RIGHT TO A JURY TRIAL IN BANKRUPTCY PROCEEDINGS In the ...

RIGHT TO A JURY TRIAL IN BANKRUPTCY PROCEEDINGS 

In the seminal case, Granfinanceria, S.A. v. Nordberg, the Supreme Court held 

that a jury trial must be provided in a bankruptcy proceeding when the relief sought is of 

a legal nature, such as money damages and private rights. 492 U.S. 33, 50 (1989). 

However, the Court expressly declined to decide whether a bankruptcy court could 

preside over such a trial. Id. Furthermore, the Court failed to address whether 

authorizing Article I bankruptcy judges to conduct jury trials would violate Article III 

and the Seventh Amendment of the United States Constitution. Id. 

Following Granfinanceria, a bankruptcy court’s ability to conduct jury trials was 

“in substantial doubt.” Craig H. Averch, Article: Denial of Discharge Litigation, 16 Rev. 

Litig. 65, 132 (Winter, 1997). However, the Bankruptcy Reform Act of 1994 added 28 

U.S.C. 157 (e) authorizing bankruptcy courts to conduct jury trials under certain 

circumstances. Specifically, Section 157(e) provides that: 

If the right to a jury trial applies in a proceeding that may 

be heard under this section by a bankruptcy judge, the 

bankruptcy judge may conduct the jury trial if specially 

designated to exercise such jurisdiction by the district court 

and with the express consent of all parties. 

Despite the enactment of §157(e), however, the issue of whether a bankruptcy 

judge is empowered to conduct jury trial remains unknown. See Denise M. Barton, 

Recent Development: In re Clay: The Fifith Circuit Denies Bankruptcy Courts the Power 

NYCLA Seminar March 9, 2004 1

to Conduct Jury Trials Without Consent of the Parties, 69 Tul. L. Rev. 1703, 1712 (June, 

1995). Section 157(e) is “largely untested by the courts and raises similar constitutional 

issues to those that plagued jury trial provisions under earlier statutes.” Id; See also 

Lawrence Ponoroff & Stephen Snyder, Can Bankruptcy Judges Conduct Jury Trials?, 

Commercial Bankruptcy Litigation § 3:21 (2002) (discussing the constitutional question 

lurking behind 28 U.S.C. § 157(e) but suggesting that consent may cure any 

constitutional problems). 

Circuit courts that have considered whether a bankruptcy judge may preside over 

a jury trial have uniformly agreed that no statutory provision either expressly authorizes 

or prohibits such jury trials. See Janine C. Ciallela, Should Bankruptcy Judges be 

Permitted to Conduct Jury Trials?, 8 Am. Bankr. Inst. L. Rev. 175 (2000). Yet, the 

courts remain split on whether bankruptcy courts may nonetheless conduct jury trials in 

“core” proceedings, in which the action “arises under” title 11 or “arises in” a title 11 

bankruptcy case. Id. 

The Second Circuit, for example, has held that bankruptcy courts may conduct 

jury trials in core proceedings in In re Ben Cooper, Inc. 896 F.2d 1394, 1403 (2d Cir. 

1990). The court found that a jury verdict in a core proceeding does not violate rules 

regarding appeals of bankruptcy cases. Id. In addition, the court reasoned that jury 

verdicts in bankruptcy courts do not violate Article III because bankruptcy courts 

normally have the power to enter final judgments without violating Article III. Id. 

The Eighth Circuit, on the other hand, held that the bankruptcy court has no 

authority to conduct a jury trial in In re United Missouri Bank of Kansas City, N.A. 901 

F.2d 1449 (8 th Cir. 1990). In that case, the court considered that although bankruptcy 


judges were not expressly given the authority to conduct jury trials under the 1978 Act, 

Congress’ extremely broad jurisdictional grant in 1998 indicated its intent that the 

bankruptcy court conduct jury trials. Id. at 1451-52. However, when the Supreme Court 

in Marathon Oil, 458 U.S. 50, struck down this broad grant of jurisdiction as 

unconstitutional, Congress responded with the 1984 Amendments establishing a 

bifurcated system dividing bankruptcy court jurisdiction between core and non-core 

proceedings. The United Missouri Bank in its view, concluded that the statutory 

language and the legislative history of these Amendments indicated that Congress did not 

intend to authorize jury trials in bankruptcy courts. 

