Appeal-Proof: Court of Appeals Jurisdiction Over Orders Concerning Stays Pending Appeal

on September 27, 2012 ·

Posted in Jurisdiction and Appeals

Two recent decisions from the United States Court of Appeals for the Third Circuit, Black Horse Capital Master Fund LP v. JPMorgan Chase Bank, N.A. (In re Washington Mutual, Inc.) and In re Tribune Company, illustrate limitations on the ability to appeal orders denying a stay of bankruptcy proceedings or establishing the bond requirement for such a stay.  These decisions are important because, in the context of an appeal from a bankruptcy order and the lingering threat of equitable mootness, whether or not a stay of proceedings is obtained can be a matter of life and death for the claim on appeal. Given the importance of a stay to the appellant, and the importance of diligently pursuing a stay to protect against dismissal for equitable mootness, parties are well advised to take every action in their power to secure one.

As illustrated by a recent appeal in the Washington Mutual bankruptcy, however, appealing an order of the district court denying a stay pending appeal presents an uphill battle.  In Black  Horse, the appellants had brought an adversary proceeding to establish that they, and not the debtor, owned roughly $1.5 billion in preferred securities.  The bankruptcy court entered summary judgment in favor of the debtor, and the appellants appealed to the United States District Court for the District of Delaware.  Meanwhile, the Washington Mutual debtors proposed a plan of reorganization that called for the transfer of those securities “free and clear” to a third party.  As confirmation approached, the appellants recognized the very real threat that the plan would render their appeal equitably moot.

The appellants sought a stay of confirmation proceedings from both the bankruptcy and district courts, and were twice refused.  They then appealed the district court’s decision to the Third Circuit; however, before the court would hear their appeal on the merits, they would have to establish a jurisdictional foothold.  At the outset of the appeal, the clerk requested briefing on the issue.

The appellants first argued that their appeal was reviewable as a final order.  Under sections 158(d) and 1291 of title 28 of the United States Code, courts of appeals have jurisdiction to hear appeals from final orders from a district court (which, incidentally, do not include any addressing interlocutory orders from a bankruptcy court).  The appellants conceded that orders concerning stays generally are not final, but argued the order from the district court nevertheless was final because it amounted to an effective dismissal of the underlying suit. They reasoned that without intervention by the court, confirmation would proceed and moot their appeals.  Further, the appellants claimed their arguments as to why a stay should be granted had been decided on the merits and that they faced the irreparable harm of equitable mootness.  Notably, these arguments can be raised in any case in which an appeal might become equitably moot.

Second, the appellants argued that, even if the court’s order was not final, it was reviewable under the “collateral order” exception to the finality rule.  Courts have jurisdiction to review appeals under the collateral order doctrine where the order appealed from (1) conclusively determines the disputed question, (2) resolves an important issue completely separate from the merits of the action, and (3) would be effectively unreviewable on appeal from a final judgment.  The appellants maintained that these factors were satisfied because the issue of whether a stay would be granted was conclusively determined, the refusal to grant the stay was a completely separate issue than the merits of the appeal, and if plan were confirmed (and their appeal thus mooted) there would be no chance to review the order denying the stay.  Again, these arguments can apply with equal strength to any order denying a stay where equitable mootness is a probable result.

Third, the appellants argued that their appeal was reviewable because the underlying order had denied an injunction.  Section 1292(a) of title 28 of the United States Code provides jurisdiction over a limited number of interlocutory appeals, including those from orders granting, continuing, modifying, refusing, or dissolving an injunction.  Although the clerk had noted that the appealed order did not expressly grant, deny, or modify an injunction, the appellants argued jurisdiction existed because the order had the effect of a denial of an injunction.  They characterized the order as refusing to enjoin the bankruptcy court from proceeding with the confirmation hearing, with the result that their appeal would be permanently lost.  Yet again, these arguments can be raised in nearly any situation where a stay is not granted and as a result claims may be rendered equitably moot.

