Bankruptcy Litigation Tip: Cost-Shifting and Offers of Judgment

This article first appeared in the December 2012 edition of the Kane County Bar Briefs.

Most clients generally wish to avoid litigation.  Bankruptcy clients, particularly, wish to have their cases resolved quickly, efficiently, and without surprises.  When litigation does arise in the bankruptcy context, debtors’ lawyers best serve their clients by creatively working to resolve the case in a cost-effective manner.  To reach that end, the bankruptcy practitioner may want to consider the cost-shifting provisions of Federal Rule of Civil Procedure 68.

Rule 68, made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7068, is intended to encourage settlement and avoid litigation.[i]  Rule 68 allows a party defending a claim to submit an offer of judgment to the other party.  If the offer is accepted, judgment is entered according to the terms offered.  If the offer is rejected, and if the plaintiff ultimately obtains a judgment less favorable than the terms of the offered judgment, the plaintiff must pay all costs incurred by the defendant following the offer. 

I.                   Does Rule 68 Apply?

Bankruptcy litigation comes in two varieties: adversary proceedings and contested matters.  Adversary proceedings (or "adversaries") are separate lawsuits brought in bankruptcy court.  Adversaries are commenced by filing a complaint.[ii]  They can then proceed through traditional motion practice, the full gamut of discovery, and, if not settled, a trial.  There are ten specific categories of cases that must be brought as adversary proceedings,[iii] including proceedings to recover money or property from a debtor,[iv] to determine the validity or priority of a lien,[v] or to object to discharge.[vi]

Contested matters, on the other hand, must be brought by motion.[vii]  Contested matters are similar to adversaries in that discovery can be lengthy and expensive.  For instance, interrogatories, production requests, physical and mental examinations of persons, requests to admit, and depositions are all available to parties in contested matters, just as they are in adversaries.[viii]  Money judgments can also be entered following a contested matter.[ix]  

As you can see, costs can quickly skyrocket during discovery in both types of proceedings.  Due to the similarities between the two, litigants need to figure out exactly which rules govern their specific case.  Rule 68 is only available in adversary proceedings by way of Rule 7068.  In contested matters, Rule 9014(c) specifies which of the rules in the 7000 series apply.  Rule 7068 is not listed in that section.  That does not mean that the defendant cannot offer a judgment as part of a settlement package, but the cost-shifting provisions of Rule 68 will not apply if that offer gets rejected.

However, Rule 9014(c) does state that “unless the court orders otherwise, the following rules shall apply…”  So, if the defendant feels that his offer is a reasonable one, I guess that it is possible to move the court for leave to propound a Rule 68 offer of judgment in a contested matter in order to place some risk on the plaintiff for rejecting the offer.

II.        Procedures and Application

           

            Rule 68 is pretty straightforward.[x] An offer of judgment can only be made by the defendant.[xi]  The offer must be in writing.[xii]  The offer must be for a specified dollar amount or specified property.[xiii]  In addition to the principal settlement amount, the offer must include an offer to pay costs accrued by the plaintiff prior to receipt of the offer of judgment.[xiv]  However, the offer’s silence on costs does not invalidate the offer and will result in a recovery of costs already incurred by the plaintiff in addition to the amount offered by defendant.[xv]

            The plaintiff has 14 days after receipt to accept the offer of judgment.[xvi]  If the offer is accepted, either party may then file the offer and notice of acceptance with the clerk.[xvii]  The clerk must then enter judgment.[xviii]  A prudent practitioner would probably place a call to the Judge’s clerk to inform him or her that the case is settled and to inquire if any other procedures should be followed.

The cost-shifting provisions of the Rule come into play when an offer of judgment is not accepted.  If the judgment that the plaintiff eventually obtains is not more favorable than the unaccepted offer, the plaintiff must pay the costs incurred by the defendant after the offer was made.[xix]  In cases involving money damages only, it is usually not too difficult to determine whether a party has received a judgment “more favorable” than the unaccepted offer.  However, money damages need not be the only measure of whether a plaintiff has obtained a more favorable judgment under Rule 68.  For instance, the value of an injunction granted can be compared to the value of a prior monetary offer. [xx]

