Edward Mandel v. Mastrogiovanni Schorsch Mersky, e , 641 F. App'x 400 ( 2016 )

Case: 15-40864 Document: 00513409468 Page: 1 Date Filed: 03/07/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 15-40864 United States Court of Appeals
Fifth Circuit
FILED
In the matter of: EDWARD MANDEL March 7, 2016
Lyle W. Cayce
Debtor Clerk
-------------------------------------------------------------
EDWARD MANDEL,
Appellant
v.
MASTROGIOVANNI SCHORSCH & MERSKY; ROSA ORENSTEIN,
Appellees
Appeal from the United States District Court
for the Eastern District of Texas
USDC No. 4:12-CV-313
Before STEWART, Chief Judge, and OWEN and COSTA, Circuit Judges.
PER CURIAM:*
This case turns on whether Edward Mandel—a debtor in a Chapter 7
bankruptcy proceeding—has standing to appeal an order by the bankruptcy
court allowing claims against his bankruptcy estate by the Appellees. The
*Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
Case: 15-40864 Document: 00513409468 Page: 2 Date Filed: 03/07/2016
No. 15-40864
district court found that Mandel lacked standing to pursue his appeal and
dismissed the case as moot. Because we hold that Mandel is a “person
aggrieved” by the bankruptcy court’s order, we REVERSE and REMAND.
I.
Mandel’s appeal involves multiple levels of court proceedings. The
discord began with a dispute between Mandel and Steven Thrasher concerning
a company called White Nile Software, Inc. Mandel and Thrasher were the
two principal shareholders of the company, and the dispute escalated to
extensive litigation in state court (the “White Nile Litigation”).
Fearing that White Nile Software, Inc. was not being properly
represented, the state court appointed Rosa Orenstein as receiver for the
company in the litigation; Orenstein then hired the law firm Mastrogiovanni
Schorsch & Mersky (“MSM”) for her representation. The parties agreed to split
Orenstein’s and MSM’s relevant costs.
Later, while the White Nile Litigation was ongoing, Mandel filed for
Chapter 11 bankruptcy. In response, Orenstein and MSM filed claims against
Mandel’s estate for their agreed-upon compensation. The bankruptcy court
allowed the claims (the “Claim Allowance Order” or “Order”), 1 and Mandel
appealed that Order to the district court (the “Claim Allowance Appeal” or
“Appeal”). The Claim Allowance Appeal is the subject of the appeal currently
before us but is not the end of the story.
The bankruptcy court then appointed a Chapter 11 trustee, and the
parties moved to abate the Claim Allowance Appeal until the Chapter 11
trustee decided whether he wished to pursue the Appeal on behalf of the estate.
The district court allowed the trustee to intervene and asked the parties to
1 Mandel objected to Appellees’ claims in the bankruptcy court. The bankruptcy court
held a trial on the claims, and allowed the claims for all but 5% of the amounts asserted.
2
Case: 15-40864 Document: 00513409468 Page: 3 Date Filed: 03/07/2016
No. 15-40864
submit briefing on whether Mandel still had standing to pursue the Appeal as
the Chapter 11 debtor-out-of-possession. The trustee ultimately decided not to
pursue the Appeal, and the remaining issue became whether Mandel still had
standing. Mandel’s bankruptcy was then converted to a Chapter 7 proceeding,
and the Chapter 11 trustee became the Chapter 7 trustee.
During the course of the Chapter 11 proceedings, Orenstein and MSM,
among others, filed a complaint objecting to the dischargeability of their claims
pursuant to 11 U.S.C. § 523 and to Mandel’s discharge generally pursuant to
11 U.S.C. § 727 (the “Discharge Complaint”). The bankruptcy court has issued
several continuances on the trial regarding the Discharge Complaint; as a
result, the bankruptcy court has not ruled on the dischargeability of the claims
that are the subject of the Claim Allowance Order. 2
After additional briefing regarding developments in Mandel’s
bankruptcy case, the district court dismissed the Claim Allowance Appeal as
moot, finding that Mandel did not have a sufficient interest in the Claim
Allowance Order to establish standing. Mandel timely appealed.
II.
We review a district court’s dismissal for lack of standing de novo.
Fortune Nat. Res. Corp. v. U.S. Dep’t of Interior, 806 F.3d 363, 366 (5th Cir.
2015). To determine whether a party has standing to appeal a bankruptcy
court order, this court uses the “person aggrieved” test. Id. (citing In re Coho
Energy Inc., 395 F.3d 198, 202 (5th Cir. 2004)). “The ‘person aggrieved’ test is
an even more exacting standard than traditional constitutional standing,”
demanding “a higher causal nexus between act and injury.” Id. Put succinctly,
an “appellant must show that he was directly and adversely affected
2 A trial on these complaints is presently set for March 22–March 24, 2016.
3
Case: 15-40864 Document: 00513409468 Page: 4 Date Filed: 03/07/2016
No. 15-40864
pecuniarily by the order of the bankruptcy court in order to have standing to
appeal.” Id.III.
