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Lis Pendens Saves Equitable Mortgage

Posted in Collateral, Foreclosure, mortgage

The Kentucky Court of Appeals recently affirmed in Brooks v. J.P.Morgan Chase Bank, N.A. that an equitable mortgage established in litigation has priority over a pendente lite mortgage.  The Lender filed an action to correct several deficiencies with its mortgage: (1) signed by husband but not wife; (2) unidentified preparer; (3) no scrivener’s statement; (4) blank legal description; and (5) original not recorded and lost.  The Lender sought to have a copy of the lost mortgage recorded.  Upon filing its complaint, the Lender recorded a lis pendens in accordance with KRS 382.440.  During the litigation, the borrower granted a Law Firm mortgage on the subject property.  The trial court held that the Lender’s resulting equitable mortgage had priority over the Law Firm’s recorded mortgage.  The appeal challenged the validity and priority of the respective liens.

While the Law Firm’s mortgage secured a debt for services, it was not a lien governed by the attorney lien statute, KRS 376.460. The statutory attorney lien attaches to sums recovered, but a client can grant a mortgage as additional security.  The Lender’s unrecorded copy of the mortgage failed almost every requirement of KRS 382.335.  While it could not be recorded, these defects did not invalidate the mortgage or the resulting equitable mortgage.  The Law Firm also challenged the Lender’s mortgage because it was granted to MERS.  Despite the involvement of MERS being commonplace and permitted by prevailing Kentucky law, the Brooks court still labeled the use of MERS as “controversial.”  But since the Lender possessed the original note, it could enforce the resulting equitable mortgage.

For priority, the Law Firm argued its lien was the only “lawfully recorded” mortgage. But the Lender had recorded a lis pendens the month before the Law Firm had taken its mortgage.  A prior equitable mortgage takes priority over a subsequent lien recorded with actual or inquiry notice.  While the lis pendens did not create a lien, it did provide notice.  As a pendente lite lienholder, the Law Firm could have no greater interest than the Lender.  Since the Lender’s predecessor had provided credit in exchange for a transfer of an interest in the property, it held an equitable mortgage despite the multitude of deficiencies in the mortgage itself.  The Lender’s equitable mortgage had priority over the Law Firm’s lien as the lis pendens resulted in the Law Firm’s lien being subject to the results of the litigation.

Brooks v. J.P. Morgan Chase Bank, N.A., 2017 Ky. App. Unpub. LEXIS 121 (Ky. Ct. App. Feb. 10, 2017).

The Power Of Three Overcomes A Putative Debtor Who Can Count To Twelve

Posted in Bankruptcy Trends
Power of Three

The Sixth Circuit BAP has reversed the denial of a motion to dismiss an involuntary petition.  A single petitioning creditor initiated the case of In re Zenga based on the putative debtors’ responses to interrogatories which identified 10 creditors.  The putative debtors sought to introduce evidence of additional creditors.  The bankruptcy court held the prior sworn statements estopped the presentation of contrary evidence.  With less than 12 creditors, Section 303(b)(2) permits a single creditor to file the involuntary petition.  The bankruptcy court entered the order for relief.

The applicable standard of review for the application of estoppel was not decided because the result was the same under a de novo or abuse of discretion review.  Since the numerosity requirement in the statute was not jurisdictional, equitable powers could be used to prevent a debtor from arguing it met the threshold.  The best interest of the creditor’s argument was not subject to a final order and not reviewed.  Siegel was not extended to prevent the use of equitable doctrines to overcome a numerical threshold.  For judicial estoppel—an oft-discussed concept—no court had relied on the sworn testimony of the number of creditors so it was inapplicable.  That left equitable estoppel.

