Understanding Withdrawal of the Reference - ABA YLD 101 Practice Series

By Amy L. Drushal

Pursuant to the 1984 Amendments of the Bankruptcy Code, bankruptcy jurisdiction remains with Article III district courts. Thus, as a result of the limitations on bankruptcy courts after the 1984 Amendments, a party may be required to litigate matters previously heard by bankruptcy courts, in the district courts. However, Title 28, United States Code, Section 157 authorizes a district court to withdraw a reference to the bankruptcy court under certain circumstances. It is the duty of the party, in these circumstances, to move to withdraw the reference of an entire case, a portion of the case or adversary proceeding, or a contested matter from the bankruptcy court back to the district court. 1 Bankr. Prac. Handbook § 3:4 (2nd Ed. June 2006), Bankr. R. 5011. A district court may withdraw, in whole or in part, any case or proceeding referred to the bankruptcy court and may do so on its own motion or on the timely motion of any party for cause shown. See 28 U.S.C. § 157. The motion must be heard by the district court and the decision to withdraw the reference is within the sole discretion of the district court. Id. However, the bankruptcy court can make recommendations as to whether the district court should withdraw the reference.

In filing a motion to withdraw the reference, the moving party must file it with the bankruptcy court, which the clerk of bankruptcy court then transfers to the district court. Further, these procedures in filing the motion are often dictated by the local rules of the court or by an order of the court providing the automatic referral of most bankruptcy or bankruptcy-related matters.

Withdrawal of a reference applies to both core and noncore proceedings. See Carlton v. Baww, Inc., 751 F. 2d 781 (5th Cir. 1985); U.S. v. ILCO, Inc., 487 B.R. 1016 (N.D. Ala. 1985). Thus, in considering whether or not to withdraw the reference, the district court must first evaluate whether the claim is core or non-core. Then, the court must weigh the issues of the efficient use of judicial resources, delay, and costs to the parties, uniformity of bankruptcy administration, and the prevention of forum shopping. In re FMI Forwarding Co., Inc., 2004 WL 1348956 (S.D.N.Y. 2004). There are two types of withdrawal: mandatory withdrawal and discretionary withdrawal.

Mandatory Withdrawal
A district court must withdraw the reference if there is an unavoidable nexus between the bankruptcy issue in the case and federal law affecting interstate commerce, or where the matter would result in liquidation of a claim for personal injury or wrongful death. See 28 U.S.C. §157(d); e.g. In re Amer. Solar King Corp., 92 B.R. 207 (N.D. Tex 1988). Specifically, a majority of the courts hold that withdrawal is mandatory "if resolution of the issues requires 'substantial and material consideration' of nonbankruptcy code statutes." In re Amer. Body Armor & Equip, Inc., 155 B.R. 588, 590 (M.D. Fla. 1993); e.g. In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004) (withdrawing the reference where the debtor requested a rejection of executory power purchase agreement and against any person seeking specific performance of the entity); In re Manhattan Invest. Fund Ltd., 343 B.R. 63 (S.D.N.Y. 2006). To qualify as a substantial and material consideration, the claims must involve "resolution of cases of first impression or 'substantial and material conflicts' between non-title 11 federal law and the Bankruptcy Code." In re Amer. Body Armor & Equip., Inc., 155 B.R. at 590 (citing In re Adelphi Inst. Inc., 112 B.R. 534, 537 (S.D.N.Y. 1990)); 28 U.S.C. § 157(d).

Discretionary Withdrawal
Title 28, United States Code, Section 157(d) provides for discretionary withdrawal of the reference. 28 U.S.C. §157(d). Discretionary withdrawal of the reference may be based upon any grounds. For example, a district court may withdraw the reference if the matter will be tried to a jury, or where there is an objection alleging that the matter to be tried is not a "core proceeding." 3 Bankruptcy Practice Handbook §18:7 (2d Ed., June 2006) (citing 28 U.S.C. §157(e)). However, if the withdrawal is based upon an objection to the matter as a core proceeding, the motion should be directed to, and will be determined by, the bankruptcy court. Id.

Discretionary withdrawal requires the demonstration of cause. 28 U.S.C. § 157(d). To determine whether cause exists, the courts consider the following factors when determining whether or not to withdraw the reference: (1) whether the claim is core or non-core; (2) what is the most efficient use of judicial responses; (3) what is the delay and what are the costs to the parties; (4) what will prevent forum shopping; (5) what will promote uniformity of bankruptcy administration; and (6) other related factors. CNH Amer., LLC v. Venture Indus. Corp., 344 B.R. 526, 528-529 (E.D. Mich. 2006) (quoting In re Burger Boys, 94 F.3d 755, 762 (2d Cir. 1996)); e.g. In re Amer. Classic Voyages Co., 337 B.R. 509 (D. Delaware 2006).

In addition, any proceeding withdrawn by the district court must be an operative part of the proceeding, the adjudication of which would grant meaningful relief. Otherwise, the withdrawn part of the proceeding may be considered to be a request for an advisory opinion, which is beyond the subject matter jurisdiction of the District Courts. 1 Norton Bankruptcy Law and Practice 2d §8.1 (Sept. 2006).

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About the Author

Ms. Drushal is an associate with Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, P.A. in Tampa, Florida. Her practice centers on creditors' rights and business litigation.

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