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.
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:
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:
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?)
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:
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.
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.)