Earlier this summer, the Delaware Bankruptcy Court issued an opinion in the New Century Holdings bankruptcy addressing the definition and purpose of the “Divestiture Rule.”  See Carr v. New Century TRS Holdings, Inc. (In re New Century TRS Holdings, Inc.), Adv. No. 09-52251(KJC)(Bankr. D. Del. June 7, 2012)(hereinafter “Opinion at *___”).  Under the Divestiture Rule, an appeal from a bankruptcy court order divests the lower court of any further jurisdiction over the subject of the appeal.  Opinion at *4, citing In re Whispering Pines Estates, Inc., 369 B.R. 752, 757 (1st Cir. BAP); In re Washington Mutual, Inc., 461 B.R. 200, 217-18 (Bankr. D. Del. 2011).  In New Century, a former borrower (the “Borrower”) filed an adversary proceeding against New Century (the “Debtor”) alleging various lender liability claims.  The parties eventually reached a settlement resolving the adversary proceeding. Opinion at *2.

After receiving the settlement payment, the Borrower filed a notice of dismissal of the adversary proceeding. The Borrower later filed a Request to Stay Dismissal arguing that she had obtained evidence that would show the bankruptcy trustee (the “Trustee”), representing the Debtor’s estate had made false representations in the course of settlement negotiations.  Opinion at *3.  After conducting an evidentiary hearing, the Bankruptcy Court issued an order denying the Borrower’s Request to Stay Dismissal.  In response, the Borrower filed a motion for reconsideration which the Court subsequently denied and the Borrower appealed.  Id.

In the New Century Opinion, the Court considered the Borrower’s Motion for Sanctions (the “Motion”), which the Borrower filed approximately two months after filing the Notice of Appeal.  In dismissing the Borrower’s Motion, the Court invoked the Divestiture Rule.  According to the Court, the purpose of the Rule is “to avoid the confusion of placing the same matter before two courts at the same time and preserve the integrity of the appeal process.”  Opinion at *4, citing Whispering Pines, 369 B.R. at 757.  The New Century Court noted, however, the obvious limitations of the Rule – “the appeal of one ruling does not stay the entire bankruptcy case.”  Opinion at *4, citing WaMu, 461 B.R. at 218.

The Whispering Pines court explained the purpose of limiting the Divestiture Rule:

… a bankruptcy case typically raises a myriad of issues, many totally unrelated and unconnected with the issues involved in any given appeal.  The application of a broad rule that a bankruptcy court may not consider any request filed while an appeal is pending has the potential to severly hamper a bankruptcy court’s ability to administer cases in a timely manner.

Opinion at *5, citing Whispering Pines, 369 B.R. at 758.  In denying the Motion for Sanctions, the New Century Court found that the issues raised in the Motion are directly related to the issues on appeal.  Based on this finding, the Court applied the Divestiture Rule to the Motion and found that the Court lacked jurisdiction to grant the relief requested by the Borrower.  Opinion at *5.