Court Opinion

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Opinions of the United
1997 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

8-22-1997

Integrated Solutions v. Ser Support
Precedential or Non-Precedential:

Docket 96-5597

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Recommended Citation
"Integrated Solutions v. Ser Support" (1997). 1997 Decisions. Paper 202.
http://digitalcommons.law.villanova.edu/thirdcircuit_1997/202

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iled August 22, 1997

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 96-5597

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

ON APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civil No. 94-04953)

Argued: June 13, 1997

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

(Opinion filed August 22, 1997)
Susan Stryker, Esq.
Suite 1400
Sterns & Weinroth
50 West State Street
P.O. Box 1298
Trenton, N.J. 08607

Paul J. Hayes, Esq.
Dean G. Bostock, Esq. (Argued)
Weingarten, Schurgin, Gagnebin
 & Hayes
Ten Post Office Square
Boston, MA. 02109

Counsel for Appellant

Stuart Gold, Esq. (Argued)
Budd, Larner, Gross, Rosenbaum,
 Greenberg & Sade
150 John F. Kennedy Parkway
CN 1000
Short Hills, New Jersey 07078

Counsel for Appellees

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.

                                  2
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
_________________________________________________________________

1. Integrated stated causes of action for unfair competition, breach of the
duty of loyalty, misappropriation of confidential information, interference
with contractual relations, conversion, and replevin.

                               3
assert claims which MTI might have had against defendants
for misappropriation of confidential information." Integrated
Solutions, Inc. v. Service Support Specialties, Inc., No. 94-
4953, slip op. at 9 (D.N.J. March 15, 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
_________________________________________________________________

2. The district court also concluded that Integrated had standing to
pursue its copyright claim because that claim was freely assignable
under federal law. The parties subsequently stipulated to dismissal of
the copyright claim in order to expedite our review of the district court's
dismissal of the state law claims.

                               4
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., 673 A.2d 300, 307-08 (N.J. Super. Ct.
1996); Costanzo v. Costanzo, 590 A.2d 268, 271 (N.J.
Super. Ct. 1991) ("[I]n New Jersey, as a matter of public
policy, a tort claim cannot be assigned."); East Orange
Lumber Co. v. Feiganspan, 199 A. 778-79 (N.J. 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

                               5
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

                               6
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 initially part of the estate." In re Geise, 992 F.2d
651, 655 (7th Cir. 1993) (citation omitted); see also In re
Cottrell, 876 F.2d 540, 542-43 (6th Cir. 1989) (holding that
a personal injury action was estate property
notwithstanding that the action was nontransferable under
Kentucky state law); Sierra Switchboard Co. v.
Westinghouse Electric Co., 789 F.2d 705, 709 (9th Cir.
1986) ("By adopting a comprehensive definition of property,
the Bankruptcy Reform Act reduced the bankruptcy court's
cumbersome reliance on state law analysis for determining
property to be included in the estate."); Tignor v. Parkinson,
729 F.2d 977, 980-81 (4th Cir. 1984) (holding that an
unliquidated personal injury claim was estate property
notwithstanding that the claim was nontransferable under
Virginia law); see also L. King, Collier on Bankruptcy,
¶ 541.07 (15th ed. rev. 1996) ("[U]nder the Code, all
interests of the debtor in property come into the estate
pursuant to section 541(a)(1) regardless of whether they are
transferable, or whether creditors could have by some
means reached them."). These courts have clearly found
that state laws restricting the transfer or assignment of
property, including causes of action and personal injury

                               7
claims, do not preclude the property from passing to the
bankrupt's estate under § 541.

While we have not decided the issue, we have previously
noted the broad sweep of § 541 and the fact that the
section expressly includes "causes of action" as property
interests included in the estate. See, e.g., In re Nejberger,
934 F.2d 1300, 1301-02 (3d Cir. 1991); Counties
Contracting & Constr. Co. v. Constitution Life Ins. Co., 855
F.2d 1054, 1057 n.3 (3d Cir. 1988). Given § 541's broad
scope, its legislative history, and the weight of authority
from other jurisdictions, we conclude that state laws
prohibiting the assignment or transfer of property,
including causes of action and tort claims, do not prevent
the inclusion of such property in the bankruptcy estate.
Accordingly, we hold that the district court correctly
determined that Machine Technology's state law tort claims
were part of the property of the estate under § 541.

