# United States Court of Appeals **For the Eighth Circuit**

___________________________ No. 15-2060

___________________________ Opportunity Finance, LLC; Opportunity Finance Securitization, LLC; Opportunity Finance Securitization II, LLC; Opportunity Finance Securitization III, LLC; International Investment Opportunities, LLC; Sabes Family Foundation; Sabes Minnesota Limited Partnership; Robert W. Sabes; Janet F. Sabes; Jon R. Sabes; Steven Sabes

lllllllllllllllllllll Appellant s

v. Douglas A. Kelley, Chapter 11 Trust ee; Unsecured Creditors Committee

lllllllllllllllllllll Appellee s

___________________________ No. 15-2061

___________________________ DZ Bank AG Deutsche Zentral-Geno ssenschaftsbank, Frankfurt am Main

lllllllllllllllllllll Appellant

v. Douglas A. Kelley; Unsecured Creditors Committee

lllllllllllllllllllll Appellee s___________________________ No. 15-2062

___________________________ Epsilon Global Active Value Fund 1-B Ltd.; Epsilon Global Active Value Fund II,

L.P.; Epsilon Global Active Value Fund II-B, L.P.; Epsilon Global Active Value Fund II-B, Ltd.; Epsilon Global Active Value Fund III Ltd.; Epsilon Global Active

Value Fund Ltd.; Epsilon Global Active Va lue Fund, L.P.; Epsilon Global Asset

Management Ltd.; Epsilon Global Master Fund II, L.P., also known as Epsilon Global Master Fund II, L.P., Sub 1; Epsilon Global Master Fund, L.P.; Epsilon Structured Strategies Master Fund, L.P., also known as Epsilon Global Master

Fund III Structured Strategies, L.P.; Epsilon Investment Management, LLC; Stafford Town Ltd.; Westford Asset Management, LLC; Westford Global Asset Management Ltd.; Westford Special Situations Fund Ltd.; Westford Special Situations Fund, L.P.; Westford Special Situations Master F und, L.P.; Steve G. Stevanovich

lllllllllllllllllllll Appellant s

v. Douglas A. Kelley; Unsecured Creditors Committee

lllllllllllllllllllll Appellee s

____________ Appeals from United States District Court for the District of Minnesota - Minneapolis

____________ Submitted: November 19, 2015 Filed: May 16, 2016

____________ Before SMITH, BYE, and BENTON, Circuit Judges.

____________

-2-BENTON, Circuit Judge.

In the aftermath of Thomas Petters ’ Ponzi scheme, Douglas A. Kelley—as trustee for Petters Company, Inc. (PCI) and eight associated special-purpose entities (SPEs)—filed Chapter 11 bankruptcy petitions . On Kelley’s motion, the bankruptcy court consolidated the bankruptcy estate s of PCI and the SPEs “for all purposes substantive and administrative.” Lenders to PCI and the SPEs appealed. The district court 1 dismissed, holding the Lenders did not have standing to appeal the consolidation order because they were not “persons aggrieved.” Westlb AG v. Kelley , 531 B.R. 783, 795 (D. Minn. 2015). The Lende rs appeal. Having jurisdiction under 28 U.S.C. § 158(d)(1), this court affirms.

I.

Petters, convicted of wire fraud, mail fraud, conspiracy and money laundering, conducted a multi-billi on-dollar Ponzi scheme using PCI and eight wholly-owned SPEs. See United States v. Petters , 663 F.3d 375, 378 (8th Cir. 2011). PCI and the SPEs were placed into receivership. The receiver filed Chapter 11 bankruptcy petitions for PCI and the SPEs. Kelley wa s appointed as the Chapter 11 trustee in each bankruptcy case, which the bankruptcy court consolidated into one jointlyadministered case.

To fund PCI, Petters used various SPEs, which held illusory accounts receivable and had no appreciable assets en tering bankruptcy. PCI also served as a holding company for several of the SPEs. Two groups of Lenders made loans to certain SPEs. Another group of Lenders did not make loans directly to the SPEs, but only to other Lenders. Each Lender wa s a net winner from the Ponzi scheme.

