Barry M. Klayman and Mark E. Felger

In Carickhoff, Chapter 7 Trustee v. Goodwin (In re Decade S.A.C.), Adv. Proc. No. 19-50095 (CSS) (Del. Bankr. March 19, 2020), U.S. Chief Bankruptcy Judge Christopher Sontchi of the District of Delaware refused to grant a motion to stay bankruptcy proceedings pending an appeal to the district court on the grounds that the appeal had divested the bankruptcy court of jurisdiction. In so doing, he adopted the divestment doctrine, whereby the filing of a notice of appeal divests the court of origin of its control over those aspects of the case involved in the appeal, but does not divest the origin court of jurisdiction to decide issues and proceedings different from and collateral to those involved in the appeal.

In Carickhoff, the Chapter 7 trustee filed a complaint to determine the property of the debtors' estate against the defendants in connection with a dispute concerning a share purchase agreement. The multicount complaint sought a declaratory judgment regarding the enforceability of the agreement between the debtors and the defendants. In response to the complaint, the defendants asserted four counterclaims.

The trustee filed a motion for summary judgment on count one of the complaint and seeking dismissal of all of the counterclaims. After briefing and argument, Sontchi held that the trustee was entitled to summary judgment on three of the defendants' four counterclaims, granted in part the trustee's motion for summary judgment on the fourth counterclaim, and denied the trustee's motion for summary judgment on count one of the trustee's complaint. In the order deciding the motion, Sontchi directed the parties to meet and confer on the issues for trial and schedule a status conference with the court within thirty days.

The defendants filed a notice of appeal to the district court, and subsequently in the bankruptcy court filed a motion for stay of the bankruptcy proceedings pending the appeal. Sontchi denied the motion for stay on the grounds that the bankruptcy court was divested of jurisdiction over the matter by the preceding filing of the notice of appeal.

Sontchi noted that the courts in the District of Delaware had addressed the issue of whether a district court is divested of jurisdiction to enter a stay pending appeal after a notice of appeal has been filed, but they had not directly addressed the jurisdiction of a bankruptcy court on the same question. He found that the District of Delaware courts were split on the issue of post-appeal court jurisdiction. Prior to 2004, the district courts in Delaware had adopted the minority view, holding that the district court does not have jurisdiction to consider a motion to stay pending appeal after a movant has filed an appeal, but after 2008, some Delaware district courts held the opposite view. Sontchi found that there was case law elsewhere that suggested a trial court retains jurisdiction to enter a stay once an appeal is filed, and case law to the contrary. The U.S. Court of Appeals for the Third Circuit has not yet ruled on the issue.

In view of the uncertainty surrounding the question of a bankruptcy court's jurisdiction to issue a stay pending appeal after a notice of appeal has been filed, Sontchi chose to adopt the view that the bankruptcy court is divested of jurisdiction to issue a stay pending appeal. The so-called divestment doctrine holds that the filing of a notice of appeal confers jurisdiction on the appellate court and divests the court of origin of its control over those aspects of the case involved in the appeal. As long as the matters in front of the court of origin would not alter the appealed order, the lower court is not divested of jurisdiction and can decide issues and proceedings different from and collateral to those involved in the appeal.

Sontchi observed that the purpose of the divestment doctrine was to prevent interference from the lower court while the appeal is pending and to conserve judicial resources by having only one court at a time review issues. Granting a motion to stay pending appeal would be an action too closely intertwined with the issues on appeal before the district court, which would lead to confusion and less efficient case administration.

Sontchi did not address the counter argument, that ordering a stay pending appeal actually stays the issues and proceedings different from and collateral to those involved in the appeal, and thus does not interfere with those aspects of the case involved in the appeal. By definition, if the bankruptcy court can proceed with the remaining aspects of the case, it ought to have the power to decide whether or not those aspects should be stayed pending the appeal of other aspects of the case. Rather than lead to confusion and less efficient case administration, permitting the bankruptcy court the power to decide whether to proceed with the case allows the court to determine whether proceeding with the specific issues before it would be more or less confusing or more or less efficient given the pending appeal.

Sontchi offered a secondary reason for refraining from deciding the motion for a stay in the case before him. In his opinion, the appeal was improper because it was interlocutory. Bankruptcy orders granting summary judgment as to some but not all of the claims is generally regarded as interlocutory and not appealable as of right, but only with leave of the appellate court. In the case before him, not all matters were resolved. Sontchi concluded that this was an additional reason not to confuse the situation further by entering a stay pending appeal.

It will not always be the case that the district court is in a better position to decide whether the issues remaining in the bankruptcy court should be stayed or proceed, but that is the consequence of adopting the divestment doctrine in this context. It is debatable whether having the power to stay the remaining issues in the bankruptcy court threatens to undermine the district court's consideration of the issues on appeal. However, adoption of the divestment doctrine in this context has the benefit of clarity and doctrinal purity. It leaves the question of whether proceeding with the issues in the bankruptcy court will interfere with the issues on appeal to the district court to decide, and not the bankruptcy court. It is conceivable that upon a subsequent motion for a stay in the district court, the district court will decide to defer to the bankruptcy court whether to stay the remaining issues in that court pending the outcome of the appeal.

Barry M. Klayman is a member in the commercial litigation group and the bankruptcy, insolvency and restructuring practice group at Cozen O'Connor. He regularly appears in Chancery Court.

Mark E. Felger is co-chair of the bankruptcy, insolvency and restructuring practice group at the firm.