Is anyone ready for a test on bankruptcy appellate jurisdiction?  For the second time in a week, the Sixth Circuit addressed its appellate jurisdiction in bankruptcy appeals, this time in the context of orders denying the substantive consolidation of two separate chapter 7 bankruptcy estates, In re Cyberco Holdings and Teleservices Group.   On the heels of its decision in Lindsey v. Pinnacle Bank on August 13 (which we reported on here), the Sixth Circuit held that (i) a Bankruptcy Appellate Panel order dismissing the appeal of bankruptcy court orders denying substantive consolidation was itself a final order appealable under section 158(d)(1), and (ii) the underlying bankruptcy court orders were not final orders and could not be appealed under section 158(a)(1), thereby affirming the BAP’s dismissal.

The BAP had found that the bankruptcy court orders were interlocutory and dismissed the appeal.   The Sixth Circuit rejected the argument that the BAP’s dismissal was in effect a remand of the case to the bankruptcy court for further proceedings.  Rather, the BAP order “fully resolved the appellate proceedings by deciding the jurisdictional question and left nothing for the bankruptcy court to do.”  Accordingly, the Sixth Circuit held that the BAP order was a final order and that it had jurisdiction under section 158(d)(1) to “address the correctness of that decision.”

Clearing that initial hurdle, the Sixth Circuit turned to the finality of the bankruptcy court orders denying substantive consolidation.  The Court began by recognizing that the finality of orders in bankruptcy cases is different from district court cases and must be considered in a more pragmatic and less technical way than in other situations.  Among other things, the concepts of finality “that easily apply to lawsuits typically brought in the district courts do not readily translate into the more far reaching proceedings that characterize bankruptcy cases.”  Bankruptcy cases are “sprawling events” made up of smaller discreet proceedings, each with a beginning, middle, and an end.  (Contrast this with the Court’s failure to embrace a flexible approach to finality for bankruptcy court orders in Lindsey last week.)

Huntington Bank, the appellee, argued that the orders denying substantive consolidation met this relaxed standard of finality because they fully and finally resolved a contested matter – a discreet judicial unit.  In support of its argument, Huntington cited to cases holding that orders granting substantive consolidation were final and immediately appealable principally because the effect of granting substantive consolidation on creditors and other parties in interest was so substantial and likely irreversible such that immediate appellate review was needed.  To fully understand the rationale behind those decisions, the Sixth Circuit briefly reviewed the doctrine of substantive consolidation, which has been recognized in prior Sixth Circuit decisions as an equitable power of bankruptcy courts under section 105(a) of the Bankruptcy Code (possibly tipping its hand as to its views on the merits of the Bankruptcy Court’s denial of substantive consolidation, which was based, in part, on rejection of substantive consolidation as an equitable power under section 105(a)).

The effect of granting substantive consolidation may well have justified the outcome of those cases.  This case, however, involved orders denying substantive consolidation.  This distinguishing factor was the key to the Sixth Circuit’s ruling.  The effect of denying substantive consolidation is “relatively minor” and really just preserves the status quo.  The assets and liabilities of the debtors remain separate and the parties will proceed according to traditional rules.  The judicial unit test advocated by Huntington cannot be applied in a vacuum and must be considered in the broader context of the bankruptcy case.  If an order has little impact on the larger bankruptcy case or proceeding, it may not be considered a final order within the meaning of section 158(a)(1) notwithstanding the fact that a discreet “judicial unit” may have been completed and fully resolved by the order.