To establish equitable estoppel, a party must prove “(1) misrepresentation by the party against whom estoppel is asserted; (2) reasonable reliance on the misrepresentation by the party asserting estoppel; and (3) detriment to the party asserting estoppel.”  There was no dispute as to the first two elements: (1) the putative debtors misrepresented that they only had 10 creditors besides the petitioning creditor; and (2) the petitioning creditor reasonably relied on that misrepresentation in commencing an involuntary bankruptcy proceeding.  But the bankruptcy court failed to make any findings on the detriment suffered by the petitioning creditor (and his attorney could not articulate any specific detriment).  The more appropriate remedy was having other creditors join in the petition as permitted by § 303(c), not estopping the putative debtors from presenting evidence of additional creditors.  The orders for relief entered by the bankruptcy court were vacated.

This case reminds us that when seeking equity from a bankruptcy court, it is important to know the harm that has been suffered.  That and the power of three petitioning creditors is only necessary when there are 12 creditors.

Keepin’ It Classy: Court Certifies Class-Action for Alleged FDCPA Violations

Posted in FDCPA
debt writing

Last week in Macy v. GC Services, the United States District Court for the Western District of Kentucky certified a class action involving the Fair Debt Collection Practices Act (“FDCPA”).  According to the plaintiffs, GC Services Limited Partnership violated the FDCPA by sending them debt collection notices which failed to specify that debt validation is only required if the customer disputes the debt in writing.

The Court rejected GC Services’s argument that a class is unascertainable. GC Services contended that the plaintiffs had not shown that every class member had “suffered an injury sufficient to confer standing.”  The Court noted that the “majority of courts” (not addressed in the Sixth Circuit) do not require the named plaintiffs in a class action to demonstrate that “each and every class member could satisfy an individualized standing inquiry” at the class certification stage.

After rejecting GC Services’s argument that the class was unascertainable, the Court found that the plaintiffs satisfied the following Rule 23(a) criteria: numerosity, commonality, typicality, and adequacy of representation.  The Court focused on the collective receipt of a similar allegedly deficient notices that put plaintiffs—and the putative class members—at risk of waiving the FDCPA’s protections.

The Court also concluded that the plaintiffs satisfied Rule 23(b)(3) because common questions of law and fact predominated over individual ones and a class action was the superior method for adjudicating the claims.  The Court declined to follow the United States District Court for the Middle District of Florida’s opinion which found that a class action was not the superior method for adjudicating the putative class’s claims in a case involving the same counsel and similar claims against GC Services.  The Florida court reasoned that the named plaintiff’s demand for statutory damages “gave rise to a potential conflict of interest because class members with actual damages would be precluded from recovering them in lieu of the nominal damages the court intended to award.”  The Macy court disagreed, noting that class actions are “designed to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action” and, therefore, the possibility that the class members might recover a “paltry” sum did not dissuade the court that a class action was the superior method of adjudication.  The Court also noted that any class members with larger actual damages could opt out of the class action and pursue their claims in an individual action.

Finally, the Court denied GC Services’s request that it certify a nationwide class in order to avoid piecemeal litigation.  The Court based its decision on the fact that the FDCPA does not limit the number of class actions that may be filed against a single defendant, and plaintiffs are masters of their own complaints.

Junk Faxes Go to the Head of the Class (Action)

Posted in TCPA

In its latest “junk fax” case, the Sixth Circuit Court of Appeals reversed a district court’s denial of class certification and dismissal of a lawsuit alleging that Top Flite Financial, Inc., a mortgage company, violated the Telephone Consumer Protection Act (“TCPA”) by hiring a third party to send unsolicited fax advertisements on its behalf. See Bridging Communities, Inc. v. Top Flite Financial Incorporated, Case No. 15-1572, 2016 U.S. App. LEXIS 22297 (6th Cir. Dec. 15, 2016).

According to the complaint, Top Flite allegedly hired Business to Business Solutions (“B2B”), a well-known fax-broadcasting company, to send unsolicited fax advertisements to the plaintiffs and a class of similarly-situated parties without their consent or an established business relationship. The district court first denied class certification because individual questions of consent (a defense to the claims) precluded a finding of predominance under Fed. R. Civ. P. 23(b)(3). Then, after the plaintiffs failed to accept a Rule 68 offer of judgment from Top Flite, the district court dismissed the lawsuit as moot. The plaintiffs appealed both rulings.

