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In re Technicool Systems, Inc.

United States Court of Appeals, Fifth Circuit

June 20, 2018

In the matter of: TECHNICOOL SYSTEMS, INCORPORATED, Debtor,
v.
TRUSTEE LOWELL T. CAGE, Appellee. ROBERT FURLOUGH, Appellant,

          Appeal from the United States District Court for the Southern District of Texas

          Before SMITH, WIENER, and WILLETT, Circuit Judges.

          DON R. WILLETT, CIRCUIT JUDGE.

         In bankruptcy litigation, the mishmash of multiple parties and multiple claims can render things labyrinthine, to say the least. To dissuade umpteen appeals raising umpteen issues, courts impose a stringent-yet-prudent standing requirement: Only those directly, adversely, and financially impacted by a bankruptcy order may appeal it.

         This appeal is from a bankruptcy court order approving a trustee's application to employ special counsel. Appellant Robert Furlough, owner of the Debtor, Technicool Systems, objects to Trustee Lowell Cage's application to employ Stacy & Baker, P.C. (SBPC), alleging that SBPC holds an interest "adverse to the estate" under 11 U.S.C. § 327(a). Both the bankruptcy court and the district court held that Furlough lacked standing to object. We agree. Furlough's indirect interest in the order fails to meet the strict requirements for bankruptcy standing. Because the order does not reach his wallet, he cannot reach this court.

         We AFFIRM.

         I

         National Oilwell Varco (NOV) purchased roughly 300 industrial-strength air conditioners from manufacturer Technicool Systems for use on specialty oil-and-gas rigs around the world. The total cost to NOV exceeded $3 million. The units were marketed as "desert-proof." They weren't. After multiple units failed in the field, NOV, represented by SBPC, sued Technicool in Texas state court for fraud, breach of warranty, and negligent misrepresentation.

         Shortly thereafter, Technicool filed for Chapter 7 bankruptcy and the resulting automatic stay froze NOV's state court lawsuit. NOV filed a Motion for Relief from the Stay to join Technicool's owner, Robert Furlough, to its state suit. After an evidentiary hearing, the bankruptcy court modified the automatic stay; it allowed NOV to add Furlough but prohibited NOV from alleging "any cause of action for damages suffered directly or indirectly by the Estate, or that otherwise are Estate property."

         In addition to its state court suit against Technicool and Furlough, NOV filed a $3 million proof of claim in the bankruptcy case, representing 93 percent of the total claims filed by Technicool creditors. SBPC represented NOV in this suit too.

         After discovery revealed that Furlough had formed other companies closely related to Technicool, the Trustee sought to consolidate the businesses and pierce the corporate veil. To that end, the Trustee filed an application to employ SBPC as special counsel under 11 U.S.C. § 327(a). Furlough objected to this application, arguing that SBPC was not a disinterested person as required by § 327(a) and that SBPC's representation of NOV was a disqualifying "interest adverse to the estate."

         The bankruptcy court held a hearing on Furlough's objection. The Trustee presented an engagement letter, signed by SBPC, in which NOV agreed to transfer to the bankruptcy estate any funds it recovered from Furlough in the state court proceedings up to the total amount of creditor claims on file. At the close of the hearing, the court held that Furlough lacked standing to object because he was not a creditor and did not have a stake in the estate. It then approved the Trustee's application to employ SBPC.

         The district court affirmed on standing, and ...


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