Contributed by Andrea Saavedra
A recent decision by the Sixth Circuit Court of Appeals reminds debtors that, while they may enjoy certain privileges (such as exclusivity) in the plan proposal context, they also bear certain burdens. In In re Lindsey, the Sixth Circuit concluded that a district court’s order affirming a bankruptcy court order denying confirmation of a debtor’s proposed plan of reorganization did not constitute a “final” order from which an appeal was permitted as of right, joining the Second, Eighth, Ninth and Tenth Circuits in foreclosing an automatic right of appellate review from an order denying confirmation of a plan. In contrast, the Third, Fourth, and Fifth Circuits previously have held that a debtor may seek immediate appellate review of an order denying confirmation of its proposed plan when, on balance, consideration of certain pragmatic factors, such as judicial economy and interest in expeditious resolution of the bankruptcy, leaned in the debtor’s favor.
Lindsey began with the bankruptcy court’s rejection of the debtor-individual’s proposed chapter 11 plan on the grounds that it violated the absolute priority rule, which the debtor argued had been abrogated as to individual debtors because of certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The district court affirmed and the debtor appealed again to the Sixth Circuit.
Rather than engage on the merits, the Sixth Circuit began and ended its decision with a review of appellate jurisdiction, an issue which neither side had briefed. The Sixth Circuit observed that there were only two possible grounds for appellate jurisdiction. First, it could adjudicate the merits of the debtor’s appeal if the district court’s affirmance qualified as a “final” judgment, order or decree, as required under either 28 U.S.C. § 158(d)(1) (which sets forth appellate review of final orders in the bankruptcy context) or 28 U.S.C. § 1291 (which permits appeals in all civil cases from “final decisions” of the district courts). Second, assuming the district court’s decision was not final, it could review the decision as an interlocutory order pursuant to either 28 U.S.C. § 158(d)(2) (which provides various grounds for certification of an interlocutory order in the bankruptcy context, including, as potentially applicable here, when “immediate appeal from the judgment, order, or decree may materially advance” the progress of the debtor’s case) or 28 U.S.C. § 1292 (which sets forth the requirements for securing appellate review of interlocutory decisions of the district court in all civil cases).
In determining whether or not the district court’s decision was a final order, the Sixth Circuit began with the principle that, as a general matter, “a district court order remanding a case to a bankruptcy court is not final” for purposes of section 158(d)(1) unless the remand is “of a ministerial character.” It noted that, to date, its practice has been to send litigants back to the district court to either obtain a finality certification or seek permissive interlocutory appeal pursuant to 28 U.S.C. § 1292. “Gauged by this understanding of finality,” the Sixth Circuit held that “a decision rejecting a confirmation plan is not a final order appealable under § 158(d)(1)” because “[f]ar more than ministerial tasks remain to be done after such a decision.” At a minimum, the debtor remained under an obligation to submit another plan for consideration by the creditors and the court. Only after such additional litigation, the Sixth Circuit observed, could any party in the chapter 11 pursue an appeal of either the “final” confirmed plan as a matter of right, pursuant to section 158(d)(1)), or a decision refusing to confirm a plan under one of the enumerated grounds for discretionary review of non-final orders under section 158(d)(2).
The Sixth Circuit rejected the reasoning of the three other circuits that had found appellate jurisdiction in similar circumstances. First, the Sixth Circuit was not persuaded that a determination of finality in the bankruptcy context required a more “flexible” approach. The Third Circuit’s Armstrong decision, for example, reasoned that, in determining whether denial of a debtor’s plan is a final order ripe for appellate review, an appellate court must examine a multitude of factors to “quickly resolve issues central to the progress of a bankruptcy”, such as: (i) the impact on the assets of the bankruptcy estate; (ii) the need for further fact-finding on remand; (iii) the preclusive effect of a decision on the merits; and (iv) the interests of judicial economy. The Sixth Circuit in Lindsey found such a balancing test was unnecessary where the jurisdictional statutes (especially 158(d)(2)) provided debtors with more than adequate flexibility to seek discretionary appellate review.
Second, it did not find unfair or “strange” that it’s holding would require a debtor to propose a plan it does not want approved in order to get review of the old plan it favored. In the first instance, the Sixth Circuit observed, a settlement could always be reached (obviating the need for an appeal in its entirety). Moreover, even if a second, creditor-supported plan were confirmed, the debtor was then free to seek appellate review of that plan (and simultaneously challenge the bankruptcy court’s rejection of its original plan).
Third, the Sixth Circuit was not persuaded that its ruling created an unfair advantage for creditors vis-à-vis a debtor. While a creditor may be able to get immediate review of a confirmed debtor-sponsored plan as a “final” order, and a debtor would have to wait to challenge a plan rejection, the Sixth Circuit observed that this difference in rights was not dissimilar to appellate rights in other civil litigation contexts (for example, a plaintiff generally would not be able to take an appeal as of right from an order denying its summary judgment motion, although a defendant would be able to appeal immediately from an order granting summary judgment against it).
Lastly, the Sixth Circuit rejected any notion that its holding would run afoul of the alleged “reality” that bankruptcy rules are supposed to be debtor-friendly. Noting that the BAPCPA was something that “few would call pro-debtor in the main,” the Sixth Circuit reasoned that “section 158(d) draws the line between appealable and non-appealable interlocutory orders, and courts should not redraw it to favor one or another group of litigants.” Accordingly, it instructed the debtor to go back to the bankruptcy court and, if and when the substantive merits of its appeals became ripe for adjudication, feel “free” return to the Sixth Circuit for proper appellate review.
Venue split watchers, add this issue to your list. The split of authority on this issue may make it a candidate for review by the Supreme Court someday.