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In re Acis Capital Management, L.P.

United States District Court, N.D. Texas, Dallas Division

July 18, 2019

JOSHUA N. TERRY, et al., Appellees. NEUTRA, LTD., et al., Appellants, IN RE ACIS CAPITAL MANAGEMENT, L.P., et al., Debtors. HIGHLAND CLO FUNDING, LTD., et al., Appellants,
ROBIN PHELAN, TRUSTEE, et al., Appellees. IN RE ACIS CAPITAL MANAGEMENT, L.P., et al., Debtors. HIGHLAND CAPITAL MANAGEMENT, L.P., et al., Appellants,
ROBIN PHELAN, CHAPTER 11 TRUSTEE, et al., Appellees.



         In multiple appeals taken from two involuntary bankruptcy cases, the principal questions presented are whether the bankruptcy court erred by issuing orders for relief and denying the debtors' motion to dismiss or compel arbitration; whether the bankruptcy court erred by approving a seven-figure break-up fee in favor of a potential transaction partner; and whether the bankruptcy court erred by confirming a reorganization plan (“the Plan”) that enjoins a non-debtor, non-creditor entity from exercising certain contractual rights. The court must also decide questions of the bankruptcy court's subject matter jurisdiction and of one appellant's standing to appeal. For the reasons that follow, the court DISMISSES the appeal from the orders for relief, AFFIRMS the break-up fee order, and AFFIRMS the order approving the Plan. The court need not address the bankruptcy court's denial of the motion to dismiss.


         The following factual summary is based on the bankruptcy court's findings of fact in support of the orders for relief and the Plan confirmation order. See In re Acis Capital Mgmt., L.P. (Acis II), 2019 WL 417149, at *2-7 (Bankr. N.D. Tex. Jan. 31, 2019) (Jernigan, J.) (confirmation order); In re Acis Capital Mgmt., L.P. (Acis I), 584 B.R. 115, 119-42 (Bankr. N.D. Tex. 2018) (Jernigan, J.) (orders for relief).[1]


         Appellant Highland Capital Management, L.P. (“Highland”) is a Dallas-based registered investment advisor that manages nearly $15 billion of assets through an organizational structure comprised of roughly 2, 000 different entities. Its investment vehicles include mutual funds, private equity funds, and (relevant here) collateralized loan obligation funds (“CLOs”). Highland conducted its CLO business through an entity called Acis Capital Management, L.P. (“Acis LP”) and Acis LP's general partner, Acis Capital Management GP, L.L.C. (“Acis GP”) (collectively, “Acis, ” unless otherwise indicated), both debtors in these appeals.

         In 2005 Highland hired appellee Joshua Terry (“Terry”) as a portfolio analyst. Terry rose through the ranks at Highland until he became the portfolio manager for Highland's CLO business, and, in turn, received a 25% limited partnership interest in Acis LP. Terry successfully managed billions of dollars of assets on Highland's behalf until June 2016, when Highland terminated him. The reason for Terry's termination is disputed.[2] As a result of the termination, Terry's partnership interest in Acis LP was deemed forfeited without compensation.

         In September 2016 Highland sued Terry in the 162nd Judicial District Court of Dallas County, seeking to recover, inter alia, on theories of breach of fiduciary duty, disparagement, and breach of contract. Terry asserted counterclaims against Highland, Acis, and others, and demanded arbitration. The state court stayed the proceeding and ordered arbitration, and in October 2017 the arbitration panel rendered an award in Terry's favor for $7, 949, 749.15, plus post-judgment interest, against Acis (“the Award”). Terry sought and obtained confirmation of the Award in the 44th Judicial District Court of Dallas County.

         After the Award was confirmed, Terry began conducting post-judgment discovery, which revealed some transactions that appeared suspicious to Terry. Terry thought that Highland was denuding Acis of assets in an effort to make Acis judgment-proof. At a January 24, 2018 hearing, Terry requested a temporary restraining order (“TRO”) to restrain Acis LP from transferring any more assets pending a January 31 temporary injunction hearing. Acis LP agreed to the request, and the court issued a TRO. Five days later, Terry filed supplemental pleadings alleging that Acis LP was engaging in more wrongdoing, and requested appointment of a receiver. Instead of proceeding with the January 31 state-court hearing, however, Terry took a different tack. At 11:57 p.m. the night before the hearing, Terry filed involuntary bankruptcy petitions against both Acis LP and Acis GP.[3]


         To comprehend some of the key issues in these appeals, it is helpful to recount some of the fundamentals of CLOs and how Highland structured its CLO business.

         At the most basic level, a CLO is a “basket of loans.” Acis I, 584 B.R. at 123. A special-purpose CLO entity (“CLO-SPE”) purchases variable-rate commercial loans at the direction of the CLO manager, and collects them into a pool of loans. The obligors of the loans are usually large, well-known companies. Investors, such as pension funds, life insurance companies, and others, buy into the CLO by purchasing fixed-rate, secured notes on which the CLO-SPE itself is the obligor. These notes are typically sold in tranches representing different levels of risk. The CLO-SPE pays its obligations on the secured notes using the income it receives from its pool of loans, starting with the top tranche of notes and then proceeding through the lower tranches. These payments are made according to the terms of certain indenture agreements between the CLO-SPE and the indenture trustee (here, U.S. Bank, N.A.) to whom the CLO-SPE pledges collateral to secure the notes.

