The First Circuit's Non-Unanimous Rejection o the Blanket Rule on Stay Relief Denials

Are orders denying relief from the automatic stay pursuant to Section 362 of the Bankruptcy Code considered final and, therefore, appealable as of right? This was the issue of first impression that was recently presented to the U.S. Court of Appeals for the First Circuit in Pinpoint I Services, LLC v. Rivera (In re Atlas IT Export Corp.), 761 F.3d 177 (1st Cir. 2014). Until this decision, it was a question with a predictable answer ' yes. Predictable, because seven of the eight circuit courts that have considered this issue have reached the same result ' yes, such orders are final and appealable.

The First Circuit, however, mindful of avoiding the apparently observable herding phenomenon, rejected the blanket-rule approach in favor of what it describes as a more nuanced one which requires courts to be mindful of the multiple layers and many moving parts inherent in bankruptcy litigation while scouting for “finality indicators.” This article explores the reasoning behind the First Circuit's decision to create a circuit split rather than deciding the question presented by ruling on the merits.

The Atlas Facts and the First Circuit Appeal

Pinpoint IT Services, LLC, a Virginia company (Pinpoint) and Atlas IT Export Corp., a Puerto Rico company (Atlas) each filed dueling federal court actions based upon a contract between them. Pinpoint commenced a breach of claim action against Atlas in the Eastern District of Virginia, but before the Virginia court could issue a ruling on Atlas' motion to change venue to the District of Puerto Rico, Atlas commenced its own action against Pinpoint in the District of Puerto Rico. Shortly thereafter, the Virginia court denied the change of venue motion, and, as a result, Pinpoint requested that the Puerto Rico action be stayed. Atlas, however, commenced a Chapter 7 bankruptcy case, thereby automatically staying both the Virginia and Puerto Rico actions.

While the bankruptcy court ultimately granted the Chapter 7 trustee's request for stay relief, allowing the Puerto Rico action ' including Atlas' claims and Pinpoint's counterclaims ' to proceed to judgment, the court denied Pinpoint's lift-stay motion, which sought to allow the Virginia action as the first-filed action, to proceed. The court held, among other things, that the parties could seek adjudication of the first-filed rule in the non-stayed Puerto Rico action. Pinpoint appealed to the BAP, which dismissed it for lack of jurisdiction, holding that the order denying stay relief was not a final order because it did not prevent Pinpoint from raising its first-to-file argument in the Puerto Rico action.

Pinpoint's appeal to the First Circuit focused on the following two issues: 1) whether the First Circuit had jurisdiction; and 2) whether the bankruptcy court and BAP decisions violated the first-filed rule.

The Relevant Jurisdiction Standard and the Blanket Rule on the Appealability of Stay Relief Denials

The relevant standard for jurisdiction can be found in 28 U.S.C. ' 158(d)(1), which provides, in pertinent part, that “courts of appeals shall have jurisdiction of appeals from all final decisions, judgments, orders, and decrees ' ” See 28 U.S.C. '(d)(1) (emphasis added). The threshold question presented to the First Circuit, then, was whether the BAP and the bankruptcy court's orders denying stay relief constituted “final” orders. Now there is no dispute ' even within the First Circuit ' that orders granting stay relief are considered final orders, and appealable as of right, because they dispose of all the issues of a discrete dispute within a larger case. But can the same be said for orders denying stay relief? The answer, at least according to the Second, Fourth, Fifth, Eighth, Ninth, Tenth and Eleventh circuits, is yes. Orders denying stay relief are final and therefore appealable of right. That's the blanket rule.

The 'Herding' Phenomenon and the First Circuit's Rejection of the Blanket Rule

The First Circuit was unimpressed with the numbers favoring the blanket rule because it implied that one or more of the circuits favoring such a rule had likely succumbed to the apparently observable phenomenon called “herding” or “cascading” whereby, in the words of the First Circuit, “decisionmakers who first encounter a particular issue ' are more likely to rely on the record presented to them and their own reasoning, while later courts are increasingly more likely to simply go along with the developing group consensus.” Pinpoint, 761 F.3d at 182-83. Reviewing the question presented “afresh,” the First Circuit seemed troubled by the fact that the blanket rule applied regardless of the specific circumstances of the case, and it pointed to the Third Circuit's decision in In re West Electronics, Inc., 852 F.2d 79 (3d Cir. 1988) as an example of another circuit that refused to adopt the blanket rule without performing a more fact-specific, case-by-case analysis.

