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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
IN RE: §
§ CASE NO. 15-34872
STANISLAW R. BURZYNSKI §
§ (CHAPTER 7)
DEBTOR §
PETITIONING CREDITOR’S RESPONSE TO PUTATIVE DEBTOR’S RULE 12 (b) (6)
MOTION (DOCKET NO. 7) AND PETITIONING CREDITOR’S MOTION TO COMPEL
PUTATIVE DEBTOR TO COMPLY WITH BANKRUPTCY RULE 1003(b) FOR ALL
CREDITORS AND TO FILE AN ANSWER
PURSUANT TO LOCAL RULE 9013:
THIS MOTION SEEKS AN ORDER THAT MAY ADVERSELY AFFECT YOU.
IF YOU OPPOSE THE MOTION, YOU SHOULD IMMEDIATELY CONTACT
THE MOVING PARTY TO RESOLVE THE DISPUTE. IF YOU AND THE
MOVING PARTY CANNOT AGREE, YOU MUST FILE A RESPONSE AND
SEND A COPY TO THE MOVING PARTY. YOU MUST FILE AND SERVE
YOUR RESPONSE WITHIN 21 DAYS OF THE DATE THIS WAS SERVED ON
YOU. YOUR RESPONSE MUST STATE WHY THE MOTION SHOULD NOT
BE GRANTED. IF YOU DO NOT FILE A TIMELY RESPONSE, THE RELIEF
MAY BE GRANTED WITHOUT FURTHER NOTICE TO YOU. IF YOU
OPPOSE THE MOTION AND HAVE NOT REACHED AN AGREEMENT, YOU
MUST ATTEND THE HEARING. UNLESS THE PARTIES AGREE
OTHERWISE, THE COURT MAY CONSIDER EVIDENCE AT THE HEARING
AND MAY DECIDE THE MOTION AT HEARING.
REPRESENTED PARTIES SHOULD ACT THROUGH THEIR ATTORNEY.
TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE:
Petitioning creditor, Richard Jaffe, files this response to putative debtor’s Rule 7012 (b) motion and
petitioning creditor’s motion requiring the putative debtor to fully comply with Bankruptcy Rule 1003 (b), and
would respectfully show the Court as follows:
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 1 of 47
2
SUMMARY OF RESPONSE/MOTION
As a matter of statute and on-point Texas bankruptcy case law, neither of the two asserted bases of the
Rule 7012 (b) (6) motion are legal bases for dismissal under the rule. The factual assertion of a “bona fide
dispute” regarding petitioning creditor’s debt, as a matter of law, cannot be the basis of a Rule 7012(b) (6)
motion under the logic of the rule and bankruptcy practice which is different from civil rule 12 (b) (6) motion
practice, as explained by on-point Texas bankruptcy authority.
Movant counsel’s representation that there are 12 or more creditors and that petitioning creditor
knows it is a factual defense which cannot be asserted in a Rule 7012 (b) (6) motion. The only proper vehicle
for asserting a factual defense of 12 or more creditors is by averring such in an answer and providing the
required information about the creditors as set forth in Bankruptcy Rule 1003(b). Recently, a schedule of
“unpaid bills” has been served, but the list is incomplete in that it does not include former patients who
overpaid the putative debtor and have credit balances on their accounts. These former patients (or their estates)
are creditors and the failure to include these creditors renders the Rule 1003(b) filing incomplete and
inadequate. In addition to the former patients, insurance companies who have requested refunds of monies
allegedly erroneously paid on the clinic’s patients’ behalf are also creditors and should be listed on the
complete 1003(b) form. Petitioning Creditor is therefore requesting that the motion be denied and that the
putative debtor be ordered to file an answer addressing all of the allegation in the petition and fully complying
with Rule 1003 (b) listing all creditors.
FACTUAL BACKGROUND
As this is a motion to dismiss filed under Rule 7012(b), the facts set forth in the involuntary petition
form are taken as true and the issue in a Rule 7012(b) (6) motion is if the facts alleged state a claim
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 2 of 47
3
for relief. Additional facts which may be required are set forth in the discussion of the purported
factual basis of putative debtor’s motion.
1. THE FACTUAL ALLEGATION OF A “BONA FIDE DISPUTE” IS NOT A VALID
BASIS OF A RULE 7012(b) (6) MOTION
Movant’s counsel asserts in this Rule 7012(b) motion that a bona fide dispute concerning the
debt requires dismissal of the petition under Rule 12(b) (6). However, a putative debtor’s counsel’s
assertion of a bona fide dispute is not a proper basis of a rule 701212(b) (6) motion. Unlike civil
practice, involuntary chapter 7 petitions are usually commenced by the use of a bankruptcy court-
approved form. Therefore, civil 12(b) (6) authority is not authoritative in a Rule 7012 (b) (6)
analysis logically and based on on-point Texas bankruptcy authority.