1 The Honorable Patrick J. Schiltz, United States District Judge for the District of Minnesota.
-3-As net winners, none of the Lenders file d a proof of claim. Kelley, however, named the Lenders as defendant s in separate avoidance ac tions. Seeking to recover funds for the bankruptcy estate s, Kelley alleges that th e SPEs wrongfully transferred funds to the Lenders. If the Lenders were found liable in the avoidance actions, they could then file proofs of claim in the bankruptcy case.

Kelley—with the support of the Co mmittee of Unsecured Creditors—moved to substantively consolidate PCI and the SPEs. See generally Sampsell v. Imperial Paper & Color Corp. , 313 U.S. 215, 219 (1941) (recognizing bankruptcy referee’s power “consolidating the estate s” of two related entities); In re Giller , 962 F.2d 796, 799 (8th Cir. 1992) (recognizing “the bankruptcy court’s power to order substantive consolidation”). The Lenders, along withnonparty Elistone Fund, objected to the consolidation. Kelley moved to strike their objections, asse rting they were not parties in interest. The motion to strike was de nied by the bankruptcy court. Granting the consolidation motion and consolidating the assets and liabilities of PCI and the SPEs in the main bankruptcy case, the bankruptcy court found that PCI and the SPEs were interrelated, and had engaged in “massive commingling and the erosion of corporate boundaries.”

The Lenders and Elistone Fund appealed the consolidation. Kelley first moved to certify those appeals directly to this c ourt, which was denied. Kelley then moved to dismiss the appeals, argui ng that the Lenders did nothave standing as “persons aggrieved” to appeal the bankruptcy court’ s order. The Lenders responded that (1) Kelley was estopped from objecting to their standing because he expressly stated in his certification motion that the district court had jurisdiction to hear the appeals and (2) nevertheless, they were persons aggrieved.

The district court dismissed the appeal s, holding Kelley was not estopped, and that the Lenders were not “persons aggrieved.” The Lenders appeal.

-4-II.

The Lenders argue Kelley should be estopped from asserting they lacked standing to appeal. The Lenders note that, in the certification motion, Kelley said that the district court had “jurisdiction over . . . the pending appeal pursuant to 28 U.S.C. §§ 158(a) and 1331 and Federal Rule of Bankruptcy Procedure 8001(f)(3)(C).” Thus, according to the Lenders, Kelley should be estopped from invoking the “persons aggrieved” doctrine (which Kelle y contends is jurisdictional).

The district court declined to estop Kelley from arguing that the Lenders were not persons aggrieved. This court review s an application of the judicial estoppel doctrine for an abuse of discretion. Van Horn v. Martin , No. 15-1710, 2016 WL537592, at *1 (8th Ci r. Feb. 11, 2016). This court “will not overturn a district court’s discretionary appli cation of the judicial estoppel doctrine unless it plainly appears that the court committed a clear e rror of judgment in the conclusion it reached upon a weighing of the proper factors.” Stallings v. Hussman Corp. , 447 F.3d 1041, 1046-47 (8th Cir. 2006)

Judicial estoppel, an equitable doctrine, “prevents a party from prevailing in one phase of a case on an argument and then relying on a contradictory argument to prevail in another phase.” New Hampshire v. Maine , 532 U.S. 742, 749 (2001). This doctrine “protects the integrity of the judicial process.” EEOC v. CRST Van Expedited, Inc. , 679 F.3d 657, 679 (8th Cir. 2012). The Supreme Court has articulated three non-exhaustive factors to ai d a court in determining whether to apply the doctrine: (1) whether a party’s later pos ition is clearly inconsistent with its earlier position; (2) whether the party has succeeded in persuading a court to accept that party’s earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that the court was misled; and (3) whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on th e party if not estopped. Jones v. Bob Evans Farms, Inc. , No. 15-2068, 2016 WL 308659, at *2 (8th Cir. Jan. 26, 2016), citing New

-5-Hampshire , 532 U.S. at 749-51. “Notably, judicial estoppel does not apply when a debtor’s prior position was taken because of a good-faith mistake rather than as part of a scheme to mislead the court.” Stallings , 447 F.3d at 1049.