In West, the Third Circuit noted that when the other circuits applied the blanket rule, they did so because the orders in dispute had conclusively decided the contested issue as evidenced by the fact that the bankruptcy courts in those cases had nothing further to do. Id' at 81-82. But, where an order denies stay relief without prejudice for, among other issues, 1) an incomplete record; or 2) ongoing discovery, those are signs of nonfinality. Id. at 82.

The First Circuit ultimately relied upon several of its prior decisions, including United States v. Fleet Bank (In re Calore Express Co.), 288 F.3d 22 (1st Cir. 2002), in considering whether to adopt or reject the blanket rule. In Calore, for example, the First Circuit highlighted the caselaw underlying the blanket rule, but then performed an analysis which enabled it to properly scout for finality indicators. Id. at 34-35. Relying on Calore, among other cases, the First Circuit concluded that it was ultimately required to reject the blanket rule because, like the Third Circuit, it concluded that there could be orders denying stay relief that lack finality. Pinpoint, 761 F.3d at 185. Instead, the First Circuit adopted a more nuanced, fact-specific approach which, it concluded, will: 1) help courts avoid “unnecessary judging” when appeals have been superseded by events; and 2) encourage parties to fully consider finality issues before reflexively appealing from stay relief denials. Id.

Performing the more nuanced approach by scouting for finality telltales, the First Circuit concluded that the challenged order denying stay relief was in fact not final for the following reasons. First, the venue-related first-filed issue had yet to be adjudicated in the non-stayed Puerto Rico action. And, once adjudicated, Pinpoint can re-file its stay relief request, and the bankruptcy court will get to decide that issue, but on a better developed record. Second, Pinpoint was in a position to litigate everything it wanted to ' both the first-filed and the contract issues ' but not necessarily in its venue of choice. The First Circuit held that these reasons simply undercut Pinpoint's finality claim. Id. at 186.

The Dissent: Does the Majority Approach Value Abstraction Born of Theory Rather Than Pragmatism Born of Experience?

The decision of the First Circuit was not unanimous. While Judge William J. Kayatta agreed with his colleagues that Pinpoint's appeal did not provide a basis to reverse the bankruptcy court's lift stay denial, he dissented from the judgment of dismissal, holding, instead, that his colleagues should have decided the case by ruling on the merits rather than preferring to create a circuit split. Id. at 188. To be sure, Judge Kayatta, like his colleagues, is mindful not to join other circuits “simply to form a herd.” That said, Judge Kayatta did emphasize the positive value of uniformity, “especially in setting federal bankruptcy law.” Id. at 189.

Distilled to its essence, the dissent disagrees with the majority approach in the following respects. First, the majority's decision to reject the uniform approach of seven other circuits in favor of a more nuanced approach ' which purports to preserve resources and inhibit unnecessary appeals ' “values abstraction borne of theory rather than pragmatism borne of experience.” Id. In support of this proposition, Judge Kayatta notes that even the Third Circuit ' “the only federal court of appeals [until now] to so much as feint in the direction of a rule admitting of an exception” ' has never encountered an order that fell within its hypothesized exception. Id. at 188. And, argues Judge Kayatta, the challenged order in this case should similarly fall outside the West exception for the simple reason that the Puerto Rico district court's decision on the first-filed issue has no relevance on the question of whether that court is entitled to decide that issue in the first place. Id. at 188. N. 23.

Second, the majority's insistence that the reallocation of the burden of changing the status quo ' i.e., in bankruptcy, the party seeking to alter the default position of the automatic stay bears the burden of doing so ' justifies “a heightened degree of stinginess in allowing an appeal from a ruling preventing such a change” is conceptually erroneous. As the dissent notes, appeals of orders denying requests for injunctive relief outside of bankruptcy are routinely allowed and so, Judge Kayatta concludes, the question of who has the burden of altering the status quo has no relevance to the question of appealability. Id. at 189.

Third, the majority should have decided the case on its merits rather than creating “an idiosyncratic exception to the norm.” Simply put: The relevant dispute was not about which court should consider the merits of the case; rather, it was about which court will decide that question. That dispute, argues Judge Kayatta, was decided by the bankruptcy court against Pinpoint. Id. at 189-90.

