Sutton 58 Associates LLC v. Philip Pilevsky ( 2020 )

State of New York OPINION
Court of Appeals This opinion is uncorrected and subject to revision
before publication in the New York Reports.
No. 80
Sutton 58 Associates LLC,
Appellant,
v.
Philip Pilevsky, et al.,
Respondents.
Ronald S. Greenberg, for appellant.
Robert S. Smith, for respondents.
American College of Mortgage Attorneys, New York Bankers Association, Melanie L.
Cyganowski, Bullard Law Group, PLLC, Legal Services NYC Bankruptcy Assistance
Project, and Brooklyn Bar Association Volunteer Lawyers Project, amici curiae.
STEIN, J.:
On this appeal, we are asked to determine whether federal bankruptcy law preempts
plaintiff’s state law claims asserted against non-debtor third parties for tortious interference
with a contract. Giving due consideration to the presumption against preemption, we hold
that plaintiff’s state law claims are not preempted under the circumstances presented here.
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I.
Plaintiff Sutton 58 Associates, LLC loaned $147,250,000 to nonparties BH Sutton
Mezz LLC (Mezz Borrower) and Sutton 58 Owner LLC (Mortgage Borrower)
(collectively, the borrowers) in order to finance the development and construction of an
apartment complex on a Manhattan property owned by Mortgage Borrower. Mezz
Borrower owned 100% of the membership interest in Mortgage Borrower. The loan
contracts consisted of a mezzanine loan agreement between plaintiff and Mezz Borrower,
as well as acquisition and building loan agreements between plaintiff and Mortgage
Borrower. These agreements forbade the borrowers from incurring any debt other than
short-term trade debt, from acquiring any unrelated assets and from engaging in other
business, and compelled them to remain “Special Purpose Bankruptcy Remote” entities.1
The agreements also prohibited the sale or transfer of any direct or indirect interest in either
the property or the borrowers without plaintiff’s consent. It is undisputed that these
provisions were intended to ensure that, if the borrowers filed for bankruptcy, they would
be single-asset real estate entities and the bankruptcy process would, at the very least, be
expedited.2 Plaintiff and Mezz Borrower also entered into a pledge and security agreement,
1
As defined in the agreements, a special purpose bankruptcy remote entity is one which,
among other limitations, is organized for the sole purpose of owning property, engages in
no unrelated business, and holds no unrelated assets.
2
The Bankruptcy Code defines single asset real estate as “real property constituting a
single property or project, other than residential real property with fewer than [four]
residential units, which generates substantially all of the gross income of a debtor who is
not a family farmer and on which no substantial business is being conducted by a debtor
other than the business of operating the real property and activities incidental thereto” (11
USC § 101 [51B]). When a debtor is a single asset real estate entity, the Bankruptcy Code
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in which Mezz Borrower pledged its 100% membership interest in Mortgage Borrower as
collateral for the mezzanine loan. This agreement gave plaintiff the right to foreclose upon
and sell that membership interest—and, by extension, the development site—in the event
of a default.
When the loans matured in January 2016, the borrowers defaulted. Plaintiff issued
notices of default and sought to conduct a UCC foreclosure sale of Mezz Borrower’s
membership interest in Mortgage Borrower pursuant to the pledge and security agreement.
Shortly before the scheduled sale, the borrowers unsuccessfully moved in Supreme Court
for a preliminary injunction to block the sale. A few days after Supreme Court ordered
that the sale proceed at the end of February 2016, Mezz Borrower filed a voluntary petition
for chapter 11 bankruptcy in federal court.
Plaintiff initially moved to dismiss Mezz Borrower’s bankruptcy petition on the
ground that it was filed in bad faith or, alternatively, sought to lift the automatic stay
imposed under bankruptcy law in order to permit plaintiff to pursue the sale. 3 Thereafter,
in April 2016, Mortgage Borrower separately filed a voluntary petition for chapter 11
bankruptcy in federal court. After the Bankruptcy Court commented that plaintiff’s motion
provides for expedited filing of a reorganization plan or the commencement of payments
to a creditor in order to avoid lifting of the automatic stay and foreclosure on the property
(see 11 USC § 362 [d] [3]).
3
The filing of a bankruptcy petition “operates as a stay” of, among other things, any
actions or proceedings against the debtor that were or could have been commenced before
the bankruptcy proceeding, the enforcement of judgments already obtained against the
debtor, and any acts to obtain or exercise control over the property of the bankruptcy estate,
create or enforce a lien against the property of the estate or debtor, or to collect or recover
a claim against the debtor that arose before the bankruptcy proceeding (11 USC § 362 [a]).
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to dismiss Mezz Borrower’s bankruptcy petition was “premature,” plaintiff withdrew that
motion without prejudice. Plaintiff did not seek to renew the motion during the bankruptcy
proceedings or otherwise move to dismiss Mortgage Borrower’s bankruptcy petition.
The bankruptcy cases were consolidated for joint administration. Plaintiff
cooperated with a creditors’ committee to develop and file a joint plan of liquidation. As
part of the plan of liquidation, an auction sale was held in December 2016, during which
plaintiff placed the winning credit bid—in the amount of $86 million—for the project site.4
In early 2017, plaintiff and the borrowers’ other creditors voted to accept the plan of
liquidation, which Bankruptcy Court confirmed.
Meanwhile, in September 2016, plaintiff commenced this action in state court
against defendants Philip Pilevsky, Michael Pilevsky, Seth Pilevsky, Prime Alliance Group
Ltd., and Sutton Opportunity LLC—various affiliated persons and entities—alleging that
defendants had tortiously interfered with the loan agreements between plaintiff and the
nonparty borrowers. According to plaintiff, defendants had engaged in a scheme to obtain
an ownership interest in the development project in violation of the loan agreements.
Plaintiff averred that, as part of this alleged scheme, defendants loaned $50,000 to Mezz
Borrower to retain counsel, transferred three rental apartments to Mortgage Borrower so
that it would no longer be a single asset real estate entity, and sold a 49% interest in BH
Sutton Owner LLC—the parent company of Mezz Borrower—to a Pilevsky entity, thereby
transferring to defendants an indirect interest in the borrowers and the development
4
Plaintiff submitted documents indicating that, by comparison, the appraisal value of the
property at the time of the planned foreclosure sale was approximately $180 million.
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project.5 Plaintiff asserted that these actions violated the covenants in the loan agreements
prohibiting the borrowers from incurring non-permitted indebtedness, owning other assets,
and transferring any interest in the borrowers, as well as those provisions requiring the
borrowers to remain special purpose bankruptcy remote entities. With respect to damages
sustained, plaintiff asserted that the conduct of defendants delayed its ability to exercise its
contractual remedies—because the bankruptcy proceeding was more protracted due to the
borrowers no longer qualifying as single asset real estate entities and having taken on
another creditor6—which, in turn, resulted in a significant loss in value of the development
site.
Defendants moved for summary judgment dismissing the complaint, as relevant
here, on the ground that the action was preempted by the Bankruptcy Code. Supreme Court
denied the motion, holding that the action was not preempted because it “d[id] not involve
the bankruptcy” and, instead, defendants were alleged to have interfered with “separate
contractual agreements.” On defendants’ appeal, the Appellate Division reversed and
granted defendants’ motion based upon its conclusion that plaintiff’s claims were
preempted by federal law because “plaintiff’s damages [arose] only because of the
bankruptcy filings” (168 AD3d 477 [1st Dept 2019]).
5
The only defendant that participated in the underlying bankruptcy proceeding was Prime
Alliance with respect to its loan to Mezz Borrower.
6
The loan was not alleged to be tortious on the basis that it facilitated the bankruptcy.
Rather, the loan allegedly violated the borrowers’ covenants not to accept any liabilities
other than “Permitted Indebtedness,” which provisions in the loan agreements were
intended to minimize the number of the borrowers’ creditors.
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Plaintiff appealed to this Court as of right (see CPLR 5601 [b] [1]).
II.
Plaintiff argues that the Appellate Division erroneously held that its tortious
interference claims are preempted by federal bankruptcy law. Plaintiff contends that
neither field nor conflict preemption precludes a New York court from adjudicating its tort
claims, observing that the borrowers’ bankruptcy proceedings were successfully concluded
and that plaintiff’s action against defendants—who were not the debtors in the bankruptcy
proceeding—did not pose any obstacle to resolution of those proceedings. Plaintiff does
not dispute that so-called bad-faith filing claims, or other tort claims premised upon
conduct within a bankruptcy proceeding, may be preempted. However, plaintiff asserts
that a distinction has been, and should be, drawn between such claims and those that, as
here, allege wrongful conduct by non-debtor defendants that occurred prior to the
bankruptcy proceeding and that are grounded in independent contractual obligations.
According to plaintiff, preemption would unfairly deprive it of any judicial forum or
remedy for defendants’ alleged wrongdoing and would upset the expectations of numerous
lenders for large-scale real estate projects governed by similar loan agreements.
In response, defendants urge us to uphold the dismissal of plaintiff’s claims on
preemption grounds. Defendants contend that federal law has occupied the field of
bankruptcy, to the exclusion of state law remedies. Defendants also assert that allowing
plaintiff’s tort claims to proceed in state court would conflict with federal bankruptcy law
because the potential liability against third parties would discourage lending to, and
counseling for, debtors—thereby indirectly chilling bankruptcy filings. As for plaintiff’s
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remedies, defendants argue that they are limited to those available against the debtors in
the bankruptcy proceeding—namely, a motion to dismiss the proceeding or for relief from
the automatic stay imposed under bankruptcy law.
Although the parties cite varied case law from across the country relating to
preemption in the bankruptcy context, no controlling precedent answers the question before
us. Defendants’ preemption arguments are not wholly implausible. Nevertheless,
defendants ultimately “bear[] the ‘considerable burden’ of overcoming the presumption
that Congress did not intend to preempt” plaintiff’s tortious interference claims (Nealy v
US Healthcare HMO, 93 NY2d 209, 218 [1999], quoting De Buono v NYSA–ILA Medical
and Clinical Services Fund, 520 U.S. 806, 814 [1997]). For the reasons discussed herein,
we conclude that defendants have not met that burden.
III.
The United States Constitution empowers Congress to establish uniform laws 7 on
the subject of bankruptcy (see US Const art I, § 8, cl 4), and Congress has effectuated this
power by enacting the Bankruptcy Code (see 11 USC 101 et seq.). The Supremacy Clause,
in turn, provides that federal law “shall be the supreme Law of the Land and the Judges in
every State shall be bound thereby, any Thing in the Constitution or Laws of any State to
the Contrary notwithstanding” (US Const art VI, cl 2). Therefore, “when federal and state
7
“The uniformity requirement is not a straightjacket that forbids Congress [from]
distinguish[ing] among classes of debtors, nor does it prohibit Congress from recognizing
that state laws do not treat commercial transactions in a uniform manner” (Railway Labor
Executives’ Assn. v Gibbons, 455 U.S. 457, 469 [1982]). Furthermore, “uniformity does not
require the elimination of any differences among the States in their laws governing
commercial transactions” (id.).
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law conflict, federal law prevails and state law is preempted” (Murphy v National
Collegiate Athletic Assn., 584 US ___, ___, 138 S. Ct. 1461, 1476 [2018]).
Preemption of state law may occur by express statutory provision or through
implication, the latter of which may be accomplished through either federal preemption of
the field of a particular subject matter or the existence of an irreconcilable conflict between
federal and state law (see Doomes v Best Tr. Corp., 17 NY3d 594, 601 [2011]; Balbuena v
IDR Realty LLC, 6 NY3d 338, 356 [2006]; Murphy, 584 US at ___, 138 S Ct at 1480).