In in re Rambo Imaging, LLC, case no 07-11190-frm (WD Tex. 2007) (copy attached), one
petitioning creditor filed an involuntary chapter 7 petition using the court-approved form. The
putative debtor filed an unspecified rule 12(b) motion to dismiss, alleging, inter alia, that the debt
was subject to a bona fide dispute thereby justifying dismissal under Rule 12(b).
Because the motion was not filed under a specific subparagraph, the bankruptcy court engaged
in an exhaustive analysis of the various sub parts of Rule12 (b) and concluded the factual assertion
of a bona fide dispute could not be the basis for granting a Rule 12(b) motion. The court’s
reasoning was that a 7012 (b) (6) motion (the most likely sub part) challenges the legal sufficiency
of the petition’s allegations. However, when the approved involuntary petition form is used, the
allegations are sufficient as a matter of law and contesting the factual allegations in a form petition
renders dismissal under rule 12(b) (6) unavailable or inappropriate.
The putative debtor in this case is attempting to use the same counsel-asserted “bona fide
dispute” argument rejected by the bankruptcy court in Rambo Imaging LLC. We request that the
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 3 of 47
4
Court follow the reasoning and result and conclude that counsel’s assertion of a bona fide dispute is
not a legal or legitimate basis for a Rule 7012(b) (6) motion.
Rambo Imaging LLC appears to be dispositive of the bona fide dispute basis in the Motion
to Dismiss. However, if the Court chooses not to follow Rambo Imaging, LLC and the logic of
limiting a rule 7012 (b) analysis to the sufficiency of the involuntary petition form, and decides to
pursue this issue despite there being no answer on file or issue being properly joined, Fifth Circuit
authority uses an objective standard for determining the existence of a bona fide dispute. See in re
Corrline International, LLC, 516 B.R. 106, 146 (S.D. Tex. 2014)(“the Fifth Circuit holds that under
the ‘objective standard’ test, ‘neither the debtor's subjective intent nor his subjective belief is
sufficient to meet [his] burden’ of proving a bona fide dispute exists. Id. (quoting in re Rimell, 946
F.2d at 1365”).
The court in in re Corrline International, LLC also stated:
“Further, it is well established that the previous recognition of a debt is evidence that no bona
fide dispute exists, and that self-serving testimony is insufficient to prove the existence of a
bona fide dispute. See Wishgard, LLC v. Se. Land Servs. LLC (in re Wishgard, LLC), no. 13–
20613–cmb, 2013 WL1774707, at *6 (Bankr. W.D. Pa. Apr. 25, 2013); in re Faberge rest.
of Florida, Inc., 222 B.R. 385, 389 (Bankr. S.D. Fla.1997). (emphasis added).
In Re Corrline, supra, 516 B.R. at 148.
A corollary or logical implication is that the existence of a bona fide dispute is determined at
the date of the petition, not after the fact. Again, although not necessary for the disposition of the
Rule 12 (b) (6), to the extent the Court requires addressing the counter facts alleged by counsel in this
Motion, petitioning creditor states that after the last bill was sent in July 2015, (for the amount which
is the basis of this petition), the putative debtor stated in writing the reason for nonpayment and it had
nothing to do with a dispute as to liability or the amount of the debt.
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 4 of 47
5
With the same caveat as above, prior communications between the parties as far back as
August 2014 involving lesser amounts further demonstrate that the reason for non-payment of the
amounts due was not because of the existence of a bone fide dispute. Estoppel also comes into play
because a putative debtor cannot continue to accept the benefit of services month-after-month and
then after the filing of petition claim a bona fide dispute.
After issue is properly joined, and at the hearing of the merits, these written communications
(or redacted versions thereof) will be offered into evidence. These documents will show that counsel’s
assertion of a bona fide dispute is the same type of “manufactured… ‘disputes’” created after the
filing of the petition which the Corrline International LLC court rejected. Id. 1
2. PUTATIVE COUNSEL’S STATEMENT THAT THERE ARE 12 OR MORE
CREDITORS IS NOT A BASIS FOR DISMISSAL UNDER A RULE 12 (b)(6) MOTION
AND THE LIST OF UNPAID BILLS IS NOT IN COMPLIANCE WITH RULE 1003 (b)
The second asserted basis for the Rule 12(b) motion is putative debtor’s counsel’s assertion
that there are 12 or more creditors. However, this assertion by counsel is not assertable in a Rule
7012 (b) motion. Rather, it must be asserted in an answer in compliance with the Bankruptcy Rule
1003 (b).2 Therefore, the Rule 12 (b) (6) motion was defective on its face when filed.
