Furlough v. Cage (In Re Technicool Sys., Inc.)

Case: 17-20603 Document: 00514557160 Page: 1 Date Filed: 07/16/2018

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

United States Court of Appeals

Fifth Circuit

FILED

No. 17-20603 July 16, 2018

Lyle W. Cayce

In the matter of: TECHNICOOL SYSTEMS, INCORPORATED, Clerk

Debtor,

ROBERT FURLOUGH,

Appellant,

v.

TRUSTEE LOWELL T. CAGE,

Appellee.

Appeal from the United States District Court

for the Southern District of Texas

Before SMITH, WIENER, and WILLETT, Circuit Judges.

DON R. WILLETT, Circuit Judge:

Treating Appellant’s motion to amend our opinion as a petition for panel

rehearing, the petition is GRANTED. The prior opinion, Matter of Technicool

Systems, Inc., 893 F.3d 308 (5th Cir. 2018), is withdrawn, and the following

opinion is substituted:

In bankruptcy litigation, the mishmash of multiple parties and multiple

claims can render things labyrinthine, to say the least. To dissuade umpteen

appeals raising umpteen issues, courts impose a stringent-yet-prudent

standing requirement: Only those directly, adversely, and financially impacted

by a bankruptcy order may appeal it.

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No. 17-20603

This appeal is from a bankruptcy court order approving a trustee’s

application to employ special counsel. Appellant Robert Furlough, owner of the

Debtor, Technicool Systems, objects to Trustee Lowell Cage’s application to

employ Stacy & Baker, P.C. (SBPC), alleging that SBPC holds an interest

“adverse to the estate” under 11 U.S.C. § 327(a). Both the bankruptcy court

and the district court held that Furlough lacked standing to object. We agree.

Furlough’s indirect interest in the order fails to meet the strict requirements

for bankruptcy standing. Because the order does not reach his wallet, he

cannot reach this court.

We AFFIRM.

I

National Oilwell Varco (NOV) alleges that it purchased roughly 300

industrial-strength air conditioners from manufacturer Technicool Systems for

use on specialty oil-and-gas rigs around the world. 1 According to NOV, the total

cost exceeded $3 million. The units were marketed as “desert-proof.” They

weren’t. After multiple units failed in the field, NOV, represented by SBPC,

sued Technicool in Texas state court for fraud, breach of warranty, and

negligent misrepresentation.

Shortly thereafter, Technicool filed for Chapter 7 bankruptcy and the

resulting automatic stay froze NOV’s state court lawsuit. NOV filed a Motion

for Relief from the Stay to join Technicool’s owner, Robert Furlough, to its state

suit. After an evidentiary hearing, the bankruptcy court modified the

automatic stay; it allowed NOV to add Furlough but prohibited NOV from

alleging “any cause of action for damages suffered directly or indirectly by the

Estate, or that otherwise are Estate property.”

1 The parties’ underlying bankruptcy and state court claims remain pending; factual

findings have yet to be made in those cases. The factual allegations here are derived from the

parties’ briefs and the record and thus are owed no deference in subsequent proceedings.

2

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In addition to its state court suit against Technicool and Furlough, NOV

filed a $3 million proof of claim in the bankruptcy case, representing 93 percent

of the total claims filed by Technicool creditors. SBPC represented NOV in this

suit too.

When discovery revealed that Furlough had formed other companies

closely related to Technicool, the Trustee sought to consolidate the businesses

and pierce the corporate veil. To that end, the Trustee filed an application to

employ SBPC as special counsel under 11 U.S.C. § 327(a). Furlough objected

to this application, arguing that SBPC was not a disinterested person as

required by § 327(a) and that SBPC’s representation of NOV was a

disqualifying “interest adverse to the estate.”

The bankruptcy court held a hearing on Furlough’s objection. The

Trustee presented an engagement letter, signed by SBPC, in which NOV

agreed to transfer to the bankruptcy estate any funds it recovered from

Furlough in the state court proceedings up to the total amount of creditor

claims on file. At the close of the hearing, the court held that Furlough lacked

standing to object because he was not a creditor and did not have a stake in

the estate. It then approved the Trustee’s application to employ SBPC.

The district court affirmed on standing, and Furlough timely appealed.

II

Because this appeal arises from a district court order affirming the final

judgment of a bankruptcy court, we apply the same standard of review as did

the district court. That is, we review the bankruptcy court’s factual findings

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for clear error, and we review legal conclusions and mixed questions of fact and

law de novo. 2 Standing is a question of law that we review de novo. 3

Bankruptcy courts are not Article III creatures bound by traditional

standing requirements. 4 But that does not mean disgruntled litigants may

appeal every bankruptcy court order willy-nilly. Quite the contrary.

Bankruptcy cases often involve numerous parties with conflicting and

overlapping interests. Allowing each and every party to appeal each and every

order would clog up the system and bog down the courts. Given the specter of

such sclerotic litigation, standing to appeal a bankruptcy court order is, of

necessity, quite limited.

Both the bankruptcy court and the district court concluded that

Furlough lacked standing to contest the Trustee’s application to employ SBPC.

We agree.

