New Bankruptcy Rules: What You Need to Know

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By Deborah Swann and Diane Davis

Nov. 30 — Amendments to 10 of the Federal Rules of Bankruptcy Procedure, and one new rule, take effect Dec. 1. They cover international procedures, Chapter 13 creditors, electronic service, and the ambiguities in bankruptcy court jurisdiction caused by the U.S. Supreme Court’s decision in Stern v. Marshall, 2011 BL 165774, 564 U.S. 462 (2011).

Bankruptcy Rules 1010, 1011, 2002, 3002.1, 7008, 7012, 7016, 9006, 9027, and 9033 are amended, and Rule 1012 is new. Three official forms were also amended.

This year’s bankruptcy rule amendments “lag behind local court rules” in navigating the Constitutional dilemmas of Stern “because the proposed amendments were put on hold while the Supreme Court addressed Stern in the subsequent cases of Arkison and Wellness, ” Una M. O’Boyle, Clerk of the Court for the U.S. Bankruptcy Court for the District of Delaware, told Bloomberg BNA Nov. 29. To clarify the confusion caused by Stern, the amendments provide for express consent in party pleadings.

Out From Under the Cloud of Stern

The Supreme Court held in Stern v. Marshall, 564 U.S. 462 (2011), that bankruptcy courts lacked constitutional authority to enter final judgment on a state-law counterclaim against a creditor, even though Congress had granted the bankruptcy courts statutory authority to do so. The decision was clarified by Wellness Int’l Network, Ltd. v. Shariff, 135 S.Ct. 1932 (2015), when the Court, four years later, permitted bankruptcy judges to enter final orders in Stern and “non-core” matters with the parties’ “knowing and voluntary” consent.

Five Bankruptcy Rules Implicate Express Consent

Rules 7008, 7012, and 9027(a) and (e) provide for express consent in party pleadings. The requirement in adversary proceedings that the pleader state whether the proceeding is “core” or “non-core” has been removed. The pleader now must expressly state whether he does, or does not, consent to entry of final orders by the bankruptcy court, regardless of the proceeding’s designation as core or non-core.

“If all the parties consent to the bankruptcy court’s adjudication, no court would have to determine whether the proceeding is one that the bankruptcy court could have heard and determined in the absence of consent,” the Advisory Committee on Bankruptcy Rules explains. “On the other hand, if all of the parties do not consent . . ., the bankruptcy court would determine whether the proceeding is constitutionally and statutorily core—in which case it could enter a final judgment—or a Stern or non-core proceeding—in which case it could do no more than submit proposed findings of fact and conclusions of law to the district court.” In cases of non-consent, the bankruptcy court will make this jurisdictional determination under new Rule 7016(b).

Where the court decides to issue proposed findings of fact and conclusions of law, Rule 9033 applies. Language limiting proposed findings of fact and conclusions of law to non-core proceedings in Rule 9033 has now been eliminated. As a result, Stern proceedings would be included within the rule’s scope.

Federal Rules Lag Behind

Many bankruptcy courts have already amended their local court rules to address Stern, Una O’Boyle told Bloomberg BNA.

Local rules for the U.S. Bankruptcy Court for the Southern District of New York, for example, already require pleadings to contain a statement that the pleader does or does not consent to the entry of a final order. In addition, the district courts for the Southern District of New York and the District of Delaware have standing orders of reference that allow the bankruptcy court’s order to be regarded as merely proposed findings of fact and conclusions of law in the event the district court concludes that the bankruptcy judge could not have entered a final order.

Multinational Bankruptcies Have a New Rule

Chapter 15 of the Bankruptcy Code provides a comprehensive scheme for recognizing and giving effect to foreign insolvency proceedings. It contemplates a short, fairly simple petition for recognition. The responsive pleading and notice provisions for these petitions have been excised from Rules 1010 and 1011 (addressing involuntary petitions), and the debtor or any party in interest must now use new Rule 1012 to challenge a petition for recognition.

New Rule 1012 requires “objections and other responses” to the petition for recognition to be presented “no later than seven days before the date set for the hearing on the petition,” unless the court prescribes otherwise. Corporate entities responding to the petition also must file a corporate ownership statement.

In addition, amended Rule 2002(q) instructs the court to promptly schedule and hold a hearing on the petition for recognition, giving 21 days’ notice. The court may also consolidate the hearing on the petition with requests for provisional relief, and thereby set a shorter notice period.

“Here there is a tension between requiring a recognition petition to be decided “at the earliest possible time” in accordance with the statutory directive of Code section 1517(c), and giving responding parties an opportunity to present objections and develop evidence to support their objections,” Daniel J. Saval, a Partner in Brown Rudnick LLP’s Bankruptcy and Corporate Restructuring Group, told Bloomberg BNA Nov. 28.

“It’s up to the bankruptcy court to manage the process consistent with the Bankruptcy Code and Rules,” Saval said. Saval is a contributing author to Bloomberg Law: Bankruptcy Treatise

Chapter 13 Creditors Give Notice

Creditors with claims secured by the debtor’s principal residence, where the Chapter 13 plan requires either the debtor or the trustee to make contractual installment payments, are required by Rule 3002.1 to provide notice during the bankruptcy case of any changes in the periodic payment amount or the assessment of any fees or charges. Rule 3002.1 directs that notice go to the debtor and the trustee.

Amendments to Rule 3002.1 clarify that the notice requirements apply regardless of whether a pre-petition default is being cured, and that notice ceases once the automatic stay on the debtor’s residence is lifted, unless the court orders otherwise.

To avoid inconsistency with Rule 3001.2, the Form 4102S2 (Notice of Postpetition Mortgage Fees, Expenses, and Charges) has had its instructions amended. Specifically, any post-petition amounts that have been previously approved by the court must be so indicated on the form. The form serves also to supplement the creditor’s proof of claim.

Forms 420A, Notice of Motion or Objection, and 420B, Notice of Objection to Claim, were amended to comply with the current numbering style.

Time Cuts

Prior to the amendments to Rule 9006(f), parties served electronically were allowed an additional three days to respond. With its more general acceptance and familiarity, electronic service has now been removed as a mode of service that will give parties additional time.

With the new amendments, the Federal Rules of Bankruptcy Procedure are now up to speed.

To contact the reporters on this story: Deborah Swann in Washington at dswann@bna.com and Diane Davis in Washington, D.C. at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

For More Information

The entire package of materials transmitted to Congress is available at: http://www.uscourts.gov/rules-policies/pending-rules-and-forms-amendments

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