Bankruptcy Abstention

One recurring issue in bankruptcy proceedings is who has jurisdiction between a bankruptcy court and a state court. There are intricate rules as to core and non-core proceedings, which influence the decision. But, to complicate matters even further, the Bankruptcy Code provides for circumstances when a bankruptcy court must abstain from exercising its jurisdiction, and when it may abstain from exercising its jurisdiction.

28 U.S.C. Section 1334(c)(2) states seven requirements that must be met for when a bankruptcy court must abstain from exercising its jurisdiction. Those requirements are:

  1. A timely motion must be filed by the party seeking abstention;
  2. The action must be based on questions of state law;
  3. The proceeding must be related to the bankruptcy case as opposed to being an actual case or core proceeding;
  4. The proceeding must be an action for which there is no independent federal jurisdiction absent the petition under title 11;
  5. The action is commenced in a state court;
  6. The action may be timely adjudicated in a state forum; and,
  7. A state forum of appropriate jurisdiction exists.

Furthermore, 28 U.S.C. Section 1334(c)(1) states that “nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for State law, from abstaining from hearing a particular proceeding arising under title 11 or arising in or related to a case under title 11.” The Ninth Circuit has settled on twelve factors to consider when deciding whether to voluntarily abstain:

  1. The effect or lack thereof on the efficient administration of the estate if a Court recommends abstention;
  2. The extent to which state law issues predominate over bankruptcy issues;
  3. The difficult or unsettled nature of the applicable law;
  4. The presence of a related proceeding commenced in state court or other nonbankruptcy court;
  5. The jurisdictional basis, if any, other than 28 U.S.C. Section 1334;
  6. The degree of relatedness or remoteness of the proceeding to the main bankruptcy case;
  7. The substance rather than form of an asserted “core” proceeding;
  8. The feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court;
  9. The burden of the bankruptcy court’s docket;
  10. The likelihood that the commencement of the proceedings in bankruptcy court involves forum shopping by one of the parties;
  11. The existence of a right to a jury trial, and,
  12. The presence in the proceeding of nondebtor parties.

In re Tucson Estates, Inc., 912 F.2d 1162, 1166-67 (9th Cir. 1167).