California Court Discusses Reference of Claims in Bankruptcy Matters

Generally, the bankruptcy courts have jurisdiction over bankruptcy matters and claims arising in bankruptcy actions. Certain bankruptcy-related actions and claims filed in bankruptcy courts are better handled by other courts, however; as such, in some instances, a bankruptcy court will refer a matter to a state or federal court. If a bankruptcy court refers a case to another court, the plaintiff has the option of moving to withdraw the reference, but proving the such motions should be granted can be challenging, as demonstrated in a recent California case. If you struggle to pay your debts and wonder if filing for bankruptcy is right for you, it is wise to talk to a California bankruptcy lawyer at your earliest opportunity.

Facts of the Case

It is alleged that the plaintiff filed a motion for sanctions in bankruptcy court against the defendants, including claims under federal non-bankruptcy statutes. The bankruptcy court automatically referred the case to the district court. The plaintiff moved to withdraw the reference, seeking both mandatory and permissive withdrawal to have the district court decide the sanctions motion.

Reference of Claims in Bankruptcy Matters

The district court denied the motion to withdraw the reference. In doing so, it explained that the mandatory withdrawal provision should be interpreted narrowly rather than as an escape hatch allowing most bankruptcy matters to be removed to the district court. Withdrawal is only required when materially considering non-bankruptcy federal law. Courts have found withdrawal mandatory when non- bankruptcy issues necessitate interpreting, not just applying, non-bankruptcy law or undertaking analysis of major unsettled non-bankruptcy law questions. Under this approach, the party seeking withdrawal must show more than the possibility novel non-bankruptcy law issues could arise in the bankruptcy case.

As to the mandatory withdrawal, the court explained withdrawal is required when resolving the bankruptcy proceeding requires interpreting, not just applying, non-bankruptcy federal law or analyzing significant unresolved non-bankruptcy law issues. As the plaintiff identified no novel legal issues that would require interpretation rather than application of the cited non-bankruptcy statutes, there was no basis to grant mandatory withdrawal.

Similarly, with regard to the permissive withdrawal, the court found no cause to withdraw the reference. The court explained it considers judicial efficiency, delay, costs, uniformity, forum shopping, and related factors when determining whether to exercise its discretion to withdrawal a reference. In the subject case, withdrawal could cause delay and added costs from restarting briefing in the district court. Further, the bankruptcy court’s familiarity with the case weighs against withdrawal, even if it cannot enter final judgment on all claims. Additionally, withdrawal may hinder bankruptcy administration, as the sanctions motion involves issues within the expertise of the bankruptcy court that it should address first.

In sum, the court found that the plaintiff did not meet her burden to show withdrawal was mandatory or appropriate under the discretionary permissive withdrawal standard. Thus, the court denied the motion to withdraw the reference and kept the case with the bankruptcy court.

Talk to a Dedicated California Bankruptcy Attorney

If you struggle to meet your debt obligations, you may be eligible to file for bankruptcy, and it is wise to talk to an attorney. Matthew D. Roy is a dedicated California bankruptcy lawyer who can advise you of your options and help you seek any relief that may be available. You can reach Mr. Roy through the form online or by calling (916) 361-6028 to set up a meeting.