We begin by agreeing with the district court that a debtor-out-of-
possession will rarely have a sufficient interest to challenge a bankruptcy court
order in a Chapter 7 proceeding. As the district court pointed out, when a
debtor files for bankruptcy, his nonexempt property becomes part of the
bankruptcy estate. See 11 U.S.C. § 541. In a Chapter 7 proceeding, a trustee
is then appointed and that trustee typically liquidates all of the assets in the
estate and distributes the proceeds to creditors. See 1 David G. Epstein, Steve
H. Nickles & James J. White, Bankruptcy §§ 1–5, 1–7, at 9–13 (1992). Further,
“the general rule is that once a trustee is in a bankruptcy case, the trustee, not
the debtor or the debtor’s principal, has the capacity to represent the estate
and to sue and be sued.” Vega v. Gasper, 36 F.3d 417, 422 (5th Cir. 1994)
(citation and internal quotation marks omitted); see also 11 U.S.C. § 323. In
other words, once Chapter 7 proceedings begin, the debtor-out-of-possession
typically has no concrete interest in how the bankruptcy court divides up the
estate.
However, despite a debtor-out-of-possession’s generally limited interest
in Chapter 7 proceedings, we hold that Mandel has standing to appeal the
Claim Allowance Order. Appellees brought their claim against the estate,
arguing that Mandel owed them money for their services in the White Nile
Litigation. The Claim Allowance Order was an adjudication of that claim;
indeed, the Order has res judicata effect if the Appellees are allowed to bring
a suit outside of the bankruptcy proceeding. See In re Bevan, 327 F.3d 994,
997 (9th Cir. 2003) (stating that “the allowance or disallowance of ‘a claim in
bankruptcy is binding and conclusive on all parties or their privies, and being
in the nature of a final judgment, furnishes a basis for a plea of res judicata’”
4
Case: 15-40864 Document: 00513409468 Page: 5 Date Filed: 03/07/2016
No. 15-40864
(quoting Siegel v. Fed. Home Loan Mortg. Corp., 143 F.3d 525, 529 (9th Cir.
1998))); see also In re Fleury, 306 B.R. 722, 727 (B.A.P. 1st Cir. 2004) (stating
that “orders entered by the bankruptcy judge relating to [claims in a
bankruptcy proceeding] are given full effect notwithstanding subsequent
dismissal of the case”).
Of course, Appellees are not currently allowed to bring their claim
outside of the bankruptcy proceedings: there is a general stay of any actions
by creditors against Mandel. See 11 U.S.C. § 362(a). In the meantime,
Appellees have filed the Discharge Complaint, which the bankruptcy court has
yet to rule on. If the Appellees are successful in pursuing the Discharge
Complaint, the stay will be lifted, and they will be permitted to bring their
claim directly against Mandel (supported by the res judicata force of the Claim
Allowance Order). See 11 U.S.C. § 362(c)(2)(C).
The precise issue, then, is whether Mandel has standing to pursue his
appeal given that: (1) the debt at issue in the Claim Allowance Order may not
be discharged, thus exposing him to personal liability for the balance; and (2)
the bankruptcy court has yet to rule on whether the relevant debt is
dischargeable. For the following reasons, we hold that he does have standing. 3
First, a successful appeal of the Claim Allowance Order by Mandel will
have a dispositive impact on the bankruptcy court’s adjudication of the
Discharge Complaint. Appellees contested the dischargeability of their claims
against Mandel in the Discharge Complaint. Put simply, if the district court
sides with Mandel on the merits of his appeal, there will be no claim to find
nondischargeable. Courts have generally held that “[a] Chapter 7 debtor
3 This appeal would be relatively straightforward if Mandel could reasonably show
that a successful challenge to the Claim Allowance Order would result in a surplus to the
estate. See Vega, 36 F.3d at 422 (holding that a debtor has standing to challenge a claim
against the estate where a successful challenge would result in a surplus). Mandel makes no
such showing and, in fact, concedes that a successful appeal would not result in a surplus.
5
Case: 15-40864 Document: 00513409468 Page: 6 Date Filed: 03/07/2016
No. 15-40864
qualifies as a ‘person aggrieved’ for purposes of appellate standing . . . if he can
demonstrate that defeat of the order on appeal . . . would affect his bankruptcy
discharge.” See In re Beaulac, 294 B.R. 815, 821 (B.A.P. 1st Cir. 2003) (per
curiam) (citing In re Thompson, 965 F.2d 1136, 1142 (1st Cir. 1992)).
