In Rosenberg v. DVI Receivables XVII, LLC, 2016 WL 4501675 (3d Cir. August 29, 2016), the United States Court of Appeals for the Third Circuit held that Section 303(i) of the United States Bankruptcy Code does not preempt state law claims by non-debtors for damages arising from the filing of an involuntary bankruptcy petition.
The Petitioning Entities filed involuntary bankruptcy petitions against Mr. Rosenberg and his affiliated entities. The involuntary petitions were dismissed because the entities were not Rosenberg’s creditors. Rosenberg subsequently recovered compensatory and punitive damages under Section 303(i).
Rosenberg’s wife and several affiliated entities (the “Rosenberg Affiliates”) then filed suit in the Eastern District of Pennsylvania against the Petitioning Entities for tortious interference with contracts and business relationships. The Rosenberg Affiliates alleged that the Petitioning Entities filed the involuntary petitions with the intent of causing the Rosenberg Affiliates to default on their mortgages and lose their properties.
The District Court dismissed the complaint on the ground that the Rosenberg Affiliates’ state law tortious interference claim was preempted by the involuntary provisions of the Bankruptcy Code. The Third Circuit reversed.
The Court explained that “[i]n deciding whether Congress has occupied a field for exclusive federal regulation, we begin, based on concerns of federalism, with a sturdy presumption against preemption.”
The Third Circuit noted that although section 303(i) provides a remedy to the debtor, it “is silent as to potential remedies for non-debtors harmed by an involuntary bankruptcy petition. This suggests that when Congress passed the provision it either did not intend to disturb the existing framework of state law remedies for non-debtors or (more likely) was not thinking about non-debtor remedies at all. In either case, field preemption does not apply.”
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. You can reach Carl at (302) 622-4272 or at email@example.com.