Lenders often go to great lengths to ensure their borrowers are Special Purpose Entities—entities whose assets will not be commingled with the assets of parent or affiliated companies—rendering bankruptcy filings by the SPE less likely. However, when a SPE does file bankruptcy and its trustee seeks to substantively consolidate its estate with the estate of its parent and affiliates, does the lender have standing to contest that motion and thereby be a “person aggrieved” from an adverse order? The Eighth Circuit recently answered this question in the negative, holding a lender to a special purpose entity is not a person aggrieved by an order of substantive consolidation and, therefore, lacks standing to appeal the order. Opportunity Finance, LLC et al v. Kelley, 2016 WL 2848587 (8^th Cir. 2016).

In Opportunity Finance, the debtors were Petters Company, Inc. (“PCI”) and eight affiliated companies which were special purpose entities. All were controlled by Thomas Petters. Although the lenders presumably required the SPEs to maintain their assets separate and apart from PCI and the other affiliates and to not commingle their assets, just the opposite happened. In fact, Petters used PCI and the SPEs to operate a Ponzi scheme. The SPEs had no appreciable assets and held only illusory accounts. PCI and the SPEs were placed into receivership. The receiver caused them to file chapter 11 petitions, and soon after the petitions were filed, sought an order from the bankruptcy court substantively consolidating the bankruptcy estates. Each lender was a net winner of the Ponzi scheme and, therefore, not a creditor of the bankruptcy estate of its specific SPE when the bankruptcy filings occurred. The lenders opposed the receiver’s motion for substantive consolidation and then perfected an appeal from the order granting the motion.

The receiver contended the lenders were not persons aggrieved by the substantive consolidation order and, as a result, lacked standing to appeal it. The Eighth Circuit agreed. The lenders first argued that the “person aggrieved” standard for appellate standing did not survive the transition from the Bankruptcy Act to the Bankruptcy Code. The Eighth Circuit quickly rejected its argument, relying on its prior opinion in In re AFY, 734 F.3d 810 (8^th Cir. 2013). The court then addressed the standing issue. First, the court stated that “standing in a bankruptcy appeal is narrower than Article III standing.” This is because bankruptcy proceedings typically involve a myriad of parties, making the need to limit collateral appeals more acute. The court held that the doctrine limits standing to “persons with a financial stake in the bankruptcy court’s order, meaning they were directly and adversely affected pecuniarily by the order.” To meet this standard, the order must diminish the person’s property, increase his burdens or impair his rights.

The court determined the lenders could not meet this standard. They were not creditors of the estates. The court held that, in order for the lenders to be affected by the substantive consolidation order, several steps had to occur: (1) the receiver had to prevail in the avoidance actions he had brought against them, (2) the affected lender had to pay the judgment in the adversary proceeding in full, (3) the lender then had to file a proof of claim against the estate. Since none of these steps had taken place at the time of the entry of the consolidation order, the court held none of the lenders was a party aggrieved. The fact that the consolidation order would likely affect defenses which the lenders might be able to raise in the adversary proceedings did not change the outcome. The court’s decision was consistent with the decision of the Eleventh Circuit in In re Ernie Haire Ford, Inc., 764 F.3d 1321 (11^th Cir. 2014), on which the Eighth Circuit relied, and where the court held that an adversary defendant is not a person aggrieved, even if the bankruptcy court order strips the defendant of a defense in the adversary proceeding.

As a result, the lenders were not persons aggrieved by the substantive consolidation order, and the Eighth Circuit concluded they lacked standing to appeal it.