Claims of Non-Debtors Alleging Harm From Filing of Involuntary Bankruptcy of Debtor are Not Preempted by the Bankruptcy Code

Rosenberg v. DVI Receivables XVII, LLC, 835 F.3d 414 (3d Cir. 2016).  As Judge Ambro noted in his opinion in this case today, an involuntary bankruptcy is one that is commenced by creditors, essentially forcing a debtor into bankruptcy proceedings.  Section 303(i) of the Bankruptcy Code provides, however, that if an involuntary bankruptcy petition is dismissed, the debtor can recover damages, attorneys’ fees, and costs from the creditors.  Though “[i]t is an understatement to say that the factual background and procedural history lurking behind this case are complex,” the bottom line is that, here, non-debtors alleged that they were damaged by the filing of an involuntary bankruptcy that was later dismissed.  Because section 303(i) limits its remedies to debtors, the non-debtors brought state law claims of tortious interference.

The creditors asserted that those state law claims were preempted by section 303(i) and sought dismissal at the threshold.  The District Court agreed with the creditors.  The non-debtors appealed and won a reversal.

Applying the de novo standard of review applicable to decisions about preemption, Judge Ambro discussed the several varieties of preemption.  This case involved only “field preemption,” which “occurs when a field is reserved for federal regulation, leaving no room for state regulation, and congressional intent to supersede state laws is clear and manifest.”  A “strong” or “sturdy” presumption against field preemption applied.  Judge Ambro tested the intent of Congress by seeing “whether there is enough evidence in the text, structure, or purpose of § 303(i) or the Bankruptcy Code as a whole to rebut the presumption of against preemption” and instead to show a “clear and manifest intent” to preempt state claims.  There was not sufficient evidence here.

The text of section 303(i) is silent as to non-debtors.  The creditors claimed that this showed that “by providing a remedy to debtors, Congress also meant to deprive non-debtors of any remedy.”  Judge Ambro did not agree.  Courts “do not lightly infer from congressional silence the intent to deprive some persons of a judicial remedy for an abuse of the bankruptcy system.”

The structure and purpose of the Bankruptcy Code and section 303(i) did not aid the creditors either.  The section 303(i) remedy for debtors who are improperly subjected to an involuntary bankruptcy was designed to deter abuse of the involuntary bankruptcy process.  Since “[n]othing in the Code suggests that Congress was also concerned about protecting non-debtors from the effects of involuntary petitions,” it was improper to say that Congress intended section 303(i) to preempt state law claims by non-debtors.

Judge Ambro also rejected a “floodgates” argument that denying field preemption would inundate federal courts with claims by non-debtors allegedly harmed by involuntary bankruptcy filings that were later dismissed.  Given the small number of such cases, the creditors’  view was “based more on conjecture than fact.”

Finally, the panel declined to follow In re Miles, 430 F.3d 1083 (9th Cir. 2005), on which the creditors and the District Court relied.  Judge Ambro found that decision inconsistent with another opinion of the Third Circuit, Paradise Hotel Corp. v. Bank of Nova Scotia, 842 F.2d 47, 52 (3d Cir. 1988), and with the presumption against preemption.  Accordingly, the decision below was reversed and the case was remanded for further proceedings.