Opinion ID: 2834679
Heading Depth: 1
Heading Rank: 4

Heading: Federal Law Occupies the Field of Bankruptcy

Text: and Preempts State Law . The U.S. Constitution gives Congress alone the power “[t]o establish . . . uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const. art. I, § 8, cl. 4. Congress passed the Bankruptcy Act of 1898 to govern bankruptcies, then overhauled and codified those statutes in 1978, and has since superceded much of the Bankruptcy Code of 1978 in the 1984 and 1986 amendments to the Code. Manuel D. Leal, The Power of the Bankruptcy Court: Section 105 , 29 S. Tex. L. Rev. 487, 492 (1988). Congress granted jurisdiction over bankruptcy matters to the federal courts by sections 157 and 1334 of title 28 of the United States Code. Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995). This jurisdiction is exercised in the first instance by bankruptcy courts, which are divisions of federal district courts. See Cox v. Zale Del., Inc. , 239 F.3d 910, 917 (7th Cir. 2001). Filing a bankruptcy petition vests broad and exclusive jurisdiction over the property of the debtor and his estate in the district court, and hence the bankruptcy court. In re Garnett , 303 B.R. 274, 277 (E.D.N.Y. 2003). Section 541(a)(1) defines the property of the estate to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). “This definition is unquestionably broad, its main purpose being to ‘bring anything of value that the debtors have into the [bankruptcy] estate.’” Lyon v. Eiseman (In re Forbes) , 372 B.R. 321, 330-31 (B.A.P. 6th Cir. 2007) (alteration in original) (citing Booth v. Vaughan (In re Booth), 260 B.R. 281, 284-85 (B.A.P. 6th Cir. 2001)) . These broad powers extend to both a debtor’s estate and all transfers made within two years before the filing of the bankruptcy petition. See 11 U.S.C. §§ 541, 548(a)(1). All legal proceedings against the debtor or his estate are automatically stayed and subjugated to the bankruptcy proceeding. 11 U.S.C. § 362. The disposition of the debtor’s property is governed by federal law, although a debtor’s property interests are generally “created and defined by state law” unless a federal purpose requires otherwise. Lyon , 372 B.R. at 331 (citing Butner v. United States , 440 U.S. 48, 55 (1979)). In the absence of explicit preemptive language, Congress’s intent to supersede state law fully may be inferred when the scheme of federal regulation is “so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it,” when the Act of Congress “touch[es] a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject,” or when “the object sought to be obtained by federal law and the character of the obligations imposed by it may reveal the same purpose.” Fidelity Fed. Sav. & Loan Ass’n v. de la Cuesta , 458 U.S. 141, 152-53 (1982) (citations omitted). This form of preemption is a federal defense to state law claims and implicates choice of law rather than choice of forum. [2] See Int’l Longshoremen’s Ass’n v. Davis , 476 U.S. 380, 391 (1986). Graber argues federal bankruptcy law impliedly preempts Fuqua’s claims because the state law purports to regulate conduct “in a field that Congress intended the Federal Government to occupy exclusively,” English v. Gen. Elec. Co. , 496 U.S. 72, 79 (1990), and because the state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” Hines v. Davidowitz , 312 U.S. 52, 67 (1941). [3] The federal interest in and control of bankruptcy may truly be said to have completely “occupied the field.” [4]
Attorneys’ Fees, and Costs to Parties, as Appropriate, for Violation of Bankruptcy Statutes and Rules and Malicious Prosecution in Bankruptcy Proceedings. Fuqua concedes that an action based on a frivolous or groundless claim could be preempted by the Bankruptcy Code and Rules, but he contends the remedial scheme of the Bankruptcy Code and Rules is inapposite to the purpose and remedies of a malicious prosecution claim. Graber argues Congress intended to supercede state law in this field by designing adequate remedies in section 105 and rule 9011 to deter abuse of the bankruptcy process. Fuqua also concedes that section 105 grants the bankruptcy court broad equitable powers, but urges that the section does not sufficiently address malicious prosecution. According to Fuqua, rule 9011 only addresses frivolous or groundless claims and mirrors Federal Rule of Civil Procedure 11, which has been held not to preempt state law actions for malicious prosecutions in federal court. See U.S. Express Lines, Ltd. v. Higgins , 281 F.3d 383, 392-93 (3d Cir. 2002). The authority bestowed on bankruptcy courts by federal law arms them with a broad array of remedies to regulate the conduct of parties, issue injunctive relief, and award sanctions and damages for maliciously initiating proceedings. The Bankruptcy Code “provides a comprehensive federal system of penalties and protections to govern the orderly conduct of debtors’ affairs and creditors’ rights.” E. Equip. & Servs. Corp. v. Factory