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News Room

IMPROVING JURISDICTION AND PROCEDURE PROPOSAL #3: MANDATORY WITHDRAWAL

REVISED FOR 9/96 MEETING

Background

Title 28 provides that, on timely motion of a party, the district court shall withdraw a proceeding if it determines that resolution of it requires consideration of both the Bankruptcy Code and another federal law regulating organizations or activities affecting interstate commerce. 28 U.S.C. § 157(d).

Proposal

28 U.S.C. § 157(d) should be amended to (1) delete the second sentence requiring mandatory withdrawal and (2) specify that the need to consider both the Bankruptcy Code and another federal statute should be specified as an example of cause for the district court to exercise its discretion to withdraw a proceeding.

Reasons for the Change

Mandatory withdrawal 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 withdrawal if (1) a motion is made and (2) the court must consider both the Bankruptcy Code and another federal statute to resolve the issue. When a federal statute other than the Bankruptcy Code is involved in the litigation, usually no part of the Bankruptcy Code requires consideration. When a provision in the Bankruptcy Code requires consideration, usually no part of another federal statute is involved. For example, a treble damage antitrust suit by or against the title 11 debtor involves issues of liability and amount of damage under the antitrust laws but does not require interpretation of any part of the Bankruptcy Code.

Section 157(d) also permits discretionary withdrawal of a case or proceeding or any part thereof, by the district judge for cause shown, on the timely motion of a party or sua sponte. Discretionary withdrawal serves to buttress the constitutionality of the bankruptcy judicial process by adding Article III district court supervision and control of the non-Article III bankruptcy court. For example, the system permits but does not require the district court to refer cases and proceedings within the jurisdiction of the district court (28 U.S.C. § 1334(a), (b)) to the bankruptcy court (28 U.S.C. § 157(a)) and by § 157(d), after referral, permits the court to withdraw a case or proceeding. There is nothing about mandatory withdrawal that is required for the constitutionality of the bankruptcy judicial system.

The cases in which mandatory withdrawal has been requested are in disarray even as to the meaning and application of the above mentioned provision in § 157(d). 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 withdrawal has the further drawback of establishing a two track litigation system. Rather than disputes being focused in the bankruptcy court for hearing, this portion of section 157(d) requires that some disputes instead go to the district court.

Additionally, mandatory withdrawal 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 withdrawal; but would retain discretion in the district judge to order withdrawal on motion or sua sponte, for cause. The Proposal also suggests retaining the reference to particular disputes involving a need to consider the Bankruptcy Code and another federal statute to resolve the dispute. This reference in the subsection would serve as a nonexclusive example of the element of "cause" that the district judge could consider when ruling on the withdrawal motion.

Competing Considerations

It may be argued that when a non-bankruptcy federal statute is the focus of the litigation, a United States district judge is the more appropriate judicial office. Indeed, some of the cases have ruled that mandatory abstention is applicable when only a federal statute needs consideration even if the Bankruptcy Code is not relevant to the dispute.

Example of Draft Statutory Provision

28 U.S.C. § 157:

(d) The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party for cause, including, but not limited to, the need to consider both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce for resolution of the proceeding.

 

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