Restructuring

Contributed by Amy Oden
In a recent decision, Wortley v. Bakst, the Eleventh Circuit Court of Appeals agreed with the Seventh Circuit Court of Appeals’ decision in In re Ortiz (which we previously covered here), and held that a circuit court of appeals does not have jurisdiction to consider, on a direct certified appeal, the merits of a bankruptcy court order entered without consent in a related noncore proceeding unless it has been first reviewed by the district court as a report with proposed findings of fact and/or conclusions of law.  Unlike In re Ortiz, which held that the bankruptcy court lacked constitutional authority to enter the judgment being appealed, the Eleventh Circuit concluded in Wortley v. Bakst that the bankruptcy court lacked statutory core jurisdiction to enter the order at issue.  Together, these two cases show that when a bankruptcy court lacks the appropriate statutory or constitutional authority to enter a final order, and the parties did not consent to entry of such a final order by the bankruptcy court, the district court must review the order as a report with proposed findings of facts and/or conclusions of law before the appeal can be heard by the circuit court of appeals.
Background
The background of this case is long but juicy, so bear with us.  Barbara Wortley filed her company, Trafford Distributing Center, for chapter 7 in the Southern District of Florida in 2008, and the case was assigned to Judge Olson.  The chapter 7 trustee hired attorney Michael Bakst to pursue three adversary proceedings against Wortley and related parties.  While Bakst was litigating these adversary cases in August 2009, his law firm hired Judge Olson’s fiancé, Steven Fender, to join its bankruptcy group.  In January 2010, the adversary cases were tried together at a bench trial before Judge Olson, resulting in judgments against the Wortley parties totaling over $2.5 million.
In August 2010, the Wortley parties moved for Judge Olson’s recusal, arguing that Fender’s hiring created the appearance of impropriety and that Fender had an actual interest in the outcome of the case.  Judge Olson denied the motion.  The Wortley parties filed a second recusal motion in September, which was denied again, and they appealed.  At a status conference, the district court expressed concern over the potential appearance of impropriety and suggested that Judge Olson recuse himself.  Judge Olson then recused himself sua sponte and the case was reassigned to Bankruptcy Judge Cristol.
The Wortley parties asked Judge Cristol to reconsider Judge Olson’s prior rulings and orders and sought sanctions against Bakst and the chapter 7 trustee.  Judge Cristol denied the motion to vacate on the grounds that any remedy should be sought on appeal.  The Wortley parties then moved for reconsideration.  The motion for sanctions and the reconsideration motion remain pending before Judge Cristol.
In April 2011, the Wortley parties brought a state court action against Bakst and Fender, alleging that Bakst, who was the head of his firm’s bankruptcy group, hired Fender as part of a scheme to improperly influence Judge Olson and secure favorable rulings for the trustee.  Bakst and Fender removed the action to bankruptcy court, where they moved to dismiss the complaint.  Judge Cristol granted the motion to dismiss on four independent grounds.  The Wortley parties requested certification of a direct appeal of the dismissal order to the Eleventh Circuit, which Judge Cristol granted and the circuit court initially accepted the appeal under 28 U.S.C. § 158(d)(2)(A).
Eleventh Circuit’s Analysis
Although no party had challenged its jurisdiction, the Eleventh Circuit addressed the issue sua sponte.  First, it considered whether the appeal involved a “final decision, judgment, order, or decree.”
To determine whether the matter before it was a final decision, judgment, order, or decree, the Eleventh Circuit next considered whether the bankruptcy court had the authority to enter the order of dismissal that it certified for direct appeal to the Eleventh Circuit.  To answer this question, the court first had to consider whether the action filed by the Wortley parties was a “core” proceeding under bankruptcy law such that the bankruptcy court could enter final judgment absent consent of the parties.
Noting that core proceedings “are narrow in scope and include only those cases that implicate the property of the bankruptcy estate and either invoke substantive rights created by federal bankruptcy law or that exist only in the bankruptcy context,” the court concluded that the Wortley parties’ action, which consisted only of state law tort claims, “d[id] not fit the bill” because the improper conduct of a judge can appear in any type of legal proceeding, and the case also did not involve any rights created by federal bankruptcy law.
Next, the Eleventh Circuit determined that the action was a noncore proceeding under the relevant standard: whether the case could conceivably have an effect on the bankruptcy estate, including any action that in any way impacts the handling and administration of the estate.  Because bankruptcy courts cannot enter a final order in a noncore proceeding without consent of the parties, and these parties did not consent, “the bankruptcy court lacked authority to enter the final order of dismissal and instead should have submitted proposed conclusions of law to the district court under § 157(c)(1).”
Addressing the question of first impression for the Eleventh Circuit—whether a report with proposed conclusions of law constitutes a “judgment, order, or decree”—the court agreed with the Seventh Circuit’s decision in Ortiz that circuit courts do not have jurisdiction under § 158(d)(2)(A) to hear a direct appeal from the bankruptcy court of an unauthorized order that has not been initially reviewed by the district court.  The Eleventh Circuit therefore transferred the unauthorized order to the district court for review as a report with proposed conclusions of law.
Conclusion
Both circuits to consider this unusual appellate jurisdiction issue have arrived at the same conclusion:  Circuit courts do not have jurisdiction over a direct appeal from an unauthorized bankruptcy court order.  Will the other circuits follow suit?   Because most bankruptcy court orders are appealed first to the district court and make their way up to the circuit courts by way of § 158(d)(1), it may be a while before we find out.  But, before incurring the additional time and expense of seeking a direct appeal to a circuit court, parties should know if they are on solid footing to do so lest they suffer an ignominious dismissal of such an appeal.