         The last investor to be paid is the “equity” holder, who does not own actual equity but instead holds a subordinated, unsecured note. The equity investor earns money when the variable interest rates paid to the CLO-SPE on the commercial loans exceed the fixed interest rates that the CLO-SPE must pay to the secured note holders. Although the equity investor assumes the most risk, it also possesses certain rights that allow it to control the CLO-most significantly, the right to call for an optional redemption of the CLO.[4] When an optional redemption is effected, the CLO's pool of loans is liquidated and the resulting cash is used to pay back the outstanding secured notes, beginning with the top tranche and proceeding downward.[5]

         In the present cases, Acis LP acts as the portfolio manager-not as the equity holder-of four CLO-SPEs, and is contractually entitled to receive portfolio management fees from them. Appellant Highland CLO Funding, Ltd. (“HCLOF”), a Guernsey[6] entity formerly known as Acis Loan Funding, Ltd., [7] is the primary equity investor in the CLOs. HCLOF does not own Acis; to the contrary, Acis LP once owned an indirect 15% stake in HCLOF for regulatory compliance reasons. Acis itself has never had any employees. Instead, it subcontracts all front office advising and back office support services to another entity. Highland was originally Acis LP's subcontractor, but, under the Plan, an entity called Brigade Capital Management, L.P. (“Brigade”) fills that role (for a much lower cost).

         Historically, all of these entities-Acis LP, Highland, HCLOF, and the CLO-SPEs-operated within an ecosystem of contracts that allowed Acis to manage the CLOs effectively. First, Acis LP had various fee-generating portfolio management agreements (“PMAs”) with the CLO-SPEs . These contracts remain in place under the Plan. Second, Acis LP and Highland had a sub-advisory agreement, which obligated Highland to provide advisory and management services in exchange for substantial fees. Third, Acis LP and Highland had a shared services agreement, through which Highland provided back office services to Acis for a significant fee. And, fourth, Acis LP had a separate PMA with HCLOF (“the Equity PMA”). While the parties dispute the exact effect of the Equity PMA-i.e., to whom it gave power over whom-it is undisputed that Acis LP earned no fees from this contract.


         Circumstances changed after the state-court litigation between Highland and Terry began. As noted above, Highland and Acis LP engaged in numerous transactions that caused Terry to believe “that Highland was dismantling and denuding Acis LP of all of its assets and value.” Acis I, 584 B.R. at 144. In October 2017, four days after Terry obtained the Award, Acis LP sold its stake in HCLOF back to HCLOF in exchange for about $990, 000 in cash. As a result, Acis LP could no longer lawfully manage any new CLOs under the applicable regulatory scheme. Three days later, HCLOF entered into a new PMA-a replacement for the Equity PMA-with a recently-formed Cayman Islands entity called Highland HCF Advisor, Ltd. At around the same time, Acis LP terminated the original Equity PMA. In early November 2017, Acis LP transferred one of its most significant assets-a $9.5 million note receivable that Highland owed to it-to another Cayman Islands entity, Highland CLO Management, Ltd. (“Highland Management”). Acis LP transferred the note pursuant to a contract that provided that Highland Management would step into Acis LP's shoes as the portfolio manager for the CLOs. Highland Management also promised to reimburse Acis LP for up to $2 million of future legal fees and up to $1 million of future administrative expenses. One day after the Award was confirmed, Acis LP transferred away “the vehicle that can most easily be described as the Acis LP ‘risk retention structure' (necessitated by [the] federal Dodd Frank law)” to Highland CLO Holdings Ltd., yet another Cayman Islands entity. Acis I, 584 B.R. at 129. That same day, Acis LP conveyed to the same Cayman Islands entity its contractual right to receive management fees from a particular CLO-SPE. This contractual right was worth $5 million, but all Acis LP received in return was forgiveness of a $2.8 million receivable that it owed to Highland.

         On the day after Terry obtained his final judgment in the 44th Judicial District Court of Dallas County, Acis LP underwent a sudden change in ownership. Previously, Acis LP's limited partners were Mark Okada (“Okada”), Highland's chief investment officer, and the Dugaboy Investment Trust, a family trust of Highland's CEO, James Dondero. But on December 18, 2017 Okada and the Dugaboy Investment Trust both conveyed their interests in Acis LP to appellant Neutra, Ltd. (“Neutra”), a Cayman Islands exempted company. The Dugaboy Investment Trust also conveyed its 100% ownership interest in Acis GP to Neutra. Thus Neutra became Acis' sole equity owner.

         Highland asserts that these transactions were part of a market-driven restructuring, or “reset, ” of Highland's CLOs. According to Highland's witnesses, Acis LP had become “‘toxic' in the market place” due to the litigation with Terry, and had to be excised from Highland's CLO business. Acis I, 584 B.R. at 128; accord Acis II, 2019 WL 417149, at *11. HCLOF also has an anonymous, third-party institutional investor (“the Passive Investor”) who purportedly demanded that Acis LP be removed as Highland's CLO manager. But the Passive Investor's representative testified at a hearing that the Passive Investor had made no such demand, and the bankruptcy court found that Highland's testimony about Acis' supposed toxicity was not credible. According to the bankruptcy court, Highland's explanations for the transfers described above were “a seemingly manufactured narrative to justify prior actions.” Acis II, 2019 WL 417149, at *16 (capitalization omitted). The bankruptcy court rejected this narrative, finding that “[t]he evidence established overwhelmingly that there is a substantial likelihood that the transfers were part of an intentional scheme to keep assets away from Mr. Terry as a creditor.” Id. at *12.


