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November 30, 2022 Feature

Interplay between Bankruptcy and State Courts: Concurrent Jurisdictions

By Judge Stephanie Domitrovich

When I was a relatively new trial judge over 32 years ago, I received notice that my family court case was automatically stayed by the bankruptcy court when one of the spouses in my nonsupport case filed for bankruptcy. Month after month, I would bring the attorneys in that case into my courtroom to provide an update on the status of the bankruptcy proceeding. The attorneys would tell me that the bankruptcy court stay remained in place, and I could do nothing in the state court. Concerned with this repetitive answer, I did some research and learned that both the state court and the bankruptcy court had “concurrent jurisdiction” over this matter. I called the local bankruptcy judge, Judge Warren Bentz, to ask him for assistance about my case. Judge Bentz said I was correct about concurrent jurisdiction, but he was told by counsel that I was not ready for the stay to be lifted. I said that was incorrect, and we both chuckled. He offered to hold a conference in his courtroom for both of us to be present to address counsel. He also suggested I bring my robe so we could both sit together on his bench to address our cases together.

On the day of the hearing, I recall seeing the jaws of counsel drop when we both took the bench. Judge Bentz and I acknowledged on the record we had concurrent jurisdiction in this case. Judge Bentz asked me as the state court judge whether I needed to have the stay lifted and why. I explained my court’s procedural position and how the case had not moved in months and involved important issues of nonsupport claims for the minor children and spousal support. Judge Bentz asked counsel if there were any objections. There were none. Because no objections were raised, Judge Bentz immediately lifted the stay against the state court on the record. We were done with our hearing in just a few minutes. Months later, in a similar situation, the issue occurred again in a different case. This time I invited Judge Bentz to sit with me on my state court bench. Judge Bentz came over with his robe, we created a record of the issues involved, and he lifted the stay. Throughout the years, we were proud of our actions that showed the essence of concurrent jurisdiction between our two courts and how we avoided delay by simply communicating.

The interplay between bankruptcy and state courts can become very complicated, and, as illustrated, delay can become a huge issue. A bankruptcy case from 10 years ago, In re Brian Lemoine, Debtor, 2012 WL 5906939 (Bankr. E.D. Pa. Nov. 26, 2012), shows this complexity when the debtor moved to reopen his Chapter 7 bankruptcy case by filing a complaint alleging a dischargeable debt. Debtor husband wanted to discharge his liability for legal fees, which he had agreed to pay for his ex-wife’s attorney in their divorce proceeding. The ex-wife objected to reopening the case in bankruptcy court, so the chief U.S. bankruptcy court judge, Stephen Raslavich, wrote a comprehensive opinion explaining concurrent jurisdiction.

The procedural history of this case was typical for a divorce case. The divorce decree required husband (the debtor) to pay child support, reimburse his ex-wife for various expenses, and provide her with life and health insurances. The debtor was also required to reimburse his ex-wife for certain legal fees and costs that she incurred during the divorce. Although the debtor’s ex-wife timely submitted her bill for those fees and costs to the debtor, he failed to pay in the required installments. The debtor’s ex-wife then sought to hold the debtor in contempt of court for his failure to make payments required by the decree. The state court ordered the debtor to make those payments by a date certain, warning the debtor that if he failed to do so, he could be responsible for his ex-wife’s legal fees incurred in beginning the contempt proceeding.

Chief Judge Raslavich noted the debtor started his Chapter 7 bankruptcy the same month the state court found him in contempt of court for failing to pay child support and to pay his ex-wife’s additional legal fees. The debtor’s ex-wife filed a second complaint for civil contempt for the debtor’s failure to reimburse the ex-wife for health insurance premiums and to pay previously ordered legal fees. The debtor received a standard discharge under § 727 of the Bankruptcy Code, which states “domestic support obligations” are not dischargeable. At a state court hearing on the ex-wife’s second contempt complaint, the debtor said he would seek an order to reopen his case in order to discharge his liability for the ex-wife’s legal fees. Based on the debtor’s representation, the state court reserved judgment on the award of counsel fees until the bankruptcy court ruled on the debtor’s motion to reopen.

In the procedural history of the case, Chief Judge Raslavich discussed “concurrent jurisdiction,” which was “necessarily implicated” when the debtor’s ex-wife opposed the debtor’s request to reopen his bankruptcy case preferring to leave matters with the state family court. See id. at 2. The bankruptcy court acknowledged it had jurisdiction over discharging a particular debt, but “that does not mean, however, that this court has exclusive jurisdiction over this question.” Id. The chief judge noted the Bankruptcy Code provides a divorce case is generally not affected by a bankruptcy filing, except where a proceeding seeks to determine the division of property that is part of the bankruptcy estate. The chief judge noted state courts of general jurisdiction have the power to decide cases involving federal rights where neither the Constitution nor statute withdraws such jurisdiction. Debts for alimony or support are not among the debts eligible for discharge, so a state trial court has concurrent jurisdiction with the bankruptcy court to determine dischargeability.