“Field preemption occurs when federal law occupies a ‘field’ of regulation ‘so
comprehensively that it has left no room for supplementary state legislation’” (Murphy,
584 US at __, 138 S Ct at 1480, quoting R. J. Reynolds Tobacco Co. v Durham County,
479 U.S. 130, 140 [1986]; see People v First Am. Corp., 18 NY3d 173, 179 [2011]) or where
there is a “‘federal interest . . . so dominant that the federal system will be assumed to
preclude enforcement of state laws on the same subject’” (Arizona v United States, 567 U.S.
387, 399 [2012], quoting Rice v Santa Fe Elevator Corp., 331 U.S. 218, 230 [1947]).
Conflict preemption, on the other hand, has been found “where it is impossible for a private
party to comply with both state and federal requirements, or where state law stands as an
obstacle to the accomplishment and execution of the full purposes and objectives of
Congress,” the latter of which is often referred to as obstacle preemption (Freightliner
Corp. v Myrick, 514 U.S. 280, 287 [1995] [internal quotation marks and citations omitted];
see Balbuena, 6 NY3d at 356). These categories “are not rigidly distinct” and, regardless
of the type of preemption urged, “a litigant must point specifically to a constitutional text
or a federal statute that does the displacing or conflicts with state law” (Virginia Uranium,
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Inc. v Warren, ___ US ___, ___ 139 S. Ct. 1894, 1901 [2019] [internal quotation marks and
citations omitted]).
Ultimately, any preemption analysis requires that we “ascertain the intent of
Congress” (Doomes, 17 NY3d at 601 [internal quotation marks and citation omitted]; see
Wyeth v Levine, 555 U.S. 555, 565 [2009]). “[B]ecause the States are independent
sovereigns in our federal system,” the United States Supreme Court has “long presumed
that Congress does not cavalierly pre-empt state-law causes of action” (Medtronic, Inc. v
Lohr, 518 U.S. 470, 485 [1996]). Furthermore, “[i]n all pre-emption cases, and particularly
in those in which Congress has ‘legislated . . . in a field which the States have traditionally
occupied,’ [courts must] ‘start with the assumption that the historic police powers of the
States were not to be superseded by the Federal Act unless that was the clear and manifest
purpose of Congress’” (id., quoting Rice, 331 U.S. at 230; see Hillsborough County v
Automated Medical Laboratories, Inc., 471 U.S. 707, 716 [1985]). As the Supreme Court
has acknowledged, “there is no question that States possess the ‘traditional authority to
provide tort remedies to their citizens’ as they see fit” (Wos v E.M.A., 568 U.S. 627, 639-
640 [2013], quoting Silkwood v Kerr–McGee Corp., 464 U.S. 238, 248 [1984]; see CTS
Corp. v Waldburger, 573 U.S. 1, 19 [2014]). The presumption against preemption applies
to preemption in the bankruptcy context (see BFP v Resolution Trust Corporation, 511 U.S.
531, 546 [1994]), and defendants here must overcome “‘the starting presumption that
Congress does not intend to supplant state law’” (De Buono, 520 U.S. at 814, quoting New
York State Conference of Blue Cross & Blue Shield Plans v Travelers Ins. Co., 514 U.S.
645, 654 [1995]).
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Looking to congressional intent in regulating bankruptcy, the principal purposes of
the Bankruptcy Code are to give a “‘fresh start’ to the ‘honest but unfortunate debtor’”
(Marrama v Citizens Bank of Mass., 549 U.S. 365, 367 [2007], quoting Grogan v Garner,
498 U.S. 279, 286, 287 [1991]) by “provid[ing] a procedure by which . . . insolvent debtors
can reorder their affairs, make peace with their creditors, and enjoy ‘a new opportunity in
life and a clear field for future effort, unhampered by the pressure and discouragement of
preexisting debt’” (Grogan, 498 U.S. at 286, quoting Local Loan Co. v Hunt, 292 U.S. 234,
244 [1934]). The Bankruptcy Code also aims to allow corporations to restructure so as to
avoid liquidation (see generally NLRB v Bildisco & Bildisco, 465 U.S. 513, 528 [1984];
United States v Whiting Pools Inc., 462 U.S. 198, 203 [1983]), and to ensure fair distribution
of the bankrupt estate to creditors (see Union Bank v Wolas, 502 U.S. 151, 161 [1991];
Katchen v Landy, 382 U.S. 323, 328-329 [1966]).
To advance these congressional purposes, the Bankruptcy Code contains an intricate
and comprehensive framework governing voluntary and involuntary bankruptcy filings for
various persons and entities. The statutory scheme governs the filing and adjudication of
bankruptcy petitions, creditor claims, adversary proceedings and counterclaims. Although
the Bankruptcy Code incorporates state law in various respects, the Code generally
prescribes which debts are dischargeable and which claims are allowable, as well as
administration of the entire bankruptcy process. Further, the Code empowers the
Bankruptcy Court to prevent litigants from misusing the bankruptcy process by authorizing
the court, among other things, to address abuses of process (see 11 USC § 105 [a]), dismiss
certain petitions for abuse (see e.g. 11 USC §§ 303 [i] [2]; 707 [b]; 1112), grant relief from
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the automatic stay (see 11 USC § 362 [d] [1]), or issue sanctions for willful violations of
the stay (see 11 USC § 362 [k] [1]).
IV.
With the foregoing background in mind, we turn to application of the preemption
doctrine to the facts of this case. Defendants make no claim of express preemption.
Further, while defendants argue that field preemption precludes assertion of plaintiff’s tort
claims in state court due to the comprehensive federal regulation of bankruptcy
proceedings, in our view, this contention does not merit extended discussion. Certainly,
the Bankruptcy Code thoroughly governs the litigation and settlement of controversies
between debtors and creditors in connection with the bankruptcy estate; after all, Congress
granted to federal District Courts “exclusive jurisdiction of all cases under title 11” and
“original but not exclusive jurisdiction of all civil proceedings arising under title 11, or
arising in or related to cases under title 11” (28 USC § 1334 [a], [b]), which they typically
refer to Bankruptcy Courts (see 28 USC § 157 [a]). Indeed, the Bankruptcy Code generally
sets out the law that applies to bankruptcy petitions and claims filed in each bankruptcy
case. However, defendants cite no provision of the Code that suggests a congressional
intent to interfere with the authority of state courts to provide traditional tort remedies for
claims brought by a non-debtor against alleged non-debtor tortfeasors for interference with
contractual agreements that exist independently of a bankruptcy proceeding (cf. Balbuena,
6 NY3d at 357). In fact, defendants concede that the Bankruptcy Code would provide no
remedy for plaintiff’s claims as asserted against defendants. To be sure, congressional
silence as to remedies against third parties may not be dispositive. However, defendants
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point to nothing in the language, structure, or history of the Bankruptcy Code to support
their contention that—in addition to occupying the field of bankruptcy adjudication as
between debtors and creditors—Congress clearly and manifestly expressed an intent to
encroach upon the state’s dominion by foreclosing tort remedies for claims that are not
asserted by or against a debtor and do not affect the bankruptcy estate, thereby removing
all available judicial recourse for plaintiffs injured by tortious conduct of non-debtors if
there is any tangential connection to a bankruptcy proceeding (see Rosenberg v DVI
Receivables XVII, LLC, 835 F3d 414, 419 [3d Cir 2016]). To the extent that federal law
occupies the field of bankruptcy, the state law claims presented here do not trigger such
preemption because they do not implicate debtor-creditor disputes relating to the
bankruptcy estate.
The more complex question is whether plaintiff’s tortious interference claims are
impliedly preempted in accordance with principles of conflict preemption insofar as
defendants suggest that permitting such claims to proceed in state court will undermine the
accomplishment and execution of the full purposes and objectives of the Bankruptcy Code.
“What is a sufficient obstacle [for purposes of preemption] is a matter of judgment, to be
informed by examining the federal [law] as a whole and identifying its purpose and
intended effects” (Crosby v National Foreign Trade Council, 530 U.S. 363, 373 [2000]).
Significantly, “the conflict between state law and federal policy must be a sharp one” and
“federal law does not preempt state law under obstacle preemption analysis unless the
repugnance or conflict is so direct and positive that the two acts cannot be reconciled or
consistently stand together” (Figueroa v Foster, 864 F3d 222, 235 [2d Cir 2017] [internal
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quotation marks and citations omitted]; Witco Corp. v Beekhuis, 38 F3d 682, 687 [3d Cir
1994]; see also Boyle v United Technologies Corp., 487 U.S. 500, 507 [1988]).
In their bid for dismissal of plaintiff’s claims, defendants do not identify any specific
Bankruptcy Code provisions that have preemptive effect. Instead, defendants cite to
various court cases addressing bad-faith filing or abuse of process claims, and analogize
plaintiff’s tortious interference causes of action to such claims. In that regard, courts have
most often confronted preemption in the bankruptcy context in relation to attempts by
creditors and debtors to lodge state tort claims against each other for malicious prosecution
or abuse of process, alleging bad-faith filings in a bankruptcy proceeding or wrongful
conduct within that proceeding. Judicial authorities are divided on whether such claims
are preempted. However, it is fair to say that the majority of courts have held that such tort
claims—those premised upon a bankruptcy filing, itself, or other alleged wrongful conduct
within a bankruptcy proceeding—are preempted (see e.g. Metcalf v Fitzgerald, 333 Conn
1, 3, 214 A3d 361, 365 [2019], cert denied ___ US ___, 140 S. Ct. 854 [2020]; Longnecker
v Deutsche Bank Nat. Tr. Co., 842 NW2d 680 [Iowa Ct App 2013]; PNH, Inc. v Alfa Laval
Flow, Inc., 2011-Ohio-4398, ¶ 31, 130 Ohio St 3d 278, 285, 958 NE2d 120, 127 [2011];
Stone Crushed Partnership v Kassab Archbold Jackson & O'Brien, 589 Pa 296, 303, 908
A2d 875, 880 [2006]; Pertuso v Ford Motor Credit Co., 233 F3d 417, 426 [6th Cir 2000];
Smith v Mitchell Const. Co., Inc., 225 Ga App 383, 386, 481 SE2d 558, 561 [Ga Ct App
1997]; MSR Expl., Ltd. v Meridian Oil, Inc., 74 F3d 910, 911 [9th Cir 1996]; Gonzales v
Parks, 830 F2d 1033, 1035 [9th Cir 1987]; but see Graber v Fuqua, 279 S.W.3d 608, 613-
614 [Tex 2009]; U.S. Express Lines Ltd. v Higgins, 281 F3d 383, 393 [3d Cir 2002]).
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We need neither adopt nor reject the reasoning of these courts to resolve the instant
appeal. It suffices to say that, where a tort claim is premised upon a bankruptcy filing,
itself, or on conduct that occurs within a bankruptcy proceeding and under the purview of
the Bankruptcy Court, the obstacle presented by state tort remedies is more readily
discerned. Parallel tort actions in state court against a debtor or creditor based on that
party’s alleged wrongful conduct in a bankruptcy proceeding risks subverting the
Bankruptcy Court’s authority to adjudicate the validity of bankruptcy filings, or otherwise
producing inconsistent standards or outcomes between state and federal law. Indeed, the
Bankruptcy Code provides remedies for such claims as asserted between debtors and
creditors by, for example, authorizing dismissal of bad-faith filings and empowering the
Bankruptcy Court to take measures to prevent any abuse of process. While some courts
have reasoned that “[s]tate 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” (Gonzales, 830 F2d at 1035; see e.g. Metcalf, 333 Conn
at 13, 214 A3d at 370), in our view, this same obstacle is not presented under the
circumstances here because no question is raised as to the propriety of the bankruptcy
proceedings. Plaintiff’s tortious interference claims—asserted against defendants who
were not debtors in the bankruptcy proceedings and which are premised upon conduct that
occurred prior to those proceedings—are peripheral to, and do not impugn, the bankruptcy
process.
