The Impact of a Bankruptcy Filing on a Pending Appellate Proceeding
Bankruptcy law is a specialized practice area. Generally speaking, trial lawyers and appellate lawyers are unfamiliar with the fundamentals of bankruptcy practice. Thus, when one of the parties to an appeal files a petition in bankruptcy, appellate counsel frequently have questions about the impact of the bankruptcy filing on the pending appellate proceeding. This article is a guide for answering the questions in this situation.
When one of the parties to a pending appellate proceeding files a petition in bankruptcy (the debtor), two questions generally arise. First, does the automatic stay imposed by §362 of the Bankruptcy Code (11 U.S.C. §362) operate to stay the continuation of the appellate proceeding? Second, assuming that the automatic stay does not apply or that the bankruptcy court grants relief from the stay, may the debtor continue as a party in the appellate proceeding or is a substitution of parties required?
Does the Automatic Stay Apply?
The scope of the automatic stay is extremely broad. The filing of a bankruptcy petition operates as a stay of numerous acts, including:
the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title[.]1
Thus, when the purpose of a lawsuit or other proceeding is to recover or to enforce a pre-petition claim against the debtor, the effect of the automatic stay is to prohibit a creditor from initiating or continuing a lawsuit or other proceeding against the debtor after the filing of a bankruptcy proceeding.2 The scope of the prohibition against the initiation or continuation “of a judicial, administrative, or other action or proceeding against the debtor” on a pre-petition claim clearly extends to appellate proceedings.3 The Florida Supreme Court has held that the automatic stay does not operate to bar the continuation of an appeal if the debtor has posted a supersedeas bond;4 other courts have reached the opposite conclusion.5
The stay imposed by §362 of the Bankruptcy Code goes into effect automatically upon the debtor’s filing of a bankruptcy petition. However, in any pending litigation — including appellate proceedings — the debtor’s bankruptcy counsel should file and serve all parties with a suggestion of bankruptcy to ensure that neither the court nor other parties unwittingly violate the stay. If the debtor’s bankruptcy counsel does not file a suggestion of bankruptcy in a pending appeal, appellate counsel with knowledge of the bankruptcy filing should file and serve a suggestion of bankruptcy so that the appellate court and the other parties are aware of the bankruptcy filing.6
The automatic stay does not apply to every appeal to which the debtor may be a party. The automatic stay applies to bar the commencement or continuation of judicial, administrative, or other actions or proceedings to recover a pre-petition claim against the debtor. It follows that the automatic stay does not apply to an appeal from an order or judgment when the debtor initiated the underlying action to recover on a claim against another party.7
The key to determining the application of the automatic stay in an appeal is whether the underlying action was against the debtor. We may see this principle in the following examples:
A) The debtor files an action to recover a claim against XYZ Corp. The debtor wins, and XYZ Corp. appeals the judgment.
B) The debtor files an action to recover a claim against XYZ Corp. XYZ Corp. wins, and the debtor appeals the judgment.
C) XYZ Corp. files an action to recover a claim against the debtor. XYZ Corp. wins, and the debtor appeals the judgment.
D) XYZ Corp. files an action to recover a claim against the debtor. The debtor wins, and XYZ Corp. appeals the judgment.
In the first two examples, the debtor was pursuing a claim against another party in the underlying litigation. Therefore, the automatic stay does not apply to the appellate proceedings in examples A and B because the underlying action was not against the debtor. Conversely, in the last two examples, XYZ Corp. was pursuing a claim against the debtor in the underlying action. Thus, the automatic stay operates to bar the continuation of the appeal in examples C and D because the underlying action was against the debtor. In examples C and D, the status of the debtor as appellant or appellee is not pertinent to the determination of the application of the automatic stay.
