IMPROVING JURISDICTION AND PROCEDURE PROPOSAL #8: MANDATORY ABSTENTION

Background

Title 28 provides that on timely motion of a party, the district court shall abstain from a proceeding if an action related to a case under title 11 but not arising in or under a case under title 11 that could not have been brought in federal court absent jurisdiction under section 1334 is commenced and can be timely adjudicated in a proper state forum. 28 U.S.C. § 1334(c)(2).

Proposal

The mandatory abstention provisions of 28 U.S.C. § 1334(c)(2) should be deleted in favor of the permissive abstention provisions contained in 28 U.S.C. § 1334(c)(1).

Reasons for the Change

Mandatory abstention of proceedings in bankruptcy cases was added to the Judicial

Code in the Bankruptcy Amendments and Federal Judgeship Act of 1984. It did not exist prior to enactment of that legislation. As written, it requires abstention if (1) a timely motion is made; (2) the "related to" proceeding could not have been brought in federal court absent the intervening bankruptcy; and (3) is commenced in a proper state forum and can be timely adjudicated in that forum.

Discretionary abstention serves to buttress the federalism and state law comity issues of the bankruptcy judicial process by permitting state law actions to be litigated in the state forum in the interests of justice and in the interest of state law comity. The discretionary abstention provisions include proceedings "arising under", "arising in" or "related to" a case under title 11. Thus, discretionary abstention applies to all bankruptcy proceedings (core as well as noncore) whereas mandatory abstention only applies to "related to" or noncore proceedings. There is nothing about mandatory withdrawal that is required for the constitutionality of the bankruptcy judicial system.

The cases in which mandatory abstention has been requested are in disarray even as to the meaning and application of the above mentioned provision in § 1334(c)(2). Confusion has arisen over whether the state action has to have been commenced prior to the commencement of the bankruptcy case. [ FN: One of the earlier drafts of section 1334(c)(2) required a state court action which "has been or will be timely instituted, " while the section as enacted states only that an action is commenced and can be timely adjudicated. See S. Bill 1013 (passed by Senate on April 27, 1983).] As drafted, section 1334(c)(2) opens the possibility that it does not apply unless that state law action had been commenced prior to the commencement of the bankruptcy case. Such litigation does not go to the merits of the litigated dispute and only serves to delay both its resolution and the progress of the title 11 case as a whole if resolution is a key element in the estate.

Mandatory abstention has led to further confusion over what constitutes a timelyadjudication in the state forum. [ FN: See , e.g. , Acolyte Electric Co. V. City of New York , 69 B.R. 155 (Bankr. E.D.N.Y. 1986) (holding that the fact that it would take longer to adjudicate the action in state court was determinative); J.D. Marshall Int ’l Inc. V. Redstart Inc. , 74 B.R. 651 (N.D. Ill. 1987) (precluding mandatory abstention on grounds that action would take four or five years to adjudicate in state court).] Rather than disputes being focused in the bankruptcy court for hearing, this portion of section 1334(c)(2) requires that some disputes instead go to the state court.

Additionally, mandatory abstention is a limitation on the original intent to invest the bankruptcy court with a broad jurisdictional base as evidenced in the 1978 Bankruptcy Reform Act. Such jurisdiction promotes the most efficient and least costly process for the resolution of disputes that are related to bankruptcy cases.

The Proposal would merely eliminate the mandatory feature of abstention; but would retain discretion in the district judge to order abstention in the interests of justice or in the interest of comity with state courts and state law.

Competing Considerations

It may be argued that when a "related to" state law proceeding is the focus of the litigation with the debtor, a state court is the more appropriate adjudicative forum if the claim can be timely adjudicated there.