The Ninth Circuit Affirms Inflexible Standard of Finality for Purposes of District Court Appeals

[authors: Christopher J. Updike and Michael A. Stevens]

On March 6, 2012, the United States Court of Appeals for the Ninth Circuit held that the flexible standard for finality generally applied in bankruptcy cases does not apply to appeals from orders of a district court sitting in bankruptcy. Klesdadt & Winters, LLP v. Cangelosi, 642 F.3d 809 (9th Cir. 2012). In so holding, the Ninth Circuit reaffirmed its position as the only circuit that applies less flexible jurisdictional standards to appeals from district courts sitting in bankruptcy as compared with appeals from bankruptcy courts.

Background

In the summer of 2009, the Nevada District Court issued rulings in a contract dispute that were adverse to Silar Advisors, LP and its subsidiary, Asset Resolution LLC. Shortly thereafter, Asset Resolution and its affiliated SPEs commenced chapter 11 cases in the Southern District of New York, which were then transferred to the District of Nevada in November 2009. On January 25, 2010, the standing reference to the bankruptcy court was withdrawn and, on January 29, 2010, the Nevada District Court converted the debtors’ bankruptcy cases to chapter 7 proceedings.

On February 9, 2010, the chapter 7 trustee and the plaintiffs in the contract dispute filed a motion for sanctions against Silar Advisors, the debtors’ bankruptcy counsel, and certain affiliated individuals on the grounds that the debtors never had any intention to reorganize and that their bankruptcy filing was an attempt to evade the district court’s prior orders in the contract dispute. The district court granted the motion and the defendants appealed.

Ninth Circuit’s Analysis

The sole issue addressed on appeal was whether the Ninth Circuit had jurisdiction over the appeal. Courts of appeals have jurisdiction over appeals of orders entered in bankruptcy cases pursuant to 28 U.S.C. § 1291 and 28 U.S.C. § 158(d). 28 U.S.C. § 1291, enacted in 1948 during the referee system employed prior to the establishment of the Bankruptcy Code, provides, in relevant part, that the “courts of appeals shall have jurisdiction of appeals from all final decisions of the district courts of the United States . . . .”

28 U.S.C. § 158(d) was promulgated as part of the Federal Judgeship Act of 1984 in response to the Supreme Court’s Marathon decision, which held that jurisdiction afforded bankruptcy courts under the Bankruptcy Reform Act of 1978 was too broad. Still, 28 U.S.C. § 158(d) has broader language than 28 U.S.C. § 1291 and provides that the “courts of appeals shall have jurisdiction of appeals from all final decisions, judgments, orders, and decrees” issued by a bankruptcy appellate panel or by a district court hearing an appeal from a bankruptcy court. Courts of appeals, including the Ninth Circuit, interpret 28 U.S.C. § 158(d) to grant “flexibility in asserting jurisdiction over interlocutory orders, because ‘certain proceedings in a bankruptcy case are so distinct and conclusive either to the rights of the individual parties or the ultimate outcome of the case’ that their resolution should be immediately appealable . . . .” Klesdadt, 642 F.3d at 814.

The appellants in Klesdadt argued that the Ninth Circuit had jurisdiction over the district court’s order under the more flexible standard of finality that applies to appeals under 28 U.S.C. §158(d). The Ninth Circuit rejected this argument, reasoning that because the order at issue was entered by a district court sitting in bankruptcy, and not by a district court hearing an appeal from a bankruptcy court, the Ninth Circuit’s jurisdiction over the appeal arose solely from 28 U.S.C. §1291, which does not incorporate 28 U.S.C. § 158(d)’s flexible jurisdictional principles.

In so holding, the Ninth Circuit relied on its previous decision in Cannon v. Hawaii Corp. (In re Hawaii Corp.), 796 F.2d 1139 (9th Cir. 1986), where the Ninth Circuit found that Congress’ intention to provide courts of appeals more flexibility in asserting jurisdiction over appeals under 28 U.S.C. § 158(d) did not apply to appeals under 28 U.S.C. § 1291 because there was no evidence that Congress intended to retroactively amend 28 U.S.C. § 1291 and enlarge the Ninth Circuit’s jurisdiction through the passing of 28 U.S.C. § 158(d). Thus, the Ninth Circuit in Hawaii Corp. “rejected reliance on flexible finality when determining our jurisdiction to hear appeals from district courts sitting in bankruptcy, holding that these appeals, arising exclusively under § 1291, would be governed by the finality rule applicable to all civil appeals.” Klesdadt, 642 F.3d at 814 (citing Hawaii Corp., 796 F.2d at 1141-42).

The Ninth Circuit ultimately held that the sanctions order was not a final order and that it lacked jurisdiction over the instant appeal. In so holding, the Ninth Circuit relied on the Supreme Court’s decision in Cunningham v. Hamilton County, Ohio, 527 U.S. 198 (1999) and Ninth Circuit cases applying Cunningham, which held that sanctions orders were not final orders or otherwise appealable under the collateral order doctrine set forth in Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541 (1949).

Concurring Opinion

In a concurring opinion, Judge Susan P. Graber stated that although the Hawaii Corp. decision bound her to conclude that the Ninth Circuit could not in this case apply the flexible standard of finality typically applicable to bankruptcy appeals, she believed “Hawaii Corp. was wrongly decided” and that the Ninth Circuit “should reevaluate Hawaii Corp.’s lonely rule en banc.” Klesdadt, 642 F.3d at 820, 824 (Graber, J. concurring). As Judge Graber details in her concurring opinion, every other circuit has rejected the Ninth Circuit’s position that the flexible jurisdictional standard of section 158(d) does not apply to appeals under 28 U.S.C. § 1291. For example, the Third Circuit in has held that “‘§ 1291 jurisdiction mirrors jurisdiction under §158(d).’” Id. at 822 (Graber, J. concurring) (quoting Metro Transp. Co. v. N. Stat Reinsurance Co., 912 F.2d 672, 676 (3d Cir. 1990)). The Second Circuit follows the Third Circuit on this issue. SeeSonnax Indus., Inc. v. Tri Component Prods. Corp. (In re Sonnax Indus., Inc., 907 F.2d 1280, 1283 (2d Cir. 1990) (“We perceive nothing to be gained by creating a second set of standards – which, when painstakingly developed, might not differ significantly from those already in place under Section 158(d) – for reviewing identical cases. We therefore follow the Third Circuit in holding that decisions regarding finality under Section 159(d) apply under Section 1291.”).

Conclusion

This decision makes plain that unless the Ninth Circuit reverses Hawaii Corp. in an en banc decision (which the concurrence requested), the determination of whether an order in a bankruptcy case pending in the Ninth Circuit is final and appealable will depend, in large part, on whether or not the reference has been withdrawn. When involved in a bankruptcy in the Ninth Circuit, parties should consider carefully whether to seek withdrawal of the reference from the Bankruptcy Court. If the reference is withdrawn, certain decisions (such as the denial of a motion to lift the automatic stay, the appointment of a bankruptcy trustee, or the award of attorney’s fees), which may be immediately appealable from the Bankruptcy Court, may be unappealable from the District Court. However, the circuit split on this issue could change if the Ninth Circuit considers the issue en banc as requested in the concurring opinion. We will track any further developments in this case and post them in the Restructuring Review Blog.