Regarding predominance, the Sixth Circuit noted that “Rule 23(b) requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class.” Id. at *6 (quoting Amgen, Inc. v. Conn. Ret. Plans & Tr. Funds, 133 S. Ct. 1184, 1191 (2013) (emphasis added). In other words, even though individual proof may be involved, if the issues which are subject to generalized proof predominate, Rule 23(b)(3) will be satisfied. In the Court’s view, Top Flite’s speculation that some claimants might have given consent was insufficient to overcome the plaintiffs’ evidence that B2B had not contacted any of the claimants to verify consent before sending faxes.

The Sixth Circuit also reversed the district court’s mootness dismissal because the plaintiffs had failed to accept Top Flite’s offers of judgment. Before the district court, Top Flite relied on the Sixth Circuit’s opinion in O’Brien v. Ed Donnelly Enterprises, 575 F.3d 567 (6th Cir. 2009), for the proposition that unaccepted offers of judgment can moot a case and deprive a district court of subject matter jurisdiction. However, in between the time of the district court’s ruling and the Sixth Circuit’s review of the case, the Supreme Court ruled in Campell-Ewald Co. v. Gomez, 136 S. Ct. 663 (2016) that unaccepted offers of judgment do not moot a case. In light of Campbell-Ewald, the Sixth Circuit held that Top Flite’s rejected offer of judgment did not moot the lawsuit.

The case is remanded to the district court.

Still Not Valid When Made

Posted in Circuit Split, Interest Rates, SCOTUS

Last year, we posted about Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), where the Second Circuit Court of Appeals decided to ignore the “Valid When Made” doctrine.  This is the established common law doctrine that if a loan is non-usurious when made, it remains non-usurious when assigned to another creditor, even when the new creditor would not qualify for the lending authority exercised by the loan originator.  In its decision, the Second Circuit departed from precedent in the Fifth, Seventh, and Eighth Circuit Courts of Appeal.  Financial institutions buying and selling debt on the secondary market hoped that the United States Supreme Court would step in, reverse the Second Circuit, and endorse the “Valid When Made” doctrine.

The Supreme Court asked the Solicitor General to weigh in, which it did, in unusual fashion. It strongly criticized the Second Circuit decision as incorrect—but then recommended that the Court deny the petition. It pointed to the cases from the Fifth, Seventh and Eighth Circuits as correct interpretations of Section 85 of the National Banking Act, and relied on 1828 and 1833 Supreme Court cases confirming the “Valid When Made” doctrine.  But the Solicitor General said that there was no circuit split, because the Second Circuit decision was only interlocutory and could be corrected on remand!

Ultimately, the Supreme Court denied Midland’s petition, without comment. Midland Funding, LLC v. Madden, 136 S. Ct. 2505 (2016).  This result apparently leaves the Madden decision as binding precedent on federal courts that sit in New York, Connecticut, and Vermont.  In addition, a district court in the Third Circuit has apparently followed Madden in a “rent-a-bank” case brought by the Pennsylvania attorney general. Pennsylvania v. Think Finance, Inc., 2016 U.S. Dist. LEXIS 4649 (E.D. Pa. Jan. 14, 2016).  Besides the Fifth, Seventh, and Eighth Circuits, other courts of appeal have yet to weigh in.  The Solicitor General’s recommendation notwithstanding, it would have been desirable for the Court to correct the Second Circuit.

In July, Representative Patrick McHenry (R-NC) introduced a bill in Congress to address the uncertainty. The Protecting Consumers’ Access to Credit Act of 2016, H.R. 5724, would amend the National Bank Act and the Federal Deposit Insurance Act to provide that federal interest rate preemption applies “regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party.”  However, no congressional action has been reported on the bill since then.

New York and Florida Courts Enforce E-Notes

Posted in CFPB, Foreclosure, Kentucky Law, Note Sales

Appellate courts in New York and Florida recently ruled that mortgage lenders “holding” electronic notes had standing to foreclose on the real property securing the E-Notes. Although Congress passed the Electronic Signatures in Global and National Commerce Act (ESIGN) in 2000, and nearly all states have passed the Uniform Electronic Transactions Act (UETA) in the last decade, there have been very few cases addressing and confirming the enforceability of E-Notes.  Last year, the Consumer Financial Protection Bureau opined that e-mortgage lending can benefit consumers.  These cases may reduce lenders’ perceived risks and provide greater certainty enforcing electronic documents.