C.

Having determined both that New Jersey law prohibits
transferring the tort claims at issue here and that the tort
claims were part of the property of the estate, we are left to
decide whether the trustee in Machine Technology's
bankruptcy was permitted to sell the company's
prejudgment tort claims to Integrated notwithstanding clear
New Jersey state law prohibiting the assignment. In
essence, this question raises a basic preemption issue:
whether Congress intended to permit bankruptcy trustees
to dispose of tort claims belonging to the estate in violation
of state laws that forbid the assignment of such claims.

1.

We begin our analysis with the legal principles
underlying the preemption doctrine. In In re Roach, 824
F.2d 1370, 1373-74 (3d Cir. 1987), we examined the
preemption issue specifically in the bankruptcy context. We
began our analysis by noting that under Article I, § 8 of the
Constitution, Congress has the power to establish uniform
bankruptcy laws throughout the United States and thus,
"[w]here Congress has chosen to exercise its authority,

                               8
contrary provisions of state law must accordingly give way."
Id. at 1373 (citation and internal quotations omitted).
Nonetheless, we immediately made clear that "the usual
rule is that congressional intent to pre-empt will not be
inferred lightly. Pre-emption must be either explicit, or
compelled due to an unavoidable conflict between the state
law and the federal law." Id. (citations and internal
quotations omitted). Because we are reluctant to assume
federal preemption, we noted that any analysis should
begin with "the basic assumption that Congress did not
intend to displace state law." Id. (citations and internal
quotations omitted). Relying on these general observations,
we said:

Our task is to ascertain and give effect to congressional
intent. However, we must approach that task with the
realization that the Bankruptcy Code was written with
the expectation that it would be applied in the context
of state law and that federal courts are not licensed to
disregard interests created by state law when that
course is not clearly required to effectuate federal
interests.

Id. at 1374. Thus, under Roach we adopted a restrained
approach to concluding that Congress has intended to
preempt state law in the bankruptcy context.3
_________________________________________________________________

3. Our approach to preemption outside the bankruptcy context is
similarly restrained when considering areas that have traditionally been
governed by state law. For example, in Witco Corp. v. Beekhuis, 38 F.3d
682, 687 (3d Cir. 1994), we made the following observations in the
context of determining whether certain provisions of CERCLA preempted
a Delaware probate statute:

In an area that has been traditionally occupied by the states, the
court must assume that the prerogatives of the states were not to be
superseded by a federal law unless it is the clear and manifest
purpose of Congress. . . . Indeed, for preemption to occur in a field
traditionally occupied by the states, there must be a "sharp" conflict
between state law and federal policy.

Id. at 687 (citations omitted). Under this reasoning, since bankruptcy is
a field traditionally occupied by the states, there must be a "sharp"
conflict between state law and federal policy before we may conclude that
federal law preempts state law in the bankruptcy context.

                               9
Supreme Court law attempting to balance federal and
state law in the bankruptcy context has generally taken a
similarly restrained approach to federal preemption. For
example, in Butner v. United States, 440 U.S. 48, 54, 99 S.
Ct. 914, 917-18 (1979), the Supreme Court emphasized
that "Congress has generally left the determination of
property rights in the assets of a bankrupt's estate to state
law." The Court then went on to instruct that:

Property interests are created and defined by state law.
Unless some federal interest requires a different result,
there is no reason why such interests should be
analyzed differently simply because an interested party
is involved in a bankruptcy proceeding. Uniform
treatment of property interests by both state and
federal courts within a State serves to reduce
uncertainty, to discourage forum shopping, and to
prevent a party from receiving a windfall merely by
reason of the happenstance of bankruptcy.

