Failure to Observe Bankruptcy Rule Deadline in An Adversary Proceeding Tried in District Court Costs Defendants Opportunity to Appeal $6,000,000 Verdict.
May 17, 2016
Authored by: James Maloney
A recent case from the 11th Circuit illustrates the procedural perils of litigation arising from a bankruptcy case but ultimately tried in the district court. In Rosenberg v. DVI Receivables XIV, LLC, the defendants lost their appeal not on the merits, but based upon the difference between civil rules and bankruptcy rules regarding what are timely post-trial motions.
BC has previously addressed procedural issues between bankruptcy courts and district courts arising from the Supreme Court’s ruling in Stern v. Marshall. As we have written when Stern was first decided, Stern held certain claims designated by statute for final adjudication in bankruptcy court, are nonetheless required by the Constitution to proceed in an Article III district court. Relevant Stern progeny has explored the role of parties’ consent to bankruptcy court proceedings, the ability of the bankruptcy court to make findings of fact and conclusions of law for final determination by the district court, and emerging local rule accommodations of jurisdictional uncertainty, including posts on In re Fisher Island Invs., Inc., 778 F.3d 1172 (11th Cir. 2015), and the sequence of Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (2014) and Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015).
Rosenberg featured an adversary proceeding tried by a jury, conducted in the district court after withdrawal of the reference in the related bankruptcy case. Rosenberg teaches us that just because a case is tried before a U.S. District Court judge in a U.S. District Court courtroom, it does not mean that the Federal Rules of Civil Procedure apply. For cases arising under the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure apply, regardless of whether the case is being heard in bankruptcy court or in the district court. As recounted by the 11th Circuit opinion, a failure to abide by the shorter time frame for filing a post-trial motion imposed by the Bankruptcy Rules resulted in several defendants losing their right to appeal a $6,000,000 jury verdict. The specific holdings in Rosenberg were:
- Even though tried before a jury in district court, adversary proceeding are still governed by Fed. R. Bankr. P. 9015, which requires any motion for judgment as a matter of law or for a new trial be filed within 14 days of the final judgment, as opposed to the 28 days allowed by the Federal Rules of Civil Procedure.
- Where a district court has withdrawn the reference for some claims asserted in an adversary proceeding, while leaving others before the bankruptcy court, two separate proceedings are created with their own, independent timelines. Thus, a judgment in the district court, which does not resolve all issues raised in the adversary proceeding is still final for purposes of appeal.
Rosenberg arose from an involuntary bankruptcy proceeding, dismissed after a determination that some petitioners were not eligible creditors, and, alternatively, were judicially estopped from prosecuting the case. The bankruptcy court retained jurisdiction to hear the debtor’s claims against the petitioning creditors under 11 U.S.C. § 303(i), which allows an involuntary debtor who has won dismissal of his case to recover costs, attorney’s fees and, in cases where a petitioner is determined to have acted in bad faith, actual and punitive damages.
The debtor filed an adversary proceeding on these claims, and demanded a jury trial. The defendants would not consent to a jury trial in the bankruptcy court. The district court granted the defendants’ motion to withdraw the reference on the claims for damages under 303(i)(2), reasoning that they were analogous to common law claims for malicious prosecution. The bankruptcy court retained jurisdiction over the claim for attorney’s fees. The case was tried in the district court and the jury found that the defendants had acted in bad faith by filing the involuntary petition. The jury awarded $1,120,000 in compensatory damages and $5,000,000 in punitive damages. The district court entered a “final judgment” on its docket on March 14, 2013.
The defendants moved for judgment as a matter of law 28 days after the final judgment was entered. This motion would be timely under Fed. R. Civ. P. 50(b), which allows 28 days to file. But the debtor moved to strike, arguing that the motion was untimely because 14 day deadline established by Fed. R. Bankr. P. 9015(c) applied. The district court overruled the motion to strike and reduced the damage award to $350,000.
The 11th Circuit ruled in favor of the debtor, finding that the motion for judgment as a matter of law was untimely and should have been denied. The 11th Circuit first noted that Fed. R. Bankr. P. 1001 provided that the bankruptcy rules were to apply in cases under Title 11 of the United States Code (i.e., the Bankruptcy Code). It was observed that a 1987 amendment to Fed. R. Bankr. P. 1001 was enacted specifically to make the bankruptcy rules applicable in all courts hearing bankruptcy matters. The opinion quotes the advisory committee notes as stating: “[t]his amended Bankruptcy Rule 1001 makes the bankruptcy rules applicable in cases and proceedings under title 11, whether before the district judges or the bankruptcy judges of the district.”
The 11th Circuit further observed that the Federal Rules of Civil Procedure themselves provide for the primacy of the bankruptcy rules when bankruptcy proceedings are adjudicated in the district court, by way of Fed. R. Civ. P. 81(a)(2) (“These rules apply to bankruptcy proceedings to the extent provided by the Federal Rules of Bankruptcy Procedure.”). The opinion notes that the rule refers to “bankruptcy proceedings” and not to “proceedings in a bankruptcy court,” and thus it does not matter where the matter is being heard – the Bankruptcy Rules control in any “bankruptcy proceeding” in whatever court. As to application of Fed. R. Civ. P. 50 to bankruptcy proceedings, it is made applicable under Fed. R. Bankr. P. 9015, but is specifically modified to provide that a renewed motion for judgment or request for a new trial must be made no later than 14 days after the entry of judgment. Consequently, defendants’ motion filed on the 28th day was untimely.
Also worth noting from Rosenberg is the 11th Circuit’s rejection of the defendants’ argument that the “real” final judgment in the adversary proceeding was not entered until April 11, 2013, when the bankruptcy court entered an order on the separate attorneys’ fees action. Under normal circumstances, a judgment is only final if it resolves all issues. However, the opinion declares that once the district court withdrew the reference for the damages claim, while leaving the attorney’s fee claim before the bankruptcy court, it created two separate claims operating on their own timelines in separate courts.
Readers, this opinion is a good reminder that regardless of the court, litigators must be students of procedure, first and foremost. When coming across a tough procedural issue, think, read, talk to your colleagues, and then think and read again. Jurisdictional and Stern issues are tough, and the multi-court proceedings that sometimes flow from these issues require a lot of deep analysis. Rosenberg is a scary reminder of the worst that can happen.
 2016 WL 1392642 (Case No. 14-14620, April 8, 2016).
 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011).