Rules of Procedure Apply When Withdrawing the Reference of a Bankruptcy Core Matter?

When the reference of a core matter from a bankruptcy court to a district court, a practitioner must be aware of the continued application of the Federal Rules of Bankruptcy Procedure in the new forum. [2]

District courts have original jurisdiction over “all civil proceedings arising under … or arising in or related to cases under title 11 of the United States Code” or the Bankruptcy Code. 28 U.S.C. § 1334(b). District courts may refer matters arising under bankruptcy jurisdiction to bankruptcy courts pursuant to 28 U.S.C. § 157(a).[3] When referring such matters, a district court, however, has the discretion of withdrawing the reference from the bankruptcy court for cause. See 28 U.S.C. §157(d).[4] So, when you are in front of a district court judge in a bankruptcy related matter, the question is: What Rules of Court apply? This article gives you the answer.

Rule 1001 of the Federal Rules of Bankruptcy Procedure provides that the “Bankruptcy Rules and Forms govern procedure in cases under [the Bankruptcy Code].” Fed R. Bankr. P. 1001. Notably, Rule 1001 provides that the Bankruptcy Rules govern in “cases under title 11” — but the rule does not limit the application of the Bankruptcy Rules only to cases pending in bankruptcy court or before a bankruptcy judge. To the contrary, Rule 1001 was amended in 1987 specifically to “make clear that the Bankruptcy Rules, not the Federal Rules of Civil Procedure, apply when the district court hears an adversary proceeding.” In re Merritt Logan, Inc., 109 B.R. 140, 145 (Bankr. E.D. Penn. 1990).

Prior to 1987, Rule 1001 provided that the Bankruptcy Rules governed procedures only in “United States Bankruptcy Courts.” Fed. R. Bankr. P. 1001 (1986). In 1987, however, Rule 1001 was changed to delete this reference and replaced with its current language. Compare Fed. R. Bankr. P. 1001 (2013) to Fed. R. Bankr. P. 1001 (1986). Because of this change, cases and proceedings arising under, arising in, or related to the Bankruptcy Code are now exclusively governed by the Bankruptcy Rules, “whether before the district judges or the bankruptcy judges of the district.” Id. (emphasis in original) (citing Advisory Committee Note to Rule 1001 (1987)).

Similarly, as part of the 1987 amendments, Bankruptcy Rule 9001 “was altered to delete the definition of ‘Bankruptcy Court’ and replace it with a definition of ‘court or judge’[.]” Merritt Logan, 109 B.R. at 145. The corresponding Advisory Committee Note for that Rule states that: “[s]ince a case or proceeding may be before a bankruptcy judge or a judge of the district court, ‘court or judge’ is defined to mean the judicial officer before whom the case or proceeding is pending.” [Id.] (citing Advisory Committee Note to Rule 9001 (1987)) (emphasis added).

Consistent with changes made to Rule 1001 and 9001, Rule 81 of the Federal Rules of Civil Procedure provides that the Civil Rules “apply to bankruptcy proceedings to the extent provided by the Federal Rules of Bankruptcy Procedure.” Fed. R. Civ. P. 81(a)(2) (emphasis added). By its plain language, Rule 81 confirms that the Civil Rules apply to bankruptcy proceedings only to the extent they are incorporated by reference into the Bankruptcy Rules. See Advisory Committee Note to Fed. R. Bank. P. 1001 (1987) (stating that Rule 81 “provides that the civil rules do not apply to proceedings in bankruptcy, except as they may be made applicable by rules promulgated by the Supreme Court”).