Like the Eighth Circuit in United Missouri Bank, the Seventh Circuit has also held 

bankruptcy courts may not conduct jury trials. In re Grabill Corp., 967 F.2d 1152 (7 th 

Cir. 1992). The Grabill court considered the 1984 Amendments and the available 

legislative history and held that they contained no affirmative indication that Congress 

desired to authorize jury trials in bankruptcy courts. Id. at 1154. Grabill also noted that 

Congress had expressly conferred the power to conduct jury trials upon magistrate 

judges, who, like bankruptcy judges, are Article I judges. Id. at 1155. The Grabill court 

reasoned that since Congress had ample opportunity to expressly grant the same power to 

bankruptcy judges as it did to magistrate judges, and it failed to include such a provision 

in the 1984 Amendments, Congress did not intend to authorize jury trials in bankruptcy 

courts. Id. 

Similarly, the Third Circuit held in Beard v. Braunstein that: 

The Seventh Amendment limitations on the review of jury 

findings are not compatible with section 157(c)(1), which 

requires that any contested finding by the bankruptcy court 

must be reviewed de novo. By the Seventh Amendment, 


any fact found by a jury cannot be reviewed de novo. 

Accordingly, a bankruptcy court cannot conduct a jury trial 

in a non-core proceeding. 

914 F.2d 434, 443 (3d Cir. 1990). 

Although the circuits are split on the question of whether a bankruptcy judge may 

preside over a jury trial in a core proceeding, all agree that a bankruptcy judge is 

prohibited from conducting a jury trial in a “non-core” proceeding, an action that is 

merely “related to” the bankruptcy case. Their reasoning is based on the fact that the 

1984 Amendments explicitly state that a bankruptcy judge cannot enter a final judgment 

in a non-core proceeding unless the parties consent. See Cialella, 8 Am. Bankr. Inst. L. 

Rev. at 195. Because of this limitation, all courts addressing the issue have held that jury 

trials of non-core matters must occur before a district judge unless the parties agree 

otherwise. See id.; see also, Palmisano v. Briggs (In re Northern Design, Inc.), 53 B.R. 

25, 27 (Bankr. D. Vt. 1985). One clear example of such a non-core proceeding is the 

liquidation of personal injury claims, which must be tried before the district court. See 28 

U.S.C. §157(b)(2)(b) and §157(b)(5); Official Committee of Asbestos Claimants v. G-I 

Holdings, Inc. (In re G-I Holdings, Inc.), 295 B.R. 211, 221 (D.N.J. 2003). 

Objections to claims, even to the extent they constitute a counterclaim for 

affirmative relief that exceeds the creditors’ claim, can be adjudicated by the bankruptcy 

judge without a jury, and the bankruptcy judge can award a judgment for affirmative 

relief against the creditor if all elements necessary to adjudication of the counterclaims 

are part of the adjudication of the objection to the claim. See, e.g., In re Dietert, 271 B.R. 

499 (Bankr. S.D. Tex. 2002). However, the creditor retains the right to a jury trial 

(outside of Bankruptcy Court) with respect to any issue that need not be adjudicated as 


part of the allowance of the claim or an objection to the claim. Id. In any event, the 

consequences of res judicata and collateral estoppel apply to the bankruptcy court’s 

adjudication. Id. 

BANKRUPTCY COURT REMAND TO STATE COURT 

Parties are permitted to remove from a state court to the federal district court 

“where such civil action is pending” any claim or cause of action over which bankruptcy 

jurisdiction extends through either or both 28 U.S.C. §§ 1441 or 1452. Things 

Remembered, Inc. v. Petrarca, 516 U.S. 124 (1995). Parties removing an action from 

state court have the burden of proving federal jurisdiction. Certain Underwriters at 

Lloyd’s, London, et al. v. ABB Lummus Global Inc., et al., 2004 U.S. Dist. LEXIS 1486 

*13 (S.D.N.Y. 2004). 

Section 1441 is the general federal removal section relating to federal jurisdiction 

based on diversity or the presence of a federal question. Section 1452 on the other hand, 

is specially designed to effect removal of claims related to bankruptcy cases, providing 

that: 

28 U.S.C. § 1452(a). 

A party may remove any claim or cause of action in a civil 

action other than a proceeding before the United States Tax 

Court or a civil action by a governmental unit to enforce 

such governmental unit’s police or regulatory power, to the 

district court for the district where such civil action is 

pending, if such district court has jurisdiction of such claim 

or cause of action under section 1334 [Bankruptcy 

jurisdiction] of this title. 

