United States District Court, E.D. Pennsylvania
January 30, 2004.
IN RE: SANDENHILL, INC.
The opinion of the court was delivered by: J. JOYNER, District Judge
MEMORANDUM AND ORDER
By way of the motion currently pending before this Court, Reliance
Insurance Company seeks to appeal the October 30, 2003 Order of U.S.
Bankruptcy Judge Kevin Carey granting the motion of one Frank Dalicandro,
an unsecured, unliquidated creditor, for leave to file an avoidance
action on behalf of the Estate of Sandenhill, Inc. At issue is a loan
made by the debtor in May, 2001 to Reliance Insurance Company in the
amount of $10,904,000 shortly before the Pennsylvania Commonwealth Court
issued its Order of Liquidation against Reliance. As the amount of the
loan apparently represented nearly all of Sandenhill's assets, it was
effectively rendered insolvent by the transaction and it filed a
voluntary petition for bankruptcy under Chapter 7 on January 28, 2002.
Although the appointed bankruptcy trustee considered filing an avoidance
action, he elected not to do so when he determined that he would not be
able to retain the counsel of his choice. He thereafter filed his
no-asset report on October 4,
2002 and the case was closed on November 15, 2002. Mr. Dalicandro
then filed his motion to re-open the case to seek leave to file an
avoidance action on behalf of the estate against Reliance and Howard
Steinberg. Following hearing on July 28, 2003, Judge Carey granted Mr.
Dalicandro's motion, noting that the trustee consented and finding that
it was within his equitable powers to grant derivative standing to a
creditor to bring an action on behalf of the estate.
Pursuant to 28 U.S.C. § 158, it is clear that District Courts are
vested with jurisdiction to hear appeals from bankruptcy courts. Section
158(a)(3) allows parties to appeal interlocutory orders and decrees of a
bankruptcy court only with leave of the district court. In re: Lavelle
Aircraft Company, Misc. No. 95-108, 1995 U.S. Dist. LEXIS 7631 (E.D.Pa.
June 2, 1995). Although Bankruptcy Rules 8001 and 8003 dictate that those
seeking to file an interlocutory appeal must file a motion for leave to
do so, the Bankruptcy Code provides no further guidance as to the
appropriate standard a district court should apply in determining whether
leave to appeal should be granted. Id.; In re: Dino's, Inc., 183 B.R. 779,
781 (S.D.Ohio 1995); In re: Neshaminy Office Bldg. Assocs., 81 B.R. 302,
302 (E.D.Pa. 1987). However, many courts, including courts in this
district, have borrowed the language of 28 U.S.C. § 1292(b), which
defines the scope of appellate jurisdiction over interlocutory appeals
district courts, to apply to appeals from interlocutory orders of the
bankruptcy courts. In re: Pelullo, Misc. No. 98-MC-53, 55, 1998 U.S.
Dist. LEXIS 17277, *3-*4 (E.D.Pa. Nov. 3, 1998) (citations omitted).
Under § 1292(b), as applied to § 158(a)(3), it is appropriate for
a district court to hear an appeal from an interlocutory order of the
bankruptcy court if all three of the following conditions are satisfied:
(1) a controlling question of law is involved; (2) there is a substantial
ground for difference of opinion regarding the question of law; and (3)
an immediate appeal would materially advance the termination of the
litigation. Id. An order is said to involve a controlling question of law
if, on appeal, a determination that the decision contained error would
lead to reversal. In re Lavelle, supra., citing Dorward v. Consolidated
Rail Corp., 505 F. Supp. 58, 59 (E.D.Pa. 1980).
In application of the foregoing, we find that the order at issue here
granting derivative standing to an unsecured creditor in a Chapter 7
action to pursue an avoidance action on behalf of the estate would
clearly lead to the termination of the avoidance action entirely, if
reversed. Accordingly, we find that it constitutes a controlling question
of law and that clearly an immediate appeal would materially advance the
termination of this litigation since, if the order allowing the action to
proceed were reversed, the action would terminate and the underlying
bankruptcy matter would again close. The question of whether there
is a substantial ground for difference of opinion on the legal question
at issue is, however, more problematic.
In reviewing the transcript of the hearing before the Bankruptcy
Court, it appears that Judge Carey based his decision upon the recent
Third Circuit decision in Official Committee Ex. Rel. Cybercrenics v.
Chinery, 330 F.3d 548 (3d Cir. 2003). In that case, following a very
thorough review and analysis of the history and principles behind the
bankruptcy code, the Third Circuit concluded that bankruptcy courts can,
under their inherent equitable powers, authorize creditors' committees to
sue derivatively to avoid fraudulent transfers for the benefit of the
bankrupt's estate. See, e.g., Cybergenics, 330 F.3d 580. Cybergenics,
however, was a Chapter 11 case. While we frankly cannot imagine that the
Third Circuit would employ a different rationale in a Chapter 7 matter,
Reliance is nevertheless correct that no other Court in this circuit has
had occasion to extend the reasoning of Cybergenics to an action
commenced under Chapter 7. For that reason, we would agree that there is
a substantial ground for difference of opinion on the legal question at
issue, i.e. whether the bankruptcy court properly granted derivative
standing to Mr. Dalicandro here in this, Chapter 7 action. For this
reason, we shall grant the motion for leave to file an interlocutory
appeal in accordance with the attached order.
AND NOW, this ___ day of January, 2004, upon consideration of the
Motion of Reliance Insurance Company for Leave to Appeal Interlocutory
Order and the response thereto of Frank Dalicandro, it is hereby ORDERED
that the Motion is GRANTED and the parties are directed to proceed in
accordance with the procedures and briefing schedules set forth in the
Federal Rules of Bankruptcy Procedure governing appeals to the district
© 1992-2004 VersusLaw Inc.