Is an order denying an individual debtor’s motion to dismiss his own bankruptcy always an interlocutory order not automatically subject to appeal?
A decision by a district judge in Brooklyn, N.Y., raises this question, which deserves renewed analysis in the wake of the Supreme Court’s Bullard opinion from 2015 holding that an order denying confirmation of a debtor’s chapter 13 plan is not a final order and is therefore not appealable.
District Judge Kiyo A. Matsumoto held in an Aug. 29 opinion that an order denying dismissal was not a final order even though the debtor claimed the filing was not authorized.
A man filed a chapter 7 petition but later filed a motion to dismiss, claiming he had neither signed nor authorized his lawyer to file the petition. The bankruptcy judge denied the motion, saying the debtor had ratified the original filing by personally signing an amended petition. The bankruptcy judge also held that the debtor acted in bad faith by using bankruptcy when it was beneficial in forestalling the foreclosure of his home.
The debtor appealed the denial of his motion to dismiss. Judge Matsumoto dismissed the appeal, holding that the order was not final under 28 U.S.C. Section 158(a).
There is a longstanding split of circuits that may or may not have been resolved by Bullard. In 1990, the Third Circuit held in In re Brown that denial of a motion to dismiss for a bad-faith filing is final and appealable. According to Judge Matsumoto, other circuits — including the Second, Eleventh and Fifth — hold that appeals from denial of dismissal are interlocutory.
Judge Matsumoto said that the Second Circuit’s 1984 decision in Committee of Asbestos-Related Litigants “definitively” resolved the question. There, a company filed a chapter 11 petition. The creditors’ committee filed a motion to dismiss, contending the filing was not in good faith. The Second Circuit held that the order was interlocutory. In Brown, the Third Circuit conceded it was splitting with the Second.
On the authority of Asbestos-Related, Judge Matsumoto concluded that the debtor did not have the right to appeal a non-final order.
Consider this: Denial of the motion to dismiss means that the chapter 7 trustee will liquidate the debtor’s property. When the case is over, the debtor would not be able to recover his liquidated property even if he were to win the appeal. Therefore, wasn’t the order final, at least when the debtor was contending that he did not authorize the filing in the first place?
The authorities used by Judge Matsumoto are distinguishable. In the Eleventh Circuit case, a creditor’s motion to dismiss was denied, and in the Fifth Circuit case, the chapter 13 debtor had a change of heart after the court modified the automatic stay. The Second Circuit case likewise involved a motion to dismiss by creditors.
Bullard may have resolved the split of circuits in some cases. The Supreme Court’s tougher standard for finality may suggest that orders are interlocutory when creditors’ motions to dismiss are denied, because creditors have other remedies during the course of the case to press their theories based on bad faith.
When a debtor — individual or corporate — knowingly files a bankruptcy petition, a motion to dismiss based on a change of heart also may be non-final, although it’s a closer question since irrevocable actions will take place, making an appeal unfeasible when the case closes. Since debtors have no absolute right to dismiss, perhaps it’s best for appellate courts to decide on the merits whether dismissal was in the creditors’ best interests.
The best case for a final order may arise when the debtor claims the filing was not authorized.
Reviewing the record, Judge Matsumoto also refused to allow an interlocutory appeal. Even if there were a controlling issue of law afoot, she said the debtor did not challenge the bankruptcy court’s legal or factual findings.
By the debtor’s signature on the amended petition, Judge Matsumoto said that the debtor either ratified the original filing or was equitably estopped. In substance, she reached the merits of the appeal in deciding whether to grant leave for an interlocutory appeal under Section 158(a)(3).
The case demonstrates that deciding the merits can be easier than splitting hairs on finality. The same can be said for motions to dismiss confirmation appeals for equitable mootness, where the merits can present easier issues than murky questions surrounding equitable mootness.
On the other hand, reflexively bypassing finality in favor of reaching the merits is improper because finality is a jurisdictional threshold, and courts have no business ruling on the merits when they have no jurisdiction. To avoid difficult cases on finality, perhaps courts should grant interlocutory appeals and decide the merits.