In a recent ruling, the U.S. Court of Appeals for the Eleventh Circuit examined whether circuit courts have jurisdiction to hear direct appeals of unauthorized bankruptcy court orders that have not been reviewed by a district court. This was an issue of first impression in the Eleventh Circuit. The appellate court held that a bankruptcy court’s ruling in a non-core proceeding that has not been reviewed by the district court carries no adjudicative authority and is therefore not directly appealable to the circuit court. The court of appeals returned the case to the district court for further proceedings.

At issue in Wortley v. Bakst were a number of adversary proceedings arising in the Chapter 7 bankruptcy of Pennsylvania-based Trafford Distribution Center (“Trafford”). The bankruptcy judge presiding over the bankruptcy case and the adversary proceedings was accused of showing favoritism to the Chapter 7 trustee’s law firm which had hired his fiancé while the bankruptcy case and adversary proceedings were pending. The law firm prevailed in the adversary proceedings and the defendants, collectively referred to as the “Wortley parties,” were ordered to pay over $2.5 million to Trafford’s bankruptcy estate.

Following the judgments, the Wortley parties brought a state court action alleging that the bankruptcy judge had been improperly influenced by the law firm through its hiring of the judge’s fiancé. The state court action was removed to bankruptcy court. A new bankruptcy judge dismissed the Wortley parties’ claims and certified his decision for direct appeal to the Court of Appeals for the Eleventh Circuit.

The court of appeals grappled over whether it had jurisdiction to hear the merits of the Wortley parties’ appeal. First, it analyzed whether the bankruptcy court had the authority to enter final judgments in the adversary proceedings. Bankruptcy courts may hear two types of proceedings in connection with the administration of a bankruptcy estate: core proceedings and non-core proceedings. A matter is a core proceeding if it arises only in the bankruptcy context and involves rights created by federal bankruptcy law. If a matter is a core proceeding, the bankruptcy court may enter final judgment absent consent by the parties. On the other hand, a matter is non-core if it is a related case that could potentially affect the bankruptcy estate. If a matter is non-core, the bankruptcy court cannot enter a final judgment, but instead must enter proposed findings of fact and conclusions of law for the district court to review de novo.

The court of appeals found that the bankruptcy court did not have authority to enter a final order or dismissal because it only had “related to” jurisdiction over the Wortley parties’ claims, i.e., it was a non-core proceeding related to the Trafford bankruptcy. The court explained its holding by noting that this was not the sort of case that would arise only in bankruptcy, because corruption or improper conduct of a judge can occur in any type of legal proceeding. The court also noted that the case did not involve any rights created by federal bankruptcy law.

As a result of the case being a non-core proceeding, the appellate court held that it did not have jurisdiction to consider the merits of the Worley parties’ appeal because the bankruptcy court’s findings needed to first be reviewed by a district court. The court cited to 28 U.S.C. § 158(d)(2)(A) to note that the appellate court only has jurisdiction to hear certified, direct appeals from “final judgments, orders, and decrees.” Because the bankruptcy court did not have authority to enter the order of dismissal that it certified for direct appeal, appellate jurisdiction under Section 158 was lacking. While this was a case of first impression in the Eleventh Circuit, the holding was consistent with the Seventh Circuit’s holding on the same issue. The court’s ruling also underscores the appellate court’s hesitancy to hear bankruptcy matters that have not been reviewed by lower courts to “finality.”

As a result of this case, more federal courts of appeals may weigh in on their jurisdiction in bankruptcy cases. While the Seventh Circuit and the Eleventh Circuit agree that federal circuit courts do not have jurisdiction to hear direct appeals of unauthorized bankruptcy court orders that have not been reviewed by a district court, another court of appeals ruling the other way could lead to Supreme Court consideration of this issue. Also, as a result of this case bankruptcy judges, at least in the Eleventh Circuit, may be hesitant to consider a bankruptcy proceeding as a “core”, and instead may opt to propose findings of facts and conclusions of law for the district court to review de novo.