Ninth Circuit: Standard For Constitutional Standing Applies To Bankruptcy Appeals

• Published date: 02 October 2023
• Subject Matter: Government, Public Sector, Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Constitutional & Administrative Law, Trials & Appeals & Compensation, Personal Injury
• Law Firm: Jones Day
• Author: Jane Rue Wittstein and Mark Douglas

Federal appellate courts have traditionally applied a "person aggrieved" standard to determine whether a party has standing to appeal a bankruptcy court order or judgment. However, this standard, which requires a direct, adverse, and financial impact on a potential appellant, is derived from a precursor to the Bankruptcy Code and does not appear in the existing statute. It also arguably conflicts with the general constitutional standing rule that governs litigation in federal courts, which, among other things, requires a litigant to demonstrate "a concrete and particularized injury in fact."

The U.S. Court of Appeals for the Ninth Circuit addressed the interplay between these standards in Clifton Capital Group LLC v. Sharp (In re East Coast Foods Inc.), 66 F.4th 1214 (9th Cir. 2023), as amended and rehearing denied, 2023 WL 5965812 (9th Cir. Sept. 14, 2023). The Ninth Circuit reversed a district court ruling affirming a bankruptcy court order approving an award of enhanced fees to a chapter 11 trustee, concluding that the appellant lacked constitutional standing to appeal the fee order because any injury to the appellant was "too conjectural and hypothetical." In so ruling, the Ninth Circuit held that an appellant must satisfy the requirements for constitutional standing in the first instance rather than the more exacting "person aggrieved" standard.

Standing

"Standing" is the legal capacity to commence litigation in a court of law. It is a threshold issue'a court must determine whether a litigant has the legal capacity to pursue claims before the court can adjudicate the dispute.

In order to establish "constitutional" or "Article III" standing, a plaintiff must have a personal stake in litigation sufficient to make out a concrete "case" or "controversy" to which the federal judicial power may extend under Article III, section 2, of the U.S. Constitution. See Pershing Park Villas Homeowners Ass'n v. United Pac. Ins. Co., 219 F.3d 895, 899 (9th Cir. 2000).

In bankruptcy cases, various provisions of the Bankruptcy Code confer another type of standing on various entities (e.g., the debtor, the debtor-in-possession, a bankruptcy trustee, creditors, equity interest holders, official committees, or indenture trustees), among other things, to participate generally in a bankruptcy case or commence litigation involving causes of action or claims that either belonged to the debtor prior to filing for bankruptcy or are created by the Bankruptcy Code. For example, in a chapter 11 case, section 1109 of the Bankruptcy Code provides that any "party in interest," including the debtor, the trustee, a committee of creditors or equity interest holders, a creditor, an equity security holder, or an indenture trustee "may raise and may appear and be heard on any issue" in a chapter 11 case.

This "bankruptcy" or "statutory" standing is distinct from constitutional standing, which is jurisdictional'if a potential litigant lacks constitutional standing, the court lacks jurisdiction to adjudicate the dispute. The distinction between constitutional and bankruptcy standing was examined by the U.S. Court of Appeals for the Third Circuit in In re Wilton Armetale, Inc., 968 F.3d 273 (3d Cir. 2020), in which the court of appeals held that the ability of a creditor to sue in bankruptcy is not a question of constitutional standing (because the risk of loss creates standing) but, rather, an issue of statutory authority because creditors may lose authority to pursue claims under the Bankruptcy Code.

The Third Circuit explained that, in accordance with the U.S. Supreme Court's decision in Lexmark Int'l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 125 (2014), constitutional standing has only three elements: (i) there must be "a concrete and particularized injury in fact"; (ii) the injury must be "fairly traceable" to the defendant's conduct; and (iii) "a favorable judicial decision" would likely redress the injury. 572 U.S. at 125. Once a plaintiff satisfies those elements, the action "presents a case or controversy that is properly within federal courts' Article III jurisdiction." Id. The party invoking the jurisdiction of...