Rule 37 Applies in Bankruptcy Court


In Markus v. Rozhkov, 615 B.R. 679 (S.D. NY. 2020) the United States District Court (on an appeal from the bankruptcy court) upheld a sanction award against one of the attorneys in a contested bankruptcy matter. The court held that Rule 37 sanctions do indeed apply in Bankruptcy court.

The discussion as to whether Rule 37 applies in contested bankruptcy matters:

Worms argues that the Sanctions Order is invalid because it was predicated on Rule 37, which, under his interpretation, does not ever apply to Chapter 15 proceedings. The FR responds that Rule 37 sanctions are available in Chapter 15 proceedings. Although the contours of Worms’s argument are less than pellucid, the Court will attempt to map out his reasoning in some detail. Importantly, this section addresses the arguments about whether Rule 37 can apply in Chapter 15 cases as a general matter; it does not discuss, as later sections of this opinion will, whether sanctions under Rule 37 were 699*699 specifically appropriate in the context of this Chapter 15 proceeding.

Worms’s argument is essentially two-fold. First, he asserts that he cannot have been held liable under Rule 37 because Bankruptcy Rule 7037 states that Rule 37 “applies in adversary proceedings” and the Chapter 15 proceedings were not “adversary proceedings” at the time the Bankruptcy Court imposed Rule 37 liability. That logic holds, as far as it goes, but it does not go very far. Bankruptcy Rule 7037 does not state that the only time Rule 37 applies to bankruptcy is in adversary proceedings. And Bankruptcy Rule 9014 forecloses such a reading. Bankruptcy Rule 9014, titled “Contested Matters,” states under subsection (c) that, “[e]xcept as otherwise provided in this rule, and unless the court directs otherwise, [Bankruptcy Rule 7037] shall apply.” Accordingly, by the plain terms of Bankruptcy Rule 9014, Bankruptcy Rule 7037 (and thereby, Rule 37) does not only apply to adversary proceedings. Indeed, Worms acknowledges that Bankruptcy Rule 9014(c) makes Rule 37 applicable to some contested matters.

But, Worms argues, that universe of contested matters cannot include any contested matters arising in Chapter 15 proceedings because Bankruptcy Rule 9014(b) provides that a motion under Bankruptcy Rule 9014 “shall be served in the manner provided for service of a summons and complaint by Rule 7004,” and Chapter 15 notices are not served in that manner. It is undisputed that Chapter 15 proceedings are not initiated “in the manner provided for service of a summons and complaint by [Bankruptcy] Rule 7004.”[9] If Bankruptcy Rule 9014 made itself applicable only when Bankruptcy Rule 7004 service is required, then Worms might have a winning argument. But it does not.

Bankruptcy Rule 9014(a)-(b) provides: “In a contested matter not otherwise governed by these rules, relief shall be requested by motion … [and the] motion shall be served in the manner provided for service of a summons and complaint by Rule 7004.” See also 10 Collier on Bankruptcy P. 9014.02 (16th ed. 2019) (“As acknowledged (`not otherwise governed by these rules’) by the rule, however, there are instances in which a contested matter is initiated by some other means.”). Chapter 15 proceedings are “otherwise governed by these rules”—specifically, Chapter 15 proceedings are governed by Bankruptcy Rule 2002(q) (which provides a substitute for Rule 7004 service).

Therefore, Worms is incorrect that Bankruptcy Rule 9014 is applicable only where Bankruptcy Rule 7004 service is required. Bankruptcy Rule 9014 (and, accordingly, Bankruptcy Rule 7037) may apply to contested matters “otherwise governed by these rules.” In sum, Bankruptcy Rule 9014 makes Rule 37 (via Bankruptcy Rule 7037) applicable to contested matters in Chapter 15 proceedings.

Bankruptcy Rule 9020 is the final blow that topples Worms’s house of cards. Under that rule, “Bankruptcy Rule 9014 governs a motion for an order of contempt made by … a party in interest.” By operation of the transitive principle, Rule 37 therefore applies to Chapter 15 contested matters when a party in interest moves for an order of contempt. That is precisely the situation here.

As outlined above, Worms’s argument that Federal Rule of Civil Procedure 37 does not ever apply to Chapter 15 proceedings cannot survive the plain text of the interlocking Bankruptcy Rules. That could be the end of the analysis. It is worth 700*700 noting, however, that precedent and pragmatism are also against him.

On the former, courts frequently recognize that Chapter 15 proceedings can involve contested matters covered by Bankruptcy Rule 9014. See In re Worldwide Educ. Servs., Inc., 494 B.R. 494, 499 n.1 (Bankr. C.D. Cal. 2013) (“Since a petition for recognition is not defined as an adversary proceeding under Rule 7001, it … should be treated as [a] contested matte[r] under Rule 9014.”); In re Basis Yield Alpha Fund (Master), 381 B.R. 37, 43 n.14 (Bankr. S.D.N.Y. 2008) (applying Bankruptcy Rule 9014 to Chapter 15 proceeding); In re Japan Airlines Corp., 425 B.R. 732, 732 n.2 (Bankr. S.D.N.Y. 2010) (same); In re Toft, 453 B.R. 186, 199 (Bankr. S.D.N.Y. 2011) (same); In re Compania Mexicana de Aviacion, S.A. de C.V., 2010 WL 10063842, at *1 n.1 (Bankr. S.D.N.Y. Nov. 8, 2010) (same).

And on the latter, Worms’s position would lead to the absurd result that bankruptcy courts handling Chapter 15 contested matters would lack Rule 37 recourse to enforce their orders. Rule 37 is intended to address discovery misconduct. That can occur as easily in contested matters under Chapter 15 as anywhere else. It would be wholly illogical for the rulemakers to have deprived bankruptcy courts of the Rule 37 toolkit in Chapter 15 contested matters. As demonstrated above, a plain reading of the rules demonstrate that the rulemakers had no such illogical intent.

Rule 37 is available in contested matters arising within Chapter 15 cases.[

For other reasons, the court reversed the sanctions decision and remanded the case to the bankruptcy court. That discussion is too complicated for this blog.

The opinion is thoughtful and important. Every practitioner who is involved in a bankruptcy matter should be aware that Rule 37 does indeed apply.

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