Henry Stursberg Plaintiff - Appellant v. Morrison Sund PLLC Defendant
- Case Type:
- Consumer
- Case Status:
- Affirmed
- Citation:
- 23-1186 (8th Circuit, Aug 13,2024) Published
- Tag(s):
-
- Ruling:
- Dismissal of an involuntary bankruptcy petition under the abstention statute, 11 U.S.C. § 305(a), does not deprive the debtor of its rights to seek fees and damages under 11 U.S.C. § 303(i), and damages under § 303 preclude or preempt state law damages that otherwise may result from the filing of an involuntary petition.
- Procedural context:
- The former debtor sued his former law firm/petitioning creditor in the United States District Court for the Eastern District of Pennsylvania for state law tort damages that the debtor allegedly suffered because the law firm had filed an involuntary bankruptcy petition against him. The Pennsylvania District Court transferred the case to the United States Court for the District of Minnesota.
Upon the law firm's motion, the Minnesota District Court dismissed the debtor's state law tort claims against the law firm.
The former debtor timely appealed.
- Facts:
- Harry Stursberg owns a financial consulting firm that manages and coordinates loans and financing for mobile home parks and others. Two mobile home parks became distressed. Stursberg engaged Matthew Burton, of the law firm of Morrison Sund PLLC (the "Firm"), to represent him in a lawsuit in Minnesota against the co-owner of the two distressed mobile home parks. About 18 months later, Stursberg informed Burton that he would engage new counsel.
The Firm withdrew and sent Stursberg notice of unpaid fees. In December 2019, Burton informed Stursberg that he was "going to commence collection steps" if Stursberg did not agree to a payment plan.
On January 8, 2020, the Firm filed an involuntary bankruptcy petition against Stursberg, which triggered litigation by both parties in federal and state courts in Minnesota and Pennsylvania. In addition, Stursberg asked the bankruptcy court to dismiss the involuntary case under 11 U.S.C. § 305(a)(1) (§ 305 is captioned "Abstention"), not § 303. Stursberg's attorney explained that Stursberg was asking for attorney's fees and damages under § 305 and did not want to give all creditors notice, as required by § 303(j).
The bankruptcy court dismissed the involuntary petition under § 305(a)(1), criticizing the Firm for using bankruptcy as "a hammer" to collect its debt.
In March 2020, Stursberg filed a diversity action against Burton and the Firm for bad faith in filing the involuntary bankruptcy petition. The complaint asserted six state-law tort claims.
In May 2020, Stursberg filed a motion in the bankruptcy court asking to recover attorney's fees and costs under § 303(i)(1). Stursberg asserted that he reserved his rights to pursue claims and remedies under § 303(i)(2).
The bankruptcy court denied Stursberg's motion because the fee request was untimely under Fed. R. Bankr. P. 7054 and because dismissal under § 305 barred recovery under § 303(i). The bankruptcy court also expressed concern that Stursberg was seeking a double recovery on his damages claim because he had sued Burton and the Firm in Pennsylvania.
In December 2020, the United States District Court for the Eastern District of Pennsylvania dismissed Stursberg's state law claims without prejudice, asserting lack of jurisdiction and improper venue because those claims were pre-empted by 11 U.S.C. § 303(i).
Stursberg then commenced litigation in the Eastern District of Pennsylvania, asserting state law claims for abuse of process and the wrongful use of civil proceedings. The court transferred the case to the United States District Court for the District of Minnesota on the Firm's motion.
With the case back in Minnesota, the Firm renewed its motion to dismiss the case. The district court rejected the Firm's argument that the bankruptcy court’s judgment dismissing the involuntary petition precluded this damages action because a § 305 abstention order “is not ‘on the merits’ for purposes of claim preclusion.” The district court then granted the Firm's motion to dismiss because “Stursberg’s state tort claims are at least conflict preempted,” as evidenced by the remedies provisions of §§ 303 and 305.
- Judge(s):
- SMITH, Chief Judge, LOKEN and COLLOTON
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