A

The narrow inquiry for bankruptcy standing—known as the “person

aggrieved” test—is “more exacting” than the test for Article III

standing. 5 Rather than showing the customary “fairly traceable” causal

connection, 6 a bankruptcy appellant must instead show that he was “directly

2 See In re Mercer, 246 F.3d 391, 402 (5th Cir. 2001) (en banc) (citing Randall & Blake,

Inc. v. Evans (Matter of Canion), 196 F.3d 579, 584 (5th Cir. 1999)).

3 See Fortune Nat. Res. Corp. v. U.S. Dep’t of Interior, 806 F.3d 363, 366 (5th Cir. 2015)

(citing Joffroin v. Tufaro, 606 F.3d 235, 238 (5th Cir. 2010)).

4 See Rohm & Hass Tex., Inc. v. Ortiz Bros. Insulation, 32 F.3d 205, 210 n.18 (5th

Cir. 1994) (explaining that “Article III is inapplicable to bankruptcy courts”).

5 Matter of Delta Produce, L.P., 845 F.3d 609, 619 (5th Cir. 2016) (quoting In Re Coho

Energy, Inc., 395 F.3d 198, 203 (5th Cir. 2004)); see also Coho Energy, 395 F.3d at 202

(explaining that the “person aggrieved” test originated in 11 U.S.C. § 67(c) (1976) and noting

that, although Congress did not include the provision “when the [Bankruptcy] code was

revamped in 1978[,] . . . courts subsequently have found that this test continues to govern

standing”).

6 See Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992) (laying out the “three

elements” that make up the “irreducible constitutional minimum” of standing: an injury in

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and adversely affected pecuniarily by the order of the bankruptcy court.” 7 In

essence, bankruptcy standing requires “a higher causal nexus between act and

injury.” 8 This restriction narrows the playing field, ensuring that only those

with a direct, financial stake in a given order can appeal it. Thus in bankruptcy

litigation, as in life, “the more money we come across, the more problems we

see.” 9

Furlough cannot show that he was “directly and adversely affected

pecuniarily by the order of the bankruptcy court.” 10 Furlough’s primary

contention is that, but for NOV’s proof of claim, Technicool’s assets would

exceed its debt, and he would be entitled to any estate surplus. Because SBPC

represents both NOV and the Trustee, Furlough argues, it might fail to disclose

any problems with NOV’s claim, robbing him of the possibility of recovering a

surplus.

This speculative prospect of harm is far from a direct, adverse, pecuniary

hit. Furlough must clear a higher standing hurdle: The order must burden his

pocket before he burdens a docket. SBPC was appointed to assist the Trustee

in consolidating claims and piercing the corporate veil. That appointment does

not directly affect whether the bankruptcy court approves or denies NOV’s

claim against the estate, and thus it does not directly affect Furlough’s

pecuniary interests. Furlough’s argument is essentially that if NOV’s claim

ceased to exist or dramatically decreased, the estate’s assets would exceed its

debt, and he would benefit financially. This might be true but it would not be

fact, a fairly traceable causal connection between the injury and the complained-of conduct,

and a likelihood of redressability).

7 Fortune Nat. Res., 806 F.3d at 366 (quoting Coho Energy, 395 F.3d at 203).

8 Id.

9 NOTORIOUS B.I.G., Mo Money Mo Problems, on LIFE AFTER DEATH (Bad Boy/Arista

1997).

10 Fortune Nat. Res., 806 F.3d at 366 (quoting Coho Energy, 395 F.3d at 203).

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a direct result of this appeal. That Furlough feels grieved by SBPC’s

appointment does not make him a “person aggrieved” for purposes of

bankruptcy standing.

B

Furlough claims another basis for standing. The Bankruptcy Code states

that creditors have standing to oppose an application to employ special counsel

if an actual conflicts exists. Under § 327(c), “a person is not disqualified for

employment . . . solely because of such person’s employment by or

representation of a creditor, unless there is objection by another creditor or the

United States trustee, in which case the court shall disapprove such

employment if there is an actual conflict of interest.” 11 The Bankruptcy Code

defines “creditor” as an entity that has: (1) “a claim against the debtor that

arose at the time of or before the order for relief concerning the debtor”; (2) one

of several specific types of claims against the estate; or (3) a community claim. 12

Furlough asserts he has standing because he is now a creditor. But this

argument proves too little, too late. Now matters not. Standing is “determined

as of the commencement of the suit.” 13 And Furlough was not a creditor at the

time the Trustee sought to employ SBPC or at the time the bankruptcy court

held a hearing on his objection. He purchased a proof of claim while his appeal

was pending before the district court. Timing matters, though, and Furlough

cannot belatedly claim creditor status and establish standing retroactively.

III

Furlough is neither a “person aggrieved” under the exacting test for

bankruptcy standing nor a creditor under 11 U.S.C. § 327(c). AFFIRMED.

1111 U.S.C. § 327(c) (emphasis added).

12Id. at § 101(10).

13 Kitty Hawk Aircargo, Inc. v. Chao, 418 F.3d 453, 458 (5th Cir. 2005) (quoting Lujan,

504 U.S. at 570 n.5).

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