Significantly, plaintiff seeks to sue non-debtor third parties for alleged wrongful
conduct that occurred prior to, and separate from, the bankruptcy proceedings. The
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Bankruptcy Code, however, is overwhelmingly concerned with the debtor’s estate.
Bankruptcy law and, in particular, chapter 11 bankruptcy, aims to “permit[] business
debtors to reorganize and restructure their debts in order to revive the debtors’ businesses”
and “maximiz[e] the value of the bankruptcy estate” (Toibb v Radloff, 501 U.S. 157, 163
[1991]). The accomplishment of these purposes relies upon the proper composition and
allocation of the debtor’s estate. Consequently, federal courts have “exclusive jurisdiction
. . . of all the property, wherever located, of the debtor as of the commencement of such
case, and of property of the estate” (28 USC § 1334 [e] [1]).
In light of these purposes of the Bankruptcy Code, a significant component of a
preemption analysis in the bankruptcy context must be the degree to which the state claims
interfere with the administration of the debtor’s estate. Here, resolution of plaintiff’s
claims in state court does not risk interference with the Bankruptcy Court’s control over,
or disposition of, the bankruptcy estate insofar as the present suit does not impair the
debtors’ estates. The debtors in the bankruptcy proceedings—i.e., the borrowers—are
unaffected by whether plaintiff prevails on its tort claims against defendants, and the state
action has no impact on the borrowers’ ability to obtain a “fresh start” (Marrama, 549 U.S.
at 367 [internal quotation marks and citations omitted]).
It is not disputed that valid contracts existed between plaintiff and the borrowers.
Plaintiff’s claims arising out of the borrowers’ breach of those contracts as asserted against
the borrowers were resolved by the bankruptcy proceeding. Here, plaintiff alleges that
defendants knew of the relevant contractual terms and deliberately induced the borrowers’
violations of those terms prior to the bankruptcy proceedings. In other words, plaintiff’s
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allegations state a claim for tortious interference with contract, and the remedy for that tort
will not affect the debtor’s estate. As such, these claims will not encroach upon the
province of the bankruptcy court. Stated simply, plaintiff’s claims “do[] not require the
adjudication of rights and duties of creditors and debtors under the Bankruptcy Code”
(Davis v Yageo Corp., 481 F3d 661, 679 [9th Cir 2007]; cf. In re Extended Stay Inc., 435
B.R. 139, 151-152 [SD NY 2010]).
Rather, plaintiff alleges that certain conduct engaged in by defendants—before the
bankruptcy proceedings were even commenced—tortiously interfered with its contractual
rights under various loan agreements. Litigation of those claims will require resolution of
whether: plaintiff had a valid contract with the borrowers; defendants had knowledge of
that contract and its relevant terms; defendants intentionally and improperly induced a
breach of that contract; and plaintiff sustained damages caused by that conduct (see Oddo
Asset Mgt. v Barclays Bank PLC, 19 NY3d 584, 594 [2012]; White Plains Coat & Apron
Co., Inc. v Cintas Corp., 8 NY3d 422, 426 [2007]). Contrary to the dissent’s assertion, our
state courts will not be asked to determine whether the borrowers’ bankruptcy petitions
were filed in bad faith or whether defendants engaged in some wrongful conduct during
the bankruptcy proceedings themselves. Regardless of whether the borrowers filed for
bankruptcy in good or bad faith (see generally 11 USC § 362 [d] [1]), “plaintiff may
recover damages for tortious interference with contractual relations even if defendant[s]
. . . w[ere] engaged in lawful behavior” to the extent that their conduct, as non-debtors, is
not alleged to have been in violation of the Bankruptcy Code (NBT Bancorp v
Fleet/Norstar Fin. Group, 87 NY2d 614, 621 [1996]). As defendants may be found to have
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tortiously interfered with plaintiff’s contractual rights prior to the bankruptcy proceedings
without any inquiry by the state court into whether any provision of the Bankruptcy Code
was violated, those cases relied on by defendants and the dissent addressing preemption of
bad-faith filing or abuse of process claims as between debtors and creditors are inapposite.
Defendants and the dissent point to Choy v Redland Ins. Co. (103 Cal App 4th 789,
796, 127 Cal Rptr 2d 94 [Cal Ct App 2002]) and Astor Holdings, Inc. v Roski (325 F Supp
2d 251, 263 [SD NY 2003]) as compelling support for the conclusion that preemption is
applicable here. Reliance on these cases is unpersuasive. In Choy, a California court
concluded that the plaintiff’s claim was preempted where plaintiff alleged that the
defendants “induced” a debtor to “file a bankruptcy petition” in “order to benefit
themselves” (103 Cal App 4th at 801, 127 Cal Rptr 2d at 102). Likewise, Astor “involved
allegations that the defendant induced a third party to file for bankruptcy, harming the
plaintiff” (325 F Supp 2d at 262). Unlike in Choy and Astor, where the filing of the
bankruptcy petitions themselves was “the basis” of the plaintiffs’ claims (id.), plaintiff here
does not allege that defendants induced the borrowers’ bankruptcy petition but, rather, that
they induced breaches of independent contractual provisions prohibiting asset and interest
transfers and certain types of indebtedness.8
Federal caselaw addressing bankruptcy preemption of state-law tort claims against
third parties differentiates between those claims that are based on conduct that occurs
8
Indeed, the District Court permitted certain of the plaintiff’s claims in Astor to proceed,
including a claim that the defendant had tortiously interfered with a bankruptcy settlement
agreement between the plaintiff and a debtor (see Astor Holdings, Inc. v Roski, 325 F Supp
2d 251, 270 [SD NY 2003]).
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during bankruptcy, and conduct undertaken by a third party before commencement of a
bankruptcy proceeding. Contrary to the dissent’s view, those cases neither find preemption
merely because some fact questions might overlap with bankruptcy proceedings, nor base
preemption on whether the damages resulting from a state-law tort or contract action would
be calculated by the delay caused by the bankruptcy proceedings.
As the dissent observes, the Ninth Circuit Court of Appeals has held that federal law
preempts state courts from determining a creditor’s claim against a debtor asserting that
the filing of a bankruptcy petition was an abuse of process (see Gonzales v Parks, 830 F2d
1033, 1035 [9th Cir 1987]) and a debtor’s allegation that a creditor’s assertion of a claim
in a bankruptcy proceeding constituted malicious prosecution (see MSR Expl., Ltd. v
Meridian Oil, Inc., 74 F3d 910, 911 [9th Cir 1996]; see also In re Miles, 430 F3d 1083,
1086 [9th Cir 2005] [holding that federal law preempted state claims alleging that “various
(involuntary) bankruptcy filings and/or prosecution of them caused great emotional,
physical, mental and psychological suffering and distress”]). However, the Ninth Circuit’s
holding in Davis v Yageo Corp. (481 F3d 661, 679 [9th Cir 2007]) undercuts the dissent’s
view that these cases support the proposition that any tort claims alleging that the damages
incurred are causally connected to a bankruptcy proceeding are preempted.
In Davis, the complaint of minority shareholders alleged “that the directors and
majority shareholder engaged in self-dealing to the detriment of the corporation through
their decision to pursue bankruptcy and sought damages for breach of fiduciary duty under
California state law” (id. at 679). The defendants argued that the plaintiffs’ state law causes
of action were preempted because they essentially constituted claims that defendants had
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- 19 - No. 80
“improperly used the bankruptcy process” (id. at 678). The Ninth Circuit clarified that its
prior cases, including Gonzales v Parks (830 F2d 1033), MSR Expl., Ltd. v Meridian Oil,
Inc. (74 F3d 910) and In re Miles (430 F3d 1083), “hold only that state law causes of action
for abuse of process and malicious prosecution involving conduct that occurred during
bankruptcy are preempted” (Davis, 481 F3d at 678). The Court explained that, by contrast,
the plaintiffs’ claims in Davis were not preempted because they “concern[ed] conduct that
occurred prior to bankruptcy” and did “not require the adjudication of rights and duties of
creditors and debtors under the Bankruptcy Code” (id. at 678, 679). The same is true here.
Furthermore, the Ninth Circuit declined to hold the claims preempted despite the fact that
the plaintiffs’ damages could be traced to the bankruptcy proceeding, as the measure of the
damages alleged was the difference in the value of the company’s shares before and after
the defendants’ decision to file for bankruptcy (see id. at 674). Thus, the Davis court
recognized that it is the nature of the legal claim, not the measure of damages, that is
relevant to determining whether a state law claim is preempted.
As the dissent observes, plaintiff could have pursued a request for dismissal of the
bankruptcy proceedings or relief from the automatic stay. However, the Bankruptcy
Court’s determination of any such request, while potentially reducing the amount of
plaintiff’s ultimate damages, would not have resolved the question of whether defendants’
conduct was tortious and, as already noted, defendants do not claim that any remedy was
available to plaintiff in the bankruptcy proceedings to compensate plaintiff for defendants’
alleged wrongdoing. Thus, this is not a situation where state and federal law provide “two
separate remedies” for identical grievances, thereby leading to an inevitable conflict
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- 20 - No. 80
(compare Garner v Teamsters, 346 U.S. 485, 499 [1953] [state remedy of granting
injunction against picketing conflicted with federal law where federal law authorized
National Labor Relations Board to issue cease and desist order or injunction if picketing
violated federal labor law]).
In addition, viewing the Bankruptcy Code as a whole to discern the relevant
congressional intent, it is noteworthy that the Code expressly authorizes the court to award
judgment for monetary damages “proximately caused by” a bad-faith petition or punitive
damages for a bad-faith petition only in the context of involuntary bankruptcy petitions (11
USC § 303 [i] [2]). No comparable statutory authorization for compensatory monetary
damages exists in voluntary proceedings, weakening defendants’ argument in support of
federal preemption here (see In re Repository Tech., Inc., 601 F3d 710, 724 [7th Cir 2010]).
In lieu of an express federal remedy authorizing monetary damages for bad-faith voluntary
bankruptcy petitions—such as the one that exists for involuntary petitions filed in bad
faith—the dissent offers several alternatives, none of which would permit recovery of the
tort damages sought here and none of which address wrongs committed by a non-debtor
third party. Dismissal of the bankruptcy petition (see generally 11 USC § 1112 [b]) or
lifting of the automatic stay (see 11 USC § 362 [d] [1])—the remedies relied on by
defendants and the dissent to support preemption—merely operate to prevent future
damages from accumulating; such remedies do not compensate for past injuries. Similarly,
the sanctions available under the Federal Rules of Bankruptcy Procedure do not, and are
not intended to, compensate an injured third party (see Federal Rules of Bankruptcy
Procedure, Rule 9011 [c]). The existence of these remedies, then, is insufficient evidence
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- 21 - No. 80
of Congress’s preemptive intent with respect to actions such as the instant one, inasmuch
as none of the remedies extend to the pre-filing conduct of third-party tortfeasors (cf. In re
Repository Tech., Inc., 601 F3d at 724 [drawing distinction between voluntary and
involuntary bad-faith filings in complete preemption analysis based on the lack of a
damages remedy in voluntary petition cases]). Under these circumstances, any obstacle
presented by plaintiff’s tort claims, to the extent it exists, is simply too tenuous to trigger
preemption.
