Metcalf v. Fitzgerald, 333 Conn. 1, 214 A.3d 361 (2019)
Jonathan Metcalf (the “Debtor”) filed a chapter 7 bankruptcy petition for his business and later a petition individually. One of his creditors, Ion Bank (the “Creditor”), objected to the discharge of any the Debtor’s obligations in bankruptcy court and initiated an adversary proceeding against the Debtor, alleging that the Debtor unlawfully transferred property, destroyed property, took possession of expensive property, defrauded creditors, and withheld information from the trustee. The Debtor provided evidence to counter the allegations of the Creditor, who upon review of the evidence, dropped the adversary proceeding. The Debtor then filed an action alleging vexatious litigation and CUTPA claims against the Creditor and their attorney in Connecticut state court. The trial court dismissed the action for lack of subject matter jurisdiction citing an appellate court decision ruled that federal bankruptcy law preempts the state claims in this situation. The Debtor appealed and the case was transferred to the Connecticut Supreme Court.
The Debtor argued that a proper preemption analysis would reveal that his state law claims are neither expressly nor implicitly preempted by the Bankruptcy Code. His argument was that Congress only intended “to provide a uniform and orderly administration of bankruptcy estates and payments to creditors” and that permitting his claims would not disturb this process. The court disagreed. While the court agreed his claims are not expressly preempted, it held that they were implicitly preempted.
Citing case law from many other states and districts, the court said Congress has “enacted such a comprehensive statutory scheme, inclusive of provisions for sanctions and remedies for abuse of the bankruptcy process, [that it] has implicitly occupied the field, leaving no room for state law.” The court noted there is no exception or carve out in the Bankruptcy Code allowing for a state remedy which would disrupt the uniformity and purpose of the bankruptcy process. The court cited examples where bankruptcy courts have sanctioned parties for abuse of process and vexatious litigation type claims, pointing out that the bankruptcy code has specific provisions to prevent abuse of the bankruptcy process.
While the Debtor tried to argue that, because the remedies available in state court were different than federal court and it was possible to comply with the laws of both systems, Congress didn’t intend the Bankruptcy Code to dominate this field of the law. But the court was unconvinced, and continued emphasizing the purpose of the Bankruptcy Code and the dominant interest of the federal government and that the “complex, detailed, and comprehensive Bankruptcy Code demonstrates Congress’ intent to provide uniform and centralized adjudication of all of the rights and duties of debtors and creditors alike”. If states were allowed to adjudicate these claims separately from the bankruptcy process, both creditors and debtors would be faced with uncertainty, preventing the “fresh start” that bankruptcy is supposed to bring.
Considering the comprehensive statutory scheme and federal interest in uniformity and finality, the court held the plaintiff’s state law claims were preempted and affirmed the trial court decision.
Contributed by Kevin Braun of Morgan Lewis & Bockius LLP
