The better part of any strategy—whether in the courtroom or on the battlefield—is knowing when to fight and when to retreat. Occasionally, a hasty retreat is needed to gain the high ground. At other times, it is better to dig in and launch a counter-offensive. The same type of analysis applies when deciding if a motion to withdraw the reference is in your client’s best interest or is even an option. Be forewarned that it can be a brutal process, but it may be the only way to have your case heard outside the bankruptcy arena.

Consider this case scenario: It is Friday afternoon and your client, a primary creditor of Omega Inc., calls. Omega has filed a petition for relief under chapter 11 and has initiated an adversary proceeding by filing a complaint and an application for a temporary restraining order (TRO). The hearing on the TRO is set for Monday morning. You cancel your weekend plans and prepare for the hearing.

At the hearing, you quote the facts and the law, which you believe are on your client’s side; however, the court grants the TRO and orders your client to pay a significant amount of money to Omega immediately. Although the preliminary injunction hearing is set, your client cannot wait until that time for a reconsideration of the TRO.

You decide to do everything possible, and proper, to protect your client. In the bankruptcy court, you file a notice of appeal of the TRO and move for a stay pending appeal. In the district court, you move for a mandatory withdrawal of the reference and for a stay pending consideration of the motion for mandatory withdrawal.

The district court sets your motion to withdraw for hearing. At the conclusion of the hearing, the district court grants the motion for mandatory withdrawal and sets the merits of the dispute for trial. The most onerous parts of the TRO have been suspended, pending the hearing on the preliminary injunction before the district court. You have won a major victory by getting your case, at least for the time being, before the district court. How did you do it?

The Applicable Statute and Procedural Rule

Pursuant to 28 U.S.C. §1334, district courts have original and exclusive jurisdiction of all cases under Title 11. Title 28 U.S.C. §157(a) permits, but does not require, district courts to refer cases to the bankruptcy courts. In reality, the district court will hear a bankruptcy case only if it is appealed or where a party moves to withdraw the reference. "Thus, a bankruptcy court’s ‘jurisdiction’ is actually coterminous with the jurisdiction of the district court as set out in §1334." ²

Section 157(d) is the operative statute for withdrawal of the reference. 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 timely 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 orga-nizations or activities affecting interstate commerce. ³(Emphasis added.)

The related procedural rule for a motion to withdraw the reference is Bankruptcy Rule 5011(a) and (c). Subsection (a) requires that "[a] motion for withdrawal of a case or proceeding shall be heard by a district judge."⁴ Subsection (c) 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.⁵

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 why the bankruptcy court was circumvented.

The Mechanics of Withdrawing the Reference

There are two types of withdrawal, and each has distinctions that should be considered when deciding to request such relief. Permissive withdrawal is defined in the first sentence of §157(d): The district court may withdraw a case or proceeding on its motion or that of a party, for "cause" shown. The plain language of §157 makes clear that this type of withdrawal is discretionary with the district court.

Mandatory withdrawal is explained in the second sentence: the district court must withdraw a proceeding if consideration of both Title 11 and laws involving interstate commerce is required. Unlike a permissive withdrawal, there is no discretion, and the district court must withdraw the case if the conditions precedent exist.

Regardless of the type of withdrawal sought, both §157(d) and Bankruptcy Rule 5011 make clear that the bankruptcy court cannot consider a motion to withdraw. Instead, "[t]he withdrawal decision is committed exclusively to the district court."⁶

Permissive Withdrawal

Permissive withdrawal is hard to obtain under even the best of circumstances because it is within the sound discretion of the district court. District courts are not receptive to motions to withdraw, "the underlying thought being that such motions smack of forum shopping."⁷ Of course, this ignores the fact that the debtor may have filed the bankruptcy case for the very purpose of forum shopping, i.e., the enormous protection of the automatic stay, the fact that the Bankruptcy Code permits such a tolerant view toward debt and the fact that the debtor can restructure debt in ways that are inconceivable in any other arena.

To determine whether cause exists for permissive withdrawal, courts often examine the following: "the goals of promoting uniformity in bankruptcy administration, reducing forum shopping and confusion, conservation of debtors’ and creditors’ resources, expediting the bankruptcy process, and the right to a jury trial."⁸ Permissive withdrawal may be especially appropriate for non-core proceedings, issues requiring the district court’s expertise,⁹ and "‘where a substantial constitutional question is presented...or in any other case containing sensitivities such that a determination by an Article III judge is required to insure the appearance and the reality of independence and impartiality in the decision.¹⁰

Seeking permissive withdrawal of the reference can expend an enormous amount of resources with no result. The district court has total discretion over the decision and may likely deny the motion. If the motion is denied, the bankruptcy court probably will not be thrilled with your attempt to take the case to the district court.

Mandatory Withdrawal

Unlike permissive withdrawal, the district court has no discretion concerning mandatory withdrawal; the court must withdraw the proceeding if cause exists. As a general rule, "cause" for mandatory withdrawal requires (1) consideration of the Bankruptcy Code and (2) "substantial and material" consideration of non-bankruptcy law affecting interstate commerce. Although the "substantial and material" test is not contained in the statute itself, it has been required by the courts.¹¹ The key factor is whether consideration of the non-Code law has more than just a de minimis effect on interstate commerce.¹²

Another approach adopted by some courts requires mandatory withdrawal when resolution of the dispute requires "substantial and material consideration of" a non-Code statute that has more than a de minimis effect on interstate commerce; however, Title 11 need not be involved in the decision.¹³ Instead, the consideration of the non-Code statute is the controlling factor. Other cases, which also disregard the requirement of Title 11, hold that withdrawal is mandatory only when novel, or unsettled, questions are involved in considering the non-Code federal statute.¹⁴

The better practice is to meet all the tests. First, argue that consideration of both the Bankruptcy Code and other federal law(s) affecting interstate commerce is required. There should be significant nexus between the various laws. Second, persuade the district court that there is more than a de minimis effect upon interstate commerce. As a back-up position, argue in the alternative that the court should find cause for a permissive withdrawal.

