ORDER
Four groups of lenders appeal from the November 22, 2013 order of Chief United States Bankruptcy Judge Gregory F. Kishel granting the trustee’s motion to substantively consolidate nine bankruptcy estates.
I. BACKGROUND
These appeals arise out of the jointly administered bankruptcy proceedings of Petters Company, Inc. (“PCI”) and eight “special-purpose entities” (“SPEs”) wholly owned and controlled by PCI or Thomas J. Petters.
Appellants are lenders who extended financing to one or more of the SPEs either directly or indirectly through one of the other lenders. All of the appellants were net winners from the Ponzi scheme. Tr. App. 5581. In other words, appellants not only regained their initial investments in the SPEs, but they also garnered tens or even hundreds of millions of dollars in profits — profits that were funded with money stolen from other investors. Because they were net winners, none of the appellants has filed a proof of claim in the bankruptcy proceeding. Nor would there appear to be anything for appellants to claim; at the time of the FBI’s raid in September 2008, none of the SPEs had any assets. App. 221-22.
Appellants seek review of Judge Kishel’s order granting the trustee’s motion for substantive consolidation of PCI and the SPEs. Substantive consolidation is a common-law doctrine under which a bankruptcy court may combine separate bankruptcy estates into a single estate. In re Owens Corning,
When a court grants substantive consolidation, creditors’ claims against the separate debtors become claims against the consolidated entity, and liabilities among the consolidated entities are erased. Id. This has the effect of providing a bigger pool of assets from which creditors can draw, but it-can also work to the disadvantage of creditors whose potential recovery is diluted. In particular, a creditor whose debtor had some assets may now be forced to share those assets with creditors of debtors who had no assets.
II. ANALYSIS
The trustee moves to dismiss for lack of jurisdiction, arguing that, because appellants are net winners from the Ponzi scheme who have no claims against the bankruptcy estate, they lack standing to appeal the substantive-consolidation order. Appellants respond that (1) the trustee should be estopped from raising the issue of standing, and (2) they do, in fact, have standing to appeal. The Court considers each issue in turn.
A. Estoppel
Appellants first argue that the trustee should be estopped from raising the issue of standing because earlier in these proceedings he argued that this Court has jurisdiction over this appeal. The Court disagrees.
Judicial estoppel is an equitable doctrine under which a court may prevent a party from deliberately changing its position on a legal or factual issue during the course of a lawsuit. New Hampshire v. Maine,
Application of the doctrine is not warranted when the party’s prior position was the product of inadvertence or mistake. Id. at 753,
Shortly after these appeals were docketed, the trustee filed motions to certify them for immediate appeal to the Eighth Circuit. In his briefing in support of the motions, the trustee represented that “[t]his Court has jurisdiction over this motion and the pending appeal pursuant to 28 U.S.C. §§ 158(a) and 1334 and Federal Rule of Bankruptcy Procedure 8001(f).” See, e.g., Case No. 13-CV-3611, ECF No. 13 at 3. In its order denying the trustee’s motions, the Court found that it had jurisdiction under § 158(a)(1), which permits appeals as of right from “final judgments,
Appellants argue that the trustee’s earlier argument that this Court has jurisdiction should estop him from now arguing that appellants lack standing. The Court disagrees. As an initial matter, the trustee’s earlier assertion regarding jurisdiction is not “clearly inconsistent” with his current assertion that appellants lack standing, because the trustee was earlier addressing the issue of finality, while now he is addressing the issue of standing. Whether an order regarding substantive consolidation is a “final” order appealable as of right under § 158(a)(1) is not entirely clear. The trustee correctly anticipated that the Court would be concerned about the issue of finality, and the trustee quite appropriately focused on that issue. Given the context, the trustee’s earlier statement about jurisdiction appears to concern only the issue of finality under § 158(a) and not the issue of standing.
Moreover, the trustee’s failure to raise the issue of standing earlier was almost certainly inadvertent.
