W. Stark v. Robert Moran

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 09a0189p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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In re: ROBERT J. MORAN,
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Debtor.
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No. 08-3606
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Plaintiff-Appellant, -
W. THOMAS STARK,
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v.
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ROBERT JOHN MORAN; MARVIN A.
Defendants-Appellees. -
SICHERMAN,
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On Appeal from the Bankruptcy Appellate Panel
of the Sixth Circuit.
No. 01-21926—Randolph Baxter, Bankruptcy Judge.
Argued: March 10, 2009
Decided and Filed: May 28, 2009
Before: BOGGS, Chief Judge; GILMAN and ROGERS, Circuit Judges.
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COUNSEL
ARGUED: Joseph Robert Spoonster III, FORTNEY & KLINGSHIRN, Akron, Ohio, for
Appellant. Lynn R. Larsen, LAW OFFICE OF TIMOTHY FARRELL SWEENEY,
Cleveland, Ohio, for Appellees. ON BRIEF: Joseph Robert Spoonster III, FORTNEY &
KLINGSHIRN, Akron, Ohio, for Appellant. Lynn R. Larsen, Timothy F. Sweeney, LAW
OFFICE OF TIMOTHY FARRELL SWEENEY, Cleveland, Ohio, Marvin A. Sicherman,
DETTELBACH, SICHERMAN & BAUMGART, Cleveland, Ohio, for Appellees.
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OPINION
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ROGERS, Circuit Judge. Shares owned by a bankrupt party amounting to a one-
third interest in a closely held corporation—shares that the debtor had not originally listed
1
No. 08-3606 In re Moran Page 2
in the bankruptcy petition—subsequently increased in value. The debtor and the bankruptcy
trustee agreed that if the debtor paid to the bankruptcy estate an amount sufficient to cover
all the bankrupt’s debts for which creditors had filed proofs of claim, the trustee would seek
bankruptcy court approval to treat the stock as “abandoned” nunc pro tunc to the time of
bankruptcy filing, thereby leaving the stock in the hands of the debtor. The bankruptcy court
approved the arrangement and the nunc pro tunc abandonment in a decision affirmed by the
Bankruptcy Appellate Panel. The owner of the remaining shares of the corporation—who
sought to buy the debtor’s stock from the trustee—appeals, contending among other things
that the deal did not comply with the statutory requirements for abandonment in 11 U.S.C.
§ 554. The appellant co-owner, however, lacks a legally protected interest in his ability to
purchase the debtor’s interest in the property, and therefore lacks bankruptcy appellate
standing. The legal bases for the co-owner’s challenges to the settlement and abandonment
serve to protect the estate and its creditors, not those who want to purchase the property in
question.
Debtor Robert Moran, his brother-in-law Tom Stark, and John Gerrish founded
Airpack, Inc. in 1996 as equal partners and co-owners. Each paid $12,000 in initial
capitalization and received one-third of the shares of the corporation.
Moran filed for bankruptcy in Ohio in December 2001, seeking the discharge of
about $140,000 of debt held by creditors with unsecured nonpriority claims. He claimed no
interest in any stock or business association, despite his one-third interest in Airpack.
Marvin Sicherman, trustee of the bankruptcy estate, filed a “No Asset Report” in January
2002. The bankruptcy court subsequently approved a discharge and closed the case. It
appears that no creditors received any funds from the estate at that time. The parties dispute
whether the Airpack stock had any significant value at the time of the discharge, but all agree
that the stock had considerable value by 2006.
In July 2005, Moran filed suit against Stark in Ohio court. Moran alleged that after
he and Stark agreed to buy out Gerrish, Stark secretly arranged to buy out Gerrish himself,
then wrongfully used Stark’s new majority-shareholder status to freeze out Moran. Moran’s
complaint contained counts of breach of contract, breach of fiduciary duties, fraud, and
violation of state corporate law. Moran’s success on these claims may depend on his
No. 08-3606 In re Moran Page 3
ownership of the Airpack stock—if the bankruptcy estate owned the stock at the time of
Stark’s alleged wrongful conduct, some or all of the counts in Moran’s suit might fail to state
1
a valid claim.
