Arguments for standing fall flat: US Fifth Circuit clarifies scope of “aggrieved person” appellate standing in bankruptcy cases
Last week, the US Fifth Circuit Court of Appeals concluded that NexPoint Advisors, L.P. lacked standing to appeal orders in the bankruptcy case of Highland Capital Management L.P. because (among other things) it was not a "person aggrieved" despite its administrative fee claim and potential liability in an adversary proceeding.
The bankruptcy court confirmed Highland Capital's Chapter 11 reorganization plan in February 2021, and in the ordinary course, ordered estate professionals to file final fee applications for compensation and reimbursement of expenses. Overruling NexPoint's objections (regarding insufficient notice and "questionable billing judgment and overstaffing"), the bankruptcy court approved various final fee applications, which NexPoint appealed to the district court. The district court dismissed NexPoint's challenge for lack of appellate standing, now affirmed by the court of appeals.
Who is an "aggrieved person"?
NexPoint primarily argued that it satisfied the "person aggrieved" test for standing.
The court of appeals confirmed that the "person aggrieved" test—a judge-made prudential limitation on standing—governs standing in bankruptcy appeals and is "more exacting" than constitutional Article III standing. It requires an appellant to show that it was "directly and adversely affected pecuniarily by the order of the bankruptcy court." Therefore, bankruptcy appellate standing requires "a higher causal nexus between act and injury" than traditional constitutional standing. Bankruptcy cases are unique because they often involve many parties with conflicting and overlapping interests. By limiting appellate standing in this way, the possibility of overburdening appellate courts with appeals from the many parties involved in a bankruptcy case is mitigated.
Who is not an "aggrieved person"?
NexPoint presented two sources of "aggrievement" in the district court, its (1) administrative expense claim; and (2) role as a defendant in an adversary proceeding.
NexPoint had filed an administrative claim in the Highland Capital case, which the bankruptcy court disallowed after NexPoint had filed its appeal. The court of appeals observed that, since NexPoint was not entitled to its claim, its finances could not therefore be impacted by the payout of professional expenses to others under the bankruptcy order. (It also noted that NexPoint, "accepting this reality, [shifted] gears" to emphasize its second argument.)
NexPoint was a defendant in an adversary proceeding filed by the trustee of the litigation trust formed under the confirmed plan. In the adversary proceeding, the trustee sought to hold NexPoint liable for hundreds of millions of debt, including millions of dollars in professional fees incurred in connection with the bankruptcy. NexPoint argued that because it could be liable for professional fees awarded by the bankruptcy court it satisfied the "person aggrieved" standard. Because there was no order requiring NexPoint to pay fees as a result of the adversary proceeding, the court of appeals reasoned that the prospect of harm was too speculative. The court of appeals further noted that "no less than seven different 'ifs' must come to pass" for the bankruptcy order to impact NexPoint.
Other insufficient arguments for standing
NexPoint also argued that the Supreme Court case of Lexmark Int'l, Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014) negated the "person aggrieved" test in bankruptcy actions. In Lexmark, the Supreme Court held that courts may not limit a cause of action that Congress has created merely when prudence dictates. The court of appeals rejected this argument, noting that Lexmark focused solely on standing on a false advertising claim under the Lanham Act (the federal trademark statute) and reached only analogous circumstances. The court of appeals also emphasized that for the Supreme Court to override Fifth Circuit precedent, the decision must be "unequivocal," an element missing from NexPoint's appeal.
The court also disagreed that the "party in interest" language from sections 330 and 1109 of the Bankruptcy Code provided NexPoint with appellate standing. Section 1109 conferred standing for a party in interest to appear and be heard before a bankruptcy court, distinct from standing to appeal the merits of a decision.
Key takeaways
Based on this opinion, to appeal a bankruptcy order, an appellant must:
- be directly and adversely affected pecuniarily by a bankruptcy court order, to meet the "person aggrieved" test;
- rely on more than the existence of an administrative claim or potential indirect liability in an adversary proceeding (where no order requires the appellant to make a payment as a result of the proceeding); and
- demonstrate more than its status as a "party in interest" in a bankruptcy case.