It is also worth noting that, at the time' that the trustee filed his motions to certify, there was an appellant who unquestionably had standing&emdash;Elistone Fund. Unlike the other appellants, Elistone Fund was a net loser from the Ponzi scheme, and it filed a proof of claim in the PCI bankruptcy case. As a result, Elistone Fund was a creditor with a direct interest in the distribution of the assets of the bankruptcy estate and therefore had standing to appeal orders affecting that distribution. Cf. Hartman Corp. of Am. v. United States,
Finally, there is little prejudice to appellants in permitting the trustee to raise the issue of standing at this stage. Appellants cite no authority for the proposition that the trustee had to raise the issue of standing before he filed his brief addressing the merits of appellants’ appeals. At worst, appellants were required to undergo one round of unnecessary briefing on the issue of immediate certification. This is not the sort of prejudice that should result in the drastic remedy of estoppel, particularly where the party to be estopped gained no advantage from failing to raise the issue earlier. The Court therefore declines to
B. Standing
Appellate standing in bankruptcy cases is more limited than either Article III standing or ordinary prudential standing. In re AFY,
The “person aggrieved” doctrine originally derives from the Bankruptcy Act of 1898. In re AFY,
This rule of appellate standing is necessary to insure that bankruptcy proceedings are not unreasonably delayed by protracted litigation that does not serve the interests of either the bankrupt’s estate or its creditors. The nature of bankruptcy litigation, with its myriad of parties, directly and indirectly involved or affected by each order and decision of the bankruptcy court, mandates that the right of appellate review be limited to those persons whose interests are directly affected.
In re El San Juan Hotel,
Conversely, the right to participate in proceedings before a bankruptcy court is broader than the “person aggrieved” status necessary to have standing to appeal an order of that bankruptcy court. See In re AFY,
“ ‘Person aggrieved’ is, of course, a term of art: almost by definition, all appellants may claim in some way to be ‘aggrieved,’ else they would not bother to prosecute their appeals.” Travelers Ins. Co. v. H.K. Porter Co.,
Even when an appellant has a direct pecuniary interest in a bankruptcy-court order, he may nevertheless lack standing to appeal that order if the interest he seeks to vindicate is not one that is protected by the Bankruptcy Code. In re Ernie Haire Ford, Inc.,
Whether an appellant is a “person aggrieved” is ordinarily a question of fact. In re Hecker,
1. Interest as Defendants in Avoidance Actions
As discussed above, Judge Bushel's substantive-consolidation order will have a major impact on how the assets of the bankruptcy estates are distributed to the creditors of those estates. Because appellants do not presently have claims against any of the estates, however, they do not currently have any interest in how the assets of those estates are distributed.
Instead, the reason appellants have appealed Judge Kishel’s order is to gain a strategic advantage in the avoidance actions that the trustee has brought against them. As noted, appellants profited from the Ponzi scheme when hundreds of millions of dollars stolen from others were paid to them. The trustee has brought avoidance actions against appellants to seek to recover this stolen loot and distribute it equitably among the victims of the Ponzi scheme; appellants are resisting those actions, seeking to retain the stolen loot for themselves.
Understandably, appellants would prefer not to have to defend the trustee’s avoidance actions. Because the substantive-consolidation order makes it more likely that those actions will go forward, appellants seek to have the order overturned. A long line of cases establishes, however, that having to defend a separate lawsuit does not render a litigant “aggrieved” for purposes of standing.
The Court is not persuaded that these circumstances render this case materially distinguishable from other cases in which an appellant’s interest in avoiding litigation has been held insufficient to confer standing. It is true that a number of these cases emphasized that the appellants’ rights were not affected because the appellants could assert the same defenses that they could have asserted in the absence of the order permitting the litigation to go forward. Nevertheless, the fact remains that in all of these cases, the appellants lost their very best “defense” — their “defense” of not having to defend the lawsuit at all.
Setting that aside, courts have rejected the argument that being deprived of a defense to an adversary action gives an appellant standing to appeal an order of a bankruptcy court. See In re Ernie Haire Ford, Inc.,
Over two years after the deadline had passed, the liquidating agent instituted a lawsuit against the appellant. Id. Invoking his rights under the plan, the appellant moved to enjoin the lawsuit. Id. The debt- or then filed a motion to extend the deadline, which the bankruptcy court granted. Id.
As in this case, the appellant argued that he had standing to appeal the bankruptcy court’s order because the order “hampered [his] ability to defend against liability by removing a defense that would have otherwise been available to him.... ” Id. at 1326-27. The appellant contended that, unlike other cases that merely permitted litigation to proceed, the bankruptcy court order “deprived him of an affirmative right....” Id. at 1326.
The Eleventh Circuit did not dispute the premise of the appellant’s argument — that the bankruptcy-court order had impaired appellant’s ability to defend the adversary action — but the court nevertheless held that the appellant lacked standing to appeal that order. Even assuming that the appellant’s alleged harm was sufficiently direct to • satisfy the “person aggrieved” standard, the Eleventh Circuit explained, “he is still not a person aggrieved because his interest is not protected or regulated by the Bankruptcy Code.” Id. at 1327. Indeed, an adversary defendant’s interest in avoiding liability to the estate is “antithetical to the goals of bankruptcy,” the primary purpose of which is to minimize injury to creditors. Id. Simply put, the desire to avoid liability to the estate does not render a litigant “aggrieved” for purposes of appealing from an order of the bankruptcy court. Id.