Point Nat’l Bank , 236 F.3d 117, 120 (2d Cir. 2001). Other courts have concluded that this comprehensive system overrides state law claims for this type of abuse of the bankruptcy process. “A debtor who believes a filing in bankruptcy is frivolous or a violation of the automatic stay occurred has a comprehensive scheme of remedies available in the federal courts. The existence of this comprehensive scheme precludes collateral attacks on such filings in state courts.” Glannon v. Garrett & Assocs., Inc. , 261 B.R. 259, 264 (D. Kan. 2001) (quoted in Greene v. Young , 174 S.W.3d 291, 302 n.7 (Tex. App–Houston [1st Dist.] 2005, pet. denied)). Sections 105(a) and 362(k) and rule 9011 provide effective remedies under federal law and authority for bankruptcy courts to enjoin violations of law and to award damages to debtors harmed by bad faith and abusive conduct in bankruptcy proceedings. 11 U.S.C. §§ 105(a), 362(k); Fed. R. Bankr. P. 9011(b)-(c). Section 105(a) empowers bankruptcy courts. The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title . No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process . 11 U.S.C. § 105(a) (emphasis added). Section 105 gave the bankruptcy courts “broad equitable powers to exercise [their] jurisdiction any time there is a threat to the successful rehabilitation of the estate.” Manuel D. Leal, The Power of the Bankruptcy Court: Section 105 , 29 S. Tex. L. Rev . 487, 497 (1988) (citing In re Stuart Glass & Mirror, Inc. , 71 B.R. 332, 335 (Bankr. S.D. Fla. 1987)). The last phrase–“to prevent an abuse of process”–was added in 1986 to affirm that bankruptcy courts may take any action on their own and make any necessary determination to prevent an abuse of process and expedite bankruptcy cases. Id. at n.219 (citing Senator Orrin Hatch who apparently made the only statement in legislative history concerning the amendment). Under section 105(a), the court may raise the issue of good faith in considering motions of the parties. Little Creek Dev. Co. v. Commonwealth Mortg. Corp. (In re Little Creek Dev. Co.) , 779 F.2d 1068, 1071 n.1 (5th Cir. 1986). Under section 362(k), any individual injured by a willful violation of a stay “shall recover actual damages, including costs and attorneys’ fees, and in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(k) (stating further that a good faith belief limits recovery to actual damages). Although this case does not concern violation of a bankruptcy stay, this section clearly shows that Congress considered the award of actual and punitive damages, in addition to fees and costs, and authorized ordering those awards as appropriate. Rule 9011, analogous to Fed. R. Civ. P. 11, empowers bankruptcy courts to impose “an appropriate sanction upon the attorneys, law firms, or parties” that have presented to the court pleadings, motions, or “other paper” containing allegations, factual contentions, or claims and defenses that generally have no evidentiary support and are not warranted by existing law. [5] Rule 9011 authorizes the award of reasonable expenses and attorneys’ fees, monetary sanctions, or a penalty to the court. Fed. R. Bankr. P . 9011(c). Fuqua asserts that “any sanctions ordered may be payable solely to the court and not the party subjected to the frivolous or groundless claim” (emphasis added). He argues this as another reason bankruptcy statutes and rules need to be supplemented by state law to provide recourse to debtors for harm caused them in bankruptcy adversary proceedings. This is incorrect, as the rule authorizes awards of sanctions and damages to parties in the proceeding. Rule 9011(c) expressly states that the court “may award to the party prevailing on the motion” reasonable expenses and attorneys’ fees. Fed. R. Bankr. P. 9011(c)(1)(A) (emphasis added). It also authorizes orders “directing payment to the movant of some or all of the reasonable attorneys’ fees and other expenses incurred as a direct result of the violation.” Id. (c)(2) (emphasis added). Fuqua’s assertion that section 105 does not provide recovery of damages for maliciously bringing proceedings in bankruptcy is likewise off the mark. A number of courts have affirmed that section 105, although widely used for injunctive relief, authorizes the award of “any type of order, whether injunctive, compensative or punitive, as long as it is ‘necessary or appropriate to carry out the provisions’” of the Bankruptcy Code. Hardy v. U.S. (In re Hardy) , 97 F.3d 1384, 1389 (11th Cir. 1996) (citing 11 U.S.C. § 105(a)). See also McTyeire v. Hunt (In re McTyeire) , 357 B.R. 898, 903 (Bankr. M.D. Ga. 2006). Section 105 authorizes a bankruptcy court to order payment of actual and puntive damages as well as attorneys’ fees and costs. Manion v. Providian Nat’l Bank , 269 B.R. 232, 241-42 (D. Colo. 2001) (affirming the bankruptcy court’s order requiring a holder of void deeds of trust to pay actual damages and attorneys’ fees in an adversary proceeding); Moratzka v. Visa U.S.A. (In re Calstar, Inc.) , 159 B.R. 247, 261 (Bankr. D. Minn. 1993) (awarding money damages for a violation of the automatic stay and stating that punitive damages, although generally available under section 105, were not warranted in the case). Leal, 29 S. Tex. L. Rev . at 496. Section 303(i) also provides a close analogue to a Texas common law malicious prosecution claim, authorizing awards to debtors for reasonable attorneys’ fees, costs, and actual or punitive damages when the court dismisses an involuntary petition. 