Manufactured Finality in Bankruptcy Proceedings

In Kiviti v. Bhatt, the Fourth Circuit dismissed an appeal from an order deeming a debt dischargeable in bankruptcy. That discharge order meant the creditors would have to pursue that debt through bankruptcy. But it also left unresolved the creditors’ request to declare the existence of that debt. The Fourth Circuit held that the parties could not secure an appeal from the discharge decision by voluntarily dismissing this remaining request without prejudice. Granted, the discharge order made pursuing that request unattractive; the creditors were not likely to recover much (if anything) on that debt through the bankruptcy proceedings. But the discharge decision did not effectively resolve the creditors’ claim. It was merely an adverse interlocutory decision. And litigants cannot manufacture appeals from these sorts of decisions by voluntarily dismissing their claims.

The Voluntary Dismissal in Kiviti

Simplifying a little bit, the creditors in Kiviti brought an adversary proceeding against the debtor. The creditors’ complaint contained two counts. The first asked the bankruptcy court to declare that the debtor owed the creditors about $60,000. The second count asked the bankruptcy court to deem this debt nondischargeable in bankruptcy.

This second request was necessary as, without it, the creditors would be able to recover only from the bankruptcy estate through a proof of claim. Those who recover on a proof of claim can receive little or none of what they’re owed. So to recover the full $60,000, the creditors needed the bankruptcy court to declare the debt nondischargeable.

The bankruptcy court rejected this request and deemed the debt dischargeable. The creditors then concluded that it was not worth pursuing their other request—a declaration of what the debtor owed—as the likely recovery was so low.

So the parties stipulated to dismiss that count without prejudice. The hope was to create a final, appealable decision that would allow review of the discharge decision. The district court affirmed. The creditors then sought review in the Fourth Circuit.

Manufacturing Appeals from Adverse Interlocutory Orders

Kiviti involves a variety of manufactured finality that I’ve described as involving voluntary dismissals after adverse interlocutory orders. These orders make a claim less attractive to pursue by increasing the costs of litigation or limiting the possible recovery (or both). But these orders do not effectively resolve a claim. The claimants can still prevail on the merits. But given the increased costs or lower possible recovery, the claimants do not want to continue litigating. They would instead like to appeal the adverse interlocutory ruling.

The normal avenue for immediately reviewing these adverse interlocutory orders is a certified appeal under 28 U.S.C. § 1292(b)—or, in the case of bankruptcy litigation, 28 U.S.C. § 158(d)(2). But litigants don’t always try to use—and sometimes cannot use—the established avenues for interlocutory review.

Sometimes these litigants instead try to create an appeal by voluntarily dismissing the affected claims. The thought is that this dismissal creates a final, appealable decision under 28 U.S.C. § 1291. The claimant can thus appeal. And if the court of appeals reverses, the claimant can return to the trial court and reinstate the affected claims.

The Manufactured Appeal in Kiviti

That’s precisely what the parties tried to do in Kiviti. The bankruptcy court’s discharge decision made it unattractive to pursue the debt in an adversary proceeding. But that decision did not effectively resolve the creditors’ claim. Rather than pursue that claim to a judgment, they tried to secure an appeal via a voluntary dismissal.

The Fourth Circuit was having none of it. Like most (but not all) courts, the Fourth Circuit regularly rejects these attempts at manufacturing a final decision. Courts see two problems with these attempted appeals.

For one thing, they risk piecemeal appellate review. If the court of appeals reverses, the parties will reinstate the voluntarily dismissed claims and continue litigating them. That could lead to a second appeal from the resolution of those voluntarily dismissed claims. That was the case in Kiviti. The creditors could reinstate the claim for the debt at any time. The resolution of that claim could result in a second appeal.

Another issue courts see with this variety of manufactured finality is litigants’ attempts to circumvent the established rules for interlocutory appeals. The thought is that Congress and the Supreme Court (via the rulemaking process) determine when litigants can appeal before a final judgment. Allowing litigants to home brew their own interlocutory appeals undermines the legislative balances struck by Congress and rulemakers.

The Fourth Circuit went on to explain that even if the discharge decision rendered the debt claim moot, Article III mootness rules do not apply in bankruptcy proceedings. So the adversary proceedings were not effectively over due to mootness.

For more on attempts to appeal after adverse interlocutory orders, you can read my new article, Voluntary Dismissals, Jurisdiction & Waiving Appellate Review. I argue that these voluntary dismissals do not implicate jurisdiction—appellate or Article III—at all. They instead implicate waiver.

Kiviti v. Bhatt, 2023 WL 5963612 (4th Cir. Sep. 14, 2023), available at the Fourth Circuit and Westlaw