X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Several months ago (in another jurisdiction, of course), while waiting for my case to be called, I witnessed a colloquy between a bankruptcy judge and counsel for the debtor in a Chapter 11 case. The court had just provided the debtor with interim relief regarding a particular matter and was scheduling a final hearing. In so doing, the court directed counsel to give notice of the final hearing to “all parties in interest.” Counsel looked somewhat puzzled, as his proposed order scheduling the final hearing had set forth a list of parties to be served, in language to the effect that service made in this manner would be sufficient. The court, however, would not give counsel what, in effect, would have been an advisory opinion — that the creditors proposed to be served in counsel’s version of the order — if all of the parties were in interest. I realized that it was time for me to give myself a refresher course on the subject of parties in interest. A recent decision of the Bankruptcy Appellate Panel of the 6th Circuit helps in applying the myriad code provisions, rules and cases touching on this issue to a rather unusual set of facts. The phrase “party (or parties) in interest” appears in both the Bankruptcy Code and the Rules of Bankruptcy Procedure. See, e.g., code Sections 102(1)(B)(i), 502(a) and 1109(b); see also Fed. R.Bankr.P. 2002(a), (b). Nowhere, however, is the phrase defined. Congress and the drafters of the rules have in some cases provided insights into what this phrase might mean, but those insights are inconsistent and, as case law has developed, not universally followed. For example, Fed.R.Bankr. P. 2002(a), entitled “Twenty-Day Notices to Parties in Interest,” list parties in interest to be “the debtor, the trustee, all creditors and indenture trustees.” A similar list is found in Fed.R.Bankr.P. 2002(b). Yet Section 1109(b) of the code, in providing who may raise and be heard on issues in a Chapter 11 reorganization case, states that a party in interest includes the debtor, the trustee, a creditors’ committee, an equity security holders’ committee, a creditor, an equity security holder, or any indenture trustee.” (As courts have often stated, the word “includes” is not a word of exclusivity but rather suggests a representative list; thus it is safe to say that the list included in code Section 1109(b) is not an exhaustive one.) In some jurisdictions (including the Eastern District of Pennsylvania), local rules have been adopted to more fully delineate the concept of who is a party in interest. Thus, L.B.R. 9014-3(g), in setting forth entities who are to be served with certain types of motions, provides that service of such motions shall be made upon the debtor and debtor’s counsel, the U.S. Trustee, any trustee or interim trustee, any official committee — or if no committee has been formed in a Chapter 11 case, the 20 largest unsecured creditors of the debtor — and “any person whose interest would be directly, materially and adversely affected if the relief requested in the motion were granted and whose interests are not adequately represented by persons on whom service is otherwise required.” This latter phrase, some have said, was included to capture the sense of various court decisions speaking to the party in interest issue, including (by way of example only) In re Amatex Corp., 755 F.2d 1034, 1041 (3d Cir. 1985) (party in interest is anyone who has a practical stake in the outcome of a case); Yadkin Valley Bank & Trust Co. v. McGee (In re Hutchinson), 5 F.3d 750, 756 (4th Cir. 1993) (party in interest is generally understood to include all persons whose pecuniary interests are directly affected by the bankruptcy proceedings); and In re Johns-Manville Corp., 36 B.R. 743, 754 (Bankr. S.N.N.Y. 1984) (party in interest is anyone who will be impacted in any significant way in the case). The party in interest concept has been described by at least one court as an “expandable concept depending on the particular factual context in which it is applied.” In re River Bend-Oxford Associates, 114 B.R. 111, 113 (Bankr. D.Md. 1990). As noted above, the Bankruptcy Appellate Panel of the 6th Circuit was recently called upon to apply these principles to an unusual set of facts in Morton v. Morton (In re Morton), No. 02-8061 (Sept. 12, 2003). In this case, Kerri and Richard Morton filed a joint Chapter 13 petition on April 18, 2000. Their Chapter 13 plan was approved on Aug. 9, 2000. Shortly thereafter, the Chapter 13 trustee moved to convert the case to a Chapter 7 case on the grounds that Kerri had forged Richard’s signature on the Chapter 13 petition and that Richard was totally unaware of the bankruptcy. Counsel for the pair (wisely) moved to withdraw and his motion was granted; at the request of Richard, the cases of Richard and Kerri were severed. Richard’s case was, by motion filed by him, thereupon dismissed. At the same time, the bankruptcy court granted the Chapter 13 trustee’s motion and converted Kerri’s case to a Chapter 7 case. Kerri’s case proceeded, though in an unusual fashion. First, the bankruptcy court vacated its order converting the case to a Chapter 7 case as part of a stipulated order which (among other things) allowed