Supreme Court Holds that a Final, Appealable Order Results When a Bankruptcy Court "Unreservedly" Grants or Denies Stay Relief

Written by:

Jonathan D’Andrea

Term Law Clerk for Judge Russ Kendig

U.S. Bankruptcy Court, Northern District of Ohio

            In Ritzen Group, Inc. v. Jackson Masonry, LLC, __ U.S. __, (No. 18-938, Jan. 14, 2020), the U.S. Supreme Court recently held that a bankruptcy court’s unreserved denial or grant of a motion for relief from stay constitutes a final, appealable order.  Although the Court explicitly declined to decide whether an order denying stay relief “without prejudice” constitutes a final order, the decision provides a bright-line rule as to the finality of orders granting or denying stay relief.  And, as the Court explained, the ruling will prevent the delay of appellate review of fully adjudicated disputes. 

            The case began in state court as a breach of contract dispute between Ritzen Group, Inc. (“Ritzen”) and Jackson Masonry, LLC (“Jackson”).  Shortly before trial, Jackson filed a petition for relief under chapter 11 of the Bankruptcy Code, halting the state court litigation.  See 11 U.S.C. § 362(a).  In the bankruptcy case, Ritzen filed a motion for relief from stay to proceed with the state court trial.  Ritzen argued that Jackson filed its bankruptcy petition in bad faith, warranting stay relief.  The bankruptcy court disagreed and denied Ritzen’s motion. 

            Ritzen had 14 days after entry of the denial order to appeal the bankruptcy court’s decision, 28 U.S.C. § 158(c)(2), but failed to do so within this time period.  Instead, Ritzen pursued its breach of contract claim against Jackson in the bankruptcy court, filing a proof of claim and an adversary proceeding against Jackson.  But the bankruptcy court found that Ritzen, not Jackson, had breached the contract at issue, and disallowed Ritzen’s claim.  The bankruptcy court subsequently confirmed Jackson’s chapter 11 plan, which effectively barred Ritzen from pursuing its claim against Jackson any further.

            Ritzen appealed the bankruptcy court’s order denying relief from stay and the order resolving Ritzen’s breach of contract claim to the district court.  The district court sided with the bankruptcy court on both issues.  Ritzen further appealed to the U.S. Court of Appeals for the Sixth Circuit.  The Sixth Circuit held that the order denying Ritzen’s motion for relief from stay was a final order, triggering the 14-day period to file a notice of appeal.  Thus, Ritzen failed to timely appeal.

            The issue for the Supreme Court to decide was whether orders denying motions for relief from stay are final and immediately appealable under 28 U.S.C. § 158(a)(1).  A unanimous Supreme Court answered this question in the affirmative, offering several reasons:  First, in Bullard v. Blue Hills Bank, 575 U.S. 496 (2015), the Court held that a bankruptcy court order denying plan confirmation with leave to amend was not final because it did not conclusively resolve the confirmation proceeding.  Bullard, 575 U.S. at 499, 502-03.  Analyzing the current case under this paradigm, the Court explained that adjudication of a motion for relief from stay is a “discrete proceeding,” the resolution of which constitutes a final, appealable order.  Second, 28 U.S.C. § 157(b)(2)(G) describes motions to terminate, annul, or modify the automatic stay as “core proceedings”, and these are listed separately from proceedings regarding the allowance or disallowance of claims, indicating that Congress intended for stay-relief adjudications to be considered final.  Third, resolution of a motion for relief from stay can be significant and consequential, resulting in more than just a determination as to the appropriate forum for claim adjudication, which lends support to the notion that such orders should be considered final.  Fourth, the Court rejected Ritzen’s argument that a stay-relief denial should not be considered final when, as in this case, the bankruptcy court’s decision rested on a substantive legal issue.  Finally, the Court explained that its rule will avoid delays and inefficiencies regarding appeals.    

            Bright-line rules are always easier to remember, and the Supreme Court’s decision in Ritzen provides one: orders granting or denying relief from stay are considered “final” under 28 U.S.C. § 158(a)(1).  Bankruptcy practitioners should be aware of the decision and its effect on the timing of bankruptcy appeals.  See 28 U.S.C. § 158(c)(2); Fed. R. Bankr. P. 8002(a).  

* Disclaimer: None of the statements contained in this article constitute the official view or policy of any judge, court or government employee. 

