Stone Crushed Partnership v. Kajo, No. 16 MAP 2004.

• Court: Pennsylvania Supreme Court
• Writing for the Court: Newman
• Citation: 908 A.2d 875,589 Pa. 296
• Docket Number: No. 16 MAP 2004.
• Decision Date: 17 October 2006
• Parties: STONE CRUSHED PARTNERSHIP and Robert James Jackson v. KASSAB ARCHBOLD JACKSON & O'BRIEN and Kassab Archbold & O'Brien, L.L.P. and Edward Kassab, Esquire and William C. Archbold, Jr., Esquire and Joseph Patrick O'Brien, Esquire and Richard A. Stanko, Esquire Appeal of Robert James Jackson.

908 A.2d 875 589 Pa. 296 STONE CRUSHED PARTNERSHIP and Robert James Jackson
v.
KASSAB ARCHBOLD JACKSON & O'BRIEN and Kassab Archbold & O'Brien, L.L.P. and Edward Kassab, Esquire and William C. Archbold, Jr., Esquire and Joseph Patrick O'Brien, Esquire and Richard A. Stanko, Esquire
Appeal of Robert James Jackson. No. 16 MAP 2004. Supreme Court of Pennsylvania. Argued October 19, 2004. Decided October 17, 2006.

[908 A.2d 877]

Robert J. Dudash, William Joseph Shehwen, III, West Chester, Robert J. Jackson, for Robert James Jackson.

Kathleen M. Carson, Jeffrey B. McCarron, Philadelphia, for Kassab Archbold Jackson & O'Brien, et al.

Before: CAPPY, C.J., CASTILLE, NIGRO, NEWMAN, SAYLOR, EAKIN, BAER, JJ.

OPINION

Justice NEWMAN.

Stone Crushed Partnership (Stone) and Robert James Jackson (Jackson) (collectively, "Appellant") appeal from an Order of the Superior Court affirming the Order of the Court of Common Pleas of Delaware County (trial court) that dismissed Appellant's action alleging wrongful use of civil proceedings and abuse of process pursuant to Pennsylvania's "Dragonetti" Act, 42 Pa. C.S. §§ 8351-55 (the Act).¹ The trial court and Superior Court based their decisions on the determination that the Bankruptcy Code, 11 U.S.C. §§ 101-1330, preempted any state claim. For the following reasons, we affirm.

FACTS AND PROCEDURAL HISTORY

On March 1, 1990, Jackson, along with William Archbold, Jr., Esq. (Archbold), and Joseph O'Brien, Esq. (O'Brien), formed, with equal shares, Granite Partners I, Ltd. (Granite), to purchase and maintain real estate. Additionally, Jackson, Edward Kassab, Esq. (Kassab), Archbold, and O'Brien were partners in the law firm Kassab, Archbold, Jackson, and O'Brien (KAJO), in Media, Pennsylvania. Subsequently, Granite entered into an agreement of sale to purchase a 12.7-acre tract of land in Middletown Township, Pa. Granite obtained a loan of $500,000.00 from First Fidelity Bank, N.A. (Fidelity), secured by a mortgage, note, and personal guarantees from the three partners.

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Granite later defaulted on the loan, and Fidelity confessed judgment in the amounts of $699,636.97 and $652,992.37, against Granite and the three partners, by virtue of their personal guarantees, respectively.

Seeking to avoid foreclosure, Jackson, the only partner who wished to continue the investment, approached Archbold and O'Brien and asked whether they would be willing to contribute funds. Archbold and O'Brien rejected the invitation, and Jackson formed his own partnership, Stone, to purchase the mortgage and note from the lender.² Stone, essentially, is Jackson acting in accordance with the protection afforded to a company formed as a limited partnership.

On October 19, 1995, approximately one year after the mortgage and note were assigned to Stone, Granite, at the request of Archbold and O'Brien, filed for Chapter 11 relief pursuant to the Bankruptcy Code. On May 17, 1996, Stone initiated an Adversary Proceeding in Bankruptcy Court against Granite to exempt from discharge the debt of $811,320.30 owed to Stone. R.R. at 49-50. On August 22, 1996, Granite counterclaimed, alleging that Jackson, as a partner in Granite and via his alter ego Stone, could not profit at the expense of Archbold and O'Brien, his partners. Id. The Bankruptcy Court dismissed the counterclaims of Archbold and O'Brien on November 20, 1997, and granted Stone's Motion for Summary Judgment in the amount of $699,636.67, plus interest at the rate of ten and one-half percent per annum plus costs. In re Granite Partners I, Ltd., No. 95-18296 DWS, 1997 Bankr.Lexis 2219 (Bankr.E.D.Pa.).

Archbold and O'Brien appealed and asserted the same claim, namely that Stone is an alter ego of Jackson and, contrary to Pennsylvania partnership law, 15 Pa.C.S. § 8334, is making a profit at the expense of his partners in Granite, thereby breaching his fiduciary duty to Granite. On February 20, 1998, the United States District Court for the Eastern District of Pennsylvania affirmed the Bankruptcy Court's denial of the claims of Archbold and O'Brien. R.R. at 20-24. In particular, the District Court found that even if Jackson and Stone were insiders, the agreement between Stone and Granite was legitimate and done with the full knowledge and consent of all parties, notably, all of whom were attorneys intimately involved in the deal. Id. at 22-23.

