A “Suggestion of Bankruptcy” is a document filed in a lawsuit to notify the court that the defendant has filed bankruptcy. Filing such notices with the court is very helpful to the court and to opposing parties so they may cancel upcoming court hearings or pending garnishment orders. Many courts automatically place a pending lawsuit on hold until further order of the bankruptcy court and take affirmative steps to release garnished funds.

Our office files bankruptcy cases electronically and in the next moment we electronically file Suggestions of Bankruptcy with the Nebraska court system. The system is efficient and quick. The goal is to “put out the fire” of collection activity as quickly as possible, and filing Suggestions of Bankruptcy greatly facilitate that goal.

In most cases the bankruptcy results in a discharge of debts, but what happens if the bankruptcy case is dismissed without a discharge? Does the filing of a Suggestion of Bankruptcy mean that the debtor’s bankruptcy attorney has entered a general appearance on behalf of the debtor-defendant? Is the debtor’s attorney in a dismissed bankruptcy case now obligated to defend the debtor in the state court action?

Most bankruptcy attorneys would say no, the filing of a Suggestion of Bankruptcy is not the same thing as filing an Appearance of Counsel. Most would say that the Suggestion is nothing more than a notice and that does not obligate the bankruptcy attorney to defend the lawsuit.

All that changed recently with the Nebraska Court of Appeals issued a new opinion stating that the filing of a Suggestion of Bankruptcy constitutes a General Appearance. By extension, the ruling could also be viewed as stating that the bankruptcy attorney who filed the Suggestion of Bankruptcy has entered an Appearance of Counsel and has a duty to represent the defendant. See Bayliss v Clason, 26 Neb. App 195 (2018).

The relevant text of the opinion is as follows:

“A party will be deemed to have appeared generally if, by motion or other form of application to the court, he or she seeks to bring its powers into action on any matter other than the question of jurisdiction over that party. Id. See Neb. Rev. Stat. § 25-516.01(2) (Reissue 2016).  [The Appellee] argues that by filing the suggestion in bankruptcy and the amended suggestion in bankruptcy, [the defendant] made a general appearance. We agree. . . . By filing the stay, [the defendant] asked the court to bring its powers into action on a matter other than the question of jurisdiction, thus making a general appearance and waiving any defects in the service of process.”

The obvious defect in the court’s reasoning is that a debtor is not asking the court to “bring its powers into action” when a Suggestion of Bankruptcy is filed. To the contrary, the debtor is informing the court that it no longer has any power. The court isn’t invoking any power at all nor is the debtor making such a request. The debtor is merely INFORMING the court of the bankruptcy so it STOPS invoking power.

Bankruptcy attorneys have good reason to be concerned. Although most Chapter 7 cases result in a discharge of debts, Chapter 13 cases frequently fail when debtors are unable to make payments. Roughly 40% of Chapter 13 cases in Nebraska are dismissed without a discharge, and nearly every one of those failed cases involves a bankruptcy attorney who filed multiple Suggestions of Bankruptcy in state court lawsuits.

Are bankruptcy attorneys who file Suggestions of Bankruptcy required to defend clients in state court actions when the bankruptcy case is dismissed without a discharge? Such a ruling would be devastating. Thousands of judgments are entered against debtors after bankruptcy cases fail, and many of those debtors have valid defenses available to them. But bankruptcy attorneys NEVER defend debtors in state court lawsuits when the bankruptcy case is dismissed. They do not believe they have that duty. Their written contracts with the clients frequently state that their representation is limited to the bankruptcy case. Are all these bankruptcy attorneys wrong?

What do Nebraska’s court rules say?