Second, the Claim Allowance Order functions as an adjudication of
Appellees’ claim against Mandel. Absent the stay in the bankruptcy
proceedings, the Appellees could march straight into court with the Claim
Allowance Order in hand and pursue their claim directly against him
individually. 4 Courts have held that challenges to nondischargeable debt are
not moot precisely because of the possibility of future proceedings directly
against the debtor. See Abel v. Campbell, 334 F.2d 339, 341 (5th Cir. 1964)
(“Because the tax liability survives the adjudication in bankruptcy, the
bankrupt has standing to attack the proof of claim before the Referee and a
right to appeal an adverse judgment.”); see also McGuirl v. White, 86 F.3d 1232,
1235 (D.C. Cir. 1996) (similar). Further, several courts have extended that
reasoning and stated that a debtor’s challenge to a claim order by a bankruptcy
court is not moot if the relevant debt may still be found nondischargeable. See
In re Curry, 409 B.R. 831, 838 (Bankr. N.D. Tex. 2009) (stating that “[a] debtor
has a pecuniary interest in the objection of a claim that may be non-
dischargeable”); In re Willard, 240 B.R. 664, 668 (Bankr. D. Conn. 1999)
(holding that the debt at issue “may never be discharged, and the debtor,
accordingly, [held] a direct pecuniary interest in the outcome of [the] action for
disallowance of [the challenged] claim, and ha[d] standing to pursue it”). 5
4As previously mentioned, Appellees would benefit from the res judicata effect of the
Claim Allowance Order in any future proceeding against Mandel.
5 Although Curry and Willard involved standing to object to a proof of claim at the
bankruptcy court level, the court in each case found that the Chapter 7 debtor had a direct
pecuniary interest in challenging the potentially nondischargeable claims. But see In re
Toms, 229 B.R. 646, 659–60 (Bankr. E.D. Pa. 1999).
6
Case: 15-40864 Document: 00513409468 Page: 7 Date Filed: 03/07/2016
No. 15-40864
In In re Knight-Celotex, LLC, the Seventh Circuit analyzed bankruptcy
standing in an analogous situation, and reached the same conclusion. 695 F.3d
714 (7th Cir. 2012). There, the case centered on the claims that two parties—
a bank and a group of companies—held against an individual debtor in a
Chapter 7 bankruptcy proceeding. Id. at 718. The Chapter 7 trustee allowed
the group of companies to assign its claims against the individual debtor to the
bank. Id. at 719. The debtor objected to the assignment arguing that the
claims were precluded by judicial estoppel; the bankruptcy court overruled the
objection; and the individual debtor appealed. Id. at 719–20. On appeal, the
Seventh Circuit held that the individual debtor had standing to challenge the
assignment. The court explained that, although “[b]ankruptcy standing is
narrower than constitutional standing and requires that a person have a
pecuniary interest in the outcome of the bankruptcy proceedings[, t]he prospect
that [the assigned] claims might not be entirely discharged, at least to the
extent they are based on fraud, is sufficient to give [the individual debtor]
standing.” Id. at 720 (citing 11 U.S.C. § 523) (citation and internal quotation
marks omitted). In short, the court concluded that the individual debtor had
standing because “[h]e faced the prospect of personal liability on some of the
claims.” Id.We applied similar reasoning in Vega. There, plaintiffs obtained a
judgment against the defendant in a labor suit. 36 F.3d at 420. While the
appeal was pending, the defendant filed for bankruptcy, which was later
converted to a Chapter 7 proceeding. Id. Plaintiffs filed a claim for the
judgment amount with the bankruptcy court and later filed an adversary
proceeding objecting under 11 U.S.C. § 523(a)(6) to the dischargeability of the
judgment debt. Id. We held that the defendant-debtor’s appeal of the
judgment was not moot in part because “relief on appeal . . . will automatically
inure to [the defendant-debtor’s] benefit . . . by reducing the amount of any
7
Case: 15-40864 Document: 00513409468 Page: 8 Date Filed: 03/07/2016
No. 15-40864
debt—such as that which is the subject of plaintiffs’ pending adversary
proceeding—found nondischargeable.” Id. at 422. 6
In response, Appellees argue that Mandel’s Appeal is moot because the
relevant debt may be discharged in the future by the bankruptcy court. This
argument puts the cart before the horse. The plain fact is the debt that is the
subject of the Claim Allowance Order has not yet been discharged. We agree
that it may be discharged in the future —and Mandel’s appeal may become
moot at that time—but that does not impact Mandel’s standing at this moment.
See Moore v. Hosemann, 591 F.3d 741, 744 (5th Cir. 2009) (stating that “any
set of circumstances that eliminates actual controversy after the
commencement of a lawsuit renders that action moot”) (citation omitted).
Accordingly, we hold that Mandel is a “person aggrieved” by the Claim
Allowance Order.
IV.
For the foregoing reasons, we REVERSE the judgment of the district
court and REMAND this matter for further proceedings consistent with this
opinion.
6 Although Vega’s reasoning is instructive, the case is not directly controlling, as it
applied the constitutional “case or controversy” test for standing, rather than the heightened
standard applied to appeals of bankruptcy court orders.
8