28 Jan California Lawyers’ Association – Cases of Interest
South Bay Law Firm is proud to profile select “Cases of Interest,” prepared by members and colleagues of the Califoria Lawyers Association Business Law Section’s Insolvency Law Committee, and posted here by kind permission of the California Lawyers Association:
In Ritzen Group, Inc. v. Jackson Masonry, LLC, 589 U.S. ___, No. 18-938 (Jan. 14, 2020), the U.S. Supreme Court unanimously held that an order unreservedly granting or denying a motion for relief from the automatic stay is a final, appealable order. However, at least as to orders denying stay-relief motions, a footnote at the end of the opinion undermines the Court’s ruling. To read the full decision, click here.
Ritzen Group, Inc. (“Ritzen”), sued Jackson Masonry, LLC (the “Debtor”), for breach of a land sale contract. A few days before trial, the Debtor filed for chapter 11.
Ritzen filed a motion for relief from stay, seeking to proceed to trial in the state court. Ritzen argued that (a) granting relief from stay would promote judicial economy, and (b) the Debtor’s bankruptcy case was filed in bad faith. The bankruptcy court denied the motion. Ritzen did not, at that point, appeal.
A lower court decision reflects that the Debtor objected to Ritzen’s alleged claim against the Debtor’s estate, and that Ritzen and the Debtor filed separate adversary complaints to resolve their alleged claims against each other. See Ritzen Group, Inc. v. Jackson Masonry, LLC, Nos. 3:17-cv-00806, 3:17-cv-00807, 2018 WL 558837 (M.D. Tenn. Jan. 25, 2018). These claim-adjudication proceedings were consolidated and, after a trial, the bankruptcy court determined that Ritzen (not the Debtor) had breached the contract and that Ritzen was not entitled to recover on its breach of contract claim. Id. at *3-4. The bankruptcy court entered a judgment in favor of the Debtor against Ritzen. Id. at *4.
At that point, Ritzen filed two notices of appeal. First, Ritzen appealed the bankruptcy court’s order denying its stay-relief motion. Second, it appealed the bankruptcy court’s judgment in the claim-adjudication proceedings.
The district court dismissed the first appeal because Ritzen had failed to file its notice of appeal within 14 days after the order was entered. See Fed. R. Bankr. P. 8002(a)(1). The district court also affirmed, on the merits, the bankruptcy court’s judgment in the claim-adjudication proceedings. The Sixth Circuit affirmed both aspects of the district court’s decision. Ritzen Group, Inc. v. Jackson Masonry, LLC (In re Jackson Masonry), 906 F.3d 494 (6th Cir. 2018).
Ritzen petitioned the Supreme Court for a writ of certiorari, asking the Court to determine whether an order denying a motion for relief from stay is a final order under 28 U.S.C. § 158(a)(1). Holding that such an order is a final, immediately appealable order, the Supreme Court affirmed.
SUPREME COURT’S REASONING
District courts have jurisdiction to hear appeals from final judgments, orders and decrees entered by bankruptcy judges in bankruptcy cases and proceedings. 28 U.S.C. § 158(a). The Court noted that, in civil litigation generally, a “final decision” is one that resolves the entire case. However, “[t]he ordinary understanding of ‘final decision’ is not attuned to the distinctive character of bankruptcy litigation.” Thus, as the Court previously held in Bullard v. Blue Hills Bank, 575 U.S. 496 (2015), a bankruptcy court’s order qualifies as a “final” (and thus appealable) order when it definitely disposes of a discrete dispute within the overarching bankruptcy case. Bullard, 575 U.S. at 501.
Ritzen’s main argument was that a stay-relief motion is simply the first step in the process of adjudicating a creditor’s claim against the estate. According to Ritzen, an order denying stay relief simply decides the forum in which the creditor’s claim will be determined, and therefore should be treated as a preliminary step in the claim-adjudication process. The Court rejected this argument.
According to the Court, a stay-relief proceeding occurs before and apart from proceedings on the merits of the creditor’s claim. First, the stay-relief motion initiates a “discrete procedural sequence.” Second, resolution of the stay-relief motion turns on a statutory standard (i.e., “cause” or the presence of specified conditions set forth in Section 362(d)), whereas a claim-adjudication proceeding typically is governed by state substantive law. Although not determinative, the Court also noted that Section 157(b)(2) of Title 28 lists stay-relief proceedings separate from claim-adjudication proceedings. See 28 U.S.C. § 157(b)(2)(B), (G). Similarly, Section 158(a) of Title 28 provides for appeals from bankruptcy “cases” and bankruptcy “proceedings.”
