PNH, Inc. v. Alfa Laval Flow, Inc.

• Decision Date: 07 September 2011
• Docket Number: No. 2010–1430.,2010–1430.
• Parties: PNH, INC., et al., Appellants, v. ALFA LAVAL FLOW, INC., Appellee.
• Court: Ohio Supreme Court

130 Ohio St.3d 278

2011 -Ohio- 4398

958 N.E.2d 120

PNH, INC., et al., Appellants,

v.ALFA LAVAL FLOW, INC., Appellee.

No. 2010–1430.

Supreme Court of Ohio.

Submitted May 25, 2011.Decided Sept. 7, 2011.

[Ohio St.3d 278] Syllabus of the Court

The United States Bankruptcy Code preempts state-law causes of action for misconduct committed by a litigant during a bankruptcy court proceeding.

Witschey, Witschey & Firestine Co., L.P.A., Jeffrey T. Witschey, Alex J. Ragon, Akron, and Betsy L.B. Hartschuh, for appellants.

Hanna, Campbell & Powell, L.L.P., James M. Lyons Jr., Robert L. Tucker, and Frank G. Mazgaj, Akron, for appellee.

O'DONNELL, J.

{¶ 1} The issue we confront in this appeal is whether the claims of PNH, Inc., and Ronald Creatore against Alfa Laval Flow, Inc., for abuse of process and tortious interference with a contract are preempted by the United States Bankruptcy Code because they seek to recover for misconduct allegedly committed during a federal bankruptcy court proceeding.

{¶ 2} PNH and Creatore asserted that Alfa Laval misused an involuntary-bankruptcy case it filed against Girton, Oakes & Burger, Inc., in an effort to eliminate Creatore as a competitor in the sale of equipment for sanitary processing of food and beverages. The trial court dismissed these claims, and the appellate court affirmed, holding that federal law has preempted state-law causes of action alleging the abuse of bankruptcy proceedings.

{¶ 3} In enacting the Bankruptcy Code, the United States Congress established a comprehensive scheme intended to promote the uniformity of bankruptcy law, and it provided for federal remedies to deter the abuse of bankruptcy court proceedings. To permit an Ohio litigant to assert state-law claims for misconduct committed during a bankruptcy proceeding as a supplement to these federal remedies would frustrate the intent of Congress by establishing standards of conduct for Ohio litigants that vary from proceedings in other states. For these reasons, we conclude that the Bankruptcy Code preempts state-law claims that allow the recovery of damages for misconduct committed by a litigant during a [Ohio St.3d 279] bankruptcy court proceeding. We therefore affirm the judgment of the Seventh District Court of Appeals.

Facts and Procedural History

{¶ 4} In January 2001, Creatore, William Sayavich, and David Barnitt formed a holding company called U.S. Sanitary Corporation (“USSC”) for the purpose of purchasing the stock of Girton, Oakes & Burger, Inc. (“GO & B”). At that time, GO & B was the exclusive distributor in Ohio, New York, and western Pennsylvania for Alfa Laval Flow, Inc., which manufactures equipment for sanitary processing of food and beverages.

{¶ 5} Creatore, Sayavich, and Barnitt entered into a close-corporation agreement that contained confidentiality and noncompetition provisions, and they financed the purchase of GO & B through a loan from Provident Bank. On purchasing GO & B, Creatore became its president, Barnitt its chief financial officer, and Sayavich its head of sales and marketing. However, Alfa Laval soon ended the exclusivity of GO & B's distributorship, and GO & B responded by starting a private-label line of products that competed with the ones it distributed for Alfa Laval.

{¶ 6} By 2003, GO & B owed Alfa Laval more than $1 million, and Provident Bank threatened to foreclose on its loan. Alfa Laval presented Creatore with a plan to minimize the impact on it in the event of foreclosure, proposing to acquire GO & B's intangible assets and to give its distributorship to a competitor. Creatore rejected this proposal and instead decided to purchase the Provident Bank loan through a company he created for that purpose, PNH, Inc.

{¶ 7} In late February and early March, Creatore terminated Barnitt and Sayavich for accounting errors in financial reports to Provident Bank, and he gave Alfa Laval notice that both were bound by the confidentiality and noncompetition provisions of the close-corporation agreement. Nonetheless, Barnitt and Sayavich allegedly informed Alfa Laval that GO & B had established a competing line of products and that Creatore had planned to purchase the Provident Bank loan.

{¶ 8} On April 23, 2003, PNH closed on the Provident Bank loan purchase. That same day, Alfa Laval and two other GO & B creditors filed an involuntary-bankruptcy petition against GO & B in the United States Bankruptcy Court for the Northern District of Ohio, and the court appointed an interim trustee to assume control over GO & B's management. Creatore then formed a company called Diversified Process Components, Inc., to start another product line that competed with Alfa Laval's products.