         Terry filed the involuntary petitions against Acis LP and Acis GP in order to stop the apparent transfer of assets away from Acis LP. See Acis I, 584 B.R. at 144. Fast-paced litigation followed.

         On March 19, 2018-two days before the scheduled trial on the involuntary petitions-Acis filed a motion to dismiss for lack of subject matter jurisdiction, or, in the alternative, to compel arbitration (“the Arbitration Motion”). The bankruptcy court's decision to deny this motion is at issue in all three of the instant appeals. The Arbitration Motion was based on the Acis LP limited partnership agreement (“the Acis LPA”), which governed the relationship between Terry and Acis. The Acis LPA provides a dispute resolution procedure for “any controversy or claim . . . arising out of, relating to or in connection with the [Acis LPA] or otherwise involving the Partnership, its Partners and/or any GP Party.” Third Appeal R. 4504 (brackets in original). Under this dispute resolution procedure, the parties must first attempt to mediate any dispute; only after mediating may they resort to binding arbitration. Any party who fails to mediate a claim, or who files a judicial lawsuit, ostensibly waives that claim. Acis argued in the Arbitration Motion that the Acis LPA's dispute resolution provisions applied to the involuntary petitions, and that because Terry failed to comply with those provisions, the bankruptcy court lacked subject matter jurisdiction over the controversy. The bankruptcy court denied the Arbitration Motion on the eve of trial.

         In the early morning hours of the day the trial was scheduled to begin (at 2:33 a.m.), several Highland-related entities-including Neutra and HCLOF-filed a motion to intervene. They sought intervention as of right under Fed.R.Bankr.P. 7024, or, alternatively, permissive intervention under Rule 2018.[8] The putative intervenors did not, however, intend to participate in the trial; they sought only to preserve their right to appeal any adverse ruling. The bankruptcy court denied the motion.

         The trial of the involuntary petitions began as scheduled on March 21, 2018, and spanned five days. On the first day of trial, the putative intervenors informed the bankruptcy court of their objection to the involuntary petitions, and they appeared via counsel during each day of the trial. Following the trial, the bankruptcy court ruled in favor of Terry as the petitioning creditor, concluding that Acis had fewer than 12 eligible creditors; Acis was not generally paying its debts as they came due; Terry filed the involuntary petitions in good faith; and abstention under 11 U.S.C. § 305 was not warranted. The bankruptcy court issued orders for relief on April 13, 2018.


         Highland and its related entities continued to participate in the bankruptcy court proceedings after the orders for relief were issued. The bankruptcy court, after finding that a “trustee appears necessary to halt the post-Arbitration Award transactions and transfers of value out of Acis LP . . . [and] to resolve the inherent conflicts of interest between [Acis] and Highland, ” appointed Robin Phelan (“the Trustee”) as trustee. See Acis I, 584 B.R. at 149- 50. On April 30, 2018 HCLOF-acting in its capacity as the equity note holder-sent five notices to Acis LP directing it to effect an optional redemption of the Acis CLOs on June 14, 2018. The Trustee analyzed the notices and concluded that they were defective.

         Highland and HCLOF responded by filing an adversary proceeding against the Trustee, seeking to compel the Trustee to effect a redemption.[9] The bankruptcy court sua sponte issued a TRO forbidding all relevant parties (including HCLOF) from taking any action in furtherance of an optional redemption of the CLOs. HCLOF then informed the bankruptcy court at a June 14, 2018 hearing that it had withdrawn the optional redemption notices. Because of HCLOF's representation, the Trustee did not seek to extend the TRO. The next day, HCLOF sent a second set of notices to Acis LP, again demanding that Acis LP effect an optional redemption of the CLOs. The Trustee then filed his own adversary proceeding (“the Trustee Adversary”) against Highland, HCLOF, and others, seeking a second TRO.[10] The bankruptcy court granted the TRO, and, after an evidentiary hearing, converted the TRO into a preliminary injunction.

         While these adversary proceedings were taking place, the Trustee was preparing a chapter 11 reorganization plan for Acis.[11] The Trustee initially proposed three plans: Plan A, Plan B, and Plan C. Under Plan A, the Trustee-using the doctrine of equitable subrogation-would have transferred HCLOF's subordinated equity notes to a third party-Oaktree Capital Management LP (“Oaktree”)-in exchange for a $100 million payment to HCLOF, and would have paid off Acis' other creditors with additional funds provided by Oaktree. Plans B and C would have amended the indenture agreements to prohibit any redemption right from being exercised until all allowed claims were paid in full. The purpose of Plans B and C was to prevent HCLOF from calling for an optional redemption of the CLOs, which would have rendered Acis LP's fee-paying PMAs worthless. The bankruptcy court ultimately held that all three of these proposed plans were unconfirmable.