This broad bankruptcy removal provision is coupled, however, with an even 

broader statute which permits these removed actions to be remanded to the state court “on 

any equitable ground.” 28 U.S.C. § 1452(b). Courts typically weigh several factors 


when deciding if grounds exist for remanding a case involving bankruptcy issues to state 

court. Dalen v. Clamage, 1997 U.S. Dist. LEXIS 16278 *17 (N.D. Ill. 1997). These 

include: 

1) the extent to which judicial resources will be 

duplicated or inefficiently used; 

2) whether remand will adversely affect the 

administration of the bankruptcy estate; 

3) whether the case involves state law issues better 

addressed by a state court; 

4) comity considerations; 

5) whether there is prejudice to unremoved parties; 

6) whether the remand lessens the possibility of 

inconsistent results; and 

7) whether the court in which the action originated has 

greater expertise. 

Id; See also Certain Underwriters at Lloyd’s, 2004 U.S. Dist. LEXIS 1486 at *30 

(S.D.N.Y. 

Once a bankruptcy or district court remands a case to state court, it is divested of 

jurisdiction. 28 U.S.C. § 1447(c); New Orleans Public Service, Inc. v. Majoue, 802 F.2d 

166, 167 (5 th Cir. 1986). The federal court is prohibited from proceeding any further 

regarding the claim or cause of action, and is not even entitled to vacate the order. Hunt 

v. Acromed Corp., 961 F.2d 1079 (3d Cir. 1992); Seedman v. United States District Court 

for Central District of California, 837 F.2d 413 (9 th Cir. 1988). Furthermore, federal 


courts of appeals are statutorily precluded from reviewing an order of remand issued by a 

district court or a bankruptcy court. 28 U.S.C. §1447(d); 28 U.S.C. §1452(b). Likewise, 

Bankruptcy Appellate Panels are prohibited from reviewing a bankruptcy court’s grant or 

denial of remand. 28 U.S.C. §158(b) & (c). Personette v. Kennedy (In re Midgard 

Corp.), 204 B.R. 764, 768 (B.A.P. 10 th Cir. 1997). 

A recent Third Circuit bankruptcy case, In re Federal-Mogul Global, Inc., 

demonstrates the complex legal effect of these remand statutes. 300 F3d 368 (3d Cir. 

2002). Federal-Mogul began for the most part in state courts around the country, when 

thousands of plaintiffs filed suit against United States automobile manufacturers claiming 

injury from brake pads lined with asbestos. Id. at 372. One of the brake pad 

manufacturers, Federal-Mogul Global, declared bankruptcy in federal district court in 

Delaware. The automakers then began removing the thousands of claims against them to 

federal court as “related to” the Federal-Mogul bankruptcy, and thus within the 

jurisdiction of the federal courts. Id. Simultaneously, the automakers moved the 

Delaware District Court to transfer all of the claims from the various District Courts to 

which they had been removed, to Delaware under Section 157(b)(5). Id. 

The Delaware District Court provisionally granted the automakers’ transfer 

motion, but it ultimately found that the claims were insufficiently “related to” the 

Federal-Mogul bankruptcy to support federal jurisdiction. Id. This meant that the 

thousands of claims would be returned to the hundreds of state courts from which they 

had been removed. The Delaware District Court held it could "cross-jurisdictionally" 

remand the claims, i.e., the matters would be remanded to the State Courts without any 

further consideration by the District Courts to which the cases had been removed -- a 


questionable holding given the language of Section 1452(b). The automakers appealed, 

challenging the district court’s cross-jurisdictional remand on procedural grounds. The 

Third Circuit, however, held that Section 1452(b) permits cross-jurisdictional remand. 

FEDERAL COURT ABSTENTION 

A federal district court may choose or be required to “abstain” from exercising its 

jurisdiction in a case involving bankruptcy matters. 28 U.S.C. § 1334(c). The standards 

for statutory abstention in the bankruptcy context are divided into two categories: 

discretionary and mandatory. However, discretionary abstention can be sought when 

such an action is contemplated, but is not yet filed. Sec. Farms v. Int’l Bhd. Of 

Teamsters, Chauffers, Warehouseman & Helpers, 124 F.3d 1999, 1009010 (9 th Cir. 

1997). Mandatory abstention arises where there is a pending state court action filed 

before the bankruptcy filing. As explained by the Court of Appeals for the Ninth Circuit, 

mandatory abstention “can only exist where there is a parallel proceeding in state court. 

That is, inherent in the concept of abstention is the presence of a pendant state action in 

favor which the federal court must, or may, abstain.” Id. 

