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Bracewell Obtains First Certification Under New Bankruptcy Appeal Statute
June 12, 2007
The 2005 amendments to the Bankruptcy Code sought to expedite the chapter 11 process to combat perceived abuses of the bankruptcy system by debtors. Some of these changes, such as the new 18-month cap on the debtor's exclusive period to file a plan of reorganization, are well known. One change that is less well known is the new ability to seek certification of bankruptcy appeals directly to the Court of Appeals, rather than having to appeal first to the District Court or Bankruptcy Appellate Panel. As discussed below, Bracewell recently utilized this innovative procedure to obtain the first certification of a bankruptcy appeal to the Fifth Circuit Court of Appeals (and perhaps the country) in the Scotia Development Company LLC chapter 11 case.
The Flaws in the Pre-2005 Appeals Process
The reality of chapter 11 cases is that decisions are often made quickly by Bankruptcy Courts that, statistically speaking, side with the debtor far more often than with the creditors. From a creditor perspective, therefore, there is a need for a relatively quick and efficient appeals process. At the same time, the decision of one Bankruptcy Court is not binding on another, even within the same district – only decisions by the Courts of Appeal (within their circuits) and the US Supreme Court are clearly binding on lower courts. This also suggests that a relatively quick and efficient appeals process is desirable in order to inject greater certainty into the bankruptcy process.
Typically speaking, however, appeals from Bankruptcy Court decisions are seldom quick or efficient. Appellants must first seek review from the District Court (or a Bankruptcy Appellate Panel ("BAP") in some jurisdictions), and only after the District Court/BAP issued its decision can appellants seek review by the Court of Appeals. In the meantime, the chapter 11 case continues to proceed, often rendering a pending appeal moot – a classic case of justice delayed being justice denied and also a situation leading to only a relative handful of binding Circuit Court or Supreme Court precedents for the benefit of future bankruptcy cases.
The New Appeals Certification Process
The 2005 bankruptcy amendments have partially changed the appeal landscape. The traditional route of proceeding through the District Court remains the norm, but now there is an alternative procedure that permits appeals of Bankruptcy Court decisions to be taken directly to the Court of appeals under certain circumstances via the new "appeal certification" process set forth in 28 U.S.C. § 158(d)(2).
The new process works as follows. First, the appellant may request the Bankruptcy Court or the District Court to certify the appeal for direct consideration by the relevant Court of Appeals by showing that the appeal meets any of the following three criteria:
- the decision appealed involves a question of law as to which there is no controlling decision of the Supreme Court or the relevant Court of Appeals, or a matter of public importance;
- the decision involves a question of law requiring resolution of conflicting decisions; or
- an immediate appeal from the decision may materially advance the progress of the bankruptcy case or proceeding.
If any of these criteria are present, the Bankruptcy Court or District Court must certify the appeal to the Court of Appeals.1
The second step occurs when the appellant requests the Court of Appeals to exercise its discretion to accept the certification of the appeal by the lower court.
Bracewell Obtains Appeal Certification in the Fifth Circuit
Bracewell's successful certification of the Scotia Development appeal illustrates how this new procedure can be strategically employed to expedite appellate consideration in bankruptcy cases. Bracewell represents an informal group (the "Group") of holders of "collateralized timber notes" issued by Scotia Pacific Company LLC ("Scopac"), which is one of the affiliated debtors in the jointly administered Scotia Development chapter 11 cases currently pending in the Bankruptcy Court for the Southern District of Texas. Scopac is a "special purpose vehicle" that was established to issue the timber notes (initially $867 million) to finance Scopac's acquisition of approximately 210,000 acres of timberland, which is the primary collateral for the timber notes. Scopac's operations are limited to operating the Timberland to generating revenue from timber sales in order to repay the timber notes.
Bracewell, on behalf of the Group, requested the Bankruptcy Court to determine that Scopac is a "single asset real estate" debtor ("SARE") subject to expedited reorganization under § 362(d)(3) of the Bankruptcy Code. While the SARE provisions were added to the Bankruptcy Code in 1994, it was only in 2005 that a $4 million limitation on the amount of secured debt was removed from the SARE definition. As a result of this amendment to the requirements, the SARE provisions can now be applied to qualifying debtors of any size, but due to the newness of the amendment, there is not yet any published decisions applying the SARE provisions to a debtor as large as Scopac.
After the Bankruptcy Court denied the Group's motion, the Group immediately sought certification of the novel legal issue presented by the SARE motion to the United States Court of Appeals for the Fifth Circuit. The Group sought to certify the SARE appeal because it involved determining whether Scopac's chapter 11 reorganization must be expedited and the limitations inherent to the normal two-tiered appeals process would deprive the Group of its ability to obtain definitive appellate review on a timely basis. For example, even if the Group were to obtain a reversal in the District Court, Scopac could then appeal that decision to the Fifth Circuit, further delaying resolution of the issue of whether Scopac's case must be expedited. In other words, the intention of the SARE provisions to expedite the resolution of "single asset real estate" chapter 11 cases would be frustrated by the delays inherent in a two-tier appeals process.
At first, the Bankruptcy Court denied the Group's request to certify the appeal, erroneously interpreting 28 U.S.C. §158(d)(2) as requiring that all three of the statutory elements must be satisfied. Three days later, the Court issued a sua sponte order correcting its prior order, finding the presence of one of the elements and recommending to the District Court that the appeal be certified. The District Court agreed and entered an order the next day certifying the appeal (the Bankruptcy Court could have issued the certification order, but it deferred to the District Court because the appeal had already been docketed in the District Court).
On May 14, 2007, the Fifth Circuit accepted certification of the SARE appeal. This was the first certification accepted in the Fifth Circuit and, possibly, is the first non-consensual certification accepted by any Court of Appeals to date.2 This development will permit the Group to obtain meaningful and definitive appellate review of the SARE issue in a manner that was not possible before the 2005 amendment. In addition, the Fifth Circuit's decision on this issue will be the first to resolve a novel issue of law regarding the scope of SARE relief, thus providing controlling precedent throughout the Fifth Circuit and persuasive guidance to courts in other circuits where the issue has not yet been considered.
Whether Bankruptcy Courts will generally be willing to certify appropriate appeals remains to be seen, as does the question of whether Courts of Appeal will generally be willing to accept direct appeals. Nevertheless, the Scotia Development case illustrates how the new certification process may be used by creditors in other bankruptcy cases that present important legal questions requiring definitive and expeditious appellate guidance.
1 The court may also certify an appeal of its own initiative and the parties may agree to certify.
2 In contrast, the Second Circuit Court of Appeals recently issued a decision declining to accept the direct appeal of a Bankruptcy Court decision. See Weber v. United States Trustee, 2007 WL 1097077 (2d Cir. April 13, 2007).