         Before proposing Plans A, B, and C, the Trustee asked the bankruptcy court to approve the payment of a $2.5 million break-up fee (“the Break-Up Fee”) to Oaktree if Plan A was not confirmed within a certain time period. This Break-Up Fee was a small percentage of the total value of the Plan A transaction-which was roughly $108 million-but represented a large percentage of the $8.6 million that Acis LP would retain after HCLOF was compensated for its subordinated notes. The Trustee's motion also sought to substitute Oaktree for Highland as Acis LP's investment advisor and service provider. The Trustee also requested that Oaktree be reimbursed for any reasonable expenses it might incur in connection with the proposed transaction (“the Expense Reimbursement”). The bankruptcy court granted the motion with minor modifications.[12]

         After the bankruptcy court rejected Plans A, B, and C, the Trustee proposed-and the bankruptcy court confirmed-Plan D. Under the confirmed Plan, Terry received full equity ownership of Acis in exchange for a $1 million reduction in the value of his claim. Acis LP continues to serve as the portfolio manager for the Acis CLOs and continues to earn management fees. The cash flow resulting from Terry's operation of Acis will be used to pay the claims of Acis' creditors, including Terry. To prevent Highland and HCLOF from disrupting this cash flow, the bankruptcy court entered an injunction (“the Temporary Injunction”)[13] prohibiting various parties and non-parties-including HCLOF-from taking any steps to effect an optional redemption or liquidation of the Acis CLOs. The Temporary Injunction is actually an extension of the preliminary injunction that the bankruptcy court issued in the Trustee Adversary. It is set to expire upon the earlier of the following: (1) the entry of a final order in the Trustee Adversary; (2) the satisfaction of all allowed claims against Acis; (3) the bankruptcy court's entry of an order finding that a material default has occurred under the Plan; or (4) any subsequent order of the bankruptcy court providing otherwise as to one or more of the CLOs.


         Three appeals (the first consisting of four consolidated appeals)[14] taken from the bankruptcy court's rulings are now before this court. For clarity, the court will refer to the appeals as the First, Second, and Third Appeals.

         In the First Appeal (No. 3:18-CV-1056-D), appellant Neutra[15] contends that the bankruptcy court erred by denying the Arbitration Motion, [16] failing to dismiss the involuntary petitions on the ground that they were filed in bad faith, and declining to abstain under 11 U.S.C. § 305.

         In the Second Appeal (No. 3:18-CV-1822-D), appellant Highland[17] contends that the bankruptcy court erred by denying the Arbitration Motion and approving the Break-Up Fee and Expense Reimbursement.[18]

         In the Third Appeal (No. 3:19-CV-0291-D), appellants Highland and Neutra contend that the bankruptcy court erred by denying the Arbitration Motion; confirming the Plan while the appeal of the orders for relief was still pending; confirming the Plan even though the statutory requirements of 11 U.S.C. § 1129 were not met; and entering the Temporary Injunction. HCLOF submitted a separate brief in the Third Appeal, arguing that the Temporary Injunction is beyond the constitutional authority of the bankruptcy court, is overbroad, and is not supportable under the four-part preliminary-injunction test.

         On April 12, 2019 Acis filed a motion to substitute itself as the appellee in the Third Appeal.

         The appeals and Acis' motion are before the court for decision.


         “The court reviews the bankruptcy court's conclusions of law de novo, but reviews its fact findings only for clear error.” In re Nary, 253 B.R. 752, 756 (N.D. Tex. 2000) (Fitzwater, J.) (quoting In re ICH Corp., 230 B.R. 88, 91 n.10 (N.D. Tex. 1999) (Fitzwater, J.)). “A finding of fact is clearly erroneous when, although there is evidence to support it, the reviewing court is left with the definite and firm conviction that a mistake has been committed.” In re Johnson Sw., Inc., 205 B.R. 823, 827 (N.D. Tex. 1997) (Fitzwater, J.) (quoting In re Placid Oil Co., 158 B.R. 404, 412 (N.D. Tex. 1993) (Fitzwater, J.)). “If the trier of fact's account of the evidence is plausible in light of the record viewed in its entirety, the appellate court may not reverse it.” Id. (quoting Placid Oil Co., 158 B.R. at 412). “[T]his court does not find facts. Neither is it free to view the evidence differently as a matter of choice.” Id. (alteration in original) (quoting Placid Oil Co., 158 B.R. at 412). “The bankruptcy judge's unique perspective to evaluate the witnesses and to consider the entire context of the evidence must be respected.” Id. (quoting Placid Oil Co., 158 B.R. at 412) (internal quotation marks omitted).

         In reviewing matters committed to the bankruptcy court's discretion-such as whether to approve a break-up fee and expense reimbursement-the court applies an abuse of discretion standard. See In re Reliant Energy Channelview LP, 594 F.3d 200, 205 (3d Cir. 2010). “To constitute an abuse of discretion, the [bankruptcy] court's decision must be either premised on an application of the law that is erroneous, or on an assessment of the evidence that is clearly erroneous.” Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 528 (5th Cir. 2000).


         In the First Appeal, appellee Terry contends that appellant Neutra lacks standing to appeal the orders for relief.[19]



         “Bankruptcy courts are not authorized by Article III of the Constitution, and as such are not presumptively bound by traditional rules of judicial standing.” In re Coho Energy Inc., 395 F.3d 198, 202 (5th Cir. 2004) (citing Rohm & Hass Tex., Inc. v. Ortiz Bros. Insulation, Inc., 32 F.3d 205, 210 n.18 (5th Cir. 1994)). But there are still limits on who may appeal a bankruptcy court order. See In re Technicool Sys., Inc., 896 F.3d 382, 385 (5th Cir. 2018). Before 1978, those limits were provided by the Bankruptcy Act, which granted appellate standing only to “person[s] aggrieved” by a bankruptcy court order. Coho Energy, 395 F.3d at 202 (quoting 11 U.S.C. § 67(c) (1976)). Congress repealed the relevant statutory provision when it passed the Bankruptcy Reform Act of 1978, but courts-including the Fifth Circuit-nonetheless still apply the person aggrieved test to bankruptcy appeals. See Id. Because “[b]ankruptcy cases often involve numerous parties with conflicting and overlapping interests, ” and “[a]llowing each and every party to appeal each and every order would clog up the system and bog down the courts, ” it is necessary for courts to limit who may appeal any given order. Technicool Sys., 896 F.3d at 385.

