Can a State Court Case Be Moved to Bankruptcy Court?

When you're involved in a state court lawsuit, you don't expect to try the case in bankruptcy court. But it can happen if the outcome of the state litigation will affect the bankruptcy case.

How a Case Gets Moved to Bankruptcy Court

It all starts when someone involved in the state case files for bankruptcy. The matter picks up traction when one of the parties decides that they would stand a better chance of winning in the bankruptcy court. (Under 28 U.S.C. § 1452, any party to the state court lawsuit has the right to remove it to bankruptcy court.)

Next, a motion gets filed asking for the transfer. In almost every instance, the motion filer argues that the case should be transferred for the following reason: The matter in state court will need to be addressed by the bankruptcy court too, and that piecemeal litigation can be inefficient and lead to contradictory results.

Here are a few types of cases in which this argument might work:

• Fraud litigation. A creditor files suit against an individual debtor (the person who files for bankruptcy) for a business debt and claims that the debtor committed fraud. A court decision that finds the debtor committed fraud could affect whether the debt is dischargeable (gets wiped out) in the bankruptcy case.
• Personal injury litigation. A debtor files suit against a third party for personal injury in a car accident (or another type of event). A decision for the debtor could significantly impact how much money will be available to pay creditors.
• Business litigation. Shareholders file several lawsuits against a financially distressed corporation for failing to pay dividends in state court. If the corporation files a Chapter 11 bankruptcy, the shareholders (or the corporation) might ask to bring the lawsuit into bankruptcy court to save money.

The bankruptcy judge has broad discretion to decide what will happen to the state court case. Even so, the judge will likely consider some factors including:

• the effect on the administration of the bankruptcy case
• what point the state case has reached and the cost to the parties
• whether the issues involve state law
• whether the issues are complicated or unsettled
• how closely related the state case is to the outstanding bankruptcy issue
• the effect on other related state court cases
• the burden on the bankruptcy court's calendar
• whether the bankruptcy-related issues can be separated from other issues
• whether the bankruptcy was filed to gain jurisdiction over the state case
• whether the parties have a right to a jury trial, and
• the effect on other people involved in the litigation other than the debtor.

Someone who opposes removal can ask the bankruptcy court to remand (send) the case back to state court. (Learn more in What Is Bankruptcy Litigation?)

Cases the Court Can (and Can't) Move to Bankruptcy Court

There are two federal laws under which the court can remove a case from state to federal court. Each method has slightly different procedural and timing requirements.

Most cases that end up in the bankruptcy court are transferred under 28 U.S.C. § 1452(a), which allows for the removal of almost any case, including matters "related to" a bankruptcy case.

Under § 1452, it isn't necessary to move the entire case. If there are causes of action or portions of the case that the judge can separate from the rest, the court can do so.

Not all cases are transferable, however. For instance, bankruptcy won't disrupt the following actions:

• criminal law matters
• cases in tax court or that involve a government agency's police powers (28 U.S.C. § 1452)
• cases involving personal injury or wrongful death (but they can be moved to a federal district court under 28 U.S.C. § 157)
• domestic relations and child custody cases, although the bankruptcy court may exercise its jurisdiction over property settlements that involve property of the bankruptcy estate, and
• probate matters.

Timing the Removal Request

Someone who wants to remove a case from a state court doesn't have much time to make that happen. The deadlines vary, however, and depend on whether the state court case was pending when the debtor filed the bankruptcy or started after the bankruptcy case began (and other factors).

However, you should be aware that the deadline can be as short as 30 days. If you find yourself in this situation, you should consult with a knowledgeable bankruptcy attorney promptly.

Meeting With an Attorney

Removing a state case to bankruptcy or federal district court entails both a strategic analysis of your position and an understanding of the law. If you're involved in a civil litigation matter with a bankruptcy component, it's likely that you already have an attorney. If not, seek counsel.

(If you're unsure about how to hire a bankruptcy attorney to help, read What to Look for in a Bankruptcy Litigation Lawyer.)