April 22, 2016

Bankruptcy Rules Rule the Day in the Eleventh Circuit

by Guest Blogger

Sometimes we forget that the Federal Rules of Bankruptcy Procedure differ from the Federal Rules of Civil Procedure by more than just the numbering scheme that adds two digits to the front of the bankruptcy rules. The defendants in Rosenberg v. DVI Receivables XIV, LLC, et al., failed to appreciate that there are also different filing deadlines. The Eleventh Circuit held that in a case tried in the district court arising under the Bankruptcy Code, the Bankruptcy Rules apply. Thus, the 14-day deadline of FRBP 9015(c) applied to the defendants' filing of a renewed motion for judgment as a matter of law under FRCP 50(b), and not the 28-day deadline under FRCP 50(b). As a result, the court held that the defendants untimely filed their motion on the 28th day after judgment, and reinstated the $6.1MM adverse jury verdict.

The creditors had filed an involuntary petition in 2008 in Pennsylvania which was transferred to Florida and dismissed. The Florida bankruptcy court retained jurisdiction to award costs to the putative debtor under § 303(i). Rosenberg filed an adversary proceeding asserting bad faith on the part of the creditors. In addition to seeking his attorney fees and costs for defeating the involuntary petition, he sought compensatory and punitive damagesâand fees for pursuing the damages. Rosenberg demand a jury trial and the creditors asked the district court to withdraw the reference. Likening the § 303(i)(2) claims to malicious prosecution, the district court withdrew the reference. The issue of attorney fees and costs remained with the bankruptcy court. The jury found bad faith and awarded $1.12MM in compensatory damages and $5MM in punitive damages. 28 days later, the defendant creditors filed a Rule 50(b) motion. Rosenberg moved to strike the motion as untimely. The district court granted the motion, vacated the punitive damages award, and upheld only $360K in compensatory damages.

The Eleventh Circuit started with FRBP 1001 which states that the Bankruptcy Rules govern procedure in every case under the Bankruptcy Code to secure the just, speedy, and inexpensive determination of every issue. The 1987 advisory committee notes indicate that amended FRBP 1001 makes the Bankruptcy Rules applicable to cases and proceedings under Title 11, whether before the district judges or the bankruptcy judges of the district. FRCP 81(a)(2) provides for the primacy of the Bankruptcy Rules. The Fourth and Seventh Circuits have held that nationwide service of process under FRBP 7004 applies in cases arising under the Bankruptcy Code but tried in district court. The Eleventh Circuit viewed these opinions dealing with service of processâa fundamental aspect of the courts' authorityâas counseling applying the Bankruptcy Rules since personal jurisdiction is more significant than the deadline for renewing post-trial motions. The Third Circuit has even applied the Bankruptcy Rules in non-core, 'related to' proceedings before a district court. The Sixth Circuit, however, has applied the 28-day filing deadline for a motion under FRCP 59, not the 14-day deadline of FRBP 9023. The Eleventh Circuit dismissed this ruling because it focused on a judicial estoppel issue, not which rules to apply. The Court dismissed the defendants remaining arguments on conflicts with the Federal Rules of Appellate Procedure and the finality of the opinion with the bifurcated fee issue remaining in bankruptcy court. The plain language of the rules and the weight of authority counseled for applying the 14-day deadline. Even though the Court did not need to address the merits of the cross-appeal, it held that the defendants had waived the issue of the availability of emotional distress damages by not properly preserving.

On my first read of this case, I was thinking of some interesting questions: Is an involuntary petition a viable creditor strategy? What are the limits of damages if the involuntary petition fails? Should defendants seek to have the reference withdrawn? Is there an ASARCO issue with seeking fees for chasing fees? (The Eleventh Circuit held in the separate appeal of this case that a putative debtor could recover its fees for pursuing its damages under § 303(I)ârecognizing the split with the Ninth Circuit.) But ultimately, the only question that I need to answer is: Can my calendaring system handle the rule of this case?