THE PREEMPTION OF STATE COURT CLAIMS
to accomplishment and execution of federal law, i. e. implied preemption. Id. However, the intent that state law be preempted must be“ clear and manifest,” and there is always a presumption that Congress did not intend to preempt a state law. Id. at 611-12.
An interesting distinction is then made between what the Graber Court considered“ custom-built” bankruptcy rules, and rules that were imported into the bankruptcy process. Id. at 612. For example, the court explained that the automatic stay was created“ for the specific purpose of bankruptcy”, and thus would preempt any competing state rule. Id. By contrast, Congress used existing federal rules for other aspects of the bankruptcy process, such as the rules governing adversary proceedings. Id. These rules, the court reasoned, are not specific to bankruptcy, and thus no intent to preempt state law exists. Id.
The court concluded that frivolous litigation rules fall into the latter category and do not preempt state law abuse of process claims. Id. In doing so, the court repeatedly returned to congressional intent, first rejecting any consideration of the“ chilling effect” on bankruptcy filings, because it is presumed that Congress already considered this possibility when it chose not to explicitly preempt state law. Id. at 616-17. The court was also unconcerned about the chance of“ disrupting the uniformity in bankruptcy law,” because any state court action could not be filed until the underlying claim reached final judgment and all appeals were exhausted. Id. at 617. Finally, the Graber Court stated that the possibility of a state court interpreting bankruptcy law in an abuse of process case was not problematic because federal and state courts often interpret the laws of the other jurisdiction. Id. at 619. It explained that“[ t ] here is no more reason to question a state court’ s aptitude at applying federal law now than there has been for the last two hundred years.” Id. at 619. The Graber Court then concluded that, despite the many jurisdictions finding otherwise, preemption does not always exist when the challenged actions occurred in bankruptcy court. Id.
How Practitioners Can Navigate these Muddy Waters
The lesson from these cases for both practitioners and defense attorneys is twofold. First, it is noted that none of these cases suggest any limitation on the ability to seek sanctions in bankruptcy court. Generally speaking, wide latitude is afforded to bankruptcy judges to“ impose sanctions upon attorneys, law firms, or parties for the filing and prosecution of pleadings and other papers which are found to be frivolous under Rule 9011( b).” In re Belmonte, B. R. 17, 29( Bankr. E. D. N. Y. 2015). A bankruptcy court may deem a filing frivolous for several reasons, such as the attempt to set forth an argument that is unwarranted under existing law, or a frivolous argument to change the existing law. Branch Banking & Trust Co. v. Michael’ s Enters. of Va., Inc.( In re Michael’ s Enters. of Va., Inc.), No. 14-30611, 2014 Bankr. LEXIS 4654( Bankr. E. D. Va. Nov. 6, 2014). While the Rule is not intended to“ deter an attorney’ s enthusiasm or creativity in pursuing factual or legal theories,” sanctions will be imposed when a claim lacks any factual or legal basis. Hagen v. McFarland( In re McFarland), No. 11-10218, 2012 Bankr. LEXIS 4621( Bankr. S. D. Ga. Sept. 29, 2012). Section 1927 further allows for costs to be assessed against an attorney who“ so multiplies the proceedings in any case unreasonably and vexatiously,” while Section 105( a) allows a bankruptcy court to take“ any action … necessary or appropriate … to prevent an abuse of process.” 28 U. S. C. §§ 1927, 105( a); see also Marrama v. Citizens Bank of Mass. 549 U. S. 365, 375( 2007)( noting the board authority of bankruptcy courts under § 105( a)). In sum, the options available to parties for obtaining sanctions and costs in the bankruptcy court are abundant.
This should be understood as an indication that good things do not come to those who wait in the majority of jurisdictions. Any claim that could be made under a theory of abuse of process can also be asserted in the bankruptcy action itself. Importantly for clients, this means immediately recouping any fees which have been expended because of frivolous litigation. Waiting until after the bankruptcy action has concluded, possibly with the intent of“ stacking” conduct for the claim, only risks a complete dismissal without any recovery at all. Of note, while the Carmen court dismissed the abuse of process claim at the pleading stage, the Oberdick court did not do so until summary judgment. This means that the plaintiff not only lost out on its frivolous litigation claim, but also shouldered the additional costs of attempting to recover those fees in state court.
For defense attorneys, the factors discussed in Oberdick and existence of minority jurisdictions will continue to provide a basis for claims based on bankruptcy court conduct, regardless of the jurisdiction. While the overwhelming weight of case law is against this position, the Oberdick decision shows that it won’ t necessarily be enough to defeat a state claim at the pleading level. In assessing such a case at the preliminary stage, it is therefore necessary to not only determine whether your jurisdiction is in the majority, but also the procedural posture of any court decisions. After all, a sound basis for moving for summary judgment is much different than one for dismissal at the pleading stage. The recent Pennsylvania decisions show that attorneys continue to bring these actions even in jurisdictions that solidly support preemption, and one must be prepared for prolonged litigation before a realistic hope for dismissal can be achieved.
44 CONSUMER BANKRUPTCY JOURNAL Summer 2017 National Association of Consumer Bankruptcy Attorneys