Date: 06-20-2018

Case Style:

Case Number: 17-20603

Judge: Don R. Willett

Court: United States Court of Appeals for the Fifth Circuit on appeal from the Southern District of Texas Bankruptcy County

Plaintiff's Attorney: Annie Catmull

Defendant's Attorney: Lowell T. Cage

Description: In bankruptcy litigation, the mishmash of multiple parties and multiple claims can render things labyrinthine, to say the least. To dissuade umpteen appeals raising umpteen issues, courts impose a stringent-yet-prudent standing requirement: Only those directly, adversely, and financially impacted by a bankruptcy order may appeal it.
This appeal is from a bankruptcy court order approving a trustee’s application to employ special counsel. Appellant Robert Furlough, owner of the Debtor, Technicool Systems, objects to Trustee Lowell Cage’s application to employ Stacy & Baker, P.C. (SBPC), alleging that SBPC holds an interest
United States Court of Appeals
Fifth Circuit
FILED
June 20, 2018
Lyle W. Cayce
Clerk
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No. 17-20603
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“adverse to the estate” under 11 U.S.C. § 327(a). Both the bankruptcy court
and the district court held that Furlough lacked standing to object. We agree.
Furlough’s indirect interest in the order fails to meet the strict requirements
for bankruptcy standing. Because the order does not reach his wallet, he
cannot reach this court.
We AFFIRM.
I
National Oilwell Varco (NOV) purchased roughly 300 industrialstrength
air conditioners from manufacturer Technicool Systems for use on
specialty oil-and-gas rigs around the world. The total cost to NOV exceeded $3
million. The units were marketed as “desert-proof.” They weren’t. After
multiple units failed in the field, NOV, represented by SBPC, sued Technicool
in Texas state court for fraud, breach of warranty, and negligent
misrepresentation.
Shortly thereafter, Technicool filed for Chapter 7 bankruptcy and the
resulting automatic stay froze NOV’s state court lawsuit. NOV filed a Motion
for Relief from the Stay to join Technicool’s owner, Robert Furlough, to its state
suit. After an evidentiary hearing, the bankruptcy court modified the
automatic stay; it allowed NOV to add Furlough but prohibited NOV from
alleging “any cause of action for damages suffered directly or indirectly by the
Estate, or that otherwise are Estate property.”
In addition to its state court suit against Technicool and Furlough, NOV
filed a $3 million proof of claim in the bankruptcy case, representing 93 percent
of the total claims filed by Technicool creditors. SBPC represented NOV in this
suit too.
After discovery revealed that Furlough had formed other companies
closely related to Technicool, the Trustee sought to consolidate the businesses
and pierce the corporate veil. To that end, the Trustee filed an application to
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employ SBPC as special counsel under 11 U.S.C. § 327(a). Furlough objected
to this application, arguing that SBPC was not a disinterested person as
required by § 327(a) and that SBPC’s representation of NOV was a
disqualifying “interest adverse to the estate.”
The bankruptcy court held a hearing on Furlough’s objection. The
Trustee presented an engagement letter, signed by SBPC, in which NOV
agreed to transfer to the bankruptcy estate any funds it recovered from
Furlough in the state court proceedings up to the total amount of creditor
claims on file. At the close of the hearing, the court held that Furlough lacked
standing to object because he was not a creditor and did not have a stake in
the estate. It then approved the Trustee’s application to employ SBPC.
The district court affirmed on standing, and Furlough timely appealed.
II
Because this appeal arises from a district court order affirming the final
judgment of a bankruptcy court, we apply the same standard of review as did
the district court. That is, we review the bankruptcy court’s factual findings
for clear error, and we review legal conclusions and mixed questions of fact and
law de novo.1 Standing is a question of law that we review de novo.2
Bankruptcy courts are not Article III creatures bound by traditional
standing requirements.3 But that does not mean disgruntled litigants may
appeal every bankruptcy court order willy-nilly. Quite the contrary.
Bankruptcy cases often involve numerous parties with conflicting and
1 See In re Mercer, 246 F.3d 391, 402 (5th Cir. 2001) (en banc) (citing Randall & Blake,
Inc. v. Evans (Matter of Canion), 196 F.3d 579, 584 (5th Cir. 1999)).
2 See Fortune Nat. Res. Corp. v. U.S. Dep’t of Interior, 806 F.3d 363, 366 (5th Cir. 2015)
(citing Joffroin v. Tufaro, 606 F.3d 235, 238 (5th Cir. 2010)).
3 See Rohm & Hass Tex., Inc. v. Ortiz Bros. Insulation, 32 F.3d 205, 210 n.18 (5th
Cir. 1994) (explaining that “Article III is inapplicable to bankruptcy courts”).
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overlapping interests. Allowing each and every party to appeal each and every
order would clog up the system and bog down the courts. Given the specter of
