Continuing Recent Trend of Broadening the Scope of Appellate Review in Bankruptcy Appeals

January 26 2023| News| | By David Curry

Fifth Circuit Guts Statutory Limitations Upon the Application and Appellate Review of Abstention in Bankruptcy Cases

On January 5, 2023, the Fifth Circuit Court of Appeals issued its opinion in ERCOT v. Just Energy Texas, L.P., vacating the decision of the Bankruptcy Court for Southern District of Texas denying ERCOT’s motion to dismiss and refusing to abstain in litigation commenced by debtor Just Energy Texas, L.P. (the “Debtor”) challenging the validity of ERCOT’s claims against the Debtor arising from ERCOT’s rate actions taken during winter storm Uri.  No. 22-02424, memorandum opinion at *1, 19, __ F.4th __ (5th Cir. Jan. 5, 2023).  The bulk of the Just Energy opinion consists of the Court’s thorough and instructive review and explanation of the development and application of the Burford abstention doctrine in chapter 11 proceedings.  Burford abstention, as the Court explained, is required in the rare circumstance where (i) the results in a case would impact a state’s implementation or execution of significant public policy regimes; and (ii) the exercise of federal jurisdiction would lead to inconsistent results.  Given Burford’s limited application, the Court’s thorough and instructive analysis is not likely to significantly impact chapter 11 practice.  However, the Court’s interpretation of 28 U.S.C. § 1334(c)(1) illustrates a growing trend amongst appellate courts to narrow existing doctrines or statutes limiting or precluding appellate review of bankruptcy court decisions.

Significantly condensing the case background and issues involved in Just Energy, the matter before the Fifth Circuit turned upon the Court’s interpretation and application of § 1334(c)(1).  Section 1334(c)(1) provides:

(c)(1) Except with respect to a case under chapter 15 of title 11 [11 USCS §§ 1501 et seq.], nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.

28 U.S.C. § 1334(c)(i) (emphasis added).

The determinative issue on appeal then, the Court explained, turned upon whether § 1334(c) established a separate, distinct ground for abstention in bankruptcy proceedings or whether § 1334(c) subsumed existing doctrines of abstention and controlled the application of such doctrines in bankruptcy cases.  If the latter, then permissive abstention under any doctrine was barred in the Just Energy bankruptcy cases (because the case is proceeding under Chapter 15).  § 1334(c)(1) (“Except with respect to a case under chapter 15 of title 11, nothing in this section prevents a district court [….] from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.”) (emphasis added).  Moreover, the Fifth Circuit would lack appellate jurisdiction to review the bankruptcy court’s order refusing to abstain.  § 1334(d) (“Any decision to abstain or not to abstain made under subsection (c) (other than a decision not to abstain in a proceeding described in subsection (c)(2)) is not reviewable by appeal or otherwise by the court of appeal ….”).

In finding that Burford (and other judicially created abstention doctrines) are separate and distinct from abstention under § 1334(c), the Fifth Circuit essentially boot-strapped its way into finding that it had jurisdiction. The Court reasoned that because the Fifth Circuit had previously decided appeals involving the Burford doctrine in bankruptcy cases and had applied the Burford doctrine in ruling upon such appeals, the judicially created doctrines must be distinct from § 1334(c) or those prior panels would have lacked jurisdiction under § 1334(d).  Going further, the Court found that because ERCOT did not seek abstention pursuant to § 1334(c), it exclusively argued for application of Burford abstention, neither § 1334(c)’s prohibition against abstention in Chapter 15 cases nor § 1334(d)’s prohibition of appellate review applied.

Given the Court’s narrow interpretation of § 1334(c)(1), it is conceivable that the net effect of the Just Energy ruling is that the prohibition against abstention in chapter 15 cases and § 1334(d) ‘s prohibition of appellate review have been almost entirely gutted. Section 1334(c)(1) provides no specific guidance as to when permissive abstention should apply; rather, it states only that abstention is permissible in the interests of justice, the interest of comity with state courts, or out of respect for state law.  As such, any request for abstention will likely rely upon factors established by the “independent” judicially established abstention doctrines and, thus, not be subject to the limitations set forth § 1334(c)(1) or § 1334(d).