JURISDICTIONAL CHALLENGES IN BANKRUPTCY - REMOVAL OFACTIONS TO BANKRUPTCY COURT

Transcription

1 JURISDICTIONAL CHALLENGES IN BANKRUPTCY - REMOVAL OFACTIONS TO BANKRUPTCY COURT CBA Bankruptcy Committee Meeting 10/15/2013 Donald W. Mallory, Esq. Cohen, Todd, Kite &Stanford, LLC 250 E. Fifth Street, Suite X350 Cincinnati, OH Ph Fax Cell dmallory@ctks.com 1

2 What s#atutes and rules are primarily involved in removing an action? (a) 28 U.S.C. 157(a) and (b)(1) ~~ ~~ ~d~~'d~} (b) 28 U.S.C. 1334(a) and (b) ' ~- ~ ~ C~'V~i~r1C,2 (c) 28 U.S.C ~ ~C, ~~,~~,~, ~ ~~~~~ ~ ~ ~ ~~ Y ~ j ~~~~,~- ~ ~Ay~~'C~ (d) 28 U.S.C ~ ~ "~ ~ U"` /L,Prw~,~~ (e) Fed. R. Bankr. P U.S.C. 157(a) and (b)(1). (a) Each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district. (b) (1)Bankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 1.1, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title. 28 U.S.C. 1334(a) and (b). (a) Except as provided in subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11. (b) Except as provided in subsection (e)(2), and notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, 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. +~, Pursuant to 28 U.S.C. 1412: "[a] district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties." The "interest of justice" and "convenience of the parties" standards of 1412 are disjunctive and separate, and transfer is appropriate if even only one is met. Things Remembered Inc. v. BGTV, Inc., 151 B.R. 827, 833 (Bankr. N.D. Ohio 1993). 2

3 V. 28 U.S.C Removal of claims related to bankruptcy cases: (a) A party may remove any claim or cause of action in a civil action other than a proceeding before the United States Tax Court or a civil action by a governmental unit to enforce such governmental unit's police or regulatory power, 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. (b) The court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground. An order entered under this subsection remanding a claim or cause of action, or a decision to not remand, is not reviewable by appeal or otherwise by the court of appeals under section 158(d), 1291, or 1292 of this title or by the Supreme Court of the United States under section 1254 of this title. 28 U.S.C V~. Fed. R. Bankr. P (in re%vant part). Notice of Removal. Where Filed; Form and Content. A notice of removal shall be filed with the clerk for the- district and division within which is located the state or federal court where the civil action is pending. The notice shall be signed pursuant to Rule 9011 and contain a short and plain statement of the facts which entitle the party filing the notice to remove, contain a statement that upon removal of the claim or cause of action the proceeding is core or non-core and, if non-core, that the party filing the notice does or does not consent to entry of final orders or judgment by the bankruptcy judge, and be accompanied by a copy of all process and pleadings. Fed. R. Bank. P. 9027(a)(1). Practice Pointer: In districts where all bankruptcy proceedings are automatically referred to the bankruptcy court, the notice of removal should be filed with the clerk of the bankruptcy court. See Lone Star Industries, Inc. v. Liberty Mut. Ins., 131 B.R. 2fi9 (D. Del. 1997). In r~~s#acts wrherz ~ankr~spt~3~ praceeding~ are got au#orr~atieaii~ referred to the bankruptcy court, a party may petition the district court for an order of reference. 28 U.S.C. 1334; 28 U.S.C. 157(b). Example: Hamilton County, Ohio state case to S.D. of Ohio Bankruptcy Case: notice should be filed in bankruptcy court due to the general order of reference in this district. General Order No (S.D. Ohio, Oct. 24, 2005). 3

4 Practice Pointer: Removal is not necessarily to the bankruptcy court where the bankruptcy case is pending. If the bankruptcy case is in another district, a party seeking to have the action tried in the bankruptcy court should first remove the state court action to the district court where that action is pending, and then move for a change of venue to the district court the bankruptcy case is pending. /n re Aztec Indus., Inc., 84 B.R. 464 (Bankr. N.D. Ohio 1987), Example: Cuyahoga County, Ohio sta#e case to Southern District of Ohio Bankruptcy Case: First remove to N.D. Ohio District Court, and then move for change of venue to S.D. Ohio Bankruptcy Court. VII. Removal of a case initiated in a Federal District Court to the Bankruptcy Court. (a) General Questions: If the case sought to be removed was pending in the S.D. of Ohio District Court, could you just file a notice of removal in the S.D. of Ohio Bankruptcy Court to remove the case? Can the Bankruptcy Court that derives its authority from the District Court simply take the case away from the District Court from which its authority originates? In districts where there exist and order referring all bankruptcy cases to the bankruptcy court, couldn't the District Court simply withdraw the reference to keep the case? (b) Proper Procedure: Motion for a Directed Reference: (1) Section 1452(a) of Title 28 does not permit the removal of a pending district court lawsuit to a bankruptcy court. "The large majority of courts interpreting Section 1452 have concluded that 'there is no legal authority to support removal from a federal district court to a bankruptcy court."' Global Aircraft Solutions, Inc, v. Hamilton Aerospace Techs., Inc. (In re G/oba! Aircraft Solutions, /nc.), 2011 Bankr. LEXIS 188 (Bankr. N.D. III. Jan. 19, 2011) (quoting Wellness Intl Network v. J.P. Morgan Chase Bank, N.A. (In re Sharit~, 407 B.R. 316 (Bankr. N.D. III. 2009)); Sharp E/ecs. Corp, v. Deutsche Fin. Servs. Corp., 222 B.R. 259 (Bankr. D. Md. 1998); Thomas Steel Corp, v. Bethlehem Rebar Indus., Inc., 101 B.R. 16 (Bankr. N.D. III. 1989); accord Holcomb v. Fed. Home Loan Mortg. Corp. (/n re Holcomb), 2011 Bankr. LEXIS 3283, 2-3 {Bankr. S.D. Fla. Mar. 31, 2011). 4