Case law also confirms the above reasoning. VFB LLC v. Campbell Soup Co., 336 B.R. 81, 84 (D. Del. 2005) (confirming application of the Bankruptcy Rules to bankruptcy proceedings pending in district court); Owens-Illinois Inc. v. Rapid Am. Corp. (In re Celotex Corp.), 124 F.3d 619, 624, 629-30 (4th Cir. 1997) (“this case is properly in federal district court on ‘related to’ jurisdiction under § 1334(b) . . . . [and] the entire body of Bankruptcy Rules, therefore, applies to this action”) (emphasis added); Phar-Mor, Inc. v. Coopers & Lybrand, 22 F.3d 1228, 1235-38 (3d Cir. 1994) (“the Bankruptcy Rules govern non-core, ‘related to’ proceedings before a district court”; concluding Bankruptcy Rule 7001(10) properly applied to determine whether case was an “adversary proceeding” for purposes of removal statute); Diamond Mortgage Co. v. Sugar, 913 F.2d 1233, 1240-43 (7th Cir. 1990) (Bankruptcy Rules “apply to all adversary proceedings, whether they transpire in bankruptcy court or in district court”) (emphasis added); Lentz v. Trinchard, 730 F. Supp. 2d 567, 577 n.33 (E.D. La. 2010) (“Because the Court has ‘related to’ bankruptcy jurisdiction pursuant to § 1334(b), the entire body of the Federal Rules of Bankruptcy Procedure, therefore, applies”); McDow v. Mayton, 379 B.R. 601, 603 (E.D. Va. 2007) (in district court after withdrawal of reference, explaining that the Bankruptcy Rules apply to bankruptcy proceeding); In re Olsen Indus., Inc., 2000 WL 376398, *11 (D. Del. 2000) (“This case is properly in this [district] court pursuant to 28 U.S.C. § 1334(b), ‘related to’ jurisdiction . . . . [and] [Bankruptcy Rule] 7056 supplies the applicable standard of review”); In re Johnson, 2006 WL 2136042, *2 (Bankr. N.D. Ill. 2006) (“Bankruptcy Rule 7013 exception applies where the action against the creditor is pending in bankruptcy court or the district court”); In re Merritt Logan, 109 B.R. at 144-46 (finding that Bankruptcy Rule 7013, not Civil Rule 13, applied in jury trial conducted in district court after withdrawal of reference).

For example, after a final judgment is obtained in a jury trial of a bankruptcy matter, a post-trial motion under Civil Rule 59(e)(to alter or amend a judgment) is permitted under the timeframe established Bankruptcy Rule 9023 – 14 days. See Fed. R. Bankr. P. 9023 (“Rule 59 F.R.Civ.P. applies . . . . [and] [a] motion for a new trial or to alter or amend a judgment shall be filed … no later than 14 days after entry of judgment”). The 14-day deadline for filing a Rule 59 motion is jurisdictional in nature, and a court may not enlarge the time for taking action under Bankruptcy Rule 9023. See Fed. R. Bankr. P. 9006(b)(2); Campbel Soup, 336 B.R. at 84-87. While the “timely” filing of the post-trial motions would stay the deadline to file a notice of appeal pursuant to Fed. R. App. P. 4(a)(4)(A), the filing of a belated Rule 59(e) motion under the Civil Rules (28 days after judgment) would not stay that deadline.[5]

In Campbell Soup, the defendant in that case moved to strike plaintiff’s motion for a new trial and to alter and amend the court’s findings and judgment as untimely. 336 B.R. at 84. In so doing, the defendant argued that Bankruptcy Rule 9006 (under which the motion was untimely) controlled the computation of time, as opposed to Civil Rule 6 (under which the motion would have been timely). Id. There, the district court observed that the matter was before it based on its original bankruptcy jurisdiction pursuant to 28 U.S.C. § 1334(b). Id. The district court explained that the Bankruptcy Rules governed the procedures in that case because the case was a proceeding “arising in or related to a case under” the Bankruptcy Code. Id. at 84-87. Based on that reasoning, the district court struck the motion as untimely under Bankruptcy Rules. Id.

The Campbel Soup case clearly demonstrates how easy the unwary practitioner can commit malpractice for failing to observe the different time periods provided in the Bankruptcy Rules as opposed to the Civil Rules.

Notably, a party’s counsel failure to know Rules, and worse yet, which of the Rules should apply to a bankruptcy matter once the reference is withdrawn does not constitute the type of neglect that could reverse a bad timing decision. The Eleventh Circuit has long applied the “ancient legal maxim” that “ignorance of fact may excuse; ignorance of law does not excuse.” Advanced Estimating System, Inc. v. Riney, 130 F.3d 996, 999 (11th Cir. 1997). The Supreme Court created a multi-factor test for establishing excusable neglect in Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380 (1993). “It is the movant’s burden to demonstrate to the trial court that excusable neglect exists.” In re Food Barn Stores, Inc., 214 B.R. 197, 200 (BAP 8th Cir. 1997). After Pioneer, courts have observed that a movant bears a “heavy burden” in showing excusable neglect. Provident Life & Acc. Ins. Co. v. Clarke, 2008 WL 619289, *3 (E.D. Va. Mar. 4, 2008) aff’d, 284 F. App’x 54 (4th Cir. 2008); In re Gehl, 324 B.R. 756, 759 (Bankr. N.D. Iowa 2005) (“the burden of establishing excusable neglect is quite onerous”).

