In re Transcolor Corp., Bankruptcy No. 98-6-5483-JS. Adversary No. 99-5464-JS.

• Citation: 258 BR 149
• Decision Date: 19 January 2001
• Docket Number: Bankruptcy No. 98-6-5483-JS. Adversary No. 99-5464-JS.
• Parties: In re TRANSCOLOR CORPORATION, Debtor. Transcolor Corporation, Plaintiff, v. Cerberus Partners, L.P., et al., Defendants.
• Court: U.S. Bankruptcy Court — District of Maryland

258 B.R. 149 (2001)

In re TRANSCOLOR CORPORATION, Debtor.

Transcolor Corporation, Plaintiff, v. Cerberus Partners, L.P., et al., Defendants.

Bankruptcy No. 98-6-5483-JS. Adversary No. 99-5464-JS.

United States Bankruptcy Court, D. Maryland, at Baltimore.

January 19, 2001.

COPYRIGHT MATERIAL OMITTED

Irving E. Walker, Miles & Stockbridge, P.C., Baltimore, Maryland, Charles R. Bennett, Jr., Riemer & Braunstein, Boston, Massachusetts, for Gordon Brothers Capital Corporation.

Joseph B. Chazen, M. Evan Meyers, Meyers, Billingsley, Rodbell & Rosenbaum, P.A., Riverdale, Maryland, Alan R. Glickman, Marilyn C. Kunstler, Steven Perlstein, Schulte, Roth & Zabel, LLP, New York City, for Cerberus Partners, L.P. and Madeleine L.L.C.

Dale A. Cooter, Donna S. Mangold, Karen S. Karas, Cooter, Mangold, Tompert & Wayson, P.L.L.C., Washington, D.C., for Transcolor Corporation.

Monique D. Almy, Ober, Kaler, Grimes & Shriver, Baltimore, Maryland, Chapter 7 Trustee.

MEMORANDUM OPINION GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT AND DISMISSING COMPLAINT

JAMES F. SCHNEIDER, Bankruptcy Judge.

The defendants, Cerberus Partners, L.P. ("Cerberus"), Madeleine L.L.C. ("Madeleine"), and Gordon Brothers Capital Corporation ("Gordon Brothers") filed the instant motion for summary judgment or, in the alternative, for judgment on the pleadings P. 13. This opinion addresses the question, "May a party (in this case, a debtor) that sustained injury or alleged that it sustained injury from the rejection by a debtor in a different bankruptcy case of an unexpired lease or executory contract maintain a cause of action in a State court against the insiders of the other debtor who caused it to file bankruptcy and reject the contract or lease?" For the reasons stated, the answer is "No," thereby requiring the dismissal of the instant complaint upon the defendants' motion.

FINDINGS OF FACT

Transcolor Corporation, the debtor-plaintiff, had a ten-year lease of nonresidential real property and equipment, and a licensing agreement with Winterland Concessions Company ("Winterland"), a California corporation. One year after the lease was executed, Winterland filed a voluntary Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Northern District of California and rejected the lease pursuant to the provisions of Section 365 of the Bankruptcy Code, which permits a debtor to reject executory contracts and unexpired leases. The bankruptcy court in the Winterland case approved the rejection of the lease in question, and, finding that the case was filed in good faith, confirmed its Chapter 11 plan by order dated January 7, 1998. Transcolor neither filed an objection to the rejection of the lease, nor a claim for damages resulting therefrom in the Winterland bankruptcy case.

Instead, Transcolor filed the instant lawsuit, upon a cause of action for interference with contractual relations, in the Circuit Court for Prince George's County, Maryland, against the defendants, whom it alleged to be insiders of Winterland. The suit was based on the proposition that the defendants wrongfully caused Winterland to file bankruptcy and to reject its lease with Transcolor. The suit was transferred to the Circuit Court for Anne Arundel County, Maryland, and then removed by the defendants to this Court.

CONCLUSIONS OF LAW

Parties who counsel or influence a debtor to file bankruptcy, whether or not they are insiders, are not subject to liability in a collateral proceeding brought in a State court for having given such advice, counsel, or persuasion to cause the filing to be made. If the law were otherwise, there would be an endless array of lawsuits against insiders and others alleged to be in control of debtors who filed proper bankruptcy petitions. Those aggrieved by the filing of bankruptcy may move to dismiss the petition in the bankruptcy court in which the petition is pending, or to oppose, in the same forum, actions by the debtor that the aggrieved party believes to be antithetical to its interests.