5 (2) Proper Procedure."[T]he proper method for a party to bring a matter that has been pending in the district court into the bankruptcy court is for that party to make a motion before the district court for a directed reference." In re Global Aircraft Solutions, lnc., 2011 Bankr. LEXIS (citing Thomas Steel Corp., 101 B.R. at 22); Ho%omb v. Fed. Home Loan Mortg. Corp. (In re Ho%omb), 2011 Bankr. LEXIS 3283, 2-3 (Bankr. S.D. Fla. Mar. 31, 2011); In re Costal Plaints, Inc., 326 B.R. 102, 108 (Bankr. E.D. Tex. 2005) ("This Court agrees that the proper procedure... is to request that the district court refer the proceeding to the bankruptcy court, because a case cannot be removed from a federal district court to its own bankruptcy court within that district."). (c) What is a Motion for Directed Reference? Example: See /n re Foremost Restoration, LLC v, Inner City Properties, LLC, et al., 13-ap (Bankr. S. D. Ohio, 2013). Motion for Directed Reference (Doc. No. 73) Order Granting Motion (Doc. No. 81) NOTE: Motion was originally filed in United States District Court for the S.D. of Indiana. When the case was transferred, new AP opened associated with lead bankruptcy case and the entire docket transferred. VIII. Time Requirements for Filing Notice. (a) Time for Filing; Civil Action Initiated Before Commencement of the Case Under the Code. If the claim or cause of action in a civil action is pending when a case under the Code is commenced, a notice of removal may be filed only within the longest of (A) 90 days after the order for relief in the case under the Code, (B) 30 days after entry of an order terminating a stay, if the claim or cause of action in a civil action has been stayed under 362 of the Code, or (C) 30 days after a trustee qualifies in a chapter 11 reorganization case but not later than 180 days after the order for relief. Fed. R Bankr. P. 9027(a)(2). (b) Time for filing; civil action initiated after commencement of the case under the Code. If a claim or cause of action is asserted in another court after the commencement of a case under the Code, a notice of removal may be filed with the clerk only within the shorter of (A) 30 days after receipt, through service or otherwise, of a copy of the initial pleading setting forth the claim or cause of action sought to be removed, or (B) 30 days after receipt of the summons if the initial pleading has been filed with the court but not served with the summons. Fed. R Bankr. P. 9027(a)(3). 5

6 IX. Service of Removal Notice on parties of interest and non-bankruptcy court. (a) Notice to Parties: Promptly after filing the notice of removal, the party filing the notice shall serve a copy of it on all parties to the removed claim or cause of action. Fed. R Bankr. P. 9027(b). (b) Filing in non-bankruptcy court. Promptly after filing the notice of removal, the party filing the notice shall file a copy of it with the clerk of the court from which the claim or cause of action is removed. Removal of the claim or cause of action is effec#ed on such filing of a copy of the notice of removal. The parties shall proceed no further in that court unless and until the claim or cause of action is remanded. Fed. R Bankr. P. 9027(c). ALWAYS REMEMBER TO CONTACT BOTH COURTS TO KEEP THEM INFORMED AS TO THE PROPOSED REMOVAL AND TO ENSURE YOU ARC COMPLYING WITH LOCAL PRACTICE OF EACH COURT C~