Id. at 55, 99 S. Ct. at 918 (citations and internal quotations
omitted). Accordingly, the Butner court concluded that
absent a countervailing federal interest, "the basic federal
rule is that state law governs." Id. at 57, 99 S. Ct. at 919;
see also Nobleman v. American Sav. Bank, 508 U.S. 324,
329, 113 S. Ct. 2106, 2110 (1993) ("In the absence of a
controlling federal rule, we generally assume that Congress
has left the determination of property rights in the assets of
a bankrupt's estate to state law.") (citation and internal
quotations omitted).

Courts applying the Butner analysis have relied on its
holding to conclude that "once a property interest has
passed to the estate, it is subject to the same limitations
imposed upon the debtor by applicable nonbankruptcy
law." In re American Freight Sys., Inc., 179 B.R. 952, 960
(Bankr. D. Kan. 1995); see also In re Transcon Lines, 58
F.3d 1432, 1438 (9th Cir. 1995) (noting that
"nonbankruptcy law defines the nature, scope, and extent
of the property rights that come into the hands of the
bankruptcy estate"), cert. denied sub nom. Gumport v.
Sterling Press, Inc., 116 S. Ct. 1016 (1996); In re Sanders,
969 F.2d 591, 593 (7th Cir. 1992) ("[A] bankruptcy trustee
succeeds only to the title and rights in property that the

                               10
debtor had at the time she filed the bankruptcy petition.");
In re FCX, Inc., 853 F.2d 1149, 1153 (4th Cir. 1988) ("The
estate under § 541(a) succeeds only to those interests that
the debtor had in property prior to commencement of the
bankruptcy case."); In re Bishop College, 151 B.R. 394, 398
(Bankr. N.D.Tex. 1993) (holding that a bankrupt's estate
receives trust assets "subject to any restrictions imposed by
state law, pre-petition").

These cases stand for the proposition that unless federal
bankruptcy law has specifically preempted a state law
restriction imposed on property of the estate, the trustee's
rights in the property are limited to only those rights that
the debtor possessed pre-petition. In other words, without
explicit federal preemption, the trustee does not have
greater rights in the property of the estate than the debtor
had before filing for bankruptcy. See L. King, Collier on
Bankruptcy, ¶ 541.04 ("Although [section 541(a)(1)] includes
choses in action and claims by the debtor against others, it
is not intended to expand the debtor's rights against others
beyond what rights existed at the commencement of the
case.").

Notwithstanding these general principles, Integrated
argues that certain Bankruptcy Code provisions evince a
clear congressional intent to preempt state law restrictions
on assigning tort claims. Specifically, Integrated points to
two separate Code provisions, 11 U.S.C. §§ 704(1),
363(b)(1). Section 704 sets forth the trustee's duties, and
subsection (1) instructs the trustee to "collect and reduce to
money the property of the estate for which such trustee
serves, and close such estate as expeditiously as is
compatible with the best interests of parties in interest
. . . ." 11 U.S.C. § 704(1). Somewhat similarly, section 363
defines the permissible use, sale, or lease of estate
property, with subsection (b)(1) specifying that "[t]he
trustee, after notice and a hearing, may use, sell, or lease,
other than in the ordinary course of business, property of
the estate." 11 U.S.C. § 363(b)(1).

These Code provisions, Integrated argues, demonstrate
that the "overriding purpose of the Bankruptcy Code is the
expeditious and equitable distribution of the assets of the
debtor's estate." Appellant's Br. at 17. Moreover, Integrated

                               11
contends that these provisions create an affirmative
obligation on the trustee's part to dispose of the estate's
assets as quickly and efficiently as possible, in order to
maximize the potential return to creditors. In light of these
express purposes of the Bankruptcy Code, Integrated
argues, New Jersey's state law prohibiting the assignment
of tort claims is in direct conflict with federal bankruptcy
law and must be preempted.

