Litigating Under the New Bankruptcy ActAuthor(s): Dennis S. MeirSource: Litigation, Vol. 6, No. 3 (Spring 1980), pp. 8-11, 68Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/29758538 .

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Litigating Under

the New Bankruptcy Act

by Dennis S. Meir

In recent years many commercial bankruptcies have been followed by lawsuits against the debtor's former of? ficers and directors for alleged mismanagement, breach of fiduciary duties, fraud, or securities violations. Under the Bankruptcy Reform Act of 1978 (Pub. L. No. 95-598), the bankruptcy courts have jurisdiction over these actions.

Bankruptcy trustees and debtors are likely to pursue vir?

tually all such claims in that forum. As a result, litigators, whether currently of the bankruptcy or nonbankruptcy variety, can expect to spend considerably more time in

bankruptcy court?whether they like it or not. Before the Bankruptcy Reform Act, bankruptcy courts

were specialized forums of rather limited jurisdiction. Litigators who were not also bankruptcy specialists rarely appeared there. This aversion was only partially because of the bankruptcy court's limited jurisdiction. Litigators and their clients also disliked resolving disputes in bank?

ruptcy courts because of the bankruptcy judges' dual ad? ministrative and judicial responsibilities. The adminis? trative function, generally performed in close connection with representatives of the debtor or the debtor's estate, often appeared to be paramount, and frequently ob? scured the judicial function.

Yet, there has been no lack of issues to be tried in this

forum, nor are insubstantial dollar amounts at stake. In recent years, more than 200,000 new cases have been filed annually in the bankruptcy courts, with almost

250,000 cases now pending. Although many of these are routine consumer-debtor actions, huge commercial in?

solvency proceedings, presenting a myriad of complex substantive issues, constitute a significant portion of the

bankruptcy court docket, particularly in large urban areas.

The Bankruptcy Reform Act has dealt with this prob? lem by getting bankruptcy judges out of the day-to-day administration of a debtor's financial affairs and into

nearly full-time dispute resolution. At the same time, the

The author practices with Kilpatrick & Cody in Atlanta.

new Act vastly expands the bankruptcy court's jurisdic? tion to include all civil proceedings arising under the Act or arising in or related to cases under the Act. This en?

compasses virtually all litigation relating to the debtor or the debtor's estate, including such complex areas as anti?

trust, securities, and patent cases. When finally enacted on November 6, 1978, after

nearly a decade in development, the Bankruptcy Reform Act provided the most sweeping revision of the bankrupt? cy court system and substantive bankruptcy law in at least 40 years. These changes generally became effective on October 1, 1979, and govern debtor relief proceedings commenced on or after that date. Proceedings begun before October 1, 1979, continue to be governed by the

prior legislation.

Hybrid Court A significant portion of the debate over the Act con?

cerned the organization and status of bankruptcy courts. The original House bill, which was supported by the Na? tional Conference of Bankruptcy Judges and other bank?

ruptcy specialists, proposed that the new bankruptcy courts should be full Article III courts with judges hold?

ing office for life during good behavior. Most of the fed? eral judiciary, including the Chief Justice, opposed this

approach, and the Senate concurred in this opposition. The resulting compromise created United States Bank?

ruptcy Courts, "as an adjunct to the district court" for each judicial district. Bankruptcy judges are to be ap? pointed by the President, with the advice and consent of the Senate, for a term of 14 years.

The new bankruptcy courts, however, also were given many powers of Article III courts, specifically including "the powers of a court of equity, law, and admiralty." 28 U.S.C. ?1481. The only express limitations on these

powers are that bankruptcy courts may not enjoin anoth? er court and may not punish a criminal contempt either

warranting imprisonment or not committed in the bank?

ruptcy judge's presence. The new bankruptcy courts

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have the power to issue writs of habeas corpus to bring a

person before the court for examination, to testify, or to

perform a duty imposed on that person under the Act.

They also have the right, under certain circumstances, to issue writs of habeas corpus ordering the release of a deb? tor who is in custody under the judgment of a federal or state court. The bankruptcy courts may issue any order, process, or judgment necessary or appropriate to carry out the provisions of the new Act.

