SDNY Bankruptcy Rules Are About to Change: What You Need to Know About the @USBCSDNY Proposed Amendments

by Robins Kaplan LLP

Got a problem, tell me now… I break the rules so I don’t care… – Jay-Z feat. Rihanna and Kanye West, “Run this Town”

Last month, the United States Bankruptcy Court for the Southern District of New York proposed amendments to its local rules. Although the amendments are not sweeping, they include some very important updates and tweaks to local practice, and restructuring professionals should take the opportunity to review and comment. The Bankruptcy Court’s notice regarding the proposed amendments is available here and the full text of the proposed amendments is available here.

The amendments conform the local rules to changes to the Federal Rules of Bankruptcy Procedure (particularly in the wake of Stern v. Marshall) and streamline and clarify existing best practices, in addition to some important changes to bankruptcy procedure in that court. Of course, even if all of the amendments are adopted, they may be modified by case management orders entered in specific bankruptcy cases. But the rules, as always, provide useful “default” rules governing typical bankruptcy practice.

Among the notable amendments are the following:

  • Local Rule 1002-1 will provide that chapter 11 and chapter 15 debtors’ counsel should, to the extent practicable, notify the Clerk of the Bankruptcy Court and the United States Trustee of any anticipated new bankruptcy filings in advance of such filings, as well as the forms of first-day motions that are contemplated. The rule specifically notes that counsel should not disclose the identity of the debtor or the petitioner.
    • The rule does not specify that this rule applies only to cases of a certain size; instead it applies only to cases in which immediate relief will be sought.
    • Although the text of the rule does not specify that copies of such motions should be shared with the Bankruptcy Court or the United States Trustee prior to the filing, the comment notes that the amendment is designed to provide the United States Trustee time to review complex orders in advance of first day hearings. Is this comment at odds with the parenthetical comment in the amendment that the information should be shared “without disclosing the identity of the debtor”? Can prospective debtors still send copies of their proposed first day pleadings to the United States Trustee prior to the filing? If so, must they be redacted?
  • Local Rule 2002-2 (regarding notices of presentment) will be folded into Local Rule 9074-1 (discussed below).
  • Local Rule 3011-1 cures an infirmity in section 347(b) of the Bankruptcy Code, pursuant to which unclaimed funds revert to the debtor or the entity acquiring assets pursuant to a plan. The new local rule expressly allows plan proponents to provide that unclaimed funds may, pursuant to a plan, be reallocated in accordance with the absolute priority rule or pursuant to the plan’s distribution scheme, or may be donated to a not-for-profit, non-religious organization.
    • This proposed local rule provides an interesting solution until the Bankruptcy Code is updated to address this inherent challenge. Bankruptcy practitioners may gravitate toward charitable organizations that support bankruptcy education or to organizations to which specific debtors have an attachment or industry nexus (for example, a health care debtor may want to donate unclaimed funds to a public health organization).
  • Local Rule 5075-1(d) will expressly provide that court-appointed claims agents must provide public access to claims registers, including complete proofs of claim. This comports with existing statutes, rules, and procedures.
  • Local Rule 8010-1 will ensure that the Bankruptcy Court is notified of “preliminary motions” that are filed in the district court – including motions for leave to appeal, motions for a stay pending appeal, or a motion to approve a supersedes bond (among others) – by requiring moving parties to also file such motions on the Bankruptcy Court’s CM/ECF system.
  • Local Rule 9006-1 will expressly authorize reply papers, but will require that any such papers be filed and served at least three days before the return date, unless otherwise ordered by the court.
  • Local Rule 9018-1 will create a uniform process for filing motions to file certain documents under seal or in redacted form. Movants must hand deliver un-redacted copies to the Clerk’s Office, conspicuously marked as being filed under a pending motion to seal.
  • Local Rule 9037-1 will similarly provide express guidance regarding redaction of personal data, placing that responsibility solely on counsel, parties in interest, and non-parties (i.e., not the Bankruptcy Court or the claims agent). However, it does authorize the Clerk and/or the claims agent to, in their own discretion, redact filings that contain information that should not have been made public and to inform the filer of the requirement to file a motion seeking authority to redact.
  • Local Rule 9074-1 will be a single local rule governing notice of a proposed action or order when not proceeding by motion. Practitioners should take note that all other applicable rules continue to apply (including Bankruptcy Rules 6004 and 6007 regarding the use, sale, lease, or abandonment of property).

The proposed amendments will also bring the court into the 21st century by eliminating the option to provide a “diskette” as an acceptable electronic format for submitting papers when not filing by ECF. In fact, the amendment as written doesn’t preclude that option, but merely eliminates that option from the list of examples of electronic formats. The comment to the amendment, however, makes it clear that diskettes are no longer supported in the Bankruptcy Court.

The rules will also expressly allow debtors and trustees to store books and records in electronic format and to keep electronic records in their original format.

Any comments with respect to the proposed amendments are due no later than 5:00 p.m. EST on Nov. 14, 2016.

Additional information regarding the process for submitting comments is available here.

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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