On May 4, 2015, in the case Bullard v. Blue Hills Bank, the United States Supreme Court held that debtors in chapter 13 (and presumably chapter 9 and 11 as well) are not entitled as of right to immediately appeal bankruptcy court orders denying confirmation of a proposed plan of reorganization. This ruling, although consistent with a majority of circuit courts of appeal that have considered the issue, reversed governing precedent in several circuit courts—including the Third Circuit, which reviews Delaware bankruptcy court decisions.
Bullard involved a specific kind of controversial chapter 13 bankruptcy repayment plan, but the Supreme Court expressly acknowledged potential application of the principle in chapter 11 cases. It is in the context of chapter 11 cases that the Bullard decision will have its greatest impact, shifting negotiating leverage to a chapter 11 creditor who successfully objects to a proposed plan, by forcing the debtor to file an amended plan addressing that creditor’s objection before the debtor has an absolute right to appeal the court’s decision. Instead, a debtor will first have to convince the bankruptcy court that an immediate interlocutory appeal is warranted. Thus the Bullard decision also limits a debtor’s ability to drag out a bankruptcy case and delay creditor distributions by seeking appeal and reversal of confirmation denial for various iterations of a plan, while keeping the automatic stay in place.
In Bullard, the debtor proposed a so-called “hybrid” chapter 13 repayment plan that sought to treat the “underwater” portion of his mortgage as unsecured debt in the U.S. Bankruptcy Court for the District of Massachusetts. Massachusetts bankruptcy courts had split as to whether this lien-stripping treatment was permitted by the Code, with recent cases trending in a creditor-favorable direction. The bankruptcy judge denied confirmation, continuing the trend in the case law against debtors, and directed the debtor to file a revised plan. Rather than filing a revised plan, the debtor instead sought to appeal, thus delaying the plan confirmation process and distributions to creditors. The debtor appealed first to the Bankruptcy Appellate Panel for the First Circuit, which affirmed the Bankruptcy Court. Thus four bankruptcy judges (one originally and three hearing the appeal) all recognized that the debtor’s plan was too legally aggressive. Nevertheless, the debtor sought a further appeal as of right to the First Circuit, because lower court judges denied further interlocutory appeal at that point. The First Circuit dismissed the appeal for lack of jurisdiction, holding that the Bankruptcy Court’s order was not final and appealable as of right. The debtor sought review of this jurisdictional decision by the U.S. Supreme Court.
In the Supreme Court, the case presented the question whether the denial of the debtor’s most preferred reorganization plan is a final judgment that terminates a bankruptcy “proceeding,” allowing immediate appeal as of right when the bankruptcy judge’s order specifically contemplates further proceedings on an amended plan. In a unanimous decision, the Supreme Court agreed with the First Circuit that an order of denial with leave to amend is not “final” and therefore not appealable as of right.
The Supreme Court adopted the reasoning of the bank, represented by a team of Ropes & Gray lawyers, and held that the statutory language indicates that the “finality” requirement in bankruptcy applies not just to cases, but to proceedings within cases. The Court agreed that the relevant proceeding in Bullard was the entire plan confirmation process, not (as the debtor argued) evaluation of each individual amended plan. Therefore, a confirmation “proceeding” terminates and is final only upon confirmation of the plan or dismissal of the case because only these outcomes would alter the legal status quo and fix the parties’ rights and obligations. Denial of confirmation orders, by contrast, does neither: the debtor is free to propose a new repayment plan. The Supreme Court found that section 157 of the Bankruptcy Code served as a “textual clue” in support of its ruling, as the statute lists “confirmations of plans” (not denials) as an example of a “core proceeding.” The Supreme Court also held that permitting immediate appeals from plan denials would protract the plan confirmation process, resulting in inefficiency and delay. The Court dismissed alternative theories and arguments raised by the debtor, the Solicitor General’s office, and amicus curiae that included Bank of America.
This ruling about a specific point of appellate procedural law makes a difference on the ground in corporate chapter 11 cases, and the related context of municipal chapter 9 cases. Debtors have significant advantages in these cases (including the exclusive right to file initial reorganization plans in chapter 11, and the only right to file plans in chapter 9). Debtors often file legally aggressive plans to establish significant leverage over creditors in negotiations. In those cases where a debtor can afford to wait through a lengthy appeal period (as is true in large chapter 11 cases and many liquidating cases of all sizes), allowing an appeal as of right would give debtors an even longer period to exert this leverage. In contrast, following Bullard a creditor can know that, if it successfully challenges a plan provision that even the bankruptcy judge thinks goes too far, the debtor will likely have to negotiate better terms. A concrete example of this occurred in the large case of Armstrong Worldwide, in which a debtor proposed distributions to equity that violated the absolute priority rule. In that case, plan confirmation was denied but the debtor took an appeal of right to the Third Circuit, delaying creditor distributions. The Third Circuit precedent in Armstrong that allowed such appeals (including from Delaware bankruptcy courts) has now been overruled.
A team of Ropes & Gray partners and associates led by Douglas Hallward-Driemeier and Ross Martin represented Blue Hills Bank during the Supreme Court appeal. Mr. Hallward-Driemeier argued the case before the Supreme Court on April 1, 2015.
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