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Integrated Solutions, Inc. v. Service Support Specialties, Inc.

124 F.3d 487 (3rd Cir. 1997)

BANKRUPTCY; JUDGMENTS—Prejudgment tort claims are property of a bankrupt estate, but in New Jersey such claims cannot be assigned before judgment. Therefore, the purchaser of the tort claims from the estate had no more right than the trustee had, i.e. none.

A corporation filed for bankruptcy under Chapter 11. Former employees of the corporation entered its offices and took various documents, diagrams and drawings. Less than a week later, those employees opened a separate company and began servicing the bankrupt company’s accounts. A corporation acquired all of the bankrupt corporation’s assets from its bankruptcy trustee, including “all claims and causes of action” and “the right to recover for any past and future damages relating to the assets.” The purchaser then filed a complaint in District Court alleging misappropriation of assets, and sought a preliminary injunction enjoining the new company from engaging in certain behavior. The new company claimed that the asset sale violated a New Jersey law prohibiting assignment of prejudgment tort claims, and as a result the purchaser had no standing to pursue the state law causes of action. The District Court agreed and dismissed the state law claims by summary judgment. On appeal, the purchaser asserted that the New Jersey common law prohibition on assignment of state law tort claims was preempted by federal bankruptcy law

The United States Court of Appeals for the Third Circuit broke the claim down into three separate questions: First, does New Jersey law prohibit assignment of pre-judgment tort claims? Second, are a debtor’s prejudgment tort claims property of the bankrupt’s estate? Third when it enacted the Bankruptcy Code, did Congress intend to preempt state law restrictions on the assignability of tort claims

The Court looked to case law for the answer to the first question and found that, in New Jersey, tort claims cannot be assigned before judgment. As to the second question, the Court concluded that prejudgment tort claims were part of the property of the bankrupt estate. This finding was based both on the language of the Bankruptcy Code, which expressly includes causes of action, and on legislative history which clearly indicates that debtor’s interest in all property of any kind is to be considered property of the estate upon commencement of bankruptcy proceedings.

The answer to the third question required analysis of Congressional intent. The Court began by stating that an intent for federal law to pre-empt state law will not be inferred, but must either be explicit or compelled by an unavoidable conflict. The Court held that since there was no explicit Congressional intent to preempt state law regarding the assignability of tort claims, the trustee’s rights were limited to those rights the debtor possessed just before filing the petition in bankruptcy, regardless of whether the tort claims arose before or after the property passed to the bankrupt estate. Furthermore, the Circuit Court cited Supreme Court and Third Circuit decisions in support of its conclusion that without explicit federal preemption, a trustee has no greater rights in the property of the estate than the debtor had before filing for bankruptcy. The Court also found neither statutory language nor legislative history to support the purchaser’s claim that, in order to maximize the potential return to creditors as quickly and efficiently as possible, Congressional intent may be found to preempt state law.

The District Court concluded that since the bankrupt company would have been prohibited from assigning its prejudgment tort claims under New Jersey law, the trustee was subject to the same restriction. Accordingly, since the trustee lacked legal authority to assign the tort claims, the purchaser lacked standing to pursue the state law tort claims


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