The district court did not abuse its di scretion in declining to estop Kelley’s arguments. First, Kelley’s statement that the district court had jurisdiction under 28 U.S.C. §§ 158(a) and 1334 is not clearly incons istent with his later position that the Lenders are not parties aggrieved. The cited statutes address the finality of bankruptcy court judgments, orders, and decr ees. There is nothing clearly inconsistent with arguing that, based on the finality of the bankruptcy court’s order, the district court has jurisdiction over the appeal, and later arguing, because the Lenders did not have standing to appeal, that th e appeal should be dismissed. See Simon v. Safelite Glass Corp. , 128 F.3d 68, 73 (2d Cir. 1997) (“If the statements can be reconciled there is no occasion to apply an estoppel.”).

As to the second New Hampshire factor, the Lenders claim that the district court accepted Kelley’s earlier position by agreeing in its denial of the certification motion that it “has jurisdiction over the appeals under 28 U.S.C. § 158(a).” Section 158(a) governs the finality of a bankruptcy court order, not standing. There was nothing clearly inconsistent with the court noting the finality of the bankruptcy court order. More importantly, this factor aims to avoid “the perception that either the first or the second court was misled.” New Hampshire , 532 U.S. at 750. Here, the same court presided over both stages of the proceedi ngs and showed no con cern that Kelley was “playing fast and loose with the courts.” See CRST Van Expedited , 679 F.3d at 679.

Under the final New Hampshire factor, the Lenders argue that Kelley’s inconsistent statements prejudiced them because they (1) e xpended money briefing the certification motion and (2) had to res pond to Kelley’s standing arguments in their reply brief rather than their opening brief. Each contention is without merit. As the district court correctly noted, at the time of the certification motion, an additional appellant that has since settle d—Elistone Financial—had st anding to appeal as a net

-6-loser in the scheme. While still in bankruptcy court, Kelley moved to strike the Lenders’ objections on the basi s that they were not parties in interest and lacked prudential standing to object. Thus, the Le nders have not demonstrated that they suffered an unfair detriment or that Ke lley gained an unfair advantage by his statement.

The district court did not abuse its disc retion in declining to estop Kelley from asserting that the Lenders are not persons aggrieved.

III.

The Lenders argue that, even if Kelley is not estopped, the persons aggrieved doctrine invalidly restricts their ability to appeal bankruptcy court orders. According to the Lenders, this court should “reconsider” the doctrine because it is no longer valid after the 1978 amendments removed explicit references to the doctrine in the Bankruptcy Code.

The Lenders concede that this court has long applied the persons aggrieved doctrine. This court even stated that th e original foundation of the doctrine has been repealed. See In re O&S Trucking, Inc. , No. 15-2048, 2016 WL 279269, at *2 (8th Cir. Jan. 22, 2016) (“Although the modern Bankruptcy Code does not articulate a standard for appellate standing, our circuit consisten tly has applied a ‘person aggrieved’ standard derived fro m the Bankruptcy Act of 1898.”); In re AFY, 734 F.3d 810, 819 n.10 (8th Cir. 2013) (“The ‘persons aggrieved’ standard is ‘[d]erived from the now-repealed Bankruptcy Act of 1898.’”). Having held that the persons aggrieved doctrine survives the 1978 amendments to the Bankruptcy Code, this court declines to reconsider the doctrine. See Cnty. of Charles Mix v. U.S. Dep’t of Interior , 674 F.3d 898, 902 (8th Cir. 2012) (noting that a panel of this court cannot overturn the decision of a previous panel). See generally In re Westwood Cmty . Two Ass’n, Inc. , 293 F.3d 1332, 1334 (11th Cir. 2002) (collecti ng decisions of First, Second, Third,

-7-Sixth, Seventh, Ninth and Tenth Circuits applying the persons aggrieved doctrine after the 1978 amendments).

IV.

