Do As I Say, Not As I Do: Tenth Circuit Holds Automatic Stay Does Not Apply to Appeals Initiated by a Debtor, But Instructs Bankruptcy Courts to Rule the Other Way

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A quick read of the Tenth Circuit’s decision in Chizzali v. Gindi (In re Gindi), Case No. 10-1186, 2011 WL 489690 (10th Cir. Feb. 14, 2011) might lead to the conclusion that, in the Tenth Circuit, the automatic stay imposed by section 362(a) of the Bankruptcy Code does not prohibit a debtor from appealing a creditor’s prepetition judgment.  And, on its face, that proposition is true … for now.  In a unique twist, however, the Tenth Circuit stated that its decision was based on a prior Tenth Circuit decision resting on a “shaky foundation” and signaled that it may rule in the alternative in the future.

In In re Gindi, the debtor, Jack Gindi, filed a chapter 11 case while the Colorado Court of Appeals was considering two separate appeals relating to a lawsuit brought against him by his former business partner.  The plaintiff, Andreas Chizzali, had appealed state court decisions (i) dismissing a contempt citation previously entered against the debtor and (ii) setting aside a default judgment against the debtor’s bank in a garnishment action.  In turn, the debtor had appealed the state court’s judgment affirming a monetary award to Chizzali.  In the bankruptcy case, Chizzali filed a motion seeking relief from the automatic stay to permit further proceedings before the Colorado Court of Appeals about the issues raised in his appeal.  The debtor objected to the motion and also argued, separately, that the automatic stay did not apply to the debtor’s appeal.  The bankruptcy court denied Chizzali’s motion and ruled that the automatic stay did not bar Gindi from pursuing his appeal.  On appeal, the Tenth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court’s rulings.

Reviewing the lower courts’ conclusions of law de novo, the Tenth Circuit held, among other things, that the bankruptcy court had erred in refusing to lift the automatic stay so as to enable Chizzali to prosecute his appeal of the Colorado court’s garnishment decision and remanded the decision to the bankruptcy court for entry of an order lifting the stay.  As for the applicability of the automatic stay to the appeal initiated by the debtor, the Tenth Circuit begrudgingly affirmed the rulings of the lower courts, but signaled that it would not do so in future cases.  The Tenth Circuit held that the lower courts correctly relied on the holding in Chaussee v. Lyngholm (In re Lyngholm), 24 F.3d 89 (10th Cir. 1994), where the court held that the automatic stay does not prevent a chapter 11 debtor from pursuing an appeal, even if it involves an appeal from a creditor’s judgment against the debtor.  The Lyngholm court relied on language in Bankruptcy Rule 6009 stating that “[w]ith or without court approval, the trustee or debtor in possession may prosecute or may enter an appearance and defend any pending action or proceeding by or against the debtor, or commence and prosecute any action or proceeding in behalf of the estate before any tribunal.”  As additional support for its holding, the Lyngholm court cited language it found in the Collier on Bankruptcy treatise about Bankruptcy Rule 6009.

On further review, however, the court in Gindi concluded that Lyngholm was incorrectly decided. The Gindi court noted that all other federal circuits that have considered the automatic stay issue addressed in Lyngholm (only the Eleventh Circuit and Federal Circuit have not) reached an opposite conclusion.  In addition, following the Lyngholm decision, the Collier treatise expressly rejected the reasoning in Lyngholm and its reliance on Collier. The rationale generally articulated by appellate courts and Collier is that section 362(a)(1) states that the filing of a bankruptcy petition stays the commencement or continuation of all actions or proceedings “against the debtor.”  Courts generally determine whether an action is “against the debtor” by assessing who initiated the original action.  Therefore, an appeal of a lawsuit where the debtor is the defendant is deemed to be a continuation of an action “against the debtor,” regardless of who inititates the appeal.  The 16th Edition of Collier on Bankruptcy, Volume 10: Section 6009.04, also states that Bankruptcy Rule 6009 “does not, even by inference, overide the express provision of section 362(a)(1).”

Against this backdrop, Chizzali asked the Tenth Circuit to overrule Lyngholm.  Though it was tempted to do so, the Tenth Circuit declined to overrule Lyngholm in Gindi because the Colorado Court of Appeals had already resolved the debtor’s state court appeal.  The court stated that it did not want to create “the discord that could result from ruling that the Colorado Court of Appeals was actually barred from hearing the debtor’s appeal.”  Therefore, in light of the unique circumstances of the Gindi case, the Court of Appeals followed Lyngholm but strongly cautioned that bankruptcy courts in the Tenth Circuit “may wish to rule in the alternative when the issue arises in future cases.”

Even though the Gindi decision, on its face, holds that the automatic stay does not bar a chapter 11 debtor from pursuing an appeal from a judgment obtained by a creditor, the Gindi decision actually solidifies the opposite conclusion.  So, ironically, a bankruptcy court that, in the future, wishes to “follow” the Tenth Circuit’s recommendation in Gindi may have to issue a contrary ruling.