Finally, do not fail to move for a stay pending consideration of the motion to withdraw. While the district court hears the motion to withdraw, the motion to stay enforcement usually should be filed first in the bankruptcy court. Obviously, this is a tricky issue. The bankruptcy court is unlikely to stay the very action that it previously ordered; however, a catch-22 situation is likely to occur if the bankruptcy court is not permitted to consider the motion for stay. Who really wants to explain why he or she did not approach the bankruptcy judge? The better course is to assume that the bankruptcy court will deny the motion for stay, but be prepared to file a second stay motion in the district court.

Concluding Thoughts

The decision to move to withdraw the reference should not be made lightly. In essence, you are telling the bankruptcy court that it has no jurisdiction, or should not exercise jurisdiction, in your particular case. It is only for those situations when there is no doubt in your mind that your client’s position is sound, that the district court should determine the merits, and that your client must be heard.

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Footnotes

¹The views expressed in the article are those of Ms. Anderson and do not necessarily reflect the views of the Department of Justice. Return to Text

²In re Simmons, 205 B.R. 834, 836-37, n. 5 (Bankr. W.D. Tex. 1997) (discussion of bankruptcy jurisdiction). Return to Text

³28 U.S.C. §157(d) (1998). Return to Text

⁴Fed. R. Bankr. Pro. 5011(a) (1998). Return to Text

⁵Fed. R. Bankr. Pro. 5011(c) (1998). Return to Text

⁶Committee Note, Fed. R. Bankr. Pro. 5011(a) (1998); In re American Motor Club Inc., 155 B.R. 49 (E.D.N.Y. 1993) (affirming general rule that district court hears the motion to withdraw, but in denying a motion to remove a bankruptcy case, district court ruled that parties could apply to the bankruptcy court to "request" the district court to withdraw the reference). Return to Text

⁷See In re Pruitt, 910 F.2d 1160 (3d Cir. 1990) (explaining why district court’s withdrawal of reference was inappropriate); compare Hassett v. Bancohio Nat’l Bank (In re CIS Corp.), 172 B.R. 748 (S.D.N.Y. 1994) (detailed discussion on standards for withdrawal; sufficient cause to withdraw where matter is non-core and creditor demands jury trial); Carmel v. Galam (In re Larry’s Apt. L.L.C.), 210 B.R. 469 (D. Ariz. 1997) (no withdrawal where no showing of right to jury trial); Big Rivers Elec. Corp. v. Green River Coal Co., 182 B.R. 751 (W.D. Ky. 1995) (judicial economy supported withdrawal of reference of adversary proceeding where the bankruptcy proceeding involved common issues of law and fact with another case pending in the district court). Return to Text

⁸Collier on Bankruptcy, ô 3.04[1][b] (1998); see Holland America Ins. Co. v. Succession of Roy, 777 F.2d 992 (5th Cir. 1985). Return to Text

⁹U.S. v. One Parcel of Real Property, 137 B.R. 802, 806-07 (D. Ore. 1992); Burger King Corp. v. B-K of Kansas Inc., 64 B.R. 728, 732 (D. Kan. 1986). Return to Text

¹⁰ In re Texaco Inc., 84 B.R. 911, 925 (S.D.N.Y 1988) (quoting Pacemaker Diagnostic Clinic of America v. Instromedix Inc., 725 F.2d 537 (9th Cir. 1984). Return to Text

¹¹ United Nat’l Ins. Co. v. Vicars Ins. Agency (In re Vicars Ins. Agency), 96 F.3d 949 (7th Cir. 1996); In re Chateaugay Corp., 193 B.R. 669 (S.D.N.Y. 1996) (withdrawal required where a significant interpretation of non-Code statute needed, when non-Code issues dominate, or when non-bankruptcy federal law governs cases significantly and conflicts with relevant bankruptcy law); In re C-TC 9th Ave., 177 B.R. 760 (N.D.N.Y. 1995) (mandatory withdrawal where resolution of claims require substantial and material consideration of non-Code law with more than a de minimis impact on interstate commerce). Return to Text

¹² This is contrasted with the approach taken by some courts that §157(d) should be read liberally so that mandatory withdrawal is required when resolution of an issue requires both bankruptcy and non-bankruptcy law. See In re Anthony Tammaro Inc., 56 B.R. 999 (D.N.J. 1986); In re IQ Telecommunications Inc., 70 B.R. 742 (N.D. Ill. 1987). Return to Text

¹³ Collier on Bankruptcy, ô 3.04[2] (1998); Contemporary Lithographers Inc. v. Hibbert (In re Contemporary Lithographers Inc.), 127 B.R. 122 (M.D.N.C. 1991); Michigan Milk Producers Ass’n v. Hunter, 46 B.R. 214 (N.D. Ohio 1985); accord PBGC v. Official Parent Creditors’ Comm. (In re Chateaugay Corp.), 108 B.R. 27 (S.D.N.Y. 1989). Return to Text

¹⁴ Collier on Bankruptcy, ô 3.04[2] (1998); Shugrue v. Air Line Pilot’s Ass’n. Int’l. (In re Ionosphere Clubs Inc.), 922 F.2d 984, 995 (2d Cir. 1990) Return to Text