In Rivera v. Wells Fargo Bank, the borrower argued that the Bank could not prove that it had possession of the E-Note. The Florida court analyzed the UETA requirements, and determined that the E-Note would be a note if it were in writing, and that the bank had control of it because there was a single authoritative copy identifying the person asserting control as the person to whom it was issued, or to the transferee of such person.  The court found substantial evidence that these requirements were met.

In New York Community Bank v. McClendon, the trial court dismissed the foreclosure complaint, apparently concluding that the bank had failed to establish that it was entitled to enforce the E-Note.  The appellate court reversed, and after analyzing the requirements of the ESIGN Act, concluded that the E-Note was a transferrable record and that the bank had established control of it.

Although Kentucky also adopted the UETA in 2000 (KRS 369.101 to 369.120), it still needs to pass additional legislation to fully implement E-Mortgage lending. It should consider the Uniform Real Property Electronic Recording Act, which would facilitate recording in the county clerks offices by electronic means.  It should expand its non-uniform version of UETA to include real estate transactions.  Finally, it should consider adopting the National E-Notarization Standards proposed by the National Association of Secretaries of State and the Revised Uniform Law on Notarial Acts.

We Said It Once and We’ll Say It Again – Debt Collectors Face FDCPA Liability for Filing Time-Barred Proofs of Claim

Posted in Circuit Split, FDCPA, Proof of Claim
Thousand Times

In 2014, the Eleventh Circuit Court of Appeals released its highly-controversial opinion in Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014), becoming the first circuit to rule that a debt collector violates the FDCPA when it files a proof of claim in a bankruptcy case on a time-barred debt. The collection industry sought to have Crawford reversed by the Supreme Court, but the petition for a writ of certiorari was denied last April. Last week, the Eleventh Circuit doubled down on Crawford in Johnson v. Midland Funding, 2016 U.S. App. LEXIS 9478 (11th Cir. May 24, 2016).

The Johnson plaintiffs both claimed that the debt-collector defendants violated the FDCPA by filing proofs of claim on time-barred debt which, under Crawford, would have been unlawful. However, the district court refused to follow Crawford and dismissed the lawsuits, reasoning that Crawford created an irreconcilable conflict between the FDCPA and the Bankruptcy Code (which permits time-barred proofs of claim). The district court applied the doctrine of implied repeal to hold that a creditor’s right to file a time-barred claim under the Code precluded debtors from challenging that practice as a violation of the FDCPA in the Chapter 13 context.

The Eleventh Circuit reversed, concluding that “[a]lthough the Code certainly allows all creditors to file proofs of claim in bankruptcy cases, the Code does not at the same time protect those creditors from all liability. A particular subset of creditors – debt collectors – may be liable under the FDCPA for bankruptcy filings they know to be time-barred.”

The Eleventh Circuit has given debtors the opportunity to trick creditors.  The debtor, Judy Brock, scheduled the alleged time-barred obligation to the creditor.  See In re Brock, Case No. 14-01200 (Bankr. S.D. Ala. 2014), Schedule D.  The debt had been sold to the debt collector who responded by filing a proof of claim (Claim 7-1).  The claim listed the last transaction date as January 16, 2008.  Brock objected to the claim based on lack of supporting documentation but made no mention of the claim being time-barred [Dkt. No. 36].  The bankruptcy court sustained the objection on negative notice.  By scheduling the debt, the debtor asked how much she owed.  The claimant filed its ministerial proof of claim which was disallowed.  And then the debtor sued for an alleged FDCPA violation.

