SEEKING REMOVAL TO THE ARIZONA BANKRUPTCY COURT AS A NON-DEBTOR THIRD PARTY

By Celeste del Carmen Tabares

Your client, AZ Company, conducts business with Debtor Co. and both have been sued in state court. Debtor Co. has filed for bankruptcy protection under Chapter 11. You’re now left thinking about strategy and how to best represent your client in light of Debtor Co.’s bankruptcy filing. You dig deep into your brain’s filing cabinets and consider several options: filing an answer in state court, responding with a dispositive motion, and reaching out to the plaintiff’s attorney, among other things. Although it seems like a distant memory from the first year of law school, you also remember that parties have the ability to have an action transferred from a state court to federal court. You recall federal statutes and jurisdictional concepts that enable removing a case from Arizona state court to the District Court for the District of Arizona and even to the Arizona Bankruptcy Court. Where do you begin? 

You know that Debtor Co., with certain time restraints, can seek removal of the state court action based on its debtor status and the direct effect the state court case may have on its bankruptcy. But, you’re left wondering whether your client, AZ Company, has the ability in its own right to remove the state court case as a non-debtor third party to the Debtor’s bankruptcy case. To put it simply, the answer is yes, but there are some limitations and additional considerations.

So, let’s discuss first, what is removal? Removal describes a party’s ability to move a civil action pending in state court to the federal court in the district in which the state court is located. Removal is only proper if the court to which the case is being transferred has jurisdiction over the case. In other words, removal is based on whether the federal court could exercise original or exclusive jurisdiction over the matter. Original jurisdiction refers to the court’s power to hear a case while exclusive jurisdiction refers to the court’s power to hear a case to the exclusion of other courts. According to 28 U.S.C. § 1331, federal district courts have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States. Furthermore, district courts have original and exclusive jurisdiction of all cases under title 11, which encompasses the U.S. Bankruptcy Code. See 28 U.S.C. § 1334(a). As a side note, the bankruptcy court’s power to hear bankruptcy cases and proceedings is derivative to the district court’s jurisdiction. In re Curtis, 571 B.R. 441, 447 (B.A.P. 9th Cir. 2017). Accordingly, 28 U.S.C. § 157 allows a federal district court to refer cases under and related to the Bankruptcy Code to Bankruptcy Courts. Pursuant to General Order 01-15 of the United States District Court for the District of Arizona, all bankruptcy cases are referred to the Bankruptcy Courts.

There are two main federal statutes that allow for removal of a state court case to federal court: 28 U.S.C. § 1441 and 28 U.S.C. § 1452. Section 1441 is the general removal statute and states that any civil action brought in a State court of which the district court of the United States has original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district in which the action is pending. This means that as a defendant in the state court case, your client, AZ Company, can use the powers of 28 U.S.C. § 1441 to seek removal of the entire state court action to the Debtor’s bankruptcy case.

There is also Section 1452 which is the federal removal statute specific to claims related to bankruptcy cases. Section 1452 states that any party may remove any claim or cause of action other than a proceeding before the United States Tax Court or in a civil action by a governmental unit to enforce such governmental unit’s police or regulatory power, to the district court for the district where such civil action is pending, if such district court has jurisdiction of such claim or cause of action under section 1334. Thus, AZ Company can also utilize Section 1452’s powers to remove the state court case because this federal statute permits any party, including AZ Company, to remove any claim or cause of action to federal court besides those involving tax court cases and governmental police or regulatory power cases.

AZ Company can use Section 1452 to remove the state court case if the district court has jurisdiction over a case “related to” the Bankruptcy Code. Here, Debtor Co. filed for Chapter 11 with the goal of achieving plan confirmation, so the court’s interpretation of “related to” depends on the status of debtor’s bankruptcy plan. If Debtor Co.’s bankruptcy plan has already been confirmed, the term “related to” has a limited meaning and a state court case may only be removed if it involves matters affecting the bankruptcy plan’s interpretation, implementation, consummation, execution, and administration. Cnty. of San Mateo v. Chevron Corp., 32 F.4th 733, 761 (9th Cir. 2022), cert. denied sub nom. Chevron Corp. v. San Mateo Cnty., CA, 22-495, 2023 WL 3046226 (U.S. Apr. 24, 2023). However, if Debtor Co.’s bankruptcy plan has yet to be confirmed, “related to” is defined much more broadly due to concerns over the state court case’s impact on the bankruptcy case itself, the plan, and its administration. Id.

So, you determine that AZ Company can remove the state court action pursuant to either §§ 1441 and 1452. However, there are other issues you should consider before deciding which of these two statutes to use. First, Section 1441 is the more general statute while Section 1452 provides for the removal of any action subject to federal bankruptcy jurisdiction. Section 1452 also provides for specific textual exceptions (tax court and government police and regulatory power cases). Additionally, you should think about joinder of parties as Section 1441 requires joinder by all defendants whereas Section 1452 does not have this unanimity requirement. (“Under the general removal statute, all properly served defendants must join in the removal or else the action is not removal.” In re Mortgages Ltd., 399 B.R. 673, 675 (Bankr. D. Ariz. 2008)). In addition, Section 1452 allows any party to remove the state court case and not just the defendant(s). A factor of significance is also that Section 1441 removes the entire civil action while Section 1452 permits any claim or cause of action to be removed. Also note, both statutes only allow “civil actions” to be removed. For example, a proceeding before the National Labor Relations Board is not a civil action and is not removable to the district court. In re Adams Delivery Service, Inc., 4 B.R. 589 (1982).

 Therefore to summarize, AZ Company, as a non-debtor third party is allowed to seek removal of the pending state court case under either §§ 1441 or 1452, and which statute to use will depend on the limitations set forth above. If AZ Company decides to proceed with the removal of the state court case, then the next procedural step is to file a timely Notice of Removal pursuant to 28 U.S.C. § 1446 and/or Federal Rule of Bankruptcy Procedure 9027. Remember too that if the plaintiff in the state court action disputes the removal, the plaintiff has the ability to file a Motion to Remand, which motion will be ruled upon by the Bankruptcy Court.