{¶ 9} On May 29, 2003, counsel for Alfa Laval filed an adversary complaint in the bankruptcy court, naming itself and the trustee as plaintiffs and PNH, [Ohio St.3d 280] Creatore, and other “Creatore shell companies” as defendants. Alfa Laval alleged that Creatore had diverted corporate assets and opportunities from GO & B and wrongfully used its confidential design specifications to start a competing enterprise manufacturing “knock-off products,” and it sought an injunction to enforce the confidentiality and noncompetition provisions of the USSC close-corporation agreement against Creatore. The trustee did not sign the adversary complaint, but later ratified it. Eventually, the trustee and Creatore reached a settlement in the adversary proceeding, which the bankruptcy court approved over Alfa Laval's objections.

{¶ 10} On May 11, 2005, Creatore and PNH brought this action against Alfa Laval in the Mahoning County Court of Common Pleas, asserting claims for defamation, tortious interference with a contract, and abuse of process. They alleged that Alfa Laval had improperly used the adversary proceeding to eliminate Creatore and Diversified Process Components as competitors, an objective not permitted by bankruptcy law, and that Alfa Laval had wrongfully misappropriated the name, power, and authority of the trustee in the adversary proceeding.

{¶ 11} On January 7, 2008, the trial court entered summary judgment against Creatore and PNH on the defamation claim. On February 2, 2009, the court dismissed the claims of abuse of process and tortious interference with a contract for lack of jurisdiction, concluding that those causes of action had been preempted by federal bankruptcy law. The trial court subsequently denied Creatore and PNH relief from that judgment.

{¶ 12} On appeal, the Seventh District affirmed, holding that state-law claims for abuse of process and tortious interference with a contract arising during a bankruptcy proceeding were preempted by the Bankruptcy Code. 189 Ohio App.3d 704, 2010-Ohio-3280, 940 N.E.2d 577, ¶ 56. The appellate court reasoned that allowing state-law remedies for violations of federal bankruptcy procedure would undermine the uniformity of the bankruptcy process and deter parties from exercising federal rights created by the Bankruptcy Code. Id. at ¶ 46. Further, the court emphasized that bankruptcy law already provided remedies for abuse of bankruptcy proceedings, evincing the intent of Congress to preempt state-law tort claims arising from the misuse of those proceedings. Id. The appellate court therefore determined that the trial court did not err in dismissing the claims or in denying relief from that judgment. Id. at ¶ 56, 70.

{¶ 13} On appeal to this court, Creatore and PNH argue that there is a presumption that Congress has not preempted state-law causes of action, so that federal law will not preempt state law unless the intent of Congress is clear and manifest. They contend that Congress has not expressed a clear and manifest intent to occupy the field of regulation regarding abusive litigation in federal [Ohio St.3d 281] bankruptcy proceedings, emphasizing that it granted state courts jurisdiction concurrent with federal courts over claims, such as theirs, that do not concern substantive or “core” matters under the Bankruptcy Code and that are only “related to” bankruptcy cases. Creatore and PNH maintain that because Fed.R.Bankr.P. 9011 and Section 105(a), Title 11, U.S.Code, import only general principles of federal civil procedure to bankruptcy proceedings, courts have held that they do not have preemptive force. Further, they note that Section 303(i)(2), Title 11, U.S.Code, which authorizes damages for bad-faith filing of an involuntary-bankruptcy petition, does not apply to their claims. Thus, Creatore and PNH maintain that because the Bankruptcy Code does not provide a complete remedy for the injuries they suffered in this case, the court should not presume that Congress displaced the remedies for that misconduct afforded by state law.

{¶ 14} Alfa Laval responds that the claims brought by Creatore and PNH are premised on allegations that it violated federal law during the GO & B bankruptcy proceedings. It relies on decisions from the Sixth and Ninth Circuit Courts of Appeals and the Supreme Court of Pennsylvania for the proposition that state-law causes of action for misconduct and improper filings in bankruptcy court proceedings are preempted by federal law, which therefore provides the only remedies available for the injuries alleged in this case.

{¶ 15} The question presented here is one of first impression for this court: whether the United States Bankruptcy Code has preempted state-law claims for abuse of process and tortious interference with a contract when the alleged misconduct occurred during a bankruptcy court proceeding.

Law and Analysis

Federal Preemption of State Law

{¶ 16} The Supremacy Clause of the United States Constitution declares that “the Laws of the United States * * * shall be the supreme Law of the Land; * * * any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” Clause 2, Article VI, United States Constitution. Since the decision in McCulloch v. Maryland (1819), 17 U.S. 316, 427, 4 Wheat....