U.S. Bankruptcy Court.

Understanding bankruptcy court jurisdiction can be daunting even for the most seasoned practitioner. The appellate process alone generally requires bankruptcy court decisions to first be reviewed by a district court and only then by a court of appeals. Even the question of when a bankruptcy court order is ripe for appeal can be complex.  The good news is that the United States Court of Appeals for the Sixth Circuit in Ritzen Group v. Jackson Masonry (In re Jackson Masonry), 2018 U.S. App. LEXIS 29009 (6th Cir. 2018), recently addressed the vagueness of current tests for determining the finality of a bankruptcy court order and provided some clarity as to when the appeal period begins to run.

Pre-petition, Ritzen Group, Inc. and Jackson Masonry entered into a machinery purchase agreement. The sale, however, never closed as both Ritzen and Jackson Masonry each claimed that the other was in breach. Ritzen sued in state court, but a week before the trial date, Jackson Masonry commenced Chapter 11, thus triggering the automatic stay. Ritzen filed a stay relief motion to allow the state court action to proceed. Although the bankruptcy court denied the motion, Ritzen did not immediately appeal.

Ritzen, however did file a claim against Jackson Masonry in its bankruptcy case, which the bankruptcy court denied finding that Ritzen breached the contract. Ritzen then appealed both the denial of stay relief and the breach of contract claim determination. The district court affirmed the bankruptcy court's breach of contract determination on the merits and also found that Ritzen's appeal with respect to the stay denial was untimely.

The U.S. Court of Appeals for the Sixth Circuit began its evaluation of Ritzen's appeal of the stay relief denial by reviewing the text of the bankruptcy appeals statue, which provides: “The district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees [and certain interlocutory orders] of bankruptcy judges entered in cases and proceedings …”  28 U.S.C. Section 158(a). While, in ordinary litigation, parties can only appeal final decisions when a court has disposed of every claim for relief in the case, the bankruptcy appeals statute sets forth a different standard given that a “bankruptcy case is an aggregation of individual disputes, many of which could be entire cases on their own.” For instance, Ritzen's claim against Jackson Masonry was a completely discrete dispute litigated within Jackson Masonry's overall bankruptcy case, and as such, the claim determination was immediately appealable despite the ongoing bankruptcy case.

The Sixth Circuit noted that many courts have loosely interpreted “final order.” Some apply “a series of vague tests that are impossible to apply consistently,” while other courts do not articulate any test or merely review the finality of the order at issue on a case-by-case basis with no guiding principles for that determination. Without an articulated test for finality, parties are at risk of appealing too early or too late, and as the Sixth Circuit found, “appellate deadlines cannot serve their purpose when their trigger is unclear.”

The bankruptcy appeals statute has two requirements for when orders may be appealed: there must be a “final” judgment, order or decree [or qualifying interlocutory order; and such order must be in either a “case” or “proceeding.” With the bankruptcy appeals statute, Congress specifically extended its scope to include not just final judgments in cases, but also final orders and decrees in both cases and proceedings. More simply stated, the Sixth Circuit determined that the bankruptcy appeals statute provides that bankruptcy court orders are immediately appealable if they are entered in a proceeding; and final.

The first step in the finality analysis is to determine the appropriate “judicial unit,” i.e., what is the “proceeding.” The Sixth Circuit found that a proceeding is when a court follows a formal procedure adjudicating a moving party's claim for relief and can be a distinct dispute within the broader bankruptcy case. The Sixth Circuit also cited to an older version of “Collier on Bankruptcy” (more contemporaneous to the enactment of the bankruptcy appeals statute) to support its interpretation that a proceeding has procedural formality and discreteness and may occur upon a contested motion or a full adversary proceeding. Thus, the Sixth Circuit held that a “proceeding” under the bankruptcy appeals statue is a discrete dispute within a bankruptcy case, which is resolved through formal procedural steps.

The second step in determining whether an order is ripe for appeal is whether the bankruptcy court order is “final.” The Sixth Circuit found that courts should first determine whether the order affects the status quo and fixes the parties' rights and obligations. Additionally, the Sixth Circuit court provided that courts should review whether the order at issue completely resolves the proceeding's substantive litigation. In summary, the Sixth Circuit held that “a bankruptcy court order is final if it is both procedurally complete and determinative of substantive rights.”

In applying its test for when a bankruptcy court order becomes final and the appeal clock starts to run, the Sixth Circuit affirmed the district court's decision that Ritzen's appeal of the denial of stay relief was untimely.  First, the Sixth Circuit found that a motion for stay relief and its determination was a “proceeding” that began upon Ritzen's motion, proceeded through notice to Jackson Masonry and a hearing, and concluded with the bankruptcy court's determination of whether the legal standard for relief from the automatic stay was satisfied.  Second, the order denying stay relief was a final order because it was procedurally complete (the stay-relief proceeding was complete upon entry of the order) and determinative of substantive rights (after the denial, Ritzen was prohibited from pursuing its pre-bankruptcy claim against the debtor outside of the bankruptcy case). Thus, the denial of stay relief was a final order, and its entry immediately triggered the appeal period, such that Ritzen's appeal was untimely. To compound Ritzen's disappointment, the appellate court also affirmed the bankruptcy court's denial of the breach of contract claim.

The Ritzen decision is helpful in that it provides some clarity as to when a bankruptcy court order may be final and therefore, immediately appealable. Many practitioners may be surprised that this particular stay relief order was immediately appealable as opposed to not being ripe until the underlying claim was fully resolved. This decision may counsel conservatism such that if there is any question that a bankruptcy court order is immediately appealable, file the appeal or alternatively seek relief to file an interlocutory appeal.

Francis J. Lawall, a partner in the Philadelphia office of Pepper Hamilton, 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.

Marcy J. McLaughlin is an associate in the corporate restructuring and bankruptcy practice group in the firm's Wilmington office.