§ 6-1506. Bankruptcy

(A) Civil cases in which a party has been named as a debtor in a voluntary or involuntary bankruptcy petition. In any civil case pending before this court in which a party has been named as a debtor in a voluntary or involuntary bankruptcy petition, a Suggestion of Bankruptcy and either (1) a certified copy of the bankruptcy petition, (2) a copy of the bankruptcy petition bearing the filing stamp of the clerk of the bankruptcy court, or (3) a copy of a “Notice of Bankruptcy Case Filing” generated by the Bankruptcy Court’s electronic filing system shall be filed by the party named as a debtor or by any other party with knowledge of the bankruptcy petition. Upon the filing of the Suggestion of Bankruptcy and one of the three bankruptcy documents noted immediately above, no further action will be taken in the case by the court or by the parties until it can be shown to the satisfaction of the court that the automatic stay imposed by 11 U.S.C. § 362 does not apply or that the automatic stay has been terminated, annulled, modified, or conditioned so as to allow the case to proceed. Such a showing shall be made by motion.

(B) Requests for disbursement of funds or distribution of property of or to a party named as a debtor in a bankruptcy proceeding. In any civil case in which a Suggestion of Bankruptcy and one of the three bankruptcy documents noted in § 6-1506(A) have been filed, no request for a disbursement of funds or distribution of property of or to a party named as a debtor shall be made, and no order disbursing funds or distributing property of or to a party named as debtor will be entered. A request for disbursement of funds or distribution of property may be made after a showing, satisfactory to the court, that such funds or property has been abandoned by the trustee in bankruptcy or that the funds or property has been exempted by the debtor in the bankruptcy proceedings or that the party named as debtor in the bankruptcy petition, rather than the trustee in bankruptcy, is otherwise entitled to disbursement of such funds or distribution of such property. Such a showing shall be made by affidavit.

Nebraska Court Rule § 6-1465 says the exact same thing.

Unfortunately, these court rules do not answer the question. They talk about the filing of Suggestions of Bankruptcy, but they do not state whether such a filing also constitutes an Appearance of Counsel and thus obligate the bankruptcy attorney to defend the lawsuit.

In the absence of a clear rule, bankruptcy attorneys are choosing to not file any notice of the bankruptcy in state court lawsuits, and that’s a bad development. The immediate response to this new ruling was full of fear and anger:

“If I were a creditor’s attorney, I would be very upset and concerned with this decision. This just made their life a whole lot worse and expensive for their clients. Ultimately, the Stay is in effect and if you immediately notify opposing counsel, informally but with certainty, then their client is on notice. If garnishments and/or executions don’t stop IMMEDIATELY, guess who is going to have to undo/fix all of that stuff? Debtor attorneys have always done the Suggestions of Bankruptcy and it is a SERVICE to the state court and a service to creditors and to their wallet. Just think about how much time and energy is saved by having Debtor’s attorney provide this service FREE of charge! And, now, we get pulled in as making a “general appearance?” No way. We don’t get paid nearly enough for that responsibility.”

Courts will not be aware of the bankruptcy and may continue with hearings or enter judgments that will later be declared to be void. Collection attorneys will be delayed in learning of the bankruptcy case and may face increased pressure to disgorge garnishment funds and may face sanction motions more often in bankruptcy cases when they ignorantly garnish debtors after the bankruptcy is filed. This is not good. Effectively penalizing bankruptcy attorneys who diligently notify the court of the bankruptcy case by imposing an obligation of defending the debtor in state court will cause bankruptcy attorneys to stop filing such notices. That is not a healthy development. I have heard from attorneys in other states with this problem and they solve it by having clients mail in the bankruptcy notice themselves thus causing a delay in notifying courts of the bankruptcy by days. A policy that leads to less communication of vital facts to the court is simply bad policy.

Nebraska court rules need to be amended immediately to clearly indicate whether the filing of a Suggestion of Bankruptcy shall be considered a General Appearance by the debtor and/or as an Appearance of Counsel by the bankruptcy attorney.  Bankruptcy attorneys do a great service to the court system by filing Suggestions of Bankruptcy, and our court rules should be clarified to allow them to continue providing such valuable information without fear of becoming involved in the underlying state court lawsuit.

Image courtesy of Flickr and jo.sau