Quick: tell me all you know about FRBP 7041. Hint: it involves voluntary dismissals
Maybe you’re like me and never gave it much thought. My encounter with the rule ended up at the 9th Circuit, so I now know a lot more about how it impacts bankruptcy motion practice.
I concluded that the “Withdraw” event on ECF enabled a trap for the unwary counsel and court.
Here’s the rule
FRBP 7041 makes FRCP 41 applicable in adversary proceedings (except if the adversary is a denial of discharge.) The federal rule reads:
Rule 41. Dismissal of Actions
a) Voluntary Dismissal.
(A) Without a Court Order. Subject to Rules 23(e), 23.1(c), 23.2, and 66 and any applicable federal statute, the plaintiff may dismiss an action without a court order by filing:
(i) a notice of dismissal before the opposing party serves either an answer or a motion for summary judgment; or
(ii) a stipulation of dismissal signed by all parties who have appeared.
(B) Effect. Unless the notice or stipulation states otherwise, the dismissal is without prejudice. But if the plaintiff previously dismissed any federal- or state-court action based on or including the same claim, a notice of dismissal operates as an adjudication on the merits.
Moving to bankruptcy motion practice, FRBP 9014 makes R. 7041 applicable in contested matters.
The rule at work
So that brings us to the case that landed in my lap. The contested matter was a motion to avoid a judgment lien to the extent it impaired the allowable homestead exemption. Debtor’s original bankruptcy counsel filed the motion, then, for reason unknown, unilaterally withdrew it after the judgment creditor had responded.
Months go by, and when the judgment lien impeded the sale of the property, Debtor hired a different bankruptcy lawyer to renew the motion. Judgment creditor opposed the motion, discovery was propounded and the matter proceeded, until counsel advised the debtor he couldn’t win the motion and again, unilaterally withdrew the motion.
I was third in line to prosecute this motion. Again, judgment creditor responded to the third iteration of the motion. As we proceeded toward an evidentiary hearing on the validity of a lien senior to the judgment lien, creditor brought a motion to dismiss our motion on the grounds that R. 7041 provided that upon the second dismissal of the motion, Debtor was barred from refiling the motion.
Does withdrawal = dismissal
If prior counsel’s withdrawal of the motion was a dismissal, Debtor was toast, as I had clearly brought the motion a third time. But, through trial and two levels of appeal, each court analyzing the facts found that the first withdrawal did not constitute a dismissal within the meaning of the rule. Finding that the creditor’s opposition to the first motion was equivalent to an answer as used in the rule , withdrawing the motion after a response was not a “dismissal”. Thus my victory at trial stood, and Debtor avoided a quarter of a million dollar judgment.
The published BAP opinion is at Airport Bus. Ctr. v. Alfahel (In re Alfahel), 651 B.R. 381 (B.A.P. 9th Cir. 2023), affirmed in Airport Bus. Ctr. v. Alfahel (In re Alfahel), No. 23-60026 (9th Cir. May 20, 2024).
The takeaway
The glib takeaway of course is “read the rules”, first. The more nuanced view reminds us that many of the tools from Part VII of the bankruptcy rules on adversaries apply to motion practice.
But what stood out to me was how prior counsel got sucked in to thinking because ECF provided a no fuss, voluntary dismissal that disposed of a troublesome case by just withdrawing the motion. But a withdrawal bypassed the due process owed to the opposing party once they responded and the matter was at issue.
