Filing a Chapter 11 bankruptcy does not automatically permit an appealing party to forego posting a supersedeas bond when appealing the decision of a federal district court. [1] However, it can create a scenario where the need for a supersedeas bond is obviated.
In the case In re Fox, the court held that the mere fact that a Chapter 11 petition had been filed to permit the debtor, without the necessity of posting an appeal bond, to obtain a stay of an adverse judgement was not "cause," in itself, for dismissal of the bankruptcy case.[2]
Another case, In re Muskogee Environmental Conservation Co., also noted that the filing of a bankruptcy petition and the imposition of the automatic stay had obviated the necessity for a supersedeas bond.[3]However, courts differ on whether filing a bankruptcy petition to avoid the posting of a supersedeas bond indicates bad faith.[4]
The court in the case In re Surgical Associates, Inc. declined to adopt a per se rule that filing a bankruptcy case as a substitute for posting a supersedeas bond constitutes bad faith.[5] Instead, the court considered the totality of the circumstances, including the debtor's ability to post such a bond and their financial situation.[6]
This sentiment is echoed in the case In re Hyatt, where it was held that the fact that an individual Chapter 11 case was largely a two-party dispute between the debtor and dominant creditor, which the debtor had commenced as an alternative to posting a $3.5 million supersedeas bond, did not, without more, constitute "cause" for dismissal or conversion of the case on a "bad faith" theory.[7]
Therefore, while a Chapter 11 bankruptcy can permit an appealing party to avoid posting a supersedeas bond, this is not an absolute rule and is subject to scrutiny and interpretation by the courts, especially with respect to the debtor's motives and financial circumstances.
[1] In re Fox, 241 B.R. 224, 227 (B.A.P. 10th Cir. 1999)
[2] Id.
[3] In re Muskogee Env't Conservation Co., 236 B.R. 57, 66 (Bankr. N.D. Okla. 1999)
[4] In re Hyatt, 479 B.R. 880, 892 (Bankr. D.N.M. 2012)
[5] In re Surgical Assocs., Inc., No. 13-10081-R, 2013 WL 1176233, at *4 (Bankr. N.D. Okla. Mar. 21, 2013)
[6] See Muskogee and Surgical Associates cases for totality of circumstances analysis.
[7] See In re Hyatt, footnote 4.
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