615 B.R. 488
Bankr. D.N.M.2020Background
- Debtor is a life beneficiary of two Mary Pat Abruzzo Kearney Testamentary Trusts; the Abruzzo Trustees are residual beneficiaries and were adverse parties in extensive state-court litigation where they prevailed and were awarded attorneys’ fees.
- Debtor filed Chapter 11 in 2017; a UCC (unsecured creditors’ committee) negotiated a Chapter 11 plan (the UCC Plan) providing the Abruzzo/ARCO parties broad releases and funding from a proposed ARCO stock sale by the Trusts.
- The Abruzzo Trustees and minor remainder beneficiaries filed proofs of claim for the state-court fees; the state court later ruled those fees are Trust expenses (which may eliminate estate claims).
- Debtor moved to convert the Chapter 11 case to Chapter 7 on February 28, 2020; the Abruzzo Trustees objected and alternatively requested immediate reconversion to Chapter 11 if conversion were ordered.
- Debtor moved to strike the Abruzzo Trustees’ objection and their reconversion request, arguing they lack Article III and statutory standing under 11 U.S.C. § 1109 and cannot seek affirmative relief under § 706(b).
- The bankruptcy court denied the motion to strike, holding the Abruzzo Trustees have Article III and statutory standing to object to conversion and to move for reconversion because the UCC Plan releases and the potential unmaking of the plan would directly and materially affect their legally protected and pecuniary interests.
Issues
| Issue | Debtor's Argument | Abruzzo Trustees' Argument | Held |
|---|---|---|---|
| Standing to object to conversion under § 1109(b) and Article III | Abruzzo Trustees are not parties in interest and lack Article III standing; they are mere potential targets of litigation | They have a direct, legally protected pecuniary interest in the UCC Plan releases and will be harmed if conversion renders the Plan moot | Court: Abruzzo Trustees have Article III and §1109(b) standing; their interests are directly affected |
| Whether the UCC Plan releases constitute a legally protected/pecuniary interest for standing | Releases are not a pecuniary or legally protected interest (relying on Campbellton contrast) | Releases and the Plan’s adjudication status are legally protected because they bar Debtor’s future causes of action against the Trustees | Court: Releases are legally protected; conversion would directly affect Trustees’ rights, so standing exists |
| Standing to seek reconversion under § 706(b) | Even if they may object, Trustees cannot seek affirmative relief under §706(b); statute protects only certain persons | §706(b) explicitly permits a party in interest to request conversion to Chapter 11; parties in interest are the statute’s beneficiaries | Court: Trustees, as parties in interest, have standing to move for reconversion under §706(b) |
| Motion to strike the Abruzzo Trustees’ filings for lack of standing | The Trustees’ objections and reconversion motion should be stricken for lack of standing | The Trustees must be allowed to appear, object, present evidence, and seek reconversion because of their direct stakes | Court: Denied motion to strike; Trustees may fully participate |
Key Cases Cited
- State of Utah v. Babbitt, 137 F.3d 1193 (10th Cir. 1998) (Article III case-or-controversy requirement)
- Friends of the Earth, Inc. v. Laidlaw Envtl. Servs., 528 U.S. 167 (2000) (standing elements: injury in fact, causation, redressability)
- Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992) (standing framework)
- Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016) (injury must be concrete and particularized)
- In re Kaiser Steel Corp., 998 F.2d 783 (10th Cir. 1993) (broad construction of "party in interest")
- Nintendo Co. v. Patten (In re Alpex Computer Corp.), 71 F.3d 353 (10th Cir. 1995) (party in interest includes those with pecuniary interests directly affected)
- Matter of Texas Extrusion Corp., 844 F.2d 1142 (5th Cir. 1988) (§706(b) conversion protects parties in interest)
- Allen v. Wright, 468 U.S. 737 (1984) (prudential standing: plaintiffs generally must assert their own rights)
- Warth v. Seldin, 422 U.S. 490 (1975) (limits on asserting third-party rights)
- In re Campbellton-Graceville Hosp. Corp., 593 B.R. 663 (Bankr. N.D. Fla. 2018) (contrast on when potential litigation exposure alone does not confer standing)