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Filing Error and Jurisdictional ChallengeOn July 27, 2009, IFC Credit Corporation (“Debtor”) filed a chapter 7 bankruptcy petition that was only signed by a non-lawyer. The following day, Debtor filed an amended petition signed by an attorney. Thereafter, Debtor sought, under 11 U.S.C. § 547(b), to recover certain prepetition payments made to Northbrook Bank & Trust Company (“Northbrook”), on the ground that such payments were avoidable preferential transfers. Northbrook challenged the validity of Debtor’s bankruptcy filing on jurisdictional grounds, arguing that because the original bankruptcy petition was not signed by a lawyer, the entire bankruptcy proceeding was void and could not be cured by the filing of an amended petition. The bankruptcy court rejected Northbrook’s jurisdictional argument and declined to dismiss the bankruptcy case, and the district court affirmed. Northbrook appealed to the Seventh Circuit.
Corporations May Not Litigate Pro SeBeginning its analysis, the Seventh Circuit instructed that, unlike an individual, a corporation may not represent itself in legal proceedings. Examining the differences between individual self-representation and corporate self-representation, the Seventh Circuit pointed out that an agency problem arises when a corporation represents itself that does not exist when an individual represents himself, as a corporation cannot literally represent itself and thus must be represented by an individual. The Seventh Circuit noted that requiring corporations to be represented by lawyers alleviates the agency issue of whether the designated individual’s relation to the corporation made him an appropriate representative of the corporation's owners.
Rule Prohibiting Corporate Self-Representation Is Not JurisdictionalNext, the Seventh Circuit addressed whether a rule prohibiting corporations from litigating pro se is a rule of federal subject matter jurisdiction, giving federal courts no choice but to dismiss a complaint or bankruptcy petition not signed by a lawyer. The Seventh Circuit concluded that there was no basis for deeming the rule against corporation self-litigation a rule of subject matter jurisdiction. To the contrary, the Seventh Circuit observed that subject matter jurisdiction addresses a federal tribunal’s legal authority to decide a particular type of case but does not typically extend to the mistakes that parties make in a case that falls within the tribunal’s adjudicative authority. As a result, the Seventh Circuit observed that Debtor’s bankruptcy was the type of proceeding the Congress authorized the federal courts to handle and that the rule barring corporate representation by non-lawyers concerned the conduct of cases that fell within that authority. Finally, the Seventh Circuit noted that even the Illinois courts that enforce the “nullity rule,” a rule voiding pleadings that are improperly filed without an attorney, consider its application discretionary rather than mandatory. Further, the Seventh Circuit instructed that sanctions for filing errors must be proportionate to the gravity of the consequences resulting from the violation. Applying this principle, the Seventh Circuit reviewed that no adverse consequence resulted from Debtor’s filing error, making the imposition of any sanction, particularly a dismissal sanction, inappropriate. Instead, as Debtor obtained counsel promptly after filing its petition, the Seventh Circuit reasoned that Debtor properly amended the petition pursuant to Bankruptcy Rule 1009(a). Even though Bankruptcy Rule 1009(a) does not specifically address “relation back,” the Seventh Circuit indicated that courts interpret Federal Rule of Civil Procedure 15(c) to allow the correction of formal defects as a proper basis for relation back. Accordingly, the Seventh Circuit determined that the bankruptcy court’s reliance on Rule 15(c) to allow Debtor’s amended petition to relate back to the original filing was proper.
Seventh Circuit Affirms District Court OrderIn sum, the Seventh Circuit held that Debtor's error in filing its chapter 7 petition without an attorney's signature did not require a dismissal of the chapter 7 case. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.
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