Bankrupt Billionaire and Family Find No Automatic Stay Protection From SEC's Asset Freeze

By Stephen W. Sather

Barron & Newburger, P.C.

Austin, TX

The Second Circuit has held that efforts by the SEC to temporarily freeze assets alleged to be ill-gotten gains from a securities fraud scheme were excepted from the automatic stay by the police powers exception of section 362(b)(4).   SEC v. Miller, 808 F.3d 623 (2nd Cir. 12/18/15).   The opinion can be found here.   

What Happened

Brothers Samuel and Charles Wyly were officers and directors of various publicly traded companies.   They transferred millions of stock options to trusts and subsidiary companies in the Isle of Man.   They used the trusts as a vehicle to trade in the stock without disclosing their beneficial ownership.

On July 29, 2010, the SEC brought an enforcement action against the wily Wylys.   In May 2014, after a six week jury trial, the jury returned a verdict against them.   In September 2014, the Court ordered disgorgement of nearly $300 million representing taxes avoided on trading profits and a portion of the profits themselves.   

The SEC then sought an asset freeze order against the Wylys and sixteen members of their extended family.   Samuel Wyly and Charles's widow, Caroline, both filed chapter 11 bankruptcy proceedings in the Northern District of Texas.   They claimed that the asset freeze request was an attempt to collect a debt and therefore subject to the automatic stay.   After the bankruptcy filings, the family members were formally made parties to the action as "relief defendants."  

The District Court for the Southern District of New York held several hearings after which it entered an order freezing any assets that were ever property of the Isle of Man entities as well as any assets received from the Wylys after January 1, 2005.  The freeze allowed the relief defendants to use any assets that did not come from the tainted sources, as well as an allowance of $15,000 per month plus medical expenses, educational costs, legal fees and bankruptcy related costs.  

The District Court's order indicated an intent to work with the bankruptcy court in Texas and stated that the asset freeze would expire once the frozen assets were under the Bankruptcy Court's control.   In other words, the assets were only frozen until such time as they could be recovered by the appropriate Debtor-in-Possession or subsequently appointed trustee.   

The District Court issued an opinion in which it found that the SEC's actions did not violate the automatic stay because they were exercised in connection with its police powers.    

Fifteen of the relief defendants appealed to the Second Circuit.   The sixteenth relief defendant, Caroline Wyly, asked the Texas Bankruptcy Court to hold that the stay applied.   The Bankruptcy Court held that the police powers exception defeated the automatic stay.   In re Wyly, 526 B.R. 194 (Bankr. N.D. Tex. 2015).

The Second Circuit's Ruling

The Second Circuit agreed with the District Court (and the Texas Bankruptcy Court) that the police powers exception applied.    It described the purpose behind the police powers exception thusly:

(T)he purpose of the governmental unit exception “is to prevent a debtor from ‘frustrating necessary governmental functions by seeking refuge in bankruptcy court.’”  As the legislative history makes plain, “where a governmental unit is suing a debtor to prevent or stop [a] violation [constituting] fraud . . . or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay.”

Opinion, pp. 16-17.  

The parties agreed that the SEC's enforcement action fell within the general bounds of the police powers exception.   However, they argued that it fell within an exception to the exception.

In the instant case, all parties agree that the SEC’s regulatory enforcement action against the Wyly Brothers falls within the governmental unit exception.  The Relief Defendants assert, however, that this case falls under an exception to the governmental unit exception. This “exception to the exception” provides that actions to enforce money judgments are subject to the automatic stay, even if they were otherwise pursued by a governmental unit in furtherance of the government’s police or regulatory powers.  Accordingly, the Relief Defendants argue that the asset freeze order is subject to the automatic stay. The SEC counters that the asset freeze order does not fall within the money judgment “exception to the exception” and hence does not trigger the automatic stay.

Opinion, p. 17.

 The Court distinguished its prior decision in SEC v. Brennan, 230 F.3d 65 (2nd Cir. 2000) to find that the stay did not apply.   The Court based its ruling on factual, procedural and policy distinctions.

 Factually, the Court found that the asset freeze order was not an impermissible enforcement of a money judgment.

