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 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