A critical bankruptcy litigation issue has finally been resolved by the U.S. Supreme Court. Until recently, litigants had been faced with the dilemma of whether to immediately appeal a denial with prejudice of a request for stay relief or wait until the underlying matter had been fully adjudicated. Given the uncertainty, parties remained unsure if they risked losing the ability to challenge the denial of stay relief by a bankruptcy court if they waited to appeal. Now it is clear that they will. In Ritzen Group v. Jackson Masonry, 589 U.S. ____ (2020), the Supreme Court affirmed a U.S. Court of Appeals for the Sixth Circuit decision and ruled that “a creditor’s motion for relief from the automatic stay initiates a distinct proceeding terminating in a final, appealable order when the bankruptcy court rules dispositively on the motion.”
Before Jackson Masonry’s bankruptcy, Ritzen Group and Jackson were parties to an agreement for Ritzen to purchase land from Jackson. Closing never occurred due to mutual allegations of contract breach. Ritzen then brought suit against Jackson in state court, however, immediately prior to trial, Jackson entered Chapter 11, which triggered the automatic stay. Ritzen sought stay relief from the bankruptcy court so that Ritzen could proceed with its state court action. Although the stay relief motion was denied, Ritzen did not immediately file an appeal.
Instead, Ritzen filed a proof of claim, asserting the same breach of contract argument, which claim was ultimately disallowed by the bankruptcy court. Only then did Ritzen file an appeal of the contract breach claim and stay relief denial order. In affirming the bankruptcy court’s orders, the district court specifically ruled that Ritzen’s appeal of the stay relief denial order was untimely (not having been filed within 14 days of entry of the underlying order). Ritzen appealed to the Sixth Circuit, which affirmed the district court’s decisions.
The Supreme Court was guided by its previous decision in Bullard v. Blue Hills Bank, 575 U.S. 496 (2015). In Bullard, the Supreme Court held that a bankruptcy court’s denial of a Chapter 13 proposed repayment plan was not a final order under 28 U.S.C. Section 158(a)—which provides that parties have an appeal as of right from “final judgments, orders and decrees” entered in bankruptcy “cases and proceedings”—because the plan denial “did not conclusively resolve the relevant ‘proceeding” in that it did not “alter the status quo and fix the rights and obligations of the parties.” The Supreme Court looked to Bullard for “how to define the immediately appealable ‘proceeding’ in the context of stay relief motions.” Jackson argued, and the Sixth Circuit held, that the relevant discrete proceeding was the adjudication of the stay relief motion, while Ritzen argued that the stay relief determination was merely the first step in the “proceeding” of its claims resolution process.
The Supreme Court—siding with Jackson and the Sixth Circuit—held that the “proceeding” at issue is the adjudication of the stay relief motion. The Supreme Court found that “a bankruptcy court’s order ruling on a stay relief motion disposes of a procedural unit anterior to, and separate from, claim-resolution proceedings.” Therefore, under Bullard, the stay relief adjudication is “an independent ‘proceeding’ within the meaning of 28 U.S.C. Section 158(a).” The Supreme Court also noted that its conclusion is consistent with 28 U.S.C. Section 157(b)(2) in that Section 157(b)(2) separately delineates “motions to terminate, annul or modify the automatic stay” and “allowance or disallowance of claims against the estate” as core proceedings, rather than categorizing stay relief motions and claims (dis)allowance together.
Ritzen argued that the stay relief denial order merely decided the forum for the adjudication of its adversary claims and was thus only a first step in the claims resolution process. The Supreme Court, however, determined that the disposition of a stay relief motion can have consequences larger than the determination of the forum, including “whether a creditor can isolate its claim from those of other creditors,” the manner in which the creditor’s claims will be adjudicated, and whether collection of the debt may be delayed or decline in value before distribution. The Supreme Court also found that even though disposition of a motion for stay relief will determine whether the claim is to be heard in bankruptcy court or state court, that fact alone does not mean the order is not final. Moreover, the Supreme Court noted that “many motions to lift the automatic stay do not involve adversary claims against the debtor that would be pursued in another forum but for bankruptcy,” such as motions to repossess or liquidate a creditor’s collateral.
Ritzen further argued that, even if the stay relief denial motion is not part of the claims reconciliation process, the order is still not final where “the bankruptcy court’s decision turns on a substantive issue that may be raised later in the litigation.” Here, Ritzen argued at the bankruptcy court level that the stay should be lifted because Jackson filed its bankruptcy case in bad faith, and thus the stay relief denial order could not be final because the bad faith argument could have been re-asserted later in the bankruptcy case. The Supreme Court found that this argument did not address the correct question, which is “whether the order in question terminates a procedural unit separate from the remaining case, not whether the bankruptcy court has preclusively resolved a substantive issue.” Lastly, Ritzen argued that holding the stay relief denial order to be final would encourage piecemeal appeals and disrupt the efficiency of the bankruptcy process. In contrast, the Supreme Court determined that “classifying as final all orders conclusively resolving stay relief motions will avoid, rather than cause, ‘delays and inefficiencies.’”
In conclusion, the Supreme Court held that the appropriate “proceeding” was the adjudication of the stay relief motion, which denial left nothing more for the bankruptcy court to address, and thus is a final order. Interestingly, however, the Supreme Court noted that it was not deciding “whether finality would attach to an order denying stay relief if the bankruptcy court enters it ‘without prejudice’ because further developments might change the stay calculus.”
So what does this mean? For sure, if a stay relief request is denied with prejudice, the losing party must immediately appeal to preserve the argument. However, if the stay relief order is entered “without prejudice” then the question as to the appropriate timing of an appeal remains open.