Integrated Solutions, Inc. v. Service Support Specialties, Inc.

• Decision Date: 22 August 1997
• Docket Number: No. 96-5597,96-5597
• Citation: 124 F.3d 487
• Parties: 38 Collier Bankr.Cas.2d 805, 31 Bankr.Ct.Dec. 422 INTEGRATED SOLUTIONS, INC., v. SERVICE SUPPORT SPECIALTIES, INC.; Gary Hillman, an individual; Paul Sherman, an individual; Aaron Cruise, an individual; Joseph O'Neill, an individual; Midlantic National Bank; United Jersey Bank, Integrated Solutions, Inc. ("ISI"), Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 487

124 F.3d 487

38 Collier Bankr.Cas.2d 805, 31 Bankr.Ct.Dec. 422

INTEGRATED SOLUTIONS, INC., v. SERVICE SUPPORT SPECIALTIES, INC.; Gary Hillman, an individual; Paul Sherman, an individual; Aaron Cruise, an individual; Joseph O'Neill, an individual; Midlantic National Bank; United Jersey Bank Integrated Solutions, Inc. ("ISI"), Appellant.

No. 96-5597.

United States Court of Appeals Third Circuit.

Argued June 13, 1997.

Decided Aug. 22, 1997.

Susan Stryker, Sterns & Weinroth, Trenton, NJ, Paul J. Hayes, Dean G. Bostock (Argued), Weingarten, Schurgin, Gagnebin & Hayes, Boston, MA, for Appellant.

Stuart Gold (Argued), Budd, Larner, Gross, Rosenbaum, Greenberg & Sade, Short Hills, NJ, for Appellees.

Before: MANSMANN, NYGAARD, Circuit Judges, and ROSENN, Senior Circuit Judge.

OPINION OF THE COURT

NYGAARD, Circuit Judge:

Integrated Solutions, Inc., appeals an order dismissing its state law claims against Service Support Specialties, Inc., and certain individuals working for that company (collectively "Service Specialties"). The district court concluded that Integrated lacked standing to pursue the state law claims because its purchase of the claims from a trustee in bankruptcy was void ab initio under New Jersey law. On appeal, Integrated argues that federal law preempts the New Jersey state law prohibition against assigning prejudgment tort claims and permits a bankruptcy trustee to assign tort claims in executing its duties to liquidate and distribute the bankruptcy estate. We disagree and will affirm.

I.

On July 22, 1994, Machine Technology, Inc. filed a petition for relief under Chapter 11 of the Bankruptcy Code. Before filing for bankruptcy protection, Machine Technology had financed its operations through loans from both Midlantic Bank and United Jersey Bank. The debt was secured by separate security agreements in assets such as accounts, inventory, machinery and equipment. On September 6, 1994, Integrated purchased certain assets of Machine Technology through the banks which held security interests in the assets.

On August 1 and 2, 1994, certain individual defendants who were former Machine Technology employees entered Machine Technology's offices and took or copied various documents, diagrams, specifications and drawings of an allegedly proprietary nature. On August 3, these individual defendants incorporated Service Specialties. Less than one week later, Service Specialties opened for business and began servicing Machine Technology accounts until September 6, when Integrated purchased the Machine Technology assets from the banks.

Integrated filed a complaint in the district court alleging a series of state law claims and a federal copyright infringement claim against Service Specialties and the individual defendants. ¹ Integrated specifically claimed that the defendants had misappropriated Machine Technology assets, used these assets to set up Service Specialties, and were unlawfully competing with Integrated. Integrated also sought a preliminary injunction to enjoin the defendants from destroying and concealing documents and information, using confidential commercial information, infringing on Integrated copyrights, and engaging in unfair competition during the suit. On March 15, 1995, the district court denied Integrated's request for an injunction on the ground that Integrated was not "a successor in interest to MTI [Machine Technology], did not purchase all general intangibles of MTI, and thus [had] no standing to assert claims which MTI might have had against defendants for misappropriation of confidential information." Integrated Solutions, Inc. v. Service Support Specialties, Inc., 193 B.R. 722, 725 (D.N.J.1995).

In an effort to cure its standing problem, Integrated subsequently purchased all of Machine Technology's remaining assets from Machine Technology's bankruptcy trustee. According to the Bill of Sale, Integrated purchased, inter alia, all general intangibles, all intellectual property, and "[a]ll claims and causes of action; including the right to recover for any past and future damages, arising out of or relating to the Assets...." J.A. at 2615-16. This purchase and sale was authorized and approved by the Bankruptcy Court.