Integrated's arguments, however, lack adequate legal
support. For starters, neither § 363(b)(1) nor § 704(1)
expressly authorizes the trustee to sell property in violation
of state law transfer restrictions. Moreover, Integrated
points to nothing in the legislative history that would even
raise an inference that Congress intended to give the
trustee such authority under these provisions. The clear
lack of Congressional intent to preempt state law
restrictions on transferring property of the estate is even
more telling given the explicit language that Congress uses
when it intends to displace state nonbankruptcy law in
other provisions of the Bankruptcy Code. See, e.g., 11
U.S.C. § 1123(a) ("Notwithstanding any otherwise applicable
nonbankruptcy law, a [reorganization] plan shall . . ."); 11
U.S.C. § 541(c)(1) ("[A]n interest of the debtor in property
becomes property of the estate . . . notwithstanding any
provision in . . . applicable nonbankruptcy law (A) that
restricts or conditions transfer of such interest by the
debtor . . ."); 11 U.S.C. § 728(b) ("Notwithstanding any State
or local law imposing a tax on or measured by income, the
trustee shall make tax returns of income . . . only if [the]
estate or corporation has net taxable income for the entire
period after the order for relief under this chapter during
which the case is pending."); 11 U.S.C. § 363(l) ("Subject to
the provisions of section 365, the trustee may use, sell, or
lease property under subsection (b) or (c) of this section . . .
notwithstanding any provision in . . . applicable law that is
conditioned on the insolvency or financial condition of the
debtor . . ."). Because both Code provisions relied upon by
Integrated fail to explicitly express Congress's intent to
supersede state law restrictions on the transfer of estate
property, Integrated's preemption claim is rendered wholly
unconvincing, especially in light of our strong presumption

                               12
against inferring Congressional preemption in the
bankruptcy context. See In re Roach, 824 F.2d at 1373-74.

In addition, there is case law from other circuits that
directly cuts against Integrated's position. For example, in
In re Schauer, 835 F.2d 1222 (8th Cir. 1987), the court
rejected an argument that federal bankruptcy law
preempted a Minnesota farm cooperative statute, and a
cooperative's bylaws promulgated thereunder, which
imposed transfer restrictions on a "patronage margin
certificate" held by the debtor and passed to the
bankruptcy estate pursuant to § 541. In reaching its
decision, the court held that since state law defined the
debtor's interest in property that became part of the estate,
"§§ 363(b)(1) and 704 do not conflict with or invalidate the
bylaws' restriction on transferability . . . ." 835 F.2d at
1225. The Schauer court further reasoned:

[T]here is no conflict between 11 U.S.C. §§ 363(b)(1),
704, and state law which defines the debtor's rights in
property of the estate. Sections 363(b)(1) and 704 do
not expressly authorize the trustee to sell property
contrary to the restrictions imposed by state and
contract law. These sections are simply enabling
statutes that give the trustee the authority to sell or
dispose of property if the debtors would have had the
same right under state law.

Id. (emphasis added).

Significantly, other courts have followed the Schauer
court's lead and also held that §§ 363(b)(1) and 704 are
general enabling provisions that do not expand or change a
debtor's interest in property merely because itfiles a
bankruptcy petition. See, e.g., In re FCX, 853 F.2d at 1155
("Neither § 363(b)(1), nor § 704, is an empowering statute in
the sense that new rights or powers for dealing with the
property of the estate are created. . . . [They] evince[ ] no
intent to enlarge the trustee's rights to take such actions
beyond the debtor's pre-bankruptcy rights."); In re Bishop
College, 151 B.R. at 398-99 (holding that § 704 is merely an
enabling statute that gives the trustee the authority to
dispose of property "if the Debtor would have had the same
rights under state law"). The reasoning of these cases is

                                13
persuasive and we conclude that neither § 363(b)(1) nor
§ 704(1) indicates a specific congressional intent to preempt
state laws limiting the assignability of tort claims belonging
to the estate. Since Machine Technology would have been
prohibited from assigning its prejudgment tort claims under
New Jersey state law, the trustee in Machine Technology's
bankruptcy was subject to the same restriction.
Accordingly, we hold that the trustee lacked legal authority
to assign the tort claims and hence, Integrated does not
have standing to pursue its state law tort claims.

We realize that the events giving rise to the prejudgment
tort claims at issue in this case occurred after Machine
Technology filed its petition for bankruptcy relief under
Chapter 11. This fact, however, does not change our
analysis. In our view, absent specific Congressional intent
to preempt state law restrictions imposed on property of the
estate, the trustee's rights in the estate property are limited
to only those rights that the debtor possessed, or would
have possessed, pre-petition. This is the case regardless of
whether the tort claims arise before or after a debtor's
property has passed to the bankruptcy estate.

