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Financial Restructuring & Insolvency, Stock Market

Feb 06, 2020

The Final Stay: Supreme Court Holds that Any Bankruptcy Court Order Denying Relief from the Automatic Stay Constitutes a Final, Immediately Appealable Order

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On January 14, 2020, the Supreme Court of the United States issued a decision resolving the question of whether a motion for relief from the automatic stay constitutes a discrete dispute within the bankruptcy that creates a basis for a final appealable ruling, or whether it simply is a controversy that is part of the broader Chapter 11 case, such that appeals would not need to be taken until the conclusion of the Chapter 11 case. In its decision, the Supreme Court clearly concludes that a bankruptcy court’s order resolving a creditor’s motion for relief from the automatic stay constitutes a final order from which an appeal must be taken within the proscribed 14-day statutory period in order for a party to preserve its appellate rights.

Background

Ritzen Group, Inc. agreed to buy land in Tennessee from Jackson Masonry, LLC. The land sale was never closed, and Ritzen sued Jackson for breach of contract in Tennessee state court. Before the trial began, Jackson filed for bankruptcy relief and the state court litigation was stayed by virtue of the automatic stay imposed by section 362 of the Bankruptcy Code. Ritzen filed a motion for relief from the stay, seeking an order allowing the trial to proceed in state court. In the motion, Ritzen argued that stay relief would promote judicial economy, and that Jackson had filed for bankruptcy in bad faith. The Bankruptcy Court entered an order denying the motion, and Ritzen did not appeal within the prescribed 14-day period.[1]

Subsequently, Ritzen filed a proof of claim on account of its breach of contract claim. Following an adversary proceeding, the Bankruptcy Court disallowed Ritzen’s claim. The Bankruptcy Court ultimately confirmed Jackson’s plan of reorganization, which plan permanently enjoined creditors from the commencement or continuation of any proceedings against the debtor on account of any claims against the debtor. Ritzen, despite not having objected to confirmation of the plan, filed two separate notices of appeal, challenging (i) the Bankruptcy Court’s order denying relief from the automatic stay, and (ii) the court’s resolution of its breach of contract claim. The District Court rejected the first notice of appeal as untimely, holding that the time to appeal expired 14 days after entry of the Bankruptcy Court’s order denying relief from the automatic stay. The District Court also ruled against Ritzen on the merits of its breach of contract claim.

Ritzen again appealed, and the Court of Appeals for the Sixth Circuit affirmed. The Court of Appeals found that the adjudication of Ritzen’s motion for relief from the automatic stay qualified as a discrete proceeding, commencing with the filing of the stay-relief motion and culminating in a dispositive decision based on the application of a legal standard. Therefore, the 14-day appeal clock ran from the order denying the motion to lift the stay. The Supreme Court granted certiorari to resolve whether an order denying relief from the automatic stay is final, and therefore immediately appealable, under § 158(a)(1).

Decision

Pursuant to § 158(a) of the United States Code, an appeal of right to a district court lies from final orders entered by bankruptcy courts in cases and proceedings. The Supreme Court noted that, by providing for appeals from final decisions in bankruptcy “proceedings” as distinguished from bankruptcy “cases,” Congress made orders in bankruptcy cases immediately appealable if they finally dispose of discrete disputes within the larger bankruptcy case. Because a bankruptcy case encompasses numerous individual controversies, many of which would exist as stand-alone lawsuits but for the bankrupt status of the debtor, the Supreme Court stated that it must inquire as to how to define the immediately appealable proceeding.[2]

The Supreme Court found the immediately appealable proceeding to be the stay-relief adjudication, noting that a bankruptcy court’s ruling on a stay-relief motion disposes of a procedural unit separate from the claim resolution process. Specifically, stay-relief adjudication occurs before and apart from proceedings on the merits of creditors’ claims, and initiates its own procedural sequence, including notice and a hearing. Moreover, the creditor’s qualification for relief from the automatic stay turns on the statutory standard (i.e., “cause” or the presence of specified conditions). Therefore, the Supreme Court found that this kind of discrete dispute constitutes an independent “proceeding” within the meaning of 28 U.S.C. § 158(a).

Ritzen argued that the adjudication of the motion seeking stay-relief only is a first step in the process of resolving a creditor’s claim against the estate, because an order denying stay relief simply decides where the claim will be adjudicated (i.e., bankruptcy court or state court), not the merits of the claim. Justice Ginsburg, writing for a unanimous Court, was not persuaded by that argument, concluding instead that the determination of a motion to lift the stay has significant consequences, because it effectively is a ruling on whether the creditor can isolate itself and “go it alone outside of bankruptcy.”

In the alterative, Ritzen argued that even if an order denying stay relief is not part of the claims adjudication process, the order should nonetheless rank as non-final where, as here, the bankruptcy court’s decision turns on a substantive issue that may be raised later in the litigation. Specifically, because Ritzen based its stay-relief motion largely on an argument that Jackson filed for bankruptcy in bad faith, Ritzen argued that the issue could have been urged again later in the bankruptcy case, thus rendering the order non-final. Again, the Supreme Court disagreed, noting that § 158(a) asks whether the order in question terminates a procedural unit separate from the remaining case, not whether the bankruptcy court has preclusively resolved a substantive issue that is pertinent to other parts of the bankruptcy case.

Discussion

This case caught the attention of the United States, which filed a brief as amicus curiae in support of Jackson. In its briefing, the United States listed various “final” consequences of an order deciding a lift-stay motion; for example, the grant of relief can allow a creditor to prosecute lawsuits, seize property and take other measures to collect debts from the debtor. Conversely, the denial of relief precludes creditors from taking such actions. From a policy perspective, the Supreme Court pointed out that delaying appeals from discrete, controversy-resolving decisions in bankruptcy cases would long postpone appellate review of fully adjudicated disputes. Moreover, reversal of a decision made early on in a case could require the bankruptcy court to unravel later adjudications rendered in reliance thereon. As a result, the Supreme Court found that classifying orders conclusively resolving stay-relief issues as final will avoid, rather than cause, delays and inefficiencies.

Footnotes

 [1]   The Bankruptcy Code and the Federal Rules of Bankruptcy Procedure require parties to appeal from a final order within 14 days after entry of the order being appealed. 28 U.S.C. § 158(c)(2); Fed. Rule Bankr. Proc. 8002(a).
[2]  The Supreme Court considered the application of § 158(a)’s finality requirement in light of its decision in Bullard v. Blue Hills (which we wrote about here [https://www.shearman.com/-/media/Files/NewsInsights/Publications/2015/07/The-Supreme-Court-Holds-That-a-Bankruptcy-Courts-Order-Denying-Confirmation-of-a-Debtors-Proposed-Chapter-13-Plan-Is-Not-a-Final-Order-Subject-to-Immediate-Appeal--FRI-071415.pdf]. In Bullard, the Supreme Court held that a bankruptcy court’s order rejecting a proposed plan was not “final” under § 158(a) because it did not conclusively resolve the relevant “proceeding.” The Supreme Court found that the plan confirmation process involves back and forth negotiations, and only upon plan approval is the status quo altered and the rights and obligations of the parties are fixed. Denial of confirmation with leave to amend, by contrast, leaves the parties’ rights and obligations unsettled, and therefore cannot be “final.”

Authors and Contributors

Fredric Sosnick

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Joel Moss

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Ned S. Schodek

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