Judicial Code Section 158(d)Bankruptcy Cases on Appeal - Part Two

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Jun 1998

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The U.S. Court of Appeals for the Ninth Circuit has had several opportunities to interpret 28 U.S.C. §158(d).¹ An important case involving the interpretation of §158(d) is Bonner Mall Partnership v. U.S. Bancorp Mortgage Co..² There, the debtor filed a plan of reorganization predicated upon the new value exception to the absolute priority rule.

A creditor objected to the plan of reorganization, contending that the new value exception did not survive the enactment of the Bankruptcy Code. In addition, the creditor made a motion for relief from the automatic stay. The bankruptcy court ruled that the new value exception did not survive the enactment of the Bankruptcy Code, and it granted relief from the automatic stay. The district court, relying on Dewsnup v. Timm.³ ruled that the new value exception had not been eliminated, and therefore, it was a viable exception to the absolute priority rule. The district court reversed the judgment of the bankruptcy court, and it remanded for further proceedings consistent with its opinion. Subsequently, an appeal was taken to the Ninth Circuit Court of Appeals.

The Ninth Circuit independently assessed whether it had appellate jurisdiction. In order for an appeals court to have jurisdiction, both lower court orders must be final. The difficult issue before the court was whether the district court order was final. The distinctive nature of a bankruptcy case mandates that an appeals court must adopt a pragmatic approach to finality.⁴ The court stated:

Under Ninth Circuit law, if the district court affirms or reverses a final bankruptcy court order, its order is final. However, difficult questions regarding finality sometimes arise, when a district court reverses a final order of a bankruptcy court and remands. In such circumstances we balance two important policies: avoiding piecemeal appeals and enhancing judicial efficiency. We also consider the systematic interest in preserving the bankruptcy court’s role as the finder of fact. On the basis of our analysis of these factors, we have concluded that when the district court remands for further factual findings related to a central issue raised on appeal, its order is ordinarily not final and we lack jurisdiction.⁵

The Ninth Circuit Court of Appeals thought that the jurisdictional principles enunciated in King v. Stanton.⁶ were controlling.⁷ and it observed:

However, Stanton suggests that we should assert jurisdiction even though a district court has remanded a matter for factual findings on a central issue if that issue is legal in nature and its resolution either 1) could dispose of the case or proceeding and obviate the need for fact-finding; or
2) would materially aid the bankruptcy court in reaching its disposition on remand. We believe that the Stanton principle is sound, and we adopt it here. The present case falls squarely within the first Stanton criterion. The central question is a legal one that is clearly potentially dispositive. It involves the very existence of the rule pursuant to which the bankruptcy court would be required to make factual findings on remand. If we hold that the new value exception no longer exists, no further factual proceedings will be necessary, and Bancorp will be entitled to the relief it seeks as a matter of law.⁸

The policy of judicial economy militated over the policy of avoiding piecemeal appeals.⁹

A case that exemplifies the Ninth Circuit’s flexible approach to §158(d) is Dominguez v. Miller.¹⁰ There, creditors, pursuant to Bankruptcy Code §141(d)(3) filed a memorandum objecting to the discharge of their debt under a liquidating plan filed by the trustee. The creditors elected not to file a complaint because they contended that §1141(d)(3) was self-executing. The bankruptcy court directed the creditors to file their objection in the form of a complaint seeking a declaratory judgment. Subsequently, the court dismissed the complaint for failure to state a cause of action. The Bankruptcy Appellate Panel (BAP) for the Ninth Circuit affirmed the bankruptcy court’s ruling that a timely complaint was necessary to invoke §1141(d)(3)’s prohibition of discharge and that the court’s permission to file a complaint for a declaratory judgment was not an extension of the period in which to file a complaint objecting to discharge. Moreover, the BAP did reverse the bankruptcy court’s ruling that the discharge memorandum was insufficient to satisfy the requirement of a complaint to which the declaratory judgment could relate back. The discharge memorandum was sufficient because it challenged the debtor’s right to a discharge.

The Ninth Circuit ruled that under Judicial Code §158(d) it had jurisdiction to adjudicate the appeal.¹¹ The court employed the two-prong Bonner Mall test for determining whether appellate jurisdiction should be exercised.¹² The Ninth Circuit Court of Appeals concluded that the issue before it was of a legal nature and its resolution could dispose of the case or proceeding and obviate the need for fact-finding.¹³ The court stated:

The Bonner provision for review of legal questions that may obviate the need for further factual proceedings is applicable in this case. If we uphold the bankruptcy court’s ruling that a complaint is necessary within the timer period established by Rule 4004 and reinstate its legal conclusion that the memorandum asserting the self-executing character of 11 U.S.C. §1141(d)(3) cannot be interpreted as an informal complaint objecting to the discharge of Dominguez’ debt, then no further factual proceedings will be necessary, and the Millers will have no relief from the con-firmation of the trustee’s plan. Therefore, we have jurisdiction to review this appeal pursuant to 28 U.S.C. §158(d).¹⁴

Another pertinent case is Foothill Capital Corp. v. Claire’s Food Market Inc..¹⁵ There, the debtor, Coupon Clearing Service Inc., was a coupon clearinghouse for various retailers. A dispute ensued between the debtor’s secured creditor, Foothill Capital Corp., which claimed a perfected security interest in coupon proceeds, and the appellees, who were retailers and alleged that the debtor held the coupon proceeds in trust. The bankruptcy court granted Foothill summary judgment because its perfected security interest had priority over the interests of the appellees. The district court found that there were numerous factual issues that precluded the issuance of summary judgment for either the appellant or appellees, and it vacated the bankruptcy court’s order and remanded for further proceedings.

The Ninth Circuit held that under Judicial Code §158(d) it had jurisdiction to determine the appeal.¹⁶ The court again utilized the Bonner Mall test.¹⁷ The issue was legal in nature, and its resolution could dispose of the proceeding.¹⁸ The court stated:

We find that what the ShopRite Retailers contend are disputed facts, however, are really inferences made from undisputed facts. It is undisputed that: (1) CCS was to reimburse the ShopRite Retailers for the coupons submitted on a fixed schedule; (2) CCS was under no duty to segregate the coupon proceeds from its own funds; and (3) under some of the Service Agreements, the coupons and coupon proceeds were assigned to CCS. The inferences to be made from the facts are legal and not factual.¹⁹

The Ninth Circuit is probably the most liberal circuit interpreting Judicial Code §158(d). The strength of the Ninth Circuit approach is that it expedites the resolution of issues that are central to the resolution of the bankruptcy case and therefore obviates the need for years of protracted litigation.