Indeed, drawing a distinction between prejudgment tort
claims that arise before a debtor files a petition for
bankruptcy and those that arise after the petition is filed is
problematic for several reasons. First, there is simply no
legal precedent for recognizing such a distinction. Second,
regardless of whether prejudgment tort claims arise before
or after a petition for bankruptcy has been filed, once the
bankruptcy case commences the claims belong to the
property of the estate and hence should be subject to
identical treatment, absent a specific Congressional intent
to augment the property rights inherent in the tort claims
arising post-petition.

Finally, drawing a distinction between prejudgment tort
claims arising pre- and post-petition is untenable in the
case of Chapter 11 reorganizations where the debtor
remains in possession of the property of the estate. In such
cases, the debtor-in-possession, "subject to any limitations
on a trustee serving in a case under [Chapter 11], and to
such limitations or conditions as the court prescribes . . .
shall have all the rights . . . and powers, and shall perform

                               14
all the functions and duties . . . of a trustee serving in a
case under [Chapter 11]." 11 U.S.C. § 1107(a); see also In
re Coastal Group, Inc., 13 F.3d 81, 84 (3d Cir. 1994)
("Section 1107(a) . . . extends the rights, powers and duties
of a trustee to a debtor-in-possession subject to any
limitations imposed upon a trustee."). Permitting debtors-
in-possession to freely assign prejudgment tort claims in
violation of state laws restricting the transfer of such
claims, solely because the claims happen to arise after the
debtor has filed a petition for bankruptcy, is tantamount to
expanding the pre-petition rights of the debtor in the
property of the estate simply because the debtor has
commenced bankruptcy proceedings and become a debtor-
in-possession. This is akin to providing the debtor with "a
windfall merely by reason of the happenstance of
bankruptcy," Butner, 440 U.S. at 55, 99 S.Ct. at 918, an
outcome clearly in tension with the purposes of the Code
and existing caselaw.

2.

As a final argument for preemption, Integrated contends
that permitting the operation of New Jersey law will cause
significant problems in actual bankruptcy practice. To
support its argument, Integrated raises two separate
concerns. First, Integrated asserts that unless bankruptcy
trustees are permitted to sell tort claims belonging to the
estate, most claims will be abandoned by trustees because
of the time and money required to pursue the claims in
court. This result will in turn, Integrated argues, frustrate
the Code's purpose of ensuring the expeditious and
equitable distribution of the debtor's estate. Second,
Integrated maintains that permitting New Jersey law to
operate in the bankruptcy context will create the negative
incentive of encouraging other corporate officers to engage
in the type of tortious behavior exhibited by Machine
Technology's former officers in this case without fear of
recourse for their wrongful conduct. We should not,
Integrated warns, permit either federal bankruptcy law or
state law, to promote such behavior.

Neither policy concern is particularly persuasive. With
respect to Integrated's first argument, although we

                               15
recognize that state law restrictions on the transferability of
tort claims could possibly impose additional litigation
burdens on the trustee and adversely affect creditors
waiting for estate liquidation, there are a number of
counterbalancing factors to consider. First, we do not
believe that bankruptcy trustees will be forced to abandon
all tort claims belonging to the estate because of the time
and resources necessary to sue on the claims. Rather, it is
more likely that trustees will weigh the costs and benefits
associated with pursuing each set of claims and prosecute
those tort claims which, ex ante, promise to result in a net
economic benefit to the estate and its creditors--
something every potential litigator should do.

Second, by refusing to find preemption of state law
restrictions on the transferability of estate property, we are
giving effect to an equally important purpose of the
Bankruptcy Code: namely, upholding the fundamental
principle that the estate succeeds only to the nature and
the rights of the property interest that the debtor possessed
pre-petition. Indeed, were we to find federal preemption of
the state law restrictions at issue here, the trustee would
possess greater rights in the property interest than the
debtor. Clearly, unless the Code expressly indicates an
intention to augment the rights and nature of the property
interest in bankruptcy, the trustee only succeeds to the
same rights the debtor possessed in the property pre-
petition.

