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Subject Matter Jurisdiction and Abstention in Legal Malpractice actions brought by a Bankruptcy Debtor – Part 2

Part 1 of this blog series examined a bankruptcy court’s subject matter jurisdiction over a debtor’s legal malpractice claims. See, Part 1.  Recognizing that bankruptcy courts typically retain related to jurisdiction over legal malpractice claims against a debtor’s pre-petition counsel, this blog now turns to abstention considerations for a legal malpractice strategy.

Mandatory Abstention:

Mandatory abstention is required in certain cases in which all claims are state law claims and the sole basis of bankruptcy jurisdiction is related to jurisdiction. 28 U.S.C. § 1334(c)(2); In re Southmark Corp., 163 F.3d 925, 929 (5th Cir. 1999)Section 1334(c)(2) of title 28 provides that:

Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.

Accordingly, upon a party’s timely motion, a bankruptcy court must abstain from hearing a state law claim if a timely motion is filed and the following elements are met:

(1) The claim has no independent basis for federal jurisdiction, other than § 1334(b); (2) the claim is a non-core proceeding, i.e., it is related to a case under title 11 but does not arise under or in a case under title 11; (3) an action has been commenced in state court; and (4) the action could be adjudicated timely in state court. Schuster v. Mims (In re Rupp & Bowman Co.), 109 F.3d 237, 239(5th Cir. 1997)(citing Gober v. Terra + Corp. (In re Gober), 100 F.3d 1195, 1206 (5th Cir.1996); 28 U.S.C. §§ 1334(c)(2), 157(b)(1)).

Particular to the elements of mandatory abstention is the requirement of a pending state court action where the malpractice claim may be “timely adjudicated”.  The existence of such an action is usually determinative in a bankruptcy court’s decision on mandatory abstention. The pending state court action need not be a legal malpractice suit, but it must include the debtor as a party and have a sufficient basis/nexis to permit adjudication of the legal malpractice claim.  Where these elements are present, mandatory abstention can be a powerful tool in the forum selection process for legal malpractice claims.  Part 3 of this blog series will examine the effect of permissive abstention on a debtor’s legal malpractice claims.

 

Authored by Paul S. Murphy

Paul Murphy