1 The movant does cite several cases in its Legal Standard section. However, the cases cited in
paragraphs 1 and 2 are all civil cases explaining and applying Rule 12 (b) (6). As suggested above,
none of these cases have any relevance to a Bankruptcy Rule 7012 (b) (6) motion where a
bankruptcy court-approved form is used as the complaint, based on common sense and the holding
of In re Rambo Imagining, LLC. Paragraph 3 contains citations to some bankruptcy cases but has no
obvious application to a Rule 7012 (b) (6), motion which is limited to the four corners of the
bankruptcy petition form. Paragraph 4 cites a case for the general burden of proof requirements, but
the case also contains an extensive analysis of the statutory abstention doctrine, and its citation may
thus be an indirect attempt to raise the abstention/two-party dispute issue. To cover that possibility,
the issue will be briefly addressed separately, infra.
2 Bankruptcy Rule 1003 (b) provides that:
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 5 of 47
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Nine days after the motion was filed, Movant filed a notice of creditors and attached a list of
“unpaid bills” from the putative debtor. However, the putative debtor has one or more additional
creditors beyond the creditors listed in the unpaid bills list, namely as of the time of the filing of the
petition, there is one or more former patients who are creditors based on overpayments to the
putative debtor and his clinic. These individuals (or their surviving relatives) are creditors and
should be included in the 1003(b) list. In addition, there is one or more insurance carriers who have
paid for the clinic’s treatment of their insureds who have sought recovery of some or all amounts
previously paid. These carriers are also creditors of the putative debtor and should be listed on the
Rule 1003 (b) schedule.
A Rule 1003 (b) list of creditors must contain information about “all creditors.” See Rule 1003
(b) quoted footnote 2 above and In re Corrline, supra, 516 B.R. at 151. The failure to file a
complete list of creditors means that the filing is not in compliance with the rule. It has been held
that noncompliance with Rule 1003 (b) estops the debtor from including creditors in the numerosity
calculation. Id. In the event the putative provides a complete list of creditors, it is requested that the
list of patient creditors contain their phone numbers and email addresses since they are not
businesses, that contact information about the patient’s closest relative be included, since some of
the patient creditors may be deceased.
With the same above caveat that the Motion to Dismiss is defective, and that the list of unpaid
bills is not in compliance with Rule 1003 (b), which should mean that the Court need not go behind
“JOINDER OF PETITIONERS AFTER FILING. If the answer to an involuntary petition filed by
fewer than three creditors avers the existence of 12 or more creditors, the debtor shall file with the
answer a list of all creditors with their addresses, a brief statement
of the nature of their claims, and the amounts thereof. If it appears that there are 12 or more
creditors as provided in § 303(b) of the Code, the court shall afford a reasonable opportunity for
other creditors to join in the petition before a hearing is held thereon.” (emphasis added)
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 6 of 47
7
the involuntary petition form or address the numerosity issue at this time, at the hearing on the
merits (or such other time as the Court determines), evidence will be offered showing that the
putative debtor and his representative provided misleading and incorrect information about his
financial situation, financial prognosis and only vague and self-serving information about the
number of creditors in an effort to justify lack of full payment of the increasing amounts due, in
order to induce petitioning creditor to continue providing services, thereby refuting movant’s
allegation of bad faith.
Finally, with the above caveat, even if the putative debtor fully complies with Rule 1003(b) and
proves that he has 12 or more qualified creditors, petitioning creditor expects to adduce evidence
satisfying the special circumstance exception to the three creditor rule based on “fraud, trick,
artifice or scam” as recognized in this district. See In re Corrline International, LLC., 516 B.R.
supra at 161 citing, In re Norriss Bros. 133 B.R. 599, 608-609 (N.D. Tex. 1991). See also, In re
Moss 249 B.R. 411, 424 (N.D. Tex. 2000) (also adopting the special or exigent circumstance
exception to the three creditor rule based on a finding that “all creditors will be benefitted by the
entry of an order for relief…” even in the absence of three petitioning creditors.
The factual basis of the special or exigent circumstance consist of, inter alia, substantial
payments by the putative debtor for personal living expenses in derogation of the rights of his
creditors (including hundreds of thousands of dollars in payments for real estate taxes, mortgage
and other payments on exempt and non-exempt property in this country and abroad, which property
has a combined appraised value of in excess of $14,000,000, despite admitting to unpaid trade
creditor bills of over 1.1 million dollars. There will likely also be evidence which raises substantial
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 7 of 47
8
public interest issues which may be relevant to the special circumstance exception under current
special exception authority or a reasonable extension thereof.3
3. ABSTENTION
Although there is no answer raising the issue, and the word “abstention” is not mentioned in the
motion to dismiss, Movant does cite in re Xacar, 216 B.R.187 (S.D. Tex. 1997) (Motion to Dismiss
page 3 para. 4) which case has an extensive discussion of abstention under U.S.C. Section 305. If
this issue is raised in an answer, or if the Court choses to address this issue because of Movant’s
reference to in re Xacar, it should be pointed out that the factors set forth in 11 U.S.C. 304 (c) are
similar to the special or exigent circumstances exception to the three petitioning creditor rule.