The conclusion that the instant complaint is barred is buttressed by the opinion of the U.S. District Court for the District of Maryland (Smalkin, D.J.), in the case of Koffman v. Osteoimplant Technology, Inc., 182 B.R. 115 (D.Md.1995), in which the court held that state law tort claims for malicious prosecution and abuse of process brought against a creditor for the alleged bad faith filing of an involuntary bankruptcy petition were absolutely barred by reason of Federal preemption. In the course of his well-reasoned opinion, Judge Smalkin stated:

Because Congress has the constitutional power to preempt state law, U.S. Const. art. VI, as well as the constitutional power to enact laws governing bankruptcies, U.S. Const. art. I, S 8, cl. 4, a number of courts have concluded that, by enacting the Bankruptcy Code, Congress has preempted some state activity on matters affecting bankruptcy. E.g., In re Demoff, 90 B.R. 391, 396 (Bankr.N.D.Ind.1988) (citing cases); In re Schnupp, 64 B.R. 763, 768 (Bankr. N.D.Ill.1986) (In the bankruptcy context, "where state law frustrates or burdens federal policy that state law must give way"). On the other hand, because the common law of the various states provides much of the legal framework for the operation of the bankruptcy system, it cannot be said that Congress has completely preempted all state regulation which may affect the actions of parties in bankruptcy court. "Where the Bankruptcy Code is silent, and no uniform bankruptcy rule is required, the rights of the parties are governed by the underlying non-bankruptcy law." Paul v. Monts, 906 F.2d 1468, 1475 (10th Cir. 1990). Remedies and sanctions for improper behavior and filings in bankruptcy court, however, are matters on which the Bankruptcy Code is far from silent and on which uniform rules are particularly important.

* * * * * *

In addition to these causes of action, the Bankruptcy Code contains numerous other provisions directed toward regulating the use of the bankruptcy process and the conduct of the parties in bankruptcy court. For example, 11 U.S.C. § 105(a) provides that the court "may issue any order, process, or judgment that is necessary or appropriate . . . to prevent an abuse of process." Other remedies include 11 U.S.C. S 727(a)(4)(B), which authorizes a denial of discharge for presenting fraudulent claims, Rule 1008 of the Federal Rules of Bankruptcy Procedure, which requires filings to "be verified or contain an unsworn declaration" of truthfulness under penalty of perjury, and Rule 9011, which authorizes sanctions for signing certain documents not "well grounded in fact and . . . warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law." See generally Taylor v. Freeland & Kronz, 503 U.S. 638, 644, 112 S.Ct. 1644, 1648, 118 L.Ed.2d 280 (1992) (listing remedies).

* * * * * *

Although the Bankruptcy Code includes all the remedies described above, as well as others, these provisions, standing alone, are insufficient to imply congressional intent to preempt all state activity in the area. The mere existence of a detailed and extensive regulatory scheme does not by itself imply an intent to preempt state remedies. English v. General Elec. Co., 496 U.S. 72, 87, 110 S.Ct. 2270, 2279, 110 L.Ed.2d 65 (1990). In addition, courts must consider whether there are "special features" which warrant preemption. Id. In this case, such special features exist not because Congress has clearly evidenced its intent to occupy the entire field of bankruptcy remedies, but rather because allowing the common law causes of action asserted by OTI to go forward would frustrate the congressional purpose in enacting the federal scheme. See Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed. 581 (1941).

* * * * * *

Allowing state tort actions based on allegedly bad faith bankruptcy filings or violations of the automatic stay to go forward ultimately would have the effect of permitting state law standards to modify the incentive structure of the Bankruptcy Code and its remedial scheme. Because such a result threatens to erode the exclusive federal authority in this area, and because it would threaten the uniformity of federal bankruptcy law, the Court finds that OTI\'s state tort suits are preempted by the federal Bankruptcy Code. See Gonzales v. Parks, 830 F.2d 1033, 1036 (9th Cir.1987) ("A congressional grant of exclusive jurisdiction to the federal courts includes the implied power to protect that grant.").

* * * * * *

In addition to being inconsistent with exclusive federal jurisdiction, allowing state law tort suits to go forward would prejudice the operation of the Bankruptcy Code in an impermissible manner. Parties could be deterred from exercising their rights in bankruptcy if, by filing a bankruptcy petition, they risk being faced with a state court lawsuit and liability for substantial damages. Gonzales, 830 F.2d at 1036. "It is for Congress and the federal courts, not the state courts, to decide what incentives and penalties are appropriate for use in connection with the bankruptcy process and when those incentives or penalties shall be utilized." Id. See also Taylor, 503 U.S. 638, 643-46, 112 S.Ct. 1644, 1648-49, 118 L.Ed.2d 280 (1992) (To the extent that existing federal remedies do not deter bad-faith behavior in bankruptcy proceedings, "Congress may enact comparable provisions to address the difficulties") (emphasis added).

Allowing collateral attack on bankruptcy petitions filed in federal court would also threaten the uniformity of federal bankruptcy law provided for in the Constitution. U.S. Const. art. I, S 8, cl. 4. Exclusive federal jurisdiction over bankruptcy proceedings would mean little if standards of conduct in bankruptcy proceedings varied from state to state, and from state to federal court. See Gene R. Smith Corp. v. Terry\'s Tractor, Inc., 209 Cal.App.3d 951, 954, 257 Cal.

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