The Third Circuit granted panel rehearing and vacated an opinion issued on June 11. Although nonprecedential, the June opinion could have been understood to mean that a debtor must show malice or egregious conduct before the court is justified in awarding punitive damages for an involuntary bankruptcy petition filed in bad faith.
In the new opinion on August 25, the same Third Circuit panel no longer requires showing malice or egregious conduct by the involuntary petitioner. However, the appeals court nonetheless upheld the denial of punitive damages by holding that the trial court has discretion to deny damages even after a bad faith filing.
The new opinion could also be read to mean that a debtor is not even entitled to compensatory damages for a bad faith failing if the business was doomed to failure.
Like the predecessor, the new opinion is nonprecedential. The story may not be over, because there may be another petition for rehearing en banc.
Bemoaning the June opinion, 18 distinguished law professors filed an amicus brief urging the circuit to grant rehearing and restore the traditional approach to punitive damages for filing an involuntary petition in bad faith.
The Involuntary Filed in Bad Faith
Lenders filed an involuntary bankruptcy petitions in Pennsylvania against an individual and his corporation. The petition against the individual was transferred to a bankruptcy court in Florida that dismissed the petition.
After dismissal, the individual filed a complaint seeking compensatory and punitive damages against the lender under Section 303(i)(2). The complaint was withdrawn to the district court in Florida where the suit went to trial before a jury. The jury awarded the individual $6.1 million in damages, including $5 million in punitive damages.
The bankruptcy court in Pennsylvania dismissed the involuntary petition against the corporation, giving issue preclusion to the decision of the Florida bankruptcy court.
Following dismissal, the corporate debtor sought damages in the Pennsylvania bankruptcy court against the lenders. On the debtor’s motion, the claims under Section 303(i)(2) were withdrawn to the district court.
The parties filed cross motions for summary judgment. The corporate debtor argued that the Pennsylvania court should give preclusive effect to the Florida jury’s finding of bad faith. The district court denied the debtor’s motion.
The Pennsylvania district court granted the lenders’ summary judgment motion, holding that the evidence of bad faith did not rise to a level justifying punitive damages, in view of the financial distress confronting the company. The district court also ruled that the debtor was not entitled to compensatory damages because the company’s financial problems were the result of factors aside from the involuntary petition.
The First Opinion
The corporate debtor appealed to the circuit and lost in the June 11 opinion, written by Circuit Judge Keith A. Jordan. National Medical Imaging LLC v. U.S. Bank NA (In re National Medical Imaging LLC), 19-3057, 2020 BL 216874, 2020 Us App Lexis 18405 (3d Cir. June 11, 2020), vacated Aug. 25, 2020.
In the original opinion, Judge Jordan held that the lenders were “entitled to summary judgment because their behavior was not egregious enough to justify punitive damages and [the corporate debtor] cannot prove the involuntary bankruptcy proximately caused it any harm.” [Emphasis added.] He also said that the evidence did not “evince malice” or “constitute malicious, vengeful, or egregious behavior.” Id. 2020 BL 216874 *5.
Judge Jordan held that the “District Court was well within its discretion in determining that the level of bad faith shown by [the debtor’s] proof was not egregious enough to justify an award of punitive damages.” Id. [Emphasis added.]
The Rehearing Petition
The debtor filed a petition for panel rehearing and rehearing en banc.
David R. Kuney wrote an amicus brief in support of the debtor on behalf of 18 law professors.
The amici said that the “statute’s stated and express standard for the awarding punitive damages is bad faith, and solely bad faith. There is no statutory reference to ill-will, malice or egregious conduct.” The brief argued that the “potential for devastating consequences [from an involuntary petition] can only be monitored effectively if the bankruptcy courts have meaningful discretion to protect against bad faith conduct.”
New Opinion Deletes ‘Egregious’ and ‘Malicious’
The panel granted panel rehearing and vacated the June 11 opinion. Panel rehearing having been granted, the court did not act on the petition for en banc review.
The new opinion on August 25 deletes all references to malicious or egregious conduct. Also nonprecedential, the new opinion upholds the discretion of a trial court to deny punitive damages even after a finding of bad faith.
In addition, the new opinion says that a reasonable jury could not find that an involuntary petition was the cause of the debtor’s damages if the business was “already in irreversible decline.”
