapter 7 bankruptcy.
The debtors’ bankruptcy schedules included a claim for a $9,492,000 “judgment on appeal,” with a potential deficiency of $7,116,800. The remaining creditors filed proofs of claim that totaled $6,572.81.
The assets scheduled by the debtors included (i) their home, (ii) four investment properties (with listed values totaling ~$1.4 million), and (iii) personal property, including a non-exempt Lexus automobile that the trustee sold for $8,000.
About a year after the bankruptcy case began, the chapter 7 trustee sought approval to sell the investment properties. He proposed to sell the properties free and clear of liens, with liens to attach to the sale proceeds. He identified the judgment creditor as holding the only lien on the properties, and did not mention the pending appeal.
The debtors objected and asked that the sale be suspended pending the outcome of the state court appeal. They argued that they were maintaining, insuring and paying taxes on the properties, and the value was likely to increase while the appeal was pending. They also argued that a reversal of the judgment would eliminate Silverio’s claims against the bankruptcy estate so that the trustee would be able to satisfy all of the remaining claims from the proceeds of the Lexus – leaving the debtors with the primary interest in the investment properties.
Apparently neither the debtors nor the trustee was able to adequately respond to the bankruptcy court’s questions regarding the appeal. Ultimately the bankruptcy court overruled the debtors’ objection because he saw no reason to suspend the sale simply because there was an appeal pending.
On appeal, the bankruptcy appellate panel ordered the debtors to show cause why the appeal should not be dismissed for lack of standing. The court articulated the issue in a majority opinion as follows (citations omitted):
Standing to appeal a bankruptcy court’s sale order requires a party to be a “person aggrieved.” This “paradigm, which delimits appellate jurisdiction even more stringently than the doctrine of Article III standing,… bestows standing only where the challenged order directly and adversely affects an appellant’s pecuniary interests. Since title to property of the estate no longer resides in the chapter 7 debtor, the debtor typically lacks any pecuniary interest in the chapter 7 trustee’s disposition of that property.” A chapter 7 debtor will be a person aggrieved by a sale order “by demonstrating, inter alia, that nullification of the sale is likely to result in an overall surplus in the chapter 7 estate… to which the debtor, qua individual, would become entitled once the bankruptcy case is closed…”
The court characterized the bankruptcy court’s approach as making a determination about whether there would be a surplus, which in turn depended upon the viability of the judgment. Since the debtors did not show a likelihood of success in the state court appeal, they lacked standing to object to the sales.
Although the debtors argued for a different test based on a balancing of harms, the court responded that it was bound by 1st Circuit law. The court concluded that the debtors lacked standing to object to the sale, and consequently lacked standing to appeal.
It appears that the majority of the court was swayed by the perception that this case was initiated by the debtors to obtain the benefit of the automatic stay. By filing bankruptcy, they were the ones responsible for putting their investment properties at risk.
A dissenting judge argued that the duty of a chapter 7 trustee to sell property is based on the sale bringing a benefit to the estate. If the Silverio lien was found to be valid, there would be no equity in the properties and no surplus. If there was no equity, then there would be no benefit to the estate, and the trustee should have moved to abandon the property.
Thus, the dissenter concluded that the trustee failed to articulate why the properties, with no equity, should be sold for the benefit of the estate. The trustee should have abandoned the properties to the debtors, as opposed to acting as an agent for the secured creditor. The judge found merit to the debtors’ arguments that there was a likelihood of success on the merits – as demonstrated in part by the dismissal of some of the claims at the trial level. The debtors also had an interest because, due to the lack of equity, the trustee should have abandoned the property to the debtors.
This case illustrates that arguments that may appear logical to one person, may not be viewed that way by another. It seems logical that either (1) the appeal could be successful, resulting in no lien or claim against the estate, with most of the benefit accruing to the debtors, or (2) the Silverio claim and lien could be upheld, in which case the trustee should have abandoned the property to the debtors since the bankruptcy estate would not have any interest. In either case, it certainly looks like the debtors had more of an interest in the disposition of the investment properties than the bankruptcy estate did.
Vicki R. Harding, Esq.