A circuit court does not have appellate jurisdiction to entertain a direct appeal from a bankruptcy court order that should have been entered as proposed findings, according to an Eleventh Circuit opinion handed down on Jan. 5.
The Eleventh Circuit came to the same conclusion as the Seventh Circuit’s Ortiz decision from 2011, a result that the Chicago-based court reached “without much explanation,” according to Eleventh Circuit Judge Adalberto Jordan.
Judge Jordan’s decision also means that parties cannot deliberately take a direct appeal to a circuit court from a bankruptcy court’s proposed order without first going through the district court gauntlet, because a bankruptcy court’s proposed disposition does not have the requisite “legal effect” required for appellate jurisdiction in a court of appeals.
The case arose after the bankruptcy court’s $2.5 million judgment in favor of a trustee and against a group of defendants. During the bankruptcy court litigation, the trustee’s lawyer had hired the bankruptcy judge’s fiancé. After the judgment against them, the defendants filed suit in state court against the trustee’s lawyer and the bankruptcy judge’s fiancé.
The suit in state court alleged conspiracy to obstruct due operation of law and fraudulent corruption of the judicial process. The suit sought compensatory damages and attorneys’ fees.
The trustee’s lawyer and the fiancé removed the state court suit to bankruptcy court, where it was assigned to a different bankruptcy judge. The new bankruptcy judge dismissed the suit on four grounds.
The new bankruptcy judge granted the parties’ request by certifying a direct appeal to the Eleventh Circuit under 28 U.S.C. § 158(d)(2)(A). In his opinion for the Eleventh Circuit, Judge Jordan never reached the merits because he referred the case to the district court to review the new bankruptcy judge’s decision as proposed findings and conclusions under Section 157(c)(1).
To decide whether there was appellate jurisdiction, Judge Jordan employed a four-step process. First, he had to determine whether dismissal was the culmination of a “core” proceeding.
The trustee contended that the dismissal order was “core” because it never would have existed absent bankruptcy. Although he conceded that the action removed from state court “stems from bankruptcy in a literal sense,” Judge Jordan did not buy the trustee’s argument.
Judge Jordan said the suit was “not the sort of case that would arise only in bankruptcy because the corruption or improper conduct of a judge can occur in any type of legal proceeding.” He said the suit was not core because it “only asserts state-law tort claims” and “does not involve any rights created by federal bankruptcy law.”
Second, Judge Jordan concluded that the claims originally made in state court gave rise to “related to” jurisdiction in bankruptcy court because the outcome could “conceivably” affect the bankruptcy estate.
Third, Judge Jordan said all parties did not consent to final adjudication in bankruptcy court.
Consequently, Judge Jordan said the new bankruptcy judge should have issued proposed findings and conclusions and should not have entered a dismissal order.
The fourth question was an issue of first impression in the Eleventh Circuit: Is a bankruptcy judge’s report with proposed findings and conclusions a “judgment, order or decree” allowing for the exercise of appellate jurisdiction in a circuit court under Section 159(d)(2)(A)?
Judge Jordan said that the “plain reading” of “judgment, order or decree” leads to the conclusion, like Ortiz, that the circuit court has no jurisdiction. He said that the words require that action taken in bankruptcy court must have “some kind of command or adjudicative consequence.” Proposed findings and conclusions, he said, “do not, in and of themselves, constitute a judicial decision with legal effect.”
Judge Jordan therefore held there is no appellate jurisdiction “to consider, on a direct certified appeal, the merits of an unauthorized bankruptcy court order entered without consent in a related [to], non-core proceeding unless it has first been reviewed by the district court as a report with proposed findings of fact and conclusions of law.”
Employing the same logic, parties could not obviate district court review by taking a case directly to a circuit court when the bankruptcy court has labeled its decision as proposed findings and conclusions.
In passing on a bankruptcy court’s proposed findings, the district court becomes the finder of fact, subject to review in the circuit court under the clearly erroneous standard. Permitting a direct appeal in a non-core, related to case would contravene the circuit court’s fundamental function as an appellate court by putting the circuit court in the position of making findings of fact in the first instance.
To read Ortiz, click here.