Thompson, In re

• Decision Date: 04 December 1991
• Docket Number: No. 91-1750,91-1750
• Parties: , 26 Collier Bankr.Cas.2d 1306, Bankr. L. Rep. P 74,576 In re Christina THOMPSON, Debtor. Sanford A. KOWAL, et al., Appellants, v. Charles M. MALKEMUS, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1136

965 F.2d 1136

60 USLW 2762, 26 Collier Bankr.Cas.2d 1306,

Bankr. L. Rep. P 74,576

In re Christina THOMPSON, Debtor Sanford A. KOWAL, et al., Appellants, v. Charles M. MALKEMUS, Appellee.

No. 91-1750.

United States Court of Appeals First Circuit.

Heard Dec. 4, 1991.

Decided April 29, 1992.

Sanford A. Kowal, Newtonville, Mass., for appellants.

Thomas J. Raftery with whom Ellen O. Harder and Sherin and Lodgen, Boston, Mass., were on brief, for appellee.

Before CAMPBELL, Circuit Judge, BOWNES, Senior Circuit Judge, and CYR, Circuit Judge.

CYR, Circuit Judge.

The present appeal requires us to determine whether either the chapter 7 debtor or an unsecured creditor possesses standing to appeal a bankruptcy court order authorizing the chapter 7 trustee to settle an adversary proceeding to which the appellants were neither original nor intervening parties. We dismiss their appeal for lack of standing.

I BACKGROUND

Appellant Christina T. Thompson, the chapter 7 debtor, and appellee Charles M. Malkemus, alleged holder of a secured claim against property of the chapter 7 estate, initiated divorce proceedings in November 1985 after twelve years of marriage. In May 1986, the Probate and Family Court of the Commonwealth of Massachusetts, Essex County, ("probate court") Thompson filed a chapter 11 petition in the United States Bankruptcy Court for the District of Massachusetts during December 1988. One month later, the proceedings were converted to chapter 7. Following the appointment of the chapter 7 trustee, Malkemus obtained relief from the automatic stay permitting a continuation of the probate court proceedings. Later, the probate court entered so-called civil contempt judgments, imposing coercive fines against Thompson for willful refusal to comply with the terms of the modified divorce judgment. ¹ During April 1989, Malkemus filed several proofs of claim against the chapter 7 estate in amounts totalling approximately $878,000 plus interest, based on judgments and liens obtained in the probate court on property of the chapter 7 estate, including the former marital home. Appellant Sanford A. Kowal, Esquire, who represented appellant Thompson in the probate court proceedings, filed a proof of claim against the chapter 7 estate for attorney fees.

                entered its judgment of divorce nisi, incorporating the terms of a separation agreement between Thompson and Malkemus.   Following a hearing at which Malkemus asserted that Thompson had withheld from the probate court relevant provisions of their separation agreement, the probate court modified its original divorce judgment to include the omitted provisions
                

In October 1989, the marital home, the principal asset of the chapter 7 estate, was sold by the chapter 7 trustee for approximately $1 million. The chapter 7 trustee filed objections to the Malkemus claims and counterclaimed against Malkemus for breach of the separation agreement. Following discovery and two days of trial before the bankruptcy court in the ensuing adversary proceeding, the chapter 7 trustee arrived at a settlement with Malkemus, whereby Malkemus would receive approximately $700,000 in full satisfaction of all claims against the chapter 7 estate and the chapter 7 trustee would dismiss the counterclaim against Malkemus. Pursuant to Bankruptcy Rules 2002(a)(3) and 9019(a), appellants Thompson and Kowal were notified of the application to settle the adversary proceeding, and filed written objection to the settlement accompanied by objections to the Malkemus claims. Appellants objected to the Malkemus claims on the ground that the probate court judgments were invalid. ² On December 3, 1990, following a hearing at which appellant Kowal

actively participated, the bankruptcy court approved the settlement of the adversary proceeding between the chapter 7 trustee and Malkemus. ³

II

DISCUSSION

Although appellants assert numerous jurisdictional and constitutional challenges to the bankruptcy court order approving the settlement of the adversary proceeding between the chapter 7 trustee and Malkemus, we need address only their "standing" to appeal the order. In re Dein Host, Inc., 835 F.2d 402, 404 (1st Cir.1987) (court "duty bound" to determine appellate standing sua sponte ) (citing Orr v. Orr, 440 U.S. 268, 271, 99 S.Ct. 1102, 1107, 59 L.Ed.2d 306 (1979)). Appellants premise their right of appeal on (1) the bankruptcy court's disallowance of their objections to the proposed settlement of the adversary proceeding and (2) its implicit denial of their objections to the Malkemus claims against the chapter 7 estate.

