Commercial Litigation and Arbitration

Does Appeal of Arbitrability Decision Divest District Court of Jurisdiction over Underlying Claims? Circuit Split — Appeal to District Court of Bankruptcy Court Arbitrability Decision Results in Automatic Stay of Bankruptcy Proceedings

Vanderbilt Mortg. & Fin., Inc. v. Lucas, 2014 U.S. Dist. LEXIS 116974 (S.D. W.Va. Aug. 22, 2014):

The issue before the Court is whether an appeal to the district court, following a bankruptcy court's denial of a motion to compel arbitration, results in an automatic stay of those bankruptcy court proceedings.  The Fourth Circuit Court of Appeals recently analyzed a similar issue in Levin [Levin v. Alms and Associates, Inc., 634 F.3d 260, 263 (4th Cir. 2011)]. That case presented an appeal from a district court's denial of the Appellants' motion to compel arbitration, with the Appellants' "assert[ing] that the filing of [an] appeal challenging the district court's arbitrability decision divested that court of jurisdiction over the underlying claims." Levin, 634 F.3d at 263. The Fourth Circuit noted that there is a circuit split on this issue, with "[t]he Third, Seventh, Tenth, and Eleventh Circuits [holding] that an appeal regarding arbitrability of claims does divest the district court of jurisdiction over those claims, as long as the appeal is not frivolous. The Second and Ninth Circuit have held that no such divestiture occurs." Id. The Fourth Circuit analyzed other circuit courts' opinions and reasoning prior to determining its position on the issue.

"The seminal case adopting the majority position is Bradford-Scott Data Corp. v. Physician Computer Network, 128 F.3d 504 (7th Cir.1997)." Id. (citation omitted.) In joining with Bradford-Scott, and the majority, the Fourth Circuit in Levin echoed the Bradford-Scott court's holding "that a district court was automatically divested of jurisdiction by the filing of an appeal that alleged that the claims before the district court were subject to mandatory arbitration." Id. (citation omitted.) Importantly, Levin also emphasized the policy considerations underlying the reasoning in Bradford-Scott:

Arbitration clauses reflect the parties' preference for non-judicial dispute resolution, which may be faster and cheaper. These benefits are eroded, and may be lost or even turned into net losses, if it is necessary to proceed in both judicial and arbitral forums, or to do this sequentially.... Immediate appeal under § 16(a) helps to cut the loss from duplication. Yet combining the costs of litigation and arbitration is what lies in store if a district court continues with the case while an appeal under § 16(a) is pending. Cases of this kind are therefore poor candidates for exceptions to the principle that a notice of appeal divests the district court of power to proceed with the aspects of the case that have been transferred to the court of appeals.

Levin, 634 F.3d at 263-64. However, Levin also cautioned that "the approach discussed above is subject to certain safeguards against frivolous appeals," and that "[f]or this [*10]  reason, each of the circuits adopting the majority view has created a frivolousness exception to the divestiture of jurisdiction." Id. at 265. Accordingly, Levin's holding also adopted the frivolousness exception.

But the Court cannot end its inquiry here. See In re Butler, 2013 WL 2102969 (S.D. W.Va. May 14, 2013) (Copenhaver, J.) (unpublished). To the contrary, this Court must satisfy itself that the holding of Levin—reversing the district court's decision that an automatic stay from the denial of a motion to compel arbitration was not warranted—applies to an appeal from a bankruptcy court to the district court, which is the procedural posture here.


It is well established that district courts act as appellate courts when an appeal is taken from a bankruptcy court's judgment, order, or decree. "On an appeal the district court . . . may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions [*13]  for further proceedings. . ." Fed. R. Bankr. P. 8013. "In considering such appeals from bankruptcy court decisions, the district courts are thus required to review the bankruptcy court's findings of fact for clear error, its legal conclusions de novo, and its exercise of discretion for abuse thereof." George Junior Republic in Pennsylvania v. Williams, 2008 WL 763304, at *2 (E.D.Pa. Mar. 19, 2008) (citing IRS v. Pransky, 318 F.3d 536, 542 (3d Cir. 2003); Professional Insurance Management v. Ohio Casualty Group of Insurance Companies, 285 F.3d 268, 282-283 (3d Cir.2002); In re Krystal Cadillac Oldsmobile GMC Truck, Inc., 142 F.3d 631, 635 (3d Cir.1998)); see also In re Modanlo, 266 F.App'x 272, 274 (4th Cir.2008) (per curium) (unpublished decision) ("In a bankruptcy appeal, we review the bankruptcy court's decision directly, applying the same standard of review as did the district court . . . Under this standard, we review legal conclusions de novo and factual findings for clear error." (citations omitted)).


After review and careful consideration of the factual and procedural history, as well as the Fourth Circuit's opinion in Levin, the Court finds no distinguishing facts or reasoning that support the conclusion that the divestiture rule should apply to an appeal taken from a district court order to the appellate level, but not to an appeal taken from a bankruptcy court to a district court. The Respondent's argument, regarding the four factor test the court uses to determine whether a stay should be issued, is not helpful in this context. As previously stated, district courts act as appellate courts when reviewing a bankruptcy court's order, decree, or judgment in much the same way that the Fourth Circuit Court of Appeals would review an order, judgment, or decree from one of its district courts. See In re Royal, 137 Fed.Appx. 537 (4th Cir. 2005). Moreover, the record before the Court reveals [*19]  that Vanderbilt has timely appealed the bankruptcy court's order(s): (1) denying its motion to compel arbitration and (2) denying its motion to stay the adversarial proceeding pending appeal of the earlier denial of the motion to compel arbitration. Further, the Court finds the bankruptcy court's order did not certify the appeal as frivolous when it denied the motion to stay pending appeal of the arbitration issue. (See 2:14-ap-2000, Documents 17 & 27.) Thus, in keeping with the Fourth Circuit's adoption in Levin of the majority position, Vanderbilt's appeal of the denial of its motion to compel arbitration automatically divested the bankruptcy court of jurisdiction over the underlying claims and required an automatic stay of the adversary proceeding.

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