February 26, 2020

Ritzen Group, Inc. v. Jackson Masonry, LLC

BANKRUPTCY

Is an Order Denying a Motion for Relief from the Automatic Stay Final and Immediately Appealable upon Entry?

CASE AT A GLANCE

Petitioner and respondent were parties to a purchase agreement that never closed. Petitioner sued respondent for breach of contract in state court; subsequently, respondent filed for bankruptcy. Petitioner sought relief from the automatic stay to continue the state court suit against respondent. The stay relief motion was denied, and, subsequently, the bankruptcy court held that petitioner breached the agreement. After its claim was disallowed, petitioner appealed the stay relief motion and claim determination. The district court dismissed petitioner’s stay relief appeal as untimely, and the Sixth Circuit affirmed.

Docket No. 18-938
Argument Date: November 13, 2019
From: The Sixth Circuit
by Francis J. Lawall and Marcy J. McLaughlin
Pepper Hamilton LLP, Philadelphia, PA

ISSUE

Is an order denying a motion for relief from the automatic stay a final order under 28 U.S.C. § 158(a)(1)?

FACTS

Petitioner Ritzen Group, Inc., and respondent Jackson Masonry, LLC, were parties to a purchase agreement, whereby petitioner agreed to purchase certain of respondent’s real property for a purchase price of $1.55 million. After the sale failed to close, the petitioner commenced suit in state court against the respondent for breach of contract. The petitioner alleged that the respondent breached the sale contract by delaying, and ultimately preventing, the closing. The respondent denied liability and contended that it was the petitioner who breached the contract by failing to secure acquisition funding.

Immediately before a hearing on the petitioner’s state court discovery sanctions motion, and a week prior to trial, respondent sought Chapter 11 bankruptcy protection. Filing of the respondent’s bankruptcy petition, Section 362 of 11 U.S.C. §§ 101, et seq., (the “Bankruptcy Code”), automatically stayed the state court litigation.

In the respondent’s bankruptcy case, the petitioner sought relief from the automatic stay to continue pursuit of its state court breach of contract suit against the respondent. The petitioner argued that the stay should be lifted “for cause”—for judicial economy and because the respondent allegedly filed its petition in bad faith. The petitioner also contended that dismissal of the bankruptcy case was warranted due to the respondent’s bad faith actions. Following an evidentiary hearing, the bankruptcy court denied the petitioner’s motion, thus keeping the automatic stay in place and preventing the petitioner from moving forward in state court.

The petitioner then filed a proof of claim against the respondent based on the same state court breach of contract allegations. The respondent objected to the petitioner’s claim, following which each party filed an adversary proceeding against the other. The adversary proceedings were consolidated with the respondent’s claim objection. The bankruptcy court held a bench trial and, ultimately, found that the petitioner breached the sale contract resulting in its claim being disallowed.

During this same period of time, the bankruptcy court confirmed the respondent’s plan of reorganization without objection from the petitioner. The plan contains a permanent injunction against “all creditors from the ‘commencement or continuation of any judicial, administrative, or other action or proceeding against [d]ebtor…on account of [c]laims against [d]ebtor, or on account of claims released pursuant to this [p]lan.’”

After the bankruptcy court entered an order disallowing the petitioner’s claim, the petitioner appealed the bankruptcy court’s rulings on both its stay relief motion and the merits of its breach of contract claim. The district court affirmed the bankruptcy court’s disallowance of the petitioner’s claim on the merits and held that the petitioner’s appeal of the order denying stay relief was untimely because it became final upon entry—thus requiring the appeal to have been filed within 14 days of entry instead of months later.

The Sixth Circuit affirmed the district court, adopting a two-part test for determining when a bankruptcy court order is a “final order” for purposes of 28 U.S.C. § 158(a)(1): “a bankruptcy court’s order may be immediately appealed if it is (1) ‘entered in a…proceeding’ and (2) ‘final’—terminating that proceeding.” The Sixth Circuit found that a “‘proceeding’ under § 158(a) is a discrete dispute within the overall bankruptcy case, resolved through a series of procedural steps[,]” and that finality is determined by “whether the order terminates the stay relief proceeding” by “alter[ing] the status quo and fix[ing] the rights and obligations of the parties.” The Sixth Circuit held that an order denying a stay relief motion was (1) a proceeding that began with the motion and concluded with entry of an order on whether the movant satisfied the standard for relief from the automatic stay; and (2) final because it was procedurally complete and fixed the parties’ rights at issue in the stay-relief proceeding.

