Victor P. Kearney
OPINION
On Fеbruary 28, 2020, the Debtor filed a motion to convert his case to a chapter 7 case. Louis Abruzzo and Benjamin Abruzzo, as trustees of the Mary Pat Abruzzo Kearney Testamentary Trusts B and C (the “Abruzzo Trustees“) objected. In their objection the Abruzzo Trustees argued, inter alia, that if the case is converted it shоuld be immediately reconverted to chapter 11. Before the Court is Debtor‘s motion to strike the objection to conversion and the motion for reconversion because
As set out below, the Court concludes that the Abruzzo Trustees, far from being mere kibitzers in this contested matter, have the strongest economic and other interests in the outcome of the motion and must certainly be allowed to object, argue, present evidence, and otherwise participate. The Court will deny the motion to strike.
For the purpose of ruling on the Motion, the Court finds:2
Debtor is a life beneficiary of two trusts—the Mary Pat Abruzzo Kearney Testamentary Trusts B and C (the “Trusts“). The Abruzzo Trustees are residual beneficiaries of the Trusts. In 2013, Debtor sued the Abruzzo Trustees in state court, alleging that they breached their fiduciary duties to him in administering the Trusts. The Abruzzо Trustees filed counterclaims against Debtor for breach of fiduciary duty.3 Debtor‘s claims were tried to a jury in 2015, but the state court entered a directed verdict against him. The state court found that the Abruzzo Trustees were the prevailing parties on all issues at trial and awarded the Abruzzo Trustees аttorneys’ fees and costs pursuant to
In 2017 the state court tried the Abruzzo Trustees’ counterclaims and found in favor of, and awarded attorneys’ fees to, the Abruzzo Trustees.
Before the final state court hearing, on September 1, 2017, Debtor filed this chapter 11 case. The Abruzzo Trustees and the minor remainder beneficiaries filed proofs of claims based on the attorneys’ fees and costs awarded in the state court action, stating that the claims were contingent on whether the state court ruled that the fees and expenses awarded should be paid from the Trusts’ gross incomе. Claims 28-2, 29-1, 30-1, 31-1, 32-1.
The U.S. Trustee in Debtor‘s bankruptcy case appointed a committee of unsecured creditors (the “UCC“) to represent Debtor‘s unsecured creditors. The UCC proposed a reorganization plan (the “UCC Plan“) which was confirmed on February 28, 2019 (the “Confirmation Order“). Docs. 536, 846. Debtor aрpealed. The appeal currently is before the Tenth Circuit Court of Appeals.
In essence, the UCC Plan is the result of lengthy negotiations among the UCC, the Abruzzo Trustees, and Alvarado Realty Company (“ARCO“).4 Under the proposed deal, ARCO would buy from the Abruzzo Trusts all of their ARCO stock for $12,571,799. The Trusts would then pаy $3,000,000 to the estate in exchange for, inter alia, a release of all estate claims against ARCO, the Trusts, the Abruzzo Trustees, and related parties (the “Abruzzo/ARCO Parties“). The $3,000,000 payment would fund the UCC plan and be
The UCC Plan provides that the Abruzzo Trustees’ claims shall not receive any distributions under the plan. Doc. 536 at 6–7, 32. However, the UCC Plan provides for a broad release of estate claims against the Abruzzo/ARCO parties. Doc. 536 at 32.
After the Court confirmed the plan the Abruzzo Trusteеs asked the state court to rule that the damages and attorneys’ fees awarded to them in the state court litigation were expenses of the Trusts. Doc. 951. On September 10, 2019, the state court granted their request and ordered that “[a]ttorneys’ fees and costs awarded by this [c]ourt, or that may be awarded in the future are recoverable Trust expenses and not amounts owed by [Debtor] . . . .” Doc. 951. This ruling may mean that the Abruzzo Trustees do not have claims against the estate.
On February 28, 2020, the Debtor filed his motion to convert his chapter 11 bankruptcy case to a chapter 7 liquidation сase pursuant to
A. Article III Standing.
Article III of the United States Constitution restricts fedеral court adjudication to actual cases or controversies. State of Utah v. Babbitt, 137 F.3d 1193, 1201 (10th Cir. 1998). To satisfy Article III‘s standing requirements, a plaintiff must show an injury in fact, causation, and redressability. Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 180–81 (2000) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)). “To establish injury in fact, a plaintiff must show that he or she suffered ‘an invasion of a legally proteсted interest’ that is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical.‘” Bednar v. RCB Bank, et al. (In re Bednar), No. AP 18-01096, 2019 WL 3928844, at *5 (10th Cir. BAP) (quoting Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1548 (2016), as revised (May 24, 2016)).
B. Prudential Standing.
Prudential standing “embodies judicially self-imposed limits on the exercise of federal jurisdiction.” The Wilderness Soc. v. Kane County, Utah, 632 F.3d 1162, 1168 (10th Cir. 2011). The prudential standing doctrine encompasses various limitations, including “the general prohibition on a litigant‘s raising another person‘s legal rights.” Id. (quoting Allen v. Wright, 468 U.S. 737, 751 (1984)). “[T]he plaintiff generally must assert his own legal rights and interests and cannot rest his claim to relief on the legal rights or interests of third parties.” Id. (quoting Warth v. Seldin, 422 U.S. 490, 499 (1975)). Prudential standing is an issue of subject matter jurisdiction. Wilderness Soc., 632 F.3d at 1168; Deutsche Bank Nat. Trust Co. v. F.D.I.C., 717 F.3d 189, 194 n.4 (D.C. Cir. 2013) (prudential standing is threshold jurisdictional concept).
