Pilevsky v. Sutton 58 Associates LLC

Pilevsky v. Sutton 58 Associates LLC

No. 20-_____, Petition for Writ of Certiorari to the Supreme Court of the United States (filed 2021). From the Court of Appeals of the State of New York, 164 N.E.3d 984 (N.Y. 2020) (4-3 decision). Prior history: 168 A.D.3d 477 (N.Y. App. Div. 2019); Index No. 654917/2016 (N.Y. Sup. Ct. 2018).

Relevant Facts

• In June 2015, Sutton 58 Associates LLC loaned $147.25 million to finance a residential apartment project in Manhattan. The loan agreements included covenants prohibiting bankruptcy filings and requiring the borrowers to remain 'special purpose bankruptcy remote entities.'

• In January 2016, the borrowers defaulted. When Sutton 58 scheduled a UCC foreclosure sale, the borrowers filed voluntary Chapter 11 bankruptcy petitions in February 2016, triggering automatic stays that halted the foreclosure.

• The Pilevskys (Philip, Michael, and Seth Pilevsky, along with their entities Prime Alliance Group and Sutton Opportunity LLC) allegedly facilitated the bankruptcies by loaning $50,000 to one borrower for bankruptcy counsel and transferring cash and property interests to the other borrower that paid for bankruptcy counsel. These contributions also caused the borrower to lose its 'bankruptcy remote' status.

• The two bankruptcy cases were consolidated and liquidated via an approved plan; the property was sold at auction in December 2016 for $86 million. Sutton 58 alleged the property would have been worth approximately $100 million more if sold via UCC foreclosure before the bankruptcy proceedings.

• Sutton 58 sued the Pilevskys in New York state court for tortious interference with contract. The trial court denied the Pilevskys' motion for summary judgment on preemption. The Appellate Division unanimously reversed, finding preemption. The New York Court of Appeals reversed again (4-3), holding the tort claims were not preempted.

Legal Issues

• Whether the federal Bankruptcy Code preempts state-law tort claims that are premised on an alleged misuse of bankruptcy proceedings or that seek to impose liability based on the very fact of a debtor's bankruptcy filing.

• Whether state-law tort claims against non-debtor third parties can proceed when the claims are based on the non-debtors' role in facilitating a debtor's bankruptcy filing.

• Whether the existence of federal bankruptcy remedies for abuse of process (such as bad-faith dismissal under 11 U.S.C. § 1112(b)) preempts supplementary state-law tort claims.

Positions of the Parties

• The Pilevskys (petitioners) argued that state-law tort claims are preempted because they are entirely premised on the alleged wrongfulness of the bankruptcy proceedings. All of Sutton 58's damages flowed solely from the bankruptcy filings and the resulting automatic stay. The Bankruptcy Code provides exclusive remedies for bankruptcy abuse (bad-faith dismissal, sanctions), and permitting state tort claims would undermine federal uniformity, chill assistance to debtors seeking legitimate bankruptcy relief, and create intolerable forum-based disparities.

• Sutton 58 (respondent) argued the tort claims target non-debtor third parties rather than the debtors, are based on wrongful conduct that occurred prior to the bankruptcy filings (loans and property transfers), do not require inquiry into whether filings were made in 'bad faith' under federal standards, and have no impact on the debtors' fresh-start protections.

Decision of the Court and Reasons

This document is the petition for a writ of certiorari to the U.S. Supreme Court seeking review of the New York Court of Appeals' 4-3 decision.

The New York Court of Appeals held that the state-law tortious interference claims against the Pilevskys were NOT preempted by the Bankruptcy Code because: (1) the claims targeted non-debtor third parties rather than the debtors themselves; (2) the alleged wrongful conduct occurred before the bankruptcy filings; (3) the Bankruptcy Code is overwhelmingly concerned with protecting the debtor's estate, not preventing state suits against outsiders; and (4) the state court action would have no impact on debtors' fresh-start rights.

The Appellate Division had unanimously reached the opposite conclusion, finding preemption because all of Sutton 58's damages arose solely from the bankruptcy filings. The Pilevskys' petition argued that the Court of Appeals' decision conflicted with decisions from multiple other courts (including the Ninth Circuit, California, Ohio, Connecticut, and Pennsylvania courts) that found preemption in similar circumstances, and that the case presented an important question about the scope of federal bankruptcy preemption warranting Supreme Court review.