Supreme Court Resolves the Appealability of Orders Denying Relief from the Automatic Stay
When a debtor files for bankruptcy, the Bankruptcy Code provides for an automatic stay of almost all proceedings to recover property from the debtor. See 11 U.S.C. § 362(a). A party in interest can seek an order exempting it from the automatic stay for cause. 11 U.S.C. § 362(d). A creditor that fails to obtain relief from the stay is limited to the claim-adjudication process in bankruptcy court. What happens if the bankruptcy court rules against a creditor seeking relief from the automatic stay, and the creditor seeks to appeal? Can the creditor appeal immediately or must it wait until its claim is fully adjudicated in bankruptcy court? The question turns on the interpretation of the federal statute governing bankruptcy appeals, which provides that appeals may be taken from “final judgments, orders and decrees . . . entered in cases and proceedings.” 28 U.S.C. § 158(a) (emphasis added). An automatic stay does not finally resolve a bankruptcy “case,” but does it finally resolve a bankruptcy “proceeding”? On January 14, the Supreme Court resolved that question affirmatively in an opinion by Justice Ginsburg, ruling that a creditor who is denied relief from the automatic stay may appeal immediately.
Ritzen Group, Inc. (“Ritzen”) brought a breach of contract suit in Tennessee state court against Jackson Masonry, LLC (“Jackson”). Shortly before trial, Jackson filed for bankruptcy, and the state-court proceeding was stayed under the automatic stay. Ritzen sought an order from the bankruptcy court permitting the trial to go forward in state court, arguing that Jackson had filed for bankruptcy in bad faith. The bankruptcy court denied the motion and Ritzen did not appeal. Ritzen filed a proof of claim against the bankruptcy estate, which Jackson contested, and after an adversary proceeding, the bankruptcy court ruled against Ritzen on the merits. After the bankruptcy court confirmed a plan, Ritzen filed appeals from the order denying relief from the automatic stay and from the order ruling against it on the merits of its breach-of-contract claim. As to Ritzen’s appeal from the automatic-stay order, the district court ruled that it was untimely, because the order had been immediately appealable and the time for filing an appeal was 14 days from when the order was entered. The Sixth Circuit Court of Appeals affirmed. Ritzen sought and obtained Supreme Court review.
The Supreme Court began by noting the difference between appealability in bankruptcy and appealability in general federal civil litigation. In general federal civil litigation, a party may normally appeal only from an order that resolves an entire case. A bankruptcy case, however, can involve many individual controversies, which absent bankruptcy might be resolved in separate lawsuits. The statute governing bankruptcy appeals thus permits appeals from final orders entered in bankruptcy “proceedings” as well as bankruptcy “cases,” which permits an appeal from a bankruptcy order that finally resolves a discrete dispute within a bankruptcy case. The Court thus asked whether an order denying relief from the automatic stay is such an order.
The Supreme Court concluded that it was. The Court reasoned that stay-relief adjudication is a distinct procedural unit, involving notice and a hearing and a determination of a creditor’s eligibility for relief based on a federal statutory standard. Claims adjudication is a separate process typically governed by state substantive law. While stating it was not determinative, the Court also noted that a neighboring statutory provision lists motions for stay relief as a separate bankruptcy “core proceeding” from the allowance or disallowance of claims against the estate. See 28 U.S.C. § 157(b)(2).
Ritzen argued that an order denying stay relief was not a final order resolving a proceeding because it simply determined the forum in which a creditor could bring its claim against the estate. The Court gave several reasons for rejecting this argument. The Court noted that a decision on the automatic stay can have substantive consequences beyond the forum, such as delaying collection of a debt or causing collateral to decline in value. Further, orders denying access to a forum sometimes qualify as final appealable orders, such as an order dismissing an action for want of personal jurisdiction or improper venue. Also, because the automatic stay operates as a bar on even nonjudicial efforts to collect or control the debtor’s assets, motions for stay relief may not involve claims that would be brought in another judicial proceeding but for bankruptcy.
The Court also rejected Ritzen’s argument that orders denying relief from the automatic stay being appealable will disrupt the bankruptcy process. Instead, the Court explained, holding otherwise would cause delays and inefficiencies. Absent immediate appealability, a creditor that lost on the stay-relief issue would have to litigate its claim in bankruptcy court and then, if it successfully appealed the stay-relief order, re-do the litigation in its original forum.
At the end of the decision, the Court added a footnote noting that it was not deciding whether an order denying stay relief would be “final” (and therefore appealable) if the order did not preclude later applications for the same relief because further developments might change the stay calculus. (This issue was raised when the case was argued in November.)