“Soon after Pioneer, it was established in [the Eleventh Circuit] that attorney error based on a misunderstanding of the law was an insufficient basis for excusing a failure to comply with a deadline.” Advanced Estimating Sys., Inc. v. Riney, 130 F.3d 996, 998 (11th Cir. 1997) (citing Cavaliere v. Allstate Ins. Co., 996 F.2d 1111 (11th Cir. 1993)). Indeed, the Eleventh Circuit has observed that “no circuit that has considered the issue after Pioneer has held that an attorney’s failure to grasp the relevant procedural law is ‘excusable neglect.’” Id. (collecting case law from the Ninth, Seventh, Second and Fifth U.S. Circuit Courts of Appeals). The Eleventh Circuit concluded, as other circuits have done elsewhere, that “counsel’s misunderstanding of the law cannot constitute excusable neglect.” Id. at 999.

Numerous courts have applied this same rule – that a mistake of law cannot, as a matter of law, constitute excusable neglect – to deny motions under similar circumstances. For example, in In re Food Barn Stores, Inc., 214 B.R. 197, 199-200 (B.A.P. 8th Cir. 1997), the movant appealed a bankruptcy court’s denial of a motion to retroactively enlarge the time to file a notice of appeal pursuant to Bankruptcy Rule 8002(c)(2), which allows for such relief upon a showing of excusable neglect. The purported basis for excusable neglect was “counsel’s mistake in calculating the time under Rule 6(a) of the Federal Rules of Civil Procedure, rather than Rule 9006(a) of the Federal Rules of Bankruptcy Procedure.” Id. at 199. There, the movant specifically relied on Pioneer, arguing the bankruptcy court was required to undertake an “equitable” analysis notwithstanding that the failure to timely file the notice of appeal was due to a mistake of law. Id.

The Food Barn court rejected this argument. The court noted that that third factor (the reason for the delay, including whether it was within the reasonable control of the movant) weighed heavily against a finding of excusable neglect because it “was [movant’s] responsibility to review the rules, ascertain the correct date for filing the Notice of Appeal, and to timely file the Notice of Appeal.” Id. at 200. The court also noted that “[c]ourts have long held, both prior to and after Pioneer, that ignorance or misreading of the law, particularly in the applicable of Rule 8002(c), does not constitute excusable neglect.” Id. (collecting numerous cases). In addition, the court stated that “Pioneer does not, in fact, furnish relief for the error of applying an incorrect rule[.]” Id. at 201 (emphasis added).

The same conclusion was reached in In re Lykes Bros. Steamship Co., Inc., 2009 WL 3157630 (M.D. Fla. 2009). In that case, the movant filed a notice of appeal only 7 days after the deadline prescribed by Bankruptcy Rule 8002(a) expired. Id. at *1. As in Food Barn, the movant sought a retroactive extension pursuant to Bankruptcy Rule 8002(c)(2), asserting excusable neglect on the basis that the movant “inadvertently” calendared the deadline using Civil Rule 6, rather than Bankruptcy Rule 9006. Id. at *2. The bankruptcy court denied the motion, concluding that “ignorance of the procedural rules could not excuse the timely filing of the notice of appeal.” Id. On appeal, the district court affirmed, noting that “[e]xtensive decisional precedent – both in th[e] [Eleventh] circuit and elsewhere” – supported the conclusion that ignorance of the law cannot form a basis for excusable neglect. Id. (collecting case law).

As one court observed, to limit application of the Bankruptcy Rules to adversary proceedings heard in bankruptcy court—contrary to the express dictates of the Bankruptcy Rules—would cause these rights to “hinge upon whether the district court has withdrawn its reference to the bankruptcy court.” Diamond Mortg., 913 F.2d at 1242 (if the nationwide service available under the Bankruptcy Rules did not apply in district court, a plaintiff in bankruptcy court would have an “anomalous” and “unjustifiable” advantage vis-à-vis a plaintiff in an identical proceeding in district court).

As a result, to require litigants and courts to determine in each instance whether and to what extent the Bankruptcy Rules apply to bankruptcy proceedings heard in district court would inject unwarranted uncertainty into bankruptcy litigation. See Windsor Commc’ns Group v. Grant, 75 B.R. 713, 732 (E.D. Pa. 1985) (adopting report and recommendation) (“the establishment of a dual procedural system [would] undoubtedly [be] in conflict with the intent of Congress to concentrate jurisdiction over all bankruptcy cases and all proceedings in a single court, as evidenced by the grant of pervasive [bankruptcy] jurisdiction to the district courts”).

Because there are numerous distinctions between the Federal Civil Rules and Bankruptcy Rules that can seriously impact litigants’ substantive rights, a huge risk exists for the practitioner who does not know or cannot distinguish the different application of the Rules in a bankruptcy context, irrespective of whether the bankruptcy matter may be pending in bankruptcy court or district court.

