Non-Final Finality: Does One Interlocutory Issue Resolved in a Bankruptcy Court Order Render All Issues Addressed in the Order Non-Appealable?
August 22, 2016
Authored by: Amanda Cartwright and Bryce Suzuki
As the Supreme Court recently reminded us in Bullard v. Blue Hills Bank, not all orders in bankruptcy cases are immediately appealable as a matter of right. Only those orders deemed sufficiently “final” may be appealed without leave under 28 U.S.C. § 158(a). In light of the numerous parties and controversies involved in a typical bankruptcy case, determining whether an order is “final” can be complicated affair. Thus, finality in bankruptcy is a “flexible standard” applied to discrete disputes that arise within the larger case. See generally 14 Wright, Miller & Cooper, Federal Practice and Procedure § 3926.2 (collecting examples of final and non-final orders). That flexibility, however, has led to disparate results.
In In re Wolff, B.A.P. No. CO-16-016 (B.A.P. 10th Cir. Jul. 18, 2016), the Tenth Circuit Bankruptcy Appellate Panel (the “BAP”) dismissed an appeal filed by debtors Deris and Cheryl Wolff (the “Debtors”) on the grounds that the appeal was taken from an order that was interlocutory, and thus, non-appealable absent leave. That order resolved two issues, one of which was interlocutory and the other of which ordinarily would be entitled to immediate appellate review. The Wolff decision is an interesting example of what can occur when a single bankruptcy-court order resolves a typically final matter in connection with a non-final one.
An Order Determining Property of the Estate Is Interlocutory?
In Wolff, the Debtors filed a voluntary chapter 13 case, but their case was later converted to chapter 7. The Debtors’ schedules listed two parcels of real property as assets, but the Debtors failed to claim either property as exempt. The chapter 7 trustee filed two separate motions seeking approval to retain real estate brokers to market the properties. The Debtors objected to the motion as to the first property and filed a motion for reconsideration of the order granting retention of the broker as to the second property. In both the objection and the motion to reconsider, the Debtors argued that the properties could not be sold because they were not property of the bankruptcy estate, and that any post-petition appreciation in value belonged to the Debtors rather than the estate.
The bankruptcy court entered an order overruling the objection, denying the motion for reconsideration, and approving the trustee’s retention of a real estate broker to market and sell both properties. The bankruptcy court rejected the Debtors’ arguments that the properties were not part of the estate because 11 U.S.C. § 348(f)(1) provides that when a case is converted from chapter 13 to chapter 7, “property of the estate in the converted case shall consist of property of the estate, as of the date of the filing of the petition, that remains in the possession of or is under the control of the debtor on the date of conversion.” Because the two parcels of real property were scheduled as estate property on the date of filing, they remained estate property upon conversion. Moreover, the Debtors’ failure to claim any exemptions relating to the properties was binding upon them, and was ultimately inapposite, as the court concluded that the trustee could sell the property even if the exemption had been claimed. The Debtors appealed.
On appeal, the BAP considered whether the order was interlocutory because it involved the employment of a broker, or whether the bankruptcy court’s ruling on property of the estate rendered the entire order final for appeal purposes. The BAP reasoned that an interlocutory order is one that constitutes part of the “process” of a bankruptcy case but does not otherwise substantively alter the rights of the parties.
Despite the ruling regarding property of the estate, the BAP concluded that the order was not final and appealable as a matter of right. Sales of estate property in a chapter 7 case involve a two-step process, according to the BAP. First, the trustee must retain a broker with court approval. Second, only after that broker has marketed the property in question, the trustee must file a separate motion for approval of the sale. In this case, the bankruptcy court’s order represented only the first step in the process. The BAP concluded that the Debtors’ rights were not substantively affected by the order because any decision as to the sale of the properties would require a separate motion, notice, and hearing. “As a result,” concluded the BAP, “Appellants’ rights in the Colorado and Nebraska Properties, and any equity associated therewith, are not yet altered.” The BAP also indicated that the Debtors would be able to seek review of “prior intermediate orders” if an order approving a sale were eventually entered.
Analysis and Conclusion
The Wolff decision is puzzling. It certainly did not help the Debtors that they failed to claim the real property as exempt, and that their substantive arguments on the property-of-the-estate issue appeared to be weak. Still, it is difficult to conceive of an order more “final” than one determining that an asset is property of the estate within the meaning of section 541 of the Bankruptcy Code. Under the Wolff decision, such a determination may be deemed non-final if it is tied to a matter (e.g., retention of a broker) typically the subject of interlocutory orders. Crafty litigants could use such a rule to deprive affected parties of immediate appellate review, even with respect to key issues if they are included in an order resolving other, interlocutory matters.
Moreover, the BAP failed to consider the impact of its ruling on the value of the properties. No rational buyer will bid as much when they learn that their bid could be held up in litigation, and appeals, over whether the property can be sold at all. Buyers will discount their price for the likely attendant risk, and the fact that they may be “on hold” for months or years of litigation and appeals over a threshold issue. If that threshold issue had been resolved, much of the cloud would be lifted over the property, and buyers obviously tend to bid more for a certainty.
In Wolff, the BAP appears to have justified the inclusion of a section 541 finding in a broker’s retention order on the rationale that if an asset “is not property of the estate, generally there would be no reason for a trustee to retain a broker to sell the property and the bankruptcy court would not approve a sale.” But that somewhat circular reasoning does not consider the procedurally proper (and arguably more orderly) possibility of resolving the threshold question—whether the real estate was property of the estate—in an adversary proceeding and deferring the motion to retain a broker until after resolution of that fundamental question. As a middle ground, the court perhaps could have approved the broker’s retention conditionally, pending a ruling on property of the estate. In fairness, the Debtors do not appear to have raised these possibilities, nor did they insist that resolution of a section 541 issue requires a properly filed adversary proceeding. Had they done so, the result may have been quite different.
As the Wolff decision demonstrates, litigants in bankruptcy cases would be wise to identify important issues that a debtor, trustee, or other adverse party might attempt to bootstrap into a non-final order. In particular, litigants should identify and zealously guard those matters subject to adversary-proceeding requirements under Federal Rule of Bankruptcy Procedure 7001. Absent resolution of “final” matters in separate proceedings and orders, litigants could find themselves forced to await appellate review on key issues until far later in a bankruptcy case, when subsequent events could weaken the relevance of their appeal or simply render the appeal moot.
 Contested issues regarding property of the estate generally require an adversary proceeding and all of the procedural safeguards associated therewith. See Fed. R. Bankr. P. 7001(2).