         The person aggrieved test “is ‘more exacting' than the test for Article III standing.” Id. (quoting In re Delta Produce, L.P., 845 F.3d 609, 619 (5th Cir. 2016)). “Rather than showing the customary ‘fairly traceable' causal connection, a bankruptcy appellant must instead show that he was ‘directly and adversely affected pecuniarily by the order of the bankruptcy court.'” Id. (footnotes omitted) (first quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992), then quoting Fortune Nat. Res. Corp. v. U.S. Dep't of Interior, 806 F.3d 363, 366 (5th Cir. 2015)).[20]


         Equally important to deciding whether Neutra has standing is the “shareholder standing rule, ” which is “a longstanding equitable restriction that generally prohibits shareholders from initiating actions to enforce the rights of the corporation” absent special circumstances. Franchise Tax Bd. v. Alcan Aluminium Ltd., 493 U.S. 331, 336 (1990). The doctrine derives from the third-party standing rule: “the plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties.” Id. (quoting Warth v. Seldin, 422 U.S. 490, 499 (1975)); see In re Troutman Enters., Inc., 286 F.3d 359, 364 (6th Cir. 2002). This court has recognized that “[u]nder federal common law [and] Texas law . . . only a corporation and not its shareholders, not even sole shareholders, can complain of an injury sustained by, or a wrong done to, the corporation.” Rigco, Inc. v. Rauscher Pierce Refsnes, Inc., 110 F.R.D. 180, 183 (N.D. Tex. 1986) (Fitzwater, J.). Although the rule is phrased in terms of corporations and shareholders, it applies with equal force to limited partnerships like Acis LP. See CILP Assocs., L.P. v. PriceWaterhouse Coopers LLP, 735 F.3d 114, 122-23 (2d Cir. 2013) (applying federal common law); 7547 Corp. v. Parker & Parsley Dev. Partners, L.P., 38 F.3d 211, 220-22 (5th Cir. 1994) (applying Texas law); see also In re A.S. Acquisition Corp., 56 Fed.Appx. 415, 416 (9th Cir. 2003) (memorandum) (holding that limited partner lacked standing to appeal bankruptcy court order that affected partnership property). It also applies to limited liability companies like Acis GP. See Heyer v. Schwartz & Assocs. PLLC, 319 F.Supp.3d 299, 304-05 (D.D.C. 2018) (applying federal common law); Schoen v. Underwood, 2012 WL 13029591, at *4 (W.D. Tex. May 15, 2012) (applying Texas law).

         The Supreme Court has “treated standing as consisting of two related components: the constitutional requirements of Article III and nonconstitutional prudential considerations.” Franchise Tax Bd., 493 U.S. at 335. The shareholder standing rule falls within the latter category, and thus can operate to bar a lawsuit even if Article III standing is satisfied. See Id. at 336. Recently, the Supreme Court called into question the continuing vitality of prudential standing, observing that it is in tension with the principle that “a federal court's obligation to hear and decide cases within its jurisdiction is virtually unflagging.” Susan B. Anthony List v. Driehaus, 573 U.S. 149, 167 (2014) (quoting Lexmark Int'l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 126 (2014)) (internal quotation marks omitted); see also Excel Willowbrook, L.L.C. v. JP Morgan Chase Bank, Nat'l Ass'n, 758 F.3d 592, 603 n.34 (5th Cir. 2014) (“[T]he continued vitality of prudential ‘standing' is now uncertain in the wake of the Supreme Court's recent decision in Lexmark[.]”). But the Fifth Circuit has since reaffirmed the third-party standing doctrine in particular. See Superior MRI Servs., Inc. v. All. Healthcare Servs., Inc., 778 F.3d 502, 506 (5th Cir. 2015). The doctrine therefore remains binding in this circuit.

         The court is aware of no binding precedent requiring it to apply the shareholder standing rule in the context of a bankruptcy appeal, but other courts have done so. See, e.g., In re Heyl, 770 F.3d 729, 730 (8th Cir. 2014) (per curiam); In re AFY, 734 F.3d 810, 822-23 (8th Cir. 2013); A.S. Acquisition Corp., 56 Fed.Appx. at 416; In re Troutman Enters., 286 F.3d at 365; In re Dein Host, Inc., 835 F.2d 402, 404-06 (1st Cir. 1987); Rose v. Logan, 2014 WL 1236008, at *5-7 (D. Md. Mar. 25, 2014). This court concludes that it should do so as well, for at least two reasons.

         First, the person aggrieved test already includes a version of the third-party standing rule. It requires that the appellant be “directly and adversely affected pecuniarily by the order of the bankruptcy court.” Technicool Sys., 896 F.3d at 385 (emphasis added) (quoting Fortune Nat. Res. Corp., 806 F.3d at 366). “An ‘indirect financial stake' in another's claims is insufficient for standing.” In re The Watch Ltd., 257 Fed.Appx. 748, 749 (5th Cir. 2007) (per curiam) (quoting Rohm, 32 F.3d at 208).

