Tuesday, March 27, 2012

2nd Circuit Holds “Mandatory Abstention”
Appropriate Under Section 1334(c)(2)

The Second Circuit Court of Appeals recently issued an opinion on mandatory abstention in Parmalat Capital Fin. Ltd. v. Bank of Am., Corp., No. 09-4302, 2012 U.S. App. LEXIS 3391  (2d Cir. Feb. 21, 2012), where the Court explained the factors to be considered when determining whether mandatory abstention is appropriate.

In Parmalat Capital Fin. Ltd. v. Bank of Am., Corp., No. 09-4302, 2012 U.S. App. LEXIS 3391 (2d Cir. Feb. 21, 2012), the United States Court of Appeals for the Second Circuit issued an opinion on mandatory abstention in which it vacated the judgments of the District Court for the Southern District of New York, found that mandatory abstention was appropriate, and instructed the District Court to transfer the actions to the District Court for the Northern District of Illinois, which would then remand the actions to the Illinois state court. 

 By way of background, the Second Circuit had previously issued an opinion in this case, whereby it vacated the decisions of the District Court not to abstain from deciding the cases, and remanded the cases to the District Court to determine whether the cases could be timely adjudicated in Illinois state court.  On remand, the District Court once again found that mandatory abstention did not apply, and the appellants renewed their appeals. 

In ultimately finding mandatory abstention was appropriate because the cases could be timely adjudicated in Illinois state court, the Second Circuit looked at each of the four factors it delineated in its prior opinion. 

The first factor, and the only factor specifically addressed in the District Court’s opinion, is whether the state court’s calendar is more backlogged than the federal court’s calendar.  The District Court found that this factor weighed in favor of denying abstention, and the Second Circuit agreed.  However, the Second Circuit noted this factor alone is not dispositive, and went on to analyze the remaining three factors. 

The second factor concerns the complexity of the issues and the respective expertise of the state and federal court involved, and the Second Circuit found this factor weighed in favor of remand and abstention.  The third factor is the status of the bankruptcy proceeding to which the state law claims are related, and the Second Circuit found this factor also weighed in favor of remand and abstention.  Finally, the fourth factor is whether the state court proceeding would prolong the administration or liquidation of the estate, and the Second Circuit again found this factor weighed in favor of remand and abstention. 

In concluding that on balance the four factors weighed in favor of abstention, the Second Circuit further clarified the analysis that a court should conduct when deciding whether mandatory abstention is appropriate, and provided courts with additional guidance when navigating each of the four factors.

For a more in-depth discussion of this case, please click here.

Karen Lee (“Kitt”) Turner
Eckert Seamans Cherin & Mellott LLC

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