Over dissent, the majority on a Fourth Circuit panel disagreed with a decision by the Ninth Circuit Bankruptcy Appellate Panel by holding that a finding of contempt and an order imposing monetary sanctions for violation of a discovery order was not a final, appealable order under 28 U.S.C. § 158(a)(1).

The April 29 decision draws into question whether any orders concluding contested matters will be appealable in the Fourth Circuit, including orders finding violations of the automatic stay. Of course, the Supreme Court has already decided that grants or denials of motions to modify the stay are appealable.

The Discovery Order

The debtor has been in chapter 11 in North Carolina since 2017 aiming to confirm a plan disposing of asbestos liability for the debtor and nondebtors. In 2020, the debtor moved in bankruptcy court and obtained an order requiring asbestos claimants to complete a questionnaire providing information about their claims. An appeal from the discovery order was dismissed for lack of jurisdiction as a nonfinal order.

In Illinois, several claimants had lawsuits pending there before bankruptcy. Earlier in the case, the bankruptcy court had entered a preliminary injunction halting suits like those in Illinois against nondebtors.

After entry of the discovery order in the North Carolina bankruptcy court, the Illinois claimants filed suit in federal district court in Illinois seeking an injunction to bar enforcement of the discovery order.

The debtor responded by filing a motion in bankruptcy court in North Carolina for contempt and enforcement of the discovery order. After a pair of hearings, the bankruptcy court held the Illinois claimants and their lawyers in contempt and assessed more than $400,000 in monetary sanctions against the Illinois claimants and their lawyers, jointly and severally.

Before the imposition of sanctions, the bankruptcy court had given the Illinois claimants an opportunity to purge contempt by dismissing the Illinois suit. Most declined, according to the majority opinion by Circuit Judge Allison Jones Rushing.

The claimants and their lawyers appealed the contempt and sanctions orders to the district court, but the district court dismissed the appeal for lack of jurisdiction under Section 158(a)(1).

The Majority Opinion

Judge Rushing dismissed a second appeal for lack of jurisdiction, holding that the “civil contempt and sanctions orders entered against them for violating a discovery order are interlocutory and cannot be immediately appealed as of right.”

On the merits, Judge Rushing began by saying that orders for civil contempt and sanctions are not final and appealable in “normal civil litigation” and “must await final judgment to appeal.” She observed that the debtor’s chapter 11 case “is ongoing” and has “[n]o final decree” that would give rise to a right of appeal.

Judge Rushing recognized the difference between appellate jurisdiction under 28 U.S.C. § 1291 and Section 158(a)(1). Section 158(a)(1) gives district courts “jurisdiction to hear appeals . . . from final judgments, orders, and decrees . . . of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges.” [Emphasis added.]

Regarding the difference, Judge Rushing cited the Supreme Court for quoting the Collier treatise and saying in Bullard v. Blue Hills Bank, 575 U.S. 496, 501 (2015), that bankruptcies are composed of “‘an aggregation of individual controversies.’” She then quoted Ritzen Grp., Inc. v. Jackson Masonry, LLC, 140 S. Ct. 582, 587 (2020), where the Supreme Court said that “Congress made orders in bankruptcy cases immediately appealable if they finally dispose of discrete disputes within the larger bankruptcy case.” To read ABI’s report on Ritzen, click here.

“For example,” Judge Rushing said, “an adversary proceeding is a separate ‘proceeding’ for purposes of bankruptcy finality,” but the “relevant procedural unit is the entire adversary proceeding, not one of the many decisions made within it.” Similarly, she cited Bullard for the principle that an order denying confirmation of a chapter 13 plan is not appealable.

On the other hand, Judge Rushing cited Ritzen to mean that an order granting or denying relief from the automatic stay can be appealable.

Judge Rushing held that the contempt and sanctions orders did not terminate a separate procedural unit. The procedural unit, she said, was the discovery order, not the proceedings for contempt and sanctions. Furthermore, the discovery order did not terminate a discrete dispute within the bankruptcy case.

Judge Rushing was not persuaded by the Ninth Circuit Bankruptcy Appellate Panel’s decision in In re Stasz, 387 B.R. 271 (B.A.P. 9th Cir. 2008), where, she said, the “bankruptcy appellate panel held that Rule 2004 contempt and sanctions orders were final and appealable. Id. at 272.” She described how the BAP had reasoned that the procedural unit was the contested matter for sanctions, which was final.

