In the most recent chapter of the Rosenberg involuntary bankruptcy, the Eleventh Circuit Court of Appeals has held that when a case “arising under” the Bankruptcy Code is tried by the District Court, the Federal Rules of Bankruptcy Procedure govern. Rosenberg v. DVI Receivables XIV, LLC, No. 14-14620 (11th Cir. April 8, 2016). While, at first blush, the Rosenberg holding appears to be counterintuitive, the Court’s analysis of the plain meaning of Bankruptcy Rule 1001 and Federal Rule 81 leads inescapably to the conclusion that the Bankruptcy Rules apply to all cases arising under the Code, even those that are tried by the District Court.
The facts of Rosenberg are relatively straightforward. DVI and certain of its affiliates commenced an involuntary bankruptcy against Rosenberg. After the involuntary case was dismissed, Rosenberg commenced an adversary proceeding pursuant to Bankruptcy Code Section 303(i) in the Bankruptcy Court against the petitioning creditors, seeking compensatory and punitive damages. The complaint demanded a jury trial. The defendants did not consent to a jury trial in the Bankruptcy Court, and the District Court granted the defendants’ motion to withdraw the reference and tried the case. At trial, the jury awarded $1,120,000 in compensatory damages and $5,000,000 in punitive damages, for a total judgment of $6,120,000. The defendants filed a motion for judgment notwithstanding the verdict pursuant to Federal Rule 50(b) on the 28th day after entry of the judgment. Rosenberg moved to strike the Rule 50(b) motion, asserting that it was untimely under Bankruptcy Rule 9015(c), which requires such motions to be filed within 14 days after entry of the judgment. The District Court for the Southern District of Florida held that the motion was timely under Rule 50(b) and entered an amended judgment in the reduced amount of $360,000 in compensatory damages.
On appeal, the Eleventh Circuit reversed and remanded, holding that the time limits in Bankruptcy Rule 9015(c), not those in Federal Rule 50(b), governed and the motion, therefore, was untimely. The primary rationale for the Eleventh Circuit’s conclusion is the plain language and legislative history of Bankruptcy Rule 1001, and the language of Federal Rule 81(a)(2). Bankruptcy Rule 1001 provides: “[t]he Bankruptcy Rules and Forms govern Procedure in cases under title 11 of the United States Code . . . .” Fed. R. Bankr. P. 1001. The advisory committee’s notes to the 1987 amendment to Rule 1001 explain: “This amended Bankruptcy Rule 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.” Consistent with Bankruptcy Rule 1001, Federal Rule 81(a)(2) provides: “These rules apply to bankruptcy proceedings to the extent provided by the Federal Rules of Bankruptcy Procedure.” Fed. R. Civ. P. 81(a)(2). Based upon the “plain language” of Bankruptcy Rule 1001 and Federal Rule 81(a)(2), the Rosenberg Court concluded:
A plain reading of the rules means that in bankruptcy proceedings, the Federal Bankruptcy Rules have primacy while the Federal Civil Rules only apply to the extent they have been explicitly incorporated by the Federal Bankruptcy Rules. This prioritization of the Federal Bankruptcy Rules reflects the reasonable determination that bankruptcy cases ought to be tried with a degree of uniformity, regardless of which court may have heard the matter. A party to a bankruptcy proceeding should not be treated differently simply because the forum in which the case is tried happens to be a district court and not a bankruptcy court. Indeed, creating this kind of discrepancy would undermine the very purpose of adopting standardized rules in the first place.
Slip op. at 9.
As further support for its conclusion that the Bankruptcy Rules apply in District Court, the Court in Rosenberg also cited favorably to several prior decisions of other Courts applying Bankruptcy Rules to cases arising under the Bankruptcy Code that were pending in District Court, including the decision in Phar-Mor. Inc. v. Coopers & Lybrand, 22 F.3d 1228, 1238 (3d Cir. 1994), which holds that the Bankruptcy Rules govern non-core “related to” proceedings before a District Court. The Rosenberg holding is limited to cases “arising under Title 11” and the Court does not indicate the extent to which its holding might also apply to cases in District Court that are “related to” a bankruptcy proceeding.
While many, if not most, of the Bankruptcy Rules applicable to adversary proceedings incorporate the parallel Federal Rule verbatim, there are a number of instances where the Bankruptcy Rules differ substantially from the counterpart Federal Rules. The lesson to be learned from this chapter of the Rosenberg saga is that if the underlying action arises under the Bankruptcy Code, the Bankruptcy Rules will apply to the case, even if the reference has been withdrawn and the case is pending in District Court. In “related to” cases pending in the District Court, counsel should analyze carefully the extent to which the Bankruptcy Rules may apply until such time as the issue has been expressly addressed by the Eleventh Circuit.