California Court Discusses Withdraw of Reference of Bankruptcy Cases

Many bankruptcy claims are complex and involve adversary proceedings filed by creditors who believe the debtor engaged in conduct that renders their debt non-dischargeable, such as fraud. In some instances, a party alleging bankruptcy and non-bankruptcy claims in a single pleading in a case that is before a bankruptcy court, may file a motion asking a bankruptcy matter to be heard before the district court, which is referred to as a withdrawal of reference. Recently, a California court discussed grounds for granting a withdrawal of reference, in a case in which the debtor was accused of violation of fiduciary duties. If you are a California resident or business owner and you wish to file for bankruptcy, you should consult a dedicated California bankruptcy attorney to discuss your rights.

Factual and Procedural History

It is reported that the debtor individual and the debtor company, which was solely owned by the individual, both filed petitions for bankruptcy. Subsequently, adversary proceedings were filed by trustees in both cases, asserting claims of violation of fiduciary duties under ERISA and violation of the RICO act. The debtor individual’s bankruptcy was dismissed. The debtor company did not file an answer to the adversary proceeding, and a default was entered.

Allegedly, the trustees then filed a lawsuit against the debtor individual in the district court, again setting forth claims of violation of fiduciary duties under ERISA and violation of the RICO act. The trustees then filed a motion to withdraw the reference of the adversary proceeding against the debtor company, arguing that it was mandatory as it required consideration of both non-bankruptcy and bankruptcy claims, and non-bankruptcy law was substantially involved in the case.

Withdrawal of Reference in Bankruptcy Cases

In its analysis, the court noted that district courts have original jurisdiction over all bankruptcy matters, but they can refer all bankruptcy matters to bankruptcy courts. Additionally, the law provides that a district court may withdraw the reference of a case to a bankruptcy court under certain circumstances. Specifically, the reference of a case should be withdrawn if the court finds the resolution of the issues involves the consideration of both Title 11 and other laws of the United States.

In determining whether adequate cause exists to withdraw a reference to bankruptcy court, a district court must weigh the efficient use of judicial resources, the prevention of forum shopping, the uniformity of administration of the bankruptcy code, and other factors. In the subject case, the court found that the adversary claim required the court to consider both bankruptcy and non-bankruptcy issues. Thus, the court found that it was subject to mandatory withdrawal.

Meet with a California Bankruptcy Attorney

While bankruptcy courts generally resolve bankruptcy cases, in some instances, they may be handled by a district court. If you wish to proceed with seeking debt relief via bankruptcy, it is wise to meet with a lawyer regarding your options. Matthew D. Roy is a California bankruptcy attorney who is adept at helping people pursue reprieve from their debts, and he is eager to help you with your legal needs. You can reach him through the form online or at (916) 361-6028 to schedule a conference.