The Court also made other observations supporting its determination of finality. Among other things, resolution of a stay-relief proceeding can have large practical consequences in a bankruptcy case; hence, it is important to fix those consequences sooner rather than later. Also, in other contexts, such as venue motions, orders denying a plaintiff the opportunity to seek relief in its preferred forum often qualify as final and immediately appealable. Further, many stay-relief motions do not actually involve claims that can be pursued in another forum (e.g., a motion seeking authority to repossess or liquidate collateral); such motions do not concern the forum in which a claim will be adjudicated, and thus are not part of any process of adjudicating the creditor’s claim against the estate.
Ritzen also presented a couple of alternative arguments, both of which were rejected by the Court.
First, Ritzen argued that the order denying its stay-relief motion should not be deemed final because the bankruptcy court’s decision turned on a substantive issue that could also have been raised later in the proceeding—particularly, that the Debtor filed its case in bad faith. The Court rejected this argument because the preclusive effect of the stay-relief order had no bearing on whether the order was final.
Second, Ritzen argued that the Court’s ruling will encourage piecemeal appeals and unduly disrupt the efficiency of the bankruptcy process. However, the Court countered that immediate appeals of orders denying stay relief, if successful, will further judicial efficiency by allowing creditors to establish their rights more expeditiously. Similarly, postponing such appeals could force the bankruptcy court to unravel later decisions rendered in reliance on the stay-relief order.
Applying Bullard, the Court held that “the adjudication of a motion for relief from the automatic stay forms a discrete procedural unit within the embracive bankruptcy case. That unit yields a final, appealable order when the bankruptcy court unreservedly grants or denies relief.” Ritzen, slip op. at 2 (emphasis added).
The word “unreservedly” is important, and the caveat is highlighted by footnote 4 anchored to the opinion’s conclusion:
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, slip op. at 12 n.4.
In its underlying decision, the Sixth Circuit ruled that (1) the stay-relief order was a final order and (2) the bankruptcy court did not err when it ruled in favor of the Debtor in the claim-adjudication proceedings. See Ritzen, 906 F.3d at 505-06. When Ritzen filed its petition for certiorari, the question presented related only to finality of the stay-relief order.
It is not clear what Ritzen expected to accomplish by taking this narrow issue to the Supreme Court. Apparently, Ritzen thought that if the Court ruled in its favor it would be able to return to square one, ignore the bankruptcy court’s separate judgment in the claim-adjudication proceedings, and relitigate its contract claim against the Debtor in the state court. See Ritzen, slip op. at 11. However, if the Supreme Court ruled in Ritzen’s favor, Ritzen first would need to return to the district court to litigate the merits of the bankruptcy court’s order denying the stay-relief motion. Even if the district court reversed and instructed the bankruptcy court to grant the stay-relief motion, that would not vacate the bankruptcy court’s judgment rejecting Ritzen’s breach-of-contract claims on the merits. Thus, even if Ritzen could get back before the state court, res judicata likely would preclude relitigation of Ritzen’s claims.
Overall, the Court’s decision is not particularly remarkable. However, footnote 4 may cause some problems. Stay-relief orders rarely say whether they are “with prejudice” or “without prejudice,” but it is generally accepted (at least in the Central District of California) that creditors may file new stay-relief motions if warranted by further developments (e.g., collateral has declined in value, prospect of reorganization has declined, insurance coverage has been lost, etc.). Thus, as noted by one commentator, Ritzen can be used against creditors. “Denial of a motion without prejudice could . . . cut off the [creditor’s] ability to appeal, exerting leverage in favor of the debtor and persuading the creditor to settle.” Bill Rochelle, Supreme Court Rules that “Unreservedly” Denying a Lift-Stay Motion is Appealable, ABI Rochelle’s Daily Wire, Jan. 14, 2020.
What can a creditor do to avoid this predicament? A creditor inclined to appeal the denial of a stay-relief motion might need to make a choice. Option 1: Appeal the order, take the position that the order is interlocutory (because the creditor can re-seek relief based on future developments), and seek leave to appeal to the district court or bankruptcy appellate panel. Option 2: Ask the bankruptcy court to expressly state in the order that it is with prejudice (thus eliminating the creditor’s ability to re-seek relief in the future) and then appeal as a matter of right. Neither option is particularly attractive.
These materials were written by John N. Tedford, IV, of Danning, Gill, Israel & Krasnoff, LLP, in Los Angeles, California (jtedford@DanningGill.com). Editorial contributions were provided by Adam A. Lewis of Morrison & Foerster LLP in San Francisco, California.