On March 20, 1998, Archbold and O'Brien appealed again, asserting the same claims in the United States Court of Appeals for the Third Circuit. On December 23, 1998, the Third Circuit affirmed the denial of their claims, In re Granite Partners I, Ltd., 173 F.3d 420 (3d Cir. 1998), noting that Jackson saved Granite from the risk of a sheriff's sale or the risk that the personal guarantees of Archbold and O'Brien would be used to satisfy a judgment. R.R. at 27. Archbold and O'Brien did not appeal to the United States Supreme Court within ninety days, which rendered the Judgment final on March 24, 1999. U.S. Supreme Court Rule 13.

In 1998, Appellant Jackson filed an entirely separate action against Archbold, O'Brien, and Kassab (collectively, "Appellees") in the Court of Common Pleas of Delaware County (trial court). R.R. at 52.

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Specifically, Jackson sought payment for his share of a building partnership, KAJO Building Associates, which Jackson, Appellees, and Richard A. Stanko, Esq. (Stanko), owned. Id. Appellees counterclaimed and within the New Matter and Counterclaim sections, asserted the same claim that was raised and dismissed in the federal courts. Id. at 53. On July 6, 2000, after a bench trial, the trial court ruled in favor of Jackson and awarded him his share of the value of the KAJO Building Associates partnership in the amount of $141,212.38. Id. Additionally, the trial court dismissed the counterclaim of Appellees. Id. On November 26, 2002, the Superior Court affirmed the judgment. Jackson v. Kassab, Archbold & O'Brien, 812 A.2d 1233 (Pa.Super.2002).³

Before the Superior Court issued its decision regarding the appeal, Appellant filed an action in February of 2000, alleging wrongful use of civil proceedings and abuse of process pursuant to 42 Pa. C.S. § 8351.⁴ Appellant Jackson seeks consequential, exemplary, and punitive damages pursuant to the state torts of malicious use of process and abuse of process as codified in the Act. On July 31, 2002, the trial court entered Summary Judgment in favor of Appellees, holding that the Bankruptcy Code preempted Appellant's claim.

On April 23, 2003, the Superior Court, in an unpublished Opinion, affirmed the Judgment of the trial court. Stone Crushed P'ship v. Kassab Archbold Jackson & O'Brien, 828 A.2d 409 (Pa.Super.2003). The Superior Court relied on Shiner v. Moriarty, 706 A.2d 1228 (Pa.Super.), petition for allowance of appeal denied, 556 Pa. 711, 729 A.2d 1130 (1998), and Werner v. Plater-Zyberk, 799 A.2d 776 (Pa.Super.), petition for allowance of appeal denied, 569 Pa. 722, 806 A.2d 862 (2002), in concluding that Appellant was precluded from bringing claims in state court for actions that occurred in Bankruptcy Court.

DISCUSSION

We granted allowance of appeal to determine, as a matter of first impression for this Court, if the Commonwealth will adopt the law established by the Superior Court in Shiner or that of the Third Circuit in U.S. Express Lines, Ltd. v. Higgins, 281 F.3d 383 (3d Cir.2002) (recognizing

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a split in the Circuit Courts regarding preemption of state remedies by the Bankruptcy Code and noting that in Paradise Hotel Corp. v. Bank of Nova Scotia, 842 F.2d 47 (3d Cir.1988), it "discovered that because of a gap in the text the Code failed to provide a remedy against a creditor that had improperly filed an involuntary petition for bankruptcy against a debtor"). U.S. Express, 281 F.3d at 393. Thus, the question we must answer is whether the Bankruptcy Code preempts the entire field, including a state tort claim for abuse of process based upon Bankruptcy Court proceedings.⁵

For the reasons that follow, we hold that the Bankruptcy Code preempts a state law claim of abuse of process based upon a frivolous claim filed in Bankruptcy Court proceedings because: (1) Congress evinced an intent to govern the whole field; and (2) Fed.R.Civ.P. 11 (Rule 11),⁶ 28 U.S.C. § 1927,⁷ and the Bankruptcy Code potentially provide for the equivalent protection afforded by this Commonwealth to its citizens in a Dragonetti Act claim.

The Supremacy Clause of the United States Constitution controls federal preemption. U.S. Const. Art. VI, cl. 2;⁸ Fidelity Federal Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 152, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982); English v. Gen. Elec. Co., 496 U.S. 72, 78, 110 S.Ct. 2270, 110 L.Ed.2d 65 (1990). Congress has the undisputed power to preempt state law in areas of federal concern. See Pac. Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm'n, 461 U.S. 190, 103 S.Ct. 1713, 75 L.Ed.2d 752 (1983). Such preemption does not need to be explicit in a statute invalidating a state law. Int'l Paper Co. v. Ouellette, 479 U.S. 481, 491, 107 S.Ct. 805, 93 L.Ed.2d 883 (1987). If the area in question is one of traditional state concern, it should be presumed that Congress did not intend to supersede state authority absent a clear and manifest legislative purpose to the contrary. Pac. Gas, 461 U.S. at 206, 103 S.Ct. 1713.

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Congress' intent to preempt state law may be express or implied and found in any of three ways:

First, state law may be preempted where the United States Congress enacts a provision which expressly preempts the state enactment. Pac. Gas, 461 U.S. at 204, 103 S.Ct. 1713. Likewise, preemption may be found where Congress has legislated in a field so comprehensively that it has implicitly expressed an intention to occupy the given field to the exclusion of state law. Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 299-300, 108 S.Ct. 1145, 99 L.Ed.2d 316 (1988)....