A district judge in Delaware ruled that a state is automatically entitled to a stay of proceedings in bankruptcy court when appealing to the circuit from denial of a motion for dismissal on grounds of sovereign immunity.
A liquidating trustee sued the state in bankruptcy court on claims of inverse condemnation. The bankruptcy court denied the state’s motion to dismiss on the assertion of Eleventh Amendment sovereign immunity. The bankruptcy court reasoned that the claim invoked the bankruptcy court’s in rem jurisdiction, to which sovereign immunity does not apply.
Pending appeal, District Judge Colm F. Connolly of Delaware had stayed proceedings in bankruptcy court. In early January, he affirmed denial of the motion to dismiss.
Immediately after affirmance, the state appealed and filed a motion asking Judge Connolly to continue the stay of proceedings in bankruptcy court pending a ruling on the merits by the Third Circuit.
Ruling on the motion for a stay in his January 17 opinion, Judge Connolly confronted two questions: (1) Did the appeal divest the district court of jurisdiction to impose a stay; and (2) was the state entitled to a stay?
Jurisdiction
One circuit court and the majority of courts, according to Judge Connolly, hold that a district court retains jurisdiction to enjoin proceedings in bankruptcy after the filing of a notice of appeal. However, three district judges in Delaware and a minority of courts believe that jurisdiction is lost following an appeal.
The Third Circuit, Judge Connolly said, has recognized limited exceptions to the general rule that an appeal to the circuit divests the district court of jurisdiction.
Judge Connolly reasoned that a stay was “akin to an injunction that preserves the status quo and the filing of a notice of appeal did not” take away the power to rule on the motion for a stay. He also said that issuing a stay would not “create confusion or uncertainty.”
To the contrary, he said, issuing a stay would “lead to efficiencies,” because the Third Circuit would not be tasked with ruling on the state’s motion for a stay pending appeal.
Judge Connolly therefore concluded that he retained jurisdiction over the motion for a stay.
The Automatic Right to a Stay
Denial of a motion to dismiss on the grounds of sovereign immunity has the trappings of an interlocutory order that is not appealable. However, the Supreme Court held that denial of a claim of Eleventh Amendment immunity is a collateral order entitling the state to appeal. Puerto Rico Aqueduct and Sewer Authority v. Metcalf & Eddy Inc., 506 U.S. 139, 113 S. Ct. 684, 121 L. Ed. 2d 605 (1993).
Given the right to appeal, Judge Connolly was charged with divining the standard for issuing a stay pending appeal. Should he employ the typical four factors, including likelihood of success on appeal?
The state urged Judge Connolly to follow Goshtasby v. Board of Trustees of University of Illinois, 123 F.3d 427 (7th Cir. 1997).
In Goshtasby, a state university appealed to the Seventh Circuit after unsuccessfully raising sovereign immunity. The district court had denied the university’s motion for a stay of discovery, but the Seventh Circuit reversed, ruling that the district court “must stay the proceedings” when the government is asserting “a colorable claim to absolute or qualified immunity.” Id. 428-29.
The Seventh Circuit said the result is the same when a state is raising Eleventh Amendment immunity. Id.
Judge Connolly said that Goshtasby “makes perfect sense.” Immunity, he said, “protects the right not to be subjected to trial in federal courts and it will be lost if appellate review awaits final adjudication in the bankruptcy proceeding.”
A stay was also required under Third Circuit authority. In Forsyth v. Kleindienst, 100 F.2d 104 (3d Cir. 1983), the appeals court said that a stay must be granted when a claim of sovereign immunity is raised in an interlocutory appeal.
A district judge in Delaware ruled that a state is automatically entitled to a stay of proceedings in bankruptcy court when appealing to the circuit from denial of a motion for dismissal on grounds of sovereign immunity.
A liquidating trustee sued the state in bankruptcy court on claims of inverse condemnation. The bankruptcy court denied the state’s motion to dismiss on the assertion of Eleventh Amendment sovereign immunity. The bankruptcy court reasoned that the claim invoked the bankruptcy court’s in rem jurisdiction, to which sovereign immunity does not apply.
Pending appeal, District Judge Colm F. Connolly of Delaware had stayed proceedings in bankruptcy court. In early January, he affirmed denial of the motion to dismiss.
Immediately after affirmance, the state appealed and filed a motion asking Judge Connolly to continue the stay of proceedings in bankruptcy court pending a ruling on the merits by the Third Circuit.
Ruling on the motion for a stay in his January 17 opinion, Judge Connolly confronted two questions: (1) Did the appeal divest the district court of jurisdiction to impose a stay; and (2) was the state entitled to a stay?