In March 2006, the trustee moved to reopen the bankruptcy case because of the
undisclosed Airpack stock, which he characterized as “clearly property of the Debtor’s
bankruptcy estate.” See 11 U.S.C. § 541(a)(1); see also id. § 554(c) (property reported
by debtor abandoned to him at close of case); id. § 554(d) (property not reported by
debtor and not administered remains property of the estate). The bankruptcy court
reopened the case, and the trustee sent notice to creditors inviting them to file proofs of
claim. Creditors filed about $20,000 worth of proofs of claim.2
Stark submitted an offer to the trustee to purchase the Airpack stock from the
estate for $20,000. But the trustee chose to deal with Moran instead. The trustee
evidently reasoned that so long as the estate received enough money to pay off all
creditors’ claims (and the trustee’s fees), the estate would not care who ended up with
the stock, and Moran was willing to contribute sufficient money to that end. Indeed,
bankruptcy law contemplates the return of leftover assets to the debtor at the close of a
case. See 11 U.S.C. § 554(c).
In January 2007, the trustee filed a motion with the bankruptcy court styled
“Motion . . . For Authority to Compromise the Bankruptcy Estate’s Claim to the
Debtor’s Equitable Interest in Airpack, Inc., and to Abandon Any Remaining Interest in
Airpack, Inc.” The trustee stated that he likely would have abandoned the stock in 2002
had Moran properly reported it. However, the trustee claimed that he thought the estate
“should be entitled to at least a portion” of the appreciation in the stock’s value, while
Moran was claiming entitlement to the stock’s entire value. The trustee characterized
the disagreement as a “disputed claim” and suggested a settlement. The terms of this
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Stark and Moran argue based on this assumption; we express no opinion about the legal merits
of Moran’s complaint under Ohio law.
2
The record does not reflect why the amount of submitted claims is significantly lower than the
amount of the debts Moran sought to discharge.
No. 08-3606 In re Moran Page 4
settlement were that Moran would pay about $32,500 to the estate (enough to pay all
creditors who had filed proofs of claim after the bankruptcy court reopened the case as
well as all administrative expenses), while the trustee would abandon any claim to the
Airpack stock. The parties asked the court to make the abandonment nunc pro tunc to
the filing of the bankruptcy petition.
Stark filed objections to the trustee’s motion. He also submitted another offer
to purchase the Airpack stock from the estate, this time for $30,000. In the letter making
that offer, Stark claimed that he would have made an offer to purchase the stock had the
trustee sought to abandon it after Moran first filed the bankruptcy case. Stark later
increased his offer to $37,500.
No creditors objected to the trustee’s motion. The bankruptcy court granted the
motion, characterizing the transaction as a “settlement” or “compromise.” The
bankruptcy court also allowed the estate to “abandon” the stock nunc pro tunc to the
bankruptcy petition filing date. The bankruptcy court held that Stark as a higher bidder
did not have standing to object to a compromise or an abandonment because neither was
a judicial sale. The court also noted that even if Stark were allowed to pay a higher
purchase price for the stock, the surplus would merely return to Moran after the estate
paid the creditors.
On appeal, the Bankruptcy Appellate Panel affirmed the bankruptcy court’s
judgment. The BAP held that Stark “arguably” had appellate standing under the “person
aggrieved” standard. However, the BAP held that Stark lacked standing before the
bankruptcy court because he had no legally protected interest in Moran’s stock. The
BAP also held that the trustee’s proposed transaction was a settlement as opposed to a
judicial sale. The BAP’s opinion indirectly suggested that the bankruptcy court erred
by allowing abandonment before the close of the case without a showing that the stock
was burdensome or of inconsequential value to the estate. But the BAP went on to
affirm on the alternate ground that abandonment served an “overriding purpose” of
bankruptcy—the “equality of distribution of the debtor’s property among creditors
similarly situated.”