A good practitioner must get acquainted with and be aware of the differences with the applicable Rules of Court, particularly the different time limits for similar procedural matters under the Federal Civil Rules as opposed to the Bankruptcy Rules.

It is important to note that a practitioner’s application of the “incorrect rule” cannot and will not constitute excusable neglect under the Pioneer standard. See, e.g., In re Silver Oak Homes, Ltd. v. Key Fed. Savings Bank, 169 B.R. 349, 351 (D. Md. 1994) (“It is clearly established that where legal counsel’s failure to act was the result of … failure to understand the law … no exceptional circumstances warranting a finding of excusable neglect are made out.”); Tidwell v. Hendricks (In re McDowell), 2002 WL 1835425, *1-2 (Bankr. M.D. Ga. July 19, 2002) (“The Court is persuaded that counsel’s mistake in relying upon the wrong rule is not excusable neglect”); In re Singer Co. N.V., 2002 WL 10452, *2 (S.D.N.Y. 2002) (concluding that “good-faith application of the wrong rule in computing the time period for appeals” did not constitute excusable neglect); see also In re Williams, 216 F.3d 1295, 1298 (11th Cir. 2000) (rejecting pro se debtor’s excusable neglect argument which relied, in part, upon Civil Rule 6, and noting that the Bankruptcy Rules, not Civil Rules, governed). So, it is important to get it right, and not run any risks.

In conclusion, this article is meant to be a word of caution to the unwary practitioner when seeking to withdraw the reference of core matters from bankruptcy court to district court in an attempt to perhaps gain a more sympathetic forum for a client or to enforce a client’s absolute constitutional right to have a matter only decided in a trial by jury before an Article III court and life-long appointed federal judge – – in such cases, however, beware, wake up, and smell the Bankruptcy Rules in a bankruptcy matter to be prosecuted and tried in district court under its original bankruptcy jurisdiction, or, else, sadly end up calling your malpractice insurance carrier to cover a claim for damages from a very unhappy and disappointed client.

Article published and available at: http://www.flabaroutofstaters.org/pdf/OOS-2015-Fall.pdf#page8

Endnotes

[1] Mr. Sardi is a partner at Sardi Law, PLLC, practicing in in the areas of commercial litigation, bankruptcy, bankruptcy litigation, creditors' rights, insolvency, workouts, reorganization and restructuring

[2] Core matters are those any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11. Section 157(b) of title 28 provides a non-exhaustive list of such core proceedings. See 28 U.S.C. § 157(b).

[3] Some districts have an automatic referral to bankruptcy courts. See, e.g., S.D. Fla. L.R. 87.4 (automatically referring all bankruptcy cases and proceedings arising in or related to cases under the Bankruptcy Code to the bankruptcy judges for the Southern District of Florida and requiring all to be commenced in the U.S. Bankruptcy Court for the Southern District of Florida pursuant to its Local Bankruptcy Rules).

[4] In addition, a district court may withdraw the reference from a bankruptcy court in order to conduct a trial by jury, which a bankruptcy judge may not conduct absent the parties’ consent. See 28 U.S. §§ 157(d) and (e); Fed. R. Bankr. P. 7008 (“[i]n In an adversary proceeding before a bankruptcy judge, the complaint, counterclaim, cross-claim, or third-party complaint shall contain a statement that the proceeding is core or non-core and, if non-core, that the pleader does or does not consent to entry of final orders or judgment by the bankruptcy judge”); Wellness Int'l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015) (holding that bankruptcy courts have authority to adjudicate claims designated for final adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding as a constitutional matter under Article III of the U.S. Constitution, so long as the parties knowingly and voluntarily consent).

[5] Bankruptcy Rule 8001 provides that Part VIII of the Bankruptcy Rules “govern the procedure in a United States district court and a bankruptcy appellate panel on appeal from a judgment, order, or decree of a bankruptcy court.” Fed. R. Bankr. P. 8001(1)(a) (emphasis added). However, “[a]n appeal to a court of appeals from a final judgment, order, or decree of a district court exercising jurisdiction under 28 U.S.C. §1334 is taken as any other civil appeal under” the Federal Rules of Appellate Procedure. See Fed. R. App. P. 6(a). In this regard, the Supreme Court knows when to treat differently a judgment entered by a bankruptcy court or a district court, and says so expressly when it draws that distinction. Compare Fed. R. Bankr. P. 8002(a) (providing 14 days to appeal a final judgment entered by a bankruptcy court) to Fed. R. App. P. 4(a) (providing 30 days to appeal a final judgment entered by a district court).