The Lenders argue that, even if the pe rsons aggrieved doctrine is valid, they satisfy its requirements as persons aggrieve d. This court reviews de novo a district court’s determination whether a plaintiff has standing. Hargis v. Access Capital Funding, LLC , 674 F.3d 783, 790 (8th Cir. 2012). Wh ether an appellant is a person aggrieved is generally a question of fact for the district court, but where the facts are undisputed, this court may treat the question as an issue of law. In re El San Juan Hotel , 809 F.2d 151, 154 n.3 (1st Cir. 1987).

Standing in a bankruptcy appeal is narrower than Artic le III standing. O&S Trucking , 2016 WL 279269, at *2. “The governing rule—a so-called person aggrieved doctrine—was derived from the Bankruptcy Act of 1898, and it carried over to practice under the mode rn Bankruptcy Code.” In re Peoples , 764 F.3d 817, 820 (8th Cir. 2014). “‘Person aggrie ved’ is, of course, a term of art: almost by definition, all appellants may claim in some way to be ‘aggrieved,’ else they would not bother to prosecute their appeals.” Travelers Ins. Co. v. H.K. Porter Co. , 45 F.3d 737, 741 (3d Cir. 1995). “[I]n bankruptcy proceedings, which typically involve a myriad of parties . . . indirectly affect ed by every bankruptcy court or der . . . , the need to limit collateral appeals is particularly acute.” Id. (second alteration in original).

“The doctrine limits standing to persons with a financial stake in the bankruptcy court’s order, meaning they were directly and adversely affected pecuniarily by the order.” In re Peoples , 764 F.3d at 820. An appellant is a party aggrieved “if the bankruptcy court order diminishes the pe rson’s property, increases the person’s burdens, or impairs the person’s rights.” In re Marlar , 267 F.3d 749, 753 n.1 (8th Cir. 2001).

-8-The Lenders believe that they are pers ons aggrieved because the substantive consolidation (1) diminished their property by increasing Kelley’s potential recovery against them and decreasing the value of their contingent claims, and (2) impaired their rights by precluding potential affirmative defenses in the avoidance actions.

Here, however, any potential pecuniary harm to the Lenders is several steps removed and not a “direct” pecuniary impact. See In re Peoples , 764 F.3d at 820. Several steps must occur before the Lenders suffer a pecuniary harm: Kelley must prevail in the avoidance actions, the Lenders must pay the judgment in full, and then they must file a valid proof of claim agai nst the consolidated estate. This possibility of harm does not satisfy the persons aggrieved standard. See Travelers Ins. Co. , 45 F.3d at 742 (holding that party was not pers on aggrieved because they were “at least two steps removed from any possibl e diminution of its property”); Rohn & Hass Tex., Inc. v. Ortiz Bros. Insulation, Inc. , 32 F.3d 205, 208 (5th Cir. 1994) (noting that pecuniary impact must be “real and immediate ” (emphasis added)).

The Lenders emphasize that they ar e persons aggrieved because the consolidation order impairs their affirmative defenses in the avoidance actions. According to the Lenders, the substantive consolidation order transforms two groups of Lenders into initial transferees of PCI, rather than subsequent transferees. This change, the Lenders say, eliminates good faith affirmative defenses otherwise available in the avoidance actions. See 11 U.S.C. § 550(b)(1) (“The trustee may not recover . . . from a transferee that takes for value . . . , in good faith, and without knowledge of the voidability of the transfer avoided . . . .”).

Generally, a bankruptcy court order a llowing litigation to proceed against an adversary defendant does not make th at defendant a party aggrieved. See In re LTV Steel Co. , 560 F.3d 449, 453 (6th Cir. 2009) (“[W]e are aware of no court that has held that the burden of defending a lawsuit, however onerous or unpleasant, is the sort of direct and immediate harm that makes a party ‘aggrieved’ so as to confer standing in a bankruptcy appeal.”). This is true even if, as here, litigation has already begun

-9-against the defendant, and the possibility of liability is more than theoretical. See id. at 454.

