In Topfer v. Topfer (In re Topfer), Case No. 5-18-ap-00066 RNO (M.D. Pa. July 25, 2018), the Bankruptcy Court for the Middle District of Pennsylvania remanded a three-and half year old divorce proceeding that had been removed to bankruptcy court. But, the remand became more complicated than it needed to be.
The chapter 7 debtor had removed the divorce action immediately after filing for chapter 7 bankruptcy. Shortly after removal, the non-debtor spouse moved to remand the case on mandatory abstention and permissive abstention grounds.
Normally, such a classic state court action would be remanded on mandatory abstention grounds, pursuant to 28 U.S.C. § 1334(c)(2), which provides that:
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.
(emphasis added). This provision governs the situation where a bankruptcy court must abstain from a removed action and remand the action to state court. See, e.g., 436 F.3d 209, 215 (3d Cir. 2006).
The Third Circuit Court of Appeals has broken down the requirements of mandatory abstention to the following elements:
(1) the proceeding is based on a state law claim or cause of action;(2) the claim or cause of action is “related to” a case under title 11, but does not “arise under” title 11 and does not “arise in” a case under title 11; (3) federal courts would not have jurisdiction over the claim but for its relation to a bankruptcy case; (4) an action “is commenced” in a state forum of appropriate jurisdiction; and (5) the action can be “timely adjudicated” in a state forum of appropriate jurisdiction.
Stoe v. Flaherty, 436 F.3d 209, 213 (3d Cir. 2006).
All the elements of mandatory abstention readily apply to a civil action, like a divorce proceeding, that has been removed to bankruptcy court simply based on a debtor’s bankruptcy filing. Why then didn’t the Bankruptcy Court remand the divorce action in the Topfer case?
The complication arose because the non-debtor spouse contemporaneously (supporting abstention) filed a premature motion for relief from the automatic stay to proceed with the divorce proceeding in state court. Such a motion was premature, because, pending a ruling on the remand motion, the automatic stay did not apply to the removed divorce action.
The Bankruptcy Court found that the lift stay motion was so intertwined with the abstention motion that both needed to be decided at the same time. But, this complicated the mandatory abstention analysis because lift stay motions are core bankruptcy matters that do arise in a bankruptcy case. As such, the Bankruptcy Court held that the divorce action, intertwined with the lift stay motion, did not meet the third element of mandatory abstention, as it was not merely “related to” the debtor’s bankruptcy case.
Ultimately, the Bankruptcy Court did reach the correct result by deciding to abstain on permissive abstention grounds,” pursuant to 28 U.S.C. § 1334(c)(1), which provides that abstention may be ordered “in the interest of justice, or in the interest of comity with State courts or respect for State law. See also In re Kessler, 430 B.R. 155, 165-66 (Bankr. M.D. Pa. 2010). In doing so, however, the Bankruptcy Court had to analyze the 12 more rigorous factors commonly used in determining whether a court should abstain from a removed civil action such as:
(1) the effect or lack thereof on the efficient administration of the estate if a Court recommends abstention, (2) the extent to which state law issues predominate over bankruptcy issues, (3) the difficulty or unsettled nature of the applicable state law, (4) the presence of a related proceeding commenced in state court or other non-bankruptcy court, (5) the jurisdictional basis, if any, other than 28 U.S.C. § 1334, (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case, (7) the substance rather than the form of an asserted “core” proceeding, (8) 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, (9) the burden of [the court’s] docket, (10) the likelihood that the commencement of the proceeding in a bankruptcy court involves forum shopping by one of the parties, (11) the existence of a right to a jury trial, and (12) the presence in the proceeding of non-debtor parties.
See, e.g., In re Castle Cheese, Inc., 541 B.R. 586, 592 (Bankr. W.D. Pa. 2105).
This more rigorous analysis might have been avoided if the non-debtor spouse had simply waited to file her lift stay motion after the bankruptcy court had decided to remand the case on mandatory abstention grounds.
Bankruptcies, big or small, all contain many similar procedural rules, like the ones demonstrated in the Topfer case. Whether a chapter 7 case or chapter 11 case, this similar web of rules require a party to carefully consider how invoking one rule will affect relief requested under another rule. In Topfer, the rules governing abstention related to the rules governing motions to lift the automatic stay. The intersection of the rules made the Bankruptcy Court undergo a much more fact intensive analysis than otherwise would have been necessary. While the Court ultimately decided to remand the civil action in Topfer, in other civil cases the results might differ based on the circumstances involved. Indeed, with so many elements to permissive abstention, there are no guarantees that a bankruptcy court will remand a case on such grounds.