Upon the filing of a bankruptcy case by a debtor, 28 U.S.C. §1452(a) generally allows the nondebtor party who is in litigation with the debtor to remove a claim or cause of action that is related to the bankruptcy case to the federal district court for the district in which the bankruptcy case is pending (as long as subject matter jurisdiction over the cause of action exists). 28 U.S.C. §1452(a) provides:
A party may remove any claim or cause of action in a civil action other than a proceeding before the United States Tax Court or a civil action by a governmental unit to enforce such governmental unit's police or regulatory power, to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under §1334 of this title.
Prior to any attempt to remove a lawsuit to federal court under this statute, it is important to evaluate a litigant's ability to remain in federal court as a party opposing removal may seek abstention or remand of the action. The ability of a removing party to avoid abstention or remand will largely depend upon whether jurisdiction over the removed action is based upon the action being a "core" proceeding or a "non-core" proceeding that is merely related to the bankruptcy case.
Mandatory Abstention and Noncore Removed Actions
Congress mandated in 28 U.S.C. §1334(c)(2) that bankruptcy courts abstain from hearing noncore proceedings "related to" a case under Title 11 that do not arise under Title 11--or arise in a case under Title 11--if certain criteria are met. Mandatory abstention requires a district court to abstain from hearing a proceeding based on state law that is before the court based on federal bankruptcy subject matter jurisdiction if (1) the abstention motion was "timely" brought, (2) the action is based on a state law claim, (3) the action is "related to" a bankruptcy proceeding, as opposed to "arising under" the Bankruptcy Code or "arising in" a case under the Code, (4) the sole federal jurisdiction for the action is §1334, (5) there is an action "commenced" in state court and (6) the action is capable of being "timely adjudicated" in state court. 28 U.S.C. §1334(c)(2); see also Renaissance Cosmetics Inc. v. Dev. Specialists Inc., 277 B.R. 5, 12 (S.D.N.Y. 2002).
Core Proceedings and Permissive Abstention
If a removed action is found to be a core proceeding, mandatory abstention will not apply regardless of whether the action was initially filed in federal court or removed there pursuant to §1452(a). The bankruptcy court may nevertheless order permissive abstention under 28 U.S.C. §1334(c)(1). Permissive abstention is a matter within the sound discretion of the bankruptcy court, and a federal court may voluntarily abstain from hearing a proceeding arising under the Bankruptcy Code or related to a case under Title 11 "in the interest of justice, or in the interest of comity with State courts or respect for State law." 28 U.S.C. §1334(c)(1). Therefore, in determining whether to abstain under §1334(c)(1), the three statutory factors are: justice, comity and respect for state law.
The Ninth Circuit has laid out several other commonly applied factors that bankruptcy courts employ in evaluating permissive abstention. The factors are as follows:
(1) the effect or lack thereof on the efficient administration of the estate if a court recommends abstention, (2) the extent to which state law issues predominate over bankruptcy issues, (3) the difficulty or unsettled nature of the applicable law, (4) the presence of a related proceeding in state court or other nonbankruptcy court, (5) the jurisdictional basis, if any, other than 28 U.S.C. §1334, (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case, (7) the substance rather than form of an asserted 'core' proceeding, (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgment to be entered in state court with enforcement left to the bankruptcy court, (9) the burden on the bankruptcy court's docket, (10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties, (11) the existence of a right to a jury trial and (12) the presence in the proceeding of nondebtor parties.
In re Tucson Estates Inc., 912 F.2d 1162, 1167 (9th Cir. 1990) (citing In re Republic Reader's Serv. Inc., 81 B.R. 422, 429 (Bankr. S.D. Tex. 1987)).
Equitable Remand
In addition to abstaining from hearing an action removed to federal court under §1452(a), a district court may remand the action on any equitable ground relying on
28 U.S.C.§1452(b). Courts generally consider the following factors (the Drexel test) in deciding whether to remand a proceeding based on a discretionary basis: (1) the effect on the efficient administration of the bankruptcy estate, (2) the extent to which issues of state law predominate, (3) the difficulty or unsettled nature of the applicable state law, (4) comity, (5) the degree of relatedness or remoteness of the proceeding to the bankruptcy case, (6) the existence of the right to a jury trial and (7) prejudice to the involuntarily removed defendants. See Drexel Burnham Lambert Group Inc. v. Vigilant Insur. Co., 130 B.R. 405, 407 (S.D.N.Y. 1991).
