In the Matter of Point Center Financial, Inc.

In In the Matter of Point Center Financial, Inc. (No. 16-56321, May 29, 2018), the United States Court of Appeals for the Ninth Circuit reversed an order of the U.S. District Court for the Central District of California dismissing an appeal for lack of standing following appellants' failure to appear or object to a motion in the bankruptcy court. In summary, neither appearance nor objection is a prerequisite for satisfying the "person aggrieved" requirement for prudential standing so long as an appellant's pecuniary interests are directly and adversely affected by the order appealed.

The opinion can be found at In the Matter of Point Center Financial Inc.

The debtor, Point Center Financial, Inc., was an originator and servicer of residential and commercial loans. It obtained loans from private investors, took fractionalized interests in the loans and deeds securing them, and would then foreclose in the event of default. The debtor would form limited liability companies to hold title to such properties and, post-foreclosure, would exchange investors' interests in the loans for membership interests in the LLCs which the debtor would then manage. The debtor formed Dillon Avenue 44, LLC ("Dillon") to hold title to an undeveloped real property in Indio, California.

Dillon's 2011 operating agreement provided for the debtor to act as Dillon's manager. Dan J. Harkey was appointed Dillon's president. Robin B. Graham, Celia Allen-Graham, and Richard Schachter held membership interests and, with Harkey, were the appellants in this case.

The debtor filed bankruptcy in 2013, and the case was later converted to Chapter 7. The trustee in the case, Howard Grobstein, brought a motion (the "Assumption Motion") asking the bankruptcy court to issue an order (1) authorizing him to exercise management authority over Dillon, so long as a majority of the membership interests in Dillon so voted, (2) authorizing him to assume Dillon's operating agreement backdated to February 2013, and (3) compelling delivery to him of the company's records and property. Neither appellants nor their counsel attended the hearing. At the end of the hearing the bankruptcy court orally granted the motion, stating that it was unopposed.

Before an order on the Assumption Motion was submitted, the appellants filed an emergency motion for reconsideration and sought an expedited hearing. The bankruptcy court declined to set a hearing on the emergency motion for reconsideration. Rather than construing appellants' failure to file a written opposition to the Assumption Motion as consent to the granting of the motion, the bankruptcy court addressed and ruled upon the merits of appellants' arguments in support of reconsideration. The bankruptcy court concluded that appellants had not shown either that the oral ruling was manifest error or that they were likely to prevail on appeal. It then entered an order approving the Assumption Motion.

On appeal to the district court, the trustee moved to dismiss the appeal on the ground that appellants lacked standing to appeal because they had not filed an objection to the Assumption Motion or attended the hearing despite having received adequate notice. The district court agreed and dismissed the appeal for lack of standing, finding that the appellants were not "aggrieved parties" because they had not appeared in opposition to the Assumption Motion.

The Ninth Circuit identified at the outset the universal legal principle for standing to appeal:

[a]ll circuits, including this one, limit standing to appeal a bankruptcy court order to 'person[s] aggrieved' by the order. See, e.g., Opportunity Fin., LLC v. Kelley, 822 F.3d 451, 457 (8th Cir. 2016); Duckor Spradling & Metzger v. Baum Tr. (In re P.R.T.C., Inc.), 177 F.3d 774, 777 (9th Cir. 1999). Under this prudential standing doctrine, only a 'person aggrieved,' that is, someone who is 'directly and adversely affected pecuniarily' by a bankruptcy court's order, has standing to appeal that order. Fondiller v. Robertson (In re Fondiller), 707 F.2d 441, 443 (9th Cir. 1983). An order that diminishes one's property, increases one's burdens, or detrimentally affects one's rights has a direct and adverse pecuniary effect for bankruptcy standing purposes. See, e.g., P.R.T.C., 177 F.3d at 777

