Richman, Matter of

• Decision Date: 15 January 1997
• Docket Number: No. 96-1052,96-1052
• Parties: , Bankr. L. Rep. P 77,254 In the Matter of Edward RICHMAN; Ilene Richman, Debtors. Edward RICHMAN; Ilene Richman, Plaintiffs-Appellants, v. FIRST WOMAN'S BANK, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 654

104 F.3d 654

36 Fed.R.Serv.3d 1391, Bankr. L. Rep. P 77,254

In the Matter of Edward RICHMAN; Ilene Richman, Debtors Edward RICHMAN; Ilene Richman, Plaintiffs-Appellants, v. FIRST WOMAN'S BANK, Defendant-Appellee.

No. 96-1052.

United States Court of Appeals Fourth Circuit.

Argued Sept. 26, 1996.

Decided Jan. 15, 1997.

ARGUED: Roger Charles Simmons, Gordon & Simmons, Frederick, MD, for Appellants. Morris Kletzkin, Friedlander, Misler, Friedlander, Sloan & Herz, Washington, DC, for Appellee. ON BRIEF: Brenda D. Thew, Gordon & Simmons, Frederick, MD; Richard H. Gins, Gins & Seeber, P.C., Washington, DC, for Appellants. Jerome Ostrov, Friedlander, Misler, Friedlander, Sloan & Herz, Washington, DC, for Appellee.

Before WILKINSON, Chief Judge, LUTTIG, Circuit Judge, and SMITH, United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge SMITH wrote the opinion, in which Chief Judge WILKINSON and Judge LUTTIG joined.

OPINION

REBECCA BEACH SMITH, District Judge:

This case involves a bankruptcy dispute in which the Appellants, two Chapter 7 debtors, claim the bankruptcy court erred in finding that the Appellee, their primary creditor, held a valid lien over the proceeds of their brokerage account. As this is a procedurally complex case, a wide variety of issues were presented to the court. The dispositive inquiry, however, concerns whether the district court correctly ruled that the Appellants failed to intervene properly in the bankruptcy court adversary proceeding, and hence lack standing to prosecute this appeal. Because we agree that the Appellants cannot satisfy the requirements for intervention as of right, we affirm the district court's ruling.

I.

This present action arose out of a loan dispute in which Edward and Ilene Richman, the Appellants, allegedly consented to the placing of a lien on their brokerage account with Shearson Lehman Brothers, Inc. ("Shearson Account") in favor of the First Woman's Bank ("FWB"), the Appellee. The long and detailed procedural history of the case is summarized as follows.

The dispute first reached the court system when FWB instituted a collection action in the Circuit Court of Montgomery County, Maryland ("state court action"), on January 28, 1992. The state court tentatively accepted FWB's arguments that the Richmans were dissipating the Shearson Account and granted the bank's request for an attachment before judgment. The Richmans filed a Voluntary Petition under Chapter 11 of the Bankruptcy Code on May 29, 1992, and the state court action was stayed. On September 3, 1992, FWB filed an adversary proceeding in bankruptcy court, which raised essentially the same issues the bank had raised in the state court action, and sought a declaration from the bankruptcy court that the Richmans' debt was nondischargeable. On April 22, 1993, Bankruptcy Judge Derby, orally ruling on the Richmans' motion for summary judgment, declined to address certain fraud claims raised by the Richmans, instead deferring to the state court the question of whether the lien on the Shearson Account had been procured through fraudulent inducement. Judge Derby's written order on this matter was entered April 25, 1993.

The Richmans filed a Turnover Action on April 23, 1993, seeking release of the proceeds of the Shearson Account. The Richmans subsequently filed another motion for summary judgment in June, 1993, on the grounds that Judge Derby's order of April 22, 1993, found no fraud on their part to support an attachment before judgment. FWB then cross-moved for summary judgment, alleging, inter alia, that it had a consensual lien on the Shearson Account. On February 23, 1994, Judge Derby ruled on the cross-motions for summary judgment, and again deferred to the state court action and abstained from ruling on the Richmans' allegation of fraudulent inducement.

At a hearing on August 15, 1994, the Richmans' Chapter 11 proceeding was converted to Chapter 7. On April 21, 1995, Judge Keir of the bankruptcy court issued a ruling on the Turnover Action ("Lien Order"). In the Lien Order, Judge Keir, who did not expressly make any findings regarding the fraudulent inducement issue, nevertheless granted FWB's motion for summary judgment, thus implicitly ruling that FWB had acquired a consensual lien on the Shearson Account. On May 4, 1995, the Richmans filed a Motion for Reconsideration of Lien Order, which the bankruptcy court treated as a post-judgment motion under Federal Bankruptcy Rule 9024. Judge Keir denied the Richmans' motion on July 21, 1995, holding, inter alia, that the Richmans (as well as the law firm of Gordon & Simmons, the only other movant) lacked standing to seek reconsideration, primarily because after the conversion from a Chapter 11 to a Chapter 7 proceeding, the Trustee was "the substituted plaintiff entitled to prosecute this turnover action...." ("Reconsideration Opinion").

