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Bankruptcy Court Did Not Err Allowing State Court Litigation against Debtor to Continue

The Bankruptcy Appellate Panel (BAP) of the Sixth Circuit recently held that a Bankruptcy Court did not err by granting a motion for relief from stay to continue litigation against a Chapter 7 individual debtor. In In re Martin (6th Cir. BAP Dec. 16, 2015), creditors who were plaintiffs in a state court fraud case against Debtor and others and who were also plaintiffs in a non-dischargeability proceeding against debtor stemming from the same state court litigation, sought relief from the automatic stay to continue the state court litigation. The Bankruptcy Court granted the motion and stayed the non-discharge proceeding. Debtor asserted that the Bankruptcy Court was improperly allowing a state court judge to decide the issue of dischargeability in contradiction to the exclusive jurisdiction of the Bankruptcy Court because a judgment rendered by the state court is likely to have preclusive effect in the adversary proceeding. The BAP affirmed the Bankruptcy Court’s decision to allow the state court litigation to continue, holding that the dischargeability of a debt is a matter separate from the merits of the debt itself, and that giving a state court judgment preclusive effect does not mean that the Bankruptcy Court is deferring to the state court to determine dischargeability. “Accordingly, the bankruptcy court does not improperly abdicate its role by holding an adversary proceeding to determine the dischargeability of a potential debt in abeyance in order to allow completion of on-going state court litigation regarding the cause of action giving rise to the potential debt.”

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