7 SUMMARIES OF WRITTEN OPINIONS ISSUEID BY JUDGE BURTON PERLMAN (Prepared by M. Elizabeth Hils for the October 15, 2013 Meeting of the Cincinnati Bar Association Bankruptcy Committee) VENUE Chapter 7 Case No In re: Scott Wayne Isaacson Decision entered in the United States Bankruptcy Court for the Soutl~ei71 District of Ohio, Western Division, on May 2, DESCRIPTION: The Court sua spofzte entered air Order to Show Cause Why This Case Should Not Be Dismissed for Improper Venue. PROCEDURAL CONTEXT: Decision after hearing on April 30, 2013, during which the Court heard the xestimony of the Debtor and oral arguments by counsel, including the Chapter 7 Trustee. FACTS: In his Chapter 7 Petition filed on December 6, 2012, the Debtor, Scott Wayne Isaacson, listed two Ohio addresses, consisting of a street addzess designating his residence, and a post office box for mail He filed an Amended Statement of Financial Affairs, in which he disclosed that he lived in his mother's home in Marblehead, Massachusetts, from early 2005 until mid-2012, when he moved to Ol~.io to obtain employment. At the hearing, he testified that he moved to Ohio in November, He also testified that he traveled to Ohio between May and I~tovember, 2005, for bxief stays lasting no more than a few days. Thus, within the 180 days preceding the filing of the Petition, he resided in Ohio for only 36 days, assuming that November 1St was the inception date of his residency. ISSUE NO. 1: May the Court raise, sua sponte, the issue of venue? COURT' S RULING: YES. The Court cited In re Bavelis, 453 B.R. 832, 868 (Baz~lcr, S.D. OH 2011); In re Donald, 328 B.R. 192, 198 B.A.P. 9th Cir. 2005); In re Wilson, 284 B.R. 109 (B.A.P. 8t~' Cir. 2002); and In re Langston, 291 B.R. 872, 877 (Banicr. N.D. Ala. 2003). ISSUE NO. 2: Is the Southern District of Ohio the proper venue?

8 COURT' S RULING: NO. The Court reviewed the federal venue statute, 28 U.S.C. 1408(1), which establishes the proper venue as the federal court district in which the debtor's domicile, residence, principal place of business, or principal assets were located either: (1) for the 180-day period preceding the filing; or (2) for the longer portion of such 180-day period, if the debtor's domicile, residence, principal place of business or principal assets were located in any other district during that period. In this instance, the Debtor acknowledged that his homestead was located in Massachusetts and that he never abandoned his Massachusetts domicile. The Debtor also conceded that he was unemployed until after the filing date, when he found temporary work in Massachusetts; therefore, venue in Ohio could not be premised upon the location of his principal place of business. Since the Debtor's sole asset was a home located in Marblehead, Massachusetts, he could not maintain'that his principal assets were located in Ohio. Moreover, during the 180-day period preceding his filings, he spent the majority of his time iil Massachusetts. ISSUE NO. 3: Should the Court dismiss or transfer the case to the appropriate venue? COURT'S RULING: DISMISS. The Court noted that 28 U.S.C ~ equip es the dismissal ox transfer of a case filed in the wrong venue. In addition, 28 U.S.C permits the transfer of a case to another district in the interests of justice or for the convenience of the parties. Based upon a review of Sixth Circuit case law, the Court concluded that the mandatory language of 1406 applied to improperly-venued cases; whereas, the permissive language of 1412 applied to properlyvenued cases. See Thompson v. Greenwood, 507 F.3d 416, 424 (6t~' Cir. 2007). In this instance, since the sale of the Debtor's home in Massachusetts was then pending, the Count cor~^.luded that dismissal was appropriate. See also F.R.B.P. 1014(a)(2). OUTCOME: The Court dismissed the case based upon improper venue but allowed the Debtor to complete the sale of the Massachusetts property and to tender the net proceeds to the Trustee to be held pending further order of the Court. 2

9 BANKRUPTCY APPELLATE PANEL SUMMARY October 2013 In re Underhill, No , 2013 WL , 2013 Bankr. LEXIS 3838, _ B.R. _ (B.A.P. 6th Cir. Sept. 16, 2013). Issue: Whether the bankruptcy court erred by granting a motion to reopen pursuant to 11 U.S.C. 350(b). Facts: In 2010, an individual filed a chapter 7 petition and scheduled a 100% ownership interest in a limited liability corporation ("LLC"). 'According to Schedule B, the ownership interest in the LLC had no value. The chapter 7 trustee filed a report of no distribution. The court issued a discharge and closed the case. Subsequently, the LLC filed a state court action for tortious interference arising from events occurring as early as The parties settled the action for $80,000. Counsel for the LLC disbursed the net proceeds to the debtor instead of the LLC. Procedure: A creditor of both the LLC and the debtor moved to reopen the bankruptcy case to administer the settlement proceeds. The debtor objected. The bankruptcy court granted the motion, concluding that the LLC's claim was sufficiently rooted in prebankruptcy events to constitute. estate property. The debtor appealed, arguing that the settlement proceeds were not estate property because: (1) the proceeds were received subsequent to the discharge and closing of the bankruptcy case; and (2) the trustee abandoned the asset when the bankruptcy case was closed. Holding: The bankruptcy court did not err by granting a motion to reopen pursuant to 11 U.S.C. 350(b). Anal sis: (1) Causes of action that are sufficiently rooted in prepetition conduct constitute estate property. The LLC's claim arose prepetition. Therefore, any settlement proceeds remaining after payment of the LLC's creditors are estate property. (2) An unscheduled asset is not abandoned. The trustee did not abandon the asset because the debtor knew about the claim on the petition date, placed a value of zero on her LLC membership interest, and failed to disclose the claim. AFFIRMED. Page 1 of 1