Is a Notice of Removal Filed in Bankruptcy Court Ok? Courts Are Split

Although courts are divided on the issue, Chief Bankruptcy Judge Neil P. Olack of Jackson, Miss., remanded a lawsuit to state court because the notice of removal had been filed with the clerk of the bankruptcy court, not with the clerk of the district court.

A corporate chapter 11 debtor had removed a lawsuit against its owner from state court to the bankruptcy court by filing a notice of removal with the clerk of the bankruptcy court. On his own, Judge Olack directed the parties to show cause why the adversary proceeding should not be dismissed for lack of subject matter jurisdiction.

Until 1984, 28 U.S.C. § 1478 provided for the removal of an action “to the bankruptcy court.” When the Supreme Court pulled the rug out from under the bankruptcy court’s jurisdiction in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), Congress replaced Section 1478 with 28 U.S.C. § 1452.

Section 1452 was the same as its predecessor, except “to the bankruptcy court” was replaced with “to the district court.” The statute now reads that a party “may remove any claim or cause of action in a civil action . . . to the district court for the district where such civil action is pending . . . .”

Governing the procedure for removal, Bankruptcy Rule 9027(a)(1) now provides that the “notice of removal shall be filed with the clerk for the district and division within which is located the state or federal court where the civil action is pending.” Previously, the rule called for filing the notice with the bankruptcy clerk.

Judge Olack said there is a split between the Northern and Southern Districts of Mississippi. The Northern District, he said, “routinely” allows removal directly to the bankruptcy court. In his district, a district judge in the Southern District of Mississippi held twice in 1993 that a notice of removal should be filed with the clerk of the district court.

A majority of courts around the country, according to Judge Olack, allow the notices to be filed in bankruptcy court. “They reason,” he said, that “bankruptcy judges are judicial officers of the district court and, therefore, removal of a claim or cause of action directly to the bankruptcy court is the ‘functional equivalent’ of removal to the district court.”

Where there is a general order of reference to the bankruptcy courts, other courts reason that “notices of removal are properly filed in the bankruptcy court,” Judge Olack said.

In view of the 1993 decisions by the district judge in his district, Judge Olack declined to find harmless error in filing the notice with the bankruptcy clerk, in part because there is no longer an inconsistency between the statute and the rule.

According to Judge Olack, strictly requiring a filing in district court is “wholly consistent” with Stern v. Marshall, 564 U.S. 462 (2011). Otherwise, permitting a filing in bankruptcy court “undermines the district court’s power to refer matters to the bankruptcy court . . . . Direct removal suggests bankruptcy courts have jurisdiction of bankruptcy proceedings independent from or co-equal to the authority granted Article III courts.”

Judge Olack remanded the suit to state court because direct removal to the bankruptcy court did not comply with 28 U.S.C. § 1452.