In Re: AFY, Inc.
MEMORANDUM AND ORDER - The appeals filed in this court on September 10, 2010 (filing 29 ), and September 15, 2010 (filing 38 ) are dismissed for lack of jurisdiction. Final judgment shall be entered by separate document. Pursuant to the court's memorandum and order filed on September 15, 2010 (filing 39 ), final judgment shall also be entered by separate document dismissing as moot the appeal filed in this court on June 2, 2010 (filing 1 ).Ordered by Judge Richard G. Kopf. (TCL )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
ROBERT A. SEARS and
KORLEY B. SEARS,
JOSEPH H. BADAMI, Chapter 11
IN RE AFY, INC.,
Bankruptcy Case No. 10-40875
On February 11, 2011, the appellants, Robert Sears and Korley Sears, were
ordered to show cause why their appeals from two orders entered in a voluntary
Chapter 11 bankruptcy proceeding initiated by AFY, Inc., should not be dismissed
for lack of jurisdiction. The appellants have now responded to the order and the
Chapter 11 trustee has replied. After careful consideration of the parties’ briefs and
evidence, I conclude the appeals must be dismissed for lack of jurisdiction.1
As explained in my previous memorandum and order, the appellants purport
to appeal “individually and on behalf of Sears Cattle Co., of which they are the sole
directors, officers, and shareholders,” from a bankruptcy court order authorizing the
Chapter 11 trustee to pay a secured creditor the entire net proceeds from the sale of
An earlier appeal filed by Robert Sears and Sears Cattle Co. was dismissed
as moot on September 15, 2010 (filing 39), but entry of judgment was withheld
pending disposition of these appeals.
a tract of land which was jointly owned by Sears Cattle Co. and AFY, Inc. Robert
Sears and Korley Sears do not have personal standing to appeal from this order and
they cannot represent Sears Cattle Co.2 Robert Sears and Korley Sears also lack
standing to appeal from an order entered by the bankruptcy court granting the
trustee’s motion to convert AFY, Inc.’s Chapter 11 reorganization into a Chapter 7
Appellants argue that the notice of appeal concerning the order to pay funds
was “ineptly” worded but manifested a clear intent to include Sears Cattle Co. as a
party. I disagree. The notice of appeal was carefully worded, employing the same
phrasing that was used in the objection filed to the trustee’s motion to pay funds, to
indicate that the filings were made by Robert Sears and Korley Sears “individually
and on behalf of Sears Cattle Co.” (Filing 29 (notice of appeal), Bankruptcy court
filing 197 (objection to motion to pay funds).) 3 The notice of appeal also contains
a listing of “[t]he names of all parties to the contested matter in which the order was
As discussed in my previous memorandum and order, “[i]t has been the law
for the better part of two centuries . . . that a corporation may appear in the federal
courts only through licensed counsel.” Rowland v. California Men’s Colony, 506
U.S. 194, 201-02 (1993). See also United States v. Van Stelton, 988 F.2d 70 (8th
Cir.1993) (per curiam) (corporation that was not represented by counsel was not party
to appeal; corporation cannot appear pro se).
The appellants contend their attorney, Jerrold Strasheim, also entered an
appearance on behalf of Sears Cattle Co. at the hearing on the trustee’s motion to pay
funds, but the record does not establish this fact. When asked to enter an appearance,
Mr. Strasheim stated that he was appearing “on behalf of the objectors.” (Bankruptcy
court filing 262 (transcript), at 5:4-5.) When next asked by the bankruptcy court
judge to identify the objectors, Mr. Strasheim stated “I better look to make sure” and
then responded, “Robert Sears and Korley Sears and on behalf of Sears Cattle.” (Id.,
at 5:7-13.) Either Mr. Strasheim misread the filed objection by omitting the word
“individually” or else the transcription of his statement is imperfect. In any event, the
bankruptcy court’s order reflects that Mr. Strasheim only “appeared for Stockholders
Korley B Sears, Robert A Sears.” (Bankruptcy court filing 211 (text entry).)
entered that is appealed from and the names and addresses of their respective
attorneys.” (Filing 29.) This listing shows that Robert Sears and Korley Sears are
represented by Jerrold Strasheim; there is no mention of Sears Cattle Co. being a
party or being represented by Mr. Strasheim. The signature block on the notice of
appeal only lists “Robert A. Sears and Korley B. Sears” as the appellants. (Filing 29.)
