Opinion ID: 204196
Heading Depth: 3
Heading Rank: 1

Heading: Sprint's Standing to Appeal

Text: Before we can address the merits of Sprint's appeal, we must decide whether Sprint has standing to bring it. The current Bankruptcy Code prescribes no limits on standing beyond those implicit in Article III of the United States Constitution. See In re Gucci, 126 F.3d 380, 388 (2d Cir.1997). Congress has given us jurisdiction over all final decisions, judgments, orders, and decrees of the district courts in bankruptcy cases, 28 U.S.C. § 158(d)(1), which courts in turn have jurisdiction to review all final judgments, orders, and decrees of the bankruptcy courts, id. § 158(a)(1). Nevertheless, for practical reasons this Court and others have adopted the general rule, loosely modeled on the former Bankruptcy Act, that in order to have standing to appeal from a bankruptcy court ruling, an appellant must be `a person aggrieved'a person `directly and adversely affected pecuniarily' by the challenged order of the bankruptcy court. [3] Int'l Trade Admin. v. Rensselaer Polytechnic Inst., 936 F.2d 744, 747 (2d Cir.1991) (citation omitted). An appellant like Sprint, therefore, must show not only injury in fact under Article III but also that the injury is direct[] and financial. Kane v. Johns-Manville Corp., 843 F.2d 636, 642 & n. 2 (2d Cir.1988). As a general rule, we grant standing to creditors . . . appeal[ing] orders of the bankruptcy court disposing of property of the estate because such orders directly affect the creditors' ability to receive payment of their claims. Id. at 642; see In re Gucci, 126 F.3d at 388. In Kane, for instance, we did not hesitate to grant standing to an asbestos-injury claimant who appealed the confirmation of a plan of reorganization. The plan in that case was even more generous to the appellant than the plan in this case, since it promised him the full amount of whatever compensatory damages he is awarded. Kane, 843 F.2d at 640. The Court, however, held that Kane was an aggrieved party entitled to appeal: as a creditor, [he had] economic interests . . . directly impaired by the Plan because the plan limited his recourse to the courts, eliminated the possibility of punitive damages, and made his recovery subject to the Trust's being fully funded. Id. at 642. Other courts have generally found standing for impaired creditors [4] when their interests are directly and pecuniarily affected by the order of the Bankruptcy Court. In re Combustion Eng'g, Inc., 391 F.3d 190, 223-24 (3d Cir. 2004); see also In re P.R.T.C., Inc., 177 F.3d 774, 778 (9th Cir.1999) (noting that creditors have a direct pecuniary interest in a bankruptcy court's order transferring the assets of the estate). We likewise hold that Sprint has standing to appeal the confirmation of the plan in this case. Before confirmation, Sprint had a claim that the bankruptcy court valued at $2 million for voting purposes. [5] After confirmation, however, Sprint stood to receive property worth less than half (between 4% and 46%) of that amount. Therefore, confirmation of the plan affected Sprint directly and financially. The appellees challenge the above analysis from two different perspectives, looking both at the confirmation of the plan as a whole and at the gifting provision that Sprint protests. First, and more broadly, they argue that confirmation could not have harmed Sprint's interests because those interests were already worthless: with insufficient value in DBSD to pay off the secured creditors, Sprint's unsecured claim entitled it to nothing. Second, and more narrowly, they argue that the gift to the existing shareholder did not harm Sprint's interests because the absolute priority rule requires either that the objecting class receive the full value of its claim (which would more than double Sprint's recovery) or that junior classes receive nothing (which could lead to a reduced recovery for Sprint), so even a strict interpretation of that rule would not guarantee any benefit for Sprint. None of our cases directly address the level of generality at which we should consider standing; because we reject the appellees' analysis at both levels, however, we need not decide whether either perspective is generally preferable. Taking the broader perspective first, we decline to withhold standing merely because the bankruptcy court's valuation of DBSD put Sprint's claim under water. By the bankruptcy court's estimatewhich we accept for purposes of this appeal DBSD is not worth enough to cover even the Second Lien Debt, much less the claims of unsecured creditors like Sprint who stand several rungs lower on the ladder of priority. But none of our prior appellate standing decisionsat least none involving creditorshave turned on estimations of valuation, or on whether a creditor was in the money or out of the money. We have never demanded more to accord a creditor standing than that it has a valid and impaired claim. Cosmopolitan Aviation, the primary decision on which the appellees rely for their broader argument, is easily distinguishable. See In re Cosmopolitan Aviation Corp., 763 F.2d 507, 513 (2d Cir.1985), abrogated on other grounds by Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). In that case, a state court had held that a debtor's lease had expired before it filed for bankruptcy. Id. at 511. The bankruptcy court found that the debtor was hopelessly insolvent, with or without the lease, and ordered the debtor's liquidation. Id. The debtor did not then appeal. It appealed only a later order to turn over the landapparently solely for purposes of delay. Id. at 512-13. We held that, because the debtor could no longer contest the first two rulings, it no longer had any interest in the land or even any right to continued existence, and therefore would suffer no injury from the turn-over. Id. at 513. Cosmopolitan Aviation is thus a far cry from this