Supreme Court: Denying Request to Lift Bankruptcy Automatic Stay Is Immediately Appealable—So Don’t Wait

The filing of a bankruptcy case imposes an “automatic stay” that protects debtors from creditors attempting to pursue litigation against them. Creditors may in turn ask the bankruptcy court to lift the stay. But if that request is denied, must a creditor wait for months or years until the entire bankruptcy case is over before it can finally appeal the bankruptcy court’s denial of its request to lift the stay?

Resolving a dispute among the lower courts on that issue, the Supreme Court has answered with a unanimous “no.” In Ritzen Group, Inc. v. Jackson Masonry, LLC, 2020 WL 201023 (Jan. 14, 2020), the Court held that an order that completely disposes of a request for relief from the automatic stay may be appealed immediately. In fact, without an immediate appeal, the losing party forfeits the right to contest that order.

In Ritzen, a creditor sued the debtor in state court for breach of contract. During the trial, the debtor filed a chapter 11 bankruptcy case, which automatically stayed the state court litigation. The creditor then asked the bankruptcy court to lift the stay, to permit it to continue its state court suit against the debtor.

The bankruptcy court denied that request with prejudice—that is, without the right to renew the request later if circumstances changed. And as a result, the creditor would be required to litigate its claims against the debtor exclusively in bankruptcy court. But rather than appeal that decision, the creditor continued pursuing its claim in bankruptcy court, and eventually, the court ruled that it had no claim.

The creditor appealed that ruling, along with the bankruptcy court’s earlier denial of stay relief, apparently in the hopes that the stay would be retroactively lifted—which, in turn, would allow it to re-litigate in state court the same claim issues that it had lost in the bankruptcy court. However, the lower appellate courts held that by not filing an appeal within the statutory 14-day deadline, the creditor had lost its right to appeal the stay-relief order.

The Supreme Court unanimously agreed. Observing that bankruptcy cases encompass many separate disputes among many different parties, the Supreme Court explained that a “final” order in bankruptcy differs from regular civil litigation: ‘[t]he ordinary understanding of ‘final decision’ is not attuned to the distinctive character of bankruptcy.” The Court explained that in bankruptcy, a final order is one that completely disposes of and terminates such a discrete dispute—known as a “proceeding”—within the larger bankruptcy case. Other orders are not final, and are appealable only after conclusion of the larger proceeding.

The creditor argued that its motion to lift the stay did not create a discrete “proceeding,” but, rather, constituted only one small administrative step in the process of determining its claims against the debtor. It therefore asserted that the order denying stay relief was not “final” and could be appealed after the claim proceeding had ended.

The Supreme Court disagreed, holding that a ruling on a motion to lift the automatic stay determines important legal rights, separate from the rest of the bankruptcy case, and can have significant practical consequences, including allowing one creditor to opt out of the collective bankruptcy process—adding time and cost to the case as a whole—or permitting a creditor to foreclose on property of the debtor’s estate that might have been available for a reorganization, or terminating contracts used in the debtor’s business. Moreover, requiring an immediate appeal of a stay-relief order prevents creditors from re-litigating the same issues that parties had expended time and resources in bankruptcy court to resolve. The creditor’s appeal was therefore untimely.

Lessons Learned
The Ritzen decision offers an opportunity and a caution. Creditors often seek relief from the automatic stay. When a bankruptcy court denies that relief, a creditor need not give up and it may consider an immediate appeal of that denial. The caution, however, is equally clear: if the creditor chooses not to immediately appeal the denial of stay relief, it will not have a second bite at that particular apple.

For more information, contact your Quarles & Brady attorney or:

• Christopher Combest: (312) 715-5091 / christopher.combest@quarles.com
• E. King Poor: (312) 715-5143 / king.poor@quarles.com