         Second, the person aggrieved doctrine is itself a creature of prudential standing-it is distinct from, and narrower than, constitutional standing, and it is justified by practical considerations. See Coho Energy, 395 F.3d at 202 (“To prevent unreasonable delay, courts have created an additional prudential standing requirement in bankruptcy cases: The appellant must be a ‘person aggrieved' by the bankruptcy court's order.” (quoting In re P.R.T.C., Inc., 177 F.3d 774, 777 (9th Cir. 1999))); see also Technicool Sys., 896 F.3d at 384-86 (distinguishing constitutional standing from bankruptcy standing, and offering prudential justifications for the latter). The policy underlying the person aggrieved doctrine would be well-served by including within it a third-party standing or shareholder standing rule. Without such a limitation, any one of a debtor's numerous shareholders could separately appeal bankruptcy court orders affecting the value of the debtor-thus resulting in “umpteen appeals raising umpteen issues.” Technicool Sys., 896 F.3d at 384. Neutra does not argue that the shareholder standing rule is inapplicable to bankruptcy appeals generally. Instead, Neutra maintains that it is asserting a direct, rather than a derivative, interest in the orders for relief. The court therefore holds that the shareholder standing rule applies in the context of bankruptcy appeals.

         Although no party cites it, the court is aware of one Fifth Circuit decision that allowed a debtor's majority shareholder to appeal an order of the bankruptcy court. In In re First Colonial Corp. of America, 544 F.2d 1291 (5th Cir. 1977), superseded by statute on other grounds as recognized by In re Woerner, 783 F.3d 266, 274 (5th Cir. 2015) (en banc), [21] the Fifth Circuit authorized a debtor's majority shareholder to appeal an order awarding attorney's fees to the trustee's attorneys (one of whom was himself the trustee). But as the First Colonial panel was careful to point out, the case involved unique circumstances. See Id. at 1297 (“Although the attorneys and the trustee are correct in stating that in the usual case the bankrupt and its shareholders do not have an interest in the disposition of the assets of the estate . . . this is hardly the usual case.”). The appeal involved an issue on which the interests of the trustee and the debtor diverged, because “[w]here the trustee serves as his own attorney there is no disinterested trustee to ensure that the attorney is paid only for professional services necessary to the administration of the estate.” Id. Thus the panel made an exception: it allowed the shareholder to appeal, thereby “refusing to permit [the trustee] to use his position as trustee to prevent [the shareholder] from contesting the size of his attorneys' fee.” Id. There are no such circumstances present here: the Trustee lacks a similarly-direct “personal financial stake” in the orders for relief, and he is not using his special position to insulate a favorable order from review. Cf. AFY, 734 F.3d at 823 (distinguishing First Colonial because trustee lacked personal financial stake in outcome of appealed orders). First Colonial therefore does not prevent this court from applying the shareholder standing rule to a bankruptcy appeal.


         Neutra asserts four different interests in the orders for relief. None of these interests suffices to give Neutra standing to appeal.

         Neutra contends that it “is watching its interest in Acis being decimated by administrative expenses.” Neutra First Appeal Br. 19. In other words, Neutra's ownership interest in Acis is losing value as a result of the inherent expenses of bankruptcy. Under the shareholder standing rule, however, this interest is quintessentially derivative of Acis' own interests, and therefore cannot confer standing. See, e.g., Stevens v. Lowder, 643 F.2d 1078, 1080 (5th Cir. Unit B Apr. 1981) (“Plaintiffs' individual injury arises only from the loss in value of their stock as a result of injury to the corporation. Under these circumstances, plaintiffs have no independent cause of action.”). The First Circuit rejected a nearly-identical argument in Dein Host, 835 F.2d 402. It held that an appellant lacked standing where his only interest in the bankruptcy court order was “that his beneficial interest in [another entity]-his stock-[was] in jeopardy and subject to shrinkage.” Id. at 405. In so concluding, the court relied on the principle that “[t]he fact that the injury may indirectly harm a stockholder by diminishing the value of his corporate shares does not bestow upon him a right to sue on his own behalf.” Id. at 405-06 (quoting Papilsky v. Berndt, 466 F.2d 251, 255 (2d Cir. 1972)). Thus even if Acis loses value as a result of its plunge into bankruptcy, Neutra cannot appeal on this basis.

         Neutra also posits that it “has lost its right to protect its interest [in Acis] via control of [Acis].” Neutra First Appeal Br. 19. This interest is insufficient to confer standing because losing control over an entity is not, in itself, a pecuniary injury. See Technicool Sys., 896 F.3d at 385 (requiring that appellant be “directly and adversely affected pecuniarily by the order of the bankruptcy court” (emphasis added)); see also Rose, 2014 WL 1236008, at *5-7 (holding that shareholder standing rule applies with full force to entity's sole equity owner). Control rights may enhance the value of Neutra's ownership interest, or may allow Neutra to protect the value of that interest via advantageous business decisions. But, as the court has already discussed, any diminishment in the value of Neutra's interest in Acis does not confer standing on Neutra.

