Gene R. Smith Corp. v. Terry's Tractor, Inc

In Gene R. Smith Corp. v. Terry's Tractor, Inc. (1989) 209 Cal. App. 3d 951, a debtor had sued a creditor for the malicious prosecution of an involuntary bankruptcy petition against the debtor. The Gene R. Smith court noted that 11 United States Code section 303(i) "permits the bankruptcy court on dismissal of a petition to award a debtor costs, reasonable attorney's fees and any damages proximately caused by the taking of the debtor's property. If the involuntary petition is filed in bad faith the bankruptcy court has the additional power to award damages proximately caused by such filing and punitive damages. This provision reflects Congress's intent that the case-by-case development of law relating to 'bad faith' in this context should be accomplished in federal courts and not in state courts. The parties make no effort to distinguish the difference, if any, between conduct constituting 'bad faith' and 'malicious prosecution' treating both as virtually identical. On that assumption, it would indeed be anomalous and, to say the least, inconsistent with this legislative intent for state courts to develop a different, more liberal definition of 'bad faith' for malicious prosecution purposes than that developed in the federal system. Different standards defining identical conduct adds an unnecessary and confusing component to the uniform law to be applied in bankruptcy proceedings. The additional risk that substantial damage awards in state courts would create a material disincentive to those seeking to use the bankruptcy laws only exacerbates the problem. The determination of damages in state courts should not determine the potential cost of entry into the federal bankruptcy system." ( Gene R. Smith Corp. v. Terry's Tractor, Inc., supra, 209 Cal. App. 3d at pp. 954-955.)