The Removal Conundrum
Although the basic statutory framework relating to mandatory abstention, permissive abstention and equitable remand appears rather straightforward, the application of these statutes to removed actions creates quite a conundrum. The puzzle was first identified in Fedders N. America Inc. v. Branded Products Inc. (In re Branded Products Inc.), 154 B.R. 936 (Bankr. W.D. Tex. 1993). In In re Branded Products Inc., after a lengthy discussion of the jurisprudential history of the doctrine of abstention and the legislative history of §1334, the bankruptcy court concluded that if mandatory abstention under §1334(c)(2) applies to an action, the result must be dismissal of the case. Further, dismissal in the context of removed actions has the potential to prejudice a litigant's rights by disturbing procedural requirements that had been met before the suit was removed to federal court. To avoid this result, which the bankruptcy court believed Congress could not have intended in enacting §1334(c)(2), the bankruptcy court held that abstention under §1334(c)(2) does not apply to cases removed under §1452(a).
Similarly, in Southern Marine & Industrial Services Inc. v. AK Engineering Inc. (In re AK Services Inc), 159 B.R. 76 (Bankr. D. Mass. 1993), the bankruptcy court considered whether removal or abstention was appropriate in an adversary proceeding that was removed from state court to bankruptcy court by the debtor. The plaintiff filed a motion to remand, or alternatively for abstention of the proceeding. The bankruptcy court cited to analysis in In re Branded Products Inc., and agreed with the Texas court that invoking abstention in a removed case would effectively eliminate the lawsuit because it would not send the case back to state court. Remand, on the other hand, would act to preserve the lawsuit without disturbing any of the original procedural requirements that had been met before the suit was removed to federal court. Thus, the bankruptcy court agreed with In re Branded Products Inc., that §1334(c)(2) did not apply to removed actions under §1452(a) because abstention can exist only where there is a parallel proceeding in state court.
Faced with a similar question, the Eleventh Circuit reached a very different conclusion in Christo v. Padgett, 223 F.3d 1324 (11th Cir. 2000), holding that §1334(c)(2) does apply to state law claims that have been removed to federal court under §1452(a). The bankruptcy court began its analysis by acknowledging that courts were split over whether §1334(c)(2) applied to cases removed under §1452. The Eleventh Circuit observed that several courts had concluded that a parallel state court proceeding is a prerequisite of mandatory abstention by focusing on the requirements in §1334(c)(2) that an action be commenced and be capable of timely adjudication in a state forum. These courts believed that once a state law action is removed, there no longer remains an action “commenced” in a state forum. The Eleventh Circuit noted that a majority of courts had reached a contrary position and held that the removed state law action has been commenced and remained capable of timely adjudication in state court upon remand. Without much discussion, the Eleventh Circuit agreed with this latter interpretation opting for remand rather than dismissal of removed actions when all of the requirements for mandatory abstention have been met. Notably, however, the Eleventh Circuit made no attempt to reconcile this holding with the holding of In re Branded Products Inc., that mandatory abstention requires dismissal.
In a case similar to Christo v. Padgett, the bankruptcy court in Anderson v. Hoechst Celanese Corp. (In re United States Brass Corp.), 173 B.R. 1000 (Bankr. E.D. Tex. 1994) held that all of the requirements of §1334(c)(2) had been met and it must abstain from hearing the case. Notwithstanding that, the bankruptcy court opted to invoke permissive abstention and equitable remand pursuant to §1334(c)(1). Pointing out that a "considerable overlap exists between factors appropriate to abstention and those appropriate to remand," the bankruptcy court held that in the interests of equity it would abstain and remand the removed case back to state court. The bankruptcy court In re United States Brass Corp., like the Eleventh Circuit, made no attempt to reconcile its holding with In re Branded Products Inc.
Conclusion
Those courts favoring application of §1334(c)(2) to removed cases seem to agree with courts that argue against the section's application on one thing: mandatory abstention under §1334(c)(2) should not lead to dismissal of a removed case if dismissal would prejudice the rights of a litigant by disturbing the procedural requirements met in the state court prior to removal. Indeed, by opting to remand under §1452(b), courts ensure that a removed case is returned to state court and adjudicated. Accordingly, the conundrum of §1334(c)(2) as applied to removed cases may offer more theoretical than actual danger. Nevertheless, a party considering removal should be aware of the jurisprudence in this area in order to avoid a trap for the unwary, and to assess the likelihood of an unfruitful attempt to remove.
As a practical matter, if a party is presented with a possible dismissal that will prejudice its rights, the party should request that the bankruptcy court refuse to dismiss the action until the opposing party has stipulated to relief to avoid such prejudice. For example, if a case is to be dismissed on abstention grounds after the statute of limitations has run, the plaintiff should request that the bankruptcy court refuse to enter the order of dismissal until the defendant has stipulated that it will not raise a statute of limitations defense upon plaintiff's refiling of the action in state court.
1 Admitted to Louisiana bar; not yet admitted in Georgia.