The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, analyzing a recent decision of interest:
In In re Lac-Mégantic Train Derailment Litigation, ___ Fed.3d. ___, 2021 WL 2217454 (1st Cir. June 2, 2021) (“Lac-Megantic”), the United States Court of Appeals for the First Circuit (the “Court”) held that the Federal Rules of Bankruptcy Procedure (the “FRBP”) rather than the Federal Rules of Civil Procedure (the “FRCP”) govern a non-core case being adjudicated in the United States District Court under the District Court’s “related to” bankruptcy jurisdiction.
Lac-Mégantic can be found here.
After a train derailment in Maine, plaintiffs filed numerous lawsuits in different states against various defendants. One of the defendant rail companies filed a bankruptcy (the “Bankruptcy”) in the District of Maine. Those cases filed in state courts were removed to the appropriate district court. Later, on petition by the plaintiffs and the debtor all the cases were transferred to and consolidated in the United States District Court for the District of Maine (the “District Court”) under 28 U.S.C. § 157(b)(5) (hereafter, the “Litigation”), which allows concentration of “personal injury tort and wrongful death cases” related to a bankruptcy case in the federal district court having “related-to” bankruptcy jurisdiction over the Bankruptcy under 28 U.S.C. § 1334(b) (“§ 1334(b)”). Without the consent of the parties, a bankruptcy court may not enter a final judgment in a related to matter; only a district court may do so. Thus, the Litigation remained in the District Court. After a broad settlement wrapped into a confirmed plan in the Bankruptcy, only the case against one railroad defendant, Canadian Pacific (“CP”), remained.
CP moved to dismiss the complaint against it. In response, the plaintiffs opposed the motion and moved to file an amended complaint. The District Court granted CP’s motion, denied the plaintiffs’ motion, and entered judgment for CP. Twenty eight days later, the plaintiffs made a motion to reconsider under FRCP 59(e) and moved for permission to filed a revised amended complaint. CP opposed the motions, arguing as to the motion to reconsider that FRBP 9023 (the FRBP cognate of FRCP 59(e)), allows only 14 days for a motion to reconsider rather than the 28 days of FRCP 59(e). The District Court agreed with CP. The plaintiffs later appealed to the Court. The Court agreed with CP’s motion to dismiss the appeal for lack of jurisdiction as untimely since under the FRBP the plaintiffs’ untimely motion for reconsideration did not toll the time to appeal.
FRCP 59(e) allows 28 days to file a motion for reconsideration, while FRBP 9023 allows but 14. A timely motion under either rule tolls the deadline for filing a notice of appeal. See Fed. R. App. P. 4(a)(4)(A)(iv); FRBP 8002(b)(1)(B). Thus, the appeal in Lac-Mégantic would have been timely under the FRCP 59(e), but not under FRBP 9023. Moreover, the failure to file a timely appeal deprives the appellate court of jurisdiction over the appeal. Therefore, the underlying issue was whether the FRBP or FRCP governed the Litigation in the District Court. If the former, the Court lacked appellate jurisdiction.
The Court first looked at the language of FRBP 1001, which delineates cases in which the FRBP apply. It found the comparison of FRPB 1001 to the language of “related to” jurisdiction pointed towards the application of the FRBP to the Litigation, but that was not dispositive. What the Court found most convincing was the effect that using the FRCP would have on cases such as the Litigation. It noted that “related to” matters often also involved “arising in” and “arising under” issues over which the bankruptcy courts could enter final judgments against the same parties. Similarly, it would mean that in a de novo review of a bankruptcy court’s findings, conclusions, and recommendation in a related to proceeding, the district court would have to apply a completely different set of rules of procedure than the bankruptcy court did (the FRCP vs. the FRBP). The Court pointed out that having the FRCP govern the related to issues and the FRBP regulate the other questions in such cases would create a quagmire of procedure. Accordingly, it concluded, it made more sense to interpret FRBP 1001 as applying also to related to matters when in the district court. This result also comports, it added, with the view of the three other Circuit Courts of Appeal that have ruled on the issue.
Under the current law of bankruptcy jurisdiction, bankruptcy courts cannot enter a final judgment over “related to” (also generically known as “non-core”) proceedings, only “arising under” and “arising in” matters. At most it can make findings and conclusions and propose a judgment in related to cases in which the district court must review de novo and then enter a final judgment. This occurs because District Courts are Article III courts, whose judges have certain Constitutional protections that Article I bankruptcy judges do not. See N. Marathon Pipeline Constr. Co. v. Marathon Pipeline Co., 458 U.S. 50, 86-87 (1982). The District Court’s subject matter jurisdiction over the litigation clearly was “related to” jurisdiction. Ultimately, the question of which set of rules governed comes down to whether the District Court was bound by the FRBP that apply to bankruptcy courts even though it could, but the latter could not, enter a final judgment? In other words, can the rules applicable to the bankruptcy court, an Article I court, determine how a district court can proceed with a related to case rather than the FRCP that normally regulate an Article III court?
The decision (and those of the other three Circuit Courts of Appeal to which the Court referred) are correct. There is no reason why the procedural rules should differ between cases handled by Article III courts and those handled by Article I courts. In fact, that they differ is of no consequence. Put differently, there is no substantive reason why the FRCP and the FRBP should differ. What makes an Article III court different from an Article I court is not the rules of procedure, but the qualifications and status of the judicial officer. This is not to say that a rule of procedure might have some implications that would make a difference which kind of court could be subject to it, but so far there is no such rule. The present differences between the FRCP and FRBP have to do only with how the two kinds of courts operate mechanically
These materials were authored by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (Ret.)), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.