A different conclusion is not necessitated by defendants’ argument that, when the
alleged tortious conduct consists of a scheme to hinder a creditor’s ability to obtain
expeditious resolution of a bankruptcy proceeding, permitting plaintiffs to assert tortious
interference claims in state court against non-debtors may generate some tension between
the state court action and the bankruptcy proceeding insofar as the alleged damages may
flow from the delay occasioned by the latter. “The mere fact of ‘tension’ between federal
and state law is generally not enough to establish an obstacle supporting preemption,
particularly when the state law involves the exercise of traditional police power” (Madeira
v Affordable Hous. Found., Inc., 469 F3d 219, 241 [2d Cir 2006]; see Silkwood, 464 U.S. at
256; see also Davis, 481 F3d at 679).
Defendants and various amici speculate that permitting plaintiff’s state law claims
to proceed will open the floodgates of litigation against attorneys who facilitate bankruptcy
filings or provide other legal advice to debtors, debt counseling agencies, restructuring
firms, and lenders to distressed borrowers. We are confident that these concerns are
overstated and, in any event, more appropriately addressed through the proper application
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- 22 - No. 80
of our tort law. In that regard, while we do not opine on the merits of plaintiff’s tortious
interference claims here, we note that New York courts have been skeptical of the viability
of claims that attorneys, acting as agents of their clients, may be liable for tortious
interference based on the provision of legal advice (see e.g. Little Rest Twelve, Inc. v Zajic,
137 AD3d 540, 541 [1st Dept 2016]; Burger v Brookhaven Med. Arts Bldg., 131 AD2d
622, 623 [2d Dept 1987]; Kartiganer Assoc. v Town of New Windsor, 108 AD2d 898, 899
[2d Dept 1985], lv dismissed 65 NY2d 925 [1985]; Goldner v Sullivan, Gough, Skipworth,
Summers & Smith, 105 AD2d 1149, 1150 [4th Dept 1984]). Liability against debt
counseling organizations on such a theory likewise seems speculative; many potential
bankruptcy petitioners are financially bereft and close to breaching contracts with creditors,
if not already in breach, due to their inability to satisfy their financial obligations. Plaintiffs
alleging tortious interference may have difficulty establishing the elements of the claim,
such as causation or improper inducement on the part of such agencies. Finally, we are not
persuaded that any remaining risk of liability assumed by lenders who intentionally and
improperly induce breaches of known contractual obligations by an entity that
subsequently files for bankruptcy sufficiently “frustrate[s] ‘a significant objective’” of the
Bankruptcy Code so as to compel preemption (Doomes, 17 NY3d at 603, quoting
Williamson v Mazda Motor of America, Inc., 562 U.S. 323, 330 [2011]).9
9
The dissent notes that plaintiff has repurchased the property and received a judgment
against the loan guarantors for at least part of the funds loaned to borrowers (dissenting op
at 32). Needless to say, the fact that this plaintiff may have secured legal entitlement to
recover from other parties a portion of its alleged damages resulting from defendants’
conduct is irrelevant to the preemption question before us.
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- 23 - No. 80
In sum, defendants have failed to meet their heavy burden of establishing that
federal bankruptcy law preempts plaintiff’s tortious interference claims that are based on
pre-petition conduct and asserted against non-debtor defendants. Accordingly, the order
of the Appellate Division should be reversed, with costs, and the case remitted to the
Appellate Division for consideration of issues raised but not determined on the appeal to
that Court.
- 23 -
RIVERA, J. (dissenting):
Plaintiff seeks to recover for damages allegedly caused by bankruptcies that it
accuses defendants of facilitating solely to prevent recovery of collateral owed to plaintiff
by one of the bankruptcy debtors. Plaintiff chose to forgo the array of federal remedies
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-2- No. 80
available to a creditor, like plaintiff, for such alleged misuse of the bankruptcy system.
Plaintiff could have sought dismissal of the bankruptcy proceedings, relief from the
automatic stay preventing plaintiff’s recovery of the collateral, foreclosure on the property,
or sanctions against the debtors for their improper conduct. Instead, plaintiff took a
different course and allowed the bankruptcy claims to proceed, causing the alleged
damages to accrue, only to file this separate action in state court against defendants for
tortious interference with contract to recover the same damages. But “no authorized
proceeding in bankruptcy can be questioned in a state court or used as the basis for the
assertion of a tort claim in state court against any defendant” (Astor Holdings, Inc. v Roski,
325 F Supp 2d 251, 262 [SD NY 2003] [emphasis in original] [citation omitted]).
Therefore, the Appellate Division properly dismissed the state tort action. To put it bluntly,
federal law preempts plaintiff’s workaround of the bankruptcy system.
I.
A. The Loans and the Bankruptcy Action
Joseph Beninati aspired to develop a towering, waterfront apartment building in
midtown Manhattan in the historic enclave of Sutton Place on the East River (the project).
The project involved several entwined business entities. Beninati owned a membership
interest in BH Sutton Owner LLC (Sutton Owner), which owned a 100% membership
interest in BH Sutton Mezz LLC (Mezz Borrower). Sutton 58 Owner LLC (Mortgage
Borrower) was a wholly owned subsidiary of Mezz Borrower and owner of the real
property where the project was to be constructed.
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-3- No. 80
Plaintiff, Sutton 58 Associates LLC, loaned to Mezz Borrower and Mortgage
Borrower (collectively, borrowers) an aggregate principal loan of $147,250,000 to finance
construction of the building. The loans were documented in a mezzanine loan structure
consisting of various loan agreements with provisions commonly used in the real estate
development industry. As relevant to this appeal, borrowers covenanted to at all times
remain “Special Purpose Bankruptcy Remote Entities” unencumbered by additional
indebtedness and to refrain from owning any assets other than the project.1 Together, these
covenants limited borrowers to developing the project.
The loans matured, and borrowers defaulted. Plaintiff issued notices of default and
sought to recover its agreed upon collateral by notice of a UCC auction sale of Mezz
Borrower’s membership interest in Mortgage Borrower. Borrowers sought to enjoin the
sale in state court, alleging, among other things, that plaintiff’s attempt to foreclose on the
collateral without complying with the statutory procedures for foreclosing on a mortgage
loan resulted in an “improper clogging of [Mortgage Borrower]’s [unwaivable] equity of
redemption in real property.” Finding that borrowers failed to establish irreparable harm,
1
A Special Purpose Bankruptcy Remote Entity, in accordance with the loan documents, is
a corporation, limited partnership or limited liability company that, among other
characteristics, is organized solely for the purpose of owning the project asset, and refrains
from engaging in any business unrelated to ownership of the project or holding any
additional assets other than the project. In comparison, the Bankruptcy Code defines
“single asset real estate” as real property “constituting a single property or project, . . .
which generates substantially all of the gross income of a debtor . . . and on which no
substantial business is being conducted by a debtor other than the business of operating the
real property and activities incidental thereto” (11 USC § 101 [51B]).
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-4- No. 80
likeliness to succeed on the merits, or that the equities tipped in their favor, Supreme Court
denied borrower’s motion to enjoin the UCC sale and ordered that the sale go forward.
Three days before the scheduled UCC sale, Mezz Borrower filed a voluntary
petition for reorganization under Chapter 11 of the Bankruptcy Code. Mezz Borrower
attached an affidavit affirming that its filing was precipitated by plaintiff’s attempt to
foreclose on Mezz Borrower’s membership interest in Mortgage Borrower, in which Mezz
Borrower held “substantial equity.”
Two weeks later, plaintiff moved the Bankruptcy Court to dismiss Mezz Borrower’s
petition under 11 USC § 1112 (b), or, in the alternative, to modify the automatic stay under
11 USC § 362 (d) (1). Plaintiff argued that Mezz Borrower was a “special purpose,
bankruptcy remote, holding company” and the petition was “a classic bad-faith filing” only
pursued by Mezz Borrower after Supreme Court “rejected [Mezz Borrower’s] last ditch
attempt to stave off a fully noticed UCC foreclosure.” Plaintiff further characterized the
petition as a “litigation tactic without the intention or serious hope of reorganizing” through
bankruptcy.
In Mezz Borrower’s opposition to plaintiff’s motion to dismiss, Mezz Borrower
painted a different picture. “Contrary to the position advanced by [plaintiff], this case is
not a simple two[-]party dispute with creditors. Rather, it is a complex commercial
transaction involving insatiable greed and disturbing facts.” Mezz Borrower explained that
it was not a “shell entity” but owned 100% of the membership interest in Mortgage
Borrower as well as contracts to purchase air rights and assets that constituted the project,
which had been appraised at a value of $181,000,000, “an amount well in excess of any
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-5- No. 80
purported amounts claimed by [plaintiff] and all unsecured debt.” In short, Mezz Borrower
alleged that “review of the loan documents, exorbitant fees, transaction costs and reserves
illustrate[d] a strange and unconscionable transaction,” brokered by a lender who “sat at
both sides of the negotiating table.”
Prior to the hearing on the motion, Mortgage Borrower filed for reorganization
under Chapter 11, and Mezz Borrower subsequently filed for joint administration of
borrowers’ bankruptcy petitions. Borrowers represented to the Bankruptcy Court that their
bankruptcy filings “prevented their unscrupulous lenders from engaging in illegal activity
through a ‘back door play’ against [borrowers].”2 Following plaintiff’s withdrawal of its
motion, the court consolidated the two bankruptcies for joint administration. Within a few
months, plaintiff and a creditors’ committee jointly filed a reorganization plan that was
accepted and confirmed by the Bankruptcy Court.
2
Borrowers, seeking to subordinate and reduce the amount they owed defendants on the
subject loans, commenced another action, an adversarial proceeding in bankruptcy court,
alleging improper conduct by plaintiff and several nonparty entities (adversarial
defendants), through their principals. Borrowers alleged breach of contract, breach of
implied duty of good faith and fair dealing, contractual unconscionability, fraud, deceit,
estoppel, equitable subordination, objection to claim, criminal usury, unjust enrichment
and lender liability by the adversarial defendants. Borrowers also sought declaratory relief
to determine the nature, extent, and validity of the defendants’ liens against the project.
After a bench trial, the court found that borrowers failed to establish a basis for
liability on all claims except the alleged criminal usury because one of the loans at issue
carried a rate in excess of New York’s criminal usury statute. The adversarial defendants
agreed to waive their claim for interest on the building loan, which reduced plaintiff’s
secured claim under the loan agreements. The court further ordered that the adversarial
defendants, including plaintiff here, were entitled to a credit bid of all or such portion of
its allowed secured claims with respect to the sale of borrowers’ assets.
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-6- No. 80
B.
Plaintiff’s Tortious Interference Claims
During the pendency of the bankruptcies, plaintiff brought this action for tortious
interference with contract against Prime Alliance Group, Ltd., and Sutton Opportunity
LLC, and their three individual owners and managers, Philip Pilevsky and his sons Michael
and Seth, in state court. Plaintiff alleged that the borrowers’ bankruptcies, which
defendants facilitated through their tortious conduct, stayed the foreclosure proceeding,
causing plaintiff to incur damages and attorney’s fees.3 Borrowers’ bankruptcies
predominate plaintiff’s narrative of the many vicissitudes of the underlying commercial
transaction and the various litigations arising therefrom, including this appeal. Indeed,
“bankruptcy” is mentioned 56 times in 41 of the 125 paragraphs of the complaint.
According to plaintiff, defendants were instrumental in a two-part scheme to prevent
it from recovering its collateral for the loan maturity defaults.
“Defendants, who were strangers to the Project, intentionally
and improperly caused these contractual breaches in a scheme
to benefit themselves and obtain an ownership interest in the
Project []. The [] Scheme had two parts.