Mandatory Abstention 

Federal courts are required to abstain from exercising their bankruptcy 

jurisdiction over proceedings where there exists no diversity or federal question 

jurisdiction, the action was commenced in state court before the bankruptcy petition was 

filed and the case can be expeditiously resolved in the state forum. 28 U.S.C. § 1334 

(c)(2). Unlike discretionary abstention, for mandatory abstention to apply, there must be 

a pending state court action commenced before the bankruptcy. 


For mandatory abstention to apply, the abstention motion must also be timely 

brought. Robinson v. Michigan Consul. Gas Co., 918 F.2d 579, 584 (6 th Cir. 1990); 

Certain Underwriters at Lloyd’s, 2004 U.S. Dist. LEXIS 1486 at *20. Additionally, the 

proceeding must be: 

1) based on a state law claim or cause of action, 

2) lacking federal jurisdiction, other than bankruptcy 

jurisdiction, 

3) commenced in a state forum with appropriate 

jurisdiction, 

4) a non-core proceeding, and 

5) capable of timely adjudication. 

Id. at *21; In re Dow Corning Corp., 86 F.3d 482, 497 (6 th Cir. 1996). 

The District Court for the Northern District of New York recently found that all of 

the factors for mandatory abstention were met in Covanta Onondoga Limited v. 

Onondaga County Resource Recovery Agency, 281 B.R. 809 (N.D.N.Y. 2002). In that 

case, plaintiff disposal company sued defendant county agency in state court for breach 

of contract, breach of the covenant against fair dealing and violation of the New York 

state open meeting law. The relief sought was monetary damages and declaratory 

judgment. One month later, the disposal company filed for bankruptcy and filed a Notice 

of Removal to remove the state law action to federal district court pursuant to § 1452. 

The county agency then filed a Notice of Motion to remand the case to state court. On 

the same date, the disposal company filed a motion seeking transfer of the case to the 

bankruptcy court where its bankruptcy case was pending on the grounds that it was in the 


interest of justice and for the convenience of parties. The court held that mandatory 

abstention was warranted, because this case did not “arise under Title 11, nor did it arise 

in a case under Title 11, since the action was started prior to the filing of the bankruptcy 

petition, exists independently, and involves only state law causes of action, rather than 

rights created by Title 11.” Id. at 813. Applying a version of the above-cited test, the 

court found that: 

Id. at 816. 

The case at bar meets all six conditions; (1) the state court 

defendant filed a timely cross motion for abstention after 

the plaintiff removed the action; (2) the removed case 

involves only state law claims; (3) the case is related to a 

bankruptcy proceeding, it did not “arise under” the 

Bankruptcy Code; (4) the removed case could not have 

been brought in federal court absent bankruptcy 

jurisdiction; (5) the removed case was commenced in state 

court; and (6) the case can be “timely adjudicated” in the 

state court. 

Some courts have stated that appellate courts have no power to review the district 

court's decision to grant mandatory abstention under § 1334(c)(2). Gober v. Terra + 

Corp., 100 F.3d 1195, 1206 n.9 (5th Cir. 1996). However, other courts have held that 

appellate courts have jurisdiction to review whether "the statutory requirements 

prerequisite to mandatory abstention are met." S.G. Phillips Constructors, Inc. v. City of 

Burlington (In re S.G. Phillips Constructors, Inc.), 45 F.3d 702, 708 (2d Cir. 1995). 

Discretionary Abstention 

Discretionary abstention is governed by Section 1334(c)(1), which states that 

“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 State law, from abstaining from hearing a 

particular proceeding arising under title 11 or arising in or related to a case under title 


11.” Abstention is considered an extraordinary and narrow exception to a federal court’s 

duty to adjudicate matters properly within its jurisdiction. See Eastern Air Lines Inc. v. 

International Association of Machinists & Aerospace Workers (In re Ionosphere Clubs 

Inc.), 108 B.R. 951, 954 (Bankr. S.D.N.Y. 1989). 

Courts consider numerous factors when determining whether one of the three 

standards 2 of §1334(c)(1) is met, including: 

1) the effect, or lack thereof, on the efficient 

administration of the estate if the court abstains; 

2) the extent state or other nonbankruptcy law issues 

predominate over bankruptcy issues; 

3) the difficulty or unsettled nature of the applicable 

law; 

4) the presence of a related proceeding commenced in 

state or other non-bankruptcy court; 

5) whether there is any federal jurisdictional premise 

besides 28 U.S.C. 1334; 

6) the degree of relatedness or remoteness to the 

bankruptcy case; 

7) the substance rather than the form of an asserted 

core proceeding; 

2 

(i) interest of justice, (ii) interest of comity with State Courts, or (iii) out of respect for State law. 

