In Rosenberg, et al. v. DVI Receivables XVII, LLC, 2016 WL 4501675, at *1 (3d Cir. Aug. 29, 2016), the Third Circuit Court of Appeals held that damages awarded pursuant to Section 303(i) of the Bankruptcy Code for an involuntary petition filed in bad faith did not preempt state law claims for damages brought by non-debtor affiliates.

Factual Background

Maury Rosenberg (Rosenberg) was the principal developer of National Medical Imaging, LLC (NMI) and National Medical Imaging Holding Company, LLC (NMI Holding) which, through affiliated limited partnerships (NMI LP's), operated medical imaging centers. In order to finance the purchase of medical equipment, the NMI LP’s entered into leases with DVI Financial Services, Inc., who later transferred the leases to DVI Funding, LLC. DVI Financial remained as the servicer of the leases and U.S. Bank acted as trustee.

During a dispute in state court over money owed by the NMI LP’s under the leases, DVI Funding and certain related entities filed involuntary bankruptcy petitions against Rosenberg, NMI and NMI Holding in the Bankruptcy Court for the Eastern District of Pennsylvania. Rosenberg transferred his involuntary petition to the Southern District of Florida, and the Bankruptcy Court there dismissed the involuntary petition against Rosenberg because DVI Funding and its related entities were not creditors of Rosenberg. The Bankruptcy Court for the Eastern District of Pennsylvania gave collateral estoppel effect to the Florida Bankruptcy Court’s decision and dismissed the involuntary petitions against NMI and NMI Holding.

Rosenberg then filed an adversary proceeding in the Southern District of Florida Bankruptcy Court pursuant to 11 U.S.C. §303(i)1 against DVI Funding, its related entities, Lyon Financial2 and U.S. Bank. After a bench trial, the Bankruptcy Court awarded Rosenberg fees and costs and transferred the remainder of Rosenberg’s bad faith filing claim to the District Court for a jury trial. At the conclusion of the jury trial, the jury awarded Rosenberg $1.1 million in compensatory damages and $5 million in punitive damages, and that decision was ultimately affirmed by the Eleventh Circuit.

Later, non-debtors Sara Rosenberg (Maury Rosenberg’s wife), the Rosenberg Trust and several NMI LP’s (the Rosenberg Affiliates) brought suit to recover damages under a state law tortious interference claim stemming from the involuntary petitions filed against Rosenberg, NMI and NMI Holdings. The plaintiffs argued that the involuntary petitions were filed with the intent to cause the NMI LP’s to default on their mortgages. As result of the involuntary petitions, the LP’s were declared in default of their mortgages and lost all of their real properties.

Defendants sought dismissal of the case arguing that the state law tortious interference claim was preempted by Section 303(i).


Turing to the preemption issue, the Third Circuit discussed the three forms of federal preemption: express, conflict and field. In determining whether preemption has occurred, the Third Circuit recognized that there is a strong presumption against preemption, including in the bankruptcy context. Specifically, the Third Circuit examined "whether there is enough evidence in the text, structure or purpose of § 303(i) or the Bankruptcy Code as a whole to rebut the presumption against preemption and say that it was Congress's 'clear and manifest intent' to preempt state law causes of action for non-debtors based on the filing of an involuntary bankruptcy petition." The Appellate Court concluded that the evidence is insufficient for field preemption.

The Third Circuit began with a review of the plain language of Section 303(i) and noted that it expressly provides a remedy for a debtor, but is silent regarding potential remedies for non-debtors harmed by an involuntary petition. This silence was interpreted as either an intent not to disturb existing state law or, more likely, that Congress did not contemplate non-debtor remedies at all, and it is unlikely that Congress would remove a means of judicial recourse without comment. The Third Circuit observed that barring non-debtors from recovery under Section 303 from state law claims seemed inconsistent with the remedial nature of Section 303.

The Third Circuit rejected Defendants' reliance the Ninth Circuit's holding in In re Miles, 430 F.3d at 1083, in which that court had held that Section 303(i) did preempt state law claims brought by non-debtors. The Third Circuit found the Ninth Circuit’s analysis on preemption unpersuasive and inconsistent with the tenets of preemption analysis articulated earlier in the opinion.


This case is significant for both creditors and affiliates of involuntary debtors and adds an additional risk for clients considering involuntary bankruptcy petitions. For affiliates of involuntary debtors, it provides a clear state court remedy assuming they can meet the requirements for standing. For creditors deemed to have filed petitions in bad faith, multiple and independent damages awards remain possible. This decision also leaves open the question of federal preemption application to other provisions of the bankruptcy code.


1The applicable part of Section 303(i) provides that a bankruptcy court may grant judgment against petitioners and for the debtor for attorneys' fees and costs and, if the petitioners filed in bad faith, for proximately caused damages as well as punitive damages. See 11 U.S.C. § 303(i).
2Lyon Financial acquired the servicing contracts from DVI Financial during DVI Financial’s bankruptcy proceeding.