BANKRUPTCY BULLETIN
Contributing Author:
David M. Tanabe, Winthrop & Weinstine, P.A.
In In re Vera T. Welte Testamentary Trust, 96 F.4th 1034 (8th Cir. 2024), the Eighth Circuit Court of Appeals held that the district court’s order was not “final” for 28 U.S.C. § 158(d)(1) because the bankruptcy court still had to (1) rule on the motion to dismiss the chapter 12 case and (2) give preclusive effect to the state appellate court’s decision with respect to the mortgage dragnet clauses and the amounts owed under the promissory notes.
In the case, the trust executed mortgages in favor of the lender with dragnet clauses (which secured not only the amount owed on the corresponding promissory notes, but all other obligations owing to the lender). The property securing the mortgages consisted of 160 acres of farmland. The creditor commenced a mortgage foreclosure action in state court naming multiple defendants, including but not limited to, the beneficiary and trustee for the trust. Shortly before trial in the foreclosure action, the trust filed a petition for bankruptcy relief under chapter 12. The lender filed a proof of claim and motion to dismiss the chapter 12 case.
Thereafter, the state trial court in the foreclosure action ruled the dragnet clauses secured loans made to the beneficiary in excess of the face amount of the promissory notes. The state appellate court affirmed. In contrast, the bankruptcy court in addressing the lender’s proof of claim and motion to dismiss the chapter 12 case held the dragnet clauses were unenforceable; and as a result, the trust no longer owed a debt to the lender. Thus, the bankruptcy court held the lender lacked standing to assert its motion to dismiss the chapter 12 case.
The lender appealed the bankruptcy court’s decision to the United States District Court for the Northern District of Iowa (“District Court”). The District Court held the state appellate court’s conclusion regarding the enforceability of the dragnet clauses and amounts owed under the promissory notes were entitled to preclusive effect. The District Court did not reach the lender’s appeal regarding the motion to dismiss the chapter 12 case and remanded the case to the bankruptcy court.
The parties appealed to the Eighth Circuit Court of Appeals (“Eighth Circuit”). In the appeal to the Eighth Circuit, the trust argued the District Court erred in its order by (1) raising issue preclusion sua sponte, (2) giving the state court ruling preclusive effect, and (3) denying the trust the benefits of the automatic stay. In a cross-appeal, the lender alleged the District Court erred by failing to find that the trust was an ineligible debtor under chapter 12. Further, the lender argued the Eighth Circuit lacked jurisdiction to consider the appeal because the District Court’s order was not “final” for the purpose of § 158(d)(1).
To determine finality under § 158(d)(1), the Eighth Circuit considered three factors, including the extent to which (1) the order leaves the bankruptcy court nothing to do but execute the order; (2) the extent to which any delay in obtaining review would prevent the aggrieved party from relief; and (3) the extent to which a later reversal would require recommencement of the entire proceeding.
For these factors, the Eighth Circuit recognized that on remand the bankruptcy court would have to consider the motion to dismiss, as well as apply the District Court’s conclusion that the state appellate court’s decision had preclusive effect with respect to the dragnet clauses and the amounts owed under the promissory notes. The Eighth Circuit determined that the trust offered no discernable reason for why the issues addressed in the District Court’s order would inevitably evade appellate review; and further, judicial economy would have been aided if the bankruptcy court took up the motion to dismiss at an earlier stage.
Thus, the Eighth Circuit held it lacked jurisdiction over the appeal and remanded to the bankruptcy court because the District Court’s order was not “final” for § 158(d)(1).
To read the Eighth Circuit’s decision, click here.
Editors-in-Chief:
C.J. Harayda, Stinson LLP
David M. Tanabe, Winthrop & Weinstine, P.A.