11 U.S.C. § 303(i). Although section 303(i) only applies to involuntary cases, it once again affirms that Congress recognized the wide panoply of available remedies for abuse of process and then associated sanctions and awards with selected violations of the Code and the Rules. Congress provided sanctions for certain violations of Bankruptcy Code provisions, injunctive relief for some, actual damages for others, and punitive damages for a few. The provisions implicated by a debtor’s claim of malicious prosecution, section 105 and rule 9011, both provide sanctions and damages upon proper proof. Because Congress has provided a comparable, if not exact, counterpart in federal bankruptcy law to Fuqua’s sought-after remedies, his argument that recoveries in bankruptcy law are woefully inadequate loses considerable steam. The existence of the remedial provisions cited “suggests that 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 (citing Mertens v. Hewitt Assocs. , 508 U.S. 248, 252-54 (1993) (enforcement scheme in ERISA indicates Congress did not forget other remedies) and Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 54 (1987) (ERISA remedies preempt others, even if some possible remedies are left out)). If a Texas common law claim packs more wallop than the bankruptcy relief, then Congress presumably intended to provide a more limited remedy for the malicious filing of an adversary proceeding in a voluntary bankruptcy. The fundamental vacancy in Fuqua’s argument is the unsubstantiated presumption that bankruptcy laws necessarily must provide equivalent levels of recovery to the state common law claim. Fuqua contends that, were we to hold his state malicious prosecution claim preempted, he would have no remedy because the bankruptcy court has discharged his debts and no longer has jurisdiction over his case. Section 350(a) states that after the estate is fully administered and the court has discharged the trustee, “the court shall close the case.” Further, according to the bankruptcy rules, a court “shall enter a final decree closing the case.” Fed. R. Bankr. P . 3022 (emphasis added). Neither a discharge of debts nor a dismissal closes the case; on the contrary, a bankruptcy case is not closed, and the bankruptcy court retains jurisdiction, until the final decree is entered on the docket sheet. See In re Union Home and Indus., Inc. , 375 B.R. 912, 917 (B.A.P. 10th Cir. 2007); Sherman v. Sec. & Exch. Comm’n (In re Sherman) , 491 F.3d 948, 967 (9th Cir. 2007); Greenfield Drive Storage Park v. Cal. Para-Prof’l Servs., Inc. (In re Greenfield Drive Storage Park ), 207 B.R. 913, 918 (B.A.P. 9th Cir. 1997); Singleton v. Countrywide Home Loans, Inc. (In re Singleton ), 358 B.R. 253, 256 (D.S.C. 2006) (holding that dismissal of a bankruptcy case does not deprive the court of jurisdiction; it must be closed); In re Hasan , 287 B.R. 308, 311 (Bankr. D. Conn. 2002) (holding that a debtor’s voluntary dismissal did not close the case and that the bankruptcy court retained jurisdiction to impose sanctions on the debtor); In re A.H. Robins Co. , 219 B.R. 145, 149 (Bankr. E.D. Va. 1998). See also 9 Collier on Bankr. § 5009.01 (15th ed. 2006). Once the bankruptcy case is closed, there is no longer a bankruptcy estate, and there can no longer be “related to” jurisdiction. 9 Collier on Bankr. § 5009.01. As such, the bankruptcy court only then loses jurisdiction. Graber states that there is no order in the record closing Fuqua’s Chapter 7 case. Fuqua does not assert that a final order was issued and has presented no evidence that his bankruptcy case was ever closed. See A.M.S. Printing Corp. v. Wernick (In re Wernick) , 242 B.R. 194, 196 (Bankr. S.D. Fla. 1999); Edwards v. Sieger (In re Sieger) , 200 B.R. 636, 639 (Bankr. N.D. Ind. 1996). If his case remains open, the bankruptcy court retains jurisdiction, and Fuqua could petition that court for appropriate remedies. Moreover, if the bankruptcy case has in fact been closed, Fuqua could petition the court to reopen it “to accord relief to the debtor.” 11 U.S.C. § 350(b). Fuqua has not persuaded me that he would have no relief in bankruptcy. Ultimately, Congress, not the state courts, should decide what incentives and penalties are appropriate to address litigation conduct in the bankruptcy proceedings and when those incentives or penalties should be used. See Gonzales v. Parks , 830 F.2d 1033, 1036-37 (9th Cir. 1987).
