A recent concurring opinion from a Tenth Circuit decision highlighted the importance of careful pleading in bankruptcy court to ensure a creditor’s prudential standing on appeal.

In Slovak Republic v. Loveridge (In re EuroGas, Inc.), the United States Bankruptcy Court for the District of Utah reopened a chapter 7 bankruptcy case to allow the trustee to investigate the ownership of certain interests in talc deposits located in the Slovak Republic that were undisclosed in the initial bankruptcy proceeding.  It was alleged that the talc claims were property of the estate and were being unlawfully held by the debtor’s successor entity. After investigation, the trustee entered into a settlement with the successor entity and ultimately abandoned any remaining interest that the estate may have had in the talc claims. The bankruptcy court authorized the abandonment over the objection of an unsecured creditor, the Slovak Republic.

The Slovak Republic appealed but the Tenth Circuit Bankruptcy Appellate Panel (“BAP”) ruled that it lacked prudential standing and dismissed the appeal. The Slovak Republic then appealed to the Tenth Circuit.

In its per curiam decision, the Tenth Circuit reasoned that because prudential standing is not a jurisdictional limitation, courts can assume without deciding that prudential standing elements are met.  As a result, the Tenth Circuit declined to decide the issue of prudential standing and simply assumed that the Slovak Republic was a person aggrieved.  Circuit Judge Bacharach, however, wrote a concurrence to address the Slovak Republic’s prudential standing to appeal. Judge Bacharach explained that the Tenth Circuit’s requirements for standing in bankruptcy appeals exceed the jurisdictional requirements of Article III.  In bankruptcy appeals, an appellant must demonstrate that it is aggrieved by a bankruptcy court’s order.  In other words, the appellant’s rights must be impaired by the order.

Accordingly, the Slovak Republic’s prudential standing turned on whether the Slovak Republic was “aggrieved” by the bankruptcy court’s order abandoning the talc claims.  Judge Bacharach reasoned that this standard should be considered in light of the Slovak Republic’s status as an unsecured creditor.  Unsecured creditors generally have a direct pecuniary interest in a bankruptcy court’s orders disposing of property of the estate because such orders directly affect the creditors’ ability to receive payment of their claims.

Notably, Judge Bacharach also found that the BAP erred in relying on the bankruptcy court’s findings of fact on the merits of the trustee’s abandonment in deciding the issue of prudential standing.  In his view, the appellant’s material allegations must be accepted as true and construed favorably toward the appellant. Judge Bacharach concluded that the Slovak Republic had adequately alleged facts which, if accepted as true, supported the assertion that the estate’s unsecured creditors would have obtained more money through competitive bidding on the talc claims than they did through the trustee’s settlement. Therefore, the Slovak Republic had prudential standing to appeal.

Read the full opinion here.