Fourth, the majority's approach fails to satisfy judicial economy, the very purpose of the finality rule as articulated by Judge Ralph K. Winter in Sonnax Indus., Inc. v. Tri Component Products. Corp. ( In re Sonnax Industries, Inc.), 907 F.2d 1280 (2d Cir. 1990). As the Sonnax court noted, “the jurisdictional ruling will necessarily require a full briefing of all issues and consume as much judicial resources as an appeal.” Id. at 1285. And that, argues Judge Kayatta, is precisely what happened in the case at bar. Pinpoint, 761 F.3d at 190.

For these reasons, Judge Kayatta would have considered the merits of Pinpoint's appeal rather than dismissing the appeal for lack of jurisdiction, and would have ultimately rejected the appeal on its merits because the bankruptcy court's order: 1) reasonably balanced competing claims of harm; 2) protected the estate assets against potential waste by preventing a race to the courthouse; and 3) did not deprive Pinpoint of its opportunity to be heard. Id. at 191.

The Nascent Sub-Sub Specialty of Appellate Jurisdiction over Bankruptcy Court Orders Denying Stay Relief

What are some of the takeaway lessons from this decision? Well, the First Circuit rejected the blanket rule that all stay relief denials are final and appealable as of right, a decision that rejects the uniform approach of seven other circuits thereby creating a circuit split. That's noteworthy, and that rejection certainly injects a measure of uncertainty going forward. And, at least according to Judge Kayatta, the majority approach has transformed “what was until today a non-issue into fodder for briefing and analysis in the nascent sub-sub specialty of appellate jurisdiction over bankruptcy court orders denying stay relief.” Id. That's also noteworthy.

Regarding Judge Kayatta's final comment that the majority approach created “a new and entirely unnecessary precursor battleground that will add expense and delay while likely never altering the practical outcome of even a single case,” I guess only time will tell. I think practitioners should take some comfort in the fact that the facts underlying the First Circuit's decision were unique in that the prepetition litigation could proceed notwithstanding the stay relief denial. Query whether the First Circuit would have ruled differently had the prepetition litigation not been pending in two courts, where the stay relief denial would have resulted in the continued stay of the prepetition litigation.

Steven B. Smith is counsel in the Financial Restructuring & Bankruptcy practice of Dickstein Shapiro LLP in New York. A member of this newsletter's Board of Editors, he focuses on complex corporate restructuring and creditors' rights, including in-court Chapter 9, 11 and 15 bankruptcy cases and out-of-court workouts. He can be reached at [email protected].

Are orders denying relief from the automatic stay pursuant to Section 362 of the Bankruptcy Code considered final and, therefore, appealable as of right? This was the issue of first impression that was recently presented to the U.S. Court of Appeals for the First Circuit in Pinpoint I Services, LLC v. Rivera (In re Atlas IT Export Corp.), 761 F.3d 177 (1st Cir. 2014). Until this decision, it was a question with a predictable answer ' yes. Predictable, because seven of the eight circuit courts that have considered this issue have reached the same result ' yes, such orders are final and appealable.

The First Circuit, however, mindful of avoiding the apparently observable herding phenomenon, rejected the blanket-rule approach in favor of what it describes as a more nuanced one which requires courts to be mindful of the multiple layers and many moving parts inherent in bankruptcy litigation while scouting for “finality indicators.” This article explores the reasoning behind the First Circuit's decision to create a circuit split rather than deciding the question presented by ruling on the merits.

The Atlas Facts and the First Circuit Appeal

Pinpoint IT Services, LLC, a Virginia company (Pinpoint) and Atlas IT Export Corp., a Puerto Rico company (Atlas) each filed dueling federal court actions based upon a contract between them. Pinpoint commenced a breach of claim action against Atlas in the Eastern District of Virginia, but before the Virginia court could issue a ruling on Atlas' motion to change venue to the District of Puerto Rico, Atlas commenced its own action against Pinpoint in the District of Puerto Rico. Shortly thereafter, the Virginia court denied the change of venue motion, and, as a result, Pinpoint requested that the Puerto Rico action be stayed. Atlas, however, commenced a Chapter 7 bankruptcy case, thereby automatically staying both the Virginia and Puerto Rico actions.

While the bankruptcy court ultimately granted the Chapter 7 trustee's request for stay relief, allowing the Puerto Rico action ' including Atlas' claims and Pinpoint's counterclaims ' to proceed to judgment, the court denied Pinpoint's lift-stay motion, which sought to allow the Virginia action as the first-filed action, to proceed. The court held, among other things, that the parties could seek adjudication of the first-filed rule in the non-stayed Puerto Rico action. Pinpoint appealed to the BAP, which dismissed it for lack of jurisdiction, holding that the order denying stay relief was not a final order because it did not prevent Pinpoint from raising its first-to-file argument in the Puerto Rico action.