The fact pattern in example C has caused the most analytical difficulty for the bench and bar. Previously, some courts held that the automatic stay did not apply in an appellate proceeding when the debtor was appealing an adverse judgment entered against the debtor in the trial court.8 Until recently, the 10th Circuit Court of Appeal held that a trustee or a debtor in possession in a Ch. 11 case could proceed with the appeal of a judgment entered against the debtor based on the language of Rule 6009 of the Bankruptcy Rules of Procedure.9 Florida’s Third District Court of Appeal has held more broadly that an appeal initiated and prosecuted by the debtor does not fall within the purview of §362.10 The Third District reasons that requiring an indefinite suspension of the debtor’s efforts to be relieved of an adverse judgment does not serve the purposes of the automatic stay.11 Furthermore, the Third District suggests that an appellate court should not be required to permit an appeal to remain pending on its docket indefinitely; instead, the debtor should be required “to fish or cut bait.”12
However, most courts have concluded that the automatic stay applies when the debtor appeals an adverse order or judgment against it. All of the federal circuits that have ruled on this question have concluded that the automatic stay does apply in the fact pattern represented by example C.13 In Florida, the First, Second, and Fourth districts now follow the same view.14 The Third District adheres to its position that the automatic stay does not apply in this situation.15 However, in one case, the Third District stayed an appeal after a bankruptcy filing under principles of comity in response to a temporary restraining order entered by the bankruptcy court that prohibited the parties from prosecuting the appeal.16
The courts have offered three reasons for the view that the automatic stay applies to an appeal by the debtor from an adverse order or judgment. First, the plain language of §362 of the Bankruptcy Code requires this result.17 Second, the application of the automatic stay “should not change depending on the particular stage of the litigation at which the filing of the petition in bankruptcy occurs.”18 Third, the rule that the automatic stay applies serves the purposes of the stay by giving the debtor protection from having to continue to pursue judicial proceedings on its own behalf19 and gives the bankruptcy court an opportunity to ensure that the debtor is adequately represented before allowing an appeal to proceed.20
I have simplified examples A through D for purposes of analysis. However, the participation of multiple parties and the assertion of multiple claims are a feature of many appeals. With certain exceptions in Ch. 13 cases, the automatic stay does not operate to stay appellate proceedings involving parties who may be jointly liable with the debtor on the claim or claims involved in the appeal.21 Similarly, in appeals involving multiple claims, the automatic stay applies only to the claims originally brought against the debtor. Multiple claims must be disaggregated and treated independently in determining to which claims the automatic stay applies.22
After a bankruptcy filing, the debtor or one or more of the other parties to a pending appeal may wish to prosecute the appeal to a conclusion for various reasons. In such cases, the debtor or another party may apply to the bankruptcy court for relief from the automatic stay under §362(d) of the Bankruptcy Code. After notice and an appropriate showing, the bankruptcy court may grant relief from the stay to allow the appeal to proceed to a conclusion. The grant of such relief may be subject to various limitations, e.g., a bar on the entry of a judgment against the debtor.
At the Second District, when we learn that one of the parties to a pending appeal has filed a petition in bankruptcy and a staff attorney has determined that the automatic stay applies, the clerk of the court generally issues an order acknowledging that further proceedings in the case against the debtor are stayed. The standard order also directs the parties to inform the court if the bankruptcy court grants relief from the stay allowing the appeal to proceed or if the automatic stay terminates. In addition, the order requests the parties file a status report if neither of these events occurs within 120 days of the order. If the court is uncertain concerning the application of the automatic stay in a particular case, it may issue an order directing the parties to file written responses addressing that question.
Who Is the Proper Party to Prosecute or Defend an Appeal?
The answer to the question of whether the debtor may continue to prosecute or defend an appeal after a bankruptcy filing generally depends on the nature of the bankruptcy proceeding. Depending on the type of bankruptcy proceeding, it may be necessary to move for the substitution of the trustee as a party in order to proceed with the appeal.23
Ch. 7 is the Bankruptcy Code’s liquidation chapter. Under Ch. 7, a trustee in bankruptcy will generally liquidate the debtor’s nonexempt assets for the benefit of the creditors. “Generally speaking, a pre-petition cause of action is the property of the Ch. 7 bankruptcy estate, and only the trustee in bankruptcy has standing to pursue it.”24 Therefore, if the debtor has filed a Ch. 7 bankruptcy, the trustee in bankruptcy will generally be the proper party to proceed with an appeal involving a pre-petition claim by the debtor. The debtor in a Ch. 7 bankruptcy may be the proper party to pursue a pre-petition claim if the trustee in bankruptcy has abandoned the claim that is the subject of the appeal.25 In a Ch. 7 case, the trustee is unlikely to pursue or defend an appeal involving a pre-petition claim against the debtor.
Ch. 13 of the Bankruptcy Code provides for the “Adjustment of Debts of an Individual with Regular Income,” or the so-called “wage earner plan.”26 A Ch. 13 debtor has standing to file claims in his or her own name on behalf of the bankruptcy estate.27 Thus, when the debtor is in a Ch. 13 bankruptcy, he or she will generally be the proper party in an appeal.
