Chapter 4 More Jurisdiction

• Jurisdiction: United States

Chapter 4 More Jurisdiction

§ 4.1 ~ Introduction

This chapter addresses a range of more specialized jurisdiction problems. We consider removal and remand, as well as appeals. We also consider the thorny issue of state sovereign immunity.

§ 4.2 ~ Removal

As noted, you can get into bankruptcy court by filing — or having filed against you — an adversary proceeding or a contested matter. There is at least one more way: A party may remove a claim or cause of action from the non-bankruptcy court (usually state court) to the bankruptcy forum.¹ The path is not intuitively obvious, so the statute needs to be read with care. You remove to the district court for the district where the civil action is pending. For example, if the bankruptcy is pending in Los Angeles and the civil action is pending in a state court in Boston, you remove to the district court in Boston, not Los Angeles.²

Removal is available for any civil action, with only two exceptions.³ The only requirement is that the district court have jurisdiction under 28 U.S.C. § 1334 — that is, if the action arises in, arises under, or relates to a bankruptcy case. If the district court has § 1334 jurisdiction, then it is free to keep the removed case, or to refer the case to its own bankruptcy court, or to transfer venue to the district court for the district in which the bankruptcy case is pending, which will then presumably refer the case to the bankruptcy court.

Removal is self-executing: You file a notice of removal with the district court and with the state court in which the litigation was pending. A party who opposes removal attacks it by filing a motion to remand or abstain with the same district court.⁴

Any party considering removal ought to keep in mind that one of the parties is ordinarily a debtor in bankruptcy. This may raise the question of whether pursuing the lawsuit is worth the bother. The nondebtor may be able to raise the same issues simply by filing a claim. The decision on issues of this sort will vary from case to case, but counsel ought to at least think them through rather than charging forward to litigate removal.

Nondebtors are more likely than not to resist removal, particularly if counsel is unfamiliar with bankruptcy court and fears that the debtor will enjoy an insider advantage. This may not always be the right strategy. For example, suppose the parties are litigating a complicated question of priority on a secured claim. By virtue of its experience in commercial cases, the bankruptcy court may be better equipped than a state court to understand that kind of case. A party who wants a serious hearing on difficult commercial issues may decide that bankruptcy court is exactly the place she wants to be.

§ 4.3 ~ getting Out again

We have talked about a few ways in which a party may get his case into bankruptcy court. Now we talk about a few ways to get it out.

§ 4.4 ~ remand

Earlier, we saw how a party may remove a matter to the bankruptcy court. We saw that removal was self-executing. But the bankruptcy court (or district court) does not need to keep the matter. Rather, it may choose to remand. The statute provides that the court to which the proceeding is removed may remand "on any equitable ground."⁵ The decision is not reviewable on appeal (although if the decision is made by a bankruptcy court, it is reviewable by the district court, because the district court has "original" bankruptcy jurisdiction).⁶

§ 4.5 ~ Abstention

Another way to send a matter out of the bankruptcy court — either one that was removed or one that originated in the bankruptcy court — is for the bankruptcy judge to abstain. There are two routes to abstention. The first is § 305 of the Bankruptcy Code, which authorizes the judge to abstain from hearing the entire bankruptcy case. This might happen, for example, if the bankruptcy case is filed after another liquidation proceeding, such as a state law receivership, is already underway. It will also be appropriate when a chapter 15 proceeding has been initiated to recognize and coordinate proceedings with a foreign bankruptcy proceeding.⁷

The second is 28 U.S.C. § 1334(c)(1), which permits the judge to abstain from a particular proceeding in "the interest ofjustice, or ... the interest of comity with State courts or respect for State law."⁸ The factors are much the same as with remand, and, as with remand, the decision is not appealable to a court of appeals. Section 1334(c)(2) also provides for "mandatory abstention" in certain cases.⁹

§ 4.6 ~ A Remand Trap

There is a trap lurking in the removal process for the party who seeks remand. Suppose you represent the plaintiff in an action in a non-bankruptcy court governed by the National Elixir Relief Act. The defendant files for bankruptcy and removes to the bankruptcy court. For remand, you develop an argument about the specialized statute, the specialized knowledge of the court, that it's not really a bankruptcy issue, etc. First thing you know, your adversary will be on his feet saying: "Judge, he's saying you aren't smart enough to decide an elixir case." No, of course that wasn't what you said, but you may spend the rest of your argument trying to dig yourself out of that hole.