As indicated above, there are one or more former patients who are owned refunds for reasons
which will be detailed at the hearing on the merits. Some of these former patients may have died
and if so, it would involve payment to the estate of the former patient. Unlike many of the trade
creditors listed in the incomplete Rule 1003(b) list of unpaid bills, these former patients (or their
estates) have no on-going relationship with the putative debtor, so short of employing collection
attorneys, they have no practical recourse for recovery of their credit balances. There are or may be
other complicating factors affecting these credit balances which will be presented at the hearing on
the merits.4
3 Although this district and the Northern District have expressly adopted the special or exigent
circumstances exception to the three petitioning creditor rule, one judge in the Western District has
rejected it and Norriss Bros. See In re Green, Case NO. 06-11761-FM (W.D. Tex. 2007)
4 The information in this section and some of the information in other sections of this
response/motion is admittedly vague. Some of the specific factual rebuttals are derived from
attorney-client communications which originally were or might have been covered by the attorney-
client privilege. However, because the movant has argued for dismissal based on a bona fide
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 8 of 47
9
4. REQUEST FOR BOND
As part of the Rule 12(b) (6) motion, the Movant also seeks a bond under Bankruptcy Code
Section 303(e).5 However:
“the bankruptcy code does not mandate that a bond be posted, involuntary debtors are not
entitled to a bond as a matter of course, and such a bond is not routinely required of petitioners
on request of a debtor. See in re Contemporary Mission, Inc., no. 5-82-00915, 1983 Bankr.
Lexis 6916, at *6 (Bankr. D. Conn. Jan. 31, 1983); in re Reed, 11 B.R. 755, 757 (Bankr. S.D.
W. Va. 1981). The burden is on the alleged debtor to show the need for a bond by showing,
for example, that the petition was filed in bad faith or with an improper motive. Hutter Assocs.,
Inc. V. Women, Inc. (in re Hutter Assocs., Inc.), 138 B.R.512, 516 (W.D. Va. 1992).”
In re: James E. Lundeen, sr., involuntary chapter 7, alleged debtor.
Case no. 07-19422. United States Bankruptcy Court, N.D. Ohio, Eastern Division (copy
Attached. No on point Fifth Circuit authority found).
Presumably the request for a bond is based on the alleged bad faith arising out of the asserted
bona fide dispute about the debt and counsel’s assertion that there are 12 or more creditors. Because
the presumed asserted bases of the bond are also the arguably defectively asserted factual defenses
dispute, bad faith, and may have indirectly asserted the two-party dispute and/or abstention, and in
general because the claim which is the basis of this involuntary petition involves services rendered
by an attorney, the federal doctrine of implied waiver of the attorney-client privilege applies, as
does certain provisions of the Texas Disciplinary Rules of Professional Conduct permitting
disclosure of otherwise protected information based on a public interest analysis. This is why it was
suggested above that some of the information responsive to this motion may be submitted under
seal, to protect the putative debtor from a public filing of the specific facts responsive to Movant’s
factual contentions. (And for the same reason, there is no citation to a specific Texas rule allowing
disclosure of otherwise protected information). The purpose of this footnote is to provide Movant
and the Court notice of this waiver issue, to avoid undue harm to the putative debtor, as well as
explain the reason for the vagueness of some of the information in this Response/Motion. 5 Bankruptcy code § 303(e) states: "After notice and a hearing, and for cause, the court may require
the petitioners under this section to file a bond to indemnify the debtor for such amounts as the
court may later allow under subsection (i) of this section.
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 9 of 47
10
to the petition, it may be premature for a bond hearing since issue has not been properly joined.
There should be one hearing where these common issues can be adjudicated.
But Movant has not fully complied with Bankruptcy Rule 1003(b). Therefore, the Court should
defer consideration of a bond until Movant fully complies with the applicable rule which is a
precondition of raising the numerosity defense. There is (not for publication) authority in another
circuit supporting this position. See in re: Apollo Health Street, Inc., debtor. Case no.: 11-22970
(nlw) United States Bankruptcy Court for the District of New Jersey dated: May 23, 2011 (copy
attached).
Some of the facts supporting the special circumstances exception to the 12 qualified creditor
rule may be applicable to the cause determination for a bond, but for the reasons set forth in
footnote 4, some of this information may be submitted under seal at the appropriate time.
Finally, it may be worth noting that the claim for legal services which is the basis of this petition
is for 10 times the amount of the requested bond. The communications between the parties involving
inducement and estoppel may also be relevant to the cause determination for a bond.
