The Future of Bankruptcy Appeals: Appellate Standing After Lexmark Considered

• Publication year: 2021

The Future of Bankruptcy Appeals: Appellate Standing After Lexmark Considered

John A. Peterson III

Joshua A. Esses

THE FUTURE OF BANKRUPTCY APPEALS: APPELLATE STANDING AFTER LEXMARK CONSIDERED

John A. Peterson, III^* Joshua A. Esses^**

Abstract

The purpose of this Article is to summarize the current state of the law regarding appellate standing in bankruptcy appeals within the various sister circuit courts of the United States, and to recommend how the law of appellate review of bankruptcy court orders should be applied. We will begin with a purely descriptive summary of the law of standing in federal courts and of standing to appeal orders of bankruptcy courts specifically. From this discussion it should be clear that courts almost universally limit appellate standing of bankruptcy court orders to parties that can demonstrate that they are a person-aggrieved— in other words, have been pecuniarily harmed—by that order. The requirement that a party demonstrate a direct pecuniary interest to have standing to appeal a bankruptcy court order is often justified by arguments based on judicial economy and is understood as a prudential standing doctrine. As a prudential doctrine, the person-aggrieved test applied to limit standing has no basis in the constitution or the statutory text of the modern bankruptcy code. Given the Supreme Court's recent holdings—most notably Lexmark International, Inc. v. Static Control Components, Inc.¹ —which aim to curb the use of prudential standing tests devoid of statutory or constitutional justifications, the law regarding standing to appeal bankruptcy court orders is subject to change.

We will summarize developments in the law of standing to appeal bankruptcy court orders across the several circuits. Recently, the Supreme Court declined to grant certiorari review to an appellant of a bankruptcy court order who sought clarity regarding the continued legality of the person-aggrieved test in bankruptcy appeals.² Accordingly, in the immediate future, Lexmark's impact on bankruptcy appeals will be defined exclusively by the several circuits. We will conclude with our recommendations that courts should combine different

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circuit approaches to allowing and limiting appeals. Specifically, we recommend that courts adopt the Ninth Circuit's interpretation of Lexmark combined with the Seventh and Tenth Circuits' rules for appellant standing.

Introduction.............................................................................................287

A. Article III Standing................................................................... 288
B. Statutory Standing .................................................................... 290
C. Prudential Standing.................................................................. 291
D. Bankruptcy Appellate Standing ................................................ 293

I. Lexmark International, Inc. v. Static Control Components, INC..................................................................................................... 296

A. Lexmark's Limitations on Prudential Standing ....................... 296
B. Appellate Bankruptcy Standing After Lexmark Considered..... 300
C. The Court Has Denied Review of Whether Lexmark Disallows the Person-Aggrieved Test........................................................ 302

II. Lower Court Developments........................................................304

A. First Circuit.............................................................................. 305
B. Second Circuit .......................................................................... 305
C. Third Circuit............................................................................. 306
D. Fourth Circuit ........................................................................... 308
E. Fifth Circuit .............................................................................. 308
F. Sixth Circuit.............................................................................. 309
G. Seventh Circuit ......................................................................... 311
H. Eighth Circuit ........................................................................... 311
I. Ninth Circuit ............................................................................. 312
J. Tenth Circuit............................................................................. 313
K. Eleventh Circuit ........................................................................ 314
L. Summary of the Circuit Courts' Approaches............................ 315

III. Alternative Approaches .............................................................316

A. Lexmark as a Distinction Without a Difference ....................... 316
B. Interpreting Individual Code Provisions' Grant of a Right (or Lack Thereof) to Appeal Bankruptcy Court Orders ................. 320
C. A Blended Approach: Combine Lexmark With a Requirement That Appellants Objected Below .............................................. 322

Conclusion.................................................................................................323

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Introduction

As we strive to first understand the basic black-letter law regarding standing to appeal orders of the bankruptcy court, we will begin with a short primer on how parties generally have standing to be heard in federal courts of appeals. Our mission here is to be purely descriptive of the landscape of standing tests as applied by the circuit courts. This presents a problem as a voluminous and convoluted literature exists on the myriad of questions raised in any academic treatment of the concept of standing.³ Therefore, we will curtail this Section to a basic summary of the issue, free from any speculation as to how "correct" courts may be in the tests they apply. We wish to understand the law, not make recommendations or criticize the behavior of the courts. From a generalized discussion of constitutional standing, we will move to specific standing inquiries conducted for claimants appealing orders of the bankruptcy court.

Through this Section we will outline the statutory rights at issue and highlight the prudential doctrines employed by appellate courts in standing analyses of bankruptcy appeals. From this discussion it should become clear— as courts themselves have acknowledged—that there is no constitutional or statutory basis for judges' current application of the "person-aggrieved" standard for granting or denying standing to appellants appealing from orders of the bankruptcy court.⁴ Yet, it remains axiomatic that parties seeking appellate review of bankruptcy orders must adhere to the current "person-aggrieved" test and demonstrate a "pecuniary interest" harmed by the lower court's decisions.⁵ This prudential test is often justified by arguments of judicial humility and efficiency, and derives its meaning from earlier versions of the Bankruptcy Code.⁶

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A. Article III Standing

It is a basic maxim of our legal system that the judicial power is carefully circumscribed and limited under Article III of the Constitution and applied only to the consideration of live cases or controversies.⁷ The exercise of the federal judicial power is "legitimate only as a necessity in the determination of real earnest, and vital controversy."⁸ As Chief Justice Roberts once noted:

The plaintiff must allege at the pleading stage, and later prove, an injury that is fairly traceable to the defendant's challenged conduct and that is likely to be redressed by the relief sought. If the plaintiff cannot do so, the court must dismiss the case as beyond its power to decide— no matter when in the litigation the flaw is discovered or arises. A dismissal on the basis of standing prevents the court from reaching and deciding the merits of the case, whether for the plaintiff or the defendant. Standing is thus properly regarded as a doctrine of judicial self-restraint.⁹

Although this is clearly not an absolute guide, "the standing concepts have gained considerable definition from developing case law."¹⁰ As Chief Justice Roberts summarized, "the injury must be distinct and palpable, concrete, certainly impending, real and immediate, and actual or imminent not conjectural or hypothetical."¹¹ The need for a "real, earnest, and vital controversy," the adverseness requirement; and the requirement that a claimant "is injured by [the] operation" of the act in question, are foundational rules of standing which have been affirmed by decades of precedent.¹² Furthermore, as the standing requirement is a constitutional limitation, it may not be waived by the parties, ignored by the court, or abrogated by Congress.¹³ This reflects the courts' mandate to preserve the delimited separation of powers outlined by the Constitution. As Justice Scalia wrote in Lujan:

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[T]he Constitution's central mechanism of separation of powers depends largely upon common understanding of what activities are appropriate to legislatures, to executives, and to courts . . . Though some of its elements express merely prudential considerations that are part of judicial self-government, the core component of standing is an essential and unchanging part of the case-or-controversy requirement of Article III.¹⁴

Finally, the burden for establishing standing and thus federal jurisdiction lies on the party bringing suit.¹⁵ However, once Article III standing's jurisdictional concerns are settled, courts have a "virtually unflagging obligation" to hear the case before them.¹⁶ This is reflective of the courts' duty to check the other branches of government and to provide a forum for redress of injuries. Federal courts "have no more right to decline the exercise of jurisdiction which is given than to usurp that which is not given. The one or the other would be treason to the constitution."¹⁷

Although there is a voluminous literature discussing supposed flaws or shortcomings in the courts'...