Commercial Litigation and Arbitration

Bankruptcy Removal

State court cases that are ‛related to“ bankruptcy proceedings may be removable to Federal Court, but the hurdles are high. The bankruptcy removal statute, 28 U.S.C. § 1452(a), permits removal where Federal bankruptcy jurisdiction exists under 28 U.S.C. § 1334. Bankruptcy jurisdiction encompasses a far broader category of cases than just those considered to be ‛core“ bankruptcy cases. See 28 U.S.C. § 157(b)(1) (non-exhaustive list of core cases). Under 28 U.S.C. § 1334(b), Federal bankruptcy jurisdiction also lies in cases ‛related to“ a bankruptcy proceeding. A case falls within ‛related to“ jurisdiction where its outcome ‛could conceivably have [an] effect on the estate being administered in bankruptcy.“ In re Pacor, Inc., 743 F.2d 984, 994 (3d Cir. 1984), overruled on other grounds by Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 116 S.Ct. 494, 133 L.Ed.2d 461(1995); In re TXNB Internal Case, --- F.3d ---, No. 05-11492, 2007 WL 914983, at *2 (5th Cir. Mar. 28, 2007).

The hurdles begin here.

First, upon removal, 28 U.S.C. 1452(b) permits the Federal district court to remand the case back to state court ‛on any equitable ground.“ The decision of the district court to remand, or not to remand, on the basis of Section 1452(b) is unreviewable on appeal. Id.

Second, upon removal, the court must determine whether to abstain. Assuming no other basis for Federal jurisdiction exists, two abstention provisions potentially apply where the case involves pure state law claims that are ‛related to“ a bankruptcy because of their potential impact on the estate: (1) mandatory abstention under 28 U.S.C. § 1334(c)(2)(district court ‛shall abstain“ if the action is ‛commenced“ and ‛can be timely adjudicated“ in state court); and (2) discretionary abstention under 28 U.S.C. § 1334(c)(1) (district court discretion to abstain ‛in the interest of justice, or in the interest comity with State courts or respect for State law“).

The Courts of Appeals are split on the question whether abstention applies to removed cases. Compare In re Lazar, 237 F.3d 967, 981-82 (9th Cir. 2001) (abstention does not apply to removed cases) with Mt Kinley Insurance Co. v. Corning Inc., 399 F.3d 436 (2d Cir. 2005) (abstention applies) (citations omitted). The Ninth Circuit view is in the minority.

All discretionary abstention decisions are unappealable, regardless of their outcome. 28 U.S.C. § 1334(d). Mandatory abstention decisions are appealable only where the district court decides not to abstain. Id.

Doug Pepe

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