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California Bankruptcy Court Rules on Debtor’s Motion to Withdraw Reference, Which Would Transfer Proceeding to District Court

karencastens from morguefile.comBankruptcy cases can present difficult jurisdictional questions. District courts have original jurisdiction over bankruptcy cases, but may refer them to the bankruptcy court system. A party in a bankruptcy case can move the district court to withdraw the reference of a case to the bankruptcy court, which would return the case to the district court. The movant must show cause for withdrawal, such as when an adversary proceeding would require a bankruptcy court to consider areas of federal law beyond the Bankruptcy Code. A California federal court recently considered a motion brought by a debtor who alleged due process violations by the bankruptcy court. In re Van Zandt, No. 4:13-cv-00702, order (N.D. Cal., Jan. 27, 2014). While the court ruled against the debtor, it left open the possibility of withdrawing a reference for due process concerns.

United States district courts have original, but not exclusive, jurisdiction over all civil cases filed under Title 11 of the U.S. Code. 28 U.S.C. § 1334. A district court, under § 1334(c), may abstain from hearing civil cases related to a bankruptcy proceeding. With the consent of the parties, the district court can also refer a case to the bankruptcy court. The district court may withdraw the reference of a case on a party’s motion or its own motion under 28 U.S.C. § 157(d), and it is required to do so if it finds that the case directly involves federal laws other than the Bankruptcy Code. Motions to withdraw the reference are further governed by Rule 5011 of the Federal Rules of Bankruptcy Procedure and, in the Central District of California, Local Bankruptcy Rule 5011-1.

The recent order in Van Zandt involved multiple appeals to the district court in a Chapter 7 bankruptcy, filed under four separate docket numbers. One of the appeals involved an unsecured creditor with an interest in a pending state court lawsuit. After the trustee reported that the bankruptcy estate had been fully administered, this creditor filed an adversary proceeding in the bankruptcy court, followed by a motion for relief from the automatic stay. The bankruptcy court granted the motion. The debtor appealed to the district court, and about two weeks later filed a motion to withdraw the reference of the entire case. The district court docketed these appeals together.

The debtor’s appeal and motion to withdraw the reference alleged due process violations. A constitutional question could conceivably merit withdrawing the reference of a case. The debtor claimed that he was not provided with adequate notice of the hearing on the creditor’s motion. He also alleged an inconsistency in court records, claiming that the creditor’s attorney did not appear for the hearing on the creditor’s motion, while the order granting the motion states that counsel was present. The bankruptcy court entered an order recommending that the district court deny the motion, and the district court agreed. The court did not expressly disagree that due process questions could constitute cause under § 157(d), but it found that the debtor did not provide sufficient evidence of any due process violations.

Bankruptcy attorney Devin Sawdayi has represented clients in the Los Angeles area for over eighteen years, guiding them through Chapter 7 or Chapter 13 bankruptcies and helping them repair their finances with dignity and respect. To schedule a free and confidential consultation to see how we may can help you, please contact us today online or at (310) 475-9399.

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Los Angeles Bankruptcy Court Rules on Whether Automatic Stay in Personal Bankruptcy Applies to Corporation Owned by Debtors, Los Angeles Bankruptcy Lawyer Blawg, February 22, 2014

Court Converts Bankruptcy Case from Chapter 13 to Chapter 7 Based on Finding that Debtor Withheld Information, Los Angeles Bankruptcy Lawyer Blawg, January 27, 2014

Art Collection Goes up for Auction as Part of Bankruptcy Liquidation, Los Angeles Bankruptcy Lawyer Blawg, January 21, 2014

Photo credit: karencastens from morguefile.com.