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Norton Annual Survey of Bankrutpcy Law 2011

January 3, 2011, Ryan M. Murphy

As courts of limited jurisdiction, federal courts generally are obligated to exercise the full authority of their jurisdiction to the extent sanctioned by the Constitution and Congress. In light of this duty, the doctrine of permissive abstention, as codified in 28 U.S.C.A. § 1334(c)(1), constitutes an anomaly within the paradigm of federal jurisdiction. Permissive abstention allows a bankruptcy court, to abstain from adjudicating a particular matter in order to allow it to be heard in an alternative forum based on “the interest of justice, or in the interest of comity with State courts or respect for State law.” Permissive abstention is grounded in the “traditional notions of abstention which allow courts to decline to assert otherwise valid subject matter jurisdiction in instances in which they find matters are better resolved in state court or where the interests of justice so demand.”

Permissive abstention is unique in that allows for the fractionalization of jurisdiction between bankruptcy courts and state courts with respect to matters over which either court could properly exercise jurisdiction. Courts employ the doctrine of permissive abstention under section 1334(c)(1) with greater frequency in the bankruptcy context than with nonbankruptcy grants of federal jurisdiction, most notably with respect to mass tort litigation. The prevalence of permissive abstention in bankruptcy cases is attributable to the additional considerations concerning the Chapter 11 process, such as the efficiency of the administration of the estate, which are not relevant in other areas of federal jurisdiction. Despite the fact that permissive abstention is implicated in many Chapter 11 cases, bankruptcy courts have neglected to develop a uniform standard for applying section 1334(c)(1). Most courts have adopted a multifactor test, referred to herein as the Tucson Estates test, without examining whether this test comports with the underpinnings of the permissive abstention doctrine codified in section 1334(c)(1).

This article addresses the contours of permissive abstention under section 1334(c)(1) as it has developed in the bankruptcy context. In addition, examining the functional application of the Tucson Estates test suggests that bankruptcy courts may be better served by forgoing this analysis in favor of a streamlined approach which focuses on the underlying principles of abstention while taking into account particularized considerations unique to bankruptcy.

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