Foreign representatives in a chapter 15 case are entitled to have the federal court abstain and remand a suit to state court that asserts claims under foreign and state law, according to District Judge Colm F. Connolly of Delaware. In those circumstances, being “related to” a chapter 15 case doesn’t defeat mandatory abstention.
Liquidators appointed by a court in the Cayman Islands had won recognition of the bankruptcy in the Caymans as the foreign main proceeding under chapter 15. The liquidators were also recognized as the debtor’s foreign representative.
The recognition order gave the liquidators the ability to bring claims against anyone subject to jurisdiction in the U.S.
The liquidators sued several defendants for allegedly stripping away some of the foreign debtor’s assets. Filed in the Delaware Chancery Court, the suit made five claims under Delaware law and four claims under Caymans law. The defendants removed the suit to federal district court in Delaware under 28 U.S.C. § 1452(a), alleging that the district court would have bankruptcy jurisdiction under 28 U.S.C. § 1334(b).
The liquidators filed a motion asking the district court to abstain and remand.
In an opinion on April 6, Judge Connolly first dealt with mandatory abstention under 28 U.S.C. § 1334(c)(2). If the suit is “based upon a State law claim,” the section requires the court to abstain if (1) the suit could not have been commenced in federal court absent bankruptcy jurisdiction under Section 1334, and (2) the suit was commenced in state court and “can be timely adjudicated” in state court.
In the Third Circuit, the controlling authority is Stoe v. Flaherty, 436 F.3d 209 (3d Cir. 2006). The appeals court laid down five requirements for mandatory abstention: (1) the suit must be based on state law; (2) the claim must be “related to” but not “arise under” or “arise in” title 11; (3) the federal courts would lack jurisdiction were it not for relation to the bankruptcy case; (4) the suit was commenced in state court; and (5) the suit can be timely adjudicated in state court.
With regard to the first requirement, the defendants cleverly argued that the suit was based on foreign law, not state law, and therefore was not subject to mandatory abstention.
Judge Connolly disagreed. It was “clear” to him that abstention “is not limited to proceedings that are based solely on state law claims.”
Judge Connolly drew his conclusion from the language of Section 1334(c)(2), which refers to a suit “based upon a State law claim . . . .” [Emphasis added.] He interpreted the statute’s use of the word “a” to mean that the suit must be “based at least in part” on a state law claim.
Because the liquidators plead five claims under state law, Judge Connolly found compliance with the first Stoe requirement.
Regarding the second Stoe requirement, Judge Connolly said that the liquidators could have sued even if there were no chapter 15 case, citing 28 U.S.C. § 1509(f). That statute says that failure to obtain chapter 15 recognition “does not affect” any right the representative “may have to sue in a court in the United States . . . .”
Furthermore, Judge Connolly said, the claims were not created by the Bankruptcy Code and could exist even if there were no bankruptcy case. The claims therefore did not “arise in” or “arise under” the Bankruptcy Code. The second Stoe requirement was met.
To meet the third Stoe requirement, there must be no basis for federal jurisdiction other than bankruptcy jurisdiction.
In that regard, the defendants insinuated there was diversity jurisdiction, but their notice of removal only alluded to bankruptcy jurisdiction under Section 1334. Consequently, the basis for removal precluded the defendants from claiming diversity jurisdiction.
The defendants also argued there might be federal question jurisdiction in the future, thus implicitly admitting there was no federal question jurisdiction at the present time. The third Stoe requirement was met.
Regarding the fifth requirement, Judge Connolly said that the Chancery Court “is well known for its expeditious handling of complex civil litigation.”
Given that the defendants did not contest the fourth requirement, Judge Connolly decided that he must abstain.
Next, Judge Connolly turned to the question of remand under Section 1452(b), which allows the court to remand “on any equitable ground.”
Judge Connolly ran into a problem with Firefighters’ Retirement System v. Citco Group Ltd., 796 F.3d 520 (5th Cir. 2015), where the Fifth Circuit held that the court could neither remand nor abstain permissively in a suit related to a chapter 15 case. The Fifth Circuit rested its decision on the introductory phrase in Section 1334(c)(1), which allows for permissive abstention “[e]xcept with respect to a case under chapter 15 . . . .”
Of significance, Judge Connolly was invoking mandatory abstention under Section 1334(c)(2), which does not contain the exclusion for chapter 15 cases. He declined to follow Firefighters’ because “there is no language in § 1334(c)(2) that suggests in any way that it does not apply to proceedings related to Chapter 15 cases.”
Judge Connolly said that “abstention alone” was an equitable ground for remand. Because a suit in Chancery Court would not affect the chapter 15 case, he granted the liquidators’ motion to abstain and remand.
Foreign representatives in a chapter 15 case are entitled to have the federal court abstain and remand a suit to state court that asserts claims under foreign and state law, according to District Judge Colm F. Connolly of Delaware. In those circumstances, being “related to” a chapter 15 case doesn’t defeat mandatory abstention.
Liquidators appointed by a court in the Cayman Islands had won recognition of the bankruptcy in the Caymans as the foreign main proceeding under chapter 15. The liquidators were also recognized as the debtor’s foreign representative.
The recognition order gave the liquidators the ability to bring claims against anyone subject to jurisdiction in the U.S.
The liquidators sued several defendants for allegedly stripping away some of the foreign debtor’s assets. Filed in the Delaware Chancery Court, the suit made five claims under Delaware law and four claims under Caymans law. The defendants removed the suit to federal district court in Delaware under 28 U.S.C. § 1452(a), alleging that the district court would have bankruptcy jurisdiction under 28 U.S.C. § 1334(b).
The liquidators filed a motion asking the district court to abstain and remand.