United States: How Did My Lawsuit End Up In Bankruptcy Court?

Last Updated: December 19 2014
Article by Robert A. Cox, Jr.

Understanding the process and effect of removal is important in developing litigation strategy

As business bankruptcy filings have become more routine, companies may be involved in litigation with a business that files for bankruptcy protection. In such circumstances, there is a strong possibility that the litigation may be removed to the bankruptcy court. It is therefore important to understand what that means.

Removal based on bankruptcy filing

28 U.S.C. § 1452(a) addresses the removal of bankruptcy matters and provides in relevant part:

A party may remove any claim or cause of action in a civil action . . . 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 Section 1334 of this title.

28 U.S.C. § 1334, which is referenced in Section 1452, provides jurisdiction to the district courts over "all civil proceedings arising under, arising in or related to" cases in bankruptcy. (This statute refers to the district courts. Bankruptcy matters are referred by the district courts to the bankruptcy courts). Accordingly, the jurisdiction granted to bankruptcy courts is very broad. Such jurisdiction covers any matters that are "related to" the bankruptcy case, which includes any matters that could "conceivably" have any effect on the bankruptcy estate. Therefore, any litigation matter that could have an effect on the bankruptcy case is subject to removal under 28 U.S.C. § 1452.

Removal under 28 U.S.C. § 1452 versus removal under 28 U.S.C. § 1441

Bankruptcy related matters can also be removed under 28 U.S.C. § 1441, which allows for removal of "any civil action brought in a State court of which the district courts of the United States have original jurisdiction" to "the district court . . . where such [State] action is pending."

There are key differences that make Section 1441 a less attractive option for removal of a bankruptcy matter than Section 1452. For one, under 1452, "any claims or cause of action" may be removed, while Section 1441 only allows removal of the entire lawsuit. Additionally, any party may seek the removal under Section 1452, while only the defendant can seek removal under Section 1441. Most significantly, removal under Section 1441 must occur within 30 days after service of process. Section 1452, however, allows for removal, in cases where the action is pending at the time of the bankruptcy filing, within the longer of 90 days from the bankruptcy filing, 30 days after entry of an order terminating the automatic stay, or 30 days after appointment of a chapter 11 trustee, but not later than 180 days after the bankruptcy filing. If the lawsuit is commenced after the bankruptcy filing, removal is timely if it occurs within thirty days of service of the summons and/or complaint.

Process of removal under Section 1452

A lawsuit is removed by filing a notice of removal in the federal district court (or bankruptcy court) in the jurisdiction where the lawsuit is pending. Therefore, if the lawsuit is pending in the same district in which the bankruptcy case is pending, the matter may be removed directly to the bankruptcy court. However, if the lawsuit is pending in a state court in a different jurisdiction, then the lawsuit is removed to the district court within that jurisdiction, and then must be transferred to the bankruptcy court through motion to transfer venue under 28 U.S.C. § 1412.

The notice of removal must be served on all parties to the removed action and a copy filed with the clerk of the court from which the action was removed. After such removal, the district court or bankruptcy court to which the case was removed has jurisdiction, and, subject to the case being remanded, the lawsuit will proceed in that court.

Remand

Upon motion, the court to which a matter is removed may remand such action to the original court "on any equitable ground." Courts have found that an "equitable" ground is one that is "fair and reasonable."A variety of factors have been considered in determining whether remand is warranted, including:

  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 main bankruptcy case
  6. The existence of the right to a jury trial
  7. Prejudice to the involuntarily removed defendants

Understanding the process and effect of removal is important in developing litigation strategy when litigating matters that involve a bankrupt party. In certain instances, removal of case to the bankruptcy court may be a strategic advantage to the non-debtor party, if the current litigation forum is less than favorable.

Republished with permission. This article first appeared in Inside Counsel on December 4, 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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