In response, Service Specialties filed a motion for summary judgment seeking the dismissal of Integrated's state law claims. Service Specialties argued that the bankruptcy trustee's sale of Machine Technology's claims violated New Jersey law which prohibited assigning prejudgment tort claims and hence, Integrated had no standing to pursue the state law causes of action. The district court agreed and dismissed Integrated's state law claims. This timely appeal followed. ²

II.

On appeal, Integrated argues that New Jersey's common law prohibition against assigning state tort law claims before judgment is preempted by federal bankruptcy law. New Jersey law is preempted, Integrated maintains, because by preventing the sale of prejudgment tort claims belonging to the estate, New Jersey law serves to defeat a primary purpose of the Bankruptcy Code: namely, the expeditious liquidation and distribution of the bankruptcy estate to its creditors. As such, Integrated concludes, New Jersey law must yield to the conflicting federal interest under the Supremacy Clause.

Our review is plenary. In re Roach, 824 F.2d 1370, 1372 (3d Cir.1987).

III.

Whether federal bankruptcy law preempts New Jersey state law prohibiting the assignment of prejudgment tort claims requires us to resolve three separate questions: (1) Does New Jersey law prohibit the assignment of prejudgement tort claims?; (2) Are a debtor's prejudgment tort claims "property of the estate" under 11 U.S.C. § 541?; and (3) Did Congress intend to preempt state law restrictions on the assignability of tort claims under federal bankruptcy law? We will address each question in turn.

A.

The relevant New Jersey statute dealing with assignability is section 2A:25-1, which provides in pertinent part:

All contracts for the sale and conveyance of real estate, all judgments and decrees recovered in any of the courts of this state or of the United States or in any of the courts of any other state of the United States and all choses in action arising in contract shall be assignable, and the assignee may sue thereon in his own name.

N.J. Stat. Ann. § 2A:25-1. Because the statute does not address causes of action arising from tort claims, we look to case law for guidance. New Jersey courts have consistently held that, as a public policy matter, tort claims cannot be assigned before judgment. Village of Ridgewood v. Shell Oil Co., 289 N.J.Super. 181, 673 A.2d 300, 307-08 (1996); Costanzo v. Costanzo, 248 N.J.Super. 116, 590 A.2d 268, 271 (1991) ("[I]n New Jersey, as a matter of public policy, a tort claim cannot be assigned."); East Orange Lumber Co. v. Feiganspan, 120 N.J.L. 410, 199 A. 778, 779 (1938); see also Conopco, Inc. v. McCreadie, 826 F.Supp. 855, 865-67 (D.N.J.1993) ("It is clear that under New Jersey law, choses in action arising out of tort are not assignable prior to judgment.").

Integrated concedes this general principle, but argues, without citation, that New Jersey's non-assignability rule does not apply to intentional torts or in the bankruptcy context. To bolster its argument, Integrated contends that the non-assignment rule "has never been expanded to intentional torts ... or to persons appointed and acting under the authority of the federal bankruptcy statute." Appellant's Reply Br. at 5. Integrated, however, points to no support for its argument that the rule is intended to be limited in the manner it suggests, nor have we found any such limit in the case law. As such, we find Integrated's attempts to place its tort claims outside the New Jersey rule without support and unpersuasive. New Jersey law clearly forbids the assignment of prejudgment tort claims, and applies to the tort claims at issue here.

B.

The Bankruptcy Code defines a bankrupt's estate broadly to encompass all kinds of property, including intangibles and causes of action. As § 541 reads in pertinent part:

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsection (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case....

(c)(1) Except as provided in paragraph (2) of this subsection, an interest of the debtor in property becomes property of the estate ... notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law--

(A) that restricts or conditions transfer of such interest by the debtor ....

11 U.S.C. § 541 (emphasis added). As the legislative history for this section specifies, "The scope of this paragraph is broad. It includes all kinds of property, including tangible or intangible property, causes of action ... and all other forms of property currently specified in section 70a of the Bankruptcy Act...." H.R.Rep. No. 95-595, at 367 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6323 (emphasis added). Moreover, the House Report clearly explained that the purpose of section 541 was to move away from the "complicated melange of references to State law," and to "determine[ ] what is property of the estate by a simple reference to what interests in property the debtor has at the commencement of the case. This includes all interests, such as ... tangible and intangible property, choses in action, [and] causes of action ... whether or not transferable by the debtor." Id. at 175-76, 1978 U.S.C.C.A.N. at 6136 (emphasis added).

Relying on the legislative history and the obvious broad sweep of § 541(a)(1), numerous courts have concluded that "[s]ection 541 eliminated the requirement that property must be transferable or subject to process in order to become...