“First, when plaintiff tried to exercise its agreed-upon
contractual remedies following the maturity defaults, Philip
Pilevsky caused Prime Alliance to lend Mezz Borrower
$50,000 (the ‘Pilevsky Loan’) to retain a law firm (in which
3
The majority is only partially correct that plaintiff sought damages “because the
bankruptcy proceeding was more protracted due to the borrowers no longer qualifying as
single asset real estate entities” (majority op at 5). Plaintiff also sought damages incurred
as a result of defendants’ facilitation of the bankruptcy (by loaning funds to Mezz Borrower
to commence its bankruptcy petition), which, in turn, triggered an automatic stay of the
foreclosure sale. In other words, according to plaintiff, defendants caused an injury in tort,
in the first instance, merely by the fact of Mezz Borrower filing its bankruptcy petition.
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-7- No. 80
another Pilevsky is a partner) to file a petition for bankruptcy
and prevented plaintiff from exercising those remedies. This
caused Mezz Borrower to breach no fewer than five contractual
obligations to plaintiff[:] . . . (a) not to file a petition for
bankruptcy; (b) not to incur debt other than ‘Permitted
Indebtedness’; (c) to pay its liabilities out of its own funds and
assets; (d) to consider the interest of plaintiff in connection
with all of its corporate actions; and (e) to remain a special
purpose bankruptcy remote entity.
“Second, Michael Pilevsky and Seth Pilevsky caused Sutton
Opportunity to transfer three rental apartments . . . (the
‘Pilevsky Apartments’) to Mortgage Borrower to evade a
fundamental protection in favor of plaintiff under bankruptcy
law. . . . The Pilevsky Apartment transaction caused Mortgage
Borrower to breach no fewer than seven contractual
obligations to plaintiff[:] . . . (a) not to file a petition for
bankruptcy; (b) not to own any real property or assets other
than the Project property; (c) not to engage in any business
unrelated to the Project; (d) not to make or permit the sale or
transfer any indirect interest in Mortgage Borrower; (e) to pay
its liabilities out of its own funds and assets; (f) to consider the
interests of plaintiff in connection with all corporate actions;
and (g) to remain a special purpose bankruptcy remote entity.”
Plaintiff further claimed that defendants knowingly and willfully precipitated
borrowers’ misuse of the bankruptcy system.
“Philip Pilevsky has sworn under penalty of perjury that he
caused Prime Alliance to make the Pilevsky Loan ‘so that
[Mezz Borrower] could file for reorganization under Chapter
11 of the Bankruptcy Code.’ . . . The Pilevsky Loan was made,
and Mezz Borrower’s bankruptcy petition was filed, just after
this Court issued an order allowing plaintiff to foreclose and
on the eve of that foreclosure. Mezz Borrower’s managing
member has sworn that Mezz Borrower filed for bankruptcy in
order to avoid that foreclosure, which is a breach of Mezz
Borrower’s contract with plaintiff.
“The Pilevsky Apartments transaction was similarly willful
and improper. The defendants urgently sought to get the
Pilevsky Apartments into the hands of Mortgage Borrower,
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-8- No. 80
which immediately upon receipt of the Pilevsky Apartments
filed a bankruptcy petition stating that it was subject to the
Bankruptcy Code’s restrictions on bankruptcy filings by
‘single Asset Real Estate’ businesses. Mortgage Borrower’s
managing member has sworn under oath that the transaction
was intended ‘to bring in equity’ and unrelated real estate,
which are breaches of Mortgage Borrower’s contract with
plaintiff.”
According to plaintiff, the sole purpose of these machinations was to prevent plaintiff from
swiftly recovering its collateral.
Plaintiff also alleged that the scheme allowed Mortgage Borrower to end its status
as a single asset real estate entity in order to “dodge” the applicable Bankruptcy Code
provisions.
“The Bankruptcy Code, for good reason, disfavors a Single
Asset Real Estate entity using bankruptcy to defeat the
ordinary contractual remedies of its secured lender (here,
plaintiff). Michael Pilevsky and Seth Pilevsky caused Sutton
Opportunity to transfer the Pilevsky Apartments to Mortgage
Borrower in order to allow it to seek to dodge these Bankruptcy
Code provisions and to continue to avoid the consequences of
its maturity defaults. . . .”
To summarize the manipulative purpose of the bankruptcy filings, plaintiff
explained that,
“The Bankruptcy Code reflects a specific public policy that
protects lenders to single asset real estate projects from ‘eve of
foreclosure’ bankruptcy filings that delay lenders’ rights to
exercise their remedies. The Project at issue here is exactly the
type of property covered by these statutory protections. The
Pilevsky Apartments were transferred to Mortgage Borrower
so that it could represent that it was not a Single Asset Real
Estate business.
“If Mortgage Borrower were engaged in a Single Asset Real
Estate business, 11 USC § 362 (d) (3) would allow plaintiff
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-9- No. 80
relief from the automatic stay to proceed with its foreclosure
unless, within 90 days, the debtor starts servicing the mortgage
debt or the debtor has filed a plan of reorganization that has a
reasonable possibility of being confirmed within a reasonable
time.
“If Mortgage Borrower were engaged in a Single Asset Real
Estate business, 11 USC § 362 (d) (3) (B) (ii) would allow
plaintiff to be relieved from the Bankruptcy Code’s automatic
stay and to proceed with its maturity default remedies against
Mortgage Borrower if Mortgage Borrower did not pay monthly
interest payments to plaintiff within ninety days of the petition
date.”
Critically, plaintiff alleged that defendants’ prebankruptcy conduct adversely
affected plaintiff’s rights as a creditor in the bankruptcy proceedings.
“Section 362 (d) (3) (B) (ii) would apply here. On the date it
filed for bankruptcy, Mortgage Borrower had no liquid assets,
no income-generating assets, no employees, and no ability to
make such monthly interest payments to plaintiff.
“Furthermore, if Mortgage Borrower were engaged in a Single
Asset Real Estate business, 111 USC § 362 (d) (3) (B) (i)
would allow plaintiff to be relieved from the Bankruptcy
Code’s automatic stay and to proceed with its maturity default
remedies against Mortgage Owner if Mortgage Borrower did
not file, within ninety days of the petition date, a plan of
reorganization that has a reasonable possibility of being
confirmed within reasonable time. A Chapter 11 debtor that is
not engaged in a Single Asset Real Estate business does not
need to satisfy this requirement in order to benefit from the
Bankruptcy Code’s automatic stay.
“Section 362 (d) (3) (B) (i) would apply here. Mortgage
Borrower was not able to file a plan for reorganization within
ninety days of its April 6, 2016 petition date. The plan for
reorganization Mortgage Borrower ultimately filed outside that
time period does not have a reasonable possibility of being
confirmed within a reasonable time. It calls for months of
discovery and litigation before the bankruptcy court will even
rule on it. And it requests the Property to be sold at a public
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sale after the conclusion of that litigation, even though
Mortgage Borrower has a single secured creditor, plaintiff, and
unsecured obligations that are dwarfed in size by plaintiff’s
secured claim.”
These excerpts of the complaint amply demonstrate that plaintiff’s tort claims arise
from, and seek damages caused solely by, the bankruptcy filings. Without the bankruptcy
filings there would have been no automatic stay, which means no delay, and no damages.
Plaintiff can prevail on its state claims only if it establishes that defendants caused these
damages from debtors’ alleged bad-faith filings and misuse of the bankruptcy system.
Defendants moved for summary judgment on preemption grounds. The court denied
the motion, concluding that borrowers’ breaches of the loan agreements had nothing to do
with bankruptcy, and it would not have to rule on the question of bad-faith filings, which
was not addressed by the bankruptcy court. The Appellate Division reversed and granted
defendants summary judgment as “plaintiff’s damages [arose] only because of the
bankruptcy filings” and are thus preempted (168 AD3d 477 [1st Dept 2019]).
Plaintiff has recast as state law causes of action what are in fact complaints of bad-
faith filings and misuse of the bankruptcy system. Litigation of these claims in state court
frustrates the congressional purpose of the Bankruptcy Code’s remedial provisions. It
allows plaintiff to forego its federal remedies to avoid the damages it now claims to have
incurred, even as it participates in the bankruptcies and recovers its collateral, and while it
simultaneously requests that a state court declare it has been damaged by the improper
actions taken in those same proceedings. The Appellate Division got it right; these claims
are preempted.
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- 11 - No. 80
II.
A.
Federal Bankruptcy Law Preemption of State Claims
The Supremacy Clause of the United States Constitution commands that federal law
is “the supreme Law of the Land; and the Judges in every State shall be bound thereby, any
Thing in the Constitution or Laws of any State to the Contrary notwithstanding” (US Const,
art VI, cl 2). In accordance with the Clause’s preemption mandate, courts “must not give
effect to state laws that conflict with federal laws” (Armstrong v Exceptional Child Ctr.,
Inc., 575 U.S. 320, 324 [2015], citing Gibbons v Ogden, 22 US [9 Wheat] 1, 210 [1824];
accord Cipollone v Liggett Grp., Inc., 505 U.S. 504, 516 [1992] [“(S)ince our decision in
M’Culloch v Maryland, 17 US (4 Wheat) 316, 427 (1819), it has been settled that state law
that conflicts with federal law is ‘without effect’”]; Murphy v National Collegiate Athletic
Assn., — US —, 138 S. Ct. 1461, 1476 [2018] [“(W)hen federal and state law conflict,
federal law prevails and state law is preempted”]). The Supremacy Clause “is essentially a
power conferring provision, one that allocates authority between the national and state
governments” (Western Air Lines, Inc. v Port Auth. of New York & New Jersey, 817 F2d
222, 225 [2d Cir 1987] [citation omitted]).
Whether state regulation of a particular subject matter “is invalid under the
Supremacy Clause depends on the intent of Congress” (Malone v White Motor Corp., 435
U.S. 497, 504 [1978] [citation omitted]; see also City of New York v ExxonMobil Corp. [In
re Methyl Tertiary Butyl Ether (“MTBE”) Prods. Liab. Litig.], 739 F Supp 2d 576, 602
[SD NY 2010] [“(T)he touchstone of the doctrine of federal preemption is not fairness to
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- 12 - No. 80
the parties; it is Congressional intent”). “State action may be foreclosed by express
language in a congressional enactment, by implication from the depth and breadth of a
congressional scheme that occupies the legislative field, or by implication because of a
conflict with a congressional enactment” (Lorillard Tobacco Co. v Reilly, 533 U.S. 525, 541
[2001]; see also Balbuena v IDR Realty LLC, 6 NY3d 338, 356 [2006] [“The Supremacy
Clause, in article VI of the Constitution, may entail pre-emption of state law either by
express provision, by implication, or by a conflict between federal and state law”] [citation
an internal quotation marks omitted]).
I agree with defendants that litigation of the state claims conflicts with bankruptcy
law.4 A conflict exists “where compliance with both federal and state regulations is a
physical impossibility[,] or where the state law stands as an obstacle to the accomplishment
and execution of the full purposes and objectives of Congress” (Balbuena, 6 NY3d at 356,
quoting Ray v Atlantic Richfield Co., 435 U.S. 151, 158 [1978]). “What is a sufficient
obstacle is a matter of judgment, to be informed by examining the federal statute as a whole
and identifying its purpose and intended effects” (Crosby v National Foreign Trade
Council, 530 U.S. 363, 373 [2000]). Critical to the analysis in this appeal, “when two
4
Because I conclude that conflict preemption applies here, I have no occasion to opine on
defendants’ field preemption argument. To the extent that the majority suggests that
defendants are subject to a heavier burden to show preemption because state common law
remedies are at issue (see majority op at 23 [“defendants have failed to meet their heavy
burden of establishing that federal bankruptcy law preempts plaintiff’s tortious interference
claims that are based on pre-petition conduct and asserted against non-debtor
defendants”]), I need not reach the issue. The question is whether Congress intended for
the Code’s remedial scheme to preempt plaintiff’s claims given the nature of the claims,
not the theory of liability in which they sound.