The appellants have also failed to identify any evidence in the record to show
that they are “persons aggrieved” by the bankruptcy court’s orders.4 With respect to
the notice of appeal from the order converting the bankruptcy case to a Chapter 7
proceeding, Robert Sears and Korley Sears argue they have standing because (1) they
are stockholders of AFY, Inc., and the bankruptcy estate is solvent; (2) the conversion
increased their burdens and impaired their rights; (3) they are parties in interest under
11 U.S.C. § 1109(b); and (4) the Chapter 11 trustee acted in bad faith.
The appellants’ first argument relates to an exception to the general rule that
a debtor in a Chapter 7 proceeding is not a “person aggrieved” by an order allowing
claims against the bankruptcy estate. The exception applies “when it appears that, if
the contested claims are disallowed, there may be a surplus of assets to be returned
“Standing to appeal in a bankruptcy case is limited to ‘persons aggrieved’ by
an order of the bankruptcy court. Gen’l Motors Acceptance Corp. v. Dykes (In re
Dykes), 10 F.3d 184, 187 (3d Cir.1993). Originally set forth in the Bankruptcy Act
of 1898, the ‘persons aggrieved’ test now exists as a prudential standing requirement
that limits bankruptcy appeals to persons ‘whose rights or interests are “directly and
adversely affected pecuniarily” by an order or decree of the bankruptcy court.’ In re
Dykes, 10 F.3d at 187 (citing In re Fondiller, 707 F.2d 441, 443 (9th Cir.1983)).
‘[P]erson[s] aggrieved’ must show the order of the bankruptcy court ‘diminishes their
property, increases their burdens, or impairs their rights.’ In re PWS Holding Corp.,
228 F.3d at 249 (citing In re Dykes, 10 F.3d at 187). Whether someone is a person
aggrieved is normally a question of fact. In re Dykes, 10 F.3d at 188.” In re
Combustion Engineering, Inc., 391 F.3d 190, 214 (3rd Cir. 2004) (footnotes omitted).
“Appellate standing in the bankruptcy context is more restrictive than Article III
standing, which need not be financial and need only be ‘fairly traceable’ to the
alleged illegal action.” Id., at 215 (internal quotations and citation omitted).
to the bankrupt, [in which event] the bankrupt is considered to have standing to
contest the claims.” Kapp v. Naturelle, Inc., 611 F.2d 703, 707 (8th Cir. 1979). It is
obvious this exception has no application here. The determinative question is not
whether AFY, Inc., has standing to appeal from the bankruptcy court’s order
converting the Chapter 11 reorganization into a Chapter 7 liquidation – Robert Sears
and Korley Sears do not even purport to be representing the corporation in their
appeal from that order – but, rather, whether the appellants have standing to appeal
because of their alleged derivative interest in the corporation’s assets. As a matter of
law, the answer is “No.” See, e.g., In re Troutman Enterprises, Inc., 286 F.3d 359,
364-65 (6th Cir. 2002) (holding that shareholders must demonstrate a “direct,
personal interest” in the bankruptcy court’s order.)
The appellants’ second argument is not substantially different. The burdens
and impairments they claim the conversion order caused are to AFY, Inc., as the
debtor in bankruptcy. As discussed above, even if Robert Sears and Korley Sears
have an ownership interest in the corporation, this does not make them “persons
aggrieved” by the bankruptcy court’s order. “To the contrary, courts have consistently
held that officers and shareholders of creditor corporations may not appeal
bankruptcy orders, in their own names, where the corporation is the party aggrieved
by the orders because any injury to the officer or shareholder is indirect rather than
direct.” Advantage Healthplan, Inc. v. Potter, 391 B.R. 521, 541 (D.D.C. 2008), aff’d,
Greater Southeast Community Hosp. Foundation, Inc. v. Potter, 586 F.3d 1 (D.C.Cir.
The appellants’ third argument was addressed in my previous memorandum
and order. Section 1109(b), which provides that “[a] party in interest . . . may raise
and may appear and be heard on any issue in a case under [Chapter 11],” does not
confer standing to appeal. See Greater Southeast Community Hosp. Foundation, Inc.
v. Potter, 586 F.3d 1, 6 (D.C.Cir. 2009) (§ 1109(b) “applies only to ‘a case under this
chapter,’ that is, under Chapter 11 of the Bankruptcy Code, and Chapter 11 governs
only proceedings in the bankruptcy court, not appeals therefrom.”); In re PWS
Holding Corp., 228 F.3d at 248-49 (§ 1109(b) “confers broad standing at the trial
level” but “courts do not extend that provision to appellate standing”); In re Am.
Ready Mix, Inc., 14 F.3d 1497, 1502 (10th Cir. 1994) (“Section 1109(b) says nothing
about a party’s standing to appeal.”). “Because Section 1109(b) expands the right to
be heard in a Chapter 11 proceeding to a wider class than those who qualify under the
‘person aggrieved’ standard, courts considering the issue have concluded that merely
being a party in interest is insufficient to confer appellate standing.” Advantage
Healthplan, Inc., 391 B.R. at 541 (citations and internal punctuation omitted). The
fact that the bankruptcy court granted Robert Sears and Korley Sears a hearing on
their objection to the trustee’s motion does not mean they have the right to appeal
from the court’s order granting the motion.
