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Media Alerts - Sara Rosenberg v. DVI Receivables XVII, LLC - Third Circuit
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September 1, 2016
  Sara Rosenberg v. DVI Receivables XVII, LLC - Third Circuit
Headline: Third Circuit Finds State Law Claim for Damages Not Preempted by Federal Bankruptcy Law

Area of Law: Bankruptcy, Federal Preemption

Issues Presented: Does the federal Bankruptcy Code preempt the state law claim of non-debtors, which was based on the wrongful filing of an involuntary bankruptcy petition?

Brief Summary: Following a successful suit for damages based on a claim of bad faith involuntary bankruptcy proceedings, plaintiffs filed suit for damages against the parties who had initiated the involuntary bankruptcy proceedings for tortious interference with contracts and business relationships. Defendants sought dismissal of that suit on the ground that it was preempted by federal bankruptcy law on which the involuntary petitions had originally been filed. The Court found that the state law claims were not preempted by the involuntary bankruptcy provisions of the Bankruptcy Code.

Extended Summary:
Maury Rosenberg established several medical imaging companies that were initially financed by DVI Financial Services, Inc. who later transferred them to DVI Funding LLC. DVI Financial entered bankruptcy in 2004, resulting in US Bank's acquisition of the servicing contracts. DVI Funding and DVI Receivables filed involuntary bankruptcy petitions over money Rosenberg's companies owed to DVI. The district court dismissed these actions because DVI Funding and DVI Receivables were not the creditors to those debts.

Mr. Rosenberg then filed an adversary action under 1 U.S.C §303(i) against those two entities as well as U.S. Bank and its subsidiary Lyon Financial. Following a trial, the court awarded attorney's fees, damages, and costs to plaintiff for the bad faith filing of the involuntary bankruptcy filings.

In 2013 Sara Rosenberg together with several other entities owned by her husband filed suit to recover damages that resulted from the involuntary bankruptcy filings ("the Rosenberg affiliates"). The Rosenberg affiliates were not named in the involuntary bankruptcy proceedings, but claimed tortious interference with contracts and business relationships resulted from the bankruptcy filings because of their relationship to the named parties. Defendants moved to dismiss on the grounds that state law tortious interference claims were preempted by the involuntary provisions of the Bankruptcy Code.

The relevant section of the Code, 11 U.S.C. §303(i), provides that if an involuntary bankruptcy petition is dismissed, debtors may recover attorney's fees, costs, and damages from the creditors. The Rosenberg affiliates, not technically debtors, were unable to recover under the Code so then filed the state law claim.

In holding that the district court erred by finding the state law claims preempted by the involuntary bankruptcy provisions of the Bankruptcy Code, the Third Circuit began by explaining that there are three types of federal preemption: express, conflict, and field preemption. This case falls into the latter category, in which federal law preempts state law only if congressional intent to supersede state laws is clear and manifest and the federal regulation leaves no room for state regulation. The Court further explained that there is a strong preference to avoid preemption if possible. In order to find preemption, § 303 must indicate a clear intent to preempt state law.

The Court noted that the law refers only to debtors and does not lay out remedies available to non-debtors. Thus, the court held that field preemption was not applicable. The Court was not convinced by Defendants' argument that the Bankruptcy Code was intended to exclude a remedy for non-debtors when it created one for debtors. Rather, the Court interpreted the Code as a means of deterring abuse by holders of debt and that it would be inconsistent with the purposes of the law to deny a remedy to others, including non-debtors aggrieved by an abusive involuntary petition.

The Court emphasized that field preemption requires a clear and manifest intent, which was not present in the Code. The Court also distinguished a contradictory opinion from the Ninth Circuit, which it found inconsistent with its own previous decisions and the presumption against preemption.
To read the full opinion, please visit

Panel (if known): Ambro, Jordan, Scirica

Argument Date: March 1, 2016

Date of Issued Opinion: August 29, 2016

Docket Number: 2-14-cv-05608

Decided: Reversed and Remanded

Case Alert Author: John Farrell

Counsel: Lewis J. Pepperman, Esq. (Argued), Tucker H. Byrd, Esq., Scottie N. McPherson, Esq., Counsel for Appellants; Craig A. Hirneisen, Esq., Stacey A. Scrivani, Esq., Peter H. Levitt, Esq. (Argued), Jack C. McElroy, Esq., Counsel for Appellees

Author of Opinion: Judge Ambro

Circuit: Third Circuit

Case Alert Supervisor: Professor Mary E. Levy

    Posted By: Susan DeJarnatt @ 09/01/2016 09:59 AM     3rd Circuit  

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