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A Team of Schnader Attorneys Achieve Appellate Victory for Client in In re SK Foods

02/14/2012

Schnader recently achieved an appellate victory for their client, Bradley D. Sharp, the Chapter 11 trustee appointed in a bankruptcy case filed by SK Foods, LP, formerly the country's second largest producer of tomato and vegetable products. SK Foods was one of numerous companies owned and controlled by Scott Salyer, the former CEO. For many years prior to bankruptcy Salyer and his non-debtor affiliated entities stored their business records and other documents at SK Foods' business premises and on SK Foods servers, where they were regularly accessed by SK Foods employees in the ordinary course. After his appointment, the Trustee took possession of all records under the Debtors' control, including those Salyer and the affiliates claimed belonged to them, and he refused their demand to immediately return the Salyer and affiliate records. This promoted Salyer and the affiliates to file a motion seeking the removal of the Trustee, and the disqualification of Schnader. The Trustee opposed Salyer's motion, and filed a counter-motion seeking to confirm that he could continue to retain and review the documents. The bankruptcy court denied Salyer's motions to remove and disqualify, and granted the Trustee's counter-motion allowing him to review the documents. Salyer and his affiliates appealed these rulings first to the U.S. District Court for the Eastern District of California, which affirmed. Salyer then appealed to the Ninth Circuit.

On appeal, in addition to arguing why the lower courts were correct on the merits, Schnader argued that, as an initial matter, these orders were not final and therefore were not immediately appealable. Salyer argued (and the District Court had held) that the orders were final based on a prior Ninth Circuit decision holding that an order removing a trustee was final and appealable. The District Court reasoned, and Salyer echoed the argument on appeal to the Ninth Circuit, that an order denying removal of a trustee was the "mirror image" of an order granting removal, and so it too must be final. But in a unanimous precedential opinion by Judge Carlos T. Bea (joined by Judge Alex Kozinski and Judge Robert W. Gettleman), the Court of Appeals agreed with Schnader that there were stark differences between an order granting a motion to remove and an order denying a motion to remove which affected the analysis of whether the orders were final. In particular, the Ninth Circuit noted that an order denying a motion to remove does not affect any party's substantial rights, and simply continues the status quo in the bankruptcy case. The Court also agreed that if an order denying a motion to remove a trustee was considered final, it would invite litigants to file successive motions to remove, which would be disruptive both to the bankruptcy proceedings and the appellate process.

The Court's decision has a large impact on the jurisdiction of courts of appeals in bankruptcy cases and offers much-needed clarity in this area of the law. The Court's decision also offers significant protection to trustees facing unfounded removal motions insofar as it confirms that the orders are interlocutory, any appeal of an order denying removal of a trustee to a district court or bankruptcy appellate panel must satisfy the traditional requirements for interlocutory appeals, and any decision by the intermediate appellate court affirming the order denying a motion to remove is not subject to further review at the court of appeals.

The team included Gregory C. Nuti, Kevin W. Coleman, Bruce P. Merenstein, Nancy Winkelman, Judge Timothy K. Lewis, John K. Gisleson, Keith E. Whitson, and Joseph J. Langkamer.