An order denying a creditor’s motion to convert from chapter 11 to chapter 7 is not a final order and is not appealable as of right, according to Chief District Judge Kimberly J. Mueller of Sacramento, Calif.

The corporate debtor had been in chapter 11 for almost two years. There were no operations and no income, but there was about $1.5 million in cash in the bank. A creditor filed a motion for conversion of the chapter 11 case to chapter 7 for “cause” under Section 1112(b)(1).

Bankruptcy Judge Christopher M. Klein denied the conversion motion without prejudice to renewal. The creditor appealed.

In her October 26 opinion, Judge Mueller dismissed the appeal for lack of appellate jurisdiction.

Citing In re Linton, 18-30773, 2021 WL 4592517, at *4 (B.A.P. 9th Cir. Oct. 6, 2021), Judge Mueller said that the Ninth Circuit takes a “flexible or pragmatic” approach to deciding whether an order is final and therefore appealable under 28 U.S.C. § 158(a)(1). Coincidentally, Linton was authored by Bankruptcy Judge Klein, whose order Judge Mueller was reviewing on appeal. To read ABI’s report on Linton, click here.

As examples of final orders subject to appeal as of right, Judge Mueller listed orders denying relief from the automatic stay, dismissing chapter 7 cases, and converting cases to chapter 7.

On point, however, Judge Mueller said there was “sparse” caselaw on the appealability of orders denying motions to convert from “11” to “7.” She cited the Tenth Circuit Bankruptcy Appellate Panel for granting leave to appeal an interlocutory order denying a conversion motion, thus suggesting that denial of conversion was not a final order.

Among binding precedents not on point, Judge Mueller naturally cited Bullard v. Blue Hills Bank, 575 U.S. 496 (2015), where the Supreme Court held that denial of confirmation of a chapter 13 plan is not final, and Ritzen Grp., Inc. v. Jackson Masonry, LLC, 140 S. Ct. 582, 584 (2020), where the Supreme Court held that an order denying a motion to modify the automatic stay is a final, appealable order “when the bankruptcy court unreservedly grants or denies relief.”

Following Bullard, the Ninth Circuit handed down In re Cherrett, 873 F.3d 1060 (9th Cir. 2017), where the appeals court held that denial of a motion to dismiss under Section 707(b) is a final order eligible for appeal.

The Ninth Circuit reasoned that the order was final because it conclusively determined a discrete issue resolving the debtor’s eligibility for a discharge in chapter 7. To read ABI’s report on Cherrett, click here.

From precedents on appealability generally, Judge Mueller divined five reasons why denial of conversion was not appealable:

• Declining to convert did not “disrupt” the status quo;
• Denial did not expose the creditor to new legal actions, nor did it prevent the creditor from renewing the conversion motion;
• Denial did not “undermine” judicial efficiency;
• The conversion motion was not a “core” proceeding; and
• Denial did not finally or conclusively resolve the issue because the creditor could renew the motion “if new causes arise as the case proceeds.”

For those reasons, Judge Mueller concluded that the order was not final and not appealable under Section 158(a)(1) because the conversion motion was not a discrete proceeding.

A Curious Conclusion

Alternatively, the creditor wanted Judge Mueller to deem the notice of appeal to be an application to grant an interlocutory appeal under Section 158(a)(3).

For an interlocutory appeal in the Ninth Circuit, there must be a controlling issue of law, among other things, Judge Mueller said. In the case on appeal, there was none.

Curiously, Judge Mueller said that “the order denying without prejudice the motion to convert is not interlocutory, as it does not rest on a controlling question of law.” Instead, the appeal dealt with pivotal factual disputes or inferences from the facts.

That is to say, the order below was not interlocutory because it did not raise a controlling question of law. Judge Mueller therefore saw no grounds for permitting an appeal under Section 158(a)(3).

Judge Mueller seemed to be saying that the order below was not a final order for the purposes of Section 158(a)(1). At the same time, it was not interlocutory under Section 158(a)(3).

Respectfully, the holding must be wrong. The opinion seems to mean that leave to appeal cannot be granted if factual controversies are wrapped around pivotal legal issues. The decision therefore seems to stand for the novel proposition that there are some categories of orders that can never be appealed under either Sections 158(a)(1) or (a)(3).

Judge Mueller also dismissed the appeal for lack of appellate jurisdiction under Section 158(a)(3).