Second Circuit Holds District Court Must Mandatorily Abstain from Deciding Parmalat State Court Action related to U.S. Ancillary Bankruptcy Proceeding

February 23, 2012

Under 28 U.S.C. § 1334(c)(2), a district court must abstain from hearing state law claims that are related to a bankruptcy case when those claims can be timely adjudicated in state court. In Parmalat Capital Finance Ltd. v. Bank of America Corp., No. 09-4302-cv (L), 2012 WL 539957 (2d Cir. Feb. 21, 2012), the United States Court of Appeals for the Second Circuit ruled that certain state court actions brought by Parmalat affiliates or their representatives against their former auditor Grant Thornton should be remanded to the Illinois court based on the Second Circuit’s application of a four-factor test governing mandatory abstention it adopted in a prior appeal in the same case. The Parmalat decision is noteworthy in that it provides a roadmap of how to approach weighing the various factors previously espoused by the Second Circuit to consider whether abstention is mandatory under section 1334(c)(2).