United States: From The Top In Brief - May/June 2015

Last Updated: May 29 2015
Article by Mark G. Douglas

On May 4, 2015, the U.S. Supreme Court handed down its first 2015 ruling in a case involving an issue of bankruptcy law. In Bullard v. Blue Hills Bank, No. 14-116, 2015 BL 129010, ___ S. Ct. ___ (May 4, 2015), the court reviewed a ruling by the First Circuit Court of Appeals that an order of a bankruptcy appellate panel affirming a bankruptcy court's denial of confirmation of a chapter 13 plan is not a final order and therefore is not appealable under 28 U.S.C. § 158(d), so long as the debtor remains free to propose an amended plan. See Bullard v. Hyde Park Sav. Bank (In re Bullard), 752 F.3d 483 (1st Cir. 2014), cert. granted, No. 14-116, 2014 BL 349325 (Dec. 12, 2014). The Second, Sixth, Eighth, Ninth, and Tenth Circuits had also held that such an order is not final so long as the debtor may still propose another plan. The Third, Fourth, and Fifth Circuits had adopted the minority approach that such an order can be final.

The Supreme Court affirmed the First Circuit's ruling, resolving the circuit split in favor of the majority approach. Writing for a unanimous court, Chief Justice Roberts explained that the finality rules in bankruptcy are different from those that apply in ordinary federal litigation because bankruptcy cases typically involve many discrete disputes within the larger case. For this reason, Congress has provided that orders in a bankruptcy case may be appealed immediately if they finally dispose of such a discrete dispute.

Confirmation of a chapter 13 plan, Justice Roberts reasoned, is immediately appealable because it "alters the status quo[,] . . . fixes the rights and obligations of the parties . . . and has preclusive effect." The consequences are similarly significant, he explained, when confirmation is denied and the case is dismissed because dismissal "dooms the possibility of a discharge and the other benefits available to a debtor under Chapter 13."

By contrast, according to Justice Roberts, denial of confirmation with leave to amend the chapter 13 plan "changes little" and " '[f]inal' does not describe this state of affairs." The conclusion that an order denying confirmation of such a plan with leave to amend is not final is bolstered by 28 U.S.C. § 157(b)(2)(L), which lists "confirmations of plans" as a "core" proceeding but does not contain any reference to confirmation denials.

A rule against immediate appeal of an order denying plan confirmation, Justice Roberts noted, avoids delays and inefficiencies arising from multiple time- and resource-consuming appeals—"precisely the reason for a rule of finality." It also promotes cooperation among debtors, trustees, and creditors in developing a confirmable plan as promptly as possible.

Justice Roberts wrote that "debtors may often view, in good faith or bad, the prospect of appeals as important leverage in dealing with creditors." He also stated that "[t]hese concerns are heightened if the same rule applies in Chapter 11," where business debtors "are more likely to have the resources to appeal and may do so on narrow issues."

Finally, Justice Roberts downplayed the argument that, if orders denying plan confirmation are not final and immediately appealable, "there will be no effective means of obtaining appellate review of the denied proposal." According to Justice Roberts, bankruptcy courts, like trial courts in ordinary litigation, rule correctly most of the time, and "even when they may slip, many of their errors . . . will not be of a sort that justifies the costs entailed by a system of universal immediate appeals."

In addition, Justice Roberts explained that there are several mechanisms for interlocutory review of an order denying confirmation of a chapter 13 plan, including the following: (i) a district court or bankruptcy appellate panel may grant leave to hear the appeal under 28 U.S.C. § 158(a)(3), and if the debtor loses on appeal, the district court or bankruptcy appellate panel may certify the interlocutory appeal to the court of appeals under 28 U.S.C. § 1292(b); (ii) under 28 U.S.C. § 158(d)(2), a bankruptcy court may certify an appeal directly to the court of appeals, which then has discretion to hear the matter. According to Justice Roberts, "While discretionary review mechanisms such as these do not provide relief in every case, they serve as useful safety valves for promptly correcting serious errors and addressing important legal questions" (internal quotation marks and citation omitted).

The Supreme Court handed down its second bankruptcy ruling in 2015 on May 18. In Harris v. Viegelahn, No. 14-400, 2015 BL 152138 (May 18, 2015), the court considered whether undistributed funds held by a chapter 13 trustee must be distributed to creditors or revert to the debtor, a question that has divided courts for 30 years. The appeal stems from a Fifth Circuit decision holding that wages earned by the debtor after filing for chapter 13, but held by the trustee at the time the debtor's case is converted to a chapter 7 liquidation, must be distributed to creditors rather than returned to the debtor, on the basis of considerations of equity and policy. See Viegelahn v. Harris (In re Harris), 757 F.3d 468 (5th Cir. 2014), cert. granted, 135 S. Ct. 782 (Dec. 12, 2015). The Fifth Circuit's decision created a split with the Third Circuit's ruling in In re Michael, 699 F.3d 305 (3d Cir. 2012).

Writing for a unanimous court, Justice Ruth Bader Ginsburg explained that, in a chapter 13 case, postpetition wages are property of the estate under section 1322(a)(1) of the Bankruptcy Code and may be collected by the chapter 13 trustee for distribution to creditors under a chapter 13 plan. By contrast, in a chapter 7 case, such earnings are not estate property, but belong to the debtor.

Justice Ginsburg further explained that, prior to 1994, courts were divided on the disposition of a debtor's undistributed postpetition wages following conversion of a case from chapter 13 to chapter 7. To address these concerns, Congress added section 348(f) to the Bankruptcy Code in 1994. Section 348(f)(1)(A) provides that, in a case converted from chapter 13, the property of the chapter 7 estate consists of the property of the estate, as of the petition date, which remains in the debtor's possession or control. Thus, a debtor's postpetition earnings and acquisitions generally do not become part of the chapter 7 estate. However, section 348(f)(2) contains an exception for bad-faith conversions. It provides that "[i]f the debtor converts a case [initially filed] under chapter 13 . . . in bad faith, the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion" (emphasis added).

On the basis of this statutory framework, Justice Ginsburg concluded that, in the absence of bad faith, postpetition wages must be returned to the debtor:

Bad-faith conversions apart, we find nothing in the Code denying debtors funds that would have been theirs had the case proceeded under Chapter 7 from the start. In sum, §348(f) does not say, expressly: On conversion, accumulated wages go to the debtor. But that is the most sensible reading of what Congress did provide.

In reversing the Fifth Circuit's ruling, Justice Ginsburg downplayed the Fifth Circuit's concern that debtors would receive a "windfall" if they could reclaim accumulated wages from a chapter 13 trustee upon conversion. "We do not regard as a 'windfall,' " she wrote, "a debtor's receipt of a fraction of the wages he earned and would have kept had he filed under Chapter 7 in the first place."

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