With respect to Integrated's second argument, it is
misleading to suggest that unless we find federal
preemption under the circumstances of this case,
individuals will be permitted to engage in strategic, tortious
behavior without fear of recourse. Indeed, this argument
ignores the fact that the bankruptcy trustee retains the
power to pursue state law tort claims against tortfeasors,
thus subjecting them to civil and criminal liability for their
wrongful conduct. Moreover, as noted above, we believe
that bankruptcy trustees are likely to prosecute all tort
claims that will potentially result in a net economic benefit
to the estate. As such, contrary to Integrated's warnings,
the failure to find federal preemption here does not give
tortfeasors a "free ride" to engage in tortious behavior and
to abuse the Code's protections.

                               16
IV.

In summary, we conclude that the trustee lacked the
authority to assign Machine Technology's state law tort
claims to Integrated, and hence, Integrated lacks standing
to sue on its state law tort claims. We will affirm the order
of the district court.

                               17
ROSENN, Circuit Judge, dissenting.

The majority holds that the trustee in bankruptcy may
not transfer the estate's pre-judgment tort claim in the
absence of specific federal law preemption. The predicate
for its holding is that "the trustee's rights in the property
are limited to only those rights that the debtor possessed
pre-petition." Maj. op. at 11. The debtor in this case,
however, never possessed the rights of action in issue. The
rights enured only to the trustee because the alleged claims
of misappropriation of confidential information, conversion
and other torts were committed against the estate after
Machine Technology, Inc. ("MTI") had filed its petition for
bankruptcy and while the estate property was in the hands
of the trustee. Thus, the tort claims accrued solely to the
trustee and their transfer in no way expands or alters the
property interest possessed by the debtor when itfiled its
bankruptcy petition.

Neutralizing the power and duty of the trustee to dispose
of these choses of action will deprive the trustee and the
creditors of the estate of $100,000 which Integrated
Solutions, Inc. ("Integrated") paid the trustee. If the transfer
made by the trustee and approved by the bankruptcy court
is invalidated, winding up the estate must be deferred and
maximization of benefits to creditors is deferred, all in the
face of no prejudice to anyone having an honest interest in
the estate and no offense to any specific identifiable
interest. I, therefore, respectfully dissent.

I.

MTI filed for Chapter 11 protection on July 22, 1994.
Integrated charges that on August 1 and 2, 1994, the
individual defendants, former officers and employees of
MTI, removed confidential files, drawings, and schematics
from MTI's office while they were in the possession of the
trustee in bankruptcy. Thus, the covert, unauthorized
removal violated federal bankruptcy law. On August 3, the
bankruptcy judge issued a bench order vacating the
automatic stay provision of Section 362 of the Bankruptcy
Code and directing the turnover of the collateral to the
secured creditors, including all assets of MTI. The formal

                               18
order directing this turnover was entered on August 22,
1994. Integrated, engaged in the manufacture, sale and
repair service of Photolite lithography equipment, bought
the property from the secured creditors on September 6,
1994, for the sum of $800,000. Accordingly, these tort
claims, which accrued after the property was in the
bankruptcy estate, are subject to federal law. Their
assignability should not be subject to the restrictions on
assignability of pre-judgment tort claims imposed under
arcane and obscure state common law.

One of the primary purposes of the Bankruptcy Code is
the expeditious and equitable distribution of the assets of
the debtor's estate. In re Smith-Douglass, Inc. , 856 F.2d 12,
15 (4th Cir. 1988) (citing Midlantic National Bank v. New
Jersey Dep't of Envtl. Protection, 474 U.S. 494, 508 (1986)
(Rehnquist, J., dissenting)). Thus, absent a restriction
imposed by state law, there would be no problem in the free
alienation of these pre-judgment tort claims under federal
law. The majority believes that New Jersey's unexplained
common law against the sale or assignment of pre-
judgment tort claims should apply in this case because the
trustee has no greater rights in the property in the estate
than the debtor had prior to the filing for bankruptcy.

