Gene R. Smith Corp. v. Terry's Tractor, Inc.
GENE R. SMITH CORPORATION, Plaintiff and Appellant, v. TERRY’S TRACTOR, INC., Et Al., Defendants and Respondents
- Area
- civil
- Panel
- Howard B. Wiener (author)
Analysis
The trial court dismissed the plaintiff's claims for malicious prosecution and abuse of process, ruling that federal bankruptcy law preempted the state court's subject matter jurisdiction. The California Court of Appeal affirmed the judgment, holding that state courts lack jurisdiction to adjudicate collateral attacks on bankruptcy petitions and that federal remedies under 11 U.S.C. § 303(i) are the exclusive means for such relief.
| Ruling reviewed | Standard | The court | The model |
|---|---|---|---|
Dismissal of malicious prosecution and abuse of process claims for lack of subject matter jurisdiction due to federal preemption.“The court dismissed the complaint as against all the defendants ruling that each cause of action was preempted by federal law and the state court had no subject matter jurisdiction over those claims.” | de novo | correct | agree with court agree with court |
Entry of judgment dismissing all defendants following judgment on the pleadings for one defendant.“Lacking subject matter jurisdiction over one defendant the court lacked subject matter jurisdiction over all.” | abuse of discretion | correct | agree with court agree with court |
Authorities
- relied: Gonzales v. Parks (1987) 830 F.2d 1033 — State courts lack jurisdiction to determine the appropriateness of bankruptcy filings; federal courts have exclusive jurisdiction over bankruptcy proceedings, and state tort actions for abuse of process or malicious prosecution regarding bankruptcy petitions are preempted.
- relied: Katchen v. Landy (1966) 382 U.S. 323 — There is no constitutional right to a jury trial in matters arising in bankruptcy, even if similar matters litigated outside bankruptcy would carry such a right.
- relied: Parklane Hosiery Co. v. Shore (1979) 439 U.S. 322 — The Seventh Amendment right to a jury trial has not been interpreted in a rigid manner and allows for procedural devices that diminish the civil jury's historic domain.
- relied: In re Godroy Wholesale Co., Inc. (1984) 37 Bankr. 496 — A bankruptcy court can dismiss an involuntary petition and retain jurisdiction solely to award costs, attorney’s fees, and damages, thereby eliminating the need for the debtor to remain in bankruptcy to seek redress.
The appellate opinion: sound — The court correctly applies the Ninth Circuit's holding in Gonzales v. Parks to establish that state courts lack subject matter jurisdiction over claims challenging the propriety of bankruptcy filings. It effectively addresses the plaintiff's constitutional argument by citing Katchen v. Landy to demonstrate that no Seventh Amendment right to a jury exists in bankruptcy proceedings, thereby validating the exclusive federal remedy under 11 U.S.C. § 303(i).
The trial court granted defendant Light Gallery's motion for judgment on the pleadings and dismissed Smith's malicious prosecution and abuse of process complaint as to all defendants, ruling that state tort claims based on the allegedly malicious filing of an involuntary bankruptcy petition are preempted by federal bankruptcy law so the state court lacked subject matter jurisdiction. The Court of Appeal affirmed, adopting the reasoning of Gonzales v. Parks (9th Cir. 1987) 830 F.2d 1033, holding that 11 U.S.C. § 303(i) is the exclusive remedy for bad-faith involuntary petitions, rejecting Smith's jury trial argument, and approving the dismissal of all defendants on a single defendant's motion.
