Contributed by Kelly E. McDonald
Last month (while many of us were distracted with holiday festivities), Judge Posner, writing for a Seventh Circuit panel that included Judges Bauer and Wood, issued a decision that seems noncontroversial on its face, but is the result of a two-year long battle between a disgruntled creditor and a corporate debtor. What was so significant that the parties spent two years litigating (drumroll)? Well, the corporate debtor’s attorney somehow did not sign the chapter 7 petition. In re IFC Credit Corporation presents a cautionary tale about how a single missing signature spawned an appeal that dragged on for two years, made its way all the way to the Seventh Circuit, and could have resulted in a corporate debtor’s attorney’s worst nightmare: nunc pro tunc dismissal of the debtor’s chapter 7 petition.
The facts are perhaps the most simple facts we have ever read in a circuit court of appeals decision concerning a corporate debtor: the debtor, IFC Credit Corporation, filed its chapter 7 petition on July 27, 2009 reflecting only the signature of the company’s president. The next day the company filed an amended petition under Bankruptcy Rule 1009(a) that was signed by a lawyer. That fact probably would never have become an issue except that the debtor has a particularly disgruntled creditor, Northbrook Bank & Trust. Prepetition, Northbrook’s predecessor sued IFC alleging fraud. Postpetition, when Northbrook filed its proof of claim, IFC sued Northbrook to recover certain prepetition payments as voidable preferences. Gloves were promptly removed.
The essence of Northbrook’s argument was that IFC’s filing of a bankruptcy petition without an attorney’s signature was “void” or a “nullity” under the generally accepted rule—called the “nullity rule”—that a corporation can not litigate pro se. If true, Northbrook argued, the bankruptcy court lacked subject matter jurisdiction over the bankruptcy case; therefore, IFC could not cure the defect by simply amending the petition under Rule 1009(a). Both the bankruptcy and district courts disagreed.
The Seventh Circuit reviewed U.S. Supreme Court cases evaluating dismissals for want of subject matter jurisdiction and found that the Supreme Court has taken a “sharp turn toward confining dismissals for want of subject-matter jurisdiction to cases in which the federal tribunal has been denied by the Constitution or Congress or a valid federal regulation the authority to adjudicate a particular type of suit.” The court noted one key exception: statutory limits on the period for filing an appeal.
The court found that IFC’s bankruptcy case is the type of proceeding Congress authorized federal courts to handle, and the nullity rule concerns conduct that lies within that authority. The court also noted that Illinois courts, “staunch defenders of the ‘nullity rule’ though they are,” also consider the rule discretionary rather than mandatory.
Had the Seventh Circuit found that the bankruptcy court lacked subject matter jurisdiction, (i) the defect would not have been waivable, and (ii) dismissal for want of subject matter jurisdiction is without prejudice, meaning because the dismissal results from a technical defect and not due to an adjudication on the merits, a future litigation to decide the merits is not barred by operation of the doctrine of res judicata.
The court noted in dicta that the consequences for a dismissal for want of subject matter jurisdiction for pro se litigation by corporations could be particularly costly if the jurisdictional defect were discovered late in a protracted bankruptcy as it was in IFC’s case and would have required IFC to file a new bankruptcy case more than two years after the original and amended petitions. The practical result of which (and the reason, of course, why Northbrook pursued the appeal for two years) would have been to tank the debtor’s preference action against Northbrook.
According to the decision, the parties settled the trustee’s preference action conditional on a determination that a bankruptcy court had jurisdiction over the preference action. It remains to be seen whether Northbrook will file a petition for writ of certiorari for a fourth bite at the apple. . .
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