- Party In Interest in Bankruptcy: The Legal Meaning
- The Sixth Circuit’s Definition of Party in Interest
- Parties in Interest in Detroit Bankruptcy Cases
- Other Examples of Parties in Interest
- Why Is Party In Interest Status Important?
- Party in Interest Status in Michigan Bankruptcy: The Bottom Line
Other “parties in interest” will always play a role in your Michigan Chapter 7 or Chapter 13 bankruptcy case. Your bankruptcy case is not yours alone, in other words.
A bankruptcy filing can be a process that touches many people (or corporate entities) in addition to yourself.
A few examples of a party in interest will be obvious, such as your creditors. The people or companies to whom you owe money are certainly parties who interest in whether they can continue to try and collect that money from you or not.
Other parties in interest will be less obvious.
This Article discusses the legal definition of the phrase “party in interest.” It goes on to discuss the typical parties in interest in most Michigan Chapter 7 and Chapter 13 bankruptcy cases, as well as a few not-so-typical parties in interest.
Party In Interest in Bankruptcy: The Legal Meaning
The US Bankruptcy Code is the Federal statute that governs the bankruptcy process in Metro Detroit and elsewhere in the United States.
When we talk about “Chapter” 7 or “Chapter” 13 bankruptcy (or Chapter 11, Chapter 9, Chapter 12), we are actually referring to different chapters of the Code. Just like a book.
It is a lengthy statute. Bankruptcy attorneys spend their careers becoming intimate with its passages and, especially, its definitions.
How does the Bankruptcy Code define a party in interest?
It doesn’t. Despite its lengthiness, the Code fails to define a number of key terms. It has thus been left to Bankruptcy Courts throughout the country to do so. From time to time, the US Supreme Court has been called upon to settle differences of definitional opinion.
The Sixth Circuit’s Definition of Party in Interest
Michigan sits within the Sixth Circuit Federal Court of Appeals. Case-law of the Sixth Circuit is binding upon Michigan’s Eastern and Western District Bankruptcy Courts. This includes Detroit, Ann Arbor, Flint, Bay City, Saginaw, Lansing, Grand Rapids, Kalamazoo, Bay City—and all of the rest of Michigan’s Bankruptcy Courts.
How has the Sixth Circuit defined a party in interest?
The Sixth Circuit, in 2020, had this to say:
Absent a precise or universal definition, the meaning of “party in interest” depends on the context in which it is used … The definition endorsed in In re Morton describes the term “party in interest” as “an expandable concept depending on the particular factual context in which it is applied,” such as a party that “has an actual pecuniary interest,” one “who has a practical stake in the outcome,” or “those who will be impacted in any significant way” by the matter. (citations omitted)
In other words, it doesn’t say much. Not specifically, anyway.
What the Sixth Circuit says that “party in interest” means is—whatever it ought to mean depending upon who is arguing for what in a particular bankruptcy case.
It depends on specific circumstances. It will depend upon specific facts.
That is the sort of legal definition that judges love to throw around. It makes more work for other judges. (Job security!)
Parties in Interest in Detroit Bankruptcy Cases
This author can tell you that, here in the Eastern District of Michigan, in the Detroit Bankruptcy Court in particular, the example provided in that definition of a party in interest being someone with a “pecuniary interest” tends to be thrown around a lot. Often as if there were no other possible definition.
A “pecuniary interest” is someone with a money interest in the outcome of the legal dispute. Your creditors, for instance, certainly have a “pecuniary interest” in the outcome of your bankruptcy. They will lose money if you successfully discharge their debt. (Of course, they’ll take a big tax write-off for it, so shed no nears for them.)
The other possibilities enshrined in the Sixth Circuit’s definition of “party in interest” of “those with a practical stake in the outcome” or “those who will be impacted in a significant way” come up from time to time—but the pecuniary (money-related) aspect is heavily emphasized in Detroit.
Nevertheless, it is a flexible definition intended to serve the case at hand.
Other Examples of Parties in Interest
There are also those persons who are always present in Chapter 7 and Chapter 13 bankruptcy cases and who always constitute a party in interest.
Your creditors obviously have a pecuniary interest in the outcome of your case. A creditor is therefore an automatic party in interest.
That is, unless you dispute that the debt is owed or valid.
If this is the case, your Metro Detroit bankruptcy lawyer may well argue in an “Adversary Proceeding” lawsuit seeking an order that the debt is not owed that the alleged creditors lack party in interest standing to file a claim.
Chapter 7 and Chapter 13 Trustees
Another perpetual example of a party in interest in a bankruptcy case is the Chapter 7 or Chapter 13 Trustee assigned by the court.
The Chapter 7 and Chapter 13 Trustee can both be said to have pecuniary interests in the outcome of the cases. This is true despite the fact that they are not either debtors or creditors involved in the matter.
Instead, Bankruptcy Trustees are the administrators of the so-called “bankruptcy estate” that is created by function of law upon the filing of the case. Like a probate estate, the bankruptcy estate contains all of your assets or claims to assets when you file.
