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Pennsylvania Supreme Court Finds That The Bankruptcy Code Preempts State Law Dragonetti Claims

In a case of first impression, the Pennsylvania Supreme Court found that state court wrongful use of civil proceedings and abuse of process claims (Dragonetti claims) which are based on frivolous claims filed in Bankruptcy Court are pre-empted by the Bankruptcy Code. Stone Crushed Partnership v. Kassab Archbold Jackson & O'Brien, et. al., 908 A.2d 875 (Pa. 2006).

This case arose when plaintiffs and defendants formed a partnership to purchase real estate. The partnership, Granite Partners I, Ltd. ("Granite") entered into an agreement of sale to purchase land secured by a mortgage, note, and personal guarantees from the three partners, Jackson, Archbold and O'Brien. Granite later defaulted on the loan and the mortgage holder confessed judgment against it and the three partners. Jackson, one of the three partners sought to avoid foreclosure by forming his own partnership, Stone, to purchase the mortgage and note from the lender. The mortgage and note were assigned to Stone. Granite later filed for Chapter 11 relief under the Bankruptcy Code and sought to have the debt to Stone discharged. Adversary proceedings ensued and at all stages of the proceedings, including an appeal to the Third Circuit Court of Appeals, the case was decided in favor of Jackson and his partnership, Stone.

On an unrelated matter, Jackson sued Archbold and O'Brien's law firm relative to another building partnership. Archbold and O'Brien counterclaimed and asserted claims against Jackson that they had raised in the bankruptcy proceedings. The counterclaim was ultimately dismissed and upheld by the Superior Court. Jackson then asserted a claim for wrongful use of civil proceedings and abuse of process in state court. The claim was dismissed by the trial court which found that the claims were preempted by the Bankruptcy Code. The decision was upheld on appeal to the Superior Court.

The Supreme Court found that the Bankruptcy Code preempts a state law Dragonetti claims based upon a frivolous claim filed in Bankruptcy Court proceedings because Congress evinced an intent to govern the whole filed and Fed. R. Civ. P. 11, 28 U.S.C. § 1927, and the Bankruptcy Code potentially provide for the equivalent protection afforded by the Commonwealth to its citizens. The Supreme Court's holding settles for Pennsylvania a long-standing disagreement among state and federal courts on the issue of whether the Bankruptcy Code preempts state law abuse of process claims.

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