         Neutra also asserted, at the time it filed its briefing in the First Appeal, that it would soon “be forced to partner with Oaktree against its wishes, and may be completely divested from its equity interests without its consent.” Neutra First Appeal Br. 19-20. But this outcome was by no means an inevitable result of the orders for relief. The person aggrieved test does not take into account every injury caused by the bankruptcy case as a whole, but instead asks whether “the order of the bankruptcy court . . . directly and adversely affect[s] the appellant pecuniarily.” Fortune Nat. Res. Corp., 806 F.3d at 367. And “bankruptcy standing requires ‘a higher causal nexus between act and injury'” than does traditional Article III standing. Technicool Sys., 896 F.3d at 385-86 (quoting Fortune Nat. Res. Corp., 806 F.3d at 366). Thus although the orders for relief created the possibility that Neutra might suffer harm in the future, Neutra was not aggrieved by them for standing purposes because “[the] speculative prospect of harm is far from a direct, adverse, pecuniary hit.” Id. at 386; see also Id. at 384-86 (concluding that equity owner was not aggrieved by order allowing trustee to employ special counsel, even though special counsel's purpose was to pierce the corporate veil to reach equity owner's other companies and assets).

         Of course, the future harms identified by Neutra in the First Appeal did actually come to pass: the bankruptcy court appointed first Oaktree, and then Brigade, as the new service provider for Acis, and later divested Neutra of its equity interest in Acis. But this court cannot take these events into account in its analysis of the First Appeal. A district court hearing a bankruptcy appeal may only consider information if it is “part of the record before the bankruptcy court” or if it “meets the narrow purpose of judicial notice.” In re SI Restructuring Inc., 480 Fed.Appx. 327, 329 (5th Cir. 2012) (per curiam). The subsequent events that are asserted to have injured Neutra are not part of the record in the First Appeal. No. party has asked this court to take judicial notice of any subsequent bankruptcy court orders in the First Appeal, and the court has no duty to do so sua sponte.[22] Moreover, Neutra would lack standing even if the court did take these events into account. That a once-speculative harm actually came to pass does not mean that the harm was initially likely to happen-so Neutra would still fail to show the “higher causal nexus between act and injury” that the person aggrieved test demands. Technicool Sys., 896 F.3d at 385-86 (quoting Fortune Nat. Res. Corp., 806 F.3d at 366); cf. Palsgraf v. Long Island R.R. Co., 162 N.E. 99, 101 (N.Y. 1928) (finding no liability for negligence where, ex ante, “there was nothing in the situation to suggest to the most cautious mind” that defendant's actions would result in harm to plaintiff, even though harm actually occurred).

         The court therefore dismisses the First Appeal, i.e., all the appeals of the orders for relief.


         The court's conclusion that Neutra lacks standing[23] is buttressed by the fact that the bankruptcy court properly denied Neutra's motion to intervene.[24]


         Neither Neutra nor Terry has substantially briefed the question whether the bankruptcy court erred by denying Neutra's motion to intervene. Neutra contends that the ruling on its motion to intervene has no bearing on whether it can appeal as a person aggrieved; Terry, meanwhile, maintains that the bankruptcy court's decision was correct, but also contends that any error was harmless because Neutra had no intention of participating in the trial on the involuntary petitions. The court is not persuaded, however, that the question is irrelevant.

         Some courts have suggested that the bankruptcy court's proper denial of a motion to intervene is dispositive of the movant's right to appeal. See, e.g., In re Living Hope Sw. Med. Servs., LLC, 598 Fed.Appx. 467, 467 (8th Cir. 2015) (per curiam) (concluding that appellant lacked standing because bankruptcy court correctly denied his motion to intervene); In re Thompson, 965 F.2d 1136, 1140-46 & n.9 (1st Cir. 1992) (equating person aggrieved test with the test for intervention under Rule 7024, and concluding that because bankruptcy court properly denied motion to intervene in adversary proceeding, appellant lacked standing to appeal judgment); In re S. State St. Bldg. Corp., 140 F.2d 363, 367 (7th Cir. 1943) (“If one who has a right to intervene, but does not, has no standing to appeal, a fortiori, one who has no right to intervene, and does not, has no standing to appeal.”); see also In re Blair, 2016 WL 8608454, at *5 (D. Colo. Aug. 24, 2016) (“One might expect that [the person aggrieved] doctrine would not apply to a party that sought and was denied intervention. Or, at a minimum, it seems incongruous to permit a party to file an unsuccessful motion to intervene and nonetheless be permitted to appeal under the persons aggrieved doctrine and immediately attack the Bankruptcy Court's substantive rulings, rather than first challenging the denial of intervention.”). Other courts disagree. See Int'l Trade Admin. v. Rensselaer Polytechnic Inst., 936 F.2d 744, 747 (2d Cir. 1991) (holding that “[Rule 2018, ] governing permissive intervention, does not limit the rights of a ‘person aggrieved' to be heard” on appeal).

         It is also possible that, had Neutra been allowed to intervene, it would have had standing to appeal by virtue of its intervention alone. See First Colonial, 544 F.2d at 1296-98 (finding that appellant was a person aggrieved, and then adding, as alternative ground for its holding, that “[appellant] has standing to appeal from all of the fee awards because the bankruptcy judge granted its motion to intervene [under what is now Rule 7024] without qualifying its right to participate in the proceeding”); see also Int'l Trade Admin., 936 F.2d at 747 (stating that permissive intervention under Rule 2018 “provides a formal mechanism that expands the right to be heard to a wider class than those who qualify under the ‘person aggrieved' standard”). But see Troutman Enters., 286 F.3d at 363-64 (holding that parties who were permitted to intervene in bankruptcy proceeding nonetheless lacked appellate standing because they were not persons aggrieved).

