Court: United States Bankruptcy Court, D. New Mexico; March 25, 2019; Us Bankruptcy; United States Bankruptcy Court
Robert H. Jacobvitz, a United States Bankruptcy Judge, oversees the case of Cashco, Inc. ("Debtor"), which initiated Adversary Proceeding No. 18-1055-j by removing a state class action lawsuit to bankruptcy court. Following the removal, the Plaintiff filed a motion for remand and abstention. A status conference revealed questions regarding the automatic stay's applicability to the removal, the motion, and the ongoing prosecution of the adversary proceeding. On February 12, 2019, the Court issued a Memorandum Opinion and Order, concluding that the automatic stay did not apply to either the removal of the state class action or its continuation in bankruptcy court. The Court alternatively annulled the automatic stay to validate the removal and allowed proceeding with the lawsuit.
Following this ruling, Philip J. Montoya, the Chapter 7 Trustee, filed a motion for reconsideration, challenging two conclusions: that the automatic stay cannot apply to judicial proceedings in the bankruptcy court and that the Court can annul or terminate the stay sua sponte under 11 U.S.C. § 105. The Trustee did not seek to change the outcome regarding the Debtor's removal being unaffected by the automatic stay. The Court, upon reviewing the parties’ briefs and relevant case law, reaffirmed that the automatic stay does not apply to the Debtor's removal or the Plaintiff's motion to remand but determined that it does apply to the ongoing prosecution of the removed state class action lawsuit under non-bankruptcy law, regardless of the court in which it is being litigated.
Cashco filed for Chapter 7 bankruptcy on August 6, 2018, concurrently with Budget Payday, which is also a Chapter 7 debtor. Prior to these filings, Matthew Kitts had initiated a class action lawsuit in state court against Cashco, Budget Payday, and Hitex, Inc., the latter not being in bankruptcy.
On August 23, 2018, the Debtor filed a notice to remove the State Court Action to the bankruptcy court, initiating Adversary Proceeding No. 18-1055-J (the "Class Action Adversary Proceeding"). Mr. Kitts, the Plaintiff, subsequently filed a motion for remand and abstention, which the Court stayed pending a ruling on the automatic stay's applicability. The State Court had previously certified a class for claims against Cashco before the removal. On February 27, 2019, the bankruptcy court in the Budget Payday Chapter 7 case granted a stipulated order allowing class certification for claims against Budget Payday. This was followed by a similar order from this Court on March 6, 2019, certifying the class against Budget Payday, while claims against Hitex remain unapproved for certification.
The removal of claims in bankruptcy cases is governed by 28 U.S.C. § 1452, which outlines requirements such as the action being civil, the removing party being involved in the action, removal occurring in the district where the state action is pending, and the district court having jurisdiction. Although removals typically go to federal district courts, cases related to bankruptcy in New Mexico are automatically referred to the bankruptcy court. Cashco complied with the removal requirements by filing the notice in a timely manner, as it was a party to the State Court Action and removed the case to the appropriate bankruptcy court. This Court has jurisdiction over the claims against Cashco due to their relation to Cashco's bankruptcy case, impacting the administration of claims therein.
Related proceedings are civil cases that could have been initiated in district or state court and are connected to bankruptcy if their outcomes might affect the debtor's rights, liabilities, or actions regarding the bankruptcy estate. A notice of removal, filed on August 23, 2017, was deemed timely, as it occurred within 90 days of Cashco's voluntary Chapter 7 petition. Upon the filing of the bankruptcy petitions for Cashco and Budget Payday, the State Court Action was automatically stayed concerning claims against them, as per 11 U.S.C. 362(a)(1). The Trustee contends that the automatic stay applies to Cashco's removal of the State Court Action, arguing that such removal constituted a continuation of the action and thus violated the stay, rendering it void, according to established case law. The Trustee also asserts that the stay affects the continuation of the removed action, regardless of whether the debtor or a creditor initiated the removal. Conversely, Cashco argues that removal merely represented a change of venue and that a motion to remand does not equate to continuing the action. Ultimately, the Court determined that the automatic stay does not apply to the removal of the State Court Action to bankruptcy court or to motions for remand and abstention, irrespective of the party initiating the removal or the nature of the claims involved.
The automatic stay is a fundamental feature of the Bankruptcy Code, preventing creditors from pursuing actions against a debtor outside the bankruptcy court. It provides the debtor and trustee with relief from creditor claims, preserves the bankruptcy estate's property for equitable asset distribution, centralizes disputes in bankruptcy court, and protects the debtor from creditor harassment. The stay applies to any act to collect or recover claims arising prior to the bankruptcy case and to the initiation or continuation of any action against the debtor that could have started before the bankruptcy case.
However, a literal interpretation of the automatic stay could bar actions taken by creditors within the bankruptcy proceedings, such as filing proofs of claim or objections. Courts may deviate from a strict interpretation in rare circumstances, particularly when it produces results contrary to legislative intent or leads to absurd outcomes that Congress could not have intended. Applying the automatic stay too broadly within bankruptcy proceedings would hinder the administration of the case and contradict its purposes. Consequently, the automatic stay does not apply to the initiation of adversary proceedings in the debtor's own bankruptcy court, as confirmed by various case law, including Victor and Uni-Marts.