case, where the bankruptcy court provisionally allowed Sprint's claim against the debtor, where the plan already gives Sprint some recovery, and where Sprint has appealed the adverse order directly. The only case the appellees cite that comes close to denying a creditor standing is In re Ashford Hotels, Ltd., 235 B.R. 734 (S.D.N.Y.1999). But in that case the district court never accepted the appellants' attempts to characterize themselves as creditors. Id. at 738. The so-called creditors had sued the debtor in state court, not to win any damages but to rescind a contract under which they were liable to the debtor. Id. at 736. In the bankruptcy proceeding, they sought to stop funding the defense against their lawsuit and, after losing that attempt, they appealed. Id. at 737-38. The district court found that the appellants had no interest in the debtor besides their desire to stop the defense of the rescission lawsuit and thereby thwart the debtor from collecting against them. Id. at 738. Noting that other courts had found no standing where a party's interest in a Bankruptcy Court appeal is (only) that of a potential defendant to another lawsuit, the district court likewise denied standing to the appellants in that case, because they were not `directly and adversely affected pecuniarily' by the Bankruptcy Court's order except as adversaries to the Debtor's estate in other litigations. Id. at 739. That case is therefore nothing like this one, where Sprint is clearly a creditor (albeit one with an unliquidated claim) and where Sprint appeals seeking to enlarge its recovery, not to head off the collection of debts against it. The three additional district court decisions cited by the dissent are equally distinguishable. The first two do not involve creditors. In one, In re Taylor, the appellant was a chapter 7 debtor, see No. 00 Civ. 5021(VM), 2000 WL 1634371, at -2 (S.D.N.Y. Oct.30, 2000), a member of a class that often lacks standing in the bankruptcy court as well as on appeal, see In re 60 E. 80th St. Equities, Inc., 218 F.3d 109, 115-16 (2d Cir.2000). In the other, Freeman v. Journal Register Co., it was a shareholder of the debtor who appealed. See No. 09 Civ. 7296(JGK), 2010 WL 768942, at  (S.D.N.Y. Mar.8, 2010). Although this case does not require us to address shareholder standing in bankruptcy cases, we note that some courts have been more cautious in granting standing to shareholders than to creditors. See In re Troutman Enters., Inc., 286 F.3d 359, 364-65 (6th Cir.2002). Finally, in the third case, Bartel v. Bar Harbor Airways, Inc ., the appellant was a creditor, but a creditor whose claim the bankruptcy court disallowed because the debtor had already settled it. See 196 B.R. 268, 271-72 (S.D.N.Y. 1996). There is all the difference in the world between a claim that has already been disallowed by the bankruptcy court, as in Bartel, and one like Sprint's that remains allowed and pending, whatever appellate judges might guess about its chances of success. None of these decisions have any bearing on the case before us. We think it plain that we should not forbid all appeals by out-of-the-money creditors. Such a rule would bar a large percentage of creditors in bankruptcy court, perhaps a majority of them, from ever reaching the district court or this Court, however erroneous the orders of the bankruptcy court might be. In this case, for instance, members of only two classes could appeal under the appellees' proposed rulethe holders of the First Lien Debt and Second Lien Debteven though the plan involved twenty-six classes of claims and interests in ten different levels. The other twenty-four classes would have to be satisfied with whatever the plan awarded them. This would remain true, under the appellees' theory, even if the bankruptcy court had committed a fundamental error such as not allowing the out-of-the-money creditors to vote or not following another of the numerous requirements of § 1129. Such a result might benefit this Court's docket, but would disserve the protection of the parties' rights and the development of the law. We should not raise the standing bar so high, especially when it is a bar of our own creation and not one required by the language of the Code, which does not contain any express restrictions on appellate standing. Kane, 843 F.2d at 642. The appellees try to soften the negative consequences of their proposed rule by positing that a creditor in Sprint's position may appeal if it at least arguesas Sprint did in the district court but does not in this Courtthat the bankruptcy court undervalued the estate and that, under a true valuation, there was enough to cover its claim. But that rule would not separate appropriate from inappropriate appeals by creditors; it would only increase the number of appeals involving frivolous valuation arguments. It would turn an extremely harsh rule into an easily-evaded one. We decline either variation of the proposed rule. Even taking the narrower perspective, focusing not on the plan's confirmation overall but only on the gift to the existing shareholder that Sprint challenges under the absolute priority rule, we still find standing. Sprint argues that the absolute priority rule entitled it to the full value of its claim before the plan could give any equity to the existing shareholder. A plan like this one that gives property to a junior interest-holder (the existing shareholder) must provide the senior claim-holder (Sprint) with property of a value ... equal to the amount of [its] claim. 