The Third Circuit split with the Ninth by holding that Section 303(i) does not preempt claims by non-debtors against creditors who mount unsuccessful involuntary bankruptcy petitions.
The story began eight years ago when secured lenders filed an involuntary petition against an individual and businesses he owned. The case became a nightmare for the creditors after the bankruptcy court dismissed the petitions. This year, the Eleventh Circuit held that a procedural snafu by the lenders’ attorneys left their clients saddled with $1.12 million in compensatory damages and $5 million in punitive damages under Section 303(i)(2). Last year, the Eleventh Circuit upheld an award of more than $1 million in attorneys’ fees under Section 303(i)(1).
Another chapter in the saga began when the owner’s wife and several of his non-debtor companies filed suit in district court against the lenders for tortious interference with contracts and business relationships. The district court in Pennsylvania dismissed the complaint, believing that the state law claims were preempted by Section 303(i)(1), which allows the court to award costs and attorneys’ fees “in favor of the debtor” when an involuntary petition is dismissed. Section 303(i)(2) permits the imposition of compensatory or punitive damages if the involuntary petition was filed in bad faith.
In his Aug. 29 opinion for the Philadelphia-based appeals court, Circuit Judge Thomas Ambro described the case as involving field preemption, not express preemption or conflict preemption. Field preemption, he said, results when the field is reserved for federal regulation, leaving no room for state regulation. Nevertheless, Congress must show “clear and manifest intent” to preempt state law because there is a “sturdy ‘presumption against preemption.’”
The statute by itself is “insufficient for field preemption,” Judge Ambro said, because Section 303(i) is “silent as to potential remedies for non-debtors.” He said the court must “not lightly infer from congressional silence the intent to deprive some persons of a judicial remedy for an abuse of the bankruptcy system.”
In the same vein, he said “it would be inconsistent with the remedial purpose of Section 303(i) to preempt state law remedies for non-debtors that can likewise be harmed by involuntary bankruptcy petitions.”
In dismissing the complaint, the district court relied on the Ninth Circuit’s 2005 decision called In re Miles, where the San Francisco-based court dismissed non-debtors’ claims on the ground of complete preemption arising from Section 303(i).
Judge Ambro said Miles was not “persuasive,” in part because the decision “is inconsistent with the presumption against preemption.”
Judge Ambro was a bankruptcy lawyer before elevation to the circuit court. To read ABI’s discussion of this year’s Eleventh Circuit opinion on punitive and compensatory damages, click here.