See 28 U.S.C. §1334 (c)(1). 


8) the feasibility of severing state law claims from core 

matters to allow judgments to be entered in state 

court with enforcement left to the bankruptcy court; 

9) the burden on the bankruptcy court’s docket; 

10) the likelihood of forum shopping by one of the 

parties; 

11) the existence of a right to a jury trial; and 

12) the presence of non-debtor parties. 

See In re Chicago, Milwaukee, St. Paul & Pacific Railroad Company, 6 F.3d 1184, 1189 

(7 th Cir. 1993). See also In re Tuscon Estates, Inc., 912 F.2d 1162, 1167 (9 th Cir. 1990). 

Courts weigh each of these factors in determining whether discretionary 

abstention is warranted. Eastport Association, 935 F.2d at 1076. The factors should be 

applied flexibly, however, and the relevance of and importance of each varies with the 

circumstances of the action. No single element is necessarily determinative. Chicago, 

Milwaukee, St. Paul & Pacific Railroad Company, 6 F.3d at 1189. 

However, because § 1334(c) is concerned with comity and respect for state law, 

whether a case involves unsettled issues of state law is especially significant. Id; see also 

Thompson v. Magnolia Petroleum Co., 309 U.S. 478 (1940). As the Seventh Circuit 

stated, “Under bankruptcy law, the presence of a state law issue is not enough to warrant 

permissive abstention, but it nevertheless is a significant consideration.” In re L&S 

Indus., Inc., 989 F.2d 929, 935 (7 th Cir. 1993). As an example, federal courts are often 

especially loathe to become immersed in disputes concerning domestic-relations issues, 

and will generally grant motions for permissive abstention for disputes involving them. 


See, e.g., Carver v. Carver, 954 F.2d 1573 (11 th Cir. 1992); Greene v. Wilson-Greene (In 

re Greene), 1999 U.S. Dist. LEXIS 13663 (Bankr. E.D. Pa. 1999). 

WITHDRAWAL OF REFERENCE 

Federal district courts have bankruptcy jurisdiction over “all civil proceedings 

arising under title 11, or arising in or related to cases under title 11,” but district courts 

rarely exercise this jurisdiction. 28 U.S.C. § 1334. Instead, 28 U.S.C. § 157 (a) permits 

each district court to provide that any or all of these proceedings may be “referred to the 

bankruptcy judges for the district.” Without exception, district courts have, by virtue of 

standing orders, referred their bankruptcy jurisdiction to the bankruptcy judges for the 

district pursuant to the statutory authorization. As the Supreme Court has explained, 

“Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that 

they might deal efficiently and expeditiously with all matters connected with the 

bankruptcy estate.” Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995). 

Notwithstanding the resultant automatic referral of cases involving bankruptcy 

matters to bankruptcy courts, however, §157(d) also permits district courts to withdraw 

the reference of any bankruptcy case or proceeding within a bankruptcy case. It provides 

as follows: 

The district court may withdraw, in whole or in part, any 

case or proceeding referred under this section, on its own 

motion or on timely motion of any party for cause shown. 

The district court shall, on motion of a party, so withdraw a 

proceeding if the court determines that resolution of the 

proceeding requires consideration of both title 11 and other 

laws of the United States regulating organizations or 

activities affecting interstate commerce. 

28 U.S.C. §157(d). The first sentence of section 157(d) quoted above governs permissive 

withdrawal, while the second sentence addresses mandatory withdrawal. 


Procedural Requirements 

The related bankruptcy rule governing a motion to withdraw the reference is Rule 

5011. Subsection (a) requires that “[a] motion for withdrawal of a case or proceeding 

shall be heard by a district judge.” Indeed, both §157(d) and Bankruptcy Rule 5011 

make clear that the bankruptcy court cannot consider the motion to withdraw. Instead, 

“[t]he withdrawal decision is committed exclusively to the federal court.” Committee 

Note, Fed. R. Bankr. Pro. 5011(a) (1988); In re American Motor Club Inc., 155 B.R. 49 

(E.D.N.Y. 1993). Subsection (c) of Rule 5011 also provides that such a motion “shall not 

stay the administration of the case or any proceeding therein before the bankruptcy judge 

except that the bankruptcy judge may stay, on such terms and conditions as are proper, 

proceedings pending disposition of the motion.” The rule further provides that a motion 

for stay should “ordinarily” be presented to the bankruptcy court for consideration. If a 

party moves for a stay, or for relief from a stay, only in the district court, the party must 

explain as a threshold matter why it circumvented the bankruptcy court. 