| Ruling reviewed | Standard | The court | The model |
|---|---|---|---|
Dismissal of malicious prosecution and abuse of process causes of action as preempted by federal bankruptcy law, depriving the state court of subject matter jurisdiction“The court dismissed the complaint as against all the defendants ruling that each cause of action was preempted by federal law and the state court had no subject matter jurisdiction over those claims.” | de novo | correct | agree with court The opinion does not state a standard of review, but it independently decides a pure question of law on a judgment on the pleadings. Its conclusion that Congress's provision of a specific remedy in 11 U.S.C. § 303(i) (costs, fees, proximate and punitive damages for bad-faith involuntary petitions) displaces state tort remedies, and that exclusive federal jurisdiction over bankruptcy petitions precludes state courts from judging the propriety of such filings, follows Gonzales v. Parks and is consistent with the uniform treatment this issue has received. The court candidly acknowledges the procedural distinction (bankruptcy pending in Gonzales, dismissed here) and that the key Gonzales language may be dicta, but adopts its policy rationale; the court also answers Smith's practical objection by noting the bankruptcy court may dismiss the petition while retaining jurisdiction to award § 303(i) relief (In re Godroy Wholesale). The analysis is thin on general Supremacy Clause preemption doctrine but the result is well supported. |
Rejection of Smith's contention that confining his remedy to the bankruptcy forum unconstitutionally deprives him of a jury trial“there is no constitutional right to a jury in matters which arise in bankruptcy even if there is a right to a jury if those same matters were litigated outside bankruptcy.” | de novo | correct | agree with court Smith offered no authority and did not identify which constitution he invoked. The court reasonably treated the argument as a federal challenge to § 303(i) because a federal statute cannot be invalidated on state constitutional grounds, and relied on Katchen v. Landy and Parklane Hosiery v. Shore for the proposition that the Seventh Amendment does not guarantee a jury in matters arising in bankruptcy and has never been applied rigidly. Given the conclusory nature of the argument, the court's disposition is supportable. |
Entry of judgment dismissing all defendants after only one defendant (Light Gallery) moved for judgment on the pleadings“we conclude the action here was a prudent and economical use of judicial resources.” | unclear | correct | agree with court Addressed in footnote 1. The court acknowledges that sweeping in non-moving defendants may be improper in some circumstances but holds it was proper here because the defect was lack of subject matter jurisdiction, which applied identically to every defendant on the same claims. Because subject matter jurisdiction cannot be conferred by a party's failure to move and the court must dismiss when it lacks jurisdiction, the reasoning is sound, though the court cites no authority for it. |
Authorities
- relied: Gonzales v. Parks (1987) 830 F.2d 1033 — Filings of bankruptcy petitions are a matter of exclusive federal jurisdiction; state courts may not adjudicate tort claims (such as abuse of process) attacking the propriety of a bankruptcy filing, and Congress's authorization of specific sanctions for frivolous or bad-faith petitions implicitly rejects other penalties including state tort damages.
- relied: In re Godroy Wholesale Co., Inc. (1984) 37 Bankr. 496 — A bankruptcy court may dismiss an involuntary petition while retaining jurisdiction to award the debtor costs, attorney's fees and damages under 11 U.S.C. § 303(i).
- relied: Katchen v. Landy (1966) 382 U.S. 323 — There is no constitutional right to a jury trial in matters arising in bankruptcy even where a jury would be available if the same matters were litigated outside bankruptcy.
- relied: Parklane Hosiery Co. v. Shore (1979) 439 U.S. 322 — Procedural devices developed since 1791 that diminish the civil jury's historic domain are not necessarily inconsistent with the Seventh Amendment; the jury right is not interpreted rigidly.
The appellate opinion: sound with gaps — The court reaches a result that has been consistently followed: that § 303(i) and exclusive federal jurisdiction over bankruptcy petitions displace state malicious prosecution and abuse of process claims premised on an involuntary bankruptcy filing, and it candidly addresses the dicta and procedural-posture problems with Gonzales while answering Smith's practical and jury trial objections. The gaps are that the court does not frame the issue under general Supremacy Clause implied-preemption doctrine or cite any California or U.S. Supreme Court preemption authority, relies on acknowledged dicta from a Ninth Circuit case that is not binding on it, and offers no authority for dismissing non-moving defendants.
Opinion — Wiener
Opinion
WIENER, J.Plaintiff Gene R. Smith Corporation (Smith) appeals the judgment dismissing all defendants after the court ruled Smith’s causes of action for abuse of process and malicious prosecution for the allegedly wrongful and malicious prosecution of an involuntary bankruptcy instituted by the defendants were preempted by federal law, depriving the trial court of subject matter jurisdiction. We affirm.
Factual and Procedural Background
Smith, a developer and builder, had commercial dealings with defendants, Terry’s Tractor, Inc., George Larabee doing business as L & L Construction and L & L Electric, and Walter L. Schwaar doing business as the Light Gallery. Allegedly Smith failed to pay Terry’s Tractor’s bill for labor and material resulting in Tractor’s petitioning under chapter 11 to place Smith in involuntary bankruptcy. L & L and the Light Gallery as creditors joined in that proceeding. Smith successfully moved to dismiss the petition *953 and then filed this action for malicious prosecution and abuse of process, alleging the defendants willfully and maliciously filed and prosecuted the involuntary bankruptcy. The Light Gallery successfully moved for judgment on the pleadings. The court dismissed the complaint as against all the defendants ruling that each cause of action was preempted by federal law and the state court had no subject matter jurisdiction over those claims.
