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In some cases, a litigant—often a defendant who expects to lose at trial—may file a petition in bankruptcy court, removing the litigation to bankruptcy court. The most common response by the plaintiff or other non-debtor litigants is to immediately file motions for remand and relief from the automatic stay, with the goal of avoiding bankruptcy court jurisdiction and returning to state court jurisdiction. However, in some cases, bankruptcy court might actually be the best forum to resolve litigation.
In his American Bar Association Litigation Journal article “When Bankruptcy Intervenes: The Pros and Cons of Bankruptcy Court Jurisdiction,” Senior Counsel David Richardson examined some of the benefits that can be obtained from letting litigation proceed in bankruptcy court, as well as some myths about bankruptcy court that do not hold up when scrutinized.
One common perception of bankruptcy court jurisdiction is that the debtor has an advantage when litigation is removed. Though some bankruptcy judges may have reputations for being debtor- or creditor-friendly, these labels are often irrelevant in situations where a debtor’s fraudulent or improper conduct will be revealed in the main bankruptcy case, thereby educating the judge before trial. Other factors that should be taken into account include: whether the bankruptcy court may be able to schedule trial much sooner than state court; whether a client would benefit from the bankruptcy court’s focus on commercial law; and whether a bankruptcy case is likely to be consolidated with other litigation.
Richardson concluded the article by noting that there is no one-size-fits-all in favor of removal to bankruptcy court jurisdiction—in many cases, this removal is an obstacle on the road to a full jury trial. “But in each case,” Richardson wrote, “counsel should consider the nature of the debtor, the circumstances of the bankruptcy case, and the likely advantages and disadvantages that the bankruptcy court could offer as an alternative forum for litigation.”