Narrowing Appeal Rights When District Court Issues an Order Sitting as a Bankruptcy Court - Klestadt & Winters v. Cangelosi, (9th Cir. March 6, 2012)

03.23.2012
Nossaman eAlert

Summary: Recently, the Ninth Circuit Court of Appeals issued an important procedural decision dismissing an appeal based on the lack of jurisdiction.  The Court held that the appellants had no right to an immediate appeal from a Bankruptcy Rule 9011 sanctions order of the District Court, where the order was issued by a District Court sitting as a bankruptcy court.  28 U.S.C. section 1291 allows appeals only from final decisions by a district court when it is sitting as a bankruptcy court.  The sanctions order was not a final decision.  In contrast, 28 U.S.C. section 158(d)(1)which gives a Circuit Court authority to hear bankruptcy appealsis broader since it applies to final decisions, judgments, orders and decrees of a District Court and/or the Bankruptcy Appellate Panel (BAP), sitting as appellate courts.  This decision is important for appellant parties as it may create additional jurisdictional restrictions when appealing an order issued by a District Court sitting as a bankruptcy court.

Facts and Procedural History: A group of lenders (Lenders) sued Asset Resolution, LLC (Asset or Debtor1)  in the District Court for the District of Nevada regarding their rights under various loan servicing agreements.  The District Court issued several unfavorable decisions against Asset, which awarded Asset less than the full amount of the servicing fees it requested.  Thereafter, Asset filed a chapter 11 petition in the Bankruptcy Court for the Southern District of New York.  The bankruptcy case was transferred to Nevada where the Lenders motion to withdraw the reference was granted. 

Subsequently, the Nevada District Court sitting as a bankruptcy court granted the Lenders motion for sanctions against the Debtor (and their counsel) for almost $300,000 pursuant to Bankruptcy Rule 9011.  The District Court found that the bankruptcy petition was improper and frivolous.  Debtor quickly appealed.  The Ninth Circuit held that the District Courts order was not immediately appealable and dismissed the appeal for lack of jurisdiction.

Reasoning: In essence, the Ninth Circuit dismissed the appeal because the District Courts order did not meet the necessary requirements to be an immediately, appealable interlocutory order under 28 U.S.C. section 1291. 

Initially, the Ninth Circuit traced the jurisdictioal standard governing appeals.  Courts of Appeal have jurisdiction over final decisions of the district courts of the United States.  28 U.S.C. section 1291.  In addition, Courts of Appeals have jurisdiction over a small class of interlocutory orders that are nevertheless appealable final decisions.  Slip op. at 2556 (citing Cohen v. Beneficial Industrial Loan Corporation, 337 U.S. 541, 546 (1949)).  The Ninth Circuit found that the District Courts sanctions order was not a final decision under Section 1291.  The Court of Appeals rejected the Debtors argument that the appeal should be governed by the broader 28 U.S.C. section 158(d)(1), which allows for a more flexible standard for interlocutory appeals of decisions from the BAP and district courts hearing appeals from bankruptcy courts.  Relying on Cannon v. Haw. Corp. (In re Haw. Corp.), 796 F.2d 1139, 1141 (9th Cir. 1986), the Court of Appeal found that the instant appeal was not subject to review under the broader Section 158(d)(1) because the order on appeal was entered by a district court sitting as a bankruptcy court.  As such, the more narrow Section 1291 applied as outlined in Cohen v. Beneficial Industrial Loan Corporation, 337 U.S. 541, 546 (1949).

The Ninth Circuit found that the sanctions orders did not satisfy the Cohen requirement that an order remain completely separate from the merits of the underlying action.  Slip op. at 2562.  The Court of Appeals relied on Cunningham v. Hamilton County Ohio, 527 U.S. 198 (1999) (discovery sanctions order) and Ninth Circuit precedent interpreting Cunningham.  The Court of Appeals found that it could not properly determine if the underlying bankruptcy case was frivolous without also examining the Debtors financial and legal position leading up to the bankruptcy filing.  Slip op. at 2566.  Therefore, the sanctions order was not completely separate from the merits and did not qualify as a final decision or an immediately appealable interlocutory order.

Notably, had the Ninth Circuit determined that the broader Section 158(d)(1) governed the appeal, it could have found jurisdiction.  However, by dismissing the appeal based on Section 1291, the Court of Appeals applied a stricter standard of review for the same type of orders (i.e., interlocutory orders) depending on the procedural/bankruptcy posture of the order.  The dissenting and concurring opinion noted that the Ninth Circuit was the outlier among the other Circuits in its treatment of such appeals.  While concurring in the result, the dissent criticized the governing precedent, In re Haw Corp., which first created the distinction in the jurisdictional standard of review for interlocutory orders appealed from district courts sitting as bankruptcy courts. 

Note:  The Debtor recently filed a petition for a rehearing en banc.  It is possible that an en banc panel will grant the petition, given that the Ninth Circuit may be the only Circuit that adheres to the dual appellate jurisdictional standard for interlocutory bankruptcy appeals.  As mentioned, parties should remain cautious when seeking immediate appeals of district court orders that "sit as a bankruptcy court."

Allan H. Ickowitz is a partner in Nossaman's Los Angeles office and co-chair of the Firm's Financial Services and Bankruptcy Practice Group. He specializes in bankruptcy, creditors' rights and workout areas including commercial, real estate and related litigation. He can be reached at aickowitz@nossaman.com or 213.612.7849.

Harleen Kaur is an associate in Nossamans Los Angeles office.  She is a member of Nossaman's Litigation Department focusing primarily on financial services and bankruptcy matters. Ms. Kaur has experience in federal and state court including developing case strategy, preparing witnesses, and participating in settlement negotiations. She can be reached at hkaur@nossaman.com or 213.612.7850.


1 The "Debtor" included owners and officers of Asset Resolution, LLC.

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