Mandatory abstention does not apply to some claims in an adversary proceeding when other claims are “core” matters within the bankruptcy court’s “arising in” or “arising under” jurisdiction, according to the Bankruptcy Appellate Panel for the Sixth Circuit.
In state court, a plaintiff filed a lawsuit with seven claims. The defendants removed the suit to federal district court, where it was referred to the bankruptcy court in connection with a previously pending chapter 11 case.
In what became an adversary proceeding in bankruptcy court, five of the plaintiff’s claims were concededly “core” claims within the bankruptcy court’s “arising in” jurisdiction. The plaintiff filed a motion for mandatory abstention with respect to two other claims that raised claims purely under state law, although the defendants and the underlying facts were the same as those in claims that were “core.”
The bankruptcy court denied the abstention motion, saying that the two state law claims were “inextricably intertwined” with the other five claims to which abstention could not apply.
In a June 1 opinion, Chief Bankruptcy Appellate Panel Judge Daniel S. Opperman upheld the bankruptcy court, holding that the concept of mandatory abstention does not apply to individual claims in a larger adversary proceeding.
The governing statute is 28 U.S.C. § 1334(c)(2). According to Judge Opperman, the Sixth Circuit has ruled that mandatory abstention applies when a proceeding is based on a state law claim, there would be no federal jurisdiction absent bankruptcy, the claim was first brought in a state court capable of timely adjudication of the claim, and the proceeding is “non-core.”
Section 1334(c)(2) also provides that mandatory abstention only applies to claims that are “related to” and not to claims that “arise in” or “arise under” the Bankruptcy Code. If all prerequisites are met, the subsection provides that the court “shall abstain from hearing such proceeding.” [Emphasis added.]
For Judge Opperman, the pivotal language was “such proceeding.” Do those words apply to the overall adversary proceeding or to each claim individually? He decided that the words relate to the entire adversary proceeding.
Judge Opperman said that the bankruptcy court properly relied on Milford Group Inc. v. Northeastern Bank of Pennsylvania (In re Milford Group Inc.), 164 B.R. 892 (Bankr. M.D. Pa. 1993), where five of nine claims in an adversary proceeding were “core.” The Milford court held that “proceeding” refers to an entire case, not to “discreet claims or causes of action pursued within that case,” Judge Opperman said.
The plaintiff argued that 28 U.S.C. § 157(c)(2), defining “core” claims, requires analyzing claims one by one. Judge Opperman responded by saying that Section 157 “does not address abstention.” Instead, he said, Section 157 lists claims “which, if pursued alone, would be sufficient to constitute a ‘proceeding.’” [Emphasis in original.]
The plaintiff also argued that the abstention doctrine was created to prevent an overextension of federal jurisdiction. Allowing the bankruptcy court to hear two non-core claims “would not over-extend a court or its jurisdiction” when the court would already be “hearing five other core claims that are based on the same facts and involve the same parties,” Judge Opperman said.
Judge Opperman ended his opinion by offering policy justification for the holding. If the two claims were returned to state court, there would be a risk of inconsistent judgments and no judicial economy. Rather, spinning off the two claims would “double the litigation required to resolve the dispute.”
Judge Opperman’s opinion was based on an assumption that the two claims were “non-core.” Nonetheless, he did say that the two claims were within the bankruptcy court’s “related to” jurisdiction. However, the facts recited in the opinion suggest that the two claims indeed were “core,” but the BAP expressly declined to decide whether the two claims were “core.” If they were “core,” there would have been no grounds for abstention in the first place.
Although Judge Opperman’s logic seems applicable anytime the bankruptcy court has jurisdiction over some claims, his opinion might arguably be inapplicable if the principal claims were only “related to” and did not confer “arising in” or “arising under” jurisdiction. The BAP’s holding also might not apply if the “non-core” claim did not arise from the same facts or involve the same parties.