When a contested matter is nested within a larger contested matter, an order in the nested proceeding ordinarily is not final and thus not appealable until there is a final order in the larger contested matter, according to a teaching from the Ninth Circuit Bankruptcy Appellate Panel.
The October 6 opinion by Bankruptcy Judge Christopher M. Klein also tells us that the embedded order becomes final and appealable when there is a final order in the overarching contested matter, even without the filing of a new notice of appeal.
We recommend Judge Klein’s opinion for reading in full text to enjoy his exposé on a “multi-forum Whack-a-Mole tournament.”
Complex Facts
The facts were horribly complex, but a few of them matter to understand the foundation of Judge Klein’s holdings.
Creditors filed an involuntary chapter 7 petition against an individual. The bankruptcy court dismissed the petition for a variety of reasons, prompting the involuntary debtor to file a motion for costs, fees and damages under Section 303(i). Definitionally speaking, the motion for costs and damages was a contested matter.
As a subset of the Section 303(i) contested matter, the debtor filed a motion to hold several individuals and other entities liable for damages as alter egos of the petitioning creditors. The bankruptcy court denied the alter ego motion. The debtor appealed to the BAP.
The BAP was prepared to dismiss the alter ego appeal for lack of jurisdiction, on the notion that denial of the motion was not a final order. Dropping to the bottom line, as we shall explain below, the BAP was able to reach the merits (and affirm) because the overarching Section 303(i) motion came to final judgment before the BAP handed down its opinion on the alter ego motion.
Judge Klein’s decision is a tour de force on appellate jurisdiction, finality, cumulative finality and mislabeled motions for reconsideration.
No Finality in ‘Nested’ Contested Matters
Judge Klein based the foundation of his opinion on the Supreme Court’s recent Ritzen and Bullard decisions on finality. The two decisions, he said, “confirmed” existing Ninth Circuit law that an order is final and appealable under 28 U.S.C. § 158(a)(1) if it fully and finally determines a discrete issue that seriously affects substantive rights.
Judge Klein said that denial of the alter ego motion was in reality the denial of a motion to add parties under F.R.C.P. 21, made applicable by Bankruptcy Rule 9014(c). He then said that the Rule 21 motion was “a subsidiary component of the overall contested matter in which it arises.” In other words, “contested matters may be nested within contested matters.”
Citing Wright, Miller & Cooper, Judge Klein said that “an order on a Civil Rule 21 motion to add party defendants on an alter ego theory would be interlocutory.” Similarly, he said that an order on a discovery motion in a contested matter would not be final.
When the appeal landed in the BAP, Judge Klein was prepared to dismiss for lack of appellate jurisdiction. However, the bankruptcy court entered final judgment on the Section 303(i) matter before the decision came down. Entry of the final order on Section 303(i) allowed the BAP to invoke the doctrine of cumulative finality, which we shall discuss below.
Lack of Finality Under Rule 54(b)
Judge Klein said that the alter ego motion fell under Rule 54(b) and thus was a decision the bankruptcy court could revisit at any time before the entry of final judgment. He noted that denial of the alter ego motion was not subject to Rules 59 and 60, made applicable by Bankruptcy Rules 9023 and 9024, because they only apply after entry of judgment, and judgment had not yet been entered in the larger Section 303(i) dispute when the involuntary debtor appealed denial of the alter ego motion.
The applicability of Rule 54(b), Judge Klein said, further demonstrated that denial of the alter ego motion “flunks the test for finality.” In addition, he said that an attempted appeal from an interlocutory order did not deprive the trial court of jurisdiction over the larger Section 303(i) dispute.
Cumulative Finality and the Merits
Judge Klein said that the doctrine of “cumulative finality permits appellate courts to recognize maturation to finality if a premature appeal is followed by final disposition of the case, even if no new notice of appeal is filed,” again citing Wright, Miller & Cooper.
Cumulative finality would have allowed Judge Klein to reach the merits of the denial of the alter ego motion. However, that was not necessary.
Along with ultimate dismissal of the larger Section 303(i) motion, the bankruptcy court once again ruled that the alleged alter egos could not be liable for a variety of reasons. Perceiving no clear error on the facts, no failure to apply the proper legal standard, and no abuse of discretion, Judge Klein affirmed denial of the motion to join the alter egos.
When a contested matter is nested within a larger contested matter, an order in the nested proceeding ordinarily is not final and thus not appealable until there is a final order in the larger contested matter, according to a teaching from the Ninth Circuit Bankruptcy Appellate Panel.
The October 6 opinion by Bankruptcy Judge Christopher M. Klein also tells us that the embedded order becomes final and appealable when there is a final order in the overarching contested matter, even without the filing of a new notice of appeal.
We recommend Judge Klein’s opinion for reading in full text to enjoy his exposé on a “multi-forum Whack-a-Mole tournament.”