Kerri to remain in Chapter 13, provided that she pay allowed unsecured claims, a 100 percent dividend, and that she agree to waive the right to a discharge in her case. Second, Kerri filed objections to a number of claims that had been filed in the joint case involving her and Richard, claiming that Richard, and Richard alone, was liable for those debts. A hearing on the objections was scheduled for Feb. 20, 2002. Kerri served her objections on the creditors and on the Chapter 13 trustee, but not on Richard. The court, noticing that Richard had not been served, itself forwarded copies of the objections to Richard and his counsel along with a notice offering him an opportunity to file a response. This notice was served on both the Chapter 13 trustee and the Office of the U.S. trustee. Richard in fact filed a response, and Kerri moved to strike his response, claiming that he had no standing to object, as he was not a party in interest. The motion to strike was filed on Feb. 19, one day before the scheduled hearing date. At the Feb. 20 hearing, the parties appeared, but because of the last-minute filing of the motion to strike, counsel for both Kerri and Richard (with the bankruptcy court’s seeming concurrence) agreed to put off the taking of evidence until the issue of standing could be resolved. However, on Aug. 7, 2002, the bankruptcy court issued a decision in which it not only found that Richard had standing to respond to the objections, but also ruled on the merits of the objections based solely on documents attached to the objections and response, finding her position on some objections to have no merit. Kerri appealed both the standing issue and the bankruptcy court’s decision on the merits with respect to certain of the objections. In its analysis of Kerri’s appeal of the bankruptcy court’s ruling on standing, the panel focused its attention on whether or not Richard was a party in interest. The panel first examined the provisions of code Section 1109(b), finding that at least in Chapter 11 cases, the phrase “invites interpretation and ‘is generally understood to include all persons whose pecuniary interests are directly affected by the bankruptcy proceedings,’” citing Nintendo Co. Ltd. V. Patten (In re Alpex Computer Corp.), 71 F.3d 353, 356 (10th Cir. 1995). Since code Section 1109 is not a statute of general applicability, some courts, noted the panel, will not apply it in Chapter 13 cases. However, other courts turn to it for guidance. Thus, in In re Davis, 239 B.R. 573, 570 (B.A.P. 10th Cir. 1999), the 10th Circuit Bankruptcy Appellate Panel did look to code Section 1109(b) for guidance and concluded that a party in interest is generally understood to include all persons whose pecuniary interests are directly affected. The 6th Circuit panel stated that “[w]e extend this definition to include anyone who has an interest in the property to be administered and distributed under the Chapter 13 plan.” In the case before it, the panel, reviewing the precedent and the code, had no trouble reaching the conclusion that Richard was in fact a party in interest who had standing to be heard on Kerri’s claims objections. Kerri contended that Richard was obligated to pay certain debts that some creditors claimed were joint debts. Clearly, Richard had a pecuniary interest in any decision relieving Kerri of liability on those debts. Permitting Richard to participate advanced the goals of the Bankruptcy Code, including the equitable distribution of debtors’ assets and the clarification of the rights and obligations of debtors and creditors (citing In re Cowan, 235 B.R. 912, 915 (Bankr. W.D. Mo. 1999)), and thus affirmed the bankruptcy court’s decision on this issue. (As for the bankruptcy court’s decision to rule on the merits of the objections, the panel remanded with instructions to permit Kerri to present evidence on those objections for which the bankruptcy court declared, on the basis of papers only, that Kerri’s objections were not meritorious.) The notion of an “expandable concept” “inviting interpretation” is a difficult one for the bankruptcy practitioner. When deciding whom to serve with a pleading, some parties are obvious; others are much less so. In this era of mega-cases with literally tens of thousands of creditors and vast numbers of equity security holders in a case, how is one to know upon whom service is to be made? For example, are all unsecured creditors adequately represented by a creditors’ committee as to every issue? Even if a bankruptcy court makes a finding that a certain type of notice shall be deemed sufficient for purposes of the code and rules, will such a finding withstand appellate review? So much for the refresher course. As is often the case, the area is gray, the cases fact-specific and the solutions not always crystal clear. The practitioner will, as is often the case, ultimately have to use his or her best judgment, err on the side of caution, and be prepared to defend his or her actions when called into question. MYRON A. BLOOM is a shareholder with the firm of Hangley Aronchick Segal & Pudlin. His practice is concentrated in the areas of corporate organization, bankruptcy, commerical workouts and creditors’ rights.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.