Thursday, May 07, 2015

Supreme Court Says Denial of Confirmation Not Automatically Appealable

In a surprisingly casual opinion, the Supreme Court, led by Chief Justice Roberts, has ruled that denial of confirmation of a chapter 13 plan does not give rise to a final order which can be appealed as a matter of right.    Bullard v. Blue Hills Bank, No. 14-116 (5/4/15).     The opinion can be found here.    The Chief's opinion compares the appellate process to the children's game of chutes and ladders, refers to insignificant matters as "small beer issues" and even includes a sentence fragment.   Notwithstanding the relaxed approach to writing, the Court offers clear guidance.   When the court denies a plan with leave to appeal, the debtor may refuse to amend and appeal the ultimate dismissal or may seek to follow the interlocutory appeal route, a process which must be renewed at each stage of the appeal.    However, the debtor may not appeal the denial as a matter of right.   

What Happened

Bullard owned a multifamily property which was worth much less than was owed upon it.   Because the property was apparently not the debtor's residence (or perhaps only part of the property constituted the debtor's residence), the debtor was able to propose a plan which modified the debt.   Chapter 13 allows a debtor to cure and maintain payments on a long term debt or to pay a secured debt over the life of the plan.   Bullard creatively sought to continue making the regular monthly payments on the secured portion of the debt, while paying disposable income with regard to the unsecured portion.    This would give Bullard the ability to complete payments on the secured debt many years after the plan was completed while paying only 5% on unsecured claims.    According to the Chief Justice, it was "no surprise" that the bank objected.   The Bankruptcy Court sustained the objection even though there was contrary authority within the circuit.

 The debtor appealed to the Bankruptcy Appellate Panel which granted leave for an interlocutory appeal.    The BAP agreed with the Bankruptcy Court and affirmed denial of the plan.   The debtor then appealed to the First Circuit which did not permit an interlocutory appeal and dismissed the appeal.    Both the debtor and the bank agreed that the Supreme Court should grant cert to determine whether denial of a plan constituted a final order appealable as a matter of right.   The Solicitor General sided with the debtor and argued that denial of a plan should be appealable as a matter of right.   In an opinion both forceful and whimsical by turns, the Court rejected the arguments of the debtor and the Solicitor General.

The Court's Ruling

The Supreme Court ruled just thirty-three days after oral argument.    The Court noted that determining finality for purposes of appeal was "different in bankruptcy" than from a typical civil case.    
A bankruptcy case involves “an aggregation of individual controversies,” many of which would exist as stand-alone lawsuits but for the bankrupt status of the debtor. (citation omitted). Accordingly, “Congress has long provided that orders in bankruptcy cases may be immediately appealed if they finally dispose of discrete disputes within the larger case.”
 Slip Opinion, p. 4.   So when does a ruling finally dispose of a discrete dispute within the larger case?    The Court agreed with the Bank that confirming a plan would meet this standard but denying confirmation would not.
The relevant proceeding is the process of attempting to arrive at an approved plan that would allow the bankruptcy to move forward. This is so, first and foremost, because only plan confirmation—or case dismissal—alters the status quo and fixes the rights and obligations of the parties. When the bankruptcy court confirms a plan, its terms become binding on debtor and creditor alike. (citation omitted). Confirmation has preclusive effect, foreclosing relitigation of “any issue actually litigated by the parties and any issue necessarily determined by the confirmation order.” (citations omitted). . . .
When confirmation is denied and the case is dismissed as a result, the consequences are similarly significant.Dismissal of course dooms the possibility of a discharge and the other benefits available to a debtor under Chapter 13. Dismissal lifts the automatic stay entered at the start of bankruptcy, exposing the debtor to creditors’ legal actions and collection efforts. §362(c)(2). And it can limit the availability of an automatic stay in a subsequent bankruptcy case. §362(c)(3).

Denial of confirmation with leave to amend, by contrast,changes little. The automatic stay persists. The parties’ rights and obligations remain unsettled. The trustee continues to collect funds from the debtor in anticipation of a different plan’s eventual confirmation. The possibility of discharge lives on. “Final” does not describe this state of affairs. An order denying confirmation does rule out the specific arrangement of relief embodied in a particular plan. But that alone does not make the denial final any more than, say, a car buyer’s declining to pay the sticker price is viewed as a “final” purchasing decision by either the buyer or seller. “It ain’t over till it’s over.”
 Slip Op., pp. 5-6.  