While Johnson characterizes itself as resolving the last open issue for stale proofs of claim in bankruptcy, there remain many more questions.  By scheduling the debt, does a debtor consent to the creditor/debt collector filing a proof of claim?  The debtor invited the claimant to the party only to pull the chair out from underneath it.  Further, does the scheduling the debt revitalize the claim even if the statute of limitations has passed?  And who owns the alleged FDCPA violation?  In a Chapter 13 case, would this post-petition asset inure to the benefit of the other creditors?  If the debtor amends its schedules to include the FDCPA claim and values that claim, is that valuation binding?  Brock amended her Schedules B & C with a valuation of the potential lawsuit of $1.00.  If this was an FDCPA violation, it comes with a statutory penalty of $1,000.00.  Has the debtor perjured herself with this false valuation?  When the debtor objects to the claim based on lack of supporting documentation, is the statute of limitations issue waived?

The underlying bankruptcy case shows how the system is designed to work.  Debtors schedule all assets and claims to put the world on notice.  Parties who may have a claim—a very broad definition under the Bankruptcy Code—file it with the court.  The debtor raises objections to any claims which are disputed.  And the court makes a determination as to the validity of the claim.  Claim administration is one area of the bankruptcy court’s power which is not subject to a Stern challenge.  And the claim administration process worked for Brock.  But the Eleventh Circuit has created this unnecessary wrinkle in smooth case administration by permitting a cause of action for filing a purported stale claim.

Unfortunately for debt collectors doing business in the Eleventh Circuit (Alabama, Florida and Georgia)—and maybe the Northern District of Indiana, it appears Crawford and Johnson are here to stay. Luckily for those elsewhere, some lower courts have refused to adopt Crawford, leading to Johnson-like challenges in other federal appellate courts. The result could be a circuit split that ultimately winds up before the Supreme Court.

Debt Collectors: Remember Opposing Counsel is Not Competent

Posted in Circuit Split, FDCPA, Shameless Promotion, Stites & Harbison PLLC

Well, at least that is the case as the Eleventh Circuit rules on communications between attorneys.  Recently, I read a warning from a colleague about the expansion of liability for creditor’s lawyers under the FDCPA.  In Bishop v. Ross, Early & Bonan, P.A., the Eleventh Circuit reversed the dismissal of an FDCPA complaint brought by a homeowner whose attorney received a letter from the HOA’s counsel regarding unpaid assessments.  At issue was a purported violation based on a faulty disclosure under 15 U.S.C. § 1692g(a)(4).  The homeowner’s counsel received this purported defective notice and within two months filed an FDCPA complaint on behalf of the homeowner for the indirect communication.  But if her counsel had sufficient competency to know that the notice failed to state the law correctly so that he could meet his Rule 11 obligations before filing the FDCPA claim,  how could the purported misstatement of the law be “false, deceptive, or misleading” within the meaning of the FDCPA?  Within a month to the day, the Eleventh Circuit has issued two opinions (Bishop and Diaz v. First Marblehead Corp.) with significant ramifications for the collegiality of the debtor/creditor bar.

Another issue that Bishop raises, but does not address, is the varying writing requirements of § 1692g. Section 1692g(a)(3) requires a statement that unless the debtor disputes the validity of the debt within thirty days, the debt will be assumed to be valid by the debt collector.  Section 1692g(a)(4), however, requires a statement that if the consumer notifies the debt collector in writing during the thirty-day period that the debt—or any portion thereof—is disputed, the debt collector will obtain verification of the debt.  So the consumer has the right to dispute a debt in any manner—verbally or in writing—but to obtain verification, the dispute must be in writing.  If you state the dispute must be in writing, you could violate the FDCPA.  If you fail to state the request for verification must be in writing, you could violate the FDCPA.  It is a statute fraught with perils for the unwary attorney.  And, unfortunately, the Eleventh Circuit does not want lawyers to communicate informally to work through these issues.