The appellants’ fourth argument is that the “shareholder standing rule” 5 allows
them to prevent the conversion to Chapter 7 because the Chapter 11 trustee acted in
bad faith by filing the motion to convert and ignoring the protection that is afforded
to a farmer debtor under 11 U.S.C. § 1112(c) (providing that “[t]he court may not
convert a case under this chapter to a case under chapter 7 of this title if the debtor
is a farmer . . ., unless the debtor requests such conversion.”). While a shareholder
may have standing to bring a derivative action where the corporation’s management
has refused to do so, the rule does not give shareholders the right to block actions that
are taken by the corporation (or, in this case, by the trustee acting for the corporation).
In effect, the appellants are challenging the bankruptcy court’s determination that
their objection to the trustee’s motion was “irrelevant.” 6 I find no fault in the
The shareholder standing rule “is a longstanding equitable restriction that
generally prohibits shareholders from initiating actions to enforce the rights of the
corporation unless the corporation’s management has refused to pursue the same
action for reasons other than good-faith business judgment.” Franchise Tax Bd. of
California v. Alcan Aluminium Ltd., 493 U.S. 331, 336 (1990).
The bankruptcy court observed that one reason it had appointed a Chapter 11
trustee was because disputes had arisen between Robert and Korley Sears and other
members of the Sears family as to who actually owned and controlled the voting
bankruptcy court’s analysis, and conclude that Robert Sears and Korley Sears lack
rights of shares of stock in AFY, Inc. The corporation had been represented in the
bankruptcy case by Mr. Strasheim, but he was granted leave to withdraw on June 11,
2010, because of the conflict of interest. The court emphasized that no substitute
counsel had entered an appearance for AFY, Inc., and ruled that Robert Sears and
Korley Sears could not act for the corporation in objecting to the conversion. The
The objection filed by Robert and Korley to the Chapter 11
trustee’s motion to convert is, quite simply, irrelevant. They are not the
debtor. The real and only question is whether AFY has requested
conversion or at least consented to conversion. It is particularly
important to note that AFY has not objected to the Chapter 11 trustee’s
motion to convert the case to Chapter 7. Further, no attorney has
entered an appearance subsequent to Mr. Strasheim’s withdrawal of
representation of AFY. Robert and Korley cannot now show up as the
purported shareholders of AFY and begin exercising the rights and
privileges of AFY. AFY is a Nebraska corporation, and thus is a
separate legal entity from its shareholders. Further, based on earlier
hearings and evidence in this case, there remains a genuine dispute as to
who may be the proper shareholders of AFY, or at least who may have
the voting control of AFY, and to this Court’s knowledge, no court has
adjudicated that issue. In any event, the shareholders of a corporation
cannot appear and make objections that belong to the corporation. . . .
Joseph H. Badami is the duly appointed Chapter 11 trustee of
AFY. As such, the trustee has been empowered to administer the
bankruptcy estate and is obligated to, among other things, file a plan or
recommend conversion of the case. 11 U.S.C. § 1106(a)(5).
Accordingly, the trustee has, on behalf of the debtor, requested
conversion. Trustees routinely take action and pursue claims in the
shoes of the debtor. . . . Nothing in the Code indicates that the debtor’s
right to request conversion is somehow excluded from the trustee’s
powers. In fact, it seems the trustee is specifically authorized to request
conversion on behalf of the debtor and the estate.
(Bankruptcy court filing 242 (emphasis in original; footnote omitted).)
standing to appeal from the conversion order.
Although I have responded only briefly to the appellants’ various arguments,
and have not set forth those arguments (or the trustee’s counter-arguments) in detail,
I think further discussion is unnecessary. It is apparent that Robert Sears and Korley
Sears do not have standing to appeal from the bankruptcy court’s orders authorizing
the Chapter 11 trustee to pay funds and converting the bankruptcy case to a Chapter
7 proceeding. It is also apparent that Sears Cattle Co. did not appeal from the order
authorizing the trustee to pay funds, and that Robert Sears and Korley Sears cannot
appeal on the corporation’s behalf.
IT IS ORDERED:
The appeals filed in this court on September 10, 2010 (filing 29), and
September 15, 2010 (filing 38) are dismissed for lack of jurisdiction.
Final judgment shall be entered by separate document.
Pursuant to the court’s memorandum and order filed on September 15,
2010 (filing 39), final judgment shall also be entered by separate
document dismissing as moot the appeal filed in this court on June 2,
2010 (filing 1).
May 11, 2011.
BY THE COURT:
Richard G. Kopf
United States District Judge
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?