The Ninth Circuit disagreed with the district court's reliance on Brady v. Andrew (In re Commercial Western Finance Corp.), 761 F.2d 1329, 1335 (9th Cir. 1985), in finding that appellants' failure to attend the hearing on the Assumption Motion deprived them of standing to appeal. The Ninth Circuit recalled its opinion in Commercial Western Finance that stated, "'attendance and objection' at the bankruptcy court proceedings 'should usually' be prerequisites to meeting the 'person aggrieved' bankruptcy standing rule." The Ninth Circuit in this case labeled that language dicta and distinguished it by concluding Commercial Western Finance had been decided on different grounds. The Ninth Circuit found there to be "no controlling law in this circuit regarding whether a person who has a pecuniary interest affected by a bankruptcy proceeding and received adequate notice of a bankruptcy court hearing, but failed to appear and object, may be found to satisfy the 'person aggrieved' requirement for appellate standing."

Noting a split among the other circuits to as whether attendance and objection are prerequisites for satisfying the "person aggrieved" requirement for prudential standing, the Ninth Circuit elected not follow circuits that prioritize considerations of judicial economy and efficiency in their analysis of the standard. The Ninth Circuit explained its reasons for doing so in the following passage: "Bankruptcy standing concerns whether an individual or entity is 'aggrieved,' not whether one makes that known to the bankruptcy court. In other words, one need not have attended and made objections at the hearing to be directly and adversely affected by a bankruptcy court's decision."

The Ninth Circuit expressly adopted the reasoning and position of the Fourth Circuit on waiver and forfeiture:

[D]efining standing by whether a party waives or forfeits rights to object to claims, . . . misconstrues the standing requirement . . ., that the appellant show that he has been directly and adversely affected pecuniarily by the bankruptcy order. Moreover, defining standing by whether an appellant has objected to an order or attended a hearing conflates basic notions of standing with notions of waiver and forfeiture. Accordingly, we . . . ask only whether [the appellant] was directly and adversely affected pecuniarily by the bankruptcy court's order.

White v. Univision of Va. Inc. (In re Urban Broad. Corp.), 401 F.3d 236, 244 (4th Cir. 2005).

The Ninth Circuit concluded that, although failure to attend and object may result in waiver or forfeiture, "it does not present a jurisdictional standing issue." The Ninth Circuit therefore reversed the district court's dismissal of the appeal for lack of standing, "[b]ecause there is no question that Appellants' pecuniary interests are directly and adversely affected by the bankruptcy court order in question." The Ninth Circuit left open for determination on remand the question of whether a finding of forfeiture would be appropriate.

This case is disturbing inasmuch as it continues a trend toward eroding finality and certainty in federal and bankruptcy cases as is seen in the development of the doctrine of equitable mootness. Several factors, however, make this case one on which appellants who have slept on their rights should not comfortably rely. First, there was no finding by the bankruptcy court that the failure to object or appear after proper notice was deemed consent. While not all courts will make such a finding, moving parties would do well to request it in the motion and include a recitation of the notice provided. Second, the bankruptcy court considered the merits of the Assumption Motion on reconsideration. Since the appellants were able to file their motion for reconsideration before the Assumption Order was entered, it may be that the Ninth Circuit saw a sufficient level of engagement that waiver could not be found. Third, remand, as is often the case, creates an opportunity for the lower court to get it right. On remand, the district court may well find that the appellants forfeited their opposition: "Forfeiture is the failure to make the timely assertion of a right; waiver is the intentional relinquishment or abandonment of a known right." Hamer v. Neighborhood Hous. Servs. Of Chi., 138 S. Ct. 13, 17 n.1 (2017). Even if the district court finds that the appellants forfeited their opposition, it would still need to determine whether the bankruptcy court's granting of the underlying motion should be reviewed for "plain error."

These materials were written by ILC Advisor Robert G. Harris of the Silicon Valley firm, Binder Malter Harris & Rome-Banks LLP in Santa Clara, California (rob@bindermalter.com). Editorial contributions were provided by ILC member Michael Davis of Brutzkus Gubner in Woodland Hills (mdavis@bg.law) and ILC member Thomas B. Rupp of McNutt Law Group LLP in San Francisco (trupp@ml-sf.com).