Into The Void: Kentucky Adopts Uniform Fraudulent … er, I Mean … Voidable Transactions Act

Posted in Fraudulent Transfer, Kentucky Law

voidUntil 2016, Kentucky was one of just a few states that had not adopted a model statute relating to fraudulent transfers.  As mentioned in a prior post on Kentucky’s statutory quirkiness, its statute descended neither from the Uniform Fraudulent Transfer Act (“UFTA”) nor the Uniform Fraudulent Conveyance Act (“UFCA”).  Effective this year, however, Kentucky is at the leading edge of uniform creditor avoidance statutes (KRS 378A), having become among the first 9 states (as of this writing) to adopt the new Uniform Voidable Transactions Act (“UVTA”).  I have written on UVTA generally, and will try to stay focused on how UVTA will likely change avoidance action practice for Kentucky practitioners.  Here are some highlights:

  • The Commissioners Really Want Everyone To Stop Using The Phrase “Fraudulent Transfer.”  According to the commentary, “the word ‘fraudulent’ in the original title, though sanctioned by historical usage, was a misleading description of the Act as it was originally written.”  This is a good point, because constructively fraudulent transfers never required fraudulent intent on the part of either the transferor or transferee.  Moreover, even intentionally fraudulent transfers did not require transferee intent, and transferor intent was typically proven circumstantially via “badges of fraud.”  The Commissioners further note that the use of the old phrase bred bad habits, including uses of “oxymoronic and confusing shorthand tags” like “constructive fraud.”  The change is not designed to be substantive, and the UVTA amendments are not a “comprehensive revision” of the predecessor UFTA.  In Kentucky, of course, where we had no UFTA, UVTA is a comprehensive revision to our old statute.  Either way, its easy to see how a simple phrase change may have unintended substantive effect.  If we’re supposed to take the fraud out of fraudulent transfers, must a plaintiff plead with Rule 9(b) particularity when asserting a Section 4(1)(a) claim (which we all used to call an “intentionally fraudulent transfer”)?  That’s currently the rule in many courts, especially when interpreting Section 548 of the Bankruptcy Code, which admittedly uses the phrase “fraudulent transfers” in the title.  See this Skadden piece on the recent Lyondell II decision from the Southern District of New York.
  • What’s Voidable In Kentucky Now:
    • 4(1)(a) Claims:  Transfers made with actual intent to delay, hinder or defraud creditors are avoidable by existing and future creditors, and UVTA has saved us all a bunch of research time by specifically delineating the “badges of fraud” we all know and love.
    • 4(1)(b) Claims:  This appears to be a super-duper constructively fraudulent transfer action that, unlike garden-variety constructively fraudulent transfers, may be asserted by creditors whose claims arise after the transfer in question.  To prevail, plaintiffs must show a lack of reasonably equivalent value, and either (1) transferor undercapitalization or (2) that the transferor should have known that it was incurring debts beyond its ability to repay.
    • 5(1) Claims:  This is the old-school constructively fraudulent transfer action, available only to existing creditors, who must prove a lack of reasonably equivalent value and insolvency.
    • 5(2) Claims:  This is a new insider preference statute, available to existing creditors if “the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.”  The prior state law preference statute has been repealed.  The lookback on insider preferences under this section is 1 year.
  • The Lookback Period For Voidable Transfers In Kentucky Is Now 4-years.  Kentucky previously operated on a 5-year lookback for fraudulent transfers, but KRS 378A.090 “extinguishes” a creditor’s claim if not asserted by the fourth year after the subject transfer (but 1 year for the insider preference, as noted above).
  • A New Basis In Kentucky to Request a Receiver!  Section 7 of UVTA is a remedy toolkit available to a creditor plaintiff, and it includes the ability to obtain:  (i) attachment and/or other provisional remedies (query how nicely this will play with our still-existing prejudgment attachment statute, which has some tricky technical requirements discussed here); (ii) an injunction against further property disposition by a debtor or transferee; and (iii) the “appointment of a receiver to take charge of the asset transferred or of the other property of the transferee.”  Historically, state law receiverships in Kentucky most often arise as a supplemental remedy to judicial foreclosure, and we have heretofore lacked anything akin to federal equity receivership.  This new language could be very powerful.  Expect judges to look to the federal receivership jurisprudence before applying this.  If not approached carefully, plaintiffs may demand the appointment of a receiver over all of the property owned by an unlucky, unknowing garden-variety, constructively-fraudulent (er… I mean voidable) transfer defendant.

