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