The tort claims, however, were never the property of the
debtor and first appeared in the bankruptcy estate only
after the filing of the bankruptcy petition. Thus, the claims
are and has always been the sole and exclusive property of
the trustee. He is duty bound to expeditiously dispose of it,
as he must with the rest of the estate property, and that
disposition should not be obstructed by an inexplicable
state common law rule of inalienation merely because the
debtor would have been bound by it. The transfer on its
face shows no threat to public health, public safety, the
state legal system, or any identifiable harm. On the other
hand, "[u]nder the Supremacy Clause of Article VI of the
United States Constitution, when enforcement of a state
law or regulation would undermine or stand as an obstacle
to the accomplishment of the full purposes and objectives
of Congress in enacting a federal statute, the conflict must
be resolved in favor of the federal law. The overriding
purpose of the Code is the expeditious and equitable

                               19
distribution of assets of the debtor's estate." Smith-
Douglass, 856 F.2d at 15 (citations omitted).

To facilitate this goal, the court in Smith-Douglass even
permitted a trustee to unconditionally abandon a fertilizer
plant, which contained violations of state environmental
laws and regulations, where the estate lacked
unencumbered assets with which to pay for clean-up and
the plant itself did not present any imminent health or
safety risks to the public. Id. at 16. Accord New Jersey
Dep't of Envtl. Protection v. North Am. Products Acquisition
Corp., 137 B.R. 8 (D.N.J. 1992). In this case, the transfer of
the tort claims pales into insignificance in offending state
law. Although recognizing that preemption by the
Supremacy Clause is a matter of congressional interest,
Hines v. Davidowitz, 312 U.S. 52, 66-67 (1941), the Court
did not suggest that an impractical obtuse "disruption of
effectual administration of bankrupt estates under the Code
was appropriate." Smith-Douglass, 856 F.2d at 16. "It is
clear that if an identifiable federal interest is present and
overriding, then recognition of a restriction to liquidate by
agreement or state law must fail." See In re Baquet, 61 B.R.
495, 500 (Bankr. D. Mont. 1986).

A bankruptcy trustee, accorded the duty of managing the
property in the estate and disposing of the assets, has a
clear interest in protecting that property from
misappropriation; otherwise the property loses value and
diminishes the money that can be brought into the estate
through the liquidation of assets to satisfy the creditors.
This interest is even greater when the tortious conduct is
committed against the property while it is in the
bankruptcy estate, as opposed to pre-petition tort claims. It
is analogous to certain crimes which become federal crimes
only because they occurred on federal property. Although
there may be no difference in the conduct itself, an assault
which takes place on federal land (such as a national park)
will be subject to federal law while one which occurs on any
other property will be governed by state law. The federal
interest is paramount because the act has been committed
against property under the control of the federal
government.

                               20
Moreover, the cases relied on by the majority for the
proposition that state law restrictions imposed on the
assignability are distinguishable. None of those cases
involved tortious conduct committed against the debtor's
property after it was part of the bankruptcy estate and in
federal custody. In those cases, the estate property subject
to the restrictions on alienability belonged to the debtor
prior to the bankruptcy.

One of the principal cases relied upon by the majority is
In re Schauer, 835 F.2d 1222 (8th Cir. 1987), which I
believe is clearly inapposite. In Schauer, there was an
attempt "to expand or change a debtor's interest in property
merely because it filed a bankruptcy petition." Maj. op. at
13. There, the question was whether the trustee could
transfer patronage margin certificates of a farm cooperative
without the cooperative's approval. The patronage margin
certificates are evidence of the ownership and interest in
the cooperative and in the patron's revolving fund. Schauer,
835 F.2d at 1223. The cooperative's by-laws provided for
redemption and barred any assignment of interest in the
revolving fund without the consent of the board of
directors. Id. at 1223-34. The trustee for the Schauers, who
had filed for bankruptcy, requested the board of directors of
the cooperative to consent to the assignment of the
certificates to third parties, but the board refused in
accordance with its standard business practice. Id. at 1224.
The trustee sought the aid of the court to compel the
transfer, but the court correctly held that the trustee
acquired the certificates subject to the cooperative's by-laws
and could not transfer or assign them without the consent
of its board of directors. Id. at 1225. In the instant matter,
however, the tort claims were never the property of the
debtor and, of course, were never the subject of contractual
limitations as in Schauer. Thus, the rule that the trustee
succeeds only to the title and rights in property that the
debtor had at the time he or she filed the bankruptcy
petition, see In re Sanders, 969 F.2d 591, 593 (7th Cir.
1992), has no relevance here.