Ch. 11 of the Bankruptcy Code is the reorganization chapter. In a Ch. 11 bankruptcy, unless a trustee has been appointed and qualified, the debtor generally retains possession and control of the debtor’s property. In a Ch. 11 case, unless a trustee has been appointed and qualified, the debtor may prosecute or defend an appeal.28 However, even if the debtor in a Ch. 11 case is authorized to prosecute or defend the appeal, it will be necessary to obtain relief from the automatic stay to proceed if the underlying action is against the debtor.29
The impact of a bankruptcy filing on a pending appeal varies substantially depending on the nature of the claim or claims asserted in the appeal and the type of bankruptcy proceeding filed. The bankruptcy filing may 1) have no effect on the pending appeal; 2) result in a temporary delay pending the entry of an order for relief from the automatic stay; 3) require the substitution of a party; or 4) halt the case entirely, at least as to the debtor. Familiarity with the basic principles outlined in this article should assist appellate counsel in assessing and addressing the problems that arise when one of the parties to an appeal files a petition in bankruptcy.
1 11 U.S.C. §362(a)(1).
2 McMahon v. Ryan, 964 So. 2d 198, 200 (Fla. 5th DCA 2007).
3 See Balaber-Strauss v. Reichard (In re Tampa Chain Co.), 835 F.2d 54, 55 (2d Cir. 1987); Ellison v. Nw. Eng’g Co., 707 F.2d 1310, 1311 (11th Cir. 1983); Grabek v. Worldwide Specialty Merch., Inc., 611 So. 2d 590, 591 (Fla. 4th DCA 1993) (Farmer, J., concurring).
4 W.W. Gay Mech. Contractor, Inc. v. Wharfside Two, Ltd., 545 So. 2d 1348, 1349-50 (Fla. 1989); see also J.M. Beeson Co. v. Sartori, 553 So. 2d 180, 181 (Fla. 4th DCA 1989) (following W.W. Gay Mech. Contractor ).
5 Borman v. Raymark Indus., Inc., 946 F.2d 1031, 1036 (3d Cir. 1991); Sheldon v. Munford, Inc., 902 F.2d 7, 8-9 (7th Cir. 1990); In re Celotex Corp., 128 B.R. 478, 484 (Bankr. M.D. Fla. 1991).
6 For cases in which appellate courts have noted the filing of a suggestion of bankruptcy, see, e.g., S & I Invs. v. Payless Flea Mkt., Inc., 10 So. 3d 699, 700 n.1 (Fla. 4th DCA 2009); Durrance v. Wingate Creek Acquisition Corp., 868 So. 2d 701, 701 n.1 (Fla. 2d DCA 2004); Fla. E. Dev. Co., Inc. of Hollywood v. Len-Hal Realty, Inc., 636 So. 2d 756, 757 (Fla. 4th DCA 1994). Forms for a suggestion of bankruptcy are available at Norm La Coe, 2 La Coe’s Pleadings Under the Florida Rules of Civil Procedure with Forms, Rule 1.460(28) (2011 ed.); Henry P. Trawick, Trawick’s Florida Practice and Procedure Forms §11.83 (2011-12 ed).
7 Crosby v. Monroe Cnty., 394 F.3d 1328, 1331 n.2 (11th Cir. 2004) (holding that the automatic stay did not apply to the debtor’s appeal of an adverse judgment in action initiated by the debtor); Kozich v. Cavallaro (In re Kozich), 406 B.R. 949, 953 (Bankr. S.D. Fla. 2009) (holding that the automatic stay did not apply to an appeal by the debtor from an order of dismissal entered in the underlying action that was initiated by the debtor); Fountas v. Microcomputer Res., Inc., 87 So. 3d 1256, 1257 n.1 (Fla. 4th DCA 2012) (noting that the automatic stay did not apply where the appellant challenged a trial court order for attorneys’ fees and costs in favor of the debtor).
8 Carpenter v. Farm Credit Servs. of Mid-Am., ACA, 654 N.E.2d 1125, 1127-28 (Ind. 1995); Marine Charter & Storage, Ltd. v. All Underwriters at Lloyds of London, 568 So. 2d 944, 946 (Fla. 4th DCA 1990), receded from by Len-Hal Realty, 636 So. 2d at 758; S. Bank & Trust Co. v. Harley, 368 S.E.2d 908, 909 (S.C. 1988); Knights of Columbus Fed. Credit Union v. Salisbury, 486 A.2d 649, 656 n.10 (Conn. App. Ct. 1985); Accredited Assocs., Inc. v. Shottenfeld, 292 S.E.2d 417, 420 (Ga. Ct. App. 1982); Marine Midland Bank v. Herriott, 412 N.E.2d 908, 910 (Mass. App. Ct. 1980).
9 See Chaussee v. Lyngholm (In re Lyngholm), 24 F.3d 89, 91-92 (10th Cir. 1994), overruled by TW Telecom Holdings, Inc. v. Carolina Internet, Ltd., 661 F.3d 495, 497 (10th Cir. 2011); Autoskill Inc. v. Nat’l Educ. Support Sys., Inc. 994 F.2d 1476, 1485-86 (10th Cir. 1993), overruled by TW Telecom Holdings, 661 F.3d at 497.
