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Texas Supreme Court Allows Malicious Prosecution Claim Based on Bankruptcy Adversary Proceeding to Proceed, Finds No Preemption

By Stephen Sather

In an interesting case dealing with concurrent jurisdiction and preemption, the Texas Supreme Court has found that a state court had jurisdiction to consider a malicious prosecution action based upon an adversary proceeding. Graber v. Fuqua, No. 05-0303 (Tex. 1/9/09).

Bankruptcy attorney Richard Fuqua filed his own bankruptcy back in 1988. Attorneys for Sunbelt Savings, FSB brought an adversary proceeding against him for fraud and forwarded information to the U.S. Attorney resulting in a criminal prosecution. Fuqua was vindicated in both the criminal case and the adversary proceeding, with the Bankruptcy Court granting a directed verdict in the adversary. After all this played out, Fuqua filed a state court malicious prosecution action against the lawyers in 2000. The state court granted a plea to the jurisdiction, but was reversed by the Court of Appeals.

The Supreme Court stated:

The question in this case is whether a state malicious prosecution claim is preempted by the federal bankruptcy regime simply because the claim arose out of the filing of an adversary action in a bankruptcy proceeding. We hold that under the facts of this case, Congress did not intend for such a claim to be preempted.

In a Texas trial court, Richard Fuqua alleged that Thomas Graber and Hopkins & Sutter had committed the common law tort of malicious prosecution by initiating an adversary proceeding in Fuqua's federal bankruptcy case. The petitioners argue that federal bankruptcy statutes express Congress's intent to preempt Fuqua's claim and others like it. But to hold as the petitioners suggest would require us to extract the requisite intent from congressional silence, an inference that our preemption jurisdiction does not allow. The petitioners further argue that permitting Fuqua's state malicious prosecution claim would impermissibly threaten the uniformity of federal bankruptcy law. Yet we can identify no such risk. Until Congress clearly says otherwise, preemption of Fuqua's malicious prosecution action is not warranted. Fuqua's suit should have survived Graber's plea to the jurisdiction.

Opinion, pp. 1-2.

The Supreme Court did a good job of analyzing the interplay between bankruptcy and non-bankruptcy jurisdiction. Under 28 U.S.C. Sec. 1334, bankruptcy courts and state courts have concurrent jurisdiction over matters arising in a bankruptcy case, arising under bankruptcy law or related to a bankruptcy case. Therefore, the state court would have jurisdiction over this claim, which either arose in a bankruptcy case or was related to a bankruptcy case, unless preemption applied. The Supreme Court reasoned that a generally applicable provision, such as Bankruptcy Rule 9011, did not evidence an intent to preempt another court's jurisdiction, while a "custom-built" provision, such as 11 U.S.C. Sec. 303(i) or 362(k) (sanctions for filing involuntary proceeding in bad faith and sanctions for violating the automatic stay) would. Since no "custom-built" bankruptcy provision applied to redress harm arising from a malicious adversary proceeding, the claim could be brought in state court.

This opinion helps to point out that there are at least four different vehicles for addressing a frivolous or malicious claim in bankruptcy court:

1. Sanctions under Rule 9011 (which requires following Rule 9011's procedures);
2. Sanctions under 28 U.S.C. Sec. 1927 for vexatiously multiplying proceedings;
3. Sanctions under the Court's inherent authority to punish bad faith conduct under 11 U.S.C. Sec. 105; and
4. A state court malicious prosecution action.

In the absence of an express prohibition, an aggrieved party may use any of these remedies.

Full post as published by A Texas Bankruptcy Lawyer's Blog on January 12, 2009 (boomark / email).