Key Points

  • A district court's judgment fully adjudicating a withdrawn bankruptcy adversary proceeding is final and appealable under 28 U.S.C. § 1291 even while core bankruptcy matters remain pending.
  • The Ninth Circuit's bifurcated finality rule — applying strict § 1291 finality rather than bankruptcy's flexible standard — is unique among the federal circuits.
  • A minority shareholder can owe fiduciary duties as a controller if it exercises actual control through financial leverage, vendor relationships, and contractual rights, even without majority ownership.
  • Hawaii's Dislocated Workers Act safe harbor for employers seeking buyers applies only when a binding agreement results in an actual divestiture, not when a closing occurs.
  • Delaware's prohibition on punitive damages for fiduciary duty claims is substantive law that binds federal courts under Erie.

The Ninth Circuit held Monday that federal appellate courts have jurisdiction under 28 U.S.C. § 1291 to review a district court's judgment in a withdrawn bankruptcy adversary proceeding, even when claims allowance and other core bankruptcy matters remain pending in the bankruptcy court. Judge Danielle J. Forrest dissented, arguing the panel lacked appellate jurisdiction because there was no final judgment.

The ruling in Kane v. PaCap Aviation Finance, LLC arose from the Chapter 7 bankruptcy of Hawaii Island Air, Inc., a carrier that abruptly shuttered in November 2017. The airline's trustee and two employee unions sued Island Air's former owners — entities affiliated with Oracle co-founder Lawrence J. Ellison and local businessman Jeffrey Au — for violating federal and state worker-notification laws and breaching fiduciary duties.

The jurisdictional question turned on an unusual procedural posture. The adversary proceeding had been withdrawn from the bankruptcy court and tried before the district court sitting in bankruptcy under 28 U.S.C. § 157(d). Because the district court exercised original jurisdiction rather than appellate jurisdiction, the Ninth Circuit's authority arose under § 1291, not § 158(d), the statute that ordinarily governs bankruptcy appeals.

Writing for the majority, Judge Jay S. Bybee framed the central question: "the precise question is whether, after the reference to the bankruptcy court was withdrawn, § 1291 permits appellate review of a district court's related final judgment when allowance of claims and other core matters are still pending in the bankruptcy court." The answer, Bybee held, was yes.

The panel acknowledged that its rule requiring strict § 1291 finality in such cases stands alone. "Nearly all our sister circuits have applied or recognized bankruptcy's pragmatic finality principles where appellate jurisdiction arises under § 1291 due to the district court exercising original bankruptcy jurisdiction rather than appellate jurisdiction under § 158," Bybee wrote in a footnote surveying the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Tenth, and Eleventh Circuits.

The majority concluded that when a district court withdraws the reference and fully adjudicates a related civil proceeding, the judgment is final under § 1291. The proper measure of finality is the withdrawn civil proceeding itself, not the entire bankruptcy case. Bybee reasoned that a bankruptcy case is "not a monolith" but rather "the 'umbrella under which all of the proceedings that follow the filing of a bankruptcy petition take place.'" Those discrete proceedings can be resolved individually.

Practical concerns drove much of the analysis. If finality were measured by the entire bankruptcy case, appellate review would be postponed until the estate's assets were collected and distributed — a result that would "practically defeat the right to any review at all."

Judge Forrest dissented sharply on jurisdiction. "No case is too big to fail for lack of jurisdiction," she began. Under her reading of precedent, the district court's amended judgment was not final because "even considering just the adversary proceeding, the district court's judgment left issues for the bankruptcy court to decide."

Forrest emphasized the textual differences between § 1291 and § 158. Section 1291 grants jurisdiction only over "final decisions," while § 158 more broadly covers "final decisions, judgments, orders, and decrees." Those are "distinctions with a difference," she wrote, "as confirmed by three canons of statutory interpretation." The dissent proposed a limited remand asking the district court whether Federal Rule of Civil Procedure 54(b) certification was appropriate. "There was an easy solution for assuring ourselves of jurisdiction," Forrest wrote. "The majority just choose not to use it."

On the merits, the panel issued a mixed ruling that partially vindicated the plaintiffs while affirming substantial portions of the district court's judgment.

The Ninth Circuit reversed the district court's grant of judgment as a matter of law in favor of Ohana Airline Holdings, LLC and Lawrence Investments on breach-of-fiduciary-duty claims. The majority held that a reasonable jury could find that Ohana, despite holding only one-third of Island Air's stock, actually controlled the airline through its equity stake, a warrant to purchase majority ownership at any time for $12,000, financial leverage over the cash-strapped airline, and relationships with critical vendors and lenders. "For a cash-burning, asset-light company that could not borrow and that required regular rounds of equity financing," Bybee wrote, quoting Delaware precedent, "the parties who control its access to cash 'sit on the company's lifeline, with the ability to turn it on or off.'"

The panel also reversed judgment in favor of Paul Marinelli, who served as an Island Air director while managing Ellison-affiliated entities. The district court had ruled Marinelli owed no duties because he resigned before a challenged aircraft sale closed. But the panel held that "a former director 'breaches his fiduciary duty if he engages in transactions that had their inception before the termination of the fiduciary relationship.'"

On the unions' claims under Hawaii's Dislocated Workers Act, the panel construed the statute to reach minority controlling shareholders and reversed the district court's ruling that § 394B-9(c) provided an affirmative defense. "§ 394B-9(c) is best read as available only when the employer enters a binding sale, transfer, or merger agreement that will 'result[] in a divestiture,'" Bybee wrote. Because Island Air suffered a closing, not a divestiture, the defense was unavailable as a matter of law.

Nickolas A. Kacprowski of Dentons US LLP represented the appellant, and Peter W. Ito of Ito Law Group PA represented the appellee.

The case now returns to the district court for further proceedings, including determining whether Ohana and the Ellison Trust qualify as "employers" under the DWA, retrying damages on one fiduciary count, and considering whether to pierce corporate veils for claims that were revived.

Judge Ryan D. Nelson joined Bybee's opinion in full.