Not Certifiable: To Appeal Or Not To Appeal, That Is The Question

by Pepper Hamilton LLP

The most critical hurdle for a debtor in the path toward emerging from bankruptcy is the debtor’s ability to file, and have the bankruptcy court approve, its plan of reorganization. If the court denies confirmation of the debtor’s plan, what are the debtor’s options? Can it appeal that decision as of right?

Two circuit courts of appeals recently reached opposite conclusions regarding the appealability of orders denying plan confirmation. While the Sixth Circuit Court of Appeals held that an appellate court lacks jurisdiction to entertain a non-certified appeal of an order rejecting a plan, Lindsey v. Pinnacle National Bank et al (In re Lindsey), 2013 U.S. App. LEXIS 16680 (6th Cir. August 13, 2013), the Fourth Circuit Court of Appeals held that a bankruptcy court’s denial of confirmation is a final, appealable order, Mort Ranta v. Gorman, 2013 U.S. App. LEXIS 13426 (4th Cir. July 1, 2013).

These decisions have intensified a growing circuit split on the issue. Compare In re Lievsay, 118 F.3d 661 (9th Cir. 1997); In re Lewis, 992 F.2d 767, (8th Cir. 1993); In re Simons, 908 F.2d 643 (10th Cir. 1990); In re Maiorino, 691 F.2d 89 (2d. Cir. 1982) (decisions holding that orders denying plan confirmation without dismissing the bankruptcy case are interlocutory orders and not appealable under Section 158(d)(1)) with In re Armstrong World Indus., 432 F.3d 507 (3d. Cir. 2005); In re Bartee, 212 F.3d 277 (5th Cir. 2000) (decisions holding that orders rejecting plan confirmation may be appealed without certification).

Not every court order is immediately appealable. An appellate court has jurisdiction of appeals from “all final decisions, judgment and orders.” 28 U.S.C. § 158(d)(1). These are appeals as of right, which a party may take simply by filing a notice of appeal. An appellate court also has jurisdiction of appeals of interlocutory, or non-final, orders when either the court certifies, or the parties certify and the court accepts, that the order (i) “involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court” or “involves a matter of public importance,” (ii) “involves a question of law requiring resolution of conflicting decisions,” or (iii) “an immediate appeal from the judgment, order, or decree may materially advance the progress of the case or proceeding.” 28 U.S.C. § 158(d)(2).

In In re Lindsey, the bankruptcy court refused to confirm an individual debtor’s chapter 11 plan. 2013 U.S. App. LEXIS 13426 at *2. The court agreed with dissenting creditors who asserted that the plan failed to comply with the Code’s absolute priority rule because the debtor could not retain property without paying the dissenting creditors in full. Id. The debtor (without seeking certification) appealed on the ground that the absolute priority rule does not apply to individual debtors. The district court affirmed the bankruptcy court’s ruling and the debtor appealed to the Sixth Circuit. Id.

The Sixth Circuit never reached the merits of the appeal. Instead, the court focused on whether the bankruptcy court’s decision was a “final” one, which could be appealed as of right, or merely an interlocutory order that could not be appealed without certification (which, of course, the debtor had not sought prior to filing the appeal). Id. at *4.

The court argued that the factors that some courts address when deciding whether confirmation denial orders are final, i.e. “practical considerations in the interests of judicial economy” or “the need to quickly resolve issues central to the progress of a bankruptcy,” are more appropriately considered in the context of whether to grant leave to appeal an interlocutory order under Section 158(d)(2). Id. at *6. The court posed the following question: “why certify such issues for appeal [under Section 158(d)(2)] if ‘final’ in Section 158(d)(1) covers them anyway?” Id.

The Sixth Circuit determined that a decision rejecting a reorganization plan is not a final, appealable order pursuant to Section 158(d)(1). In so holding, the court emphasized that Congress drew the line between appealable and non-appealable interlocutory orders when drafting Section 158(d), and it is not for the courts to redraw this line. The court therefore lacked jurisdiction to adjudicate the merits of the appeal. Id. at *7.

In Mort Ranta, the bankruptcy court denied confirmation of the debtor’s chapter 13 plan, which excluded the debtor’s Social Security income, because the court found that the plan did not accurately reflect the debtor’s disposable income and was therefore not feasible. 2013 U.S. App. LEXIS 13426 at *1-2. The district court affirmed, and the debtor appealed to the Fourth Circuit. Id. at *2.

Some courts holding that a rejection order is interlocutory have rested their holding on the fact that the debtor may propose an amended plan. In Mort Ranta, the Fourth Circuit, by contrast, took the position that such an order is not interlocutory because it resolves a discrete dispute - whether the “at issue plan” is confirmable, notwithstanding the fact that the debtor may still propose an amended plan before dismissal. Id. at *12-13. The argument here is a practical one: confirmation denial acts as a final order for purposes of appeal, given that a debtor may otherwise be faced with the prospect of filing a less-desirable plan, voluntarily dismissing the case, or having it dismissed by the court. Id. at *15-17. Finding that a technical approach to finality would be inconsistent with the pragmatism typically seen in bankruptcy proceedings, the Fourth Circuit concluded that a bankruptcy court’s denial of confirmation is a final order for purposes of appeal pursuant to Section 158(d)(1). Id.

It may be time for either Congress or the Supreme Court to clarify whether a bankruptcy court’s order rejecting plan confirmation is final or interlocutory. At least until the circuit split is resolved, a debtor facing the prospect of a contested plan should opt to file its bankruptcy petition in a more appeal-friendly bankruptcy court venue (where applicable) or should otherwise be prepared to seek certification of its appeal if confirmation is denied.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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