The following is a case update written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, analyzing a recent decision of interest:
The 9th Circuit Court of Appeals held that a bankruptcy court’s order denying a motion for relief from the automatic stay “without prejudice” conclusively resolved the requested relief and therefore was an appealable final order under 28 U.S.C. section 158(a). See In re Mayer (9th Cir. 2022) 2022 WL 679085.
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Sometime in the 1990’s, Robert Harrington and Stewart Mayer formed two entities, Nexum Development Corp. and Terrian, LLC. In September 2010, Mayer sued Harrington in a Massachusetts state court for breach of fiduciary duty and to dissolve Nexum. Harrington counterclaimed. In August 2011, Mayer’s sister, on behalf of the Mayer Family Trust, sued Terrian, Harrington, Mayer, and the manager of Terrian. Harrington counterclaimed against Mayer’s sister and Mayer. The court consolidated the various actions in October 2011, and scheduled trial for October 4, 2017.
On September 29, 2017, Mayer filed for bankruptcy under Chapter 7 of the Bankruptcy Code in the Southern District of California, resulting in a stay of the state court proceedings. Harrington filed an adversary action in the bankruptcy court seeking denial of Mayer’s discharge and for non-dischargeability of his debts to Harrington, under 11 U.S.C. sections 523(a) and 727(a).
In September 2018, Harrington filed a motion for relief from the automatic stay so he could proceed with the state court action. Mayer’s Chapter 7 trustee urged the court to grant the motion, as well as his own motion to approve two agreements with Harrington. The agreements gave Mayer’s estate an interest in proceeds Harrington could ultimately obtain in the state court litigation. Finding that it required additional information regarding fraudulent transfer claims, the bankruptcy court denied the trustee’s motion without prejudice and approved limited discovery in lieu of granting Harrington’s relief from stay motion. It continued the hearing on Harrington’s motion.
On June 16, 2020, the court approved the trustee’s agreements with Harrington, but denied the relief from stay motion “without prejudice.” Harrington filed a motion for leave to appeal, which the United States District Court denied on the grounds that the stay motion was denied without prejudice and Harrington failed to establish a right to an interlocutory appeal.
Harrington appealed to the Court of Appeals, arguing that denial of his relief from stay motion was indeed a final order that was immediately appealable.
The Court of Appeals reversed the district court’s denial of the motion for leave to appeal, holding that under the circumstances of this action, the United States Supreme Court’s ruling in Ritzen Group, Inc. v. Jackson Masonry, LLC (2020) 589 U.S. ___, 140 S. Ct. 582, and prior Ninth Circuit precedence, the bankruptcy court’s order denying relief from stay conclusively resolved the requested relief sought by Harrington and was therefore a final and appealable order under Section 158(a).
The Court initially explained that contrary to “ordinary civil litigation” the rules governing a determination of finality in bankruptcy cases are “somewhat relaxed.” This is 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.’” Ritzen, 140 S. Ct. at 586 . . . . Thus, “[o]rders in bankruptcy cases qualify as ‘final’ when they definitively dispose of discrete disputes within the overarching bankruptcy case.”
While the United States Supreme Court recently held in Ritzen that a stay motion is immediately appealable, “when it ‘conclusively resolve[s] the movant’s entitlement to the requested relief,’” it did not decide whether finality attaches to denial of a stay motion when made “‘without prejudice’ because further developments might change the stay calculus.”
In the present case, the Court concluded that the trial court “unreservedly denied” the stay motion, leaving no doubt that, unless a future stay motion were filed for a purpose other than Harrington’s continued state court litigation, such motion would be denied. The trial court therefore conclusively resolved the discrete issue raised by Harrington’s stay motion, namely whether he would be allowed to proceed with the state court action. Indeed, the ruling that Harrington’s non-dischargeability and discharge claims would be resolved in the bankruptcy court, rather than in state court, “‘resolve[d] and seriously affect[ed] substantive rights and … finally determine[d] the discrete issue to which it [was] addressed.’”
Interestingly, while the Court reversed the district court’s ruling that the order denying the relief from stay motion was not appealable, in a separate and unpublished decision the Court held that the bankruptcy court did not abuse its discretion when it denied Harrington’s motion for relief from stay.
While the Supreme Court in Ritzen held that an order denying a motion for relief from stay left nothing more for the bankruptcy court to do in that proceeding, and therefore amounted to a final order under Section 158(a), it added a footnote stating,
We do not decide whether finality would attach to an order denying stay relief if the bankruptcy court enters it “without prejudice” because further developments might change the stay calculus. Nothing in the record before us suggests that this is such an order.
Ritzen, at fn. 4.
The Court in the present case attempted to clarify whether denial of a motion for relief from stay made “without prejudice” is indeed a final order requiring an immediate appeal. Finding that the bankruptcy court’s ruling “conclusively” resolved the issue raised in the relief from stay motion because of statements it made at oral argument, the appellate court gave little guidance to practitioners in future cases as to when denial of a motion for relief from stay “without prejudice” could be deemed non-dispositive as to make the ruling non-final.
Without a clear bright-line test, practitioners are left to guess when such rulings are final and must be appealed, as opposed to non-final, requiring no immediate appeals. To protect their clients’ interests, attorneys should assume that any denial of a motion for relief from stay is a final order unless the bankruptcy judge specifically reserves its right to change the ruling in the future. Even then, though, it is possible that, based on the discussions in Ritzen and the present case, future courts would rule that all denials of motions for relief from stay are indeed final, regardless of whether they are issued “without prejudice.”
These materials were written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, located in Los Angeles, California, who is a member of the ad hoc group and the representative from the Business Law Section (BLS) to the CLA’s Board of Representatives. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.