Bankruptcy Court Service of Process Rules Set Traps for the Unwary

The Supreme Court’s decision in Stern v. Marshall  has generated renewed focus on what types of cases and claims can be resolved in an adversary proceeding in the bankruptcy courts, and what types of cases will have to be resolved in the federal district courts. The resulting shift should serve as a reminder that, while the Federal Rules of Bankruptcy Procedure governing adversary proceedings are similar to and modeled on the Federal Rules of Civil Procedure, there are significant differences. For example, because the Bankruptcy Rules regarding service of process may result in a shorter time within which a defendant must respond, corporations must remain mindful of these differences and avoid relying upon the more well-known Federal Rules.

The Bankruptcy Rules allow for a summons and complaint to be served quickly and efficiently at minimal expense to the debtor’s estate while simultaneously helping to expedite the ultimate resolution of the case. From a practical standpoint, it means that individuals and corporations who anticipate that they might be sued in a bankruptcy case should not operate on the assumption that if a lawsuit is filed it will be served by a process server, as would be required under Federal Rule 4(e) in a case filed in the district court. Rather, Bankruptcy Rule 7004(b) provides for mailing the summons and complaint to the defendant by first class mail postage prepaid to complete service. If the defendant is a corporation, service can be completed by mailing a copy of the summons and complaint to the attention of an officer, a managing or general agent, or to any other agent authorized by statute to receive service. As a result, an adversary complaint will in all likelihood arrive in the mail, and could, in the case of a corporate defendant, simply be addressed to the attention of an officer or agent.

Likewise, corporate defendants should avoid relying upon general assumptions regarding personal jurisdiction. Bankruptcy Rule 7004(b) permits service of process by mail anywhere in the United States. Thus, a defendant in a bankruptcy court proceeding may be subject to the court’s jurisdiction even though the defendant has very few or perhaps no contacts with the state where the court sits. Federal Rule 4(k)(2), in contrast, authorizes nationwide service of process only in the unlikely circumstance that the defendant has sufficient contacts with the United States as a whole, but is not subject to the jurisdiction in any one state.

The Bankruptcy Rules also modify the time to answer the complaint. Under Federal Rule 12(a), a defendant generally has 21 days from the time he or she was served to respond to it. Bankruptcy Rule 7012 (a), on the other hand, requires the defendant to respond to a complaint within 30 days after the issuance of the summons. Pursuant to Bankruptcy Rule 7004(e), the summons must be served within 14 days of the summons being issued. As a result, the defendant could have less than two weeks to respond to the complaint by the time it arrives in the mail.

Under these circumstances, legal process received by mail cannot be ignored because it may be valid and binding under Bankruptcy Rule 7004. Moreover, it could contain a complaint that must be responded to immediately, and the failure to respond to a complaint can result in the entry of a default judgment for the amount sought in the complaint.