In an analogous case, the Eleventh Circu it held that an a dversary defendant is not a person aggrieved, even if the bankrupt cy court order strips the defendant of a defense in the adversary proceedings. In re Ernie Haire Ford, Inc. , 764 F.3d 1321, 1327 (11th Cir. 2014). The trustee there file d adversary proceedings against a former creditor, who moved to enjoin the pr oceedings as untimely under the bankruptcy plan’s litigation-bar date. Id. at 1324. The trustee then moved to amend the plan to allow the adversary proceed ings to go forward. Id. The bankruptcy court granted the motion. Id. The adversary defendant sought to appeal. Id.

The Eleventh Circuit held that the adversary defendant was not a person aggrieved by the bankruptcy court’s order. The court held that an order that subjects a party to the risks of litigation causes only indirect harm to that party. Id. at 1326. Further, even if a bankruptcy court order de prived a party of “a defense that would have otherwise been available to him,” it did not render the defendant a party aggrieved. Id. at 1326-27.

Here, as in Ernie Haire , the bankruptcy court’s order arguably strips the Lenders of certain defenses in their avoidance actions. The Lenders attempt to distinguish Ernie Haire by asserting that, unlike their Code-based affirmative defense, the defense in Ernie Haire was created by the bankruptcy plan, not the Bankruptcy Code itself. As the dissent notes, the Ernie Haire court considered that distinction: “Even if we considered [the defendant’s] interest in avoiding litigation by enjoining a lawsuit as different from hi s interest in avoiding liability, we would not deem [the defendant] a person aggrieved because his in terest is not protected by the Bankruptcy Code.” Id. at 1327; see also id. at 1327 n.4 (“[W]e are not saying that an adversary defendant can never be a pe rson aggrieved. An advers ary defendant may satisfy our standard if his appeal attempts to defe nd an interest that is protected by the Bankruptcy Code.”). These quotations from Ernie Haire , however, are not the

-10-ultimate holding, but rather facts that “only serve[d] to highlight that [the adversary defendant] is not a person aggrieved.” Id. at 1327.

The court in Ernie Haire did not hold that a defendant with a potential Codebased defense is automatically a person a ggrieved with standi ng to appeal from a bankruptcy court order. Here, the Lenders ’ citation of a Bankruptcy Code provision whose application may be altered by the bankruptcy court’ s order does not change the fact that the Lenders’ interest in avoidi ng liability is antithetical to the primary purposes of the Bankruptcy Code. See In re LTV Steel Co. , 560 F.3d at 454 (stating that the interest in avoiding liability to the estate “is diametrically opposed to the primary goal of . . . the Bankruptcy Code ingeneral, which is to minimize the injury to creditors” (alteration in original)). Mo reover, even if the Lenders’ interests are arguably protected by the Bankruptcy Code, th e harm they suffered remains indirect. See Ernie Haire , 764 F.3d at 1326 (“Allowing appeals from parties who have suffered only an indirect harm or who hold interests outside th e scope of the Bankruptcy Code would defeat the very purpose underlyi ng our person aggrieved standard.”).

The principles underlying the persons aggrieved doctrine support the district court’s conclusion that the Lenders are not persons aggrieve d. The doctrine is designed “to prevent bankruptcies from be ing needlessly prolonged by parties whose interests are not central to the process.” Id. at 1327; see also In re First Cincinnati, Inc. , 286 B.R. 49, 51 (B.A.P. 6th Cir. 2002) (noting that doctrine is intended “to prevent marginally interested parties fro m litigating satellite issues up and down the appellant chain while the bankruptcy case sta lls out and neither creditors nor debtors receive their relief intended by the Code.”). The Lenders’ in terests here are not central to the bankruptcy process, and allowing them to appeal the bankruptcy court’s order “would completely undermine the rationa le behind [the] standard and bring bankruptcy proceedings to a grinding halt.” Ernie Haire , 764 F.3d at 1327. The district court did not err in dismissi ng the Lenders under the persons aggrieved doctrine.

-11-* * * * * * *

The judgment is affirmed.

BYE, Circuit Judge, dissenting.