RELIEF REQUESTED
Petitioning creditor requests that the Rule 7012(b) (6) motion to dismiss be denied in all
respects, and that the putative debtor be ordered to provide the required creditor information (plus
last known phone numbers and email addresses) regarding all former patients who have a credit
balance on their accounts, the required information regarding any health insurance carriers who are
creditors, and that the request for a bond be denied, or that the hearing on the bond be continued and
held with the hearing on this involuntary petition. It is also requested that the putative debtor be
required to file an answer to the involuntary petition admitting or denying all of the elements
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 10 of 47
11
alleged in the petition, including whether he is generally paying his debts as they become due.
Respectfully Submitted,
s/:Richard Jaffe
Richard Jaffe, Petitioning Creditor
TSB 10529500
770 L Street. Suite 950
Sacramento, Ca. 95616
713-626-3550
713-626-9420 (fax)
Certificate of Conference
I certify that on October 30, 2015, I conferred with counsel for the movant concerning the
motion to dismiss and our motion and based on these communications it was decided that the papers
should be submitted to the court for disposition.
s/:Richard Jaffe
Richard Jaffe, Esq.
Certificate of Service
The undersigned certifies that he served a true and correct copy of this response to the motion to
dismiss and motion to compel compliance with Rule 1003(b) by ECF notification, to the parties on the
ECF service list on this 1st day of November, 2015 and specifically to Joshua Wolfshohl Esq., Porter
Hedges, LLP, 1000 Main Street, 36th floor Houston Tx. 77002, and Diane Livingstone, Assistant US
Trustee, 515 Rusk, St. Suite 3516, Houston Tx, 77002 and also emailed a copy of these papers to
them.
s/: Richard Jaffe
Richard Jaffe, Esq.
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 11 of 47
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
IN RE: §
§ CASE NO. 15-34872
STANISLAW R. BURZYNSKI §
§ (CHAPTER 7)
DEBTOR §
PROPOSED ORDER
CAME ON TO BE HEARD, putative debtor Stanislaw R. Burzynski’s Rule 12(b)
Motion to Dismiss the Involuntary Chapter 7 petition filed by petitioning creditor, Richard Jaffe,
and petitioning creditor’s motion to compel the putative debtor to provide a Bankruptcy Rule
1003(b) containing information for all creditors.
Upon consideration of all the papers presented in these Motions, and the argument of
counsel,
IT IS HEREBY ORDERED THAT the Motion to Dismiss is denied in all respects,
including the request for a bond. Putative debtor may renew his request for a bond and have a
hearing on same, if so desired, together with a hearing on the merits of the involuntary petition.
IT IS FURTHER ORDERED THAT Dr. Burzynski is ordered to file an answer and if he
avers 12 or more creditors, he shall provide the requisite Rule 1003(b) information about all
creditors including all former patients who have a credit balance and all health insurance carriers
who claim Dr. Burzynski is indebted to such carrier. Information concerning the former patients
shall include the phone number and email address of the former patient and the closest relative
contact information.
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 12 of 47
SO ORDERED:
________________________
David Jones, USBJ
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 13 of 47
In re Rambo Imaging, L.L.P., Case No. 07-11190-FRM (Bankr. W.D. Tex. 11/8/2007) (Bankr. W.D. Tex., 2007)
Page 1
IN RE: RAMBO IMAGING, L.L.P.,
Chapter 7, Alleged Debtor. Case No. 07-11190-FRM.
United States Bankruptcy Court, W.D.
Texas, Austin Division. November 8, 2007.
MEMORANDUM OPINION ON
DEBTOR'S MOTION TO DISMISS
INVOLUNTARY PETITION
CRAIG GARGOTTA, Bankruptcy Judge.
Strasburger & Price, LLP ("Petitioner")
filed an Involuntary Petition under Chapter 7
against the alleged Debtor, Rambo Imaging,
L.L.P. ("Debtor" or "Movant") on July 2, 2007.
On July 23, 2007, the Debtor filed a "Motion
to Dismiss Pursuant to Rule 12" (the "Motion"
or the "Motion to Dismiss"). On August 10,
2007, Petitioner filed a Response to the
Motion. After Movant's request for a
continuance was granted, the Motion to
Dismiss was heard by the Court on October 2,
2007.
Movant raises three grounds for the relief
it requests. Two of those, having to do with
sufficiency of service and of process of service,
had been cured as of the date of the hearing.
The third, which Movant identifies in the
Motion as arising under 11 U.S.C. § 303(b)(1),
challenges whether the claim of the sole
petitioner in this case is subject to a "bona fide
dispute." Movant alleges several bases for that
dispute, including that it was not a party to the
contract(s) with
Page 2
Petitioner (because less than the required
number of partners authorized the Petitioner's
retention by the Debtor), that Petitioner's
services were substandard and so,
presumably, not worth the amount charged,
and that the debt is subject to the defense that
it was incurred under duress.