No. 08-3606 In re Moran Page 5
Before the BAP and on the instant appeal, Stark argues that the bankruptcy
court’s order is not an “abandonment” but a sale under 11 U.S.C. § 363. He argues that
the stock could not be abandoned under 11 U.S.C. § 554(a) because it was not
burdensome to the estate or of inconsequential value. Therefore, he maintains, the
bankruptcy court lacked authority to order that the transfer to Moran have nunc pro tunc
effect. Further, he suggests that the bankruptcy court abused its discretion in rejecting
his higher bid for the stock.
Because Stark lacked standing to appeal to the BAP, however, the BAP properly
declined to overturn the bankruptcy court’s judgment. Stark does not show that he seeks
to defend himself from direct harm to a legally protected interest so as to satisfy the
standing doctrine applicable to appeals from bankruptcy courts’ orders. His interests as
a co-owner of Airpack, as a state court defendant, and as a frustrated bidder for the stock
are not the sort of interests that support standing for the purpose of his bankruptcy
appeal, and the federal appellate courts are an improper forum in which to defend those
interests, which are adequately protected in state court.
A party “does not have standing to appeal a bankruptcy court order unless that
party is directly and adversely affected pecuniarily by the order.” Moran v. LTV Steel
Co., Inc. (In re LTV Steel Co., Inc.), 560 F.3d 449, 452 (6th Cir. 2009) (quotation
omitted). “Only when the order directly diminishes a person’s property, increases his
burdens, or impairs his rights will he have standing to appeal.” Fid. Bank, Nat’l Ass’n
v. M.M. Group, Inc., 77 F.3d 880, 882 (6th Cir. 1996). This standing requirement is
“more limited than Article III standing.” LTV Steel, 560 F.3d at 452-53.
All of Stark’s asserted interests are either not directly harmed by the bankruptcy
court’s order or are not interests that bankruptcy law—in particular the law governing
abandonment—protects. Stark’s ownership of some Airpack stock does not confer
standing to appeal the bankruptcy court’s disposition of the stock that Moran originally
owned. A part owner of a corporation, without more, does not have an interest sufficient
to justify intervention in (and delay of) any proceeding in which a bankruptcy court
administers other shares in the corporation. Any court order in the Moran bankruptcy
No. 08-3606 In re Moran Page 6
proceeding would not directly affect Stark’s ownership of his shares. Stark does not
allege that Moran directly harmed Stark’s ownership interest in his stock simply by the
transfer of Moran’s stock to the bankruptcy estate, and Stark does not explain how
allowing the estate to transfer the stock back to Moran would harm any interest in
Stark’s shares that is protected by the bankruptcy law provisions relied upon by Stark.
Stark’s status as a state-court defendant in a suit brought by a bankruptcy debtor
is also not sufficient for standing. The interest Stark has in avoiding a state-court
lawsuit, or even in affecting who has the right to bring that suit, is not the sort of interest
that bankruptcy law in general is designed to protect. In the somewhat analogous
situation of an order allowing a bankruptcy creditor to have derivative standing to sue,
we held that the defendants of such suits are not aggrieved by such an order “when their
interest in the order is as party defendants in the resulting adversary proceeding because
the interest that such parties assert as defendants to an adversary proceeding is not
protected by the Bankruptcy Code.” LTV Steel, 560 F.3d at 454 (quotation and
alterations thereto omitted). The interest if anything is opposed to the primary goal of
the Bankruptcy Code in general, which is to minimize the injury to creditors. Id.
Moreover, the bankruptcy court’s order does not “impair [Stark’s] ability to defend
[himself]” in the state court suit; “[t]hose defenses that would have been available” had
the trustee brought the action on behalf of the estate, or had the trustee transferred the
stock to Moran in a way free of the errors that Stark alleges, will still be available as
defenses on the merits to Moran’s action. See Fid. Bank, 77 F.3d at 883.
