Buyer Standing: No Leg to Stand On
After a debtor’s assets were auctioned off, the bankruptcy trustee unsuccessfully sued the buyer and insiders of the debtor contending that they colluded to depress the purchase price. When the trustee sought court authorization to pay legal fees, the buyer objected. The bankruptcy court approved the fees over its objection and the district court affirmed. So the buyer appealed to the 7th Circuit. The 7th Circuit focused on the threshold issue of whether the buyer had standing.
The debtor owed $7.8 million on a bank loan that was secured by a lien on all of its assets. The bank agreed that the assets could be sold at the auction free and clear of its lien, with the sale proceeds being used to repay the loan. So (1) if the assets sold for less than $7.8 million, all of the proceeds would be applied to the bank loan (leaving the bank with an unsecured claim for any deficiency), and (2) if the assets sold for more than $7.8 million, the excess would go to the bankruptcy estate.
The buyer was the successful bidder and acquired the assets free and clear of the bank’s lien for a bid of $2.7 million. After the auction the trustee decided that the buyer and insiders of the debtor colluded to depress the purchase price and that the true value was ~$5 million. The trustee unsuccessfully sued to undo the sale or to recover the difference between the true value and the sale price.
When the trustee sought court authorization to pay the fees of the law firms who handled the litigation, the buyer objected, arguing that the services were not reasonably likely to benefit the bankruptcy estate and thus could not be approved under section 330(a)(4)(A)(ii)(I) of the Bankruptcy Code.
The buyer reasoned that even if the trustee had won it would not have benefited the estate since any recovery would have gone to the bank. The law firms seeking payment disagreed, contending that since the bank lien was extinguished by the auction any recovery would have belonged to the estate. The bankruptcy court agreed with the law firms and approved their fees; the district court affirmed.
On appeal the 7th Circuit first addressed the threshold question of whether it had jurisdiction. Specifically if the buyer lacked Article III standing the court did not have jurisdiction. The court noted Supreme Court precedent holding that (citations omitted):
A plaintiff has Article III standing if, and only if, it has suffered is to “injury in fact,” which is “fairly traceable” to the challenged action of the defendant, and which would “likely” be redressed by a favorable decision. Standing is lacking if it is merely “speculative” – as opposed to “likely” – that the plaintiff’s injury would be redressed by a favorable decision.
In this case the buyer became an unsecured creditor when it was awarded litigation costs of ~$5, 000. However, in support of their argument that the buyer lacked standing the law firms argued that since (1) the estate’s only asset was $225,000 cash, (2) under the buyer’s own theory most of that would be owed to the bank, and (3) administrative claims with priority totaling $300,000 had already been filed (with more likely to follow), it was “difficult to imagine any scenario” where the buyer would receive a distribution on its unsecured claim.
For whatever reason the buyer did not respond to this argument. The court noted that normally this would mean that the buyer waived its arguments in response:
Nevertheless, we gave [the buyer’s] lawyer an opportunity to orally argue that [the buyer] has Article III standing, but no such argument was made. Asked whether [the buyer] would get “even a dollar” from a favorable decision, he responded “Who knows?” He urged that it was “theoretically possible” that [the buyer] would benefit, but he could not describe his theory. Indeed, he confirmed that he had “no idea” how many claims have been filed against [the debtor’s] estate that would take priority over [the buyer’s] claim, nor did he know the aggregate dollar value of such claims, nor the likelihood that any such claim would be approved by the bankruptcy court. Without a doubt, [the debtor] has failed to demonstrate that it has Article III standing.
The court went on to comment that oral argument revealed that the buyer’s true goal had nothing to do with its $5,000 unsecured claim. Rather it hoped to file a lawsuit against the law firms for their role in the litigation and figured it would be useful to have an opinion saying that the lawsuit was pointless. The court noted that not only was the buyer not entitled to an advisory opinion “to be used as a sword in independent litigation,” the court lacked the authority to give one.
Consequently the 7th Circuit vacated the lower court judgment and remanded with instructions to dismiss for want of jurisdiction
It is easy to imagine that the buyer’s perception was that it was injured by pointless litigation and had every right to raise the objection that the trustee’s legal fees could not be approved because the litigation was not “reasonably likely to benefit the debtor’s estate.” However, there is a fairly consistent theme in bankruptcy cases that even if there is some merit to substantive arguments, a party will lack standing if there are no assets available to compensate the party if it wins.
The opinion is also a reminder that it is a good idea to come up with a credible response to any arguments made by the opposing party, since you never know when a court might take a fancy to that one argument that you ignored.
Vicki R Harding, Esq.