Here, the applicable order is merely an asset freeze, which, unlike the order in Brennan, neither transfers ownership, nor vests control over assets in the courts, nor—given its numerous exemptions for legal, medical, educational, and other uses, as well as generous living expenses—entirely deprives the Relief Defendants of their use. To be sure, the asset freeze order entered by the District Court does temporarily burden the use of certain assets. It does not, however, rise to the level of impermissible enforcement of a money judgment.  Unlike the repatriation and deposit order in Brennan, the asset freeze seeks not to modify or transfer assets in any way, but rather, merely to “preserve the status quo in anticipation of a final judgment.

Opinion, pp. 19-20.

The Court also found that procedurally, an asset freeze entered prior to judgment was not a naked attempt to collect a judgment.

In Brennan, we instructed that “the line between [unstayed] police or regulatory power on the one hand, and [stayed] enforcement of a money judgment on the other, [must] be drawn at entry of judgment.”  In other words, “up to the moment when liability is definitively fixed by entry of judgment, the government is acting in its police or regulatory capacity. . . . However, once liability is fixed and a money judgment has been entered, the government necessarily acts only to vindicate its own interest in collecting its judgment.

Opinion, p. 21.

Finally, and perhaps most importantly, the Court found that the asset freeze order complimented the bankruptcy court's jurisdiction rather than threatening it.

No conflict exists between the proceedings in the District Court and those in the Bankruptcy Court. This asset freeze order is narrowly framed to exclude assets in the bankruptcy proceeding and to be lifted as soon as the assets are clearly under the control of the Bankruptcy Court. Indeed, the Bankruptcy Court itself endorsed the freeze as “neatly avoiding duplication of judicial effort between the SEC Action and these bankruptcy cases.”  What is more, the Bankruptcy Court determined that enforcing the automatic stay “may ultimately accomplish little” since the SEC would likely seek relief from the stay to proceed against the Relief Defendants in its enforcement action.   Though it stopped short of deciding such a hypothetical motion, the Bankruptcy Court strongly indicated its own inclination to avoid extending the automatic stay to cover this case: “From the standpoint of judicial economy, it likely would make the most sense for the District Court, in one coordinated proceeding, to liquidate the amount of alleged ill‐gotten gains of the securities fraud that all relief defendants allegedly received and still possess.”

Under these circumstances, the entry of the asset freeze order here does not contravene the first policy of “centraliz[ing] all disputes concerning property of the debtor’s estate so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in other arenas.”   Moreover, the asset freeze order is fully consistent with the second policy of “prevent[ing] a debtor from frustrating necessary governmental functions by seeking refuge in bankruptcy court.”   The Wylys initiated bankruptcy proceedings and invoked the automatic stay mere days after the SEC filed its then‐pending motion for an asset freeze. The timing speaks loudly for itself. 

Opinion, pp. 24-25.

As a result, the Court concluded that the automatic stay did not apply.

What It Means

At first blush, it seems counter-intuitive that an action by the SEC to freeze assets was not an attempt to enforce a money judgment.   However, upon further reflection, it seems clear that both the SEC and the District Court took a nuanced approach to preserve assets until they could be brought into the bankruptcy estate.  The SEC learned how to get the result it wanted while avoiding the result from the Brennan case.   The close coordination between the District Court and the Bankruptcy Court makes it clear that the two courts were working towards a common end rather than competing with each other.   Thus, the Second Circuit's ruling seems quite sensible.    

Creditors Beware: A Restrictive Approach to the Criminal Prosecution Exception to the Automatic Stay

By Kirk B. Burkley

and Daniel R. Schimizzi

Bernstein-Burkley, P.C.

Pittsburgh, PA

                 A recent decision from the United States Court of Appeals for the Sixth Circuit will likely chill certain collection practices employed by aggressive creditors.  In the case of Weary v. Poteat, No. 15-5159, 2015 WL5712191 (6th Cir. Sept. 30, 2015), the Sixth Circuit reviewed the criminal prosecution exception to the automatic stay and upheld the bankruptcy court’s award of actual and punitive damages to the debtor for the creditor’s violation of the stay. 

            In Weary, after the Debtor defaulted on her rent payments and moved out of the rental property, her landlord commenced a civil action, claiming $24,999.99 in damages.  The Debtor then filed a chapter 7 bankruptcy petition with the United States Bankruptcy Court for the Eastern District of Tennessee.  After receiving notice of the bankruptcy, the landlord sent letters to the Debtor’s bankruptcy attorney and her mother threatening to pursue criminal charges against the Debtor.  As a result of the letters, the Debtor moved the bankruptcy court to hold the landlord in contempt for violating the automatic stay.  In defense, the landlord invoked the criminal prosecution exception, claiming that the letters communicated his intent to pursue criminal prosecution and fell within the exception. 

