Mandatory Absention of a Removed State Court Action: A New Case Reviews the Split Among the Circuits
In Allen v. J.K. Harris & Co, LLC, 2005 WL 2600205 (E.D. Pa., 10/12/05), a state court consumer class action seeking damages based on unfair trade practices was removed by the defendants to federal district court following the plaintiff/debtor's filing of a chapter 13 petition for relief. The plaintiff/debtor then moved to remand the case back to state court.
The district court considered whether abstention is mandatory under 28 U.S.C. § 1334(c)(2), which says that courts "shall abstain" from exercising jurisdiction over an adversary proceeding where a party timely moves for abstention based on a state law claim that does not arise in the bankruptcy case and could be "timely adjudicated" in the state forum.
In noting the split among the circuits as to whether the doctrine of mandatory abstention can be applied to an already removed case, the Court (indicating that the Third Circuit has not decided the matter) sided with the majority view that the doctrine of mandatory abstention may be applied to a removed proceeding. The Court stated:
A minority of courts have held that abstention cannot apply to a removed case because (1) abstention requires the existence of two actions--one in state and one in federal court; and (2) abstention would result in dismissal, rather than remand, of the case. See Personette, 204 B.R. at 773. The Court of Appeals for the Third Circuit has not directly addressed the applicability of Section 1334(c)(2) to removed proceedings. However, the Bankruptcy Court for the Eastern District of Pennsylvania appears to have adopted this minority position. See Paxton Nat'l Ins. Co. v. British American Assocs. (In re Pacor, Inc.), 72 B.R. 927, 931 (Bankr. E.D. Pa. 1987).
In Paxton, a non-debtor plaintiff filed a declaratory judgment action in state court, and a chapter 11 debtor removed the state court suit to bankruptcy court pursuant to 28 U.S.C. § 1452(a). Paxton, 72 B.R. at 928. After attending a pretrial conference and agreeing to scheduling deadlines, and after moving to amend its complaint, the non-debtor plaintiff sought to have the case remanded to the state court. Id. Finding that mandatory abstention pursuant to Section 1334(c)(2) did not apply, the Paxton court stated that "since this matter was already removed from state court to bankruptcy court, it is not clear that the provision ... requiring that an 'action is commenced ... in a state forum' is established; there no longer exists any proceeding pending in state court." Id. at 931.
As logical as the foregoing analysis may seem at first blush, the majority of courts, however, disagree with this reasoning, finding that Section 1334(c)(2) sets forth a statutory duty to abstain from hearing a case or proceeding, and that this duty is distinctly defined, contrary to the applicability of the common law abstention standards. See Personette, 204 B.R. at 773. The courts in this majority typically first reason that under Section 1334(c)(2), the existence of two proceedings is not required for a court to abstain, but rather that an action be "commenced" in a state forum of appropriate jurisdiction before abstention is mandated. Id. Courts finding that abstention may apply to a removed proceeding also reason that because Section 1334(c)(2) itself neither supports nor rejects the supposition that abstention requires a stay or dismissal, a federal court would not be prohibited from remanding a case to state court were it to find abstention necessary. Id.
In the present case, neither party has challenged the propriety of applying Section 1334(c)(2) to a removed proceeding. Despite the significant conflict among the courts and in the absence of direction from the Court of Appeals for the Third Circuit, this Court must, in the present context, interpret Section 1334(c)(2) to determine its applicability here.
The Court is not persuaded by the Paxton court's reasoning that Section 1334(c)(2) does not apply to a state court case that is removed to federal court. Rather, the Court concludes that the reasoning of the majority position is more sound. Section 1334(c)(2) requires a district court to abstain "if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction." 28 U.S.C. § 1334(c)(2). The statute does not specifically require that two proceedings be pending. Moreover, courts within the Third Circuit have considered the propriety of mandatory abstention pursuant to Section 1334(c)(2) upon a party's timely motion to remand. See, e.g., Lomas & Nettleton Co. v. Warren (In re Warren), 125 B.R. 128, 130 (E.D. Pa. 1991) (remanding proceeding removed from state court to bankruptcy court). Thus, the Court concludes that a claim properly filed in state court, but subsequently removed to bankruptcy court, may properly be subject to mandatory abstention.
© Steve Jakubowski 2005