Stursberg v. Morrison Sund PLLC

Background

Henry Stursberg alleged that Morrison Sund PLLC, a law firm, abused the bankruptcy process by filing an involuntary Chapter 7 bankruptcy petition against him under 11 U.S.C. § 303. According to the complaint, the filing followed a dispute over legal fees incurred while Morrison Sund represented Stursberg and 1648 Properties, LLC in a Minnesota lawsuit. Stursberg alleged that the petition was knowingly false and was used as a debt-collection device. The bankruptcy court dismissed the petition under 11 U.S.C. § 305(a)(1), which allows a bankruptcy court to abstain from exercising jurisdiction when dismissal or suspension would better serve the interests of the debtor and creditors.

Stursberg later sought attorney fees and other relief under 11 U.S.C. § 303(i), but the bankruptcy court denied that request as untimely and concluded that relief under Section 303(i) was unavailable after a dismissal under Section 305. Stursberg then brought this federal case, asserting state-law claims for abuse of process and wrongful use of civil proceedings against Morrison Sund. After the case was transferred to the District of Minnesota, he filed a purported amended complaint adding Matthew Burton and additional state-law claims.

Amended complaint

Federal Rule of Civil Procedure 15(a)(1) allows one amendment without court permission within specified deadlines. Judge Tostrud concluded that Stursberg had already exhausted that right before the transfer. The transfer did not restart or revive the deadline because the case remained in the same procedural posture. The court therefore held that the amended complaint was not operative. Stursberg had not filed a proper motion for leave to amend under Rule 15(a)(2) and the District of Minnesota’s local rules; the court denied his apparent request for leave.

Claim preclusion

Morrison Sund argued that the bankruptcy court’s dismissal barred this lawsuit under claim preclusion, a doctrine that prevents relitigation of claims resolved by an earlier final judgment. Judge Tostrud rejected that argument. The bankruptcy court had dismissed the involuntary petition under Section 305 as an abstention decision—meaning it declined to exercise jurisdiction—not as a decision on the merits. Because the bankruptcy dismissal was not on the merits, it did not preclude Stursberg’s claims in this case.

Bankruptcy-law preemption

Morrison Sund also argued that 11 U.S.C. § 303(i) preempted Stursberg’s state-law claims. Preemption means that federal law displaces a state-law claim. The court concluded that the claims were at least conflict-preempted. Section 303(i) provides a bankruptcy-law remedy that can include attorney fees and costs and, for a bad-faith involuntary petition, compensatory and punitive damages. Judge Tostrud reasoned that Congress assigned responsibility for deciding those issues to the bankruptcy court in which the involuntary case was filed and dismissed. Allowing a jury to decide the same alleged misconduct under different state-law standards would conflict with that federal remedial system.

The court distinguished decisions involving non-debtors and a Third Circuit decision involving a debtor who faced a choice between promptly converting a bankruptcy case and preserving potential claims. Judge Tostrud found that Stursberg did not face the same circumstances. The court also noted that the Supreme Court and the Eighth Circuit had not addressed whether Section 303(i) preempts state-law claims arising from the filing of an involuntary petition.

Disposition

The court granted Morrison Sund PLLC’s motion to dismiss the original complaint. It also granted Morrison Sund PLLC and Matthew Burton’s amended motion to dismiss. The court dismissed the action with prejudice because the amended complaint was unauthorized and Stursberg had not shown how he could amend the complaint to overcome the preemption problem. Judgment was ordered to be entered accordingly. Judge Eric C. Tostrud signed the order on January 3, 2023.