CASE ANALYSIS

Section 158(a)(1) of Title 28 of the United States Code provides that “[t]he district courts of the United States shall have jurisdiction to hear appeals…from final judgments, orders, and decrees[]…of bankruptcy judges entered in cases and proceedings….” In Bullard v. Blue Hills Bank, 135 S. Ct. 1686 (2015), the Supreme Court addressed a question regarding the finality of bankruptcy orders under Section 158 and held that a bankruptcy court’s order denying confirmation of a debtor’s Chapter 13 plan is not a final order and thus cannot be immediately appealed. In Bullard, the Supreme Court analyzed what the relevant “proceeding” under Section 158 was in relation to the denial of a Chapter 13 plan. The Supreme Court determined that the relevant proceeding was the entire plan process, which only ended when a plan was confirmed or the case was dismissed. Little changes, however, when the lower court denies confirmation of a proposed plan, because the debtor could propose a new plan. It is only upon plan confirmation or case dismissal that parties’ rights and obligations are fixed and the status quo altered; therefore, the “proceeding” was the entire plan confirmation process and not the court’s ruling on each separate proposed plan.

The petitioner’s first argument is that “an order denying stay relief to litigate a claim in state court is an interlocutory order that is not subject to immediate appellate review.” The petitioner asserts that an order denying stay relief to litigate a claim in state court should be treated as part of the claims adjudication process because “the only practical effect [of such a motion’s denial] is that the litigation must proceed in the bankruptcy court, if it is to proceed at all.” (Emphasis in original).

The petitioner relies on three subarguments for its position that an order denying relief from the automatic stay is interlocutory. First, the petitioner argues that Bullard is the correct standard to apply. Specifically, the petitioner contends that the Sixth Circuit erred when it “adopted and applied a two-part, procedural test” because the issue “is not whether the particular order at issue was entered in a procedurally discrete action[,]” but “whether the order had a practical impact on the substantive bankruptcy process that the order implicates.” Under Bullard, the petitioner asserts that the stay relief denial order must make some separate, substantive determination so that the order alters the status quo or fixes parties’ rights and obligations.

The respondent agrees with the petitioner that Bullard is the correct standard to apply in determining whether the relevant “proceeding” is the stay relief motion on its own or what the petitioner asserts is the claims adjudication process, comprised of the stay relief motion and claim determination. The respondent contends that, under Bullard, an order denying relief from the automatic stay is a discrete proceeding in itself that “fixes the parties’ rights vis-à-vis the automatic stay and triggers significant consequences for the debtor, creditors, and the estate.” In particular, when stay relief is denied, the automatic stay is continued and creditors are limited to pursuing any action or claim against the debtor in the bankruptcy court—altering the status quo amongst the parties because the creditor “loses its choice of forum,” has to abide by different rules, and usually loses its right to a jury trial. Additionally, unlike the denial of plan confirmation in Bullard, the respondent argues that “an order denying stay relief is ‘procedurally complete…[with] no more rights and obligations at issue in the stay-relief proceeding[]’” compared to the back and forth negotiation nature of the plan confirmation process in Bullard.

The respondent further contends that the stay relief motion cannot be part of the claims adjudication process as argued by petitioner. The respondent argues that stay relief and claims adjudication are separate proceedings because they “involve entirely different requests for relief, legal standards, and applicable rules.” Moreover, the petitioner did not seek a ruling on its contract claim in connection with its stay relief motion, and “[d]iscrete proceedings are not merged simply because one follows the other.” The respondent reasons that Congress itself identified stay relief and claims adjudication as separate “proceedings” from which final orders can be appealed under Section 158(a)(1) because stay relief and claims adjudication are separately listed as “core proceedings.” Compare 28 U.S.C. § 157(b)(2)(B) (listing “allowance or disallowance of claims against the estate”) with id. § 157(b)(2)(G) (listing “motions to terminate, annul, or modify the automatic stay”). The petitioner’s counterargument, however, is that the list of core proceedings in Section 157(b)(2) refers to “motions to terminate, annul, or modify the automatic stay” in the plural, and, thus, this language acknowledges that “a larger process beyond any singular motion or individual disposition[]” is at play given that stay relief motions always “relate to and impact some other bankruptcy function.”