In many cases, the deadline to file a motion to withdraw the reference in any 

proceeding brought in a chapter 11 case is governed by the local rules for the United 

States District Court for the district in which the case is pending. In addition to the timing 

requirements established by the local rules, a timeliness requirement for withdrawal 

motions has been developed in the case law. Courts have indicated that a withdrawal 

motion must be filed "as soon as possible, or at the first reasonable opportunity after the 

moving party has notice of the grounds for withdrawal, depending on the facts of each 

case." In re Sevko, Inc., 143 B.R. 114, 116 (N.D. Ill. 1992). 


Any delay in filing a motion to withdraw the reference therefore increases the risk 

that it will be denied as untimely. In examining the timeliness of such a motion, courts 

consider: (i) whether the nonmoving party will suffer unfair prejudice; and (ii) whether 

the moving party is seeking withdrawal of the reference for an improper motive, such as 

forum shopping. Id; In re Texaco, Inc. 84 B.R. 911, 919 (S.D.N.Y.) 

In Sevko, for example, the court held that a creditor's motion to withdraw the 

reference filed five months after the creditor had notice of the grounds for such a motion 

nevertheless was timely where the creditor delayed seeking a withdrawal of the reference 

pending the court's determination of the debtor's motion to dismiss the action. The district 

court stated that "the only matter of substance conducted before the bankruptcy judge on 

the merits of this matter was Sevko's motion to dismiss, which merely saves the district 

court the trouble of rebriefing." In re Sevko, Inc., 143 B.R. at 116-17. Under these facts, 

the debtor could not show that either (i) the creditor was engaging in improper forum 

shopping or (ii) the debtor would be unfairly prejudiced by withdrawal of the reference. 

Id.; see also Auto Specialties Mfg. Co. v. Sachs (In re Auto Specialties Mfg. Co.), 134 

B.R. 227, 228 n.1 (W.D. Mich. 1990) (filing motion to withdraw reference nine months 

after initiation of RICO action was timely where there was no showing that defendant 

was prejudiced by delay). 

A different result is found in Laine v. Gross, 128 B.R. 588 (D. Me. 1991), where a 

motion to withdraw the reference was filed by the defendants six months after the 

commencement of a lawsuit, following the denial of the defendants' motion to dismiss the 

action. The district court determined that the request to withdraw the reference was 

untimely and amounted to improper forum shopping by the defendants. In reaching this 


conclusion, the court emphasized that "only after the Bankruptcy Court denied their 

motion to dismiss, having invested a significant amount of time and energy, did 

Defendants try another tack and seek withdrawal of the reference." Id. at 589; see also 

Brizendine v. Montgomery Ward & Co., 143 B.R. 877, 878 (N.D. Ill. 1992) (finding that 

motion to withdraw reference brought seven months after commencement of adversary 

proceeding was untimely). 

Permissive Withdrawal of the Reference 

As the District Court for the Southern District of New York recently stated, 

“where withdrawal is not mandatory, the Court has broad discretion to withdraw the 

reference for cause.” In re Enron Corp., 295 B.R. 21, 25 (S.D.N.Y. 2003) (quoting City 

of New York v. Exxon Corp., 932, F.2d 1020, 1026 (2d Cr. 1991). However, District 

courts do not usually grant motions for permissive withdrawal since they are often 

viewed as a means of forum shopping. See, e.g., In re Pruin, 910 F.2d 1160 (3d Cir. 

1990). 

The party seeking permissive withdrawal the reference must show that withdrawal 

is “in the interests of judicial economy and that it will be prejudiced by having the 

bankruptcy court oversee pretrial matters.” Prudential Securities Credit Corp., LLC v. 

Pacific Pointe Escrow, Inc., et al. (In re Apponline.com, Inc.), 2004 U.S. Dist. LEXIS 

487 *6 (E.D.N.Y. 2004). Relevant factors to the court’s determination include: 

1) whether the proceeding is core or non-core, 

2) judicial economy 

3) uniformity in bankruptcy administration 

4) economical use of the debtors’ and creditors’ resources 


5) reduction of forum shopping and confusion; 

6) expediting the bankruptcy process 

7) the presence of a jury demand. 

Id. (citing In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir. 1993); See Collier on 

Bankruptcy P3.04[1][b] (1998); Holland America Ins. Co. v. Succession of Roy, 777 F.2d 

992 (5 th Cir. 1985). 