In a brief opinion, the Third Circuit rejected every one of the appellants’ jurisdictional arguments and dismissed the appeal for lack of jurisdiction.  It noted that the stay order was not a final order, a dismissal of the underlying suit, or a collateral order.  Furthermore, the court rejected the injunction argument, noting that the order was not designed to accord or protect anything in more than a temporary fashion.  In short, the imminent threat of equitable mootness did not render the decision appealable.

Although the Third Circuit did not decide the merits of the appeal, it did point out that the appellants failed to seek a stay of enforcement under Rule 62(d) of the Federal Rules of Civil Procedure.  Rule 62(d), made applicable to adversary proceedings by Bankruptcy Rule 7062, provides for an automatic stay of enforcement pending appeal where the appellant posts a supersedeas bond.  While a stay of enforcement may have preserved the appeal, the bond requirement for staying the Washington Mutual bankruptcy would have been incredibly, even prohibitively, large.  Furthermore, as illustrated by a recent appeal from the Tribune Company bankruptcy, appeals from orders conditioning a stay on such a requirement face the same jurisdictional hurdles as those from orders denying a stay.

In Tribune, appellants were noteholders who had objected to a settlement of fraudulent transfer claims held by the estate.  The claims were based on the debtor’s LBO, which had arguably pushed it into bankruptcy.  The LBO claims, which if successful might have provided a full recovery for the noteholders, played a central role in the bankruptcy.  A report by the court-appointed examiner with respect to the potential value of the claims had derailed an early plan incorporating the settlement of such claims.  Soon after, the exclusivity period expired and two plans emerged – one from the debtors settling the claims and another from the noteholders preserving the claims to be prosecuted postconfirmation.  The court found both plans unconfirmable, but importantly approved the reasonableness of the part of the debtors’ plan settling the LBO claims.  The debtors proposed a new plan addressing the shortcomings identified by the court, again premised on the settlement of the LBO claims.  That plan was successfully confirmed.

The appellants appealed from the confirmation order and, recognizing the threat of equitable mootness, sought to stay the consummation of the plan.  The bankruptcy court considered their arguments, as well as the costs of delaying consummation, and granted a stay, which was conditioned on posting a bond of $1.5 billion.  Either unwilling or unable to post that amount, the appellants appealed that decision to the district court, arguing that the bond requirement was based upon speculative harms that could be invoked in any chapter 11 case.  The court issued a cursory order refusing to modify the bankruptcy court’s order, noting that the stay and bond were “appropriate.”

The appellants appealed that decision to the Third Circuit, contending that, in light of the threat of equitable mootness, if the bankruptcy court could condition a stay on a bond of $1.5 billion for the stated reasons, then key bankruptcy rulings might never be appealable.  As in Black Horse, the clerk issued an order for the court, noting that the order appealed from was not a final and did not expressly modify an injunction and requesting that the parties brief the issue of jurisdiction.  The similarities between the cases did not stop there: the appellants also sought to characterize the order as one pertaining to an injunction, because the stay would have enjoined the implementation of the reorganization plan.  Furthermore, the appellants emphasized the threat of equitable mootness, describing it as a “game-changer” because it meant that the stay order was not merely one to maintain the status quo.  Once again, the Third Circuit disagreed, briefly restating the findings in its preliminary order: the order appealed from was neither final nor one granting, denying, or modifying an injunction.

Both of these decisions illustrate the difficult situation of appellants who are denied a stay pending appeal, or granted a stay conditioned on a prohibitively large bond.  A diligent effort to obtain a stay (including appealing decisions that deny it) is one of the few measures an appellant can take to counter the threat of equitable mootness.  Those appeals and their costs, however, are often a waste as courts of appeals are very reluctant to find jurisdiction to hear them.  Indeed, the appellants from Black Horse and Tribune put forth a number of arguments as to why their appeals should be heard, based in large part on the perceived inequity of equitable mootness.  But in both cases the court made clear that those arguments alone were not enough to successfully challenge a stay order.  Future appellants should take note: the Third Circuit must be persuaded on other grounds that it has jurisdiction to hear such appeals.

Disclosure: Weil represented the debtors in the Black Horse case.

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