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