In a decision with important implications for parties listed in debtor reorganization plans, the United States Court of Appeals for the Third Circuit recently reiterated its position that section 1128(b) of the Bankruptcy Code (the “Code”) should be interpreted broadly to permit any listed party whose rights might be implicated by a debtor’s reorganization plan the ability to object to the plan’s terms in bankruptcy court. In its decision, the Third Circuit distinguishes between a party’s right to object to a debtor’s confirmation plan in bankruptcy court (“Bankruptcy Standing”) versus that party’s ability to appeal the debtor’s confirmation ruling (“Appellate Standing”). Because Section 1109(b)4 does not provide an exhaustive list of which parties may object to a debtor’s reorganization plan, the Third Circuit’s decision furthers the existing policy of the Federal Circuits of allowing liberal Bankruptcy Standing to permit wide participation and objection by those listed parties at the trial level to see whether a debtor’s reorganization plan does in fact injure a listed party. Essentially, the Federal Circuits, as seen through the Third Circuit’s holding and definition of “party in interest,” hold that a contingent injury is sufficient to allow a party standing to object to a plan of reorganization in bankruptcy court.
Part I of this memo first provides an overview of Bankruptcy Standing by discussing how the Federal Circuits and bankruptcy courts interpret sections 1128(b) and 1109(b) of the Code to permit seemingly any party listed in a debtor’s confirmation plan the right to object to the plan’s terms. Part I then discusses and contrasts the heightened standards required for parties to have standing to appeal a bankruptcy court’s confirmation of a debtor’s reorganization plan. Next, Part II of this memo uses the Third Circuit’s recent decision in In re Global Industrial Technologies as a model to demonstrate how inclusive the Circuits intend for section 1109(b) to be by discussing the case’s facts, the arguments in favor of standing and those against, and the court’s holding. Finally, Part III discusses what practical effects such an inclusive reading of section 1109(b) by the Federal Circuits—a reading which seems to allow even parties with tenuous grounds for standing the right to object—might have on bankruptcy practitioners and bankruptcy courts.