The petitioner’s second argument for why a stay relief denial order is interlocutory relies on the legislative history of Section 158 to argue that Congress did not intend an order denying relief from the stay—where all that is determined is the venue for the parties’ litigation—to be final orders. Specifically, the petitioner asserts that Congress modeled Section 158 after the general appellate statute, Section 1291 of Title 28 of the United States Code, and that Section 1291 would treat an order resolving where parties will litigate as an interlocutory, not final, order. The petitioner relies on Congress’s incorporation of Section 1291’s finality requirement into Section 158 and argues that, due to this construction, finality under Section 158 is properly informed by Section 1291. Moreover, the petitioner argues that “under the former Bankruptcy Act of 1898 (the predecessor to the current Bankruptcy Code), orders denying stay relief were treated as interlocutory[,]” and that nothing in Congress’s adoption of the current Bankruptcy Code in 1978, or amendments enacted since, supports that “Congress intended orders denying motions for stay relief that resolve where the parties will litigate a dispute to be treated as final and immediately appealable.”

With respect to petitioner’s argument on legislative history, the respondent counters that “general finality” from nonbankruptcy civil litigation should not be applied to bankruptcy appeals because of the unique nature of bankruptcy cases and proceedings. The respondent argues that “it is immaterial that ‘orders concerning transfer of venue, abstention, and remand’…are considered interlocutory in the ordinary civil context.” In contrast, respondent maintains that a final hearing and order on a stay relief motion is similar to a hearing on, and order issuing or denying, a permanent injunction—which Congress has expressly stated—and permanent injunctions are usually considered “final” for appeal purposes. In response to the petitioner’s argument regarding the history of the Bankruptcy Code, the respondent claims that it is unhelpful to look to the Bankruptcy Act of 1898 as it was repealed and replaced, and the Supreme Court has determined that it “will not assume that Congress intended to enact statutory language that it has earlier discarded in favor of other language.”

The petitioner’s last argument for why stay relief denial orders are interlocutory looks to analogous orders addressing the location of litigation, such as orders denying withdrawal of the reference, abstention, and remand, and argues that just as those orders are not final, neither should the stay relief denial order be final when the order’s practical effect is merely to determine where litigation will proceed. The respondent counters by arguing that the majority of circuit courts hold that orders denying stay relief are final orders and that even the nonmajority of circuit courts recognize that orders denying stay relief can be final depending on specific case circumstances.

The petitioner’s next argument is that “even if some orders denying stay relief could be immediately appealable, denial of a stay-relief motion premised on bad faith is not.” The petitioner argues that because a party may file motions based on a debtor’s bad faith at any time in the case, including based on actions that occur during the bankruptcy case, a stay relief motion premised on bad faith could be remade continually as the circumstances warrant. Specifically, the petitioner contends that until a good faith determination is made in conjunction with plan confirmation or case dismissal, the issue of a debtor’s good faith is not final; thus, “an order denying a motion premised on the debtor’s bad faith presented at an early stage of the case cannot finally resolve the issue and is thus not final.”

The respondent’s only counterargument directly as to bad faith is contained in a footnote where it contends that the finality of an order denying stay relief premised on bad faith cannot be likened to the finality of an order denying a motion to dismiss a case on the same grounds because denial of a motion to dismiss does not fix the rights and obligations of parties, where an order denying relief from the automatic stay does. Moreover, the respondent contends that, in connection with the petitioner’s stay relief motion, the bankruptcy court determined that the respondent’s bankruptcy petition was not filed in bad faith, and the petitioner failed to renew its bad faith argument in connection with its stay relief request or object to the respondent’s plan on the basis of bad faith. While not directly in response to the petitioner’s bad faith argument, the respondent also argues that, because the order denying relief from the automatic stay was not without prejudice, that order was intended to be final, thereby preventing the petitioner from remaking a stay relief motion due to the doctrines of preclusion and estoppel.