10 Shop in the Grove, Ltd. v. Union Fed. Sav. & Loan Ass’n of Miami, 425 So. 2d 1138,1139 (Fla. 3d DCA 1982).
13 TW Telecom Holdings, 661 F.3d at 497 (overruling prior decisions to the contrary); Platinum Fin. Servs. Corp. v. Byrd (In re Byrd), 357 F.3d 433, 439 (4th Cir. 2004); Parker v. Bain, 68 F. 3d 1131, 1135-36 (9th Cir. 1995); Farley v. Henson, 2 F.3d 273, 275 (8th Cir. 1993); Sheldon, 902 F.2d at 8-9; Teachers Ins. & Annuity Ass’n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir. 1986); Marcus, Stowell & Beye Gov’t Sec., Inc. v. Jefferson Inv. Corp., 797 F.2d 227, 230 n.4 (5th Cir. 1986); Cathey v. Johns-Manville Sales Corp., 711 F.2d 60, 62 (6th Cir. 1983); Ass’n of St. Croix Condo Owners v. St. Croix Hotel Corp., 682 F.2d 446, 449 (3d Cir. 1982). See generally Paul A. Avron, Does Automatic Stay Apply to Appeals Being Prosecuted by Debtor of Adverse Order?, 31
Am. Bankr. Inst. J. 22 (Feb. 2012) (reciting a more detailed history of the federal circuit court cases holding that the automatic stay applies in this context).
14 Taylor v. Barnett Bank of N. Cent. Fla., N.A., 737 So. 2d 1105, 1106 (Fla. 1st DCA 1998); Len-Hal Realty, 636 So. 2d at 758; Crowe Group, Inc. v. Garner, 691 So. 2d 1089, 1089 (Fla. 2d DCA 1993).
15 Shop in the Grove, 425 So. 2d at 1139.
16 Cruise Holdings, Ltd. v. Mathiesen, 804 So. 2d 334, 335 (Fla. 3d DCA 2001).
17 See Farley, 2 F.3d at 275 (citing Cathey, 711 F.2d at 61) (“It would strain the language of the statute to suggest that an appeal by a debtor from a judgment obtained against the debtor as defendant is not a ‘continuation’ of a judicial ‘proceeding against the debtor.’”).
18 Ass’n of St. Croix Condo. Owners, 682 F.2d at 449; see also Cathey, 711 F.2d at 62 (“It is inconceivable that Congress intended or envisioned construction of the phrase ‘against the debtor’ to oscillate in any given judicial proceeding depending upon which stage of trial the action had progressed on the date of the filing of the bankruptcy petition.”).
19 Teachers Ins. & Annuity Ass’n, 803 F.2d at 65.
20 See Sheldon, 902 F.2d at 9.
21 1 1 U.S.C. §1301; Marcus, Stowell & Beye Gov’t Sec., 797 F.2d at 230 n.4.
22 Mar. Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1204-05 (3d Cir. 1991).
23 See Fla. R. App. 9.360(c)(1); Special Invs., Inc. v. Indian Lake Estates, Inc., 183 So. 2d 20, 20 (Fla. 2d DCA 1966).
24 Parker v. Wendy’s Int’l, Inc., 365 F.3d 1268, 1272 (11th Cir. 2004).
25 Section 554 of the Bankruptcy Code (11 U.S.C. §554) addresses the subject of “abandonment of property of the estate.” See, e.g., Fedotov v. Peter T. Roach & Assocs., P.C., 354 F. Supp. 2d 471, 475-76 (S.D.N.Y. 2005) (concluding that the bankruptcy trustee had abandoned the Ch. 7 debtor’s pre-petition claim against a law firm under the Fair Debt Collection Practices Act).
26 Plans under Ch. 13 of the Bankruptcy Code are sometimes referred to as “wage earner plans.” See In re Britt, 211 B.R. 74, 76 (Bankr. M.D. Fla. 1997) (“Chapter 13 simplifies, expands, and makes more flexible wage earner plans.”).
27 Smith v. Rockett, 522 F.3d 1080, 1081-82 (10th Cir. 2008); see also Crosby, 394 F.3d at 1331 n.2.
28 “With or without court approval, the trustee or a 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.” Fed. R. Bankr. P. 6009.
29 See Simon v. Navon, 116 F.3d 1, 4 (1st Cir. 1997); Parker, 68 F.3d at 1136.
Judge Douglas A. Wallace is a judge on the Second District Court of Appeal.
This column is submitted on behalf of the Appellate Practice Section, Jack R. Reiter, chair; Brandon Christian, editor, and Chris McAdams and Kristi Rothell, assistant editors.