 The language quoted above captures the essence of the opinion.   However, the Court went on to offer several practical reasons for its ruling.
  • Appeals take a long time.   "As Bullard's case shows, each climb up the appellate ladder and slide down the chute can take a year."    A more narrow construction on finality avoid delays and inefficiencies.
  • While debtors probably would not appeal over "small beer issues," the prospect of an appeal could be used for tactical reasons in negotiating with creditors.   Besides Chapter 11 lawyers might have the money to spend on appealing insignificant issues.
  • The Court also stated that lack of a guaranteed appeal would "encourage the debtor to work with creditors and the trustee to develop a confirmable plan as promptly as possible.
 The Court took the time to reject several arguments from the debtor and the Solicitor General.   The SG argued that any order which resolved a contested matter should be considered final for purposes of appeal.    In a firm putdown, the Court stated:
That version of the argument has the virtue of resting on a general principle—but the vice of being implausible. As a leading treatise notes, the list of contested matters is “endless” and covers all sorts of minor disagreements. (citation omitted). The concept of finality cannot stretch to cover, for example, an order resolving a disputed request for an extension of time.
 Slip Op., pp. 8-9.     The Court also suggested that arguing that all orders resolving contested matters should be appealable begged the question.
At other points, the Solicitor General appears to argue that because one possible resolution of this particular contested matter (confirmation) is final, the other (denial) must be as well. But this argument begs the question. It simply assumes that confirmation is appealable because it resolves a contested matter, and that therefore anything else that resolves the contested matter must also be appealable.  But one can just as easily contend that confirmation is appealable because it resolves the entire plan consideration process, and that therefore the entire process is the “proceeding.” A decision that does not resolve the entire plan consideration process—denial—is therefore not appealable.
Slip Op., p. 9.  

The Court was more sympathetic to the debtor's argument that denying the right to appeal would leave the debtor with no effective means of obtaining appellate review. The debtor would be given the Hobson's Choice to either refuse to amend and appeal the dismissal order, which would result in loss of the automatic stay and probably the debtor's property, or to move forward with a plan the debtor did not want.    In a terse statement, the Chief commented "All good points" before noting that:
our litigation system has long accepted that certain burdensome rulings will be “only  imperfectly reparable” by the appellate process. (citation omitted). This prospect is made tolerable in part by our confidence that bankruptcy courts, like trial courts in ordinary litigation, rule correctly most of the time. And even when they slip, many of their errors—wrongly concluding, say, that a debtor should pay unsecured creditors $400 a month rather than $300—will not be of a sort that justifies the costs entailed by a system of universal immediate
 Slip Op., pp. 10-11.   Perhaps acknowledging that "life is unfair" was a less than satisfactory answer, the Court went on to note that important issues could be appealed through the interlocutory appeal process.   Indeed, in this case, the BAP allowed an interlocutory appeal although the Court of Appeals did not.  
While discretionary review mechanisms such as these “do not provide relief in every case, they serve as useful safety valves for promptly correcting serious errors” and addressing important legal questions.
 Slip Op., pp. 11-12.
What Does It Mean?

This short opinion contains several layers of meaning.    The most basic lesson is that orders denying relief which do not change the status quo cannot be appealed as a matter of right.   It does not matter whether it is an order denying confirmation of a plan, an order refusing to lift the automatic stay or an order declining to dismiss a case.    Any order which leaves the parties free to return to the field of battle another day is not subject to an automatic appeal.   In most cases, the only option will be to request an interlocutory appeal, a process which requires the aggrieved party to be persuasive on the front end of the appeal process.   The option of refusing to propose another plan and allowing the case to be dismissed probably will only apply in the plan confirmation process.   For example, if the court refuses to lift the automatic stay, the creditor cannot create a final order through inaction.  Instead, the debtor or trustee will be allowed to retain the property until some future action changes the status quo.

On a more philosophical note, the opinion shows that the Supreme Court trusts Bankruptcy Judges to make good decisions and does not want the higher courts to be troubled with appeals of many minor matters.    This vote of confidence could bode well for Bankruptcy Courts in the continuing tension between the boundaries of Article I and Article III authority.

There are also two points applicable to appellate argument to be noted here.   When in doubt, cite Collier on Bankruptcy.   This opinion relied on the Collier treatise three different times in a twelve page opinion.   This could lead to a surge in bankruptcy lawyers adding Collier's to their legal research plans.    Finally, just because the Chief Justice used a sentence fragment (which would have meant an automatic F in my high school English class) and used such mixed metaphors as chutes and ladders and small beer, does not mean that practitioners should.   While a well-chosen metaphor or an intentional grammatical error could add force to a brief, a poorly chosen one or too many discordant examples could prejudice the court.   The Chief Justice has life tenure and no one above him reviewing his decisions.   He can engage in written flights of fancy such as those observed here without any negative consequences.   Practitioners cannot.  

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