On July 31, 1995, the Richmans then moved to intervene as a matter of right for the purposes of appealing the Lien Order, but in an October 31, 1995 order, the district court, sitting as an appellate court over the bankruptcy proceeding, rejected the Richmans' Motion to Intervene. On November 30, 1995, the district court ruled on the issue of whether the bankruptcy court had abused its discretion in refusing to grant the Richmans' Motion for Reconsideration of the Lien Order, finding that it had not.

II.

The threshold question on appeal is whether the Richmans satisfy the requirements for intervention, and thus whether they may participate as a matter of right in the Turnover Action to challenge the Lien Order and for purposes of appeal to the district court and to this court. This question involves issues of both law and fact. We review the lower court's legal conclusions de novo, and reverse its findings of fact only if clearly erroneous. E.g., In re Varat Enterprises, Inc., 81 F.3d 1310, 1314 (4th Cir.1996); In re Stanley, 66 F.3d 664, 667 (4th Cir.1995).

Courts consistently have noted a public policy interest in reducing the number of ancillary suits that can be brought in the bankruptcy context so as to advance the swift and efficient administration of the bankrupt's estate. This goal is achieved primarily by narrowly defining who has standing in a bankruptcy proceeding. See, e.g., In re Schultz Mfg. Fabricating Co., 956 F.2d 686, 689-90 (7th Cir.1992) (observing that, because the Chapter 7 debtor lacked standing, the court could not review the merits of the bankruptcy court's orders); Hancock Bank v. Jefferson, 73 B.R. 183, 185 (S.D.Miss.1986) (noting that the court has no jurisdiction to hear a claim if the litigant lacks standing to prosecute the appeal). As a general matter, in a Chapter 7 proceeding, the trustee alone has standing to raise issues before the bankruptcy court and to prosecute appeals. A trustee is the representative of the bankrupt's estate and has the capacity to sue or be sued. 11 U.S.C. § 323; In re Eisen, 31 F.3d 1447, 1451 n. 2 (9th Cir.1994). Once appointed, the trustee becomes the estate's "proper party in interest, and the only party with standing to appeal the bankruptcy court's order." Eisen, 31 F.3d at 1451 n. 2 (quoting Hancock, 73 B.R. at 185); see also Stanley v. Sherwin-Williams Co., 156 B.R. 25, 26 (W.D.Va.1993) (preventing a Chapter 7 debtor from litigating a cause of action which belonged to the estate on the grounds that the debtor "lacks standing because the cause of action is [no longer] his to assert"). ¹

In certain instances, courts relax the general rule that only the Chapter 7 trustee has standing before the bankruptcy court and grant standing to certain other interested parties. Courts should be chary about granting such dispensations, however, as lax rules which liberally allow parties with some interest in the bankruptcy proceeding, such as a Chapter 7 debtor, to contest a proposed course of action, or to appeal an adverse decision, are too likely to generate "protracted litigation" that ultimately serves the interests of neither the debtor's estate nor the creditors. See In re Thompson, 965 F.2d 1136, 1145-46 (1st Cir.1992). Stricter rules, on the other hand, have the salutary effects of advancing the estate's "timely administration," In re Bowman, 181 B.R. 836, 844 (Bankr.D.Md.1995), and shielding the courts from "the needless multiplication of lawsuits." In re Wells, 575 F.2d 329, 331 (1st Cir.1978); see McGuirl v. White, 86 F.3d 1232, 1235 (D.C.Cir.1996) (discussing the need to avoid "overwhelm[ing] bankruptcy courts with claims by the many parties indirectly affected by bankruptcy court orders").

The Richmans argue that they have standing to contest the bank ruptcy court's actions because they qualify as "parties in interest." ² The debtors seem to have concluded that the mere fact of being a party in interest would grant them an automatic right to intervene, and hence participate as a matter of right, in the adversary proceeding. Even if the Richmans are correct in arguing that they are "parties in interest," that status does not guarantee that they have a right to intervene, either in the Turnover Action or for the purposes of appeal. ³ Rather, while a "party in interest" may have standing to intervene, the party with the interest must still separately satisfy the requirements for intervention in order to participate in an adversary proceeding. Although this court has not directly addressed the issue of whether a "party in interest" has an automatic right to intervene, other circuits have debated the similar question of whether a "party in interest," as that term is used in 11 U.S.C. § 1109(b), must still formally intervene to participate in an adversary proceeding. ⁴ In Fuel Oil Supply and Terminaling v. Gulf Oil Corp., 762 F.2d 1283 (5th Cir.1985), the Fifth Circuit rejected the argument that a Chapter 11 creditors' committee, which qualified as a "party in...