for Adversary Proceedings Conflicts with Congress’s Decision Not to Create Such a Claim for Voluntary Chapter 7 Bankruptcies. “[B]ankruptcy principles come from federal rather than state law.” Randolph v. IMBS, Inc. , 368 F.3d 726, 730 (7th Cir. 2004) (Easterbrook, J.) (citing Cox v. Zale Del., Inc. , 239 F.3d 910, 916 (7th Cir. 2001) (Posner, J.). In bankruptcy, “the debtor’s protection and remedy remain[] under the Bankruptcy Act.” Kokoszka v. Belford , 417 U.S. 642, 651 (1974) (holding superceded in part by statute). The “delicate balance of a debtor’s protections and obligations during the bankruptcy procedure” have been fixed, modified, overhauled, and set by Congress over more than a century, eminating from explicit constitutional authority to make the bankruptcy laws. Kokoszka , 417 U.S. at 651. Congress provided a roadmap to its intent in the relevant provisions of the Bankruptcy Code. It includes both voluntary and involuntary bankruptcies under Chapters 7 and 11. See 11 U.S.C. §§ 301, 303. In section 303, Congress promulgated a statutory analogue to state law malicious prosecution claims for abuse of bankruptcy proceedings in involuntary cases. Id. Section 303(i) provides for recovery of “any damages proximately caused,” including actual and exemplary damages, by filing an involuntary petition in bad faith. Id. By its language, section 303(i) remedies include the damages that may be recovered under Texas common law for malicious prosecution . See, e.g. , Fifth Club, Inc. v. Ramirez , 196 S.W.3d 788, 798 (Tex. 2006) (allowing mental anguish damages); Ellis County State Bank v. Keever , 915 S.W.2d 478, 479 (Tex. 1995) (discussing sufficiency of the evidence for punitive damages). Courts have consistently held that section 303(i) preempts state law actions for malicious prosecution in involuntary bankruptcy proceedings. [6] Importantly, for this case and Fuqua’s claim, Congress did not similarly create a vehicle for recovery of “all damages proximately caused” or exemplary damages for voluntary Chapter 7 proceedings. Instead, Congress created remedies to recover attorneys’ fees and costs as sanctions. The extensive remedial provisions for involuntary petitions indicate that Congress did not ignore but considered sanctions, equitable remedies, and compensatory and exemplary damages in the bankruptcy scheme. MSR Exploration , 74 F.3d at 913. Where Congress includes damages provisions in one section of a statute but omits them in another section of the same statute, we presume Congress acted intentionally and purposefully in the disparate inclusion or exclusion. Clay v. U.S. , 537 U.S. 522, 528 (2003); Duncan v. Walker , 533 U.S. 167, 173 (2001). In this context, Congress’s creation of sanctioning tools, albeit broad, rather than damages, speaks loudly to Congress’s intent for conduct constituting malicious prosecution in voluntary Chapter 7 proceedings. By allowing Fuqua’s Texas common law prosecution claim to proceed for actions that occurred entirely in bankruptcy, the Court, in effect, creates a malicious prosecution claim for voluntary Chapter 7 bankruptcies that Congress saw fit not to create. There is no provision comparable to a Texas malicious prosecution claim directed specifically at the voluntary filings of a debtor or an adversary proceeding instituted by a creditor. There are, however, many other remedial provisions in the Code that could apply. See, e.g. , 11 U.S.C. § 362(k) (willful violation of automatic stays); 11 U.S.C. § 707(b) (dismissal for “substantial abuse”); 11 U.S.C. § 930(a) (dismissal under Chapter 9); 11 U.S.C. § 1112(b) (dismissal under Chapter 11); 28 U.S.C. § 1927 (liability for excessive costs for “unreasonably and vexatiously” multiplying proceedings). And like 303(i), section 362(k) has been held to preempt state law abuse of process claims for violations of an automatic stay. See E. Equip. & Servs. Corp. v. Factory Point Nat’l Bank , 236 F.3d 117, 120 (2d Cir. 2001) (preemption of jurisdiction); Periera v. Chapman , 92 B.R. 903, 908 (C.D. Cal. 1988); Brandt v. Swisstronics, Inc. (In re Shape) , 135 B.R. 707, 708-09 (Bankr. D. Me. 1992); Koffman , 182 B.R. at 123-28 (preemption holding based on both section 303(i) and section 362(k)); Smith v. Mitchell Constr. Co. , 481 