         Because the bankruptcy court's decision to deny intervention could affect Neutra's standing to bring the present appeal, the court will consider the merits of Neutra's appeal of that decision.


         “A ruling denying intervention of right is reviewed de novo.” St. Bernard Par. v. Lafarge N. Am., Inc., 914 F.3d 969, 973 (5th Cir. 2019) (quoting Edwards v. City of Houston, 78 F.3d 983, 995 (5th Cir. 1996) (en banc)). Although generally “the timeliness of an intervention motion is reviewed for abuse of discretion, ” if the bankruptcy court did not explain its ruling on timeliness, review is de novo. See Id. (citing Sommers v. Bank of Am., N.A., 835 F.3d 509, 513 (5th Cir. 2016)). The court reviews the denial of a motion for permissive intervention for “clear abuse of discretion, ” and will disturb the bankruptcy court's ruling “only under extraordinary circumstances.” Id. (quoting Edwards, 78 F.3d at 995).

         Neutra sought intervention as of right under Rule 1018, which provides that Rule 7024 applies in proceedings to contest an involuntary petition. Rule 7024, in turn, states that “[Fed. R. Civ. P. 24] applies in adversary proceedings.”

A party is entitled to an intervention of right under Rule 24(a)(2) if (1) the motion to intervene is timely, (2) the interest asserted by the potential intervenor is related to the action, (3) that interest may be impaired or impeded by the action, and (4) that interest is not adequately represented by the existing parties.

Inclusive Cmtys. Project, Inc. v. Tex. Dep't of Hous. & Cmty. Affairs, 2012 WL 2133667, at *1 (N.D. Tex. June 12, 2012) (Fitzwater, C.J.) (citing In re Lease Oil Antitrust Litig., 570 F.3d 244, 247 (5th Cir. 2009); Sierra Club v. Espy, 18 F.3d 1202, 1204-05 (5th Cir. 1994)), rev'd on other grounds, 747 F.3d 275 (5th Cir. 2014), aff'd, U.S., 135 S.Ct. 2507 (2015). “Failure to satisfy any one requirement precludes intervention of right.” Haspel & Davis Milling & Planting Co. v. Bd. of Levee Comm'rs, 493 F.3d 570, 578 (5th Cir. 2007).

         Neutra also sought permissive intervention under Rule 2018. That rule provides that “after hearing on such notice as the court directs and for cause shown, the court may permit any interested entity to intervene generally or with respect to any specified matter.” Rule 2018(a).

In deciding whether to permit intervention under Rule 2018(a), courts look to various factors, including (1) whether the moving party has an economic or similar interest in the matter; (2) whether the interest of the moving party [is] adequately represented by the existing parties; [(3)] whether the intervention will cause undue delay to the proceedings; and (4) whether the denial of the movant's request will adversely affect their interest.

Pasternak & Fidis, P.C. v. Wilson, 2014 WL 4826109, at *6 (D. Md. Sept. 23, 2014) (collecting cases). Thus “[t]he standards under Rule 2018 and [Rule] 24 overlap.” In re Adilace Holdings, Inc., 548 B.R. 458, 462 (Bankr.W.D.Tex. 2016). “The decision whether to allow intervention is wholly discretionary under Rule 2018 . . . even where each required element is met.” Id. at 463 (citing Staley v. Harris County, 160 Fed.Appx. 410, 414 (5th Cir. 2005) (per curiam); In re Durango Ga. Paper Co., 336 B.R. 594, 596 (Bankr. S.D. Ga. 2005)).

         Neutra was not entitled to intervention of right in the trial of the involuntary petitions because it did not have a sufficiently direct interest in the proceedings. The only interest that Neutra asserted was its property interest in Acis. But in the intervention context, “[t]he term ‘interest' is narrowly read to mean a direct and substantial interest in the proceedings . . . that the substantive law recognizes as belonging to or being owned by the party seeking intervention.” Rigco, 110 F.R.D. at 183 (emphasis added). Accordingly, the shareholder standing rule applies to Rule 24(a) motions to intervene. See Id. at 183-84. Neutra's property interest in the alleged debtors therefore could not support Neutra's claimed right to intervene in the trial on the involuntary petitions. See supra § III(B). Because one of the four Rule 24(a) factors was not met, the bankruptcy court did not err by denying Neutra's motion to intervene as of right. See Haspel, 493 F.3d at 578.

         For similar reasons, the bankruptcy court did not abuse its discretion by denying Neutra permissive intervention under Rule 2018. This is because Neutra lacked a sufficiently direct interest in the proceedings. And even if Neutra had such an interest, this court still would not disturb the bankruptcy court's ruling. This court reviews the bankruptcy court's denial of a Rule 2018 motion under a deferential standard-the bankruptcy court has discretion to deny such a motion even if all four factors are met. See Adilace Holdings, 548 B.R. at 463; see also St. Bernard, 914 F.3d at 973 (providing that orders as to permissive intervention are reviewed for clear abuse of discretion). Neutra offers no argument on appeal that the bankruptcy court committed a clear abuse of its discretion by denying its motion. Cf. Brinkmann v. Dall. Cty. ...

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