A. Standing to Appeal Settlement of Adversary Proceeding

Bankruptcy Rule 9019(a) provides that, "[o]n motion by the trustee and after a hearing on notice to creditors, the United States trustee, the debtor and indenture trustees as provided in Rule 2002 and to such other entities as the court may designate, the court may approve a compromise or settlement." Fed.R.Bankr.P. 9019(a). All "parties in interest," including the debtor, trustee, and creditors, normally must be given twenty days' notice of the hearing on approval of a compromise or settlement by the trustee. Fed.R.Bankr.P. 2002(a)(3). The general notice provisions in Bankruptcy Rule 2002(a)(3) enable interested entities to monitor the progress of the bankruptcy case and to interpose timely opposition to the proposed settlement. Appellants mistakenly presume, however, that their entitlement to prior notification of the hearing on the approval of the settlement of the adversary proceeding between the chapter 7 trustee and Malkemus ensured appellate standing to challenge the bankruptcy court order entered over their objection after notice and hearing.

Under the Bankruptcy Code of 1978, an adversary proceeding is a subsidiary lawsuit within the larger framework of a bankruptcy case. See Fed.R.Bankr.P. 7001. ⁴ The parties to the instant adversary proceeding were the chapter 7 trustee and Malkemus. The opportunity broadly afforded all "parties in interest" to monitor the administration of the bankruptcy case through the provision of notice under Bankruptcy Rule 2002(a)(3) ⁵ does not confer In a typical civil case, there is a plaintiff and a defendant, one of which loses at the trial level. It is therefore unnecessary to set strict standards regarding standing on appeal, because the person appealing is the party to the action who lost below. On the other hand, bankruptcy litigation many times involves and affects the interests of parties who are not formally parties to litigation.... [Several] examples come immediately to mind: approval of a compromise between a trustee and a third party, with an appeal taken by a creditor or by the debtor[ ].... In none of these instances [was] the ... creditor[ ] [who is appealing] or the debtor nominally a party. It might be said that all of the creditors and the debtor are parties to every order entered in a bankruptcy proceeding, but that does not help in determining what parties have standing to take an appeal, because it would result in a rule that all parties who are involved either directly, indirectly or tangentially in the bankruptcy proceeding have the power to appeal from almost any order entered by the bankruptcy judge.

                on a debtor or the individual creditors in a bankruptcy case the status of "parties" to every adversary proceeding brought by or against the chapter 7 trustee.   Rather, the Bankruptcy Code and the Bankruptcy Rules delimit the appellate standing of "parties in interest" under Bankruptcy Rule 2002(a)(3) to challenge judgments entered in adversary proceedings to which they were not proper parties
                

Lawrence D. King, 9 Collier on Bankruptcy p 8001.05, at 8001-12 (15th ed. 1991) (emphasis added) (citations omitted) [hereinafter "Collier "].

The formal procedural criteria for intervention prescribed in Federal Rule of Civil Procedure 24 are made applicable to adversary proceedings by virtue of Bankruptcy Rule 7024. ⁶ Thus, nonparty participation in an adversary proceeding is dependent on intervention. See In re Latimer, 918 F.2d 136, 137 (10th Cir.1990) (debtor lacks standing to participate in adversary proceeding, absent intervention), cert. denied, --- U.S. ----, 112 S.Ct. 186, 116 L.Ed.2d 147 (1991). ⁷ Permission to intervene as of right endows the intervenor with appellate standing to challenge an adverse judgment entered in the adversary proceeding. See, e.g., Karcher v. May, 484 U.S. 72, 77, 108 S.Ct. 388, 392, 98 L.Ed.2d 327 (1987) (while "[o]ne who is not an original party to a lawsuit may of course become a party by intervention, substitution or third-party practice, ... we have consistently applied the rule that one who is not a party or has not been treated as a party to a judgment has no right to appeal") (Rule 24); Sandra Cotton, Inc. v. Bank of New York, 87 B.R. 272, 274 (W.D.N.Y.1988) ("[w]ithout first having sought to intervene in the [bankruptcy court, appellant] can not now be granted standing to appear on the appeal").

Moreover, mere participation in a hearing on the approval of a settlement or [T]he fact that the appellants were given an opportunity to be heard in the bankruptcy court does not provide a basis for standing on appeal.... '[A]n interested party who had taken part in the [compromise and settlement] proceedings and had the right to intervene, but who had not formally done so, was not capable of appealing, as such a party was not properly on the record as an intervenor, and not being a party to the record has no standing to appeal.'

compromise in an adversary proceeding does not constitute de facto intervention:

In re Central Ice Cream Co., 62 B.R. 357, 360 (N.D.Ill.1986) (quoting In re South State Street Bldg. Corp., 140 F.2d 363, 367 (7th Cir.1944)). ⁸

A putative intervenor under Bankruptcy Rule 7024 must submit a timely motion to intervene in the adversary proceeding, demonstrate a direct and substantial interest which would be...