Stark similarly lacks bankruptcy appellate standing in his capacity as a frustrated
bidder for the Airpack stock, because his interests are not aligned with those of the
bankruptcy estate’s creditors. Generally, “[f]rustrated bidders do not have standing to
object to the sale of property.” Squire v. Scher (In re Squire), 282 F. App’x 413, 416
(6th Cir. 2008). An exception to this general rule may exist “where an unsuccessful
bidder challenges the intrinsic structure of the sale because it is tainted by fraud, mistake,
or unfairness.” Id. But even if we read Stark’s objection to the trustee’s motion as
alleging that the trustee somehow fraudulently or unfairly decided not to sell the stock
No. 08-3606 In re Moran Page 7
to Stark, Stark still does not qualify for the exception. See id. This is because Stark’s
bare interest as a potential purchaser is not protected by the Bankruptcy Code provisions
that he relies upon.
A frustrated bidder lacks bankruptcy appellate standing when he merely alleges
that he would have profited from his desired purchase, and does not allege, for instance,
that fraud or impropriety prevented the estate from accepting his higher bid such that
creditors would not receive as great a recovery as they would have had the estate
accepted the higher bid. See Kabro Assocs. of W. Islip, LLC v. Colony Hill Assocs. (In
re Colony Hill Assocs.), 111 F.3d 269, 274 (2d Cir. 1997). The Seventh Circuit’s In re
Harwald Company opinion, relied upon by our court in Squire, explained that to satisfy
the “person aggrieved” test in the bankruptcy appellate context, a frustrated bidder must
show that “the interest which he seeks to protect through his petition for review is an
interest which the Bankruptcy Act seeks to protect or regulate.” 497 F.2d 443, 444 (7th
Cir. 1974). The Seventh Circuit noted that “the primary objective of the Bankruptcy Act
is to minimize the injury to creditors arising from the fact of bankruptcy,” and linked
frustrated-bidder appellate standing to the creditors’ interest in maximizing recovery.
Id. at 444-45. Allowing a frustrated bidder to bring an appeal based on allegations of
impropriety may make some sense when the bidder’s interest in obtaining property
aligns with the interests of creditors who may not be aware of the alleged wrongdoing
that would limit their recovery, but allowing such an appeal does not serve the purposes
of the bankruptcy proceeding when the alleged wrongdoing cannot possibly harm any
creditor. Stark does not allege an injury that brings him within the interests protected
by the Bankruptcy Code because even if everything he alleges about the impropriety of
the bankruptcy court order is true, none of the relief he requests on appeal could possibly
increase any creditor’s recovery. No creditor that filed a proof of claim was left
unsatisfied by the bankruptcy court’s judgment. Thus, Stark lacked bankruptcy appellate
standing as a frustrated bidder.
The lack of standing in this case to appeal to the BAP distinguishes our recent
holding in Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc. (In re
No. 08-3606 In re Moran Page 8
Trailer Source, Inc.), 555 F.3d 231 (6th Cir. 2009). There we held that “the bankruptcy
appellate-standing doctrine is not applicable to the second layer of appeal, from the
district court to the court of appeals, when it is uncontested that the party who appealed
the bankruptcy court’s order to the district court had appellate standing.” Id. at 237.
Here, when Stark sought to appeal the bankruptcy court order to the BAP (the equivalent
of the district court), he lacked appellate standing. The bankruptcy appellate standing
doctrine thus bars Stark’s appeal.
Because Stark does not have standing to appeal the order of the bankruptcy court,
it is not necessary to decide whether he had standing before that court as a “party in
interest,” nor is it necessary to decide whether the bankruptcy court’s nunc pro tunc
abandonment order was improper. We remand to the BAP with instructions to dismiss
the appeal for want of bankruptcy appellate standing.