Arizona court discusses requirements to remove case from state court to bankruptcy court in another state

In remanding a case back to Arizona state court, an Arizona district court decision found that the case was never properly removed to the federal district court, and it may not have jurisdiction over the matter.   Great Western Bank v. Clear Vision Express Tucson 2 LLC, 2021 U.S. Dist. LEXIS 193166, case No CV-21-00883-PHX-MTL (Dist. Ariz. 6 October 2021).  While this is a matter that does not arise often, it illustrates the problems that can arise when proper procedures are not followed.

The case started in Arizona Superior court alleging a default on a $2.3 million promissory note secured by commercial real estate in Arizona, and included a number of guarantors as defendants.  The loan documents specified Maricopa County Arizona choice of venue.  Avery, the state court defendant then filed for relief under chapter 11 in the Southern District of Texas.  Avery filed a notice of removal in the state court action requesting removal to the Texas Bankruptcy Court, and Great Western sought to remand the case back to Superior Court, asserting that the removal did not comply with 28 U.S.C. §1452(a). Avery noted that it had tried to file the removal to the bankruptcy court for the district of Arizona, but that court refused to accept an adversary filing for a bankruptcy case pending in a bankruptcy court outside of Arizona.

The Texas bankruptcy court then transferred the adversary proceeding to the District Court of Arizona, which requested that the parties file with it the pleadings in order to create a record in the matter.  While the parties presumed that the above effected a transfer of the case and pending motions to the Arizona District Court, both the Arizona District Court and the Maricopa County Superior Court disagreed, with the Superior Court continuing to hold hearings on the matter.

The District Court first examined the removal statute.  28 U.S.C. 1452(a) permits removal of any claim or cause of action in a civil action to the district court where such civil action is pending, if the district court has jurisdiction  of such claim or action under 28 U.S.C. §1334.  Normally, to remove an action from state court to a bankruptcy court in a different district, the removing party must first remove the state court case to the federal district court within the district where the state court matter is pending,1 and then should seek to have the district court refer the matter to the bankruptcy court within that district, then seek to have the bankruptcy court transfer the matter to the district where the bankruptcy case is pending.

Failure to properly follow these procedures may create a jurisdictional issue.2  The court noted Avery should have first filed the notice of removal with the Arizona District Court, which would have then referred the matter to the Arizona Bankruptcy Court, and then Avery could have filed the motion to change venue to the Texas bankruptcy court.  Failing to follow the procedure caused confusion and slowed the proceedings in three different courts.  Since it is unclear the court has jurisdiction, the most equitable solution is to remand the matter back to the Arizona Superior Court under 28 U.S.C. 1452(b).  This statute permits remand of any action removed under §1452(a) for any equitable grounds.

The equitable basis for removal includes that the predominant issues are all issues of state law, the complaint raises only state law causes of action, the counterclaim is likewise a state law claim, the nature of the applicable law weighs in favor of remand to state court, and the loan documents provide the Maricopa County, Arizona to be the choice of venue. There also is a question of forum shopping, as only one of the ten defendants filed bankruptcy in Texas.

The only alleged jurisdictional basis for removal is 28 U.S.C. §1334.  No court has yet ruled on the relatedness of the Defendant’s claims to the debtor’s estate.  If the matter is core to the bankruptcy proceeding, this would weigh significantly against equitable remand, but no allegation has been made that such matter is core.  Further, remand could reduce the burden on the bankruptcy court.   Finally, comity favors removal, as the collateral and guarantors are all located in Arizona, and all claims are issues of Arizona state law.

  The court thus remanded the case back to the Arizona Superior Court.

The court cites to Roberts v. Bisno (In re Bisno), 433 B.R. 753, 757 (Bankr. C.D. Cal. 2010) for support of this proposition, however, the Bisno case actually states the first step is to refer the matter to the bankruptcy court whose district encompasses the state court where the case is pending, then have that bankruptcy court transfer to the district court where the bankruptcy is pending.  Id. at *7-8.

Compare In re BisnoSupra, finding improper procedures only resulted in a curable venue defect, to Peterson v. BMI Refractories, 124 F.3d 1386, 1388 (11th Cir. 1997) (finding a procedural defect) and Furr v. Barnett Bank (In re S & K Air Power, Inc.), 166 B.R. 193, 195 (Bankr. S.D. Fla. 1994) finding a lack of jurisdiction.

Michael Barnett
Michael Barnett, PA
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Tampa, FL 33609-1703
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