As part of its effort to upgrade the bankruptcy court's status and independence, Congress provided that each

may appoint a clerk, deputies, clerical assistants, and other employees. Thus, for the first time, each bank?

ruptcy court shall have a clerk's office directly account? able to it, separate from the district court clerk's office. It is anticipated that the clerk's office will perform some of the administrative functions previously relegated to the judges themselves.

In addition, the new Act provides that bankruptcy judges may appoint other necessary employees, specifi? cally including law clerks. Thus, also for the first time, bankruptcy judges will have much needed legal assis?

tance, comparable to that available to district court

judges. The new Act also specifically requires, whenever prac?

tical, a record of all proceedings in cases held in open court. Although some of these changes seem elementary, compared to prior practice before bankruptcy courts, they are a significant step forward.

To separate further the administrative and judicial roles of the judges, the new Act provides an experimental program of United States trustees. For each of ten "pilot districts" (some of which are groups of districts), the At?

torney General has appointed a United States trustee. Each will establish and supervise a panel of private trus? tees within his district, and generally will supervise the administration of cases under the Act.

The United States trustee system will operate for five

years, during which the Attorney General will study its effectiveness. Before April 1, 1984, Congress will decide whether to implement the system nationwide. During the interim period, however, litigators in bankruptcy courts in pilot districts are likely to confront salaried federal trustees as opponents.

Technically, the new bankruptcy court system itself does not become effective until April 1, 1984. This delay ostensibly is to permit the Administrative Office of the United States Courts to make various studies and surveys about the new system and the number of bankruptcy judges required. During the interim period, bankruptcy courts will enjoy the expanded jurisdiction and powers granted under the Act, and all cases commenced under the Act will be referred automatically to United States

Bankruptcy Judges. The improved staffing provisions, including the new clerk's office and the legal assistants, became effective on October 1, 1979.

Under prior law, bankruptcy jurisdiction was greatly limited. The court's jurisdiction frequently hinged on elusive determinations of whether jurisdiction was "sum?

mary" or "plenary." Thus, the court had jurisdiction

summarily to resolve disputes over administrative mat? ters internal to the bankruptcy proceeding. The court also had summary jurisdiction to adjudicate all rights and claims to property in its possession.

However, if the controversy involved property in the

possession of a third party asserting a bona fide adverse

claim, the bankruptcy court did not have summary juris? diction. In such cases, unless the adverse party con?

sented, the trustee's or receiver's claim to the property could be decided only by a plenary suit brought in a state or federal court of competent jurisdiction. Thus, before cases could be heard in bankruptcy court, difficult juris dictional issues had to be resolved. The resolution of these disputes frequently was complicated, expensive, and time-consuming. Often, the court appeared to spend as much time determining the existence of its jurisdiction as resolving the merits of the dispute.

Under the new Act, the distinction between summary and plenary jurisdiction no longer exists. The bank?

ruptcy court now has original, although not exclusive,

jurisdiction of all civil proceedings arising under the

Bankruptcy Reform Act or arising in or related to cases under the Act. The jurisdiction is nonexclusive in that the bankruptcy court may, in its discretion, abstain from

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exercising its jurisdiction in the interests of justice. An abstention decision is not reviewable by appeal or other? wise. Virtually all litigation relating to the debtor or his estate thus comes within the bankruptcy court's jurisdic? tion, and unless it decides to abstain, the bankruptcy court will decide these disputes.

Complementing this is the automatic stay codified in section 362 of the Act. Under this section, all proceed? ings, judicial, administrative or otherwise, against the debtor or his property are automatically stayed by the fil?

ing of a petition. They remain stayed until leave is ob? tained from the bankruptcy court to proceed in another forum. The Reform Act provides elaborate procedures for obtaining such leave. Whether a case may commence or proceed in another forum may be the subject of an

adversary proceeding in the bankruptcy court requiring the filing of a complaint and the observance of the proce? dural formalities discussed below.

The bankruptcy court's authority to hear disputes is enhanced further by the removal provision of the new Act. 28 U.S.C. ? 1478. Under that provision, either the debtor or his opponent may remove any claim or cause of action to the bankruptcy court for the district where the civil action is pending, if the bankruptcy courts would have had original jurisdiction over the controversy. The sole exception is a proceeding before the United States Tax Court.