Discussion
To a great extent the outcome of this appeal hinges on our interpretation of Gonzales v. Parks (9th Cir. 1987) 830 F.2d 1033. Because Gonzales materially influenced the trial court’s favorable ruling the defendants understandably urge that Gonzales is persuasive and should govern our analysis. Smith, on the other hand, vigorously argues Gonzales is factually and procedurally distinguishable from his case and in any event its broad language adversely affecting him is simply dicta. Even though there is some technical merit to Smith’s assertion, we conclude Gonzales correctly states the considerations controlling our review and on the basis of those considerations we affirm the judgment.
Gonzales involved the following.
Attorney Michael Dodge filed a chapter 11 bankruptcy petition for his clients Richard and Juliana Gonzales. Apparently one purpose of the bankruptcy was to stay a foreclosure of the Gonzales’ house by Barbara Parks. Pending the bankruptcy proceedings Parks sued the Gonzaleses and Dodge in state court alleging the debtors’ filing of the voluntary bankruptcy was an abuse of process. Parks entered a default against the Gonzaleses and obtained a $10,000 default judgment against them. Later Dodge and the Gonzaleses filed an adversary proceeding in the bankruptcy court against Parks and her counsel, Jerome Parks, seeking relief from the state court action. The bankruptcy court declared the state court judgment void as violating the automatic stay provisions of the bankruptcy act, vacated the judgment and awarded fees to the bankrupt and to their counsel. On appeal, the district court affirmed the bankruptcy’s court judgment and fee award also awarding sanctions against Parks’s counsel. Except as to the sanctions, the Ninth Circuit affirmed emphasizing the federal courts’ exclusive jurisdiction over bankruptcy proceedings. “Filings of bankruptcy petitions are a matter of exclusive federal jurisdiction. State courts are not authorized to determine whether a person’s claim for relief under a federal law, in a federal court, and within that court’s exclusive jurisdiction, is an appropriate one. Such an exercise of authority would be inconsistent with and subvert the exclusive jurisdiction of the federal courts by allowing state courts to create their own standards as to when persons may properly seek *954 relief in cases Congress has specifically precluded those courts from adjudicating.” (Gonzales, supra, 830 F.2d at p. 1035, fn. omitted.)
Smith points out that there is a significant procedural difference between Gonzales and the case before us stressing that in Gonzales, unlike the facts here, the bankruptcy case was pending at the time the state court action was filed. While we agree with Smith’s observation that a case must be interpreted in the context in which it was decided, we cannot overlook Gonzales’s broad - and we believe correct - policy statements. “That Congress’ grant to the federal courts of exclusive jurisdiction over bankruptcy petitions precludes collateral attacks on such petitions in state courts is supported by the fact that remedies have been made available in the federal courts to creditors who believe that a filing is frivolous. Debtors filing bankruptcy petitions are subject to a requirement of good faith, [citation] and violations of that requirement can result in the imposition of sanctions, ... 11 U.S.C.A. § 303(i)(2) (Supp. 1987) (authorizing the imposition of sanctions on petitions for involuntary bankruptcy petitions filed in bad faith). Congress’ authorization of certain sanctions for the filing of frivolous bankruptcy petitions should be read as an implicit rejection of other penalties, including the kind of substantial damage awards that might be available in state court tort suits. Even the mere possibility of being sued in tort in state court could in some instances deter persons from exercising their rights in bankruptcy. In any event, it is for Congress and the federal courts, not the state courts, to decide what incentives and penalties are appropriate for use in connection with the bankruptcy process and when those incentives or penalties shall be utilized.” (Gonzales, supra, 830 F.2d at pp. 1035-1036, italics added.)
We agree with the foregoing even if those comments are properly described as dicta.
Title 11 United States Code section 303(i) permits the bankruptcy court on dismissal of a petition to award a debtor costs, reasonable attorney’s fees and any damages proximately caused by the taking of the debtor’s property. If the involuntary petition is filed in bad faith the bankruptcy court has the additional power to award damages proximately caused by such filing and punitive damages.