Furthermore, no compelling rationale exists for
preventing the sale or assignment in this case. On the
contrary, the estate and all interested parties would be best

                               21
served by allowing the transfer of the claims, as the
bankruptcy court did, to Integrated. The sale of the tangible
assets of the bankrupt estate could be seriously hindered if
the purchaser cannot acquire the accompanying tort claims
upon which the full value of the property may depend. For
example, in the present situation, it is unlikely that
Integrated would have purchased the tangible property in
question if they knew that they would lack standing to
retrieve the confidential files, drawings and schematics
misappropriated by the tortfeasors or to obtain damages.
Thus, barring the transfer of the tort claims can in certain
situations have the destructive effect of also obstructing the
sale of the assets in the estate, in contradiction to the
overriding purpose of the Bankruptcy Code.

The majority expresses a concern that allowing the sale
and transfer of a pre-judgment tort claim is "untenable" in
case of Chapter 11 reorganizations where the debtor
remains in possession of the estate property. Maj. op. at 14.
This is a needless fear. So long as the debtor remains in
possession, it bears essentially the same fiduciary
obligation to the creditors as does the trustee for the debtor
out of possession. "Moreover, the duties which the . . .
Debtor in possession must perform during the proceeding
are substantially those imposed upon the Trustee, § 188."
Wolf v. Weinstein, 372 U.S. 633, 649 (1962). Accord Matter
of Ribs-R-Us, 828 F.2d 199, 203 (3d Cir. 1987). If property
of the debtor is wrongfully removed or stolen by a third
party, recovery by the debtor's estate as in the case of
property in the hands of a trustee, poses no harm to
anyone except to the tortfeasor.

The majority's concern that permitting debtors-in-
possession to freely assign pre-judgment tort claims"in
violation of state laws restricting the transfer of such claims
. . . is tantamount to expanding the pre-petition rights of
the debtor in the property of the estate," maj. op. at 15, is
more imaginary than real. First, transfers are not made
wide and loose but only for a valuable consideration to the
bankrupt estate, and, as in this case, with the approval of
the court. 11 U.S.C. § 363(b)(1). Moreover, the situation
here is one where the estate itself has been deliberately
injured by dishonest tortfeasors. Second, the transfer is not

                               22
made in violation of any state legislative enactment; under
the harshest interpretation, the assignment may
superficially conflict with an obscure judicial concept.
Third, the transfer neither offends nor alters the property
interest of any party. As in the case of the trustee, the right
to transfer tort claims committed against the debtor-in-
possession facilitates its reorganization and expeditiously
maximizes the estate for the benefit of creditors.

The defendants do not offer a sufficient answer when
they assert the trustee may litigate the tort claim. This
presupposes that the trustee has the funds to carry on the
litigation, and appeals if necessary, and that the purchaser
of the tangible assets is willing to stand by and wait.
Moreover, if the trustee cannot transfer the claims,
insufficient resources may compel him to abandon the
claim rather than litigate it and thus diminish the value of
the bankruptcy estate left for the creditors. Accordingly,
common sense, fairness, and pragmatism dictate that the
trustee be permitted to sell and transfer the pre-judgment
tort claim and settle the estate as speedily as possible.

II.

Given the very specific facts of the present situation, in
which the alleged tort occurred while the debtor's property
was in the custody of the federal bankruptcy trustee,
federal law governs the alienability of the property. The
trustee may not be subjected to the state common law
restrictions prohibiting the assignment of pre-judgment tort
claims. Therefore, I would vacate the order of the district
court granting Service Specialties' motion for summary
judgment and remand for further proceedings consistent
with this opinion.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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