Breaking New Ground (Again) In Chapter 15

To read Business Restructuring Review in full, please click here.

Two recent decisions from the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") have further contributed to the rapidly expanding volume of chapter 15 jurisprudence. In In re Fairfield Sentry Ltd., 2011 WL 1998374 (Bankr. S.D.N.Y. May 23, 2011), and In re Fairfield Sentry Ltd., 2011 WL 1998376 (Bankr. S.D.N.Y. May 23, 2011), bankruptcy judge Burton R. Lifland rendered two decisions involving offshore "feeder funds" that invested in the massive Ponzi scheme associated with Bernard L. Madoff Investment Securities LLC ("BLMIS"). Judge Lifland ruled, in matters of apparent first impression, that: (i) the court would not remand or abstain from hearing actions commenced by the foreign representatives of a foreign debtor seeking recovery or avoidance of transfers made in connection with the Madoff Ponzi scheme; and (ii) the tolling provisions of the Bankruptcy Code apply in chapter 15, such that the foreign representatives would receive an extension of deadlines in connection with both pending and potential lawsuits.

REMOVAL OF LITIGATION TO THE BANKRUPTCY COURT

One of the benefits of filing for bankruptcy is that it suspends piecemeal litigation against the debtor and its assets in potentially hundreds of different courts and centralizes litigation in a single coordinated forum. To that end, the debtor and anyone who is involved in litigation with the debtor are permitted pursuant to 28 U.S.C. § 1452(a) to "remove" to the district court certain kinds of litigation pending in state or other federal courts. In most districts, such removed actions are then automatically referred to the bankruptcy court. In accordance with Rule 9027 of the Federal Rules of Bankruptcy Procedure ("Bankruptcy Rule 9027"), removal requires only that the litigant file a notice of removal with the district court, or the bankruptcy court in districts in which such matters are automatically referred to the bankruptcy court, within a prescribed period that varies according to whether the litigation was commenced prior or subsequent to the bankruptcy petition date.

The notice must contain a statement indicating whether, once removed, the action would be within the bankruptcy court's "core" jurisdiction and, if not, whether the removing litigant consents to the entry of final orders or judgment by the bankruptcy court. Court approval is not necessary. Certain actions, however, may not be removed to the district or bankruptcy court. These include noncivil actions (e.g., criminal, administrative, and arbitration proceedings), tax court proceedings, certain governmental proceedings, and claims or causes of action over which the district court does not have jurisdiction.

REMAND AND ABSTENTION

Once litigation has been "removed" to the district or bankruptcy court, under certain circumstances, the court can "remand" such removed litigation to the court from which it came. Pursuant to 28 U.S.C. § 1452(b), the court may remand a removed "claim or cause of action on any equitable ground." Factors that courts consider in determining whether "equitable remand" is appropriate include: (1) the effect of the action on the administration of the bankruptcy estate; (2) the extent to which issues of state law predominate; (3) the complexity of applicable state law; (4) "comity," or the interest that a state has in developing its law and applying its law to its citizens; (5) the relatedness or remoteness of the action to the bankruptcy case; (6) the existence of a right to jury trial; and (7) prejudice to the party involuntarily removed from state court. A court's decision on a remand request is not subject to appellate review above the district court level.

A related concept—"abstention"—involves the bankruptcy court's determination not to hear a case because another forum is more appropriate. "Permissive abstention" from adjudicating particular controversies in a bankruptcy case is authorized by 28 U.S.C. § 1334(c)(1), which provides (with emphasis added):

Except with respect to a case under chapter 15 of title 11, nothing in this section prevents a district court in the interest of justice, or in the interest of comity with State courts or respect for...