Tuesday, August 22, 2017
Ninth Circuit Appellate Panel Says:
Parties Can’t Remove District Court Suits to Bankruptcy Court
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals’ Bankruptcy Appellate Panel has held that the defendants in a federal District Court action who declared bankruptcy after being sued cannot remove the lawsuit to the Bankruptcy Court.
The panel on Friday affirmed Bankruptcy Judge Scott Ho Yun’s order striking a notice of the removal of an action from the U.S. District Court for the Eastern District of New York. He acted at the request of the plaintiff in that case, Natasha Shpak, who is seeking $500,000 based on an allegedly fraudulent scheme in connection with restaurant equipment.
Panel Judge William J. Lafferty III said that debtors Malcolm Curtis and Judith Curtis are correct insofar as they assert that a provision of the removal statute, 28 U.S.C. §1452(a), “is designed to further Congress’s purpose of centralizing bankruptcy litigation in a federal forum.”
The provision says that in cases where a defendant has sought protection under Title 11 of the Bankruptcy Code, “[a] party may remove any claim or cause of action in a civil action other than a proceeding before the United States Tax Court or a civil action by a governmental unit to enforce such governmental unit’s police or regulatory power, to the district court for the district where such civil action is pending….”
A district court then refers the matter to the bankruptcy court.
“Debtors contend that the statute authorizes removal of an action pending in a federal district court to the federal district court or the bankruptcy court in the district where the bankruptcy case is pending. We agree with the bankruptcy court’s conclusion that it does not.”
As Yun put it:
“You can’t remove a district court lawsuit to another district court or to a bankruptcy court. The way 1452 works, you remove a civil action to the district court where the civil action is pending. Here the civil action is pending in the United States District Court for the Eastern District of New York.
“So, if you technically want to comply with 1452, you have to remove that lawsuit from the United States District Court in the Eastern District of New York to the United States District Court in Eastern District of New York, because that’s where the civil action is pending. That’s the district. That’s a nullity....You can’t remove a district court lawsuit to the district court where the civil action is pending, because you can’t remove a lawsuit from [and] to...the same Court. So this doesn’t work.”
As Lafferty phrased it:
“28 U.S.C. §1452 does not authorize removal to a bankruptcy court. The statute authorizes removal ‘to the district court for the district where such civil action is pending’ if the district court has jurisdiction under [Title 11]. As the bankruptcy court recognized, it is illogical to interpret the bankruptcy removal statute to authorize removal from a district court to the district court in the same district….
“Given the clear language of the statute, and the sensible meaning thereof adopted in the cases, we agree with the bankruptcy court that one could not reasonably interpret the statute as allowing a matter to be removed from a district court to the same district court. Accordingly, we would affirm on that basis.”
Lafferty said there are no circuit court decisions in point, but eight bankruptcy court opinions say that removal is not permissible, and there is one opinion of such a court that is arguably to the contrary. He wrote:
“Courts concluding that 28 U.S.C. §1452 does not permit removal from a federal district court directly to the bankruptcy court cite two reasons: first, the plain language of the statute does not support a contrary conclusion; and second, to interpret the bankruptcy removal statute as Debtors urge would thwart the district courts’ power to refer matters to bankruptcy courts. We agree with those courts.”
If the Curtis’s position were accepted, Lafferty said, it would “interfere with the district court’s power to control the referral of matters to the bankruptcy court” and would authorize bankruptcy court to remand a matter to a district court that had not been referred to it by that court.
Lafferty noted the “bedrock principle that the district courts have jurisdiction over bankruptcy cases and proceedings; the bankruptcy court’s jurisdiction over such matters is purely and solely derivative of the district court’s jurisdiction.” He commented:
“Any interpretation of a statute that would imply that the bankruptcy courts had jurisdiction of bankruptcy cases and proceedings separate and independent from, or even co-equal to, the jurisdiction granted the Article III courts, or that would interfere with the Article III courts’ exercise of that jurisdiction and judicial power through the system of referral to the bankruptcy courts, or that, as here, would permit bankruptcy courts to dispose of matters originating in the district courts in apparent derogation of the power of those courts to control their own proceedings, would be…a constitutional non-starter.”
In a footnote, Lafferty expressed bafflement as to why the Curtises are appealing given that any judgment that might be rendered against them in New York would still be subject to scrutiny in the bankruptcy court here as to dischargeability.
Los Angeles attorney Rebekah L. Parker argued for the Curtises. The case is In re Malcolm Curtis and Judith Curtis, CC-16-12 88-LtaKu.
Lafferty noted in his opinion that the Curtises also sought to remove the case from federal court in New York to the district court here. He related that the district court dismissed, without prejudice, and that an appeal is now pending in the Ninth Circuit.
In the action filed in federal court in New York in 2010, Shpak (along with other parties) contends that the Curtises son, who is not a party, promised to marry her; that the Curtises obtained restaurant equipment from her parents based on the representation that once she and their son were married, they would set the couple up with a restaurant in California; and that the Curtises made off with the equipment.
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