Although Ernie Honre Ford appears to be unique in the explicitness with which it held that an appellant does not have standing to appeal even when the bankruptcy-court order impairs his defenses in a separate lawsuit, other cases have reached the same conclusion. For example, in In re Moran, the debtor was a shareholder in a closely-held corporation, but did not initially disclose that asset in his bankruptcy petition.
Another shareholder in the corporation objected and submitted an offer to purchase the stock from the estate. Id. at 680. The bankruptcy court rejected the other shareholder’s offer and granted the trustee’s motion to abandon the stock to the debtor as of the date of the bankruptcy filing. Id.
Notably, the debtor had a separate state-court lawsuit pending against the other shareholder concerning ownership and control of the corporation. Id. at 679. Both the debtor and the other shareholder agreed that the order granting the trustee’s motion gave the debtor an advantage in that separate litigation. Id. at 679 & n. 1. Specifically, if the bankruptcy estate owned the shares instead of the debtor, then some or all of the debtor’s claims could fail. Id. at 679. By granting the trustee’s motion to abandon the shares as of the date of the bankruptcy filing, the bankruptcy court removed the other shareholder’s ability to argue that the debtor did not own the shares.
Nevertheless, the Sixth Circuit held that the shareholder lacked standing to appeal the bankruptcy court’s order. The court held that the shareholder’s interests as a
True, the court also opined that the shareholder’s ability to defend himself had not been impaired. Specifically, the court observed that any defenses that the shareholder could have asserted if the trustee had 'properly abandoned the stock to the debtor — or if the trustee had brought the same suit on behalf of the estate — would still be available. Id. The fact remains, however, that under the actual circumstances of the case — as opposed to the hypothetical circumstances posited by the Sixth Circuit — the appellant’s defenses were unquestionably compromised by the bankruptcy court’s order. Nevertheless, the appellant did not have standing to attack that order as erroneous on appeal.
Land-O-Sun Dairies v. Pine State Creamery Co. is another case in which the bankruptcy court’s order did more than just allow litigation to go forward. In Land-O-Sun Dairies, the appellant had agreed to purchase the debtor’s assets.
On appeal of the bankruptcy-court order, the district court held that the appellant lacked standing because its main interest was in avoiding a separate breach-of-contract action for refusing to go forward with the sale. Id. at 127. Crucially, the appellant lacked standing even though the order approving the sale did not merely allow a separate lawsuit to go forward; it actually changed the legal relationship between the parties and thereby affected the ability of the appellant to defend that lawsuit. The bankruptcy court’s approval was a condition precedent of the sale. Without it, the debtor would not have a valid breach-of-contract claim against the appellant. Id. Again, though, the fact that the bankruptcy-court order had an impact on the ability of the appellant, to defend a separate lawsuit did not give the appellant standing to appeal that order.
In this case, as in these other cases, appellants’ asserted interest in avoiding liability to the consolidated bankruptcy estate is not the sort of interest that is protected by the Bankruptcy Code. Indeed, as Ernie Haire Ford put it, appellants’ interest is “antithetical to the goals of bankruptcy.” In re Ernie Haire Ford,
2. Interest as Creditors with Contingent Claims
Appellants next argue that they are, in fact, creditors of the consolidated bank
Whether or not appellants meet the formal definition of “creditor” under the Bankruptcy Code, the fact remains that the contingent and speculative nature of appellants’ hypothetical future bankruptcy claims is at odds with the “person aggrieved” standard. That standard requires that the appellant have a direct pecuniary interest in the order from which he appeals. In re Peoples,
Appellants’ interest as potential creditors is remote from the substantive-consolidation order because that interest depends on the highly uncertain outcome of the avoidance actions. If appellants prevail in those actions — and they express confidence that they will — then appellants will never file proofs of claim against a bankruptcy estate and their interest as creditors will never come into being, much less be affected by Judge Kishel’s substantive-consolidation order. Under these circumstances, any pecuniary harm to appellants as creditors is merely potential and cannot be characterized as a direct consequence of the substantive-consolidation order. •
Indeed, because their status as creditors turns entirely on the outcome of the avoidance actions, appellants’ “contingent claim” argument is really just another way of attempting to assert their interest as adversary defendants. Cf. LTV Steel Co.,
Appellants cite cases in which courts have allowed creditors with contingent claims to participate in proceedings before the bankruptcy court. See, e.g., In re Dunes Hotel Assocs., No. 94-75715,
If appellants are eventually found liable in the trustee’s avoidance actions — and if appellants then file claims against the estate that are detrimentally affected by the substantive-consolidation order — then presumably appellants may invoke that harm as the basis for an appeal at that time.
