Lenders to SPEs: Be Aware, You May Not Have Standing to Appeal a Substantive Consolidation Order

by Dechert LLP

Dechert LLP

A substantive non-consolidation opinion is a common feature of structured finance transactions in the U.S. Most, if not all, opine as to what a bankruptcy court would do, but express no opinion on the appellate process. We would venture a guess that most opinion recipients assume that if the bankruptcy court gets it wrong, their rights will be vindicated on appeal. The Eighth Circuit opinion in Opportunity Finance1 casts a troubling shadow over that assumption.


The case grew out of the massive Ponzi scheme ran by Thomas Petters. To fund a multi-billion dollar Ponzi scheme, Mr. Petters utilized eight special purpose entities (SPEs) to raise approximately US$30 billion over a seven year period. When the scheme collapsed, the various Petters entities, including the SPEs filed for bankruptcy. Some of the lenders to the SPEs were direct lenders while others made indirect loans. All of the lenders were net winners and therefore did not file proofs of claims in the bankruptcy case. 

The chapter 7 bankruptcy trustee brought separate avoidance actions against the lenders seeking to recover about US$5.2 billion in payments made to them by the SPEs. Later on, however, the trustee sought the substantive consolidation of the debtors, including the SPEs. The bankruptcy court granted the motion and the district court dismissed the appeal holding that the lenders did not qualify as “persons aggrieved” by the consolidation order and thus, lacked standing to appeal. The lenders appealed to the Eighth Circuit.

The Court of Appeals Opinion

The Eighth Circuit panel was split, with the majority affirming the dismissal of the appeal and the minority voting to reverse. The lenders argued that the consolidation order affected their rights in two ways. First, prior to consolidation, each SPE had only one creditor-the relevant defendant lender. Since certain fraudulent transfer actions (i.e. those brought under section 544(b)) require the trustee to establish the existence of an unpaid creditor, the trustee, absent consolidation, lacked standing to avoid transfers made by the SPEs. Second, the consolidation order transformed certain lenders, with respect of certain of the claims, from subsequent transferees to initial transferees, thus eliminating their ability to argue good faith defense under section 550(b)(1). Both the majority and the minority agreed with said impact of the consolidation order on the lenders. 

Nonetheless, the majority held that the lenders were not “persons aggrieved” and thus lacked standing to appeal. First, the majority analogized the consolidation order to one allowing litigation to proceed. Allowing litigation to proceed does not make a defendant a “person aggrieved” and by implication, nor does an order stripping defenses. Second, the harm caused to the lenders does not create direct pecuniary harm required to satisfy the “person aggrieved” standard since the harm to the lenders is several steps removed; to suffer a pecuniary harm the trustee must prevail in the lawsuit, the lenders must pay the judgment and then file a claim. This possibility of harm does not satisfy the standard the majority held. Finally, the majority viewed the lenders as pursuing interests “antithetical to the primary purposes of the Bankruptcy Code” since they are attempting to avoid liability and as having interests that are not central to the bankruptcy process; the “person aggrieved” standard is used to avoid prolonging bankruptcy needlessly by parties whose interests are not central to the case. 

The minority disagreed. The minority argued that the “person aggrieved” standard is satisfied when the order or judgment at hand impairs parties’ rights. The consolidation order, resulting in loss of two significant defenses, clearly turns the lenders to persons aggrieved. First, an order that strips defenses goes beyond simply allowing a litigation to proceed; it affects substantive rights. An order that strips defenses “changes the probability that the party will win the lawsuit.” Second, the defenses that were stripped by the consolidation order are bankruptcy code statutory defenses. Therefore, it cannot be argued, as the majority does, that the lenders’ interests are “antithetical to the goals of bankruptcy.” Finally, the lenders, in the minority view, are not “marginally interested parties” as viewed by the majority. In the minority’s view, the attempt to avoid and recover billions of dollars is not merely a “satellite issue” and the “consolidation order fundamentally alters the entire Petters bankruptcy proceeding.”

What’s Next?

There is no record of a petition for rehearing, for an en banc review or for a Supreme Court review. Being the first Court of Appels’ opinion on the subject, it could prove influential. Since, however, it is not binding outside of the Eighth Circuit, the split opinion provides fertile ground for litigation. Lenders to SPEs should be aware that the right to appeal they probably took for granted, may face stiff opposition in the future.


1) Opportunity Finance, LLC v. Kelley, 822 F.3d 451 (8th Cir. 2016). The opinion is also available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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