Under the framework established by the Court of Appeals for the Second Circuit, 

the threshold question is whether the case involves a core or non-core proceeding, “since 

it is upon this issue that questions of efficiency and uniformity will turn.” Schneider v. 

Riddick III, et al. (In re Formica Corp.), 2004 U.S. Dist. LEXIS 1492 *7 (S.D.N.Y. 

2004) (internal citations omitted). After the district court “makes the core/non-core 

determination, it should weigh questions of efficient use of judicial resources, delay and 

costs to the parties, uniformity of bankruptcy administration, the prevention of forum 

shopping, and other related factors, such as the presence of a jury demand.” Id. 

Some courts have recognized that permissive withdrawal of the claim is 

inappropriate when the party seeking it has filed a proof of claim against the bankruptcy 

estate, reasoning that the party has brought itself into the equitable jurisdiction of the 

bankruptcy court. See, e.g., The Official Committee of Unsecured Creditors v. TSG 

Equity Fund, L.P. (In re Envisionet Computer Services, Inc.), 276 B.R. 1 (D. Me. 2002); 

Comco Associates v. Faraldi Food Industries Ltd., 170 B.R. 765, 772 (E.D.N.Y. 1994). 

As the District Court for the District of New Jersey succinctly stated in a recent case, 

there is “Supreme Court precedent to the effect that when a creditor submits a proof of 

claim against the estate, the creditor submits itself to the jurisdiction of the bankruptcy 


court as to disputes against the estate.” General Electric Capital Corporation v. Alfred 

Teo, 2001 U.S. Dist. LEXIS 22266 *21-22 (D.N.J. 2001) ( citing Langenkamp v. Culp, 

498 U.S. 42 (1990) and Granfinanceria, 492 U.S. 33). Accordingly, permissive 

withdrawal may not be warranted in such cases. Id. 

Likewise, in Citicorp North America, Inc. v. Finley (In re Washington Mfg. Co.), 

the court held that where a bankruptcy trustee’s counterclaims were objections to proofs 

of claim, “those counterclaims are an integral part of the claims allowance process in the 

bankruptcy estates” and the “mere fact that claims allowance is being conducted in the 

form of adversary proceedings rather than by motion does not change that conclusion.” 

128 B.R. 198, 201 (Bankr. M.D. Tenn. 1991); See also Billing v. Ravin, Greenberg & 

Zackin, P.A., 22 F. 3d 1242, 1253, n.16 (3d Cir. 1994) (citing former case with approval). 

Nevertheless, not all courts will necessarily refuse to grant a party’s motion for 

permissive withdrawal of the reference just because the party has filed a proof of claim in 

the bankruptcy proceeding. See, e.g., Complete Management, Inc. v. Arthur Andersen, 

LLP (In re Complete Management, Inc., 2002 U.S. Dist. LEXIS 18344 (S.D.N.Y. 2002); 

United States Gypsum Company v. National Gypsum Company (In re National Gypsum 

Company), 145 B.R. 539 (N.D. Tex. 1992). 

In Complete Management, the debtor, CMI, filed an adversary proceeding in 

bankruptcy court asserting that Andersen’s audits of CMI’s financial statements were 

deficient for failing to detect alleged reporting errors. Id. at *2. Anderson moved to 

withdraw the reference even though it had previously submitted a proof of claim seeking 

payment for the rendered audit services. Id. at *2-3. The court found that CMI’s claims 

were “ground in state law claims of negligence” and granted the motion for withdrawal of 


the reference notwithstanding the fact that Andersen had filed a proof of claim in the 

bankruptcy court. Id. 

The Complete Management court acknowledged that that there was some case 

law suggesting that since Andersen filed a proof of claim against the estate of CMI in the 

bankruptcy court, the adversary proceeding by CMI against Andersen for negligence in 

performing its audit work for CMI was a counterclaim, and therefore a core proceeding. 

Id. at *11. However, the Complete Management court found that, while these cases 

speak of the filing of a proof of claim subjecting the claimant to the equitable jurisdiction 

of the Bankruptcy Court, “no case has suggested that the equitable jurisdiction extends to 

a counterclaim that is seventy times greater than the proof of claim, as was the instant 

case.” Id. at *12. The court further recognized that: 

Id. at *11-12. 

