Interpreting Finality in § 158(d): Whether an Order Denying Confirmation of a Debtor's Reorganization Plan Should Be Considered Final or Interlocutory for the Purpose of Appeal

• Publication year: 2014
• Citation: Vol. 31 No. 1

Interpreting Finality in § 158(d): Whether an Order Denying Confirmation of a Debtor's Reorganization Plan Should Be Considered Final or Interlocutory for the Purpose of Appeal

Drew Vermette

INTERPRETING FINALITY IN § 158(D): WHETHER AN ORDER DENYING CONFIRMATION OF A DEBTOR'S REORGANIZATION PLAN SHOULD BE CONSIDERED FINAL OR INTERLOCUTORY FOR THE PURPOSE OF APPEAL

Abstract

A debtor appealing a bankruptcy reorganization plan to the second level of appellate review is faced with uncertainty. The federal courts of appeals are split over whether an order denying confirmation of a reorganization plan is final or interlocutory for the purpose of appeal.

Two recent circuit court decisions represent this ideological split. First, on July 1, 2013, the Fourth Circuit, in Mort Ranta v. Gorman, held, under a flexible interpretation of finality, that a court order denying confirmation of a debtor's proposed reorganization plan is final for the purpose of appeal. Second, on August 13, 2013, the Sixth Circuit, in In re Lindsey, held, under a rigid interpretation of finality, that a court order denying confirmation of a debtor's proposed reorganization plan is interlocutory and, therefore, not final for the purpose of appeal.

Congress and the Supreme Court have given little insight as to how to interpret "finality" within 28 U.S.C. § 158(d)(2). This uncertainty has caused courts to perform fact-intensive inquiries that focus little on text and heavily on policy. This Comment analyzes these policy arguments and offers an explanation for why a flexible interpretation should be uniformly implemented throughout the circuits.

While the circuits are still split over the finality of an order denying confirmation of a reorganization plan, the majority of circuits interpret 28 U.S.C. § 158(d)(2) to read that the denial of a reorganization plan is an interlocutory order, and therefore, not final for the purpose of appeal. However, in the interest of judicial economy and the prevention of harm, courts should interpret orders denying confirmation of reorganization plans as final for the purpose of appeal.

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Introduction

Reorganization plans are proposed in both chapter 11 and chapter 13 proceedings.¹ Debtors spend a substantial amount of time and financial resources structuring these reorganization plans to comply with the Bankruptcy Code (the "Code").² After the debtor submits its plan to a court, the court is then tasked with either confirming or denying the plan.³ If the court confirms the plan, the debtor can begin moving towards financial solvency. Alternatively, a court can deny the debtor's plan.⁴ Courts reach this conclusion for various reasons.⁵ Critical questions about a debtor's ability to appeal this denial remain unanswered.

The majority of circuits hold that a court order denying confirmation of a debtor's reorganization plan is interlocutory and, therefore, not final for the purpose of appeal.⁶ Many of these circuits come to this conclusion based on attenuated arguments from parties such as: "[T]he debtor is free to propose alternative plans."⁷ These alternative proposed plans will be less favorable to the debtor and will likely force the debtor to transfer more of the debtor's assets to the bankruptcy estate, and ultimately creditors. Courts have continued to tighten their grasps around this concept of limited jurisdiction based on the argument that the debtor is free to appeal the denial order once a different plan has been confirmed.⁸

Forcing the debtor to wait until the end of the proceeding negatively affects the debtor because of the increased time and financial resources the debtor is forced to expend.⁹ When drafting the Code, Congress created safeguards to

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protect both the debtor and the creditor. For example, the debtor has an exclusive period to file a plan.¹⁰ While Congress created the exclusivity period as a pro-debtor device, the exclusivity period also protects creditors from a debtor trying to prolong the proceedings.¹¹ Once the exclusivity period expires, the creditor is at a greater advantage because the creditor is now free to propose a less-debtor-friendly plan.

The federal circuits are split on the finality of an order denying confirmation of a debtor's reorganization plan.¹² Congress failed to define "final" when drafting 28 U.S.C. § 158, the section of the U.S. Code that deals with jurisdiction of courts to hear bankruptcy appeals.¹³ Additionally, the Supreme Court has provided little insight into interpreting this section, which has led to diametrically opposed circuits and inconsistent results across jurisdictions.¹⁴

Two recent circuit court decisions exemplify this unsettled concept within the bankruptcy appeals system. In Mort Ranta v. Gorman, the Fourth Circuit held that a court order denying confirmation of a debtor's proposed reorganization plan was final for the purpose of appeal.¹⁵ In Lindsey v. Pinnacle National Bank (In re Lindsey), the Sixth Circuit held that a court order denying confirmation of a debtor's proposed reorganization plan was interlocutory and, therefore, not final for the purpose of appeal.¹⁶

The majority of circuits interpret § 158 to hold that the rejection of a reorganization plan is an interlocutory order and, therefore, not final for the purpose of appeal.¹⁷ However, in the interest of judicial economy and the

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prevention of harm, courts should interpret orders denying confirmation of reorganization plans as final for the purpose of appeal.