S.E.2d 558, 561 (Ga. Ct. App. 1997). See also Halas v. Platek , 239 B.R. 784, 792 (N.D. Ill. 1999) (holding that because a claim for sanctions under section 362(k) is within the exclusive jurisdiction of federal courts, state court lacked subject matter jurisdiction over claim). The existence of such an extensive remedial scheme indicates congressional intent for bankruptcy law to “occupy exclusively” the regulation of conduct amounting to malicious prosecution or abusive filings in the bankruptcy process. English v. Gen. Elec. Co. , 496 U.S. 72, 79 (1990). An overlay of fifty states’ common law claims would damage or interfere with the federal scheme. In addition to the Bankruptcy Code’s extensive remedial scheme indicating congressional intent, the constitutionally prescribed need for uniformity in the bankruptcy laws is a special feature that warrants preemption. Id.
State Common Law Claims for Misconduct in Bankruptcy Proceedings . The Constitution grants Congress the authority to establish “uniform Laws” on the subject of bankruptcies. U.S. Const . art. I, § 8. Utilizing this power, Congress created comprehensive regulations on the subject of bankruptcy and vested original and exclusive jurisdiction over bankruptcy petitions in the federal district courts. 28 U.S.C. § 1334(a). Allowing state court actions for abuse of the bankruptcy process conflicts with this goal of uniformity. “[T]he unique, historical, and even constitutional need for uniformity in the administration of the bankruptcy laws is another indication that Congress wished to leave the regulation of parties before the bankruptcy court in the hands of the federal courts alone.” See MSR Exploration , 74 F.3d at 915. There are several reasons to preclude these types of state common law claims to ensure the uniformity of bankruptcy law. First, Congress’s authorization of certain penalties for frivolous filings in its pervasive promulgation of bankruptcy laws “should be read as an implicit rejection of other penalties, including the kind of substantial damage awards that might be available in state court tort suits.” Gonzales , 830 F.2d at 1036. Second, the ability to sue parties in bankruptcy in civil proceedings under state law that is inconsistent with the Bankruptcy Code would threaten the uniformity of federal bankruptcy law by potentially affecting parties’ rights before the bankruptcy court. See Gonzales , 830 F.2d at 1035 (discussing a claim against debtor for maliciously filing a voluntary petition). Third, the threat of being sued in tort in state court could deter persons from exercising their rights in bankruptcy, for instance by making them reluctant to file an adversary proceeding. See id. at 1036; MSR Exploration , 74 F.3d at 916. “While it is true that bankruptcy law makes reference to state law at many points, the adjustment of rights and duties within the bankruptcy process itself is uniquely and exclusively federal.” MSR Exploration , 74 F.3d at 916 . Moreover, It is very unlikely that Congress intended to permit the superimposition of state remedies on the many activities that might be undertaken in the management of the bankruptcy process . . . [T]he highly complex laws needed to constitute the bankruptcy courts and regulate the rights of debtors and creditors also underscore the need to jealously guard the bankruptcy process from even slight incursions and disruptions brought about by state malicious prosecution actions. Id. at 914. Even what may be slight incursions could very well collectively and over time, with fifty different jurisdictions considering them, even in a well-intentioned fashion, undermine the uniformity and objectives of the federal bankruptcy system. Fuqua argues that Congress intended state law to supplement this area of bankruptcy. I disagree and conclude that, based on the remedial scheme established and the need for uniformity, Congress intended to preempt state common law claims based on malicious proceedings in a bankruptcy case to avoid such claims presenting “an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” and to avoid undermining the constitutional mandate of “uniform Laws on the subject of Bankruptcies throughout the United States.” Hines , 312 U.S. at 67. See U.S. Const. art. I, § 8.