Furlough v. Cage, No. 17-20603 (5th Cir. 2018)

Annotate this Case
Justia Opinion Summary

NOV purchased industrial-strength "desert-proof" air conditioners from Technicool for use on specialty oil-and-gas rigs, for more than $3 million. After multiple units failed, NOV, represented by SBPC, sued Technicool in Texas state court. Technicool filed for Chapter 7 bankruptcy. NOV sought relief from the automatic stay and was allowed to join Technicool’s owner, Furlough, to its state suit. NOV, again represented by SBPC, filed a claim in the bankruptcy case, representing 93 percent of the total claims. After learning that Furlough had formed other companies, the Trustee sought to consolidate the businesses and pierce the corporate veil and to employ SBPC as special counsel under 11 U.S.C. 327(a). Furlough objected, arguing that SBPC’s representation of NOV was a disqualifying “interest adverse to the estate.” In an engagement letter, signed by SBPC, NOV agreed to transfer to the bankruptcy estate funds it recovered from Furlough in state court. The bankruptcy court, district court, and Fifth Circuit held that Furlough lacked standing to object. Furlough cannot show that he was “directly and adversely affected pecuniarily by the order of the bankruptcy court.” SBPC’s appointment does not directly affect whether the bankruptcy court approves NOV’s claim. Under section 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, [and] an actual conflict of interest.”

The court issued a subsequent related opinion or order on July 16, 2018.

Download PDF
Case: 17-20603 Document: 00514521461 Page: 1 Date Filed: 06/20/2018 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals Fifth Circuit No. 17-20603 In the matter of: TECHNICOOL SYSTEMS, INCORPORATED, FILED June 20, 2018 Lyle W. Cayce 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: 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. 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 Case: 17-20603 Document: 00514521461 Page: 2 Date Filed: 06/20/2018 No. 17-20603 “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) purchased roughly 300 industrialstrength air conditioners from manufacturer Technicool Systems for use on specialty oil-and-gas rigs around the world. The total cost to NOV 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.” 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. After 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 2 Case: 17-20603 Document: 00514521461 Page: 3 Date Filed: 06/20/2018 No. 17-20603 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 for clear error, and we review legal conclusions and mixed questions of fact and law de novo. 1 Standing is a question of law that we review de novo. 2 Bankruptcy courts are not Article III creatures bound by traditional standing requirements. 3 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 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)). 2 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)). 3 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”). 1 3 Case: 17-20603 Document: 00514521461 Page: 4 Date Filed: 06/20/2018 No. 17-20603 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. 4 Rather than showing the customary “fairly traceable” causal connection, 5 a bankruptcy appellant must instead show that he was “directly and adversely affected pecuniarily by the order of the bankruptcy court.” 6 In essence, bankruptcy standing requires “a higher causal nexus between act and injury.” 7 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.” 8 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”). 5 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 fact, a fairly traceable causal connection between the injury and the complained-of conduct, and a likelihood of redressability). 6 Fortune Nat. Res., 806 F.3d at 366 (quoting Coho Energy, 395 F.3d at 203). 7 Id. 8 NOTORIOUS B.I.G., Mo Money Mo Problems, on LIFE AFTER DEATH (Bad Boy/Arista 1997). 4 4 Case: 17-20603 Document: 00514521461 Page: 5 Date Filed: 06/20/2018 No. 17-20603 Furlough cannot show that he was “directly and adversely affected pecuniarily by the order of the bankruptcy court.” 9 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 (somehow) ceased to exist or dramatically decreased, the estate’s assets would exceed its debt, and he would benefit financially. This might be true—however unlikely—but it would not be 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 9 Fortune Nat. Res., 806 F.3d at 366 (quoting Coho Energy, 395 F.3d at 203). 5 Case: 17-20603 Document: 00514521461 Page: 6 Date Filed: 06/20/2018 No. 17-20603 employment if there is an actual conflict of interest.” 10 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. 11 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.” 12 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. 11 U.S.C. § 327(c) (emphasis added). Id. at § 101(10). 12 Kitty Hawk Aircargo, Inc. v. Chao, 418 F.3d 453, 458 (5th Cir. 2005) (quoting Lujan, 504 U.S. at 570 n.5). 10 11 6

Primary Holding

Owner of the bankruptcy debtor-company lacked standing to object to the trustee's appointment of an attorney representing a creditor as special counsel.

Disclaimer: Justia Annotations is a forum for attorneys to summarize, comment on, and analyze case law published on our site. Justia makes no guarantees or warranties that the annotations are accurate or reflect the current state of law, and no annotation is intended to be, nor should it be construed as, legal advice. Contacting Justia or any attorney through this site, via web form, email, or otherwise, does not create an attorney-client relationship.