In a Chapter 7 bankruptcy, it is the role of the Chapter 7 Trustee to seize and liquidate non-exempt assets of the bankruptcy estate in order to distribute the funds to the creditors “of the estate.” The Chapter 7 Trustee is paid with a percentage of liquidation funds retrieved. (Note that most Chapter 7 bankruptcy cases in Metro Detroit do not result in the loss of any property—but further discussion on this subject is outside the scope of this Article.)
In a Chapter 13 bankruptcy, it is also the role of the Chapter 13 Trustee to administer the assets of the bankruptcy estate, although no property is seized or liquidated in Chapter 13.
Instead, the Chapter 13 Trustee’s job is to accept your monthly Chapter 13 Plan payment and distribute the funds to your own Detroit bankruptcy lawyer and to your creditors, in a priority order.
The Chapter 13 Trustee will, however, first pay her own percentage-based fee from monthly Plan payment.
Thus, both Trustees have a pecuniary interest.
There are occasions in which debtors’ counsel have argued successfully that a Chapter 13 or Chapter 7 Trustee lacks the pecuniary interest necessary to constitute a “party in interest” in a particularly micro-dispute.
There have also been occasions in which Detroit bankruptcy judges have ignored valid arguments regarding this and granted a Trustee standing to participate in a dispute regardless.
We’re not naming names.
The US Trustee & Assistant US Trustees
The United States Trustee is also always a party in interest.
This individual and his or her “Assistant US Trustees” (or AUSTs) are functionaries of the US Department of Justice tasked with overseeing the integrity of the bankruptcy process in this country.
The US Trustee and AUST does not take an active role in every case, but he or she can as needed. The Chapter 7 and Chapter 13 Trustees can also refer cases to their local Detroit or Grand Rapids office if fraud or other funny business is suspected or found.
It is the US Trustee who will file a motion to dismiss your Chapter 7 Bankruptcy, for example, if you have fudged your Means Test to qualify on an income basis when you really earn sufficient income that you should have filed Chapter 13 instead.
It is the US Trustee who will prosecute you for the Federal criminal felony of Bankruptcy Fraud if you hide or fail to disclose assets or other required information.
The US Trustee does not have any pecuniary interest in your Chapter 7 or Chapter 13 case. Nevertheless, these governmental actors are empowered under the Bankruptcy Code to do what they do regardless of the Sixth Circuit’s “person of interest” definition above.
Ex-Spouses & Other Private Parties in Interest in Bankruptcy Cases
There are other types of persons who have been granted party in interest status in Chapter 7 and Chapter 13 cases.
One frequent flyer in this regard is the aggrieved ex-spouse.
Ex-husbands and ex-wives eat up a notable amount of docket-space in Sixth Circuit case-law regarding party in interest questions.
Most recently, in September, 2022, the Bankruptcy Court in Northern Ohio ruled that an ex-spouse was a party in interest in the Chapter 11 (corporate) bankruptcy proceeding of the business her now deceased ex-husband owned in life.
The Ohio Bankruptcy Court, in that case, ruled that the ex-spouse was a party in interest with standing to file a motion to dismiss the Chapter 11 case. The basis for this ruling was that the ex-spouse’s divorce settlement agreement with her now-deceased ex-husband granted her a lien on 40% of the membership interests of his business.
Although the corporate debtor in this case argued that her pecuniary interest was “merely speculative,” dependent as it was upon a judgment of the Ohio divorce court for valuation, the Ohio Bankruptcy Court ruled in her favor.
“Potential or speculative” interests will, it said, suffice for a finding that a person is a party in interest.
Likewise, the court also noted that “tangential” interests also support party in interest status in bankruptcy cases.
A “tangential” interest is a “sideways” or “adjacent” interest. The Ohio Bankruptcy Court gave the example, here, of a bank allowed in as party in interest in a Chapter 13 case even though it had no claim in the Chapter 13 case. Instead, the bank was a creditor in a prior Chapter 7 case in which the debtors owed a debt to the Chapter 7 Trustee.
It can complicated, in other words.
Why Is Party In Interest Status Important?
Only a party in interest has “standing” to intervene in a bankruptcy case. You must be a party in interest to file a claim as a creditor, file a motion to dismiss the case, or to do anything else in the case if you are not the debtor filing the case.
As you may have noted from news articles regarding US Supreme Court cases, standing is required generally to file a Federal or Michigan state lawsuit.
Without standing, you have no business being in the courtroom, unless you are being paid to draw hazy pictures of the parties who do have standing for your local TV news station.
Party in Interest Status in Michigan Bankruptcy: The Bottom Line
The bottom line is that, if you are seeking an answer to this question, you are likely involved in some level of litigation within your Michigan Chapter 7 or Chapter 13 bankruptcy case.
If this is the case, you’d better not be representing yourself. You need an experienced Michigan bankruptcy attorney—and litigator.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented Metro Detroit Chapter 7 and Chapter 13 clients for over 30 years.
If you are considering filing for bankruptcy, contact us now to schedule your free initial consultation.