Burr & Forman

01.20.2017   |   Articles / Publications

Burr Alert: Who Decides Whether Bankruptcy Jurisdiction Exists after Removal from State Court?

Imagine that while a bankruptcy case is pending, the debtor-in-possession or bankruptcy trustee files a state law claim against one of the estate’s creditors. Presumably, if the debtor wins its state law claim, that recovery augments the bankruptcy estate and increases the amount available to pay the debtor’s creditors.1 The creditor, seeking to avoid litigating the action in the debtor’s home state court, timely removes the lawsuit to federal court as permitted under 28 U.S.C. § 1452(a).2 The creditor argues that the case should proceed in federal bankruptcy court because that court has bankruptcy jurisdiction over the matter under 28 U.S.C. § 1334(b).3 That provision says that bankruptcy jurisdiction exists over all proceedings “related to cases under title 11.”4 The debtor responds by arguing that the state law claims have nothing to do with bankruptcy. Even if they did, the bankruptcy court should abstain and allow the state court to hear the lawsuit.5

At first glance, the creditor appears to be right: the bankruptcy judge has jurisdiction over the claim. According to the vast majority of case law, the debtor’s state law claim appears to “relate to” the debtor’s underlying bankruptcy case under 28 U.S.C. § 1334(b) because it meets the standard for “related to” jurisdiction – the outcome “could conceivably have an effect on the estate being administered in bankruptcy.”6 Moreover, all of the district courts in the United States have Reference Orders providing that all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judge for that district.7 Given that the bankruptcy judge appears to have “related to” jurisdiction over the debtor’s claims in this scenario, it appears that the bankruptcy judge has jurisdiction over the case barring the judge’s decision to abstain.

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