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A judge in the Northern District of New York has held that the U.S. Bankruptcy Code pre-empts state law claims and also precludes action under the Fair Debt Collection Practice Act when the allegations are rooted solely on code violations. Chief Judge Frederick J. Scullin Jr. of Syracuse, N.Y., found that allowing state law claims would “thwart Congress’ intent in promulgating the Bankruptcy Code to create a singular federal system to adjust all of the rights and duties of both creditors and debtors.” Similarly, he said a plaintiff cannot be allowed to circumvent the civil contempt provision in the Bankruptcy Code by initiating a claim under the Fair Debt Collection Practice Act, which allows damages and attorneys’ fees. To do so, Scullin said, “would directly contravene the Bankruptcy Code’s remedial scheme.” Scullin’s ruling this month in Diamante v. Solomon & Solomon PC stems from a protracted dispute between a debtor and a collections law firm. It is rooted in a voluntary petition filed back in 1994 by Alfred E. Diamante. Diamante’s initial petition neglected to list a debt owed to Monogram Bank and assigned for collection to Solomon & Solomon, an Albany, N.Y., law firm. After the petition was amended to include that obligation, Solomon & Solomon notified debtor’s counsel, Marc S. Ehrlich of Troy, that it did not consider the debt dischargeable. Regardless, the debt was discharged, after which Solomon & Solomon froze Diamante’s bank account. Later, Solomon & Solomon released the restraint. Prior to the release of the funds, Diamante, now represented by Richard L. DiMaggio of Clifton Park, N.Y., initiated an adversary proceeding accusing Solomon & Solomon of willful violation of the automatic stay, emotional distress and conversion. Bankruptcy Judge Robert E. Littlefield Jr. held that since the alleged violation of the automatic stay had occurred after discharge, there was no automatic stay in place at the time the debtor’s bank account was frozen, and therefore there could be no violation of the stay. Meanwhile, Solomon & Solomon sought sanctions under Federal Rule of Bankruptcy Procedure 9011, which integrated Rule 11 of the Federal Rule of Civil Procedure and was intended to curtail abusive litigation. Judge Littlefield denied the motion on the grounds that Solomon & Solomon had failed to strictly comply with the time requirements of the “safe harbor” provision of Rule 9011. The most recent decision arises from Diamante’s pursuit of attorney’s fees under the Fair Debt Collection Practices Act and damages pursuant to state law claims sounded in abuse of process, conversion and intentional infliction of emotional distress. Judge Scullin referred the matter back to the bankruptcy court, which issued a finding that Solomon & Solomon improperly restrained Diamante’s bank account, but that any damages were negated through the defendant’s adequate demonstration of laches, the failure to make a claim at the proper time. TWO ISSUES LEFT That left two primary issues for Judge Scullin’s consideration: the Bankruptcy Code’s impact on state law claims, and the Bankruptcy Code’s impact on Fair Debt Collection Practices Act claims. On the former, Scullin said the vast majority of courts that have addressed the issue have held that the Bankruptcy Code pre-empts state law claims. He termed “persuasive” the view that “because the Bankruptcy Code provides a remedial scheme for addressing violations of the Bankruptcy Code, it preempts state law claims based upon such violations.” Scullin said the sole basis for Diamante’s state law claims is the allegation that Solomon & Solomon violated the federal code by attempting to collect a discharged debt. “By asserting these claims, plaintiff is, in effect, attempting to circumvent the enforcement and remedial scheme of the Bankruptcy Code, which provides a remedy for any violation … in the form of possible contempt sanctions,” Scullin said. On the Fair Debt Collection Practices Act claim, courts are divided on whether the Bankruptcy Code precludes such action. Several courts have found preclusion and several others have not. Judge Scullin found preclusion and dismissed Diamante’s complaint in its entirety. He noted that the Bankruptcy Code provides a specific remedy, civil contempt, and allowing a plaintiff to circumvent that provision through a Fair Debt Collection Practices Act claim would undercut the code’s remedial scheme. “If the reasoning of the courts finding no preclusion were followed, it would render the Bankruptcy Code’s remedy … superfluous because in most, if not all, cases, the plaintiff would choose the potentially more lucrative remedies found in the [Fair Debt Collection Practices Act],” Scullin said. Appearing were Richard L. DiMaggio for the plaintiff and Douglas Fisher for Solomon & Solomon.

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