Abstention Under 20 U.S.C. § 1334(c) — Permissive & Mandatory (One William Street v. Wilmington Trust): Part 1

By: Donald L Swanson

Here is a bankruptcy abstention ruling: One William Street Capital Master Fund Ltd. V. Wilmington Trust, National Association, Case No. 26-CV-01123, S.D.N.Y. Bankruptcy Court (decided June 5, 2026). 

This is the first of two articles on abstention. The second article will be on limited appellate review of decisions on bankruptcy abstention.

Overview

Debtor files voluntary Chapter 7 bankruptcy in the Northern Texas Bankruptcy Court (see Tricolor; Case No. 25-33487). Debtor’s Chapter 7 Trustee investigates allegations of fraud and works to recover assets for distribution to creditors.

Meanwhile, various creditors sue Defendant Bank, who had worked with Debtor.  The suit is in a New York state court alleging state law claims for breaches of contract and fiduciary duties.

Defendant Bank removes the lawsuit to the U.S. District Court for Southern New York under 28 U.S.C. § 1452, as “related to” Debtor’s Chapter 7 bankruptcy:

• in response, Plaintiffs ask the District Court to abstain under 28 U.S.C. § 1334(c) and to remand the case to the New York state court; and
• in turn, Defendant Bank cross-moves to transfer the case to the U.S. District Court in Northern Texas (where Debtor’s Chapter 7 is pending) under 28 U.S.C. § 1404.

Here’s how the U.S. District Court rules:

• Plaintiffs’ motion to abstain and remand is GRANTED; and
• Defendant’s cross-motion to transfer is DENIED.

What follows is a summary of the One William Street v. Wilmington Trust opinion.

Background

Debtor operates a chain of used car dealerships in Texas, Arizona, and California.  Under a “buy here, pay here” arrangement, Debtor’s dealers sell used vehicles and originate loans to finance those vehicles, primarily for high-risk borrowers with poor or no credit.

–Strategy

Debtor uses several related entities to borrow money from lenders.  Debtor sends its auto loan receivables to the related entities, who use those receivables as collateral for new loans.

Defendant Bank is custodian of the auto loans originated by Debtor—ensuring that the physical file for each loan includes a true copy of the loan contract and the title of the vehicle securing the contract.

To gain more liquidity:

• the related entities bundle the auto receivables into large, income-generating assets with predictable cash flows;
• bundled receivables are then sold to other insider entities (“Trusts”) who issue notes to noteholders backed by the underlying receivables; and
• the noteholders then receive a portion of the proceeds generated by the auto loan receivables in accordance with the class they purchase.

Other insider entities pursue repayment of the loans each month and determine how much Defendant should pay the noteholders based on collections.

–Result

The Trusts use proceeds from the notes to purchase more auto loan receivables, creating a circular scheme. In total, the Trusts issue $1,816,960,000 of asset backed notes between 2022 and 2025.

Debtor is alleged to have defrauded its creditors by:

• double-pledging 31,408 auto loan receivables, which inflate the value of its alleged assets by over half a billion dollars; and
• completely fabricating $135 million of fictitious auto loans to inflate the value of its receivables.

Bankruptcy Abstention—Legal Background

28 U.S.C. § 1334(b) provides that the district courts shall have original but not exclusive jurisdiction of proceedings “arising under” title 11, “arising in” title 11, or “related to” cases under title 11.

Civil claims filed in state court can be removed “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 of this title” (28 U.S.C. § 1452(a)).

“The court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground” (§ 1452(b)); and on a motion to remand, the removing party bears the burden of demonstrating the propriety of removal.

A federal court can abstain from adjudicating a matter falling within the federal court’s bankruptcy jurisdiction. Abstention may be permissive or mandatory.

Plaintiffs argue that, (i) abstention is mandatory, and (ii) abstention is also appropriate on permissive abstention and equitable remand grounds. What follows is a discussion of both grounds for abstention.

Mandatory Abstention

A party seeking mandatory abstention, under § 1334(c)(2), must establish these six statutory requirements:

1. the motion to abstain was timely;
2. the action is based on a state law claim;
3. the action is “related to” but not “arising in” a bankruptcy case or “arising under” the Bankruptcy Code;
4. 28 U.S.C. § 1334 provides the sole basis for federal jurisdiction;
5. an action is commenced in state court; and
6. that action can be “timely adjudicated” in state court.