ORDER
Based on the foregoing, and on all of the files, records, and proceedings herein, IT IS HEREBY ORDERED THAT:
1. Appellees’ motion to dismiss for lack of jurisdiction [EOF No. 52 in Case No. 13-CV-3611] is GRANTED.
2. These appeals [Case Nos. 13-CV-3611, 13-CV-3614, 13-CV-3616, and 13-CV-3618] are DISMISSED WITHOUT PREJUDICE FOR LACK OF JURISDICTION.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Notes
. The appellant in a fifth case voluntarily dismissed its appeal with prejudice. See Eli-stone Fund v. Kelley, No. 13-CV-3615, ECF No. 33.
. The cases in the bankruptcy court are In re Petters Company, Inc., Case No. 0845257; In re PC Funding, LLC, Case No. 08-45326; In re Thousand Lakes, LLC, Case No. 0845327; In re SPF Funding, LLC, Case No. 08-45328; In re PL Ltd., Inc., Case No. 08-45329; In re Edge One, LLC, Case No. 08-45330; In re MGC Finance, Inc., Case No. 08-45331; In re PAC Funding, LLC, Case No. 08-45371; and In re Palm Beach Finance Holdings, Inc., Case No. 08-45392. All of these entities filed for bankruptcy protection between October 11 and October 19, 2008. A tenth entity (Petters Group Worldwide, LLC) is part of the jointly administered bankruptcy proceeding, but was not a subject of the trustee’s motion to consolidate.
. Because the Court chooses not to estop the trustee from raising the issue of standing, the Court need not address the trustee’s contention that he cannot be estopped because his argument relates to the subject-matter jurisdiction of the Court. That said, the Court notes that the Eighth Circuit does indeed seem to treat the "person aggrieved” doctrine&emdash;which governs the issue of appellate standing in bankruptcy appeals&emdash;as a matter of subject-matter jurisdiction. See In re AFY,
. For this reason, the Court also rejects appellants' cursory contention that the trustee waived the issue of standing. See United States v. Olano,
. Appellants argue that although they have not filed any claims in the bankruptcy proceeding, they are nevertheless creditors because they have "contingent claims” against the consolidated estate. The Court addresses that argument below.
. Whether appellants knew or suspected that the money was stolen at the time it was paid to them is disputed and will presumably be litigated in the avoidance actions.
. Generally speaking, a bankruptcy trustee has the same right to bring an avoidance action that a creditor of the estate would have had. Appellants profited from the Ponzi scheme when various SPEs made payments to them, but the estates of those SPEs have no creditors (because, again, the lenders associated with those SPEs were Ponzi-scheme winners). Because the estates have no creditors, appellants can argue that the trustee does not have standing to bring avoidance actions against them. Substantive consolidation weakens appellants’ argument, because it creates one estate that has numerous creditors.
.In re Ernie Haire Ford, Inc.,
. In so holding, the Court recognizes that courts have occasionally permitted adversary defendants to appeal substantive-consolidation orders. See, e.g., In re Bonham, 229 F.3d 750 (9th Cir.2000). In those cases, however, no one appears to have challenged the standing of the appellants, and the courts did not address the "person aggrieved” doctrine. The Court therefore does not regard these cases as being particularly helpful.
. At oral argument, the trustee predicted that appellants would not be able to attack the propriety of the substantive-consolidation order in the avoidance actions. It is worth noting, however, that courts have permitted adversary defendants to contest the nunc pro tunc feature of substantive-consolidation orders as part of adversary .proceedings — an inquiry that (as such courts have noted) “closely parallel[s]’’ the substantive-consolidation analysis and that can be a dispositive issue in a preference action. See In re Auto-Train Corp.,
True, in permitting the adversary defendant to contest the nunc pro tunc feature of the substantive-consolidation order, Auto-Train mainly relied on the fact that the adversary defendant had not received adequate notice of the consolidation hearing. Id. at 278. The court also noted, however, that the adversary defendant did not suffer any harm until "the Trustee sued to recover the funds as preferential,” id. at 278 n. 11, suggesting that the proper time for the defendant to litigate the issue was during the adversary proceeding.