Costs allowable under Rule 68 are limited to costs allowed under Federal Rule of Civil Procedure 54 (“Judgment; Costs”) and 28 U.S.C. 1920 (“Taxation of Costs”).[xxi]  Those costs have been found to include filing and appearance fees,[xxii] service of process,[xxiii] court reporter fees,[xxiv] deposition transcripts necessarily obtained for use in the case,[xxv] witness and expert witness per diems,[xxvi] photocopies,[xxvii] compensation of interpreters,[xxviii] copying and collating exhibits and graphics for trial,[xxix] and even the costs of hiring computer technicians to assist in the e-discovery process when responding to discovery requests propounded by plaintiff.[xxx]

In certain circumstances, attorneys’ fees are considered costs under Rule 68.  Where a specific statute includes attorneys’ fees in its definition of costs, those fees are recoverable under Rule 68.  The United States Supreme Court has held that attorneys’ fees are recoverable as costs under The Civil Rights Attorney’s Fees Awards Act of 1976[xxxi] and the Eleventh Circuit has held that fees are recoverable as costs under The Copyright Act.[xxxii]  I am not aware of fees being awarded under Rule 68 in the bankruptcy context, but the possibility is something to keep in mind because the inclusion of fees in costs can really skew the settlement analysis.

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[i] In re Alvarez, 261 B.R. 742, 744 (Bankr. M.D. Fla. 2000).

[ii] Fed. R. Bankr. P. 7003

[iii] Fed. R. Bankr. P. 7001

[iv] Fed R. Bankr. P. 7001(1)

[v] Fed. R. Bankr. P. 7001(2)

[vi] Fed. R. Bankr. P. 7001(4)

[vii] Fed. R. Bankr. P. 9014

[viii] Fed. R. Bankr. P. 9014(c)

[ix] Id.

[x] Rule 68.  Offer of Judgment.

(a) Making an Offer; Judgment on an Accepted Offer.  At least 14 days before the date set for trial, a party defending against a claim may serve on an opposing party an offer to allow judgment on specified terms, with the costs then accrued.  If, within 14 days after being served, the opposing party serves written notice accepting the offer, either party may then file the offer and notice of acceptance, plus proof of service.  The clerk must then enter judgment.

(b) Unaccepted Offer.  An unaccepted offer is considered withdrawn, but it does not preclude a later offer.  Evidence of an unaccepted offer is not admissible except in a proceeding to determine costs.

(c) Offer After Liability is Determined.  When one party’s liability to another has been determined but the extent of the liability remains to be determined by further proceedings, the party held liable may make an offer of judgment.  It must be served within a reasonable time—but at least 14 days—before the date set for a hearing to determine the extent of liability.

(d) Paying costs After an Unaccepted Offer.  If the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay the costs incurred after the offer was made.

[xi] Fed. R. Civ. Pro. 68(a)

[xii] Driver Music Co., Inc. v. Commercial Union Ins. Companies, 94 F.3d 1428, 1432 (10^th Cir. 1996).

[xiii] Marryshow v. Flynn, 986 F.2d 689, 691 (4^th Cir. 1993).

[xiv] Fed. R. Civ. Pro. 68(a)

[xv] See McCain v. Detroit II Auto Finance Center, 378 F.3d 561 (6^th Cir. 2004).

[xvi] See Perkins v. U.S. West Communications, 138 F. 3d 336 (8^th Cir. 1998).

[xvii] Fed. R. Civ. Pro. 68(a)

[xviii] Id.

[xix] Fed. R. Civ. Pro. 68(d)

[xx] Andretti v. Borla Performance Industries, Inc., 426 F.3d 824, 837 (6^th Cir. 2005).

[xxi] See Thomas v. Caudill, 150 F.R.D. 147 (N.D. Ind. 1993).

[xxii] 28 U.S.C. 1920(1)

[xxiii] In re O’Callaghan, 304 B.R. 887, 891 (Bankr. M.D. Fla. 2003).

[xxiv] Id.

[xxv] 28 U.S.C. 1920(2)

[xxvi] 28 U.S.C. 1920(3)

[xxvii] 28 U.S.C. 1920(4)

[xxviii] 28 U.S.C. 1920(6)

[xxix] Haroco, Inc. v. Am. Nat’l Bank & Trust Co., 38 F.3d 1429, 1441 (7^th. Cir. 1994)

[xxx] Glenn Tibble et al. v. Edison International et al., 2011 U.S. Dist. LEXIS 94995 (C.D. Cal 2011).

[xxxi] Marek v. Chesny, 473 U.S. 1, 9 (1985).

[xxxii] Jordan v. Time, Inc., 111 F.3d 102, 105 (11^th Cir. 1997).