Given the existence of concurrent jurisdiction, the issue became whether bankruptcy court should hear the case or abstain in favor of the state court. Chief Judge Raslavich noted, “[h]istorically, federal courts have been loath to become involved in domestic relations matters of any kind.” See id. at 3. He also described a 12-factor test to determine whether to abstain from hearing certain matters:

  1. effect or lack thereof on efficient administration of the estate;
  2. extent to which state law issues predominate over bankruptcy issues;
  3. difficulty or unsettled nature of the applicable state law;
  4. presence of a related proceeding commenced in state court or other non-bankruptcy court;
  5. jurisdictional basis, if any, other than 28 U.S.C. § 1334 [“Bankruptcy cases and proceedings”];
  6. degree of relatedness or remoteness of the proceeding to the main bankruptcy case;
  7. substance rather than the form of an asserted “core” proceeding;
  8. feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with the enforcement left to the bankruptcy court;
  9. burden of the court’s docket;
  10. likelihood that commencement of proceeding in bankruptcy court involves forum shopping by one of the parties;
  11. existence of a right to a jury trial; and
  12. presence in the proceeding of non-debtor parties.

The chief judge noted it would be “grossly unfair to the Debtor’s ex-wife, a non-debtor, to require her to litigate the instant dispute in a new forum. Admittedly, she is a creditor of the Debtor, but this being a no asset case, the payment of her legal fees will not come from a bankruptcy estate but from the Debtor himself.” See id. at 4. The chief judge also found the debtor’s motivation in deciding to litigate the question of dischargeability of legal fees was suspect and basically forum-shopping. He wrote the Bankruptcy Code should not be abused as a weapon for marital disputes, and bankruptcy courts should avoid resolving family law matters, noting state courts have expertise in this area of the law. The state court involved had original jurisdiction over divorce proceedings by statute, thereby having jurisdiction over the dischargeability of debts in this case. Moreover, the case was a “no-asset” case in bankruptcy court, where the debtor was seeking to keep all his property claiming it was exempt, so no bankruptcy estate was to be administered in the first place. “If there is jurisdictional weight to be accorded as between these two fora, it falls heavily in favor of the state court.” See id. at 5.

The chief judge acknowledged the case was not complicated and contained no unsettled legal issue, meaning either court could resolve the legal issues. Using a commonsense approach, the chief judge remarked it made little sense to remove this matter from the state court, which “has intimate knowledge of the case and so it is well-positioned to make the determination.” Id. If the state court finds the fees are, in fact, support and are, therefore, non-dischargeable, then that ruling could be enforced in that court, if necessary. Thus, he weighed factors 1, 2, 4, 5, 6, 7, and 8 in support of abstention, while only factor 3 did not. The chief judge ruled it was a “sensible course” to defer to the state court in fairness, comity, and judicial economy.

In a more recent Pennsylvania state court case, Hanrahan v. Ketch, 243 A.3d 219 (Pa. Super. 2020), a general jurisdiction judge erred by failing to consider the parameters of concurrent jurisdiction between bankruptcy and state courts and by finding the husband’s sole remedy was to seek clarification or challenge discharge of the wife’s marital debt in bankruptcy court. The husband appealed to the state intermediate appellate court, which reversed and remanded to the state court for further hearings.

In Hanrahan, soon after the entry of the divorce decree, having paid the husband $15,166 of the agreed-upon debt, the wife petitioned for bankruptcy under Chapter 7. She listed a $36,000 debt that she owed to the husband among the nonpriority unsecured claims she sought to discharge. She characterized her $36,000 debt to the husband as “Obligations arising out of a separation agreement or divorce that [she] did not report as priority claims.” See id. at 220. The husband did not participate in the bankruptcy proceeding, challenge the filing, or assert in the bankruptcy court this debt was not dischargeable. The bankruptcy court entered a nonspecific, form order of discharge indicating most, but not all, debts were covered by the discharge.

The husband, who was self-represented, then filed a petition for contempt in the state court family matter against his wife, asserting she failed to pay him. The wife countered that the debt had been discharged in bankruptcy and that any remedy by her husband was to seek to reopen the bankruptcy. The state court dismissed the husband’s petition for contempt, as well as a follow-up contempt petition, and the husband appealed. The Pennsylvania intermediate appellate court found the wife’s debt to her husband was exempt from discharge, the husband was not required to assert this issue in the bankruptcy court, and the state trial court had concurrent jurisdiction to enforce the wife’s obligation in favor of her husband.

These paired cases show the importance of concurrent jurisdiction between state and bankruptcy courts. Judges of both courts need to be aware of the various parameters and intricacies of concurrent jurisdiction. They must comprehend the factual and legal underpinnings that exist in their own cases in which the interrelationship between bankruptcy law and state court proceedings exists. Judges must make the requisite findings about the factual circumstances and then apply the necessary factors and law to avoid any forum shopping by the parties. In doing so, judges protect the integrity of their proceedings through their rulings that promote judicial economy and fairness. A court cannot simply defer to the other court without sufficient reasons for doing so. Judicial decisions must make sense when supported by the rule of law. The interplay between these two courts shows how important it is to reach the right decisions at the crossroads of justice in the appropriate court.

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By Judge Stephanie Domitrovich

Judge Stephanie Domitrovich, PhD, is a senior judge for Pennsylvania, after being an elected general jurisdiction trial judge for over 32 years.