A debtor in a Chapter 13 bankruptcy proceeding may not immediately appeal the rejection of his proposed repayment plan, a unanimous U.S. Supreme Court ruled on Monday.
A bankruptcy court's order denying confirmation of the proposed plan is not an appealable final order, Chief Justice John Roberts Jr. wrote in Bullard v. Blue Hills Bank.
The federal bankruptcy appeals statute authorizes appeals from final judgments in cases but also from “final judgments, orders and decrees … in cases and proceedings.” The federal circuit courts had split over what an immediately appealable "proceeding" is under Chapter 13.
"The relevant proceeding is the process of attempting to arrive at an approved plan that would allow the bankruptcy to move forward," Roberts wrote. "This is so, first and foremost, because only plan confirmation—or case dismissal—alters the status quo and fixes the rights and obligations of the parties."
Louis Bullard filed a Chapter 13 bankruptcy in Massachusetts in 2010. His largest debt was $346,000 that he owed Blue Hills Bank for a home mortgage that was significantly underwater. He proposed splitting the debt into a secured claim in the amount of the house's then-current value (which he estimated at $245,000), and an unsecured claim for the remainder (roughly $100,000).
Under the plan, Bullard would make his regular mortgage payments toward the secured claim, which he eventually would repay in full. He would pay on the unsecured claim only as much as his income would allow over the course of his five-year plan—about $5,000 of the $100,000 claim. The bank objected; the bankruptcy court refused to confirm the plan and ordered Bullard to submit a new plan within 30 days.
Although it said it lacked jurisdiction to hear his appeal, the Bankruptcy Appellate Panel of the U.S. Court of Appeals for the First Circuit exercised its discretion to take the appeal, because it raised a controlling question of law and a decision would move the litigation to an end. On the merits, the panel agreed with the bankruptcy court. Citing lack of jurisdiction because there was no final order, the First Circuit subsequently dismissed Bullard's appeal of the panel ruling.
Bullard had argued for a plan-by-plan approach to appeals. A bankruptcy court conducts a separate proceeding each time it reviews a proposal plan, he contended, and an order granting or denying confirmation terminates that proceeding, is final and appealable.
In rejecting arguments by Bullard and the United States, the chief justice wrote, "When the bankruptcy court confirms a plan, its terms become binding on debtor and creditor alike. When confirmation is denied and the case is dismissed as a result, the consequences are similarly significant."
But when, as in Bullard's situation, there is denial of confirmation with leave to amend, little changes, he wrote. "The automatic stay persists. The parties' rights and obligations remain unsettled. The trustee continues to collect funds from the debtor in anticipation of a different plan's eventual confirmation. The possibility of discharge lives on. 'Final' does not describe this state of affairs."
And Roberts gave little weight to Bullard's assurances that piecemeal appeals would not ensue if the court adopted his approach. "An appeal extends the automatic stay that comes with bankruptcy, which can cost creditors money and allow a debtor to retain property he might lose if the Chapter 13 proceeding turns out not to be viable," he wrote.
Ropes & Gray's Douglas Hallward-Driemeier, counsel to Blue Hills, said the decision was important because "it eliminates one way in which a debtor can really drag out a bankruptcy proceeding, or at least create the threat of that." The prospect of piecemeal appeals, he added, would give debtors undue influence in negotiations.
Although the high court did not specifically hold that its decision also applied to Chapter 11—corporate—bankruptcies, the chief justice did write that the costs to creditors of piecemeal appeals "are heightened if the same rule applies in Chapter 11, as the parties assume. Chapter 11 debtors, often business entities, are more likely to have the resources to appeal and may do so on narrow issues."
Hallward-Driemeier agreed, saying, a company actually has a lot of assets it can spend to take appeals for strategic reasons. "This eliminates one opportunity they would have to prolong proceedings and force creditors to accept the plan on the debtor's terms."
Mayer Brown's Michael Kimberly said Chapter 11 and 13 debtors would have less flexibility to challenge intermediate rejections of their reorganization plans.
"Because the development of a plan is such an undertaking, that means the risk of using creative solutions to deal with difficult problems will be far greater," he said.
"Without the right to an immediate appeal, the debtor and its creditors will have to scrap their efforts, and either return to the drawing board or dismiss the case altogether and forfeit the benefits of the automatic stay, every time a bankruptcy judge rejects a plan. This means creative solutions will be used less often, and the law will develop far more slowly, which helps no one."
Reprinted with permission from the May 4, 2015 edition of The National Law Journal © 2015 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.