This expansive jurisdiction, combined with the con? tinued applicability of nationwide service of process, required that some protection be afforded a distressed defendant who might be asked to litigate in an inconve? nient forum. The Act provides that any proceeding aris?

ing in or related to a case under the Act may be com

Some protection must be afforded a distressed defendant in an inconvenient forum.

menced in the court in which the bankruptcy is pending. However, if the trustee seeks to recover a judgment or

property of less than $1,000, or a consumer debt of less than $5,000, venue is proper only in the bankruptcy court for the district where the defendant resides.

Similarly, a trustee may proceed on a claim arising from the operation of the debtor's business after the commencement of the bankruptcy case only in the bank?

ruptcy court for the district that applicable nonbank

ruptcy law would require. If the trustee is suing as suc? cessor to a claim of the debtor or creditors, then he has the additional option of proceeding in the bankruptcy court where the main case is pending. Overriding all

specific venue provisions, however, is the court's power to transfer any action to another bankruptcy court, "in the interest of justice and for the convenience of the

parties."

Litigation in bankruptcy court under the new Act should prove to be similar to litigation in district court.

With some important exceptions discussed below, the

bankruptcy court is governed by the same rules of proce? dure and evidence that apply in similar proceedings in district court. Participants are entitled to the same jury trial rights and testimonial immunities.

Like its predecessor statutes, the Bankruptcy Reform Act contains relatively few procedural provisions, leaving that to the rule-making powers of the Supreme Court.

Pending the Supreme Court's adoption of new rules con?

forming to the Bankruptcy Reform Act, proceedings will be governed by the existing Bankruptcy Rules, except to the extent that they are inconsistent with the Act.

Suggested Interim Rules

Suggested interim rules have been proposed by The

Advisory Committee on Bankruptcy Rules of the Judicial Conference of the United States. These rules are ex?

pected to be adopted as local rules by most bankruptcy courts, and should provide useful guidelines in the lim? ited areas they cover until the Supreme Court adopts new

Bankruptcy Rules. The existing rules recognize two types of bankruptcy

court litigation. An "adversary proceeding" under Bank?

ruptcy Rule (BR) 701 corresponds to a "civil action" as that term is used in Rule 2 of the Federal Rules of Civil Procedure. It includes suits by the trustee or debtor to recover money or property from creditors or other defen? dants. The suggested interim rules provide that a pro? ceeding seeking "legal, equitable or declaratory relief which arises under non-bankruptcy laws" is such an

"adversary proceeding." The other type of litigation, a "contested matter,"

consists of actions not considered to be adversary pro? ceedings. Contested matters normally involve disputes over the administration of a debtor's estate, and their number should not be affected by the bankruptcy courts'

expanded jurisdiction under the new Act. The expected increase in bankruptcy court litigation should be in the area of adversary proceedings, and litigators should be concerned principally with learning the rules that apply to them. Since the rules relating to adversary proceedings (Part VII of the Bankruptcy Rules) generally are consis? tent with the new Act, for the most part, they apply until the Supreme Court adopts new rules.

Part VII either incorporates by reference or adopts in

part most of the Federal Rules of Civil Procedure. The rules in this part generally are numbered to correspond to the Federal Rules. Where a Federal Rules provision has been incorporated, Part VII provides for translation of terms into applicable bankruptcy terminology. For ex?

ample, "district court" or "court" should be read

"bankruptcy judge," and "action" or "civil action" should be read "adversary proceeding." Where a Federal Rules provision has been adapted,

rather than incorporated outright, the adaptation fre?

quently reflects the expedited nature of bankruptcy pro? cess. Often, it sets shortened time periods or permits court discretion to establish shorter time periods. Liti?

gators should scrupulously verify filing deadlines in

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bankruptcy court because, with only a few exceptions, deadlines fall several days earlier than they do under dis? trict court rules. While borrowing extensively from the Federal Rules of

Civil Procedure, the Bankruptcy Rules differ in several

important aspects. Service of process generally is faster, less formal, and less expensive under the Bankruptcy Rules. Upon commencement of a proceeding, the bank?

ruptcy judge is required to set a date either for trial or for a pretrial conference, and to issue a summons and notice of the trial or pretrial conference. The rules authorize

personal service of process by delivery by any person of

age, and even permit service by first class mail. This is a substantial change from the Federal Rules requirement that, in most cases, process be served by a United States

Marshal or by a court-appointed officer.

