Bankruptcy Litigation Committee

ABI Committee News

Industrial Clearinghouse Inc. v. Mims: Direct Removal from State Court to Bankruptcy Court

In Industrial Clearinghouse Inc. v. Mims (In re Coastal Plains Inc.), 338 B.R. 703 (N.D. Texas 2006), the U.S. District Court for the Northern District of Texas took the majority view of 28 U.S.C. §1452, holding that when that section refers to removal to a “district court,” it includes bankruptcy courts in that group. According to this view, it is not necessary to file a notice of removal with a district court before having the case referred to the bankruptcy court for that district. The jurisdictional scheme adopted pursuant to the Bankruptcy Amendments and Federal Judgeship Act of 1984 served as a basis for that holding. Id. at 711.

Industrial Clearinghouse arose out of a lawsuit filed against a chapter 7 trustee in Texas state court in 2004 alleging breaches of fiduciary duty in connection with the trustee’s administration of claims. The trustee filed a notice of removal with the U.S. Bankruptcy Court for the Northern District of Texas, thereby removing the lawsuit from Texas state court directly to the bankruptcy court for the district in which the state court case was pending. The plaintiffs filed a motion with the bankruptcy court for remand of the case and for the bankruptcy court to strike the removal.  The bankruptcy court found that the trustee was correct to file the notice of removal directly and denied the plaintiffs’ motion. Id. at 709. 

As the district court noted in its opinion deciding the plaintiffs’ appeal from the bankruptcy court’s decision, there is a split among federal courts on how to interpret 28 U.S.C. §1452.  According to the minority view of that section, when it provides for removal to a “district court,” it means only a U.S. District Court. Federal courts taking this view require that a notice of removal of a state court case be filed with the district court for that district, which then may refer the case to the bankruptcy court for that district. Id. at 710; see, also, Cook v. Cook, 215 B.R. 975, 977 f.1 (Bankr. E.D. Mich. 1997); Searcy v. Knostman, 155 B.R. 699, 704 (S.D. Miss. 1993) (“although some jurisdictions have interpreted bankruptcy statutes to support removal directly to the bankruptcy court, this court is in agreement with those jurisdictions which hold that removal should be to the district court clerk for possible referral to the bankruptcy court”) (citations omitted); Centrust Savings Bank v. Love, 131 B.R. 64, 65-66 (S.D. Tex. 1991). The result of filing a notice of removal directly with the bankruptcy court in such a case may range from the court ignoring the error to remanding the case back to state court. Cook, 215 B.R. at 977 f. 1.; Searcy, 155 B.R. at 711.

The district court in Industrial Clearinghouse sided with the majority of federal courts and upheld the bankruptcy court’s decision that the trustee was correct to file a notice of removal directly with the bankruptcy court. In reaching this conclusion, it interpreted 28 U.S.C. §1452 to include bankruptcy courts in the term “district court,” since under 28 U.S.C. §151 bankruptcy courts are units of district courts. It found such an interpretation consistent with the terminology used in the Federal Rules of Bankruptcy Procedure. Rule 9027(a), for example, instructs litigants to file a notice of removal with the clerk of the district in which the action to be removed is pending, and Rule 9001(3) defines the term “clerk” as the bankruptcy clerk. Industrial Clearinghouse, 338 B.R. at 711.

The Fifth Circuit Court of Appeals has not decided whether 28 U.S.C. §1452 provides for direct removal of state court cases to bankruptcy courts, or whether a state court case must first be removed to a district court and then be referred by the district court to a bankruptcy court. As illustrated by the Industrial Clearinghouse and Searcy cases, bankruptcy courts and district courts within the Fifth Circuit may take differing views on this issue.