Opinion ID: 669071
Heading Depth: 1
Heading Rank: 4

Heading: is the phar-mor/coopers lawsuit an adversary proceeding?

Text: 23 Phar-Mor and Coopers have argued vigorously that because their lawsuit is simply a state law civil action removed to federal court solely because it was related to a bankruptcy case, it is not an adversary proceeding, and that, consequently, Marin does not apply. We disagree, and hold that the Phar-Mor/Coopers lawsuit is an adversary proceeding. 24 The analysis is straightforward. Bankruptcy Rule 7001 identifies which proceedings are to be considered adversary proceedings (as opposed to contested matters). Bankruptcy Rule 7001(10) states that an adversary proceeding is a proceeding ... (10) to determine a claim or cause of action removed pursuant to 28 U.S.C. Sec. 1452. Fed.R.Bank.P. 7001(10). 10 Since the Phar-Mor/Coopers lawsuit was removed pursuant to Sec. 1452, 11 it is an adversary proceeding. 25 Of course, this conclusion is correct only if the Bankruptcy Rules, rather than the Federal Rules of Civil Procedure, apply to the Phar-Mor/Coopers lawsuit. We believe, however, that they do apply even though this case is not a core proceeding and is not in bankruptcy court. The Federal Rules of Civil Procedure govern the procedure in the United States District Courts in all suits of a civil nature whether cognizable as cases at law or in equity or in admiralty, with the exceptions stated in Rule 81. Fed.R.Civ.P. 1. Rule 81 makes an exception for bankruptcy proceedings. See Fed.R.Civ.P. 81(a)(1) (These rules do not apply to ... proceedings in bankruptcy ... except in so far [sic] as they may be made applicable thereto by rules promulgated by the Supreme Court of the United States.). At first glance, then, these rules seem to indicate that the Federal Rules of Civil Procedure do not apply to the Phar-Mor/Coopers lawsuit because federal jurisdiction over the lawsuit is based solely on bankruptcy jurisdiction under Sec. 1334, and is, therefore, a proceeding in bankruptcy. 26 Unfortunately, the matter is not that simple. When Rule 81 was promulgated, the Bankruptcy Act of 1898 (1898 Act) governed bankruptcy proceedings. At that time, the term proceedings referred only to matters arising directly from the substantive provisions of the bankruptcy law analogous to core proceedings (summary matters) but not to matters related to a bankruptcy case analogous to non-core proceedings (plenary matters). See Diamond Mortg. Corp. v. Sugar, 913 F.2d 1233, 1240 (7th Cir.1990), cert. denied, 498 U.S. 1089, 111 S.Ct. 968, 112 L.Ed.2d 1054 (1991); Windsor Communications Group, Inc. v. Grant, 75 B.R. 713, 728-29 (E.D.Pa.1985). 12 In 1978, Congress obliterated the distinction between summary and plenary matters by extending the bankruptcy courts' jurisdiction to all civil proceedings arising under title 11 or arising in or related to cases under title 11. 28 U.S.C. Sec. 1471(b) (repealed 1984). Had Sec. 1471 (the pre-Marathon jurisdictional grant of the 1978 Act) remained in force, the argument would be strong that the Bankruptcy Rules rather than the Federal Rules of Civil Procedure apply to any proceeding related to a bankruptcy case. 27 Marathon and the BAFJA, however, revived the distinction between matters involving substantive bankruptcy law and those that are related to a bankruptcy case, a distinction similar to the summary/plenary distinction existing before the 1978 Act. An argument could therefore be made that the Federal Rules of Civil Procedure should govern non-core, related to proceedings just as they governed plenary matters before 1978. But courts have rejected such an argument largely because it is incompatible with the policies underlying the BAFJA. Diamond, 913 F.2d at 1240; Windsor, 75 B.R. at 732-33. Although the BAFJA may have created a two-tiered system, it was clearly not the intent of Congress to return to the same scheme of jurisdiction as that in the 1898 Act. 28 To find that the Federal Rules of Civil Procedure govern non-core, related to proceedings while the Bankruptcy Rules govern core (or arising under) proceedings would create a cumbersome dual procedural process ... whereby every time an adversary proceeding is commenced, the plaintiff would have to determine whether the underlying action is 'core' or 'non-core' and follow the applicable set of procedural rules. Windsor, 75 B.R. at 723. Such a result would be incompatible with the efficient disposition of bankruptcy cases--the animating policy underlying the BAFJA. Id. at 732. Implementation of the statutory framework of the BAFJA can be accomplished in a sensible and practical manner by having both the bankruptcy judges and the district court judges apply the same set of procedural rules in all proceedings having a nexus to a bankruptcy case, including proceedings arising under, arising in, and related to a bankruptcy case. Id. 13 These considerations have led courts to conclude that the Bankruptcy Rules apply to non-core, related to proceedings in district court. Id.; Diamond, 913 F.2d at 1240. 