Further, the time for responding to the complaint begins to run from the date the summons is issued. If ser? vice is made by mail, proof of service need only recite

mailing within ten days of the summons's issuance. Most

importantly, the Bankruptcy Rules permit service any? where in the United States, including the Common? wealth of Puerto Rico, regardless of where the action is filed.

Trustee Must Counterclaim Most counterclaim provisions of the Federal Rules are

adapted for use in adversary proceedings. However, a

person sued in bankruptcy court by a trustee is not re?

quired to assert any counterclaims against the trustee, even if the counterclaim would have been considered

compulsory had the trustee sued in district court. A trus? tee, however, when sued in bankruptcy court, must file all counterclaims considered compulsory under Rule

13(a). This distinction is premised on the nontrustee defendant's ability to file a creditor's proof of claim and

thereby share in any distribution from the debtor's estate without having to resort to a separate adversary proceed? ing against the trustee. To expedite bankruptcy litiga? tion, this option is preserved. And, while the trustee defendant must assert his claim as a counterclaim in the same adversary proceeding in which he is sued, if he has failed to do so through oversight, inadvertence or ex? cusable neglect, he still may commence a separate adver?

sary proceeding. The Reform Act amended the Federal Rules of Evi?

dence so that those rules specifically apply to cases under the Act and in all proceedings in the bankruptcy courts.

The Act also applies the testimonial immunity provi? sions of the Organized Crime Control Act of 1970, 18 U.S.C. ?? 6001-6005, to all witnesses in bankruptcy court, including the debtor. Previously, a nondebtor wit? ness could be compelled to testify over a claim of privil? ege against self-incrimination only if the procedures set forth in the Organized Crime Control Act were followed and an order of the district court conferring use and derivative use immunity was issued. The debtor, how? ever, automatically was given use and derivative use im?

munity for testimony in any bankruptcy proceeding other than a hearing on objections to the debtor's discharge in

bankruptcy. Under the new Act, the debtor is subject to

the rules and procedures applicable to any other witness before the bankruptcy court or any other federal court. One problem with the new immunity procedure is that the order conferring immunity must be issued by the dis? trict court for the district in which the bankruptcy court is located, rather than by the bankruptcy court itself. Since the district court may not be overly impressed by the need for an expedited order, there is a significant potential for delay.

Under the Reform Act, a party's right to trial by jury

A party's right to trial by jury is

essentially the same as in district court.

in bankruptcy court is essentially the same as in district court. The Act states, however, that the court may order issues to be tried without a jury if they relate to a deter?

mination of whether involuntary relief should be granted against a debtor. The Act also applies to adversary pro? ceedings the provisions of Chapter 121 of Title 28 of the United States Code regarding, among other things, the selection and qualifications of juries. While the existing Bankruptcy Rules did not utilize any Federal Rules jury trial provisions, the proposed interim rules adapt or in?

corporate all of them. Under the prior law, an appeal from an order or judg?

ment of a bankruptcy court was taken, first, to the dis? trict court and, second, to the circuit court of appeals. The Bankruptcy Reform Act provides three different routes of appeal, which, under the Act's transition provi? sions, became effective on October 1, 1979. First, the Act

permits appeal directly to the circuit court of appeals in which the bankruptcy court is located, without any inter? mediate review, if the parties to the appeal consent to the circuit court's review. It is not clear at this time whether the direct appeal of a bankruptcy court order or judg? ment to a circuit court would be governed by the Federal Rules of Appellate Procedure (FRAP) or by Part VIII of the existing Bankruptcy Rules, which adapts in part a number of the key FRAP provisions. Pending the Su?

preme Court's resolution of this question in the new

Bankruptcy Rules, the issue probably will be dealt with in the rules of each circuit.

Appellate Panel The Act also authorizes, but does not require, the cir?

cuit council for each circuit to order the chief judge of that circuit to establish in any district one or more appel? late panels composed of three bankruptcy judges. These

appellate panels will have jurisdiction to hear appeals from final orders and judgments of the bankruptcy court for the district in which the panel is established. The

panels, unlike the circuit courts, also will have discretion

(Please turn to page 68)

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Recorded

Evidence

(Continued from page 33)

demonstrated, the admissibility of the tape's contents still must be estab? lished. A claim of hearsay may be

made. Usually, the conversation con? tains admissions of a party to the liti?

gation, with statements of others per? mitted as forming the context of those admissions. Other hearsay exceptions under which taped conversations often are admitted into evidence in? clude statements of co-conspirators, res gestae, and excited utterances.