I respectfully dissent from Part IV of th e majority opinion because I believe the Lenders’ arguable loss of their Code-based de fenses to the Trustee’s avoidance action makes them “persons aggrieved” by the bankruptcy court’s substantive consolidation order. I therefore believe they have standing to appeal.

A few additional facts are necessary to explain the impact of the substantive consolidation order on Epsilon/Westford (Epsilon) and Opportunity Finance, LLC (Opportunity Finance). 2During the Tom Petters Ponzi scheme, Petters Company, Inc. (PCI) purported to buy electronics and resell them to other companies at a markup. Petters formed Special Purpose Entities (SPEs) as vehicles to collect the loans that fueled this business. Companies would lend money to the SPEs secured by the “collateral” – illusory account s receivable – the SPEs owned. The SPEs then funneled the money upward through PCI, which was a cen tral repository for all the transactions. The money that traveled th rough the SPEs represented the majority of funds in the Ponzi scheme, roughly $30 billion over the seven-year scheme.

Each SPE had only a single creditor. Thus , Epsilon was the sole creditor of the SPE called PL Ltd., Inc., and Opportunity Finance was the sole creditor of two separate SPEs: PC Funding, LLC, and SPF Funding, LLC. This corporate structure has played a significant role in the Petters bankruptcy proceedings.

2 DZ Bank AG was a senior lender to Opportunity Finance from 2001 to 2003 for a series of loans, and its interest is th erefore consistent with Opportunity Finance’s interest. For simplicity, I refer to themcollectively as “Opportunity Finance.”
-12-After the Ponzi scheme unraveled, PCI and each of the eight SPEs filed for bankruptcy separately, so th e Petters bankruptcy proceedings, collectively, began as nine separate bankruptcy pr oceedings. Since Opportunity Finance and Epsilon were net winners in the Ponzi scheme, Chapter El even Trustee Douglas Kelley (the Trustee) filed an avoidance action on behalf of the estates of the SPEs against them, seeking to recover money that the Trustee allege d had been wrongfully transferred from the SPEs to Opportunity Finance and Epsilon – the “winnings” from the Ponzi scheme. These transactions totaled over $2.2 billi on to Opportunity Finance and $3.2 billion to Epsilon.

The structure of the bankruptcy procee dings gave Opportunity Finance and Epsilon the ability to assert two potentially significant defenses to the avoidance action. First, a trustee may only use its a voidance power on behalf of a creditor of the debtor. See11 U.S.C. § 544(b). But because Epsilon was the sole creditor in the bankruptcy proceeding of its SPE (PL Ltd., Inc.), and it filed no claims against the estate, it argued the Trustee was not using its power on behalf of a creditor of the debtor because there were no creditors in the PL Ltd., Inc.’s bankruptcy proceeding. Epsilon therefore argued the Trustee lackedstanding to avoid the transactions from PL, Ltd., Inc., to Epsilon. Opportunity Finance made the same arguments in the avoidance action, because it was the sole cr editor of each of its SPEs and it had filed no claims against either estate.

Second, to the extent th at the Trustee made a voidance claims against Opportunity Finance and Epsilon on behalf of the PCI estate, the factthat the transfers went from PCI through the SPEs before th ey reached Opportunity Finance and Epsilon made them subsequent transferees of PCI. Opportunity Finance’s and Epsilon’s status as subsequent transferees allowed them to assert a good faith defense to the avoidance that they might not have been able to assert if they were initial transferees of the PCI estate – i.e., if PCI had transferred money directly to Opportunity Finance or Epsilon. Compare, e.g. , 11 U.S.C. § 550(a)(1) (providing that a trustee may recover from the initial transferee without further showing), with 11

-13-U.S.C. § 550(b)(1) (providing that a trustee may not recover from a subsequent transferee that “takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided”).

In short, the corporate structure of th e Ponzi scheme – and, derivatively, the structure of the bankruptcy proceedings – gave Opportunity Finance and Epsilon two significant defenses to potentially escape billions of dollars of liability in the Trustee’s avoidance actions.

