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Divestiture Doctrine Inapplicable to Request for Stay Pending Appeal

In In re Sabine Oil & Gas Corp., 548 B.R. 674 (Bankr. S.D.N.Y. 2016), a New York bankruptcy court recently refused to apply the divestiture doctrine to stay confirmation proceedings pending an appeal. The court had previously denied a request by the official committee of unsecured creditors to derivatively pursue certain causes of action on behalf of the estate. The committee then appealed the court’s decision and sought a stay. At the time of the appeal, the debtors had already filed a plan of reorganization that released the same causes of action the committee sought to pursue. Thus, if the plan were confirmed pending the committee’s appeal, it would effectively moot the appeal. This result, the committee argued, violated the divestiture doctrine because it would divest the appeals court of its ability to allow the committee to pursue the claims. The bankruptcy court held the divestiture doctrine inapplicable to the committee’s request. “The divestiture doctrine, in its simplest terms, provides that the filing of an appeal divests the lower court of its control over the issue or matter that is on appeal. . . . During the pendency of an appeal of a bankruptcy court order, however, the bankruptcy court is not divested of jurisdiction to enforce or implement the order being appealed, nor is the bankruptcy court divested of jurisdiction to decide issues and proceedings different from and collateral to those involved in the appeal.” Here, the court held, confirmation of the proposed plan containing releases would not alter the court’s order denying the committee derivative standing. Further, the court held, “[i]f the divestiture doctrine were to be applied in a way that divests bankruptcy courts of jurisdiction over all issues relevant to confirmation on which the court has previously ruled and are the subject of a pending appeal, this would lead to an absurd result—courts would likely decline to rule on any issues that could be implicated at confirmation for fear of interfering with a debtor’s ability to emerge from chapter 11. Moreover, it would effectively cede control of the conduct of a chapter 11 case to disappointed litigants. This cannot be, and is not, the law.” Accordingly, the committee’s request was denied.

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