Writing again for the panel in the new opinion, Judge Jordan focused on the word “may” in Section 303(i)(2)(B), e.g., the court “may grant any damages proximately caused by such filing . . . or punitive damages.” In substance, the new opinion upholds the judgment based on the trial court’s discretion, rather than on the absence of egregious or malicious conduct.
No Jury Could Award Punitive Damages
Citing the Collier treatise, Judge Jordan said that punitive damage for a dismissed involuntary petition are discretionary. Citing Third Circuit authority, he said that bad faith is judged by the “totality of the circumstances.” While bad faith is the only “statutory prerequisite for punitive damages,” he cited the Seventh Circuit for saying that Congress reserved the power to withhold an award “in certain rare circumstances.” In re Reid, 854 F.2d 156, 160 (7th Cir. 1988).
Even assuming that the facts showed bad faith, Judge Jordan could not “say that the District Court erred in concluding, in effect and in light of the totality of the circumstances and ‘the policy surrounding § 303(i)(2)’, that no reasonable jury would grant punitive damages.” While the lenders’ litigation strategy was “aggressive,” he said it did “not constitute evidence warranting an award of punitive damages.”
Similarly, Judge Jordan said that dismissal of the involuntarily petition, although “improperly filed,” does not mean that the debtor “is necessarily entitled to punitive damages, even given what was characterized by the District Court as the creditors’ ‘negligent and hasty approach to filing the involuntary bankruptcy.’”
In view of the record, Judge Jordan upheld summary judgment dismissing the claim for punitive damages because “the District Court did not err in determining that there was no reasonable basis for awarding punitive damages.”
No Compensatory Damages for a Failing Company
Turning to compensatory damages, Judge Jordan concluded from the record that any damages were not proximately caused by the involuntary petition. He cited bankruptcy courts for holding that “compensatory damages may not be justified” when the “business was failing before the filing of the involuntary bankruptcy.”
Turning the case on appeal, Judge Jordan said that “the evidence does not prove causation. No reasonable jury would credit unsubstantiated rumors as evidence, rumors that were, in any event, likely to be ruled inadmissible hearsay.” He cited the corporate debtor for saying before bankruptcy that financial problems were caused by changes in the government’s rules for compensating medical facilities.
Judge Jordan upheld dismissal of the claims for compensatory damages because the involuntary petition was filed when the business “was already in irreversible decline — by all appearances on the precipice of complete collapse. . . . A reasonable jury could not find otherwise.”
Observations
When the circuit court was ruling on legal issues of significance, handing down a nonprecedential opinion seems odd. In this writer’s opinion, the circuit court was more focused on barring the debtor’s claims than on making law. In other words, the panel was searching for a reason to uphold the granting of summary judgment.
Recall that a jury in Florida meted out $6.1 million in damages after finding bad faith. On presumably the same evidence, the Pennsylvania district court ruled on summary judgment that no jury could assess damages.
In this writer’s opinion, the Pennsylvania district court and the Third Circuit both believed that $6.1 million in damages was enough. They therefore constructed legal theories to uphold summary judgment dismissing the debtor’s claims.
Beyond bankruptcy law, the opinions of district and circuit courts are remarkable statements about the ability of a trial court to grant summary judgment in the face of arguably disputed facts.
Another petition for rehearing en banc is a possibility if not a likelihood.
The Third Circuit granted panel rehearing and vacated an opinion issued on June 11. Although nonprecedential, the June opinion could have been understood to mean that a debtor must show malice or egregious conduct before the court is justified in awarding punitive damages for an involuntary bankruptcy petition filed in bad faith.
In the new opinion on August 25, the same Third Circuit panel no longer requires showing malice or egregious conduct by the involuntary petitioner. However, the appeals court nonetheless upheld the denial of punitive damages by holding that the trial court has discretion to deny damages even after a bad faith filing.
The new opinion could also be read to mean that a debtor is not even entitled to compensatory damages for a bad faith failing if the business was doomed to failure.
Like the predecessor, the new opinion is nonprecedential. The story may not be over, because there may be another petition for rehearing en banc.
Bemoaning the June opinion, 18 distinguished law professors filed an amicus brief urging the circuit to grant rehearing and restore the traditional approach to punitive damages for filing an involuntary petition in bad faith.