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- 13 - No. 80
separate remedies are brought to bear on the same activity, a conflict is imminent” (Garner
v Teamsters, Chauffeurs & Helpers Local Union No. 776 [A. F. L.], 346 U.S. 485, 498-499
[1953]).
Under its federal constitutional power to establish “uniform Laws on the subject of
Bankruptcies through the United States,” Congress enacted the Bankruptcy Code (US
Const, art I, § 8, cl 4; accord Kunzler v Kohaus, 5 Hill 317, 324 [1842] [“The subject in
respect to which uniform laws are authorized, is bankruptcy throughout the United States
(and) the power conferred is without restriction, save in its uniformity”]). The Bankruptcy
Code “provides a comprehensive federal system of penalties and protections to govern the
orderly conduct of debtors’ affairs and creditors’ rights” (Eastern Equip. & Servs. Corp. v
Factory Point Nat. Bank, Bennington, 236 F3d 117, 120 [2d Cir 2001], citing 11 USC §
101 et seq.). The Code provides a detailed procedure “by which [an] . . . insolvent debtor[]
can reorder their affairs” and “make peace with their creditors” (Grogan v Garner, 498 U.S.
279, 286 [1991] [citation omitted]). It accomplishes this by enabling the continued
operation of the subject estate through restructuring (N.L.R.B. v Bildisco & Bildisco, 465
U.S. 513, 550 [1984]) and the “equitable distribution of the bankrupt’s estate” (United States
v Embassy Rest., Inc., 359 U.S. 29, 31 [1959]). A good faith standard applies to bankruptcy
petitions, which “furthers the balancing process between the interests of debtors and
creditors which characterizes so many provisions of the bankruptcy laws and is necessary
to legitimize the delay and costs imposed upon parties to a bankruptcy” (In re C-TC 9th
Ave. Partnership, 113 F3d 1304, 1310 [2d Cir 1997], quoting Little Creek Dev. Co. v
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- 14 - No. 80
Commonwealth Mortgage Corp. [In re Little Creek Dev. Co.], 779 F2d 1068, 1071 [5th
Cir 1986]).
To ensure the proper functioning of the bankruptcy system, Congress has provided
remedies to prevent bad-faith filings and actions intended to misuse the bankruptcy
process. “[S]uch misuse is governed exclusively by [the Bankruptcy] Code” (Astor
Holdings, 325 F Supp 2d at 262). These remedies include, among other things, granting
relief from the automatic stay upon a showing that a petition is part of “a scheme to delay,
hinder, or defraud creditors that involved either [] transfer of all or part ownership of, or
other interest in, [single asset real estate] without the consent of the secured creditor or
court approval” (11 USC § 362 [d] [1]). A creditor may also seek to have the bankruptcy
proceeding dismissed or have the proceeding converted to a proceeding under chapter 7 of
the Bankruptcy Code (11 USC § 1112 [b]).5 Under Rule 9011 of the Federal Rules of
5
The Second Circuit Court of Appeals has recognized the following non-exhaustive list of
indicia of bad-faith conduct:
“(1) the debtor has only one asset; (2) the debtor has few
unsecured creditors whose claims are small in relation to those
of the secured creditors; (3) the debtor’s one asset is the subject
of a foreclosure action as a result of arrearages or default on
the debt; (4) the debtor’s financial condition is, in essence, a
two party dispute between the debtor and secured creditors
which can be resolved in the pending state foreclosure action;
(5) the timing of the debtor’s filing evidences an intent to delay
or frustrate the legitimate efforts of the debtor’s secured
creditors to enforce their rights; (6) the debtor has little or no
cash flow; (7) the debtor can’t meet current expenses including
the payment of personal property and real estate taxes; and (8)
the debtor has no employees” (In re MBM Entertainment,
LLC, 531 B.R. 363, 408 [Bankr SD NY 2015], quoting In re C-
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Bankruptcy Procedure, the court may impose sanctions against parties, attorneys or law
firms that have filed a petition “for any improper purpose, such as to harass or to cause
unnecessary delay or needless increase in the cost of litigation” (Fed R Bankr P 9011 [b]
[1]; see also Midland Funding, LLC v Johnson, ___US___, 137 S. Ct. 1407, 1419 n 5 [2017,
Sotomayor, J., dissenting] [noting that Rule 9011 of the Federal Rules of Bankruptcy
Procedure “authorize[s] a court to impose sanctions on parties who willfully file meritless
claims”). Chapter 11 bankruptcy aims to “permit[] business debtors to reorganize and
restructure their debts in order to revive the debtors’ businesses” and “maximiz[e] the value
of the bankruptcy estate” (Toibb v Radloff, 501 U.S. 157, 163 [1991]), but the Bankruptcy
Code’s remedial framework evinces Congress’ clear and manifest interest to protect the
proper “adjudication of the rights and duties of creditors” under the Code (Davis v Yageo
Corp., 481 F3d 661, 679 [9th Cir 2007] [emphasis added]).
The majority of courts to address the issue have concluded that state regulations,
including tort actions, that conflict with this carefully designed federal statutory framework
or obstructs its purpose are preempted (see e.g. Metcalf v Fitzgerald, 214 A3d 361, 379
[Conn 2019]; PNH, Inc. v Alfa Laval Flow, Inc., 958 NE2d 120, 126 [2011]; Stone Crushed
Partnership v Kassab Archbold Jackson & O’Brien, 908 A2d 875, 886 [2006]; Glannon v
Garrett & Assocs., Inc., 261 B.R. 259, 265 [D Kan 2001]; Pertuso v Ford Motor Credit Co.,
233 F3d 417, 426 [6th Cir 2000]; Koffman v Osteoimplant Tech., Inc., 182 B.R. 115, 127 [D
Md 1995]).
TC 9th Ave. Partnership, 113 F3d at 1311; see also 9A Am Jur
2d Bankruptcy § 911).
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The Second Circuit has explained that,
“(1) Congress placed bankruptcy jurisdiction exclusively in the
district courts under 28 U.S.C. § 1334 (a); (2) Congress created
a lengthy, complex and detailed Bankruptcy Code to achieve
uniformity; (3) the Constitution grants Congress exclusive
power over the bankruptcy law; (4) the Bankruptcy Code
establishes several remedies designed to preclude the misuse
of the bankruptcy process; and (5) the mere threat of state tort
actions could prevent individuals from exercising their rights
in bankruptcy, thereby disrupting the bankruptcy process
(Eastern Equip., 236 F3d at 121 [internal citation omitted],
citing MSR Expl., Ltd. v Meridian Oil, Inc., 74 F3d 910, 913-
916 [9th Cir 1996]).
Remedies for bad-faith-filings and misuse of bankruptcy are well-covered terrain under the
Code. Accordingly, the propriety of a bankruptcy filing is solely within the jurisdiction of
the bankruptcy court because “no authorized proceeding in bankruptcy can be questioned
in a state court or used as the basis for the assertion of a tort claim in state court against
any defendant” (Astor Holdings, 325 F Supp 2d at 262, quoting Choy v Redland Ins. Co.,
103 Cal App 4th 789, 800, 127 Cal Rptr 2d 94, 102 [Cal Ct App 2002] [emphasis in
original]).
B.
Elements of Common Law Tortious Interference with Contract
The substantive law of tortious interference with contract is also central to the
analysis in this appeal. The common law elements of tortious interference with contract are
“the existence of a valid contract between the plaintiff and a third party, defendant’s
knowledge of that contract, defendant’s intentional procurement of the third-party’s breach
of the contract without justification, actual breach of the contract, and damages resulting
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therefrom” (Lama Holding Co. v Smith Barney, 88 NY2d 413, 424 [1996]; see also Oddo
Asset Mgt. v Barclays Bank PLC, 19 NY3d 584, 594 [2012]). Damages are an essential
element of the tort (Kronos, Inc. v AVX Corp., 81 NY2d 90, 94 [1993]). Another keystone
is the requirement that the conduct is “without justification,” which “draw[s] its substance
from the circumstances of the particular situation at hand” (Guard-Life Corp. v Parker
Hardware Mfg. Corp., 50 NY2d 183, 190 [1980]).
Our Court has observed that,
“(t)he issue in each case is whether the interference is improper
or not under the circumstances; whether, upon a consideration
of the relative significance of the factors involved, the conduct
should be permitted without liability, despite its effect of harm
to another. The decision therefore depends upon a judgment
and choice of values in each situation” (id., quoting
Restatement [Second] of Torts § 767, Comment b; accord NBT
Bancorp v Fleet/Norstar Fin. Grp., 87 NY2d 614, 621 [1996]
[“(T)he degree of protection available to a plaintiff for a
competitor’s tortious interference with contract is defined by
the nature of the plaintiff’s enforceable legal rights”]).
Factors to be considered by the court are (a) “the nature of the conduct of the [party]
who interferes (a chief factor in determining whether conduct is improper)” and that party’s
motive, (b) the interests sought to be advanced by the interfering party, (c) the broader
social interests in protecting the “freedom of action” for the interfering party and the
contractual interests of the party being interfered with, and (d) proximity to the interference
of the conduct complained of (Guard-Life Corp., 56 NY2d at 190). The interests of the
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party with whom the actor’s conduct interferes, and the relationship between the parties
are also relevant factors (id.).6
III.
As noted, plaintiff’s state common law claims are for damages incurred due to the
delay caused by the bankruptcy proceeding, occasioned by the filing, which triggered the
automatic stay, as well as the change in the Mortgage Borrower’s status from a special
purpose bankruptcy remote entity to a holder of multiple assets. Plaintiff seeks
compensatory damages, which, assuming plaintiff prevails, would require the court to
calculate the loss flowing from the automatic stay and any additional delay caused by the
status change. The court must also determine whether defendants improperly induced
debtors to breach their contractual obligations, which would require the court to opine on
the legitimacy of the debtors’ bankruptcy proceedings and defendants’ interest and role in
facilitating debtors’ filings. The court must also inquire into the causal relationship between
plaintiff’s damages and defendants’ alleged tortious conduct, which turns in large part on
the propriety of borrowers’ bankruptcy proceedings.
The majority correctly expounds on the law and explains “that, where a tort claim
is premised upon the bankruptcy filing, itself, or conduct that occurs within the bankruptcy
proceeding and under the purview of the Bankruptcy Court, the obstacle presented by state
6
I need not address whether the majority’s assertion that a claim of tortious interference
with contract is a historic example of our state’s regulation of public health and safety
(majority op at 9), because for purposes of preemption, the dispositive question remains
whether Congress intended to preempt the state’s regulation of the subject matter at issue.
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tort remedies is more readily discerned. Parallel tort actions in state court against a debtor
or creditor based on that party’s alleged wrongful conduct in a bankruptcy proceeding risks
subverting the Bankruptcy Court’s authority to adjudicate the validity of bankruptcy
filings, or otherwise producing inconsistent standards or outcomes between state and
federal law” (majority op at 14). But then the majority reaches the unfounded conclusion
that plaintiff’s case does “not impugn[] the bankruptcy process” (id.). It is as if the majority
read a different complaint than the one filed by plaintiff in Supreme Court wherein it
alleged repeatedly that the bankruptcy was commenced for an improper purpose, at the
behest and for the benefit of defendants, and that defendants’ conduct was willful and
improper. The only way to read these allegations is that plaintiff “cast doubt upon,”
“call[ed] into question,” and roundly “dispute[d] the truth, validity or honesty of” the
bankruptcy proceeding, which, by definition, means plaintiff impugned the bankruptcy
action (impugn, New Oxford American Dictionary [3d ed 2010]; impugn, Black’s Law
Dictionary [11th ed 2019]; impugn, Merriam Webster’s Collegiate Dictionary 585 [10th
ed 1993]).