Here, there is no dispute over the requirements numbered 1 through 5. So, the only disputed factor is timeliness of adjudication in state court.

Timeliness is a “mixed question of law and fact,” going to (1) the pace at which a state court can adjudicate a claim and (2) the legal sufficiency of that pace.  Four factors come into play:

• first, the backlog of the state court’s calendar relative to the federal court’s calendar;
• second, the complexity of the issues presented and the respective expertise of each forum;
• third, the status of the bankruptcy proceeding to which the state law claims are related; and
• fourth, whether the state court proceeding would prolong the administration or liquidation of the estate.

Each of these four factors is now considered in turn.

First Factor—Backlog.  Defendants point to the state court’s backlog of 1758 cases with an average disposition time of 745 days; compared to the 465 adversary proceedings pending in the Bankruptcy Court with an average disposition time of nine months.

However, since this case involves a non-core matter, the Bankruptcy Court could only issue non-binding proposed findings of fact and conclusions of law, with the U.S. District Court for Northern Texas then considering the matter de novo. The parties have not presented any data as to the current disposition time of matters pending in that court.

Second factor—Complexity.  This case raises claims under New York law, over which the Commercial Division of the New York state court undoubtedly has the greatest expertise.

On the other hand, the Bankruptcy Court has already analyzed some of the contracts at issue in resolving certain motions, and it has existing familiarity with Debtor’s underlying fraud scheme. But the U.S. District Court for Northern Texas probably does not have any relevant knowledge of this case.

The relevant question is not whether the action would be more quickly adjudicated in the bankruptcy court than in state court, but rather, whether the action can be timely adjudicated in the state court.

In this case, any delay in proceedings engendered by a remand to state court would not unduly hinder the administration of the Bankruptcy Cases.

Third Factor—Bankruptcy Status.  In a Chapter 11 reorganization, the court must be sensitive to the needs of the debtor attempting to reorganize; but in a Chapter 7, there is no administrative urgency or need to facilitate a plan of reorganization.

The Debtor here is in Chapter 7 liquidation.

Fourth Factor—Prolong.  Defendants counter that an adverse judgment may result in an indemnification or contribution claim against the Debtors’ estate, which would then need to be liquidated and administered as part of the Chapter 7.

Yet bankruptcy estates are routinely administered even in the face of contingent or unliquidated claims, and Defendants have not demonstrated how their potential claims would prevent the Chapter 7 Trustee from doing its essential work of gathering available assets, disposing of them, determining the amounts due to various creditors and the priority of such claims, and making distributions in the interim.

Ruling.  Accordingly, the requirements for mandatory abstention have been met. The Court must therefore abstain from exercising jurisdiction over this action and remand to state court.

Permissive Abstention and Equitable Remand

For similar reasons, permissive abstention under 28 U.S.C. § 1334(c)(1) and equitable remand under 28 U.S.C. § 1452(b) are also appropriate.

These two inquiries (permissive abstention and equitable remand) are essentially the same and are often analyzed together.

Relevant factors include:

• the effect on the efficient administration of the bankruptcy estate;
• the extent to which issues of state law predominate;
• the difficulty or unsettled nature of the applicable state law;
• comity;
• the degree of relatedness or remoteness of the proceeding to the main bankruptcy case;
• the existence of the right to a jury trial; and
• prejudice to the involuntarily removed defendants.

Here, these factors weigh strongly in favor of abstention and remand:

• this action will have minimal effect on the administration of the bankruptcy estate;
• state law issues clearly predominate;
• the interests of comity are promoted by allowing the claims to remain where the plaintiffs elected to bring them, i.e. in state court;
• the state action does not turn on any issue that is now being litigated in Bankruptcy Court;
• while the potential indemnification claim against the bankrupt estate is a factor that weighs somewhat against abstention, alone it is not a sufficient ground for avoiding an equitable remand;
• Plaintiffs’ right to a jury trial will be protected in state court; and
• the Bankruptcy Court is unable to preside over a jury trial absent the consent of all parties.

So, the Court finds the requirements for permissive abstention and equitable remand are met.

Conclusion

Very informative!

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