Pinpoint's appeal to the First Circuit focused on the following two issues: 1) whether the First Circuit had jurisdiction; and 2) whether the bankruptcy court and BAP decisions violated the first-filed rule.

The Relevant Jurisdiction Standard and the Blanket Rule on the Appealability of Stay Relief Denials

The relevant standard for jurisdiction can be found in 28 U.S.C. ' 158(d)(1), which provides, in pertinent part, that “courts of appeals shall have jurisdiction of appeals from all final decisions, judgments, orders, and decrees ' ” See 28 U.S.C. '(d)(1) (emphasis added). The threshold question presented to the First Circuit, then, was whether the BAP and the bankruptcy court's orders denying stay relief constituted “final” orders. Now there is no dispute ' even within the First Circuit ' that orders granting stay relief are considered final orders, and appealable as of right, because they dispose of all the issues of a discrete dispute within a larger case. But can the same be said for orders denying stay relief? The answer, at least according to the Second, Fourth, Fifth, Eighth, Ninth, Tenth and Eleventh circuits, is yes. Orders denying stay relief are final and therefore appealable of right. That's the blanket rule.

The 'Herding' Phenomenon and the First Circuit's Rejection of the Blanket Rule

The First Circuit was unimpressed with the numbers favoring the blanket rule because it implied that one or more of the circuits favoring such a rule had likely succumbed to the apparently observable phenomenon called “herding” or “cascading” whereby, in the words of the First Circuit, “decisionmakers who first encounter a particular issue ' are more likely to rely on the record presented to them and their own reasoning, while later courts are increasingly more likely to simply go along with the developing group consensus.” Pinpoint, 761 F.3d at 182-83. Reviewing the question presented “afresh,” the First Circuit seemed troubled by the fact that the blanket rule applied regardless of the specific circumstances of the case, and it pointed to the Third Circuit's decision in In re West Electronics, Inc., 852 F.2d 79 (3d Cir. 1988) as an example of another circuit that refused to adopt the blanket rule without performing a more fact-specific, case-by-case analysis.

In West, the Third Circuit noted that when the other circuits applied the blanket rule, they did so because the orders in dispute had conclusively decided the contested issue as evidenced by the fact that the bankruptcy courts in those cases had nothing further to do. Id' at 81-82. But, where an order denies stay relief without prejudice for, among other issues, 1) an incomplete record; or 2) ongoing discovery, those are signs of nonfinality. Id. at 82.

The First Circuit ultimately relied upon several of its prior decisions, including United States v. Fleet Bank (In re Calore Express Co.), 288 F.3d 22 (1st Cir. 2002), in considering whether to adopt or reject the blanket rule. In Calore, for example, the First Circuit highlighted the caselaw underlying the blanket rule, but then performed an analysis which enabled it to properly scout for finality indicators. Id. at 34-35. Relying on Calore, among other cases, the First Circuit concluded that it was ultimately required to reject the blanket rule because, like the Third Circuit, it concluded that there could be orders denying stay relief that lack finality. Pinpoint, 761 F.3d at 185. Instead, the First Circuit adopted a more nuanced, fact-specific approach which, it concluded, will: 1) help courts avoid “unnecessary judging” when appeals have been superseded by events; and 2) encourage parties to fully consider finality issues before reflexively appealing from stay relief denials. Id.

Performing the more nuanced approach by scouting for finality telltales, the First Circuit concluded that the challenged order denying stay relief was in fact not final for the following reasons. First, the venue-related first-filed issue had yet to be adjudicated in the non-stayed Puerto Rico action. And, once adjudicated, Pinpoint can re-file its stay relief request, and the bankruptcy court will get to decide that issue, but on a better developed record. Second, Pinpoint was in a position to litigate everything it wanted to ' both the first-filed and the contract issues ' but not necessarily in its venue of choice. The First Circuit held that these reasons simply undercut Pinpoint's finality claim. Id. at 186.

The Dissent: Does the Majority Approach Value Abstraction Born of Theory Rather Than Pragmatism Born of Experience?

