In re Hayes Bankruptcy

• Decision Date: 12 March 1998
• Docket Number: Civ. No. C97-1006 MJM.
• Citation: 220 BR 57
• Parties: In re HAYES BANKRUPTCY. MAQUOKETA STATE BANK, Appellant, v. Robert C. HAYES and Andrea Hayes, Appellees.
• Court: U.S. District Court — Northern District of Iowa

220 B.R. 57 (1998)

In re HAYES BANKRUPTCY MAQUOKETA STATE BANK, Appellant, v. Robert C. HAYES and Andrea Hayes, Appellees.

Civ. No. C97-1006 MJM.

United States District Court, N.D. Iowa, Eastern Division.

March 12, 1998.

Eric W. Lam, Moyer & Bergman, P.L.C., Cedar Rapids, IA, for Maquoketa State Bank.

Brian W. Peters, Naylor Hoover Peters & Blair, Dubuque, IA, for Robert C. and Andrea Hayes.

Memorandum Opinion and Order

MELLOY, Chief Judge.

I. Introduction

The Bankruptcy Court for the Northern District of Iowa (Honorable Paul Kilburg, Judge) denied Maquoketa State Bank's (the "Bank's") motion to convert the Hayes's bankruptcy to a Chapter 7 case. The Bank sought that motion in order to secure the appointment of a Chapter 7 trustee, who could avoid the mortgage on the Hayes's residence. The bankruptcy court explained its reasoning in a detailed order, and clarified its reasoning in a subsequent order denying the bank's motion to reconsider.

The bank then appealed to this Court, either under 28 U.S.C. § 158(a)(1) or § 158(a)(3). The distinction is significant, since § 158(a)(1) provides that this Court "shall have jurisdiction to hear appeals" only from "final judgments, orders, and decrees" of the bankruptcy court, while § 158(a)(3) allows this Court to hear appeals "from all interlocutory orders and decrees" of the bankruptcy court, subject only to this Court's decision to grant leave to appeal. See 28 U.S.C. § 158(a).

In the initial briefing to this Court, neither party briefed the question of whether the bank's appeal was properly taken under § 158(a)(1) as an appeal of a final order, or whether the bank's appeal should nonetheless be heard pursuant to § 158(a)(3). Accordingly, this Court ordered the parties to provide supplemental briefing on that question. See Doc. # 6.

Both parties have now submitted briefs addressing that question. The bank contends that the bankruptcy court's order is a "final" order under § 158(a)(1) and, even if it is not, that this Court should nevertheless entertain its appeal. The Hayeses contend that the bankruptcy court's order is not a "final" order, and that this Court should refrain from entertaining a § 158(a)(3) appeal. The matter is fully submitted and ready for decision.

II. Facts

As the bankruptcy court noted, the timing of the various transactions at issue in this case is "odd." See Order Re Objection to Exemption Claim and Motion to Convert, at 8 (hereinafter "Order"). The Hayeses first filed a bankruptcy petition on Friday, May 31, 1996, which was promptly returned to them by the bankruptcy clerk because of an unspecified "error in execution." Order, at 2. They filed a proper bankruptcy petition on June 3, 1996.

Also on May 31, 1996, the Hayeses sold one home, located on Country Club Drive in Maquoketa, Iowa (hereinafter the "Country Club"), and bought another, located in Baldwin, Iowa (hereinafter the "Baldwin property"). The financial details of this sale and purchase are fairly straightforward, and may be summarized briefly.

Before its sale on May 31, Mark and Debra Edwards held a mortgage on the Hayes's Country Club home. With some of the proceeds from the sale of the Country Club, the Hayeses paid the Edwards around $60,000 to release the Country Club mortgage. The Hayeses used the rest of the Country Club proceeds to pay $80,000 toward their new Baldwin property. The remainder of the Baldwin property purchase price was provided by the Edwards, who lent the Hayeses around $35,000 in exchange for a mortgage on the Baldwin property. Documents evidencing these transactions, and recording the Edwards's mortgage on the Baldwin property, were filed on June 3, 1996. The evident aim of all these transactions was to improve the Edwards's position as creditors of the Hayeses by giving the Edwards a purchase-money mortgage on the Baldwin property. Under Iowa law, a properly recorded purchase-money mortgage has a kind of superpriority akin to that of a purchase money security interest under the Uniform Commercial Code. See IOWA Code § 654.12B Maquoketa State Bank is a general creditor of Hayeses. The bank claims that if the mortgage to Edwards on the Baldwin property is avoided, a portion of the homestead property would be available to pay the claims of unsecured creditors. The exact amount available to pay creditors is somewhat disputed. The purchase price of the Baldwin property was $80,750. Judge Kilburg found that up to $54,566.33 of that amount would be exempt as the "carry over" exemption from the debtors' prior homestead. However, the bank argues that the size of the homestead exceeds the statutory allowance of .5 acres and, consequently, there may be somewhat more available to pay creditors once the property of platted and the debtors actually designate the .5 acre homestead that they are allowed to claim. Again, this assumes that the mortgage to the Edwards is avoided.