Although, as the majority argues, a plaintiff may recover damages for tortious
interference with contract even if the defendant “w[as] engaged in lawful behavior”
(majority op at 16, quoting NBT Bancorp, 87 NY2d at 621), nonetheless, under our law the
allegedly tortious conduct must be “improper under the circumstances” (Guard-Life Corp.,
50 NY2d at 190 [emphasis added]). The majority ignores our observation in Guard-Life
Corp. that whether a defendant’s conduct is tortious is necessarily particularized (id.).
Here, plaintiff alleged that borrowers and defendants acted pursuant to a scheme to
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disadvantage plaintiff as creditor by filing for bankruptcy. If true, at a minimum, this
constitutes improper conduct intended to achieve defendants’ own ends by use of a
surrogate with equally bad intentions and with the common goal to injure plaintiff.
Thus, contrary to the majority view, the state court is caused to invade the precinct
of bankruptcy law to determine the merits of plaintiff’s claim of tortious interference with
contract. But federal courts have exclusive jurisdiction over that determination (see
Gonzales v Parks, 830 F2d 1033, 1035 [9th Cir 1987] [stating that, allowing state courts to
determine whether a claim for relief under federal law is of merit “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 relief in cases Congress
has specifically precluded those courts from adjudicating”]).
In Choy v Redland Insurance Co. (103 Cal App 4th 789 [Cal Ct App 2002]), the
plaintiff brought a state court action against an insurance company and associated
defendants. The plaintiff alleged that the defendants encouraged the insured to petition for
bankruptcy for the “real purpose” of “frustrat[ing]” the plaintiff’s “ability to seek and
obtain a judgment against [the insured]” in excess of defendant insurer’s policy limit (id.
at 794). The claims were preempted because the “gist” of the plaintiff’s complaint was the
defendants’ “misuse[] [of] the bankruptcy process” and state court remedies cannot serve
as a vehicle to “circumvent well established federal rules relating to redress” for such
misuses (id. at 802). Although bankruptcy law references state law, “the adjustment of
rights and duties within the bankruptcy process itself is uniquely and exclusively federal”
(id. at 797, quoting MSR Expl., 74 F3d at 914 [alteration omitted]). The “superimposition”
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of tort remedies “on the many activities that might be undertaken in the management of the
bankruptcy process” would lend to intolerable exposure to claims of malicious prosecution
(Choy, 103 Cal App 4th at 798).
As recognized in Choy,
“the highly complex laws needed to constitute the bankruptcy
courts and regulate the rights of debtors and creditors also
underscore the need to jealously guard the bankruptcy process
from even slight incursions and disruptions brought about by
state malicious prosecution actions. To put it another way, the
problem here is not only one of state courts deciding issues of
federal law in one manner or another. That is not an entirely
unique situation, even when uniformity is required. The
difficulty here goes much deeper. It is a question of state
courts, in effect, interfering with the whole complex,
reticulated bankruptcy process itself” (id. at 797-798 [internal
citation omitted]).
As in Choy, if plaintiff incurred damages because of borrowers’ improper bankruptcy
filings, it was for the bankruptcy court to address those claims, not a state court (id. at 801).
Plaintiff here has made no claim—as it could not—that its only remedy for its
damages lies in state court because “the ‘authorized proceeding’ in bankruptcy was not
only exclusive, it was adequate” (id.; see supra Part II.A). Plaintiff’s choice to forego the
remedies in the forum available to it under the Bankruptcy Code does not open the door to
our courts.
The Ninth Circuit in Gonzales has explained that,
“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
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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, 830 F2d at 1036).
In Gonzales, the court determined that permitting state court tort claims against a
bankruptcy attorney “based on the filing of a bankruptcy petition,” would distort exclusive
federal jurisdiction in “much the same manner” as allowing tort damages against debtors
(id. at 1036-1037).
Similarly, in MSR Exploration, the Ninth Circuit underscored the significance of the
Bankruptcy Code’s preemptive effect on state law remedies. The court explained that
“[d]ebtors’ petitions, creditors’ claims, disputes over reorganization plans, disputes over
discharge, and innumerable other proceedings”—all the business of the bankruptcy
courts—would “lend themselves to claims of malicious prosecution. Those possibilities
might gravely affect the already complicated processes of the bankruptcy court” (74 F3d
at 914 [emphasis added]). The complaint filed by the debtors in MSR Exploration “self-
consciously” sought damages for a claim allegedly maliciously filed and pursued during
the plaintiffs’ Chapter 11 bankruptcy proceeding, and the court understood that “the
opportunities for asserting malicious prosecution claims,” much like here, are “only limited
by the fertility of the pleader’s mind and by the laws of the state in which the proceeding
took place” (id.).
Plaintiff’s case here is indistinguishable in any meaningful way from Astor
Holdings. In Astor Holdings, Second Circuit Judge Lynch, then a district-court judge sitting
in the Southern District of New York, dismissed as preempted several tort claims that
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required the court to opine on whether the defendant filed bankruptcy documents in bad
faith or for an improper purpose (325 F Supp 2d at 262). The plaintiff sponsor of robotic
combat events, Astor Holdings, sued defendant Roski, a robot builder, and his promotional
company, alleging that these nondebtors had, among other claims, tortiously interfered
with contractual agreements between plaintiff and its joint venture partner, Thorpe. The
plaintiff averred that Roski had assisted Thorpe in acquiring bankruptcy counsel, and it
was counsel that suggested that Thorpe file for bankruptcy. Counsel advised Thorpe that
bankruptcy could serve dual purposes of “reconfigure[ing]” his debt and “freeing him of
his obligations” under the contractual agreements at issue (id. at 257). The plaintiff’s
complaint alleged that filing for bankruptcy was an effort to “divest [plaintiff] of its interest
in the [subject] business” (id. at 260).
Closer inspection of Astor Holdings’ complaint demonstrates further similarities
with the state claims asserted here. Astor Holdings also alleged that Roski’s attorneys
arranged for Thorpe to borrow $150,000 from the defendant “for the sole and express
purpose of enabling Thorpe to file a bankruptcy petition. [Roski’s] loan, which was secured
by Thorpe’s interest in the Venture, was used to pay a retainer to the bankruptcy counsel
that [the defendant] picked for Thorpe.” Astor Holdings contended that Roski and his
attorneys, “who had formulated the strategy Thorpe and his bankruptcy counsel pursued”
succeeded in “paralyzing Robot Wars and preventing the Venture from making any new
deals.”
Citing the Bankruptcy Code’s remedies for abuse of process, the court held that
“misuse of the [bankruptcy] process” is governed exclusively by the Bankruptcy Code (id.
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at 262). Notably, relying on Choy, the court rejected an argument advanced by plaintiff
here, and adopted by the majority, to expound that defendants’ nondebtor status was “a
distinction without a difference,” reasoning that preemption “implies” that a claim for
which the Bankruptcy Code provides a remedy “cannot be the subject of regulation by state
statutory or common-law remedies” (id.). Further, the court explained, any assertion that
Thorpe petitioned for bankruptcy or filed certain papers in bad faith or for an improper
purpose would be measured by state law, and therefore would be barred (id. at 263). Just
so here, where plaintiff alleges that borrowers’ bankruptcy petitions were filed for an
improper purpose: to prevent plaintiff from exercising its contractual remedies by means
of the foreclosure sale.
The majority unpersuasively attempts to distinguish Choy and Astor Holdings. The
courts in those cases explained that the underlying nature of the claims is what matters in
the preemption analysis. For example, in Choy, “(t)he real purpose” of causing the non-
party debtor to petition for bankruptcy “was to frustrate [the plaintiff’s] ability to seek and
obtain a judgment against [the debtor]” (103 Cal App 4th at 794). The bankruptcy filing
was “on the initiative” of the defendant, who paid the necessary filing fees, so that the
defendant could “avoid liability” for its bad-faith conduct in rejecting the plaintiff’s earlier
offers to settle an insurance dispute (id.). In Astor Holdings, Roski’s attorney “suggested
that Thorpe file for bankruptcy” because the Venture Agreement was purportedly
“onerous,” “obscene,” and “unconscionable” (325 F Supp 2d at 257). The attorney also
suggested to Thorpe that bankruptcy could serve the dual goal of “reconfigur[ing]”
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Thorpe’s debt and “freeing him of his obligations under the Venture Agreement” (id.).7
Here, plaintiff alleges breaches of contract, but its complaint is with the actions taken in
bankruptcy. As I have noted (see supra Section I.B), for purposes of preemption, what
matters is not the source of the allegedly tortious conduct but that the damages flow from
the bankruptcy proceedings. Indeed, the function of the doctrine is to preempt a litigant’s
“ability collaterally to attack bankruptcy petitions in the state courts,” lest a patchwork “of
laws of the state in which the proceeding took place” and “the fertility of the pleader’s
mind” “threaten the uniformity of federal bankruptcy law, a uniformity required by the
Constitution” (Choy, 103 Cal App 4th at 798, citing US Const, art I, § 8, cl 4).
The majority’s reliance on Davis is no more availing. In Davis, the basis of the
plaintiff minority shareholders’ claim of breach of fiduciary duty was grounded in their
allegation that defendants caused the corporation to petition for bankruptcy without
“considering other alternatives that may have yielded greater value for the corporation and
its shareholders” (481 F3d at 665). In other words, defendants’ alleged tortious act was
their failure to represent the best interests of plaintiffs by presenting bankruptcy as one
option among others. Thus, “plaintiffs’ breach of fiduciary duty claims [were] not based
7
The majority correctly notes that in Astor the District Court did not dismiss the plaintiff’s
claim that the defendant had tortuously interfered with a bankruptcy settlement (majority
op at 17 n 8) but fails to explain its relevance. The plaintiff alleged that Roski “set out to
undermine the bankruptcy settlement, and Robot Wars itself, by causing Thorpe to renege
on the promise to ‘promote’ Robot Wars” (Astor Holdings, 325 F Supp 2d at 269), which,
unlike here, plainly does not implicate either the plaintiff’s or debtor’s status in the subject
bankruptcy proceeding or the administration of the debtor’s estate. And, of course, state
courts are authorized to enforce settlement agreements.
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on ‘activities that might be undertaken in the management of the bankruptcy process,’” (id.
at 679-680, quoting MSR Expl., 74 F3d at 914). In contrast, the damages here flow solely
from defendants’ facilitation of borrowers’ bankruptcies and the additional attendant delay
related to administration of that process, which, according to plaintiff, would not have
occurred but for defendants’ alleged inducement of borrowers’ contractual breaches.8
Davis illustrates that the ultimate legal conclusion turns on whether there has been
misuse of the bankruptcy system. In Davis, the majority shareholders made no allegation
that defendants had abused the bankruptcy system but instead argued that the defendants
had a duty to weigh different options to yield the greatest value in the company’s shares.
In contrast, plaintiff’s claim here is that defendants, acting in concert with borrowers, took
advantage of “the adjustment of rights and duties within the bankruptcy process” to upset
plaintiff’s status as a first-tier creditor in borrowers’ bankruptcy proceedings (Choy, 103
Cal App 4th at 797, quoting MSR Expl., 74 F3d at 914).
In finding no preemption here, the majority relies on the premise that the plaintiff’s
claims “do not implicate debtor-creditor disputes relating to the bankruptcy estate”
(majority op at 12). To the contrary, if plaintiff’s claims are credited, the purpose of the
bankruptcy filings was solely to delay plaintiff’s recovery of its collateral. In fact, plaintiff
8
The majority claims that my analysis compels preemption in cases where “some fact
questions might overlap with bankruptcy proceedings” (majority op at 18). As I explain,
the preemption analysis requires careful scrutiny of the substantive nature of the claim, and
its potential disruptive impact on the bankruptcy system by, as here, avoiding the remedial
framework of the Bankruptcy Code. Unlike the majority I do not ignore plaintiff’s
allegations and the leitmotif of its complaint that defendants and borrowers labored towards
one end—filing bankruptcy to undercut plaintiff in its position as borrowers’ secured
creditor.
