In re Miles
| Decision Date | 05 May 2003 |
| Docket Number | BAP No. CC-02-1529-KJP.,BAP No. CC-02-1545-KJP.,BAP No. CC-02-1546-KJP.,Bankruptcy No. SA 01-13243-JB.,BAP No. CC-02-1537-KJP.,Adversary No. SA 02-01448-JB.,BAP No. CC-02-1528-KJP.,BAP No. CC-02-1544-KJP.,Adversary No. SA 02-01449-JB.,Adversary No. SA 02-01451-JB. |
| Citation | 294 B.R. 756 |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
| Parties | In re Rodney Cassimer MILES, Former Alleged Debtor. Ann Miles; Melinda Miles; Kelly Cunningham, Appellants, v. David B. Okun; Sheila Reiser-Okun; David B. Okun, M.D., F.A.C.P., A California Medical Corporation; David B. Okun, M.D., F.A.C.P., A Medical Corporation Money Purchase Plan; Okun Family Trust U/D/T/ March 10, 1998; Emanuel & Ann S.N. Reiser Revocable Trust; Andrew K. Mauthe; M. Stephen Koontz; Milburn A. Matthews; Coontz & Matthews L.L.P.; Lauren Elizabeth Murphy; Susan A. Spitzo; Vera J. Ferguson; Nancy M. Vold, Appellees. |
Rodney C. Miles, Laguna Niguel, CA, for Ann R. Miles.
David R. Haberbush, Haberbush & Campbell, LLP, Long Beach, CA, for appellees.
Before KLEIN, JELLEN,1 and PERRIS, Bankruptcy Judges.
In these appeals, we hold that Congress preempted state law remedies when it enacted 11 U.S.C. § 303 providing for involuntary bankruptcies and, at § 303(i), prescribed a set of remedies against unsuccessful petitioners in involuntary bankruptcies. Thus, we AFFIRM the dismissal of removed state law actions filed by relatives of an alleged debtor seeking tort damages for the filing of an involuntary bankruptcy.
This decision complements the opinion of another panel, Franklin v. Four Media Co. (In re Mike Hammer Prods., Inc.), 294 B.R. 752, BAP Nos. CC-02-1433 through 1436, 2003 WL 21204621 (9th Cir. BAP 2003) ("Mike Hammer"), published simultaneously with this one, which holds that § 303(i) does not authorize damage awards in favor of creditors.
Separate involuntary petitions against Ann and Rodney Miles, apparently arising out of a feud with neighbors, were dismissed without relief being ordered and with a ruling that the petition against Ann was filed in bad faith. Awards under § 303(i) were made in favor of Rodney ($144,432.97) and Ann ($10,445.98) based on their attorney's fees and costs.
After the petitions were dismissed, Ann (as Rodney's spouse and not as a former alleged debtor) and the Miles' daughters (Melinda and Kelly), with Rodney Miles as counsel, filed three substantially identical tort actions in a California state court seeking damages for the filing and prosecution of the involuntary petitions. The complaints stated theories of: defamation, false light, abuse of process, emotional distress, negligent misrepresentation, and simple negligence.
The named defendants included the petitioning creditors, their lawyers, and the law firm's paralegals and secretaries who worked on the case.
The defendant lawyers removed the three actions from state court to bankruptcy court pursuant to 28 U.S.C. § 1452(a).
Appellants moved for remand under 28 U.S.C. § 1452(b), on the premise that the removal was untimely and there is no federal jurisdiction over damage claims by third parties resulting from the filing of an involuntary bankruptcy.
The defendant lawyers countered with motions to dismiss the removed complaints, contending that federal law preempted all of the state law causes of action pleaded in the complaints.
The bankruptcy court refused to remand and dismissed the complaints as to all defendants, holding that § 303(i) preempts state law tort remedies for filing involuntary bankruptcies and does not authorize damages for third parties who claim to be harmed by the filing of an involuntary bankruptcy petition.
These timely appeals by Ann Miles (Nos. CC-02-1528 & 1545), Melinda Miles (Nos. CC-02-1529 & 1544), and Kelly Cunningham (Nos. CC-02-1537 & 1546) ("Appellants") ensued.
The bankruptcy court had jurisdiction per 11 U.S.C. § 1334. We have jurisdiction under 11 U.S.C. § 158(a)(1).
1. Whether Bankruptcy Code § 303(i) preempts state law causes of action for damages incurred by third parties resulting from the filing of an involuntary bankruptcy petition.
2. Whether there was the required jurisdictional foundation under 28 U.S.C. § 1334 for removal under 28 U.S.C. § 1452(a).
3. Whether remand was required by 28 U.S.C. § 1452(b).
4. Whether the complaints stated claims upon which relief can be granted.
Issues of preemption, jurisdiction, and dismissal for failure to state a claim are questions of law that are reviewed de novo. Audette v. ILWU, 195 F.3d 1107, 1111 (9th Cir.1999); N. Slope Borough v. Rogstad (In re Rogstad), 126 F.3d 1224, 1228 (9th Cir.1997). Remand decisions under 28 U.S.C. § 1452(b) are reviewed for abuse of discretion. McCarthy v. Prince (In re McCarthy), 230 B.R. 414, 416 (9th Cir. BAP 1999).
