The question in this case is whether federal bankruptcy law preempts plaintiffs’ state law tort claims, which allege that defendant tortiously interfered with plaintiffs’ contracts with another company that filed for bankruptcy.
The Supremacy Clause of the U.S. Constitution makes federal law the supreme law of the land and, as a result, federal law will preempt state law in certain circumstances. For instance, under “conflict preemption,” federal law preempts state law where the two bodies of law conflict. Under “field preemption,” federal law preempts state law, even if the two don’t necessarily conflict, if federal law sets out a governing scheme so comprehensive that it cannot abide by supplementary state rules. Some courts have held that federal bankruptcy law–a comprehensive and exclusively federal scheme–preempts state law tort claims that are premised on injuries allegedly caused by a bankruptcy filing.
This case implicates that rule. Plaintiffs lent money to a borrower, who was developing a residential real estate project in Manhattan. In effect, the borrower pledged the real estate it was developing as collateral for the loan. The loan agreements contained provisions intended to prevent the borrower from filing for bankruptcy in the event of a default. Notwithstanding these provisions, the borrower defaulted and filed for bankruptcy–with defendants’ assistance. Plaintiff alleges that defendant lent the borrower money (to retain bankruptcy counsel) and transferred assets to the borrower (to facilitate its bankruptcy filing).
Plaintiffs ultimately got the borrower’s pledged collateral through the bankruptcy proceeding, but they were allegedly injured by the delay caused by that proceeding. They sued defendants for tortious interference with their contracts with the borrower, alleging in essence that defendants conspired with borrowers to get out from under the no-bankruptcy provisions of their agreements with plaintiffs.
Defendants moved for summary judgment, arguing that plaintiffs’ claims were preempted because they arose from the borrower’s bankruptcy filing. Allowing tort claims premised on the filing of a bankruptcy petition would, in defendants’ view, chill bankruptcy proceedings and stand as an obstacle to the availability of a federal bankruptcy forum. Supreme Court denied the motion, but the First Department reversed, holding without discussion that plaintiffs’ claims were preempted by federal bankruptcy law.
The Court of Appeals granted leave to appeal.
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