Basics for Non-Bankruptcy Litigation Lawyers
By Christine M. Kieta, Esq. The Law Office of Christine M. Kieta PC Hinsdale, Illinois
“ If he files for bankruptcy, then we will follow him into it.”
That would be the textbook battle cry of a true litigation General smoked out by his own pride as a non-bankruptcy lawyer. Something about bankruptcy just smacks of defeat and pierces the attorney’ s amor of success. But on the less crazy side and a bit more grounded in the law, jurisdiction in the bankruptcy courts is unique.
Getting into a Bankruptcy Court
“ Bankruptcy courts are not courts of general jurisdiction. [ They ] are courts of limited jurisdiction.” In Re Shepherds Hill Development Co., LLC, 263 B. R. 673, 683( 2001). Even bankruptcy attorneys make this mistake of what a bankruptcy court can adjudicate.
Consequently, following a debtor into bankruptcy can happen in a couple of ways. The most common way is when a debtor files a petition seeking the protection of the bankruptcy court, and the creditor( or the debtor for the creditor) then files a proof of claim. See 11 U. S. C. § 501 et seq. This tends to mean that the creditor will end up empty handed or with pennies on the dollar.
Further, in these instances the debtor is likely seeking the protection of the bankruptcy court because of the claim that the creditor holds or is currently litigating. If there is active or impending litigation filing for bankruptcy protection acts as an injunction against commencing or continuing the litigation. See 11 U. S. C. § 362( a)( 1). So the claim is probably dischargeable in a bankruptcy.
Another way to follow a debtor into bankruptcy is pursuant to 28 U. S. C § 157. This is particularly important for litigators. Under § 157( a) district courts— not state courts— are allowed to refer to the bankruptcy court all proceedings arising under title 11 or core proceedings arising in or related to a case under title 11. See 28 U. S. C. § 157( a). This may happen automatically, and the local court rules for your district can affect if and how it happens automatically.
The 9th Circuit, for example, requires an order from the district court where an action has already been commenced in the district court before the bankruptcy case was filed. Knapp v. Cardinale( N. D. Cal., 2014) Case No. 12-05076 at pg 2 citing L. R. 5011-( b). Stated differently, the debtor was getting sued and then turned around and filed for bankruptcy protection. In Knapp, the court analyzed the referral against a few factors including whether or not the claim fell under the“ related to” language under § 157 and whether or not judicial efficiency supported the referral. Id. at pg 2-3. But each district court may have a different procedure for this referral process governed by the local rules.
For the non-litigation lawyers reading this article the distinction of how the referral happens may sound mundane or irrelevant. But a civil litigation strategy could easily be derailed by a referral to the bankruptcy court. Further, civil litigation may involve multiple parties not all of whom can or did file for bankruptcy protection. So each procedural layer is important to understand because these layers are the avenues to challenge Orders or Judgments that are unfavorable.
But back to jurisdiction. Since bankruptcy courts are of limited jurisdiction even this“ referral … does not confer on the bankruptcy court unlimited power to hear and determine cases.” Shepherds Hill at 678.“ Proceedings arise under title 11 if they involve a cause of action created or determined by a statutory provision of the bankruptcy code.” Id. citation omitted( emphasis is original).“ Proceedings arising in a bankruptcy case are those that are not based on any right expressly created by title 11, but nevertheless would have no existence outside of the bankruptcy.” Id. citation omitted( emphasis is original).
More importantly, § 157( b)( 2) goes on to define“ core proceedings” which is one of the chief limitations on the
18 CONSUMER BANKRUPTCY JOURNAL Spring 2017 National Association of Consumer Bankruptcy Attorneys