Commercial Litigation and Arbitration

Mandatory Abstention from Federal “Related to” Bankruptcy Jurisdiction — What Constitutes “Timely Adjudicated” within 28 U.S.C. § 1334(c)(2)

From Parmalat Capital Finance Limited v. Bank of Am. Corp., 632 F.3d 71 (2d Cir. 2011):

The questions presented are (1) whether the district court erred in exercising jurisdiction over plaintiffs' claims, pursuant to 28 U.S.C. § 1334(b); and (2) whether the district court properly declined to abstain from exercising that jurisdiction, pursuant to 28 U.S.C. § 1334(c)(2). This appeal is taken from judgments of the United States District Court for the Southern District of New York (Kaplan, J.) and challenges rulings made by that court and by the United States District Court for the Northern District of Illinois (Castillo, J.). The contested rulings include two orders dated February 25, 2005 and February 16, 2006 finding federal jurisdiction in the present cases and declining to abstain from exercising that jurisdiction. We conclude that jurisdiction was proper, but remand to allow the district court 1 to consider, in light of this Opinion, whether abstention is mandatory. ***

28 U.S.C. § 1334(b) provides that "the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b) (emphasis added). ***

B. Section 1334 (c) (2) Abstention

The jurisdiction-conferring statute covering bankruptcy cases and proceedings provides:

Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.

28 U.S.C. § 1334(c)(2) (emphasis added). The district courts determined that abstention pursuant to § 1334 (c) (2) was not mandatory here because PCFL and Bondi failed to *** show that their actions could be "timely adjudicated" in state court as required by statute. We review these holdings in turn. ***

2. Timely Adjudication

i. Standard of Review

***§ 1334(c)(2) abstention is mandatory when, among other things, the matter can be "timely adjudicated" in state court. Whether an action can be timely adjudicated in state court is a mixed question of law and fact. The factual inquiry focuses on how quickly a case can be adjudicated in state court; the legal inquiry asks if this pace is sufficiently swift. Given this mixed question of law and fact, we review the court's determination de novo. See McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 204 (2d Cir. 2007).

ii. What Constitutes 'Timely'

Four factors come into play in evaluating § 1334(c)(2) timeliness: (1) the backlog of the state court's calendar relative to the federal court's calendar; (2) the complexity of the issues presented and the respective expertise of each forum; (3) the status of the title 11 bankruptcy proceeding to which the state law claims are related; and (4) whether the state court proceeding would prolong the administration or liquidation of the estate. ***

The first two factors require a court to consider timely adjudication in light of the particular factual and procedural circumstances presented in the two courts being compared. Timeliness cannot reasonably be defined as a fixed period of time. Instead, timeliness is a case-and situation-specific inquiry that requires a comparison of the time in which the respective state and federal forums can reasonably be expected to adjudicate the matter. The inquiry does not turn exclusively on whether an action could be adjudicated most quickly in state court. It is, however, informed by the comparative speeds of adjudication in the federal and state forums. A court should therefore consider the backlog of the state court's calendar (if any) relative to the federal court's calendar. Where the legal issues in a case are especially complex, the forum with the most expertise in the relevant areas of law may well be expected to adjudicate the matter in a more timely fashion relative to the other forum.

Footnote 8 The district court may find that this factor particularly favors abstention here because one of the key issues in this case — the defense of in pari delicto — is a matter of Illinois state law and there is some doubt as to the nature and reach of the defense. Notably, Illinois does not permit our Court to certify questions of Illinois state law to the Illinois Supreme Court. Ill. Sup. Ct. R. 20 (permitting certification only from the Supreme Court of the United States and the United States Court of Appeals for the Seventh Circuit).

On the other hand, when the facts in a case are especially complex, the forum with greater familiarity with the record may likewise be expected to adjudicate the matter more quickly. Ultimately, the relative adjudication times are not solely determinative, but do shed light on whether the state court can timely adjudicate the matter.

As to the third factor — the status of the "related to" title 11 bankruptcy proceeding — a court must consider whether the litigants in a state proceeding need the state law claims to be quickly resolved as a result of the status of the ongoing title 11 bankruptcy proceeding. For instance, a trustee in a chapter 11 reorganization may require expeditious resolution of the state law claims in order to determine what resources are available to fund the chapter 11 reorganization. For this reason, courts have found that what might be timely in the Chapter 7 context is not necessarily timely in Chapter 11 cases where time is of the essence. *** In the Chapter 7 context, some courts have even suggested that "in deciding whether a matter may be timely adjudicated, perhaps the single most important factor is the nature of the underlying chapter proceeding." Id. (citation omitted).

Finally, the fourth factor asks whether the state court proceeding would prolong the administration or liquidation of the estate. A matter cannot be timely adjudicated in state court if abstention and remand of the state law claims will unduly prolong the administration of the estate. Thus, in a case like the WorldCom bankruptcy, "the close connections between the defendants in [the] action and the debtor, and the complexity of [the] litigation" may suggest that "remanding to the state court could slow the pace of litigation dramatically" by leading to duplicative motions practice, repetitious discovery, and parallel adjudication of common issues.

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