While it is not an exception to the

hearsay rule, argument that the re?

cording is corroboration of admis? sible testimony often is successful. See generally Annot., 58 A.L.R.3d 598, 606-12 (1974).

Occasionally, an objection will be based on "best evidence" grounds. This objection usually has been over? ruled where the original recording has been lost or destroyed, or where there is no question about the accuracy of the duplicate. The issue also may be that the live testimony of a witness is the best evidence of a conversation or, conversely, that a tape recording (rather than a witness's testimony) is the best evidence. Where either

recordings or testimony have been claimed to be "best evidence" to the exclusion of the other, courts general? ly have held both to be admissible.

Voice Identification

Identification of the speakers gen? erally may be made by anyone famil? iar with the speaker's voice. Voice identification is more of a problem in

wiretapping and eavesdropping situa? tions than it is with consent record?

ings, since all participants in the

eavesdropped conversation may not be known. Voice identification of defendants or known conspirators is somewhat less difficult because the

prosecution can compel voice exem?

plars by subpoena without violating the right against self-incrimination.

While still sharply divided over the

admissibility of voice spectrograms as a means of identification, many courts now acknowledge the scientific

acceptance and reliability of such devices. See Annot., 49 A.L.R.3d 915

(1973). Whether voice identification is accomplished by lay or expert testi?

mony, the standard instruction is that the voice identity is a question for the

jury to decide.

The use of tape-recorded evidence

provides substantial challenges for both sides in the criminal case. When electronic eavesdropping is involved, counsel is confronted with one of the most technical areas of trial practice. A prosecutor obtaining and executing an eavesdropping warrant and dili?

gent defense counsel litigating a

tape's admissibility both need to act with precision. Tape recordings require a proper foundation and

grounds for admissibility at trial. When counsel knows the rules of evi?

dence, admission of these recordings is not automatic.

Plaintiffs

Strategy

(Continued from page 50) financial statement deterring invest? ment or franchises. Hopefully, they will feel as if they are being watched, and this may have a potential chill?

ing effect on their business activities, thereby providing an additional incentive for settlement. When you are faced with a loss of

trade secrets and trusted employees, do not hesitate to make a federal case of it. Be assured that other unlawful conduct is also probably present. Conspiracies in restraint of

trade, trademark infringement, and interference with contractual rela? tions are typical examples of such conduct.

After you have obtained all the facts and assembled your claims, move quickly and efficiently. Seek an early settlement and, if unsuc?

cessful, preliminary injunctive relief and damages. Most important, let the defendants know that you are serious.

Bankruptcy

Act

(Continued from page 11) to review interlocutory orders. Appeal from a panel's decision will be taken

directly to the circuit court. A panel may not, of course, hear an appeal from any order or judgment of one of its members. As of November 1,1979, only the Ninth Circuit had established such appellate panels of bankruptcy judges. Again, it is not clear whether

appeals to these panels will be gov? erned by the Federal Rules of Ap? pellate Procedure or by Part VIII of the existing Bankruptcy Rules. The

proposed interim Bankruptcy Rules

provide that the latter shall govern, and it is anticipated that the circuits that establish such panels will follow that designation.

The third avenue of appellate re? view under the new Act is through the district court. If no appellate panel has been established for the district, the district court can hear appeals from the final orders and judgments of its adjunct bankruptcy court. The district court may also, in its discre? tion, review the interlocutory orders of its bankruptcy court. These ap? peals continue to be governed by Part VIII of the Bankruptcy Rules. Appeal from the district court's decision, in turn, would be made to the circuit court under the Federal Rules of Ap? pellate Procedure. Retention of this

appellate process was necessary, since not all districts have a sufficiently large bankruptcy docket to justify es? tablishment of an appellate panel of

bankruptcy judges. The Bankruptcy Reform Act of

1978 makes fundamental changes in the substance and procedure of bank?

ruptcy practice. As a result of the new

bankruptcy court's expanded juris? diction, litigators may very well find themselves appearing more and more

frequently in bankruptcy courts. Nevertheless, even with a minimum review of the new court's structure, powers, jurisdiction, and procedures, they should find themselves right at home in these new surroundings.

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