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initially argued to the bankruptcy court that the filing was in bad faith. However, it
withdrew its motion and instead supported the reorganization plan. In doing so, plaintiff
chose to forgo its remedy for the borrowers’ alleged misuse of bankruptcy law and the
bankruptcy system. Plaintiff cannot now seek to have a state court decide whether the
damages were caused by delay from the improper bankruptcy filings. To permit such action
would interfere with and undermine the uniform remedies enacted by Congress in the
Bankruptcy Code.
The majority’s other argument that plaintiff’s state claims are not preempted
because the defendants are nondebtors and their alleged actions occurred prior to the
bankruptcy, is no more persuasive. First, the preemption analysis does not turn on whether
the defendants are nondebtors, but rather on the fact that the Code is written to address the
impact of the alleged scheme on the bankruptcy proceeding (see Astor Holdings, 325 F
Supp 2d at 262; Gonzales, 830 F2d at 1035). In other words, the issue is plaintiff’s
“interfer[ence] with the whole complex reticulated bankruptcy process itself” by its choice
to shop forums and forego the remedial mechanisms exclusive to the bankruptcy court and
gamble on a state remedy instead (Choy, 103 Cal App 4th at 798).
Moreover, plaintiff was a creditor in the bankruptcy proceedings when it
simultaneously filed these state claims and relied on those federal proceedings to support
its allegations that defendants’ scheme undercut its creditor status. The majority’s view
that there is an insufficient connection is simply belied by the plaintiff’s narrative of the
interdependent actions of defendants and borrowers.
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Second, the conduct alleged here was to facilitate the bankruptcies, so the fact that
acts were taken prefiling is unsurprising. For example, a debtor who, before filing, secures
a loan to pay the bankruptcy filing fee or acquires property to undercut a creditor’s
remedies—as plaintiff asserts happened here—would be relevant to the bankruptcy court’s
assessment of the motives of the debtor (cf. National Hockey League v Moyes, No. CV-10-
01036-PHX-GMS, 2015 WL 7008213, at *6 [D Ariz Nov. 12, 2015] [rejecting the
plaintiff’s argument that its tort claims are not preempted because the claims comprise pre-
filing conduct on the ground that, when an injury “might never occur, and thus plaintiff’s
claim would not accrue . . . until after the company files its bankruptcy petition, and accrual
of the claim depends on what happens in the Bankruptcy Court, the potential future claim
would interfere sufficiently with the bankruptcy process to trigger preemption”] [citation
omitted]). As this example illustrates, for preemption purposes there is no analytically
sound basis to distinguish between preparatory actions that make possible the bankruptcy
filing. The latter cannot occur without the former—indeed that is plaintiff’s core argument
in support of its claims, i.e., but for defendants having loaned money to borrowers to
finance the bankruptcy filings and defendants’ transfer of the apartments that transformed
Mortgage Borrower from a special purpose bankruptcy remote entity, there would be no
automatic stay and delay of the foreclosure sale, which is what plaintiff alleges caused its
losses.
Contrary to the majority’s characterization of plaintiff’s claims, the state lawsuit is
an attempt to avoid the remedies of the Bankruptcy Code. Indeed, plaintiff filed a motion
to dismiss Mezz Borrower’s bankruptcy petition, which it withdrew after the court
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indicated that it was premature because, were the court to afford plaintiff relief at that early
stage, it would have had to adopt the view based on plaintiff’s disputed assertions that the
proceeding was a two-party dispute with no additional creditors. Such a view would require
the court to have disregarded the existence and appointment of the committee of unsecured
creditors, and that was “asking a lot of [that] early stage of the case.” Rather than pursue
remedies under the Bankruptcy Code for the alleged misuse of the bankruptcy system by
refiling its motion at the appropriate time and pursuing sanctions, plaintiff seeks to have
our state courts decide that defendants’ actions were for an improper purpose, caused
plaintiff damages, and therefore warrant compensation to plaintiff. But the Bankruptcy
Code provides the exclusive remedies for these alleged injuries. As amicus curiae Melanie
L. Cyganowski, former Chief Judge of the United States Bankruptcy Court for the Eastern
District of New York, explains, “[t]he only significance of [d]efendants’ allegedly tortious
conduct is that it facilitated or affected the nature of, the [b]ankruptcies. The damages
[p]laintiff claims to have sustained all resulted from [d]ebtors’ bankruptcy filings” (see
brief for amicus curiae Melanie L. Cyganowski at 6). And as amicus curiae details, the
Bankruptcy Code afforded plaintiff various remedies for that alleged tortious conduct.
The Bankruptcy Code’s remedial scheme includes a set of “comprehensive and
purposeful procedures designed to achieve uniformity, fairness and efficiency in the
administration of bankruptcy cases” (id. at 2). The only remedy plaintiff chose to pursue
was the credit-bid for debtors’ assets under 11 USC § 363 (k), which allowed it to purchase
the property at an auction sale, almost one month after filing the underlying tort claims in
state court. The United States Supreme Court has explained that “[t]he ability to credit-bid
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helps to protect a creditor against the risk that its collateral will be sold at a depressed price.
It enables the creditor to purchase the collateral for what it considers the fair market price
(up to the amount of its security interest) without committing additional cash to protect the
loan” (RadLAX Gateway Hotel, LLC v Amalgamated Bank, 566 U.S. 639, 644 [2012]).9
Thus, plaintiff simultaneously invoked remedies from federal and state courts to address
damages flowing from the bankruptcy filings—exactly the type of dual proceedings
Congress sought to preempt.10
Apart from incorrectly approving state litigation of issues that fall squarely within
the exclusive jurisdiction of the bankruptcy court, the majority’s decision will affect debtor
access to bankruptcy remedies and the “fresh start” allowed by Congress. The fear of state
litigation may disincentivize lawyers and potential secondary lenders from assisting
9
As amicus curiae notes, had Mortgage Borrower been a “single asset real estate” debtor,
at most the earliest date upon which plaintiff could have obtained relief from the automatic
stay under 11 USC § 362 (d) (3) would have been on July 5, 2016 (Cyganowski brief at 13
n 4). Plaintiff purchased the property under its winning credit-bid on December 13, 2016,
meaning that Mortgage Borrower’s changed status as a “single asset real estate” debtor
resulted, at most, in a delay of approximately six months (id.).
10
The majority makes the remarkable assertion that “defendants do not claim that any
remedy was available to plaintiff in the bankruptcy proceedings to compensate plaintiff for
defendants’ alleged wrongdoing” (majority op at 19). Defendants have described several
remedies plaintiff could have sought during the bankruptcy proceedings to prevent,
mitigate, or recoup the alleged damages plaintiff requests in state court, remedies further
detailed by amicus curiae former Chief Judge Cyganowski. For example, plaintiff could
have moved to dismiss the bankruptcy cases on the ground that they were filed in bad faith
(see 11 USC § 1112 [b]), moved to lift the automatic stay (see 11 USC 362), or sought
sanctions for filing a meritless claim (see Fed R Bankr P 9011). Had plaintiff pursued its
initial motion and succeeded, there might well be no injury to remedy. Further, the majority
has failed to identify, because it cannot, what would be plaintiff’s damages were borrowers
not to have filed for bankruptcy.
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debtors who wish to file for bankruptcy but need legal counsel and financial assistance to
do so, impacting those with the little to no resources and a low credit rating (see brief for
amicus curiae Legal Services NYC Bankruptcy Assistance Project, for defendants-
respondents, at 6-8; brief for amicus curiae Bullard Group at 15-16 ; see also Alana
Abramson, “People are Very Scared.” Why Small Businesses Hit by Coronavirus Are
Struggling to Get Emergency Loans [Apr. 9, 2020, 3:41 PM] [explaining that “(i)t may be
the companies most in need of assistance” during the coronavirus pandemic that “are the
companies that don’t have a current banking relationship”]; Paul Kiel, What Happens When
You Can’t Afford to Go Bankrupt, Washington Post [Mar. 2, 2018, 3:28 PM] [“Scores of
people considering bankruptcy told me the same thing again and again: if they had $1,000
to pay an attorney, then they probably wouldn’t need to file (for bankruptcy) in the first
place”]; David Skeel, Bankruptcy and the Coronavirus 5, Brooklings [2020] [“The costs of
bankruptcy for small and medium-sized businesses are substantial—often 30% of the value
of the business—and two-thirds are liquidated rather than reorganizing”]; Chrystin
Ondersma, Small Debts: Big Burdens, 103 Minn L Rev 2211, 2233 [2019] [“Although
purportedly designed to keep out high-income debtors, the effect of the 2005 amendments
(to the Bankruptcy Code) has been to reduce access for the poorest debtors who cannot
afford the increased fees and who have difficulty navigating the complex technical rules
without attorneys”]). The majority opines that state claims against attorneys and debt
counseling entities are likely to fail (majority op at 22). And yet this is the first time our
Court has addressed the viability of a claim for tortious interference with contract against
a nondebtor. It remains to be seen as to what other parties shall be subject to the ruling
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here, notwithstanding the majority’s speculative “optimism” about the narrow class of
defendants who will be dragged into state court by litigious lenders.
IV.
According to the majority, plaintiff’s state claims for tortious interference with
contract against defendants “are peripheral to, and do not impugn, the bankruptcy process”
(majority op at 14). That conclusion will come as a surprise to defendants who plaintiff
alleges were parties to a “scheme” that depended on and succeeded only by virtue of
borrowers’ bankruptcy filings. It is also contrary to Congressional intent in enacting our
reticulated Bankruptcy Code with remedies for a party aggrieved by the type of
manipulation of the bankruptcy system alleged by plaintiff in its state action. And I do not
anticipate it will be well-received by the bankruptcy courts, which have exclusive
jurisdiction over bankruptcy filings and sole authority to determine whether a bankruptcy
petition is filed in bad faith.
Notably, this plaintiff recovered $86 million as a creditor in the bankruptcy
proceeding, achieved its goal of purchasing the property from one of the borrowers, and
obtained a $24 million judgment against the loan guarantors. Plaintiff obtained everything
our federal and state legal systems allow. Plaintiff’s state action is merely an attempt to
avoid litigating in bankruptcy court the impact of defendant’s alleged scheme to manipulate
plaintiff’s status as a creditor of the bankruptcy petitioners. Put another way, plaintiff’s
state action is for damages incurred by the delay in purchasing the property that resulted
from borrowers filing for bankruptcy. If there’s no bankruptcy filing, there’s no delay, and
no damages. Without damages, there is no viable state claim. There is nothing peripheral
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about that. The majority plainly misconstrues the matter when it suggests that “this is not
a situation where state and federal law provide ‘two separate remedies’ for identical
grievances” (majority op at 19). The voluminous record before us tells a different story.
In sum, plaintiff’s complaint is “self-consciously and entirely one which seeks
damages for a claim filed and pursued in the bankruptcy court” (MSR Expl., 74 F3d at 912).
Plaintiff “allege[s] state law tort causes of action for damages entirely predicated upon the
filing and prosecution of” the bankruptcy petitions (In re Miles, 430 F3d 1083, 1093 [9th
Cir 2005]). Therefore, plaintiff’s claims are preempted by federal law. I dissent.
Order reversed, with costs, and case remitted to the Appellate Division, First Department,
for consideration of issues raised but not determined on the appeal to that Court. Opinion
by Judge Stein. Chief Judge DiFiore and Judges Wilson and Feinman concur. Judge
Rivera dissents and votes to affirm in an opinion in which Judges Fahey and Garcia concur.
Decided November 24, 2020
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