Pennsylvania Superior Court Holds Diversion to Bankruptcy Court Eliminates Dragonetti Act Claim

Douglas J. Smillie      Aug. 22, 2017

The Pennsylvania Superior Court has held that the removal of a state law claim from the state courts to the federal bankruptcy court pre-empted the defendants’ subsequent suit under the Dragonetti Act for wrongful use of civil proceedings.

The facts are summarized as follows: Landlord commenced an action against Law Firm and its partners for rent under a lease. In order to collect, Landlord then sued one of the partners, Oberdick, and his wife under Pennsylvania’s Uniform Fraudulent Transfer Act (“UFTA”). Oberdick and his wife filed preliminary objections to the UFTA complaint but, before those objections could be decided by the trial court, the Oberdicks filed a bankruptcy petition.

Once in bankruptcy, the pending UFTA case was “removed” to the bankruptcy court where the case was litigated as an adversary proceeding. The litigation included the filing of an amended complaint and the subsequent substitution of the Trustee as plaintiff in place of Landlord.

Eventually, the bankruptcy court ruled in favor of the Oberdicks on all claims. At that point, the Oberdicks filed a suit against Landlord in state court under the Dragonetti Act, which governs the wrongful use of civil proceedings in Pennsylvania. Landlord sought dismissal of the Dragonetti complaint, arguing it was preempted by the Bankruptcy Code and Rules. The Oberdicks countered that preemption does not apply, because the Dragonetti action arose from litigation “procured, initiated and continued in Pennsylvania state court.”

What is “preemption” and when does it apply? By way of background, the Supremacy Clause of the United States Constitution controls federal preemption.  Congress has the power to preempt state law in areas of federal concern.  Such preemption does not need to be explicit in a statute invalidating a state law. If the area in question is one of traditional state concern, it will be presumed that Congress did not intend to supersede state authority, absent a clear and manifest legislative purpose to the contrary. Congress’ intent to preempt state law may be express or implied and may be found where Congress has legislated in a field so comprehensively that it has implicitly expressed an intention to occupy the given field to the exclusion of state law. In such cases, the federal law will preempt state law and the state courts will defer to federal law. Thus, the Court focused on whether the doctrine of federal preemption applied to the facts before it.

In analyzing the claim, the Superior Court relied upon the leading preemption case in Pennsylvania, Stone Crushed Partnership v. Kassab Archbold Jackson & O’Brien, 908 A.2d 875 (Pa. 2006). In Stone Crushed, the Pennsylvania Supreme Court had concluded that “the Bankruptcy Code and Federal Rules of Civil Procedure preempt [an appellant’s] rights pursuant to state law for compensation in a wrongful use of civil proceedings or abuse of process claim grounded in bankruptcy court proceedings.” (emphasis by the Court). Thus, the question before the Court was whether the initiation of the UFTA suit in State Court was sufficient to support the Dragonetti Act claim, or whether the removal of the case to the bankruptcy court and extensive litigation before that court effectively rendered the action one grounded bankruptcy court proceedings for preemption purposes.

In Stone Crushed, the Court based its preemption conclusion on the following reasons:  (1) Congress evinced an intent to govern the whole field of bankruptcy; and (2) Federal Rule of Civil Procedure 11, 28 U.S.C. § 1927, and the Bankruptcy Code potentially provide for the equivalent protection afforded by the Commonwealth of Pennsylvania to its citizens in a Dragonetti Act claim. In the present case, the Court noted that the UFTA had been removed to the bankruptcy court by the Oberdicks even before the trial court had decided their preliminary objections and that most of their complaints about the Landlord’s conduct related to its conduct in the bankruptcy case. At the same time, the Court recognized that in the bankruptcy court, where the Oberdicks chose to litigate, they had available to them the protections recognized by the Stone Crushed Court, namely Rule 11, Section 1927 and the Bankruptcy Code. On balance, the Court suggested the rights afforded the Oberdicks may have outweighed even those available under the Dragonetti Act. As a result, the Superior Court had no hesitation in finding that the Oberdicks’ wrongful use of civil proceedings claim was subject to federal preemption and remanded the case for dismissal.

In passing, the Court mentioned that one of the policies underlying preemption is to prevent litigants from forum shopping to achieve a different result in federal court than they could obtain in state court. Possibly, the option of a jury trial in state court, which would not have been available under the various federal remedies, motivated the choice of state court for the Oberdicks’ filing. If that was the strategy, it was not availing to the Oberdicks, who will be constrained to find another means to pursue their claim.

While Courts are often keen to protect their turf, they are equally loath to have their jurisdiction manipulated or to permit perceived gamesmanship. Here, the decision of the Court is consistent with established precedent, but also represents a cautionary tale for litigants who might be viewed as shopping for a more favorable forum in which to pursue their claims.

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