The petitioner’s final argument is that “the Sixth Circuit’s ruling violates the policy against piecemeal appeals and, if uncorrected, will improperly expand the types of proceedings subject to immediate appeal.” The petitioner contends that the jurisprudence regarding finality from Bullard is that finality is intended to avoid piecemeal appeals, but that the Sixth Circuit’s two-part test eliminates constraints on piecemeal appeals by making virtually any order on a contested matter a final order. The petitioner asserts that the rule against piecemeal appeals is particularly relevant for bankruptcy cases because, in addition to promoting judicial economy, such a rule is also believed to encourage settlement, which is vital in bankruptcy cases where parties’ resources are already scarce.

The respondent counters and argues that it is actually less judicially efficient to relitigate the stay relief issue after the final claim determination. Not only is there a financial and time cost to litigating the claim in the bankruptcy court and then appealing the initial stay relief denial in an attempt to relitigate the claim determination, the respondent argues that “[the petitioner’s] proposed rule would give losing creditors a second bite at the apple, and, worse still, could force reorganized debtors to resubmit to the process of administering a bankruptcy.” Specifically, the respondent contends that if the petitioner was successful in its appeal, the respondent may have to go back to the drawing board on its plan of reorganization when it has already sold property through its bankruptcy, negotiated with creditors, and confirmed a plan.

Practically, the respondent argues that parties in a bankruptcy rely on “a reasonable degree of certainty and finality…” and that, to treat a stay relief denial order as interlocutory would cause unnecessary doubt in the case, which could chill the participation of lenders, creditors, and potential buyers in various transactions, such as financing and assets sales. Additionally, from a practical standpoint, the respondent argues that the petitioner’s proposed appeal rule effectively “renders stay relief proceedings ‘virtually unreviewable.’” In this case, the respondent contends that the petitioner would have to overcome the following obstacles to accomplish its end goal of the appeal—to be able to litigate its contract claim against the respondent in state court—(1) the petitioner’s underlying state court suit was dismissed by the state court, which recognized that the suit was adjudicated as a core proceeding in the bankruptcy; (2) the petitioner’s contract claim is likely barred by res judicata given that the contract claim was litigated on the merits in the bankruptcy court and the respondent’s reorganization plan was subsequently confirmed; (3) the petitioner’s contract claim is barred by the permanent  injunction in place and effective through the respondent’s plan of reorganization; and (4) there is no automatic stay currently in place because the respondent is out of bankruptcy.

SIGNIFICANCE

This case is significant because it will provide needed clarity for parties concerning when the appeal period begins to run on a stay relief and possibly other contested matter orders. If the Court sides with the petitioner—essentially furthering the application of its decision in Bullard—then parties going forward may view more contested motions, particularly those involving stay relief, as merely part of an overall “proceeding” and thus not ripe for appeal. This could potentially create a cloud on the efficient administration of bankruptcy cases by leaving the door open for possible relitigation of matters thought to have been decided and upon which subsequent case resolution was premised. In contrast, if the Court rules for the respondent, then parties who have been denied stay relief may become more likely to file immediate appeals, which itself could slow down bankruptcy case resolution until such appeal has been fully adjudicated. Each of the foregoing outcomes are likely to have their own discrete positive and negative impacts on bankruptcy case administration.

Francis J. Lawall is a partner in the Philadelphia office of Pepper Hamilton and concentrates his practice on national bankruptcy matters and workouts, including the representation of major energy and health-care companies in bankruptcy proceedings and general litigation throughout the United States. He can be reached at 215.981.4481 or lawallf@pepperlaw.com. Marcy J. McLaughlin is an associate in the corporate restructuring and bankruptcy practice group of the firm, resident in the Wilmington office, and can be reached at 302.777.6535 or mclaughlinm@pepperlaw.com.

PREVIEW of United States Supreme Court Cases 47, no. 2 (November 4, 2019): 38–41. © 2019 American Bar Association

ATTORNEYS FOR THE PARTIES

  • For Petitioner Ritzen Group, Inc. (Shane Gibson Ramsey, 615.664.5355)
  • For Respondent Jackson Masonry, LLC (Griffin S. Dunham, 615.933.5851)

AMICUS BRIEFS

In Support of Respondent Jackson Masonry, LLC

  • National Association of Consumer Bankruptcy Attorneys (Craig Goldblatt, 202.663.6483)
  • United States (Noel J. Francisco, Solicitor General, 202.514.2217)