The Rosenberg case continues to make noise, and breaking ground on all fronts for involuntary bankruptcy proceedings. This case involves six special purpose entities under the strings of its master puppeteer, U.S. Bank, placed the individual principal of a medical imaging business, Maury Rosenberg, involuntarily into bankruptcy in the Eastern District of Pennsylvania after litigating in state court a debt owed by the business under certain equipment leases. After the case was transferred to the Southern District of Florida, the bankruptcy court there dismissed the involuntary petition, because, among other things, the special purpose entities were not Rosenberg’s creditors. See In re Rosenberg, 414 B.R. 826, 840 (Bankr. S.D. Fla. 2009), aff’d, 472 Fed. App’x 890 (11th Cir. 2012) (per curiam). The involuntary bankruptcy cases filed against Rosenberg’s businesses pending in the Eastern District of Pennsylvania were likewise dismissed under collateral estoppel. In re Nat’l Med. Imaging, LLC, 439 B.R. 837, 854 (Bankr. E.D. Pa. 2009), aff’d, __ Fed. App’x __, No. 15-1996, 2016 WL 1743475 (3d Cir. 2016).
After the involuntary case dismissal, Rosenberg filed an adversary action under 11 U.S.C. § 303(i) against the special purpose entities and the bank, in which he sought to recover, jointly and severally, the costs, attorney’s fees and damages for the bad faith filing of the involuntary bankruptcy petition against him. Rosenberg subsequently obtain an award for fees and costs after a bench trial in the bankruptcy court, In re Rosenberg, No. 09-13196, 2012 WL 3990725 (Bankr. S.D. Fla. Sept. 11, 2012), aff’d in part, 779 F.3d 1254 (11th Cir. 2015), cert. denied, 136 S. Ct. 805 (2016), and, after a trial by jury on the bad faith claim in the district court as a result of the bank’s withdrawal of the reference there, obtained a judgment for $1.1 million in compensatory damages and $5 million in punitive damages. Upon considering the bank’s post-trial motion, the district court overturned the punitive damages award in its entirety and limited compensatory damages to $360,000, but the Eleventh Circuit held that U.S. Bank’s post-trial motion was untimely because it was not filed within the 14-day period established by the bankruptcy rules and reinstated the jury’s verdict in totum. Rosenberg v. DVI Receivables, XIV, LLC, No. 12-22275, 2014 WL 4810348 (S.D. Fla. Sept. 29, 2014), rev’d in part, 818 F.3d 1283 (11th Cir. 2016).
Against this backdrop, we turn now to the new breaking ground of this case stemming from the Third Circuit Court of Appeals on August 29, 2016. See Rosenberg v. DVI Receivables, XIV, LLC, __ F.3d __, 2016 WL 4501675 (3d Cir. Aug. 29, 2016). In August 2013, Rosenberg’s wife, Sara, the Rosenberg Trust, and several limited partnerships (collectively, the "Rosenberg Affiliates") brought suit to recover damages stemming from the dismissed involuntary bankruptcy petitions filed against Rosenberg and his business. See SaraRosenberg, et al. v. DVI Receivables XVII, LLC et al., Case No. 2-14-cv-05608 (E.D. Pa.). All of the plaintiffs in that case are affiliated with Rosenberg, but none of them were parties to the involuntary bankruptcies in Pennsylvania or Florida. The district court in that case concluded that the Rosenberg Affiliates’ claims were preempted by the Bankruptcy Code and dismissed the complaint. Rosenberg, 2016 WL 4501675.
On appeal, the Third Circuit concluded that Section 303(i) of the Bankruptcy does not preempt state law claims of non-debtors predicated on the filing of an involuntary bankruptcy petition. Id. at *3. In so doing, the Third Circuit examined the whether there was enough evidence in the text, structure, or purpose of Section 303(i) or the Bankruptcy Code to rebut the presumption against field preemption. Id. The appellate court concluded that there was insufficient evidence expressing Congress’ "clear and manifest intent" to preempt state law causes of action for non-debtors based on the filing of an involuntary bankruptcy petition. Id. There, Judge Ambro, writing for the court, explained that Section 303(i) from its text merely provides a remedy to the debtor, but is completely silent as to potential remedies for non-debtors harmed by the improvident involuntary bankruptcy filing, suggesting that Congress did not want to disturb the existing framework of state law remedies for non-debtors or impliedly deprive non-debtors of any judicial remedy for abuse of the bankruptcy system. Id. at *4 (quoting Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 251 (1984) ("[i]t is difficult to believe that Congress would, without comment, remove all means of judicial recourse for those injured by illegal conduct")).
From its structure and purpose, the Third Circuit determined that likewise there was no indication of field preemption. To the contrary, it ironically stressed that "[b]y giving creditors the ability to bring a debtor into bankruptcy, Congress created a power that could be abused …. [and] included a remedy for debtors to discourage abuse." Id. at *4 (citations omitted). In concluding its analysis, the appellate court found that nothing in the Bankruptcy Code suggests that Congress was also concerned about protecting non-debtors from the effects of involuntary petitions inconsistent with the remedial purpose of Section 303(i). Id. (citing In re John Richards Homes Bldg. Co., LLC, 298 B.R. 591, 605 (Bankr. E.D. Mich. 2003) ("[T]he harm from an improper involuntary bankruptcy petition can result not only to the debtor but also to the debtor’s owners, employees, suppliers, customers, and other creditors"). The court also rejected other arguments, including those based on policy by "flooding of the gates" or the undermining the uniformity of the bankruptcy laws. Id. at *4-5. Accordingly, the Third Circuit held that Section 303(i) of the Bankruptcy Code does not preempt state law claims by non-debtors against the petitioners for damages based on the improper filing of an involuntary bankruptcy petition. Id. at *5.
The take away from the most recent part of the Rosenberg saga at the Third Circuit is that creditors must fully understand the risk and ramifications of involuntarily dragging a debtor into bankruptcy. Creditors need not only worry about potential liability to the debtor under Section 303(i) of the Bankruptcy Code when they abuse the bankruptcy system to collect a debt or simply get it wrong, but must also now be cognizant of potential additional liability to non-debtors stemming from an improper filing. Yikes!