Identification of the Authority for
Movant's Request for Relief
Critical at this juncture of these
involuntary proceedings, however, is the fact
that the Motion to Dismiss by its terms is
brought under Rule 12 of the Federal Rules of
Civil Procedure. It does not identify under
which subsection of that Rule the Motion is
brought. At the hearing Movant's counsel did
state that the Motion was brought under both
Rule 12(b), as a motion to dismiss (without
identifying which of the grounds listed in that
subsection applied), and under Rule 12(c), as a
motion for judgment on the pleadings.
Federal Rule of Bankruptcy Procedure
1011(b) expressly provides that FRCP 12
applies to involuntary petitions ("Defenses
and objections; when presented. Defenses and
objections to the petition shall be presented in
the manner prescribed by Rule 12 F.R.Civ.P.").
Rule 12, of course, allows not only several
types of dispositive motions to be filed, but
also provides for the filing of an answer. In
fact, after filing its Motion to Dismiss the
Debtor on September 6, 2007, also filed an
Original Answer and Counterclaim Subject to
Debtor's Motion to Dismiss Under Rule 12.
A reference in Rule 1011(c), however,
makes it abundantly clear that at least Rule
12(b) motions to dismiss may be brought with
respect to an involuntary petition. See
Fed.R.Bankr.P. 1011(c) ("Service of a motion
under Rule 12(b) F.R.Civ.P. shall extend the
time for filing and serving a responsive
pleading as permitted by Rule 12(a)
F.R.Civ.P."). Debtor's Motion to Dismiss is,
therefore, properly brought under Rule 12(b).
A motion to dismiss under Rule 12(b) can
be based on any of several grounds stated in
that Rule—dismissal for lack of subject matter
jurisdiction; for lack of personal jurisdiction;
for improper venue; for insufficiency of
process; for insufficiency of service of process;
for failure to state a claim
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 14 of 47
In re Rambo Imaging, L.L.P., Case No. 07-11190-FRM (Bankr. W.D. Tex. 11/8/2007) (Bankr. W.D. Tex., 2007)
Page 3
upon which relief can be granted; and for
failure to join a necessary party.
Unfortunately, Movant failed to specify in the
Motion to Dismiss the specific grounds for
dismissal in this case, instead merely citing the
underlying statute—§ 303(b)(1). Because
Petitioner's response to the Motion to Dismiss
shows that it assumed that the requested
dismissal was based on Rule 12(b)(6), and
because Debtor's arguments generally center
on the sufficiency of Petitioner's pleading, it
seems fair to infer that Debtor contends, under
Rule 12(b)(6), that the Petition fails to state a
claim upon which relief can be granted. There
appears to be no dispute that Movant makes at
least that argument.
Debtor's counsel, however, also made
references to Petitioner's "standing" to file the
involuntary petition. Debtor's argument seems
to be that, if Petitioner could not prove each of
the requirements in § 303(b) for filing an
involuntary petition, it had no standing to file
it and this court therefore has no jurisdiction.
Such an argument would arise under Rule
12(b)(1), providing for dismissal for lack of
subject matter jurisdiction. Whether the
Court's subject matter jurisdiction is
challenged is important in this case, because
unlike when it considers a Rule 12(b)(6)
motion, the court in determining a motion to
dismiss under Rule 12(b)(1) is not limited to
the pleadings but may consider other evidence
outside the pleadings. E.g., Taylor v. Dam,
244 F.Supp.2d 747, 753 (S.D. Tex. 2003)
("Thus, unlike a motion to dismiss under Rule
12(b)(6), when examining a motion to dismiss
for lack of subject matter jurisdiction under
Rule 12(b)(1), the district court is entitled to
consider disputed facts as well as undisputed
facts in the record."), citing Clark v.
Tarrant County, 798 F.2d 736, 741 (5th Cir.
1986); see also Den Norske Stats
Oljeselskap As v. HeereMac V.O.F., 241
F.3d 420, 424 (5th Cir. 2001), cert. denied, 534
U.S. 1127 (2002) ("In ruling on a motion to
dismiss for lack of subject matter jurisdiction,
a court may evaluate (1) the complaint alone,
(2) the complaint supplemented by
undisputed facts evidenced in the record, or
(3) the complaint supplemented by
undisputed facts plus the court's resolution of
disputed facts."), quoting
Page 4
Barrera-Montenegro v. United States,
74 F.3d 657, 659 (5th Cir. 1996). Movant argues
that the Court can and should look beyond the
pleadings in deciding its Motion.