Judge Rushing also declined to follow BAP decisions from the First, Sixth and Ninth Circuits holding that orders for contempt and sanctions for violations of a confirmation order, the automatic stay and a discharge injunction were final and appealable. Finding the BAP decisions “inapposite,” she said:

Whether those contempt sanctions followed a final judgment, order, or decree in a “proceeding” presents a different question from the one raised here, regarding sanctions for violating a discovery order in a continuing bankruptcy case.

Judge Rushing dismissed the appeal for lack of jurisdiction, holding that “civil contempt and sanctions orders . . . for violating a discovery order are interlocutory and cannot be immediately appealed as of right.”

The Dissent

“To my chagrin,” Circuit Judge Robert King “respectfully” dissented.

Judge King dissented because he defined the procedural unit differently. He said that “neither of these appeals are from the North Carolina discovery order — both [of] these appeals are from the Contempt and Sanctions Orders.”

Judge King first addressed the contempt and sanctions orders levied against the claimants’ lawyers. Recognizing that the lawyers were not parties in the chapter 11 case, he said that “a nonparty is generally entitled to appeal a final contempt order, before the conclusion of related litigation.”

Judge King said that the lawyers were “entitled to appeal the Contempt and Sanctions Orders.”

Looking more broadly at the law with regard to the claimants themselves, Judge King said “that these appeals are not governed by the rules that most lawyers generally deal with” because they arose “from contempt proceedings before a bankruptcy judge and implicate the provisions of 28 U.S.C. § 158(a).”

Judge King said that “§ 158(a) is even more generous with respect to appellate review than the generally applicable final judgment rule codified in 28 U.S.C. § 1291,” because Section 158(a) allows appeals from “cases and proceedings.” He quoted Ritzen for saying “that ‘Congress made orders in bankruptcy cases immediately appealable if they finally dispose of discrete disputes within the larger bankruptcy case.’ See Ritzen Group, Inc. v. Jackson Masonry, LLC, 589 U.S. 35, 39 (2020) (cleaned up).”

In the opinion of Judge King, the “Contempt and Sanctions Orders, however, finally disposed of the bankruptcy judge’s contempt proceedings against the Illinois Claimants and [the claimants’ lawyers], which arose from a very discrete and precise dispute in [the debtor’s chapter 11] bankruptcy.” To his way of thinking, the debtor’s motion to enforce the discovery order was “a discrete procedural sequence” that resulted in the Contempt and Sanctions Orders [which] were a discrete dispute process resolved within the vast . . . bankruptcy case.”

Judge King would have followed Stasz because it was unclear to him when the contempt and sanctions orders would become final and appealable, given the protracted nature of the chapter 11 case that had already been pending for seven years. He bemoaned “the inability of practicing lawyers to appeal the Contempt and Sanctions Orders [that] will have serious ramifications.”

Judge King dissented, saying, “Our failure to accord them that appeal is misguided and unjustified.”

Related Update

In a tangentially related case in the ongoing, attempted reorganization of Bestwall LLC, the Supreme Court denied certiorari on May 13 in Official Committee of Asbestos Claimants, Petitioner v. Bestwall LLC, 23-675 (Sup. Ct. May 13, 2024). The official committee was attempting to obtain Supreme Court review of Official Committee of Asbestos Claimants v. Bestwall LLC (In re Bestwall LLC), 71 F.4th 168 (4th Cir. June 20, 2023). To read ABI’s report on the Fourth Circuit opinion, click here.

The Bestwall chapter 11 case could be described as an attempt at using the bankruptcy court to obtain the release of tort liability for nondebtors following a so-called Texas divisional merger. Over a dissent, the majority held that the bankruptcy court had jurisdiction to impose a preliminary injunction.

The Fourth Circuit had declined to follow In re LTL Management LLC, 58 F.4th 738, 64 F.4th 84 (3d Cir. Jan. 30, 2023), where the Third Circuit had dismissed the chapter 11 case for a lack of good faith given the absence of “financial distress.” The majority opinion said that the Third and Fourth Circuits have different “good faith” standards.