The decision of the First Circuit was not unanimous. While Judge William J. Kayatta agreed with his colleagues that Pinpoint's appeal did not provide a basis to reverse the bankruptcy court's lift stay denial, he dissented from the judgment of dismissal, holding, instead, that his colleagues should have decided the case by ruling on the merits rather than preferring to create a circuit split. Id. at 188. To be sure, Judge Kayatta, like his colleagues, is mindful not to join other circuits “simply to form a herd.” That said, Judge Kayatta did emphasize the positive value of uniformity, “especially in setting federal bankruptcy law.” Id. at 189.

Distilled to its essence, the dissent disagrees with the majority approach in the following respects. First, the majority's decision to reject the uniform approach of seven other circuits in favor of a more nuanced approach ' which purports to preserve resources and inhibit unnecessary appeals ' “values abstraction borne of theory rather than pragmatism borne of experience.” Id. In support of this proposition, Judge Kayatta notes that even the Third Circuit ' “the only federal court of appeals [until now] to so much as feint in the direction of a rule admitting of an exception” ' has never encountered an order that fell within its hypothesized exception. Id. at 188. And, argues Judge Kayatta, the challenged order in this case should similarly fall outside the West exception for the simple reason that the Puerto Rico district court's decision on the first-filed issue has no relevance on the question of whether that court is entitled to decide that issue in the first place. Id. at 188. N. 23.

Second, the majority's insistence that the reallocation of the burden of changing the status quo ' i.e., in bankruptcy, the party seeking to alter the default position of the automatic stay bears the burden of doing so ' justifies “a heightened degree of stinginess in allowing an appeal from a ruling preventing such a change” is conceptually erroneous. As the dissent notes, appeals of orders denying requests for injunctive relief outside of bankruptcy are routinely allowed and so, Judge Kayatta concludes, the question of who has the burden of altering the status quo has no relevance to the question of appealability. Id. at 189.

Third, the majority should have decided the case on its merits rather than creating “an idiosyncratic exception to the norm.” Simply put: The relevant dispute was not about which court should consider the merits of the case; rather, it was about which court will decide that question. That dispute, argues Judge Kayatta, was decided by the bankruptcy court against Pinpoint. Id. at 189-90.

Fourth, the majority's approach fails to satisfy judicial economy, the very purpose of the finality rule as articulated by Judge Ralph K. Winter in Sonnax Indus., Inc. v. Tri Component Products. Corp. ( In re Sonnax Industries, Inc.), 907 F.2d 1280 (2d Cir. 1990). As the Sonnax court noted, “the jurisdictional ruling will necessarily require a full briefing of all issues and consume as much judicial resources as an appeal.” Id. at 1285. And that, argues Judge Kayatta, is precisely what happened in the case at bar. Pinpoint, 761 F.3d at 190.

For these reasons, Judge Kayatta would have considered the merits of Pinpoint's appeal rather than dismissing the appeal for lack of jurisdiction, and would have ultimately rejected the appeal on its merits because the bankruptcy court's order: 1) reasonably balanced competing claims of harm; 2) protected the estate assets against potential waste by preventing a race to the courthouse; and 3) did not deprive Pinpoint of its opportunity to be heard. Id. at 191.

The Nascent Sub-Sub Specialty of Appellate Jurisdiction over Bankruptcy Court Orders Denying Stay Relief

What are some of the takeaway lessons from this decision? Well, the First Circuit rejected the blanket rule that all stay relief denials are final and appealable as of right, a decision that rejects the uniform approach of seven other circuits thereby creating a circuit split. That's noteworthy, and that rejection certainly injects a measure of uncertainty going forward. And, at least according to Judge Kayatta, the majority approach has transformed “what was until today a non-issue into fodder for briefing and analysis in the nascent sub-sub specialty of appellate jurisdiction over bankruptcy court orders denying stay relief.” Id. That's also noteworthy.

Regarding Judge Kayatta's final comment that the majority approach created “a new and entirely unnecessary precursor battleground that will add expense and delay while likely never altering the practical outcome of even a single case,” I guess only time will tell. I think practitioners should take some comfort in the fact that the facts underlying the First Circuit's decision were unique in that the prepetition litigation could proceed notwithstanding the stay relief denial. Query whether the First Circuit would have ruled differently had the prepetition litigation not been pending in two courts, where the stay relief denial would have resulted in the continued stay of the prepetition litigation.

Steven B. Smith is counsel in the Financial Restructuring & Bankruptcy practice of Dickstein Shapiro LLP in New York. A member of this newsletter's Board of Editors, he focuses on complex corporate restructuring and creditors' rights, including in-court Chapter 9, 11 and 15 bankruptcy cases and out-of-court workouts. He can be reached at [email protected].