CHAPTER 3, B. Circuit Splits and Other Hot Topics in the Consumer Arena

• Jurisdiction: United States

B. Circuit Splits and Other Hot Topics in the Consumer Arena

2019 Annual Spring Meeting

April 2019

Ronald R. Peterson

Jenner & Block LLP

Chicago

Is an Objection Required to Preserve Appellate Standing?

Bankruptcy lawyers tend to treat bankruptcy procedure like a wedding: They make a proposal, invite interested parties to participate, hold their breath as a robed officiant offers one last opportunity to "speak now or forever hold your peace," and — hearing no objection — assume they are in the clear to live happily ever after. Their self-assurance is not unfounded. Indeed, until recently, the majority of circuits viewed the "person aggrieved" standard for appellate standing to be satisfied only where the appellant actually participated in the proceedings by attending the hearing and raising an objection.¹

However, the Ninth Circuit recently muddied the waters on this issue in In re Point Center Financial Inc., 890 F.3d 1188 (9th Cir. 2018), when it held that an appellant's failure to attend and object at a bankruptcy court hearing does not affect whether the appellant is a "person aggrieved" for the purposes of appellate standing. In Point Center Financial, the debtor (PCF) was an originator and servicer of residential and commercial loans. Private investors funded the loans offered by PCF to its customers. In return, the investors would typically receive a fractionalized interest in the loan and in the deed of trust securing the loans. When defaults occurred, PCF would foreclose on the loans and place the property into a new single-purpose limited liability company. The investors would then be given membership interests in the LLC.

In once such instance, PCF formed Dillon Avenue 44 LLC to hold title to property obtained after a foreclosure, and gave the membership interests to the applicable investors. After PCF filed for bankruptcy, the court set a deadline for the chapter 7 trustee to assume or reject PCF's executory contracts, including Dillon Avenue 44 LLC's operating agreement. The trustee did not do so. Instead, three months after the deadline, the trustee filed a motion asking for permission to assume the operating agreement retroactively. Since no parties filed objections or appeared at the hearing to oppose the assumption motion, the court granted it. When the investors learned that the operating agreement had been assumed, they filed an emergency reconsideration motion, which the bankruptcy court denied. The investors then appealed the bankruptcy court's written opinion on the assumption motion. At the district court, the trustee moved to dismiss the appeal on the grounds that the investors had not objected to or attended the hearing on the assumption motion. The district court agreed and dismissed the appeal for lack of standing.

The Ninth Circuit reversed, noting that, although there was a circuit split on the issue, there were no controlling opinions in the Ninth Circuit addressing whether a person who has a pecuniary interest affected by a bankruptcy proceeding and received adequate notice of a bankruptcy court hearing, but failed to appear and object, may be found to satisfy the "person aggrieved" requirement for appellate standing.² The court held that requiring participation in the lower court proceedings as a prerequisite to having appellate standing conflates the basic notion of standing with notions of waiver and forfeiture. Rather, since there was "no question that [the investors'] pecuniary interests [were] directly and adversely affected by the bankruptcy court order in question," the court found that the investors qualified as "aggrieved persons" for the purposes of appellate standing. However, it noted that it was still possible that the investors forfeited the arguments raised on appeal by failing to timely object. The Ninth Circuit therefore remanded the case to the bankruptcy court to determine that issue.

Shortly thereafter, in In re Wrightwood Guest Ranch LLC,³ the Ninth Circuit provided additional guidance on this issue, explaining that:

When it comes to the attendance and objection requirement, the dispositive question is whether there is any evidence in the bankruptcy court record that an attorney entered an appearance on behalf of the would-be appellant, objected to the relevant order on behalf of the would-be appellant, or otherwise informed the bankruptcy court that he or she was representing the interests of the would-be appellant. When a party has not objected to an order in writing and the record contains no explicit indication that a party meant to object, a party has normally failed to preserve its objection to that order. Requiring parties to make their objections clear on the record is not an onerous burden, and it is one that ensures that the bankruptcy court is squarely presented with the facts and legal arguments necessary to reach a reasoned decision considering the interests of all affected parties. Whether we refer to the attendance and objection requirement as one of "standing," or now as one of "forfeiture," it serves the same interests of economy, efficiency, and notice that are crucial to the orderly functioning of the bankruptcy system.⁴

In other words, the Ninth Circuit's recent divergence from the majority approach is not as drastic as it may seem at first glance. The Ninth Circuit simply views the lack of appellate standing stemming from the failure to timely object as an issue of waiver/forfeiture, rather...