§ 4.7 ~ Factors that Encourage Abstention or Remand

Courts have developed a list of "factors to be considered" in deciding whether to remand. The same factors are typically used in considering discretionary abstention. They include:

- the effect, or lack thereof, on the efficient administration of the estate if the court recommends remand or abstention;
- the extent to which state law issues predominate over bankruptcy issues;
- the difficulty or unsettled nature of the applicable law;
- the presence of related proceedings commenced in state court or other non-bankruptcy proceedings;
- the jurisdictional basis, if any, other than § 1334;
- the degree of relatedness or remoteness of the proceeding to the main bankruptcy case;
- the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court;
- the burden of the bankruptcy court's docket;
- the likelihood that the commencement of the proceeding in bankruptcy court involves forum-shopping by one of the parties;
- the existence of a right to a jury trial;
- the presence, in the proceeding, of nondebtor parties;
- comity; and
- the possibility of prejudice to other parties in the action.¹⁰

§ 4.8 ~ Mandatory Abstention

Section 1334 also calls for so-called "mandatory abstention" for certain state law proceedings.¹¹ Abstention is mandatory under this section if (1) an action could not have been commenced in a court of the U.S. absent bankruptcy jurisdiction; and (2) an action is commenced, and can be timely adjudicated, in a state forum of appropriate jurisdiction.

Mandatory abstention is available in proceedings "related to" bankruptcy cases but not for proceedings "arising under" the Bankruptcy Code or "arising in" bankruptcy cases. And while decisions on abstention generally are not reviewable by an appellate court, a decision denying mandatory abstention is subject to review on appeal.

§ 4.9 ~ Which Court Hears the Motion?

As between district judge and bankruptcy judge, who hears and decides the motion to abstain? The Code is silent, but the rules and their advisory notes make clear that, while the district court is vested with original jurisdiction to determine abstention motions, the bankruptcy judge can hear them and "ordinarily will be in the best position to evaluate the grounds asserted for abstention."¹² The bankruptcy judge's report and recommendation on an abstention motion are then subject to review by the district court under Rule 9033.¹³ This is probably preferable, because there seems to be a good argument that a decision by the bankruptcy judge alone would be unconstitutional under the Supreme Court's Marathon decision.¹⁴

§ 4.10 ~ Jurisdiction over Dischargeability

In Chapter 17 of this book, we discuss the dischargeability of debts. Here, we include a word on jurisdiction. Special rules govern jurisdiction over the determination of dischargeability. Suppose the debtor files a no-asset chapter 7 case and gets a discharge. Later, the government sues him in state court for a liability arising from an environmental cleanup. The debtor believes the claim is barred by the chapter 7 discharge. The government asserts that the claim is excepted from discharge as a fine, penalty or forfeiture under § 523(a)(7). Who gets to decide the question of dischargeability? There are two possible courses.

In the first approach, the state court may decide the issue as part of the pending litigation. The second possible course is that either party may ask the bankruptcy court for a determination of dischargeability.¹⁵ The action is an adversary proceeding, essentially a declaratory relief action.¹⁶ The rule makes clear that the relief may be sought either before or after the closing of the case and specifies that there be no filing fee for reopening a case to determine dischargeability.¹⁷

There is an important exception to these general rules for objections to discharge when the debt is based on the debtor's alleged misconduct, such as for money obtained through false pretenses, fraud or willful and malicious injury.¹⁸ Section 523(c) of the Bankruptcy Code provides that those debts will be discharged unless the creditor to whom the debt is owed requests that the debt be excepted from discharge. Bankruptcy Rule 4007(c) requires the creditor to bring that action no later than 60 days after the date first set for the meeting of creditors, and the Advisory Committee notes to Bankruptcy Rule 4007 make clear that the bankruptcy court has exclusive jurisdiction over these § 523(c) objections to discharge.¹⁹

What is the time limit in which the nondischargeability action must be brought? For objections governed by § 523(c), see the previous paragraph. More...