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Bankruptcy Rules Rule the Day in the Eleventh Circuit

Posted in Bankruptcy Trends, Circuit Split

Sometimes we forget that the Federal Rules of Bankruptcy Procedure differ from the Federal Rules of Civil Procedure by more than just the numbering scheme that adds two digits to the front of the bankruptcy rules.  The defendants in Rosenberg v. DVI Receivables XIV, LLC, et al., failed to appreciate that there are also different filing deadlines.  The Eleventh Circuit held that in a case tried in the district court arising under the Bankruptcy Code, the Bankruptcy Rules apply.  Thus, the 14-day deadline of FRBP 9015(c) applied to the defendants’ filing of a renewed motion for judgment as a matter of law under FRCP 50(b), and not the 28-day deadline under FRCP 50(b).  As a result, the court held that the defendants untimely filed their motion on the 28th day after judgment, and reinstated the $6.1MM adverse jury verdict.

The creditors had filed an involuntary petition in 2008 in Pennsylvania which was transferred to Florida and dismissed.  The Florida bankruptcy court retained jurisdiction to award costs to the putative debtor under § 303(i).  Rosenberg filed an adversary proceeding asserting bad faith on the part of the creditors.  In addition to seeking his attorney fees and costs for defeating the involuntary petition, he sought compensatory and punitive damages—and fees for pursuing the damages.  Rosenberg demand a jury trial and the creditors asked the district court to withdraw the reference.  Likening the § 303(i)(2) claims to malicious prosecution, the district court withdrew the reference.  The issue of attorney fees and costs remained with the bankruptcy court.  The jury found bad faith and awarded $1.12MM in compensatory damages and $5MM in punitive damages.  28 days later, the defendant creditors filed a Rule 50(b) motion.  Rosenberg moved to strike the motion as untimely.  The district court granted the motion, vacated the punitive damages award, and upheld only $360K in compensatory damages.

The Eleventh Circuit started with FRBP 1001 which states that the Bankruptcy Rules govern procedure in every case under the Bankruptcy Code to secure the just, speedy, and inexpensive determination of every issue.  The 1987 advisory committee notes indicate that amended FRBP 1001 makes the Bankruptcy Rules applicable to cases and proceedings under Title 11, whether before the district judges or the bankruptcy judges of the district.  FRCP 81(a)(2) provides for the primacy of the Bankruptcy Rules.  The Fourth and Seventh Circuits have held that nationwide service of process under FRBP 7004 applies in cases arising under the Bankruptcy Code but tried in district court.  The Eleventh Circuit viewed these opinions dealing with service of process—a fundamental aspect of the courts’ authority—as counseling applying the Bankruptcy Rules since personal jurisdiction is more significant than the deadline for renewing post-trial motions.  The Third Circuit has even applied the Bankruptcy Rules in non-core, ‘related to’ proceedings before a district court.  The Sixth Circuit, however, has applied the 28-day filing deadline for a motion under FRCP 59, not the 14-day deadline of FRBP 9023.  The Eleventh Circuit dismissed this ruling because it focused on a judicial estoppel issue, not which rules to apply.  The Court dismissed the defendants remaining arguments on conflicts with the Federal Rules of Appellate Procedure and the finality of the opinion with the bifurcated fee issue remaining in bankruptcy court.  The plain language of the rules and the weight of authority counseled for applying the 14-day deadline.  Even though the Court did not need to address the merits of the cross-appeal, it held that the defendants had waived the issue of the availability of emotional distress damages by not properly preserving.

On my first read of this case, I was thinking of some interesting questions: Is an involuntary petition a viable creditor strategy?  What are the limits of damages if the involuntary petition fails?  Should defendants seek to have the reference withdrawn?  Is there an ASARCO issue with seeking fees for chasing fees? (The Eleventh Circuit held in the separate appeal of this case that a putative debtor could recover its fees for pursuing its damages under § 303(I)—recognizing the split with the Ninth Circuit.)  But ultimately, the only question that I need to answer is: Can my calendaring system handle the rule of this case?