Third Circuit Expands the Flexible Notion of ‘Finality’ on Bankruptcy Appeals

The Third Circuit further expanded the notion of a final order to include seemingly interlocutory rulings that will become essentially unreviewable because subsequent events will render them moot.

For example, the opinion will mean that an order denying a stay pending appeal from approval of a settlement will be appealable because consummation of the settlement will ordinarily make the appeal moot. In that regard, the Third Circuit and the Second Circuit disagree on appealability.

The Appeal from Denial of a Stay Pending Appeal

The appeal involved a law firm that had litigated successfully before bankruptcy under the Sarbanes Oxley Act of 2002, 15 U.S.C. § 7243.1. The firm was entitled to a fee award for creating a common fund by clawing back compensation paid to company executives whose misconduct required the restatement of financial statements.

Later, the bankruptcy court set aside $5 million to cover the fee award that the court might ultimately grant. Having sought a $15 million set-aside, the firm appealed. The appeal remains pending in district court.

Next, the firm sought a stay of distributions from the common fund created when the target of the clawback agreed in settlement to pay about $150 million. The bankruptcy court denied the law firm’s motion for a stay of the distributions.

Appealing the denial of a stay, the law firm asked the district court for a stay of distributions until the district court decided the prior appeal from the refusal to set aside $15 million.

The law firm appealed to the Third Circuit when the district court denied the stay.

In a June 25 opinion, Circuit Judge Joseph A. Greenaway, Jr. ruled that the district court’s denial of a stay pending appeal was a final, appealable order under 28 U.S.C. § 158(d)(1), which gives appellate jurisdiction to the circuits over appeals from final orders entered by district courts on appeal from bankruptcy courts.

The Revel Decision in 2015

Judge Greenaway followed dicta in an analogous Third Circuit opinion from 2015. In re Revel AC, Inc., 802 F.3d 558 (3d Cir. 2015). To read ABI’s discussion of Revel, click here.

Revel involved an appeal from denial of a stay of an order authorizing a sale of property. Writing for the Third Circuit in Revel, Circuit Judge Thomas L. Ambro conceded that the denial of a stay was “not technically a final judgment.” He went on to say that the appeal was final in a “practical sense” because a statute, Section 363(m), would have rendered the appeal moot and prevented the court from later reaching the merits if there were no stay.

In the case on appeal, there was no statute to render the appeal moot. Consequently, Judge Greenaway said that Revel was not on point. However, he said that “this appeal . . . does fit within Revel’s dicta, to which we give teeth today.”

The imminent distribution of the $150 million, Judge Greenaway said, would “effectively” moot the law firm’s appeal from the bankruptcy court’s order refusing to set aside $15 million. Once the money was out the door, there would be no way to take the distributions back from creditors if the law firm were awarded more than $5 million.

In bankruptcy, where the Third Circuit takes a “relaxed, pragmatic, and functional view of finality,” Judge Greenaway said that treating the stay denial as a final order is a “mere logical application of Revel.”

Having found appellate jurisdiction, Judge Greenaway next ruled on the merits. The denial of a stay was proper because the law firm had not shown that a $5 million set-aside was inadequate. On the merits, he used the sliding-scale approach adopted by Revel to judge whether a stay pending appeal would be appropriate.

Judge Ambro was on the panel alongside Judge Greenaway.

Observations

Revel and the new Third Circuit opinion are arguably in conflict with the Supreme Court’s decision in Bullard v. Blue Hills Bank, 135 S. Ct. 1686, 191 L. Ed. 2d 621 (2015), holding that denial of confirmation of a chapter 13 plan is not a final, appealable order.

The Third Circuit is also in apparent conflict with an unreported opinion from the Second Circuit in 2014. There, the Second Circuit dismissed an application for a stay pending appeal, saying the creditors “have not shown that the district court’s order denying a stay should be treated as a denial of injunctive relief.” BOKF NA v. Momentive Performance Materials Inc. (In re MPM Silicones LLC), 14-3531 (2d Cir. Oct. 31, 2014).

Finality in the bankruptcy context will come before the Supreme Court in the new term to begin in October 2019. See Ritzen Group Inc. v. Jackson Masonry LLC, 18-938 (Sup. Ct.) (cert. granted May 20, 2019).

The creditor who took Ritzen to the Supreme Court contends that the Sixth Circuit deepened an existing circuit split by erroneously holding that an order denying a motion to modify the automatic stay is always a final order that must be appealed immediately. However it comes down, the Supreme Court is likely to tell us whether finality is formulaic and immutable in bankruptcy or whether there is a more relaxed, pragmatic approach to finality in bankruptcy cases.

The propriety of the new opinion from the Philadelphia-based appeals court will be in doubt if the Supreme Court goes against the Third Circuit’s flexible approach to finality.