Restructuring

Contributed by Kyle J. Ortiz
The Advisory Committee on Bankruptcy Rules for the Judicial Conference of the United States has proposed amendments to Bankruptcy Rules 7008, 7012, 7016, 9027, and 9033 in an attempt to address some of the inefficiencies that the Supreme Court’s Stern v. Marshall decision has introduced into bankruptcy proceedings.  The proposed amendments were published in the Federal Register on August 17, 2012 for public comment.  Public hearings on the proposed amendments will be held in Chicago, Illinois, on January 18, 2013 and Washington, D.C., on February 1, 2013.  The public comment period ends February 15, 2013.
The proposed changes with additions underlined and deletions struck through are:

Rule 7008. General Rules of Pleading

(a) APPLICABILITY OF RULE 8 F.R.CIV.P. Rule 8 F.R.Civ.P. applies in adversary proceedings. The allegation of jurisdiction required by Rule 8(a) shall also contain a reference to the name, number, and chapter of the case under the Code to which the adversary proceeding relates and to the district and division where the case under the Code is pending. In an adversary proceeding before a bankruptcy judge court, the complaint, counterclaim, cross-claim, or third-party complaint shall contain a statement that the proceeding is core or non-core and, if non-core, that the pleader does or does not consent to entry of final orders or judgment by the bankruptcy judge court.

Rule 7012. Defenses and Objections—When and How Presented—By Pleading or Motion—Motion for Judgment on the Pleadings

(b) APPLICABILITY OF RULE 12(b)–(i) F.R.CIV.P. Rule 12(b)–(i) F.R.Civ.P. applies in adversary proceedings. A responsive pleading shall admit or deny an allegation that the proceeding is core or non-core. If the response is that the proceeding is non-core, it shall include a statement that the party does or does not consent to entry of final orders or judgment by the bankruptcy judge court. In non-core proceedings final orders and judgments shall not be entered on the bankruptcy judge’s order except with the express consent of the parties.

Rule 7016 Pre-Trial Procedures; Formulating Issues

(a) PRETRIAL CONFERENCES; SCHEDULING; MANAGEMENT.  Rule 16 F.R.Civ.P. applies in adversary proceedings.

(b) DETERMINING PROCEDURE.  The bankruptcy court shall decide, on its own motion or a party’s timely motion whether:

(1) to hear and determine the proceeding;

(2) to hear the proceeding and issue proposed findings of fact and conclusions of law; or

(3) to take some other action

Rule 9027. Removal

(a) NOTICE OF REMOVAL.

(1) Where Filed; Form and Content. A notice of removal shall be filed with the clerk for the district and division within which is located the state or federal court where the civil action is pending. The notice shall be signed pursuant to Rule 9011 and contain a short and plain statement of the facts which entitle the party filing the notice to remove, contain a statement that upon removal of the claim or cause of action the proceeding is core or noncore and, if non-core, that the party filing the notice does or does not consent to entry of final orders or judgment by the bankruptcy judge court, and be accompanied by a copy of all process and pleadings.

(e) PROCEDURE AFTER REMOVAL

(3) Any party who has filed a pleading in connection with the removed claim or cause of action, other than the party filing the notice of removal, shall file a statement admitting or denying any allegation in the notice of removal that upon removal of the claim or cause of action the proceeding is core or non-core. If the statement alleges that the proceeding is non-core, it shall state that the party does or does not consent to entry of final orders or judgment by the bankruptcy judge court. A statement required by this paragraph shall be signed pursuant to Rule 9011 and shall be filed not later than 14 days after the filing of the notice of removal. Any party who files a statement pursuant to this paragraph shall mail a copy to every other party to the removed claim or cause of action. If the statement required by this paragraph is not timely filed, the party will be deemed to have consented to the bankruptcy judge’s authority to enter final orders and judgments in the particular removed claim or cause of action.

Rule 9033. Review of Proposed Findings of Fact and Conclusions of Law in Non-Core Proceedings

(a) SERVICE. In non-core proceedings heard pursuant to 28 U.S.C. § 157(c)(1) In a proceeding in which the bankruptcy court has issued the bankruptcy judge shall file proposed findings of fact and conclusions of law,. Tthe clerk shall serve forthwith copies on all parties by mail and note the date of mailing on the docket.

The proposed amendments are intended to relieve some of the ambiguity that has followed in the wake of Stern by: (i) deleting references in the Bankruptcy Rules to core and non-core proceedings, (ii) requiring all parties in all adversary proceedings to express, at the initial pleading stage, whether they consent to bankruptcy court authority, and (iii) creating procedures for bankruptcy courts to state on their own motion (or on the motion of a party) whether the bankruptcy court intends to enter a final judgment or issue a report and recommendation in any given matter.
Although the proposed rules do not address the types of matters in which a bankruptcy court may enter a final judgment, or how a bankruptcy court should address a Stern-like matter (statutorily but not constitutionally core), they are a substantial step in alleviating some of the ambiguity and delay that has plagued bankruptcy cases since the Stern ruling.
By eliminating the requirement to declare whether a proceeding is core or non-core, the proposed amendments appear to acknowledge that, following Stern, a case’s status as core or non-core is not necessarily determinative of whether a bankruptcy court may issue a final order.  By having parties, instead, assert whether they consent to final adjudication by the bankruptcy court, the parties will be required to address the Stern issues at the pleading stage and, if they consent, dispense with any uncertainty as to the bankruptcy court’s authority to finally adjudicate the matter.  Accordingly, the proposed amendments will prevent litigants from using motions to withdraw the reference as litigation tactics in the later stages of a proceeding and will ensure a more efficient resolution of the proceeding free of the procedural roadblocks that have become commonplace following Stern.
Requiring parties to express whether they consent to final adjudication by the bankruptcy court, however, will not fully address the uncertainty and inefficiency arising from Stern because parties will still be able to withhold consent to preserve their ability to object to the authority of the bankruptcy court, or for other strategic reasons.  This concern (parties strategically withholding consent) is partially alleviated by the proposed amendments to Bankruptcy Rule 7016, because, if a party withholds consent, the opposing party can immediately move the court to decide whether it will enter a final judgment on the matter or issue a report and recommendation.  Indeed, should proposed Bankruptcy Rule 7016 be approved, bankruptcy courts may begin issuing routine statements regarding their final authority as standard practice in all proceedings.  Litigants may, however, respond to a bankruptcy court’s decision on its authority by appealing the decision to the district court or moving to withdraw the reference.  This could reintroduce some of the very inefficiencies that proposed Bankruptcy Rule 7016 seeks to alleviate.
We can already get a taste of how the proposed amendments to the Bankruptcy Rules will affect bankruptcy proceedings by observing how litigants have responded to the local rules containing similar provisions that already have been promulgated in numerous districts. There is wide variance in how local districts have sought to address Stern, and these proposed amendments should alleviate some of that ambiguity by introducing a national standard.  If approved, however, the proposed amended Bankruptcy Rules will not take effect until December 1, 2014.  That is a long time away in light of the ever expanding body authority stemming from the Stern decision (as of the publication of this post, over 500 cases have cited Stern and, take it from us: there is no sign that the volume of such cases is slowing).  Indeed, with hot button issues such as the proper treatment of fraudulent transfer actions following Stern beginning to appear before the circuit courts, we may see the Supreme Court weigh in on bankruptcy court authority again before these proposed rules even take effect.