But that was before substantive consolid ation. The substantive consolidation order dissolved the corporate structure of the Ponzi scheme and combined all nine bankruptcy proceedings into one bankruptcy proceeding with one bankruptcy estate. Now, there are no SPEs separating Opportun ity Finance and Epsilon from PCI. As a result, they have arguably lo st their two defenses to the avoidance action: (1) they can no longer argue the Trustee lacks standing to pursue the avoidance action because there are dozens of creditors of PCI on whos e behalf the Trustee may act; and (2) they can no longer defend the avoidance action on the grounds they acted in good faith as subsequent transferees, because without the SPEs as intermediaries between them and PCI, they are now initial transferees of PCI.

I believe the effect of this substan tive consolidation order makes Opportunity Finance and Epsilon persons aggrieved with standing to appeal the order. A party is considered a person aggrieved when the bankruptcy court order impairs the party’s rights. In re Marlar , 267 F.3d 749, 753 n.1 (8th Cir. 2001) . Prior to the substantive consolidation order, the Bankruptcy Code gave Opportun ity Finance and Epsilon the right to defend the avoidance action on the grounds that the Trustee lacked standing and that they were good faith subsequent tr ansferees. The substantive consolidation order stripped these defenses. Because this order impaired Opportunity Finance’s and Epsilon’s rights, I believethey are “persons aggrieved” by the substantive consolidation order.

-14-The majority disagrees. It reasons an order that strips a party’s defenses is analogous to an order that allows litigation to proceed against an adversary defendant. And since an order that merely allows litigation to proceed against an adversary defendant does not make the defendant a pe rson aggrieved, an order that strips a party’s defenses does not make th e party a person aggrieved either.

To reach this conclusion, the majority relies on In re Ernie Haire Ford, Inc. , 764 F.3d 1321, 1325 (11th Cir. 2014) cert. denied sub nom. Atkinson v. Ernie Haire Ford, Inc. , 136 S. Ct. 104 (2015). In Ernie Haire , a bankruptcy court empowered a liquidating agent to sue third parties that allegedly owed money to the estate as long as the litigation began by a certain date, the litigation bar date. 764 F.3d at 1324. After the litigation bar date passed, the bankruptcy court, at the request of the liquidating agent, entered an order modifyi ng the litigation bar dateso the liquidating agent could sue an additional defendant. Id. The defendant attempted to appeal the order, but the Eleventh Circuit held th e defendant was not a person aggrieved with standing to appeal. Id. at 1325-26. The court’s reasoning was twofold. First, “[o]rders allowing litigation to go forward do not burden a party’s ability to defend against liability; they simply require pa rties to exercise that ability.” Id. at 1326. Second, the court reasoned that for a party to be aggrieved, its interest “must be one that is protected or regulated by the Bankruptcy Code,” and because the defendant’s “sole interest [was] that of an adversary defendant in avoiding liability,” his interest was “antithetical to the goals of bankruptcy.” Id. at 1326-27.

But neither basis for the Eleventh Circuit’ s conclusion is present where, as here, an order strips a party of Bankruptcy Code-based defenses. First, an order that strips a party’s defenses goes a step beyond an order that merely allows litigation to go forward, because it requires a party to defend a lawsuit and it hobbles its defense. This additional step is significant because it changes the odds of the litigation. While an order that allows litigation to proceed ag ainst a party may force the party to assert its defenses, the order does not change the probability that the party will win the lawsuit because the party still retains all of its defenses. Since the order does not

-15-change the party’s legal positi on, it does not “impair” the ri ghts of the party such that the party has standing to appeal. SeeErnie Haire , 764 F.3d at 1325-26; see also In re LTV Steel Co. , 560 F.3d 449, 453 (6th Cir. 2009) (“[W]e are aware of no court that has held that the burden of defending a lawsuit , however onerous or unpleasant, is the sort of direct and immediate harm that makes a party ‘aggrieve d’ so as to confer standing in a bankruptcy appeal.”) (empha sis added); Travelers Ins. v. H.K. Porter Co. , 45 F.3d 737, 743 (3d Cir. 1995) (“[A]n or der which simply allows a lawsuit to go forward does not necessarily ‘aggrieve ’ the potential defendant for purposes of appellate standing.”).