We begin with the preemption analysis before turning to the jurisdiction and equitable discretion issues inherent in Appellants' challenge to the removal, and the dismissal.
Neither the Ninth Circuit nor the Supreme Court has squarely held that § 303(i) preempts state tort remedies. Accordingly, we focus on the question.
Retracing the well-worn preemption path quickly leads to the question whether Congress intended to preempt all state tort remedies when it enacted Bankruptcy Code § 303(i) to provide a scheme of remedies that may be imposed if an involuntary bankruptcy petition is dismissed. 11 U.S.C. § 303(i).
Although preemption is an application of the Supremacy Clause of the Constitution, it is fundamentally a question of Congressional intent in which the presumption is that Congress did not intend to displace state law. U.S. Const. art. VI; Maryland v. Louisiana, 451 U.S. 725, 746, 101 S.Ct. 2114, 68 L.Ed.2d 576 (1981); Radici v. Associated Ins. Cos., 217 F.3d 737, 741 (9th Cir.2000).
Congressional intent to preempt may be inferred from a scheme of federal regulation that is so comprehensive, or where the federal interest so dominates, that the federal system may be assumed to preclude enforcement of state laws on the same subject. When a federal scheme is sufficiently comprehensive to warrant an inference that Congress "left no room" for state regulation, the "field" has been preempted. Hillsborough County, Fla. v. Automated Med. Labs., Inc., 471 U.S. 707, 713, 105 S.Ct. 2371, 85 L.Ed.2d 714 (1985); Ting v. AT & T, 319 F.3d 1126, 1135-36 (9th Cir.2003); Petitioning Creditors v. Matsco, Inc. (In re Cybernetic Servs., Inc.), 252 F.3d 1039, 1045 (9th Cir.2001); Radici, 217 F.3d at 741. It is "field preemption" that we consider here.
In the case of bankruptcy, Congress has power to establish "uniform Laws on the subject of Bankruptcies throughout the United States." U.S. Const. art. I, § 8, cl. 4. The requirement of "uniformity" in bankruptcy is of constitutional proportions and well-recognized. MSR Exploration Ltd. v. Meridian Oil, Inc., 74 F.3d 910, 914-15 (9th Cir.1996).
Thus, the Ninth Circuit has held that a state's laws regarding malicious prosecution are completely preempted by the Bankruptcy Code with respect to the filing of a claim by a creditor. MSR Exploration, 74 F.3d at 915. Likewise, it has held that the state law tort of abuse of process is preempted when the alleged abuse of process is the filing of a bankruptcy case. Gonzales v. Parks, 830 F.2d 1033, 1035-36 (9th Cir.1987).
In MSR Exploration, the Ninth Circuit held that malicious prosecution actions based on bankruptcies are preempted, reasoning that "the unique, historical, and even constitutional need for uniformity in the administration of the bankruptcy laws" signaled Congressional intent to preempt the regulation of parties appearing in bankruptcy court. It cited § 303(i) as an example of how "Congress has considered the need to deter misuse of the process and has not merely overlooked the creation of additional deterrents." MSR Exploration, 74 F.3d at 915.
For the same reasons, state tort actions against those who file involuntary petitions must also be regarded as preempted.
The § 303(i) remedial scheme is comprehensive in that it specifically addresses the full range of remedies from costs and attorney's fees to compensatory and punitive damages for unsuccessful involuntary bankruptcies.2
Nor, in limiting the persons eligible for § 303(i) awards, was Congress inadvertently overlooking third parties.3 There is a palpable federal interest in foreclosing the possibility that debtors or third parties opposed to the bankruptcy would attempt to interrupt or chill legitimate bankruptcy cases by pursuing satellite state tort litigation as a form of collateral attack on the bankruptcy petition.
A key justification for involuntary cases is as a creditors' remedy that enables creditors who lack the muscle or the luck to extract preferences or unequal transfers from distressed debtors to achieve equitable treatment by invoking the protections inherent in the trustee's avoiding powers consistent with the principle of ratable recovery for creditors. Third-party transferees who might be at risk of disgorgement to a bankruptcy trustee can be expected to resist the involuntary bankruptcy by any means possible. If they could bring state tort actions against petitioning creditors, then the filing of meritorious involuntary bankruptcy petitions would be chilled by state law. As noted in the Collier treatise: "The better argument is that federal law preempts state tort law [because] to hold otherwise would undermine the federal scheme relating to involuntary filings." 2 COLLIER ON BANKRUPTCY ¶ 303.15[10] () ("C OLLIER"); see also Walls v. Wells Fargo Bank, 276 F.3d 502, 510 (9th Cir.2002)(the contempt remedy provided by the Bankruptcy Code for violation of the discharge injunction is the exclusive remedy because to hold otherwise ...
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