This provision reflects Congress’s intent that the case-by-case development of law relating to “bad faith” in this context should be accomplished in federal courts and not in state courts. The parties make no effort to distinguish the difference, if any, between conduct constituting “bad faith” and “malicious prosecution” treating both as virtually identical. On that assumption, it would indeed be anomalous and, to say the least, inconsistent with this legislative intent for state courts to develop a different, more *955 liberal definition of “bad faith” for malicious prosecution purposes than that developed in the federal system. Different standards defining identical conduct adds an unnecessary and confusing component to the uniform law to be applied in bankruptcy proceedings. The additional risk that substantial damage awards in state courts would create a material disincentive to those seeking to use the bankruptcy laws only exacerbates the problem. The determination of damages in state courts should not determine the potential cost of entry into the federal bankruptcy system.
Smith’s description of the injustice inflicted on a debtor improperly and maliciously placed in involuntary bankruptcy who wishes to seek appropriate sanctions from those responsible for doing so is certainly of concern. Smith explains the only way the aggrieved debtor will be able to obtain redress in such circumstances will be to remain in bankruptcy which involves further harm to a party’s ability to obtain credit, enter into contracts or to run its business.
In addition to our unwillingness to accept Smith’s factual predicate, which requires us to accept the adverse consequences of a bankruptcy pending for the sole purpose of awarding the debtor damages for the wrongful filing of an involuntary bankruptcy petition, we disagree with Smith’s legal predicate. The bankruptcy court can dismiss the involuntary bankruptcy petition eliminating the potential harm which Smith describes retaining jurisdiction for the sole purpose of awarding costs, attorney’s fees and damages. (In re Godroy Wholesale Co., Inc. (D. Mass. 1984) 37 Bankr. 496, 498.)
Smith correctly observes that limiting his remedy to the bankruptcy forum deprives him of a jury trial, but interestingly does not accompany his claim of unconstitutionality with any authority. We believe his omission is significant for a number of reasons. The most basic is our assumption that if there were such authority he would have directed us to it. Also omitted in Smith’s conclusionary argument is whether he is relying on the United States or California Constitutions. We assume his argument rests on the former since a federal statute can be invalidated only on federal and not on state constitutional grounds. In effect Smith challenges the constitutionality of 11 United States Code section 303(i), a virtually impossible argument to make since there is no constitutional right to a jury in matters which arise in bankruptcy even if there is a right to a jury if those same matters were litigated outside bankruptcy. (See e.g. Katchen v. Landy (1966) 382 U.S. 323, 336-337 [15 L.Ed.2d 391, 401, 86 S.Ct. 467].) The right to a jury has never been interpreted in a rigid manner. “[M]any procedural devices developed since 1791 that have diminshed the civil jury’s historic domain have been found not to be inconsistent with the Seventh *956 Amendment. See Galloway v. United States, 319 U.S. 372, 388-393 (directed verdict does not violate the Seventh Amendment); Gasoline Products Co. v. Champlin Refining Co., 283 U.S. 494, 497-498 (retrial limited to question of damages does not violate the Seventh Amendment even though there was no practice at common law for setting aside a verdict in part); Fidelity & Deposit Co. v. United States, 187 U.S. 315, 319-321 (summary judgment does not violate the Seventh Amendment).” (Parklane Hosiery Co. v. Shore (1979) 439 U.S. 322, 336 [58 L.Ed.2d 552, 565, 99 S.Ct. 645].)
Disposition
The judgment is affirmed. 1
Kremer, P. J., and Huffman, J., concurred.
Appellant’s petition for review by the Supreme Court was denied July 13, 1989.
Our disposition reflects our rejection of Smith’s argument that the court erred in entering judgment after granting the Light Gallery’s motion for judgment on the pleadings and his re-quest that we vacate the judgment. The entry of a judgment implementing a court’s order oc-curs routinely for a number of valid reasons. Smith’s implicit quarrel with the judgment here is that it removes all the defendants when only a single defendant brought the motion. Al-though in certain circumstances the trial court’s broad sweep might be improper we conclude the action here was a prudent and economical use of judicial resources. Lacking subject mat-ter jurisdiction over one defendant the court lacked subject matter jurisdiction over all.
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