Anything you do in bankruptcy can and will be used against you in bankruptcy. Prior to the commencement of a bankruptcy case, perhaps courts should issue this Miranda-esque warning to the parties. At least, if the bankruptcy court had, Plymouth LLC (“Plymouth”) might have saved approximately $800,000 that it spent acquiring a lien against Princeton LP’s (“Princeton”) vacant office park in the Township of Lawrence, New Jersey. Recently, the United States Court of Appeals for the Third Circuit held that Plymouth’s claim against Princeton in Princeton’s bankruptcy case was disallowed for violating New Jersey’s tax sale law pursuant to section 502(b)(1) of the United States Bankruptcy Code (the “Code”). There, Plymouth unsuccessfully argued that the claims allowance process in bankruptcy preempted New Jersey’s tax sale law. As this case illustrates, the application of the preemption doctrine in bankruptcy can have a dramatic effect on the outcome of a bankruptcy case. A court’s decision regarding the applicability of preemption in the claims allowance context can mean the difference between a creditor receiving the total value of their claim, or nothing at all. Therefore, it is crucial for the parties to a bankruptcy case to understand the jurisprudence of the preemption doctrine before proceeding.
Preemption is a judicially created doctrine pursuant to the Supremacy Clause of Article VI of the United States Constitution that “invalidates state law that interfere with, or are contrary to, federal law.” In turn, the application of preemption in bankruptcy is highly nuanced because bankruptcy courts must often look to state law to determine the rights and obligations of the parties to a bankruptcy proceeding. Therefore, bankruptcy is a unique area of the federal law because of the high level of interaction between state law and the Code.
This article discusses the application of the preemption doctrine in bankruptcy, and more specifically, to section 502 of the Code which governs the claims allowance process. Part I examines the doctrine of preemption, and its various applications in bankruptcy. Part II provides background information for the In re Princeton case. Finally, Part III discusses the Third Circuit’s opinion in In re Princeton, and the implications of that decision to the application of the preemption doctrine in bankruptcy.