Debtors are often dismayed by the amounts received or recovered by the trustee administering their bankruptcy estate assets. A debtor may think the rural land she inherited from Grandpa is worth a fortune. Or, more likely, a debtor may believe his slip and fall case will fund his retirement. When a debtor files a Chapter 7 bankruptcy case, all of the debtor’s assets become property of his bankruptcy estate. 11 U.S.C. §541. The trustee is the sole representative of the bankruptcy estate with full authority to sign deeds and bills of sale and to settle and release claims. 11 U.S.C. §704. Of course, all of the trustee’s actions must be approved by the bankruptcy court, usually upon a motion and proposed order filed by the trustee. Many debtors have a hard time understanding and/or accepting this fact. After all, HE is the one who slipped on the grape and hurt his back! Can a Chapter 7 debtor object to the trustee’s proposed sale of assets or settlement of claims? Sometimes a debtor can talk his lawyer into filing an objection to a trustee’s proposed action. However, in most cases, the debtor lacks standing to object to the trustee’s administration of estate assets.
There are many written opinions on the bankruptcy standing issue and the rulings are generally consistent. A person must have a “pecuniary interest” in the outcome of a bankruptcy proceeding in order to have standing to object to a trustee’s actions. In order to establish a pecuniary interest, a debtor must demonstrate a reasonable possibility of a surplus distribution after all creditors’ claims are satisfied. See Spenlinhauer v. O’Donnell, 261 F.3d 113 (1st Cir. 2001); In re Cult Awareness Network, Inc., 151 F. 3d 605 (7th Cir. 1998); In re Richman, 104 F.3d 654 (4th Cir. 1997); In re Andreuccetti, 975 F.2d 413 (7th Cir. 1992); In re El San Juan Hotel, 809 F.2d 151 (1st Cir. 1987); Gregg Grain Co. v. Walker Grain Co., 285 F. 156 (5th Cir. 1922).
The Seventh Circuit case In re Cult Awareness Network is one of the most frequently cited cases on the bankruptcy standing issue (probably because the underlying facts are so interesting). The Court’s ruling and its reasoning are consistent with the other cases cited. The Cult Awareness Network (“Cult Awareness”) was a non-profit entity engaged in anti-cult advocacy and cult victim support. In 1996, Cult Awareness filed Chapter 11 reorganization case in the Northern District of Illinois after it became embroiled in legal disputes with churches it had alleged to be cults. One such church was the Church of Scientology. Cult Awareness failed to get a plan confirmed and ultimately the case was converted to a Chapter 7 liquidation proceeding and a trustee was appointed.
The Chapter 7 trustee auctioned Cult Awareness’s trade name, mailing lists, telephone records and similar assets to an individual alleged to be associated with the Church of Scientology. The debtor filed an objection to the trustee’s motion to confirm the sale. The Bankruptcy Court ruled that Cult Awareness lacked standing to object to the sale because it lacked a “pecuniary interest” in the outcome of the sale. The District Court affirmed the opinion of the Bankruptcy Court.
On appeal, the Seventh Circuit upheld the rulings of the lower courts. The Court of Appeals confirmed that a debtor must show a “reasonable possibility of a surplus after satisfying all debts” in order to have a pecuniary interest and standing to object to the trustee’s actions. Cult Awareness, 151 F. 3d at 608 (citing Andreuccetti, 975 F 3d at 417). Cult Awareness argued that there was a possibility of a surplus distribution because judgments against it were on appeal. The Court found that the possibility of a surplus recovery was too remote. “The purpose of the pecuniary interest rule ‘is to insure “that bankruptcy proceedings are not unreasonably delayed by protracted litigation by allowing only those persons whose interests are directly affected by a bankruptcy order to appeal.”‘” Id. at 609 (citations omitted). The opinion further stated:
[c]ourts consistently have noted a public policy interest in reducing the number of ancillary suits that can be brought in the bankruptcy context so as to advance the swift and efficient administration of the bankrupt’s estate. This goal is achieved by narrowly defining who has standing in a bankruptcy proceeding.
Id. (quoting Richman, 104 F. 3d at 656-57).
In sum, the overwhelming majority of Chapter 7 cases are “no asset” cases that result in no distribution to creditors whatsoever. Very few cases result in a surplus distribution to the debtor. I believe the law is clear that if a debtor wants to object to a trustee’s sale of assets or settlement of claims, it is the debtor’s burden to demonstrate that there is a reasonable likelihood of a surplus distribution that confers a “pecuniary interest” in the outcome. Otherwise, the debtor lacks standing to contest the trustee’s actions.
As always, I assert my DISCLAIMER. I would very much be interested in your opinions and comments.