The bank claimed that the debtors had acted in bad faith and that the case should be converted to Chapter 7, so that a Chapter 7 Trustee could be appointed to examine the debtors' conduct, marshal assets and void the Edwards' mortgage. The bankruptcy court denied the motion to convert and this appeal followed.

III. Discussion

A. An Overview of District Court Appellate Jurisdiction over the Orders of Bankruptcy Courts

As mentioned above, and leaving aside the issue of extraordinary relief, see In re Olson, 20 B.R. 206 (D.Neb.1982)(Beam, J.); Tripati v. U.S. Bankruptcy Court for the Eastern District of Texas, 180 B.R. 160 (E.D.Tex.1995); Keller v. Blinder, 135 B.R. 892 (D.Co.1991), a litigant has the right to appeal final orders and decrees of the bankruptcy court, see § 158(a)(1), and may seek leave to appeal interlocutory (which is to say, non-final) orders and decrees. See § 158(a)(3). Whether or not to grant leave to appeal a non-final order is wholly within the discretion of the district court. See U.S. Trustee v. Vance, 189 B.R. 386 (W.D.Va. 1995); QF Finance Ltd. v. National Indemnity Corp., 180 B.R. 510 (N.D.Ill.1995); In re American Freight System, Inc., 153 B.R. 316 (D.Kan.1993); see also 28 U.S.C. § 158(a)(3); compare 28 U.S.C. § 1292(b) (standards for interlocutory review of district court orders by circuit courts); see also White v. Nix, 43 F.3d 374 (8th Cir.1994)(holding that circuit court cannot entertain interlocutory appeal when standards of § 1292(b) are not met); In the Matter of Morse Electric Co., Inc., 805 F.2d 262, 264 (7th Cir.1986)("District courts may elect to hear appeals from bankruptcy judges' interlocutory orders . . . while only `final' orders of district judges are appealable to the court of appeals under § 158(d).").

While some district courts have read the requirements of 28 U.S.C. § 1292(b) into § 158(a)(3), see, e.g., IBI Security Service, Inc. v. National Westminster Bank USA, 174 B.R. 664 (E.D.N.Y.1994), that approach seems to arise from a felt necessity to impose an analytical structure on the § 158(a)(3) inquiry and to discourage pell-mell appeals. Nothing in the text of § 158(a)(3) indicates a limit to the district court's discretion. Perhaps more importantly, nothing in the statutory or constitutional relationship between district and bankruptcy courts reveals any reason why a district court must decline review when the strict requirements of § 1292(b) are not met. Since the bankruptcy court is a "unit of the district court," see 28 U.S.C. § 151, its adjudicatory authority flows from that of the district court, and the district court may review decisions of the bankruptcy court as freely as it may review its own decisions. Cf. Lindh v. Murphy, 96 F.3d 856, 870 (7th Cir.1996)(en banc), rev'd on other grounds, ___ U.S. ___, 117 S.Ct. 2059, 138 L.Ed.2d 481 (1997).

Nevertheless, district courts exercise this discretionary power of review with care, and with an eye toward safeguarding the bankruptcy court's role as the initial and in some respects primary forum for the adjudication of bankruptcy disputes. It is therefore very much in the interest of those seeking § 158(a) review to characterize the order appealed from as "final." See 1 Collier on Bankruptcy, ¶ 5.071a (Matthew Bender 15th Ed. Revised 1996). The evident next question here is whether an order denying a motion to convert is "final" for § 158(a)(1) purposes.

B. Finality of Bankruptcy Orders in the Eight Circuit

Both parties rely on In re Koch, 109 F.3d 1285 (8th Cir.1997) for the proposition that a 3-step test determines whether a bankruptcy court's order is "final" for § 158(a)(1) purposes. See Supplemental Brief of Appellees Robert C. Hayes and Andrea Hayes, Doc. # 8, at 1 (asserting that "the basis for finality under 28 U.S.C. § 158(a)(1)" is determined by the Koch test); Supplemental Brief of Appellant Maquoketa State Bank, at 2 (asserting that "the Eighth Circuit has adopted a three step process for the determining the finality of a bankruptcy order" and citing Koch).

This reliance is technically misplaced. The issue in Koch was whether the district court's order, entered pursuant to § 158(a)¹, was final for the purposes of circuit court review under § 158(d). See Koch, 109 F.3d at 1287 ("Although the parties ignored this jurisdictional issue, we must first decide whether the district court's order is final for purposes of 28 U.S.C. § 158(d).").² Nevertheless, the Eighth Circuit has held that the same three-part test applied in Koch also generally applies to the question of whether a bankruptcy court's order is final for purposes of district court review. See, e.g., Lewis v. FHA, 992 F.2d 767 (8th Cir.1993); In re Huebner, 986 F.2d 1222, 1223 (8th Cir.1993); In re Olson, 730 F.2d 1109 (8th Cir.1984). Under that test, whether a bankruptcy court's order is final depends upon a consideration of the following:

(1) The extent to which the order leaves the bankruptcy court nothing to do but execute the order;

(2) The extent to which delay in obtaining review would prevent the

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