Pursuant to § 158(d)(1), an individual can appeal a bankruptcy court decision if it is final.¹⁸ This Comment addresses whether an order denying confirmation of a debtor's proposed reorganization plan is final pursuant to § 158(d)(1). It argues that allowing a debtor to appeal orders denying plan confirmation benefits the debtor, the creditors, and the bankruptcy system as a whole.

Part I of this Comment summarizes the process for plan confirmation, the bankruptcy appeals structure, and the rules for determining finality. Next, Parts II.A and II.B analyze the two main approaches courts use to determine the finality of appealable orders: the flexible approach and the rigid approach. Finally, Part II.C discusses the policy arguments in favor of the flexible approach.

I. Background

This Part begins by providing an overview of the plan confirmation process. It then explains the bankruptcy appeals process, from the evolution of the appellate structure to the current appeals systems. It then concludes with a discussion of finality and provides a number of policy arguments for determining whether an order is final.

A. The Bankruptcy System: Plan Confirmation

Debtors in bankruptcy share a common reason for filing: the inability to meet financial obligations owed to creditors. Whether the debtor is an individual or a public corporation, the ultimate goal of the debtor is to achieve a state of financial solvency. For chapter 11 and chapter 13 debtors this means obtaining confirmation of a reorganization plan.¹⁹ In fact, "plan confirmation is surely the central measure of success in [a bankruptcy reorganization]."²⁰ The

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confirmed plan will allow the debtor to shed its financial burden and reorganize the debt into a more manageable form.²¹

The plan confirmation process is lengthy and costly.²² Thus, the "reorganization system should move cases through the system quickly . . . ."²³ Plan confirmation takes an average of nine months.²⁴ For a large corporate debtor in chapter 11, the "average ratio of fees and expenses to assets was 2.2 percent."²⁵

Generally, only around thirty percent of debtors filing for chapter 11 bankruptcy will obtain plan confirmation.²⁶ The process of creating a plan will force out many debtors that do not have a business that can be successfully reorganized.²⁷ The plan negotiation stage consists of an intricate process of "negotiations, notice, voting, confirmation hearings, and the like."²⁸

Reorganization plans are proposed in chapter 11 and chapter 13.²⁹ In chapter 13, a debtor proposes a plan to the court and the court confirms the

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plan as long as the plan meets the requirements of the Code.³⁰ Bankruptcy reorganization in chapter 11 adds another dimension to the process: plan voting.³¹ Plan voting makes the chapter 11 process longer and more intricate to navigate.³² The ultimate goal of a chapter 11 reorganization is the "acceptance of a financial plan by majorities of each class of creditors."³³ As parties negotiate an acceptable plan, the negotiation process places an additional burden on the debtor by extending the cost and time to proceed through the system. Each time the debtor is forced back into the plan creation process, the temporal and financial burden imposed on an already burdened debtor is increased.³⁴

B. The Bankruptcy System: Appeals

The Constitution gives Congress the ability to establish a uniform bankruptcy law throughout the nation.³⁵ Therefore, bankruptcy cases are subject to federal jurisdiction and begin in the federal court system.³⁶ Under 28 U.S.C. § 157(a),³⁷ a system of federal bankruptcy judges is established within the federal district court system.³⁸ While bankruptcy judges are regulated under Article I, federal district court judges derive their power under Article III.³⁹ This difference between the sources of authority from which bankruptcy and federal judges derive their powers impacts the type of decisions each may render and changes the structure of appeals.⁴⁰

Congress bifurcated judicial bankruptcy power into two categories under 28 U.S.C. § 157.⁴¹ First, bankruptcy jud ges can both hear and determine "core

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proceedings."⁴² Section 157(b)(2) does not define the term core proceedings but rather presents a non-exclusive list of issues that fall into the category.⁴³ Furthermore, in drafting § 157(b), Congress did not limit the bankruptcy judge's power to hear and determine issues in core proceedings.⁴⁴ Therefore, when deciding...