C. Statutory Standing.
Sometimes the right to bring a cause of action is сonferred by statute. In those cases, prudential standing concepts, which are judge-made, take a back seat. See, e.g., Lexmark Intern. Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1387-88 (2014) (“[W]e do not ask whether in our judgment Congress should have authorized [plaintiff‘s] suit, but whether Congress in fact did so.“).
D. The Abruzzo Trustees have Standing to Object to Debtor‘s Motion to Convеrt.
The Abruzzo Trustee clearly have standing to object to the motion to convert. First,
[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 appeаr and be heard on any issue in a case under this chapter.
Section 1109(b)‘s enumerated list of parties that may object is not exhaustive, Vermejo Park Corp. v. Kaiser Coal Corp., et al. (In re Kaiser Steel Corp.), 998 F.2d 783, 788 (10th Cir. 1993), and the term “party in interest” is “generally given a broad though not ‘infinitely expansive’ construction.” In re Sandia Tobacco Manufacturers, Inc., No. 16-12335-J11, 2019 WL 4307561, at *4-5 (Bankr. D.N.M. July 27, 2019) (quoting Southern Blvd, Inc. v. Martin Paint Stores (In re Martin Paint Stores), 207 B.R. 57, 61 (S.D.N.Y. 1997)). The Court considers whether a party is a party in interest on a case by case basis. Sandia Tobacco Manufacturers, Inc., 2019 WL 4307561, at *4. A party is a party in interest if it “has a sufficient stake in the proceeding so as to require representation.” Id. (quoting Kaiser Steel, 998 F.2d at 788). Generally, if the bаnkruptcy proceedings will have a direct effect on a party‘s pecuniary or legally protected interests, the party has standing under
Here, the Abruzzo Trustees argue that they “have a significаnt interest in the UCC Plan and any conversion of the case that would render the UCC Plan moot” because “[t]he [Abruzzo] Trustees are receiving releases [through the UCC Plan].” Doc. 1037. Citing Campbellton, Debtor argues in response that the Abruzzo Trustees’ interest in the releases contained in the UCC Plan is not a legally protеcted or pecuniary interest. Doc. 1043.
In Campbellton, the objecting party‘s “only role . . . was as a potential target of future litigation by the [d]ebtor, [c]ommittee, creditors and/or a liquidating trustee . . . .” 593 B.R. at 669. The court held that the objecting party was not a party in interest where the potential for litigation against it did “not depend on the outcome of this Chapter 11 case” and the objecting party could be sued “irrespective of whether or not this Chapter 11 case proceeds, the plan is confirmed, or the case is dismissed.” Campbellton, 593 B.R. at 669.
In contrast, conversion of this case would have a direct effect on whether Debtor may sue the Abruzzo Trustees for certain causes of action. The UCC Plan precludes “all Causes of Action, as defined [in the UCC Plan], with Debtor fully, finally, and forever waiving relinquishing, releasing and discharging all such Causes of Action.” Doc. 536 pg. 32. As defined, “Causes of Action” includes “аny and all rights, claims, demands, and causes and
The Abruzzo Trustees have spent an enormous amount of time, energy, and monеy dealing with this chapter 11 case, the UCC, and the Debtor. The Abruzzo Trustees negotiated the terms of the UCC Plan and obtained the necessary approvals from this Court and the state court. Given the history of the Debtor and the Abruzzo Trustees since the state court litigation began in 2013, it is ludicrous to contend that the Abruzzo Trustees are not parties in interest in the Debtor‘s effort to undo all of their work by converting the case to chapter 7. Other than (perhaps) the Debtor himself, no party is more interested in the outcome of this chapter 11 case than the Abruzzo Trustees. They have spent milliоns of dollars and seven years defending against claims brought by the Debtor. The Debtor has made it very clear that he wants to bring new claims against the Abruzzo Trustees if only he is allowed to do so.
The motion to convert raises the specter that all of time, money, and effort the Abruzzo Trustee devоted to the UCC Plan will be undone, and that they would once again face years of litigation brought by the Debtor. This possibility gives the Abruzzo Trustees Article III and statutory standing to object to Debtor‘s motion to convert.
E. The Abruzzo Trustees Have Standing to Move for Reconversion to Chapter 11 Under § 706(b) .
In their objеction to Debtor‘s motion to convert, the Abruzzo Trustees asks that,
Debtor argues that, even if the Abruzzo Trustees are parties in interest eligible to object to his motion to convert, the Abruzzo Trustees do not have standing “to seek affirmative relief under
The Court concludes thаt the Abruzzo Trustees have Article III and statutory standing to file a motion to reconvert.
The Abruzzo Trustees have a legally protected interest in the UCC Plan that would be directly affected if Debtor‘s case were converted to chapter 7 and not immediately reconverted. They have been as involved in this bankruptcy case as any other party. The economic and other interests of the Abruzzo Trustees would be profoundly affected by conversion. Thus, the trustees clearly have standing under
Entered: March 20, 2020
Hon. David T. Thuma
United States Bankruptcy Judge
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