Movant's "standing" argument is based on
11 U.S.C. § 303(b). That Section provides, in
relevant part:
An involuntary case against a person is
commenced by the filing with the bankruptcy
court of a petition under chapter 7 or 11 of this
title—
(1) by three or more entities, each of which
is either a holder of a claim against such
person that is not contingent as to liability or
the subject of a bona fide dispute as to liability
or amount, or an indenture trustee
representing such a holder, if such
noncontingent, undisputed claims aggregate
at least $13,475 more than the value of any lien
on property of the debtor securing such claims
held by the holders of such claims;
(2) if there are fewer than 12 such holders,
excluding any employee or insider of such
person and any transferee of a transfer that is
voidable under section 544, 545, 547, 548, 549,
or 724(a) of this title, by one or more of such
holders that hold in the aggregate at least
$13,475 of such claims ....
Movant cites two cases in support of its
argument that § 303(b)'s requirements are
jurisdictional and require the Court to look
beyond the pleadings: In re Silverman, 230
B.R. 46 (Bankr. D. N.J. 1998) and In re
Iroquois Brands, Ltd., 1991 WL 639359
(Bankr. S.D. Tex.).
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In In re Silverman the court had
granted an alleged debtor's motion to dismiss
an involuntary petition, stating that it had
found that the petitioner did "not have
standing under Code section 303(b)(1) to file
an involuntary petition if his claim is the
subject of a bona fide dispute." Id. at 48. There
was no analysis or issue as to the jurisdictional
nature, vel non, of § 303(b)(1), and no issue as
to whether extrinsic evidence should be
considered. Instead, the issues that the court
actually addressed in the opinion related to the
alleged debtor's request for punitive damages
under § 303(i).
The decision in Iroquois Brands cited
by Movant was vacated soon after it was
issued. See In re Iroquois Brands, Ltd.,
No. 91-01018, 1991 WL 639359, 1991 Bankr.
LEXIS 1915 (Bankr. S.D. Tex. March 7, 1991),
vacated by 1991 Bankr. LEXIS 2238 (Bankr.
S.D. Tex. May 24, 1991). Even if it were still
good law, the original decision in Iroquois
Brands would be of little relevance here.
Page 5
In that case, the bankruptcy court examined
whether the petitioners "had standing" to file
the involuntary petition, inasmuch as the
indenture agreement under which they held
their debentures did not authorize that sort of
action by individual debentureholders. It is
true that the court spoke in terms of
"jurisdiction." In re Iroquois Brands,
Ltd., No. 91-01018, 1991 WL 639359, at * 2,
1991 Bankr. LEXIS 1915 at * 5 (Bankr. S.D.
Tex. March 7, 1991) ("The issue of lack of
standing, one of the bases for Iroquois' Motion
to Dismiss, raises the defense of lack of subject
matter jurisdiction pursuant to F.R.Civ.P.
12(b)(1) as made applicable to this proceeding
by B.R. 1011."), vacated by 1991 Bankr. LEXIS
2238 (Bankr. S.D. Tex. May 24, 1991). It also
noted that standing cannot be inferred from
the pleadings. Id. As in Silverman, however,
the Iroquois Brands court provided no
analysis and does not appear to have actually
been presented with the issue of whether or
not § 303(b)'s requirements are jurisdictional
or whether or not extrinsic evidence should be
considered, but rather only with the ultimate
factual issue of whether or not the petitioning
creditors were authorized to file the case. See
id. 1991 WL 639359, at *3, 1991 Bankr. LEXIS
1915 at * 9 (dismissing the petition and noting
that it "need not address . . . whether the
petitioners have the requisite status as
creditors under 11 U.S.C. § 303").
These two cases suffer from the same
analytical flaw as others that speak in terms of
jurisdiction when considering standing to file
a bankruptcy petition. As the Fifth Circuit
Court of Appeals in In re Phillips, 844 F.2d
230, 236 n.2 (5th Cir. 1988), concluded, "the
courts holding that the issue is not
jurisdictional generally have engaged in an
analysis of the issue, while the courts holding
that it is a matter of jurisdiction have not."
Section 303(b) determines whether a
creditor is "eligible" to file the petition. See
Official Form 5 for an Involuntary Petition
(referring to § 303(b) requirements as
determining whether the petitioner is
"eligible" to file the involuntary petition). In
the Fifth Circuit, however, it is clear that
"eligibility does not raise an issue of subject
matter jurisdiction." Id. In Phillips, the
Court of
Page 6
Appeals addressed a debtor's eligibility under
11 U.S.C. § 109 to file a voluntary petition, but
its analysis applies as well to the filing of an
involuntary petition:
[S]ubject matter jurisdiction of the
bankruptcy court comes from 28 U.S.C. § 1471
and 28 U.S.C. § 157, which provide that the
bankruptcy courts shall have exclusive
jurisdiction of all cases arising under Title 11.