11 U.S.C. § 1129(b)(2)(B). When the law requires full payment, getting less than full payment surely constitutes direct and financial injury. The appellees respond that Sprint is entitled to nothing under the priority rules and only receives anything because it itself is the beneficiary of a gift under the plan. Rejecting this plan would not give anything to Sprint, they argue: although an alternative plan might give Sprint the full value of its claim in order to maintain the gift to the existing shareholder, an alternative plan might well cut out both Sprint and the shareholder entirely. But we rejected just such an argument in Kane. In that case, we accepted the possibility that the appellant, Kane, actually benefitted from the plan he was challenging and could have fared worse under alternative plans. 843 F.2d at 642. We refused, however, to allow this possibility to defeat Kane's appellate standing: Kane might receive more under this Plan than he would receive in liquidation. However, he might do better still under alternative plans. Since the... Plan gives Kane less than what he might have received, he is directly and adversely affected pecuniarily by it, and he therefore has standing to challenge it on appeal. Id. at 642. We did not investigate any particular alternative plan or estimate the likelihood that a plan more advantageous to Kane would actually be adopted if the existing plan were rejected; rather, we found it sufficient for appellate standing that Kane might receive more under a different plan. Here, too, Sprint might do better still under alternative plans. Id. As the bankruptcy court found, there were good business reasons for the ... gifts to the existing shareholder, DBSD I, 419 B.R. at 212 n. 140, and those reasons might well lead the secured creditors to support the gift even at the price of sufficiently favorable treatment for Sprint to secure its support. Put another way, if the absolute priority rule applies, Sprint may use its unsecured claim as leverage to increase its share in the reorganized entity if the good business reasons for the gift to the existing shareholder are still worth the cost. By rejecting the absolute priority rule, however, the bankruptcy court eliminated Sprint's leverage and reduced its potential financial recovery. To be sure, enforcing the absolute priority rule in this case would make the gift to the existing shareholder more costly to the plan proponents, who would have to pay more to Sprint in order to maintain that gift. Sprint therefore risks receiving nothing by enforcing the absolute priority rule because, if its demands outweigh the gift's perceived benefits to the senior creditors, the latter may cut out the junior classes entirely and leave nothing for Sprint. Whether such a risk is in Sprint's best interests, however, is not the issue here. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 207, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988) ([I]t is up to the creditorsand not the courtsto accept or reject a reorganization plan which fails ... to honor the absolute priority rule.) For Sprint to have standing, we need only determine that, whatever the exact odds may be, Sprint at very least stands a reasonable chance of improving its position below. From whatever angle we look at the issue, therefore, we reject the appellees' challenge to Sprint's standing. Like the appellees, our dissenting colleague does not argue that all out-of-the-money creditors lack standing to challenge a plan for violating the absolute priority rule. See Dissent. Op. at 111. Rather, adopting an approach not argued by appellees, Judge Pooler finds that Sprint lacks standing because it is not only out of the money but has an unliquidated claim that might turn out to be valueless on its own merits. We do not find the ultimate merits of Sprint's claim against DBSD relevant. Standing to appeal in no way depends on the merits of the issue appealed, Warth v. Seldin, 422 U.S. 490, 500, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975), and certainly cannot depend on the merits of an issue that is not before us at all. Here, the bankruptcy court allowed Sprint's claim against a DBSD entity for voting purposes, see Fed. R. Bankr.P. 3018(a), which are the only purposes that matter at this stage. The plan's supporters did not object to this ruling, did not appeal it, and do not argue that any uncertainty about the merits of Sprint's underlying claim against the debtor should deny Sprint standing. They have good reason for their silence before us, as the dissent cites no decision where standing turned on the unliquidated status of a creditor's claim, or on an appellate court's assessment of the likely merits of such a claim. Even if it were appropriate for us to consider the merits or ultimate worth of Sprint's claim, we would have no way to make that determination, lacking any briefing from the parties or much information in the record on appeal regarding the merits of that claim, which will turn not only on the potential offset of its obligations to the government (as the dissent recognizes) but also on the date that the relevant DBSD subsidiary occupied a specific band of the transmission spectrum. See DBSD IV, 427 B.R. at 249 n. 4. Because the parties do not brief the issue and did not raise it below, moreover, our evaluation of Sprint's claim would require piecing together the evidence without a guide. A rule that would turn a claimant's standing to appeal a bankruptcy court's ruling on the as-yet-undetermined merits of the claimant's underlying claim would unduly complicate the standing determination, and require district and circuit courts prematurely to address the merits of issues the bankruptcy court has not yet addressed. We see no need for such an inquiry. The bankruptcy court's temporary allowance of Sprint's claim for voting purposes was enough to allow it to object below, where no one argues that Sprint lacked standing. The ultimate merits of that claim should not determine standing here, where we have less ability than the bankruptcy court to decide those merits. Accordingly, we conclude that Sprint has standing to appeal the denial of its objection to the confirmation of the reorganization plan. We therefore turn to the merits of that objection.