In a trial in district court invoking bankruptcy law, the court must apply the Bankruptcy Rules, not the Federal Rules of Civil Procedure, even when the time limits are different, the Eleventh Circuit held in an April 8 opinion.
Creditors filed an involuntary petition against an individual. The bankruptcy court dismissed the petition. The putative debtor responded by filing a complaint in bankruptcy court for compensatory and punitive damages under Section 303(i). The district court withdrew the reference with respect to the damage claims because they were similar to common law claims for malicious prosecution. The district judge left the claims for attorneys’ fees and costs in bankruptcy court.
At the ensuing trial in district court, the jury imposed $1.12 million in compensatory damages and $5 million in punitive damages, having found that the creditors acted in bad faith. Twenty-eight days after the district court entered judgment, the creditors filed a seemingly timely motion under F.R.C.P. 50(b) for judgment notwithstanding the verdict.
The district court granted the motion, in the process holding the creditors liable only for $360,000 in compensatory damages for emotional distress. The debtor appealed and won in an opinion by Circuit Judge Stanley Marcus.
Judge Marcus held that the “plain language” of Bankruptcy Rule 1001 “unambiguously provides” that the Bankruptcy Rules govern proceedings in district court based on claims “created or determined by” the Bankruptcy Code. He cited the Fourth and Seventh Circuits as holding that the more liberal Bankruptcy Rules govern service of process in “cases arising under title 11 but tried in district court.”
Without saying whether he agreed, Judge Marcus said it was “illuminating” how the Third Circuit held that the Bankruptcy Rules govern non-core, “related-to” proceedings that “do not arise directly under the substantive rules of title 11.”
Judge Marcus said that the Federal Rules “only apply to the extent they have been explicitly incorporated by the Federal Bankruptcy Rules.”
Choosing between the two sets of rules was important because Bankruptcy Rule 9015(c), governing motions for judgment or a new trial, requires motions within 14 days. Under Federal Rule 50(b), the time limit is 28 days. Judge Marcus reversed the district court because the motion was untimely under the Bankruptcy Rules.
It is unclear from the opinion whether the creditors, following remand, can appeal the district court’s original judgment for more than $6 million since the Rule 50(b) motion, which would have tolled the time for appeal, was itself untimely. If the creditors lost the right to appeal, the next question is whether the creditors’ lawyer could be liable for malpractice.
The entire case became a nightmare for the creditors. Last year, the Eleventh Circuit upheld the bankruptcy court’s award of more than $1 million in attorneys’ fees under Section 303(i)(1).