The Ninth Circuit recently held that federal courts have exclusive jurisdiction over claims like malicious prosecution that arise from actions taken in bankruptcy cases.

One of the judges on the panel concurred, noting a circuit split and implying that Ninth Circuit law may be out of step with Supreme Court authority.

The facts and procedural history were exceptionally complex. Suffice it to say that a surgeon was in chapter 7. One of the surgeon’s patients had died soon after surgery. By then, the doctor was in bankruptcy. A lawyer for the family of the deceased filed an adversary proceeding alleging that the medical malpractice claim was nondischargeable as willful and malicious injury or debt resulting from false representation.

Eventually, the doctor beat the medical malpractice suit. Later, the doctor sued the lawyer in state court for malicious prosecution, abuse of process and intentional infliction of emotional distress resulting from the allegedly meritless dischargeability suit.

Ultimately, the state trial court gave the doctor an $8 million judgment against the lawyer. On appeal, the state appellate court upheld the finding of liability for malicious prosecution, vacated the damages award and called for a new trial on damages. In a complex settlement, the lawyer gave the doctor an $8 million judgment on the condition that the debt would be discharged in the lawyer’s bankruptcy.

The lawyer collaterally attacked the $8 million settlement by suing in federal district court and contending that the bankruptcy court had exclusive jurisdiction over claims for malicious prosecution arising from conduct occurring in the bankruptcy case. Consequently, the lawyer argued that any judgment in state court for malicious prosecution was void.

The district court dismissed the suit in federal court, ruling that the Rooker-Feldman doctrine barred collateral attack on the state court judgment. The doctor appealed.

Exclusive Federal Jurisdiction

Circuit Judge Daniel P. Collins began analysis of the merits by explaining how Rooker-Feldman arose from Supreme Court decisions in 1923 and 1983. The two cases, he said, stand for the proposition that a district court may not exercise what is effectively appellate review of a state court civil judgment.

However, Judge Collins said that the Ninth Circuit has “held that a ‘state court judgment entered in a case that falls within the federal courts’ exclusive jurisdiction is subject to collateral attack in the federal courts,’ Gonzales v. Parks, 830 F.2d 1033, 1036 (9th Cir. 1987) (emphasis added), and that the Rooker-Feldman doctrine therefore does not bar such suits.”

Judge Collins went on to cite MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910 (9th Cir. 1996), and described how the Ninth Circuit “held that ‘state malicious prosecution actions for events taking place within . . . bankruptcy court proceedings are completely preempted by federal law.’ Id. at 912.” He also cited Gonzales v. Parks, 830 F.2d 1033, 1036 (9th Cir. 1987), to mean that “the state courts lack ‘subject matter jurisdiction to hear a claim that the filing of a bankruptcy petition constitutes an abuse of process.’”

Judge Collins interpreted Ninth Circuit authority to mean that a “federal claim may only be ‘brought in the bankruptcy court itself’ and cannot even be brought as a later ‘separate action in the district court.’” MSR, supra, at 916.

“It follows inexorably,” Judge Collins said, that the doctor’s “malicious prosecution claim is completely preempted by federal law and may only be asserted in federal court as part of [the doctor’s] bankruptcy proceedings.”

Because the doctor’s claim was “completely preempted” by federal law and was within the federal courts’ exclusive jurisdiction, Judge Collins reversed the district court’s dismissal, holding that Rooker-Feldman did not apply.

The Concurrence

Circuit Judge Milan D. Smith, Jr., concurred “in full.” However, his concurrence reads like an invitation for en banc review or the precursor to a petition for certiorari to resolve a circuit split.

Three times, Judge Smith said, the Ninth Circuit has held that Rooker-Feldman does not apply “if Congress expressly authorizes the federal district courts to review state-court judgments by statute.” One of the cases held that a federal court may review a state court judgment about violations of the automatic stay.

In the case on appeal, Judge Smith said that Ninth Circuit precedent “controls the result here” and means that the doctor’s “malicious prosecution claim for events taking place within federal bankruptcy proceedings is, in reality, an exclusively federal claim for bankruptcy sanctions arising under Title 11 of the bankruptcy code and is completely preempted by federal law.”

“Notably,” Judge Smith cited the Third and Seventh Circuits for being “two other federal courts of appeals [that] have issued decisions that directly conflict with MSR’s broad holding.” Moreover, he said that “the Supreme Court has sharpened the test for determining whether a state-law cause of action is completely preempted by federal law in the intervening years since we issued our 1996 decision in MSR.”

For himself, Judge Smith said he was “skeptical that 11 U.S.C. § 105 and Rule 9011 of the Federal Rules of Bankruptcy Procedure would satisfy the modern test for completely preempting state-law malicious prosecution claims for events taking place within bankruptcy proceedings.”

Judge Smith did not see the later Supreme Court decisions as being “clearly irreconcilable” with MSR. “Absent en banc reconsideration of MSR’s broad holding, we are bound by it,” he said.