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Read the Rules; Know How They Are Applied!

Posted on July 14, 2016 in

As lawyers, we’re constrained by and operate under rules in nearly every aspect of our profession – rules of Professional Conduct, rules of Civil Procedure, rules of Evidence, rules of Appellate Procedure, rules of Bankruptcy Procedure, Family Law rules, Probate rules, rules of Criminal Procedure, just to name a few. These and other sets of rules may govern any particular case alone or in combination.

Zealous, effective representation of our clients requires that we know and abide by the governing rules at all times.  If we disregard or overlook them, it could have disastrous consequences for our clients and possibly for our malpractice insurance carriers.

At times we will be faced with conflicts between two sets of rules that govern a particular issue, such as a deadline.  Of course, common sense dictates that the practitioner should always comply with the earlier deadline.  As one of our Federal District Judges is fond of saying, “If you’re not five minutes early, you’re late.” By following the earlier deadline, the worst thing that will happen is that you check a task off your “to-do” list a little earlier.  But the consequences of choosing the later date can be severe, as was the case in Rosenberg v. DVI Receivables XIV, LLC et al., No. 14-14620, slip op. at 2 (11th Cir. Apr. 8, 2016).

In Rosenberg, the issue before the Eleventh Circuit Court of Appeals was whether a federal district judge was obligated to follow the Federal Rules of Civil Procedure or the Federal Rules of Bankruptcy Procedure in a bankruptcy case before the district court.  Spoiler alert: the judge should have followed the deadlines contained in the Bankruptcy Rules.

In Rosenberg, three creditors filed an involuntary Chapter 7 bankruptcy against Maury Rosenberg, asserting a claim based on a limited guaranty that Rosenberg had made relating to a chain of medical imaging centers.  Ultimately the bankruptcy was dismissed, but the bankruptcy court retained jurisdiction to award Rosenberg his damages, attorney’s fees, and costs.  

Rosenberg sued the creditors, demanding a jury trial, compensatory damages, attorney’s fees, and costs. The creditors moved to withdraw the reference from the bankruptcy court, so the case would be tried in district court. After trial, the jury awarded Rosenberg $1.120 million in compensatory damages, and $5 million in punitive damages. Twenty-eight days after the district court entered the judgment, the creditors moved to vacate the judgment under Federal Rule of Civil Procedure 50(b).  Rosenberg moved to strike the motion as untimely because it was filed after the deadline set forth in Bankruptcy Rule 9015(c), which required that the motion be filed within 14 days after entry of judgment.  The district court determined that the Federal Rule, not the Bankruptcy Rule applied.  On that basis, the district court denied the motion to strike, granted the creditors’ motion, and entered an amended final judgment reducing the liability down to only $360,000 in compensatory damages.

Rosenberg appealed on the basis that the Rule 50(b) motion was untimely. On appeal, the Eleventh Circuit agreed that the district court was required to apply the deadlines contained in the Bankruptcy Rules.  As a result, the motion was untimely, and the judgment would revert back to the original award of $6.12 million.

Rosenberg is a cautionary tale for counsel litigating adversary proceedings stemming from bankruptcy cases.  Although those proceedings are in many respects similar to cases litigated under the Federal Rules, counsel must be familiar with the Bankruptcy Rules and when they may apply.  To further complicate the practice, all or most of the U.S. Bankruptcy Courts, like the District Courts, also have Local Rules.  Some bankruptcy judges even have their own courtroom procedures.  So, before litigating claims arising from a bankruptcy case, whether you will be in bankruptcy court or elsewhere, make sure you read the rules – all of the rules – and learn which ones apply and when they apply.  This additional preparation and perhaps some more caution will help avoid multi-million dollar errors like the creditors in Rosenberg.