The Bankruptcy Code allows creditors to file suits against a debtor in bankruptcy court without breaching the automatic stay, enabling adversary proceedings to commence without prior relief from the stay. A notice of removal in a debtor's bankruptcy case initiates an adversary proceeding, as defined by Fed. R. Bankr. P. 7001(10). The automatic stay does not apply to the filing of a notice of removal, as supported by the Advisory Committee's note to Fed. R. Bankr. P. 9027, which indicates that while a claim removed to bankruptcy court may be subject to the automatic stay, the act of removal itself is exempt. However, removal does not advance the underlying state court litigation nor does it terminate the automatic stay.
Remand of the state court action to state court and abstention from hearing it are also not subject to the automatic stay, as these processes are governed by 28 U.S.C. 1452(b) and 28 U.S.C. 1334(c), respectively. The automatic stay applies only to the continuation of judicial actions against the debtor that could have been initiated prior to the bankruptcy filing. Remanding an action simply restores its pre-removal status without constituting a continuation barred by the automatic stay, and abstention keeps the case in state court. Until relief from the automatic stay is granted, remanded actions remain subject to the stay. The decisions regarding remand or abstention do not affect the merits of the removed action or the substantive rights of involved parties. Unlike the removal and remand/abstention processes, continuing litigation in a Class Action Adversary Proceeding post-removal constitutes a continuation of a pre-petition action against the debtor.
The automatic stay, which takes effect upon filing a voluntary bankruptcy petition, protects the debtor from ongoing litigation, including the Class Action Adversary Proceeding after removal. If the stay did not apply, the debtor would face obligations such as responding to discovery requests and attending depositions scheduled post-bankruptcy filing, undermining the intended relief of the stay. Under 11 U.S.C. § 362(a), the debtor is automatically entitled to this stay without the need for a separate request. The Bankruptcy Rules Advisory Committee notes that if a state court case is stayed, it remains stayed upon removal to bankruptcy court. Consequently, litigation cannot continue until relief from the stay is granted.
The substitution of the Trustee for the Debtor in the Class Action Adversary Proceeding does not violate the automatic stay, even if the motion to join the Trustee was initiated by the Court. Once the debtor files for Chapter 7 bankruptcy, the Trustee assumes control over pre-petition claims and has the authority to manage related lawsuits. The Trustee is considered the real party in interest, as the debtor loses standing to prosecute or defend claims. Thus, seeking to join the Trustee in the Class Action does not constitute an action against the Debtor. The conclusion affirms that the automatic stay does not obstruct the removal of a state court action to bankruptcy court, nor does it prevent a party from pursuing remand or abstention post-removal; such filings are not viewed as a continuation of the original litigation.
The Court's review indicates that it is not required to resolve the merits of the underlying claims. Once a state court action that is subject to an automatic stay is removed, the automatic stay prevents further litigation of those claims in the bankruptcy court's adversary proceeding. The automatic stay continues to apply to claims against the Debtor in the State Court Action if remanded, unless the Court grants the Plaintiffs relief from the stay. Relevant case law, such as In re Hoskins and F. M Bank, Trust Co. v. Owens, supports that the automatic stay applies to the removal of state court lawsuits to bankruptcy court when the claims are subject to the stay. The Court clarifies that the stay would not apply to cases removed to the debtor's bankruptcy forum. Furthermore, the Court has decided to eliminate the previously stated alternative ruling regarding the annulment of the automatic stay related to removal. Section 1442 specifies exceptions for certain proceedings before the United States Tax Court and civil actions initiated by governmental units for regulatory enforcement. Additionally, Section 157(a) allows district courts to refer bankruptcy cases and proceedings to bankruptcy judges. Case law indicates that actions stayed by a bankruptcy filing include the removal of pending state court lawsuits if the claims are subject to the automatic stay. A party cannot remove a state court case until the bankruptcy court lifts the automatic stay, as demonstrated in Phillips v. FDIC and Hill v. Wilson, where unauthorized removal violated the stay and was deemed void. The automatic stay serves to protect debtors from creditor harassment, ensure orderly asset distribution, and restrict creditors from acting outside the bankruptcy court.
The automatic stay serves to temporarily shield a debtor from lawsuits and creditor collection efforts outside the bankruptcy court, allowing the debtor to focus on financial rehabilitation and asset distribution within the bankruptcy framework. Its purpose is to provide the debtor with "breathing room" and to facilitate the equitable distribution of assets among creditors. The filing of a proof of claim in bankruptcy is not restricted by the automatic stay, as the bankruptcy court is specifically equipped to handle estate administration issues. Applying the automatic stay to actions within the bankruptcy court would contradict its intended function and lead to illogical outcomes. Courts possess the authority to determine and allow claims against the debtor, and without this exception, it would be nonsensical to modify the automatic stay to permit creditors to lift it for claims processing.
