Opinion ID: 216173
Heading Depth: 2
Heading Rank: 2

Heading: The Lead Appeal

Text: Appellant argues principally that K & L Gates should be enjoined from raising, as a defense in the malpractice action in D.C. Superior Court, any arguments relating to the validity of the provisions of the settlement agreement because K & L Gates did not raise its challenge to the provisions of the settlement agreement when the agreement's approval was pending before the bankruptcy court. Insofar as this argument is premised on Savage & Associates's mistaken conclusion that K & L Gates had standing to challenge the approval of the settlement agreement, we disagree. As the bankruptcy court concluded, K & L Gates could not have appeared before the bankruptcy court to challenge the settlement agreement because K & L Gates lacked both Article III and prudential standing to object to the order, and was not a party in interest under 11 U.S.C. § 1109(b). 417 B.R. at 210. [3] Section 1109 provides that [a] party in interest, including the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter. See 11 U.S.C. § 1109. Beyond this non-exhaustive list, the term party in interest is not further defined in the statute. In re Comcoach Corp., 698 F.2d 571, 573 (2d Cir.1983). The general theory behind the section is that anyone holding a direct financial stake in the outcome of the case should have an opportunity ... to participate in the adjudication of any issue that may ultimately shape the disposition of his or her interest. Alan Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 1109.01 (16th ed. 2011); accord FutureSource LLC v. Reuters Ltd., 312 F.3d 281, 284 (7th Cir.2002); In re Alpex Computer Corp., 71 F.3d 353, 357 (10th Cir.1995); In re Hutchinson, 5 F.3d 750, 756 (4th Cir.1993). However, courts have long recognized that the meaning of the term must be determined on an ` ad hoc ' basis, and the categories mentioned in Section 1109 are not meant to exclude other types of interested parties from the purview of that section. In re Johns-Manville Corp., 36 B.R. 743, 747, 748 (Bankr.S.D.N.Y.1984), aff'd, 52 B.R. 940 (S.D.N.Y.1985); accord In re Martin Paint Stores, 207 B.R. 57, 61 (S.D.N.Y.1997) (The term `party in interest' is broadly interpreted, but not infinitely expansive.); see also In re Ionosphere Clubs, Inc., 101 B.R. 844, 849 (Bankr. S.D.N.Y.1989) (Section 1109(b) is not exclusive in its listing of parties in interest, but if a party is not affected by the reorganization process it should not be considered a party in interest). Although parties in interest typically have a financial stake in the outcome of the litigation, under certain limited circumstances, courts have recognized that a party with a legal (as opposed to financial) interest may appear. See, e.g., In re Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 5 (1st Cir.1999) (individual creditor may maintain adversary proceeding against trustee for alleged breach of duty); In re Brady, 101 F.3d 1165, 1170-71 (6th Cir.1996) (trustee acts as a party in interest in seeking extension of time to object to dischargeability of a debt on behalf of creditors); In re Co Petro Mktg. Grp., Inc., 680 F.2d 566, 572 (9th Cir.1982) (regulatory agency with supervisory responsibilities over the debtor's business or financial affairs); In re Overview Equities, Inc., 240 B.R. 683, 686-87 (Bankr.E.D.N.Y. 1999) (party with legal interest in property, rather than claim, found to be a party in interest). Whether or not someone is a party in interest must be read against the purposes of Chapter 11, which are to preserv[e] going concerns and maximiz[e] property available to satisfy creditors, Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 453, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999) (citation omitted). Thus, any construction of the term party in interest must be mindful of the fact that Chapter 11 is structured the way that it is because Congress believed that creditors and equity security holders are very often better judges of the debtor's economic viability and their own economic self-interest than courts, trustees, or [governmental agencies such as] the SEC, id. at 458 n. 28, 119 S.Ct. 1411, and that is why Chapter 11 allows the intervention of third parties in limited circumstances, such as in the case of parties in interest. Although party in interest must be interpreted in terms of the specific provision in which it appears, see In re Refco Inc., 505 F.3d at 116 n. 9 (2d Cir.2007) (noting that party in interest may have different meanings in different portions of the bankruptcy code), other rights afforded parties in interest throughout the bankruptcy code are instructive. These include: (1) the right to request the appointment of a trustee or examiner under Section 1104(a) and (b); (2) the right to request termination of a trustee's appointment under Section 1105; (3) the right to request conversion of a chapter 11 case to a case under an alternate chapter pursuant to Section 1112(b); (4) the right to file a plan under Section 1121(c); (5) the right to object to confirmation of a plan under Section 1128(b); and (6) the right to request a revocation of an order of confirmation under Section 1144. There is no question in this case that K & L Gates had too remote an interest in the settlement agreement to have been considered a party in interest for the purposes of being heard before the bankruptcy court on the agreement's approval. As the bankruptcy court succinctly explained, the law firm was not a creditor of Teligent; it was merely a potential debtor of Teligent's debtor ( i.e., Mandl). As such, it had no financial stake in the outcome of the bankruptcy case. Further, it had no stake in the outcome of the 9019 Motion [because] the Settlement did not require K & L to pay any money to the Teligent estate or to Mandl. In re Teligent, 417 B.R. at 210. We find no error in these conclusions. And because K & L Gates lacked standing to challenge the settlement agreement when it was pending before the bankruptcy court, the law firm is not estopped from asserting a defense in the malpractice action that relates to the validity of the settlement agreement. See Marvel Characters, Inc. v. Simon, 310 F.3d 280, 288-89 (2d Cir.2002) (collateral estoppel applies only where (1) the identical issue was raised in a prior proceeding; (2) the issue was actually litigated and decided; (3) the party had a full and fair opportunity to litigate the issue; and (4) the resolution of the issue was necessary to support a valid and final judgment on the merits). We have considered Appellant and Cross-Appellant's remaining contentions and find them to be without merit for substantially the reasons stated by the bankruptcy and district courts.