But a defense-stripping orde r does impair the party’s rights, because it changes the probability that the party will win the la wsuit. By removing the party’s defenses, the order imposes an additional legal burde n on the party’s “ability to defend against liability,” Ernie Haire , 764 F.3d at 1326, and this add itional legal burden distinguishes a defense-stripping order from an order th at merely allows litigation to proceed.

This case illustrates the distinction. Opportunity Finance and Epsilon would have had to defend the Trustee’s avoidance action whether the bankruptcy court substantively consolidated the estate or not , so the substantive consolidation order was not an order that “simply allow[ed] a laws uit to go forward.” Travelers Ins. Co. , 45 F.3d at 743. The effect of th e order, rather, is that it takes away two of Opportunity Finance’s and Epsilon’s defens es and makes it harder for th em to defend the lawsuits. Simply put, it is now less likely they will prevail in the avoidance action because of the substantive consolidation order. Thus, the substantive consolidation order impairs Opportunity Finance’s and Epsilon’s legal rights and gives them standing to appeal.

Second, because the defenses Opportunity Finance and Epsilon could lose are defenses the Bankruptcy Code gives them, their interests are not “antithetical to the goals of bankruptcy.” Ernie Haire , 764 F.3d at 1326-27. The majority discounts Opportunity Finance’s and Epsilon’s citation of the Code-based defenses they stand to lose, reasoning that these lost defenses do “not change the fact that the Lenders’

-16-interest in avoiding liability is antithetical to the primary purposes of the Bankruptcy Code.” But the question is not whether the harmed interests are consistent with the “primary purpose” of the Code. It is whether the harmed interests are “interests the Bankruptcy Code seeks to pr otect or regulate.” Id. at 1326. While it is true that the Code’s primary interest is minimizing the in jury to creditors, this is not its singular interest. The Code is also interested in protecting subsequent transferees from having their transactions avoided if they acted in good faith, see11 U.S.C. § 550(b)(1), and in protecting parties from having their tran sactions avoided when the trustee is not acting for the benefit of a creditor, see 11 U.S.C. § 544.

I therefore disagree with the majority th at Opportunity Finance’s and Epsilon’s citation to the Bankruptcy Codedefenses they may lose insubstantive consolidation does not make them persons a ggrieved. To the contrary, it is precisely the fact that the Code gives them these defenses that shows they are persons aggrieved, because the substantive consolidation order has stripped them of these “interests the Bankruptcy Code seeks to protect.” Ernie Haire , 764 F.3d at 1326; see also id. at 1327 n.4 (“Of course, we are not saying that an adversary defendant can never be a person aggrieved. An adve rsary defendant may satisfy our standard if his appeal attempts to defend an interest that is protected by the Bankruptcy Code.”).

Finally, this is not the type of app eal the persons aggrieved doctrine was designed to prevent – an appeal by “marginally interested parties . . . litigating satellite issues up and down the appellate chain wh ile the bankruptcy case stalls out and neither creditors nor debtors receive the re lief intended by the Code.” Travelers Cas. & Sur. v. Corbin (In reFirst Cincinnati, Inc.) , 286 B.R. 49, 51 (B.A.P. 6th Cir. 2002). The substantive consolidation order fundame ntally alters the entire Petters bankruptcy proceeding. It could allow th e Trustee to void billions of dollars of transactions and therefore transfer billions of dollars from O pportunity Finance and Epsilon back to the estate. True, the appeal w ill prolong the bankruptcy. But this is not merely a “satellite issue” and Opportunity Finance and Epsilon are not “marginally interested parties.” This is a fundamental reorganization of a bankruptcy proceeding that strips

-17-Opportunity Finance and Epsilon of two significant defenses to a billion-dollar avoidance action. The persons aggrieved doc trine was not designed to prevent appeals of this magnitude.

I believe Opportunity Finance and Ep silon are persons aggrieved by the substantive consolidation order, because th e order arguably strips them of two Codebased defenses to the Trustee’s avoidance action. Therefore, they have standing to appeal the order. I respectfully dissent.

______________________________

-18-