Bankruptcy Rules of Procedure Apply When a District Court is Hearing a “Related To” Proceeding

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The First Circuit was required to decide whether the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) or the Federal Rules of Civil Procedure (the “Civil Rules”) govern  a case that comes within the federal district court’s jurisdiction as a case “related to” a pending bankruptcy case.  If the Bankruptcy Rules applied, plaintiffs’ motion for reconsideration was too late (Fed. R. Bank. P. 9023 allows 14 days for the filing of a motion to reconsider whereas Fed. R. Civ. P. 59(e) allows 28 days).    The answer to this question was outcome determinative in In re Lac-Megantic Train Derailment Litigation, 999 F.3d 72 (1st Cir. 2021).

The case arose from a derailment of railroad cars carrying crude oil resulting in deaths and personal injuries.   Responsibility for the railroad cars was eventually assumed by Montreal, Maine and Atlantic Railway, which filed bankruptcy in Maine. Wrongful death suits were filed in various state courts, removed to federal district courts and eventually centralized in the District of Maine pursuant to 11 U.S.C. § 157(b)(5), which allows a district court having jurisdiction over a bankruptcy proceeding to order the transfer to it of any personal injury claims related to the bankruptcy proceeding.

A settlement agreement that was part of the plan of liquidation resulted in the dismissal of claims against all the defendants except Canadian Pacific, which moved to dismiss on various grounds.  Plaintiffs moved to file an amended complaint.

On September 28, 2016 the district court granted Canadian Pacific’s motion to dismiss on jurisdictional grounds and denied the plaintiffs’ motion to amend.  On October 26, 2016, twenty-eight days later, the plaintiffs moved for reconsideration of denial of their motion to file an amended complaint.  On January 19, 2017 the plaintiffs filed a notice of appeal. Canadian Pacific moved to dismiss the appeal, arguing that the plaintiffs’ untimely motion for reconsideration did not toll the time for appeal.

The First Circuit started its analysis with the passage of the Bankruptcy Reform Act of 1978 (the “Code”), which created the modern bankruptcy system.  N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982) repudiated Congress’s efforts to give Article I bankruptcy courts  broad jurisdiction over all cases loosely connected to title 11 claims.  Two years later, Congress passed the Bankruptcy Amendments and Federal Judgeship Act of 1984 which provided that the district courts could exercise jurisdiction over bankruptcy cases arising under title 11 and bankruptcy cases “related to” title 11 cases.  A district court could refer any such case to a bankruptcy court if it elected to do so.

The new system distinguished between “core” and “non-core” cases and identified different decision makers for each. Bankruptcy courts could issue final orders with respect to core cases (that is, cases arising under title 11), but only the district court could issue final orders in “non-core cases (“related to” cases).

By its terms, the Bankruptcy Rules “govern procedure in cases under title 11 of the United States Code.”  Bankruptcy Rule 1001.  The court read the phrase broadly, reasoning that if Congress wanted to restrict applicability of the Bankruptcy Rules to core cases alone, they could have said so.

The court found further support for its broad reading of Rule 1001 in Code §157(b), which provides that “[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11.”  This language suggested to the court that Congress envisioned a difference between “cases under title 11” and core cases.  If both phrases were intended to define the same universe of cases, there would have been no point in using two phrases.

The convincing argument for the court was the practicalities attendant to the efficient operation of the modern bankruptcy system:

If the Civil Rules applied to non-core cases, a district court adjudicating both core and non-core cases in any given bankruptcy proceeding would need to apply two different set of rules simultaneously.  This anomaly would persist despite the fact that those cases would involve the same parties. . . Such a convoluted procedural scheme would be in marked tension with the bankruptcy system’s goal of resolving claims efficiently. 999 F.3d at 80.

We cannot imagine any reason why Congress would authorize jurisdiction for core and non-core cases in the same judicial district  . . , but require the district court to apply a different set of rules to each.  999 F.3d at 81.

The First Circuit held that the Bankruptcy Rules governed the procedural aspects of the case. Consequently, the plaintiffs’ motion was untimely.  Therefore, the deadline for filing notice of appeal expired 30 days after the district court entered final judgment on September 28, 2016.  The appeal was untimely and the case was dismissed for want of appellate jurisdiction.

The First Circuit’s decision is consistent with that of the courts of appeal that have considered the issue and concluded that the Bankruptcy Rules apply to a non-core, “related to” case pending in a federal forum.  In re Celotex Corp., 124 F.3d 619, 629 (4th Cir. 1997); Phar-Mor, Inc. v. Coopers & Lybrant, 22 F.3d 1228, 1238 (3d Cir. 1994); Diamond Mortg. Corp. of Ill. v. Sugar,913 F.2d 1233, 1243 (7th  Cir. 1990).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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