29 Analysis of the Bankruptcy Rules supports this conclusion. To begin with, nothing in the current Bankruptcy Rules specifically limits them to cases before the bankruptcy courts. Indeed, the amendment history of the Bankruptcy Rules indicates that they apply to proceedings before federal district courts. Before 1987, Bankruptcy Rule 1001, which defines the scope of the Bankruptcy Rules, stated that [t]he Bankruptcy Rules and Forms govern procedure in United States Bankruptcy Courts in cases under chapters 7, 9, 11 and 13 of title 11 of the United States Code (emphasis supplied). In 1987, the in United States Bankruptcy Courts language was removed; and Bankruptcy Rule 1001 now provides that [t]he Bankruptcy Rules and Forms govern procedure in cases under title 11 of the United States Code. The advisory committee explained that the amendment in 1987 makes the Bankruptcy Rules applicable to cases and proceedings under title 11, whether before the district judges or the bankruptcy judges of the district. Fed.R.Bank.P. 1001 advisory committee note (1987). 30 A similar amendment was made to Rule 7001. Prior to 1987, Rule 7001 described adversary proceedings as proceedings in a bankruptcy court. Fed.R.Bank.P. 7001 (1986). That language was excised from Bankruptcy Rule 7001 in 1987 and the current version contains no such limitation. See Fed.R.Bank.P. 7001 (1993); Diamond, 913 F.2d at 1241-42. Apparently today the bankruptcy rules can apply to proceedings pending before a federal district court. 31 Furthermore, we believe that nothing in the Bankruptcy Rules, and in Bankruptcy Rule 7001 in particular, suggests that the rules are limited to core (as opposed to non-core, related to) proceedings. 14 To the contrary, the language of Bankruptcy Rule 7001 apparently reaches non-core, related to proceedings, including Bankruptcy Rule 7001(1), which covers a proceeding ... to recover property, Fed.R.Bankr.P. 7001(1), and Bankruptcy Rule 7001(10), which, as has been mentioned, includes civil actions removed pursuant to Sec. 1452. See Diamond, 913 F.2d at 1241 (debtors' non-core suit against attorneys for malpractice can be described as a proceeding to recover money or property and within the scope of Bankruptcy Rule 7001(1)). 32 The conclusion that the Bankruptcy Rules govern non-core proceedings in district courts is not a novel one. For example, courts have consistently held that Bankruptcy Rule 7004 (nationwide service of process) applies to both core and non-core proceedings, including non-core, related to proceedings before federal district courts. See Diamond, 913 F.2d at 1243; In re Outlet Co. Stores, Inc., 82 B.R. 694, 698 (Bankr.S.D.N.Y.1988); In re GEX Kentucky, Inc., 85 B.R. 431, 434 (Bankr.N.D.Ohio 1987); see also Windsor, 75 B.R. at 732 (interpreting the reach of the Bankruptcy Rules under the Emergency Rule rather than the BAFJA). Also, one bankruptcy court within this circuit has held that Bankruptcy Rule 7013 (counterclaims) governs non-core proceedings withdrawn by the district court. See In Re Merritt Logan, Inc., 109 B.R. 140, 144-45 (Bankr.E.D.Pa.1990). 33 We conclude, then, that the Bankruptcy Rules govern non-core, related to proceedings before a district court like the Phar-Mor/Coopers lawsuit, and, hence, our reliance on Part VII of those rules to characterize the Phar-Mor/Coopers litigation is appropriate. According to Bankruptcy Rule 7001(10), the Phar-Mor/Coopers lawsuit, which was removed pursuant to Sec. 1452, is an adversary proceeding. Thus, to the extent that one of the requirements of Marin is that the Phar-Mor/Coopers lawsuit be an adversary proceeding, it has been met. We now consider whether Sec. 1109(b) as interpreted by Marin applies to an adversary proceeding like the Phar-Mor/Coopers litigation which is a non-core, related to adversary proceeding before the district court. 15 34