 

            The automatic stay prohibits creditors from engaging in any act to collect, assess or recover a claim against the debtor that arose before the commencement of the case.  See 11 U.S.C. §362(a). The automatic stay does not operate as a bar to “the commencement or continuation of a criminal action or proceeding against the debtor.”  11 U.S.C. §362(b)(1).  The bankruptcy court found that the landlord’s motivation for sending the letters was to threaten, harass and intimidate the Debtor in an effort to coerce her into making a payment.  More importantly, the letters were not in the nature of, or in furtherance of any, criminal prosecution; rather, the letters communicated the landlord’s threat to pursue criminal prosecution.  Finding that the landlord willfully acted to harass and coerce the debtor into paying him, the bankruptcy court awarded the Debtor with actual damages, including costs and attorneys’ fees, and punitive damages of $7,500.00. 

            The United States District Court for the Eastern District of Tennessee and the Sixth Circuit affirmed the bankruptcy court.  The Sixth Circuit noted that the landlord failed to challenge the bankruptcy court’s fact findings, or its exercise of discretion in imposing punitive damages.  The landlord also did not challenge the bankruptcy court’s finding of his intent underlying the letters, or of his knowledge of the bankruptcy case.  Since the letters were not in furtherance of any criminal prosecution and were intended to coerce payment from the Debtor, the plain language of Section 362(b)(1) prevented the letters from falling within the criminal prosecution exception.  The Sixth Circuit affirmed the bankruptcy court’s findings that the criminal prosecution exception to the automatic stay did not apply.  The Sixth Circuit also affirmed the award of actual and punitive damages, as the landlord did not challenge these findings.

            The practice point to take from this opinion is that the criminal prosecution exception to the automatic stay does not safeguard the threat of criminal prosecution.  Don’t take the risk:  if you have grounds to pursue criminal charges against a debtor, just do it.  Threatening to do so may run afoul of the automatic stay. 

 

Does A U.S. Bankruptcy Court Have Jurisdiction Over a Beis Din, or Jewish Religious Court?

By Michael R. King

Gammage & Burnham, P.C.

Phoenix, AZ

 

QUESTION:  DOES A U.S. BANKRUPTCY COURT HAVE JURISDICTION OVER A BEIS DIN, OR JEWISH RELIGIOUS COURT?

ANSWER:         AT LEAST IN THIS VELT, THE BANKRUPTCY COURT HAS ASSERTED ITS JURISDICTION OVER A BEIS DIN RELIGIOUS
COURT.

Would a Bankruptcy Judge really have the chutzpah to enjoin a Jewish Rabbinical Court and issue sanctions against it?

Congregation Birchos Yosef filed a Chapter 11 reorganization bankruptcy. In re: Congregation Birchos Yosef, Case No. 15-22254 (Bankr. S.D.N.Y.). After filing the Chapter 11 petition, Congregation Birchos Yosef filed an adversary lawsuit in bankruptcy court against Bais Chinuch L'Bonois, Inc. ("Bais Chinuch") and others alleging claims for fraud, breach of fiduciary duty and "looting" of assets of Congregation Birchos Yosef.

Religious Proceeding Violates Automatic Stay

By Jeff Sayer

Scorpion Legal Services, LLC

Roswell, GA

 

The Honorable Robert Drain of the United States Bankruptcy Court for the Southern District of New York issued an opinion on August 24, 2015 in a case which raised a conflict between bankruptcy law and Jewish religious proceedings.

In In re: Congregation Birchos Yosef, the Debtor was a debtor in possession of a Jewish School in a case filed under Chapter 11. The issue arose when the Debtor asserted an adversary proceeding against Bais Chinuch L’Bonois (“Bais”), another Jewish School asserting claims of breach of fiduciary duty and looting of the Debtor’s assets. Upon the filing of the adversary proceeding, Bais invoked a religious proceeding to hear the case, in which a Jewish religious court, a Beis Din, would allow the principals of the Debtor to dispute the charges brought by the Bais. If the principals of the Debtor did not participate in the Jewish court hearing, the result would be at a minimum a shunning by their religious community, a Sirov, and potentially all Orthodox Jews.