[E]ven assuming that the Andersen adversary proceeding is 

technically a core proceeding, we find that the other factors 

to be considered favor the discretionary withdrawal of the 

adversary proceeding… CMI’s claims against Andersen are 

based in tort, have no relation to bankruptcy law, and 

would certainly still exist in the absence of CMI’s 

bankruptcy filing. Further, the claims against Andersen 

arose entirely pre-petition. Finally, as argued by Andersen, 

the Andersen adversary proceeding raises legal issues more 

commonly resolved by this court than the bankruptcy 

courts, and the advancement of this action will involve 

extensive discovery, expert testimony, and a lengthy and 

complex trial requiring a jury. 

Mandatory Withdrawal of the Reference 

Unlike permissive withdrawal, the district court has no discretion concerning 

mandatory withdrawal; the court is required to remove the proceeding if the listed factors 

are present. Courts consider whether the case requires “substantial and material” 


consideration of non-bankruptcy law affecting interstate commerce. See, e.g., United 

National Insurance Co. v. Vicars Insurance Agency (In re Vicars Insurance Agency), 96 

F.3d 949 (7 th Cit. 1996). 

Mandatory withdrawal is to be applied narrowly to “ensure bankruptcy cases are 

litigated in the bankruptcy courts and to prevent § 157(d) from becoming an ‘escape 

hatch’ from litigating cases under the Bankruptcy Code.” G-I Holdings, Inc., 295 B.R. at 

221. “This narrow reading of § 157(d) comports with Congressional intent for 

bankruptcy judges to ‘act like magistrates’ with the ability to ‘enter a final judgment…in 

all proceedings integral to the core bankruptcy function of restructuring the obligations of 

the debtor and his creditors.” Id. (citing 130 Con. Rec. H1848 (Daily Ed. March 21, 

1984)((Statement of Rep. Kindness). 

In deciding whether mandatory withdrawal is necessary, most courts focus on 

whether consideration of the non-Code law has more than just a minimal effect on 

interstate commerce. Id. Some courts, however, read § 157(d) even more liberally, 

requiring mandatory withdrawal whenever resolution of an issue requires both 

bankruptcy and non-bankruptcy law. See, e.g., In re Anthony Tummard Inc., 56 B.R. 999 

(D.N.J. 1986); In re JQ Telecommunications Inc., 70 B.R. 742 (N.D. Ill. 1987). 

Other courts require mandatory withdrawal whenever resolution of the dispute 

requires “substantial and material consideration of” a non-Code statute that has more than 

a de minimus 

effect on interstate commerce; however, Title 11 is not necessarily 

involved in the decision. Collier on Bankruptcy, P3.04[2](1998); Contemporary 

Lithographers Inc. v. Hibbert (In re Contemporary Lithographers Inc.), 127 B.R. 122 

(M.D.N.C. 1991). Instead, consideration of the non-Code statue is the controlling factor. 


Id. Still other courts have held that withdrawal is mandatory only when new or unsettled 

questions are involved in considering the non-Code federal statute. Collier on 

Bankruptcy, P3.04[2] (1998); Shurgne v. Air Line Pilot’s Association International (In re 

Ionosphere Clubs Inc.), 922 F.2d 984, 995 (2d Cir. 1990). 

Mandatory abstention is often granted in actions based upon the federal patent or 

copyright law, especially when the bankruptcy court is asked to interpret novel issues of 

law or if such issues predominate and are essential to the proceeding. For instance, in 

United States Gypsum Co., a claimant sought the withdrawal of the reference with respect 

to its proof of claim alleging damages based on patent infringement and the debtor's 

objection to the infringement claim. The National Gypsum court found that the patent 

issues raised by the proof of claim required "substantial and material consideration" of 

nonbankruptcy federal law (including both patent and antitrust law), thereby requiring 

withdrawal of the reference. Id. at 542. The court further explained that "it is apparent 

that the nature of the alleged patent infringement is such that its effect, if infringement is 

found, would be on items placed in the stream of interstate commerce." Id. See also 

Baldwin Tech. Corp. v. Dahlgren Int’l, Inc. (In re Dahlgren Int’l, Inc.), 147 B.R. 393, 

396 (N.D. Tex. 1992) (referencing prior decision that withdrawal of reference was 

mandatory in connection with request for payment of administrative expense claim based 

on patent infringement suit brought against debtor). But see Institut Pasteur v. 

Cambridge Biotech Corp. (In re Cambridge Biotech Corp.), 186 B.R. 9, 12 (Bankr. D. 

Mass 1995) (referencing earlier decision of court denying withdrawal of reference in 

patent infringement adversary proceeding).

RIGHT TO A JURY TRIAL IN BANKRUPTCY PROCEEDINGS In the ...

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