such sclerotic litigation, standing to appeal a bankruptcy court order is, of
necessity, quite limited.
Both the bankruptcy court and the district court concluded that
Furlough lacked standing to contest the Trustee’s application to employ SBPC.
We agree.
A
The narrow inquiry for bankruptcy standing—known as the “person
aggrieved” test—is “more exacting” than the test for Article III
standing.4 Rather than showing the customary “fairly traceable” causal
connection,5 a bankruptcy appellant must instead show that he was “directly
and adversely affected pecuniarily by the order of the bankruptcy court.”6 In
essence, bankruptcy standing requires “a higher causal nexus between act and
injury.”7 This restriction narrows the playing field, ensuring that only those
with a direct, financial stake in a given order can appeal it. Thus in bankruptcy
litigation, as in life, “the more money we come across, the more problems we
see.”8
4 Matter of Delta Produce, L.P., 845 F.3d 609, 619 (5th Cir. 2016) (quoting In Re Coho
Energy, Inc., 395 F.3d 198, 203 (5th Cir. 2004)); see also Coho Energy, 395 F.3d at 202
(explaining that the “person aggrieved” test originated in 11 U.S.C. § 67(c) (1976) and noting
that, although Congress did not include the provision “when the [Bankruptcy] code was
revamped in 1978[,] . . . courts subsequently have found that this test continues to govern
standing”).
5 See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992) (laying out the “three
elements” that make up the “irreducible constitutional minimum” of standing: an injury in
fact, a fairly traceable causal connection between the injury and the complained-of conduct,
and a likelihood of redressability).
6 Fortune Nat. Res., 806 F.3d at 366 (quoting Coho Energy, 395 F.3d at 203).
7 Id.
8 NOTORIOUS B.I.G., Mo Money Mo Problems, on LIFE AFTER DEATH (Bad Boy/Arista
1997).
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Furlough cannot show that he was “directly and adversely affected
pecuniarily by the order of the bankruptcy court.”9 Furlough’s primary
contention is that, but for NOV’s proof of claim, Technicool’s assets would
exceed its debt, and he would be entitled to any estate surplus. Because SBPC
represents both NOV and the Trustee, Furlough argues, it might fail to disclose
any problems with NOV’s claim, robbing him of the possibility of recovering a
surplus.
This speculative prospect of harm is far from a direct, adverse, pecuniary
hit. Furlough must clear a higher standing hurdle: The order must burden his
pocket before he burdens a docket. SBPC was appointed to assist the Trustee
in consolidating claims and piercing the corporate veil. That appointment does
not directly affect whether the bankruptcy court approves or denies NOV’s
claim against the estate, and thus it does not directly affect Furlough’s
pecuniary interests. Furlough’s argument is essentially that if NOV’s claim
(somehow) ceased to exist or dramatically decreased, the estate’s assets would
exceed its debt, and he would benefit financially. This might be true—however
unlikely—but it would not be a direct result of this appeal. That Furlough feels
grieved by SBPC’s appointment does not make him a “person aggrieved” for
purposes of bankruptcy standing.
B
Furlough claims another basis for standing. The Bankruptcy Code states
that creditors have standing to oppose an application to employ special counsel
if an actual conflicts exists. Under § 327(c), “a person is not disqualified for
employment . . . solely because of such person’s employment by or
representation of a creditor, unless there is objection by another creditor or the
United States trustee, in which case the court shall disapprove such
9 Fortune Nat. Res., 806 F.3d at 366 (quoting Coho Energy, 395 F.3d at 203).
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employment if there is an actual conflict of interest.”10 The Bankruptcy Code
defines “creditor” as an entity that has: (1) “a claim against the debtor that
arose at the time of or before the order for relief concerning the debtor”; (2) one
of several specific types of claims against the estate; or (3) a community claim.11
Furlough asserts he has standing because he is now a creditor. But this
argument proves too little, too late. Now matters not. Standing is “determined
as of the commencement of the suit.”12 And Furlough was not a creditor at the
time the Trustee sought to employ SBPC or at the time the bankruptcy court
held a hearing on his objection. He purchased a proof of claim while his appeal
was pending before the district court. Timing matters, though, and Furlough
cannot belatedly claim creditor status and establish standing retroactively.

* * *

10 11 U.S.C. § 327(c) (emphasis added).
11 Id. at § 101(10).
12 Kitty Hawk Aircargo, Inc. v. Chao, 418 F.3d 453, 458 (5th Cir. 2005) (quoting Lujan,
504 U.S. at 570 n.5).
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Outcome: Furlough is neither a “person aggrieved” under the exacting test for
bankruptcy standing nor a creditor under 11 U.S.C. § 327(c).
AFFIRMED.

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