On the other hand, issues pertaining to
whether a debtor meets the requirements of §
109(g)(2) only "determine whether or not the
court must dismiss the case. They are factual
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or legal questions which the court must
determine. They are the issues raised by the
pleadings. They are defenses not jurisdictional
requirements."
Id., quoting In re Johnson, 13 B.R. 342,
346 (Bankr. D. Minn.1981). Similarly, in
Abramson v. Boedeker, 379 F.2d 741, 746
(5th Cir. 1967), in examining an involuntary
petition under the Bankruptcy Act, the Court
held "that allegations in the wording of the
statute, although vulnerable to objection by
the debtor-alleged-bankrupt . . ., are not
`jurisdictionally' defective.").
Based on the foregoing, this Court finds
that the requirements of § 303(b) are not
jurisdictional, and that it does have
jurisdiction over this case. See also In re
Bowshier, 313 B.R. 232, 239 (Bankr. S.D.
Ohio 2004) ("The court concludes that section
303 requirements for the filing of an
involuntary petition are nonjurisdictional in
nature."). It therefore treats the Motion, to the
extent brought under Rule 12(b), solely as a
motion to dismiss under Rule 12(b)(6) for
failure to state a claim for relief.
Finally, Movant's counsel at the hearing
also made reference to the Motion to Dismiss
as a motion for judgment on the pleadings
under Rule 12(c). Because the analysis under
Rule 12(b)(6) presents more complex issues
than that under Rule 12(c), the Court will first
address the latter.
Judgment on the Pleadings
Federal Rule of Civil Procedure Rule 12(c)
provides, in relevant part, that "[a]fter the
pleadings are closed but within such time as
not to delay the trial, any party may move for
judgment on the pleadings." In this case, the
pleadings are not yet closed, inasmuch as the
Petitioner's time to reply to the Debtor's
counterclaim is tolled by the Petitioner's own
Rule 12(b)(6) motion to
Page 7
dismiss that counterclaim. See docket entry #
21, Strasburger & Price's Motion to Dismiss
Debtor's Counterclaim; Rule 12(a)(4) ("Unless
a different time is fixed by court order, the
service of a motion permitted under this rule
alters these periods of time as follows . . . if the
court denies the motion or postpones its
disposition until the trial on the merits, the
responsive pleading shall be served within 10
days after notice of the court's action . . ..").
For that reason, the Court finds that the
Motion to Dismiss, to the extent brought
under Rule 12(c), should be denied as
premature. See Nortel Networks Ltd. v.
Kyocera Wireless Corp., 2002 WL
31114077, *1 n.1 (N.D. Tex.) (holding that
motion for judgment on the pleadings was
timely since a reply to the defendant's
counterclaim had been filed the day before the
motion, and noting that "Rule 7(a) provides
that the pleadings are closed upon the filing of
a complaint and answer, unless a
counterclaim, cross-claim, or third-party
claim is interposed, in which event the filing of
a reply, cross-claim answer, or third-party
answer normally will mark the close of the
pleadings."), quoting Wright, C.A. & Miller,
A.R., Federal Practice and Procedure §
1367, at pp. 5012-13 (1990) (footnotes
omitted).
Thus, the Court proceeds to determine the
Motion solely under Rule 12(b)(6).
Dismissal for Failure to State a Claim:
Whether the Petition Is Deficient on Its
Face
In general, consideration of matters
beyond the complaint is improper in context of
motion to dismiss under Rule 12(b)(6).
Spivey v. Robertson, 197 F.3d 772, 774 (5th
Cir. 1999) ("This court will not look beyond the
face of the pleadings to determine whether
relief should be granted based on the alleged
facts ...."), cert. denied, 530 U.S. 1229 (2000).
Movant's counsel, in argument at the hearing,
expressly acknowledged that Petitioner would
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expect that the Court was limited to
considering only the pleadings in deciding the
Motion, as it would ordinarily be in deciding a
motion to dismiss for failure to state a claim
upon which relief can be granted. Consistent
with this Rule
Page 8
12(b)(6) standard, Movant's threshold
argument is that the Petition on its face is so
deficient as to require dismissal.
Movant also asserts, however, that the
burden of proof at a hearing on a Rule 12(b)(6)
motion to dismiss an involuntary petition is
that applicable to a "reverse summary
judgment," which Movant claims is that the
Petitioner must prove that there is absolutely
no question regarding the validity and amount
of Petitioner's claim, and/or that there is "no
more than a scintilla of evidence" and "no
dispute as to the law" that supports
Petitioner's claim.
The Court rejects this argument. It does
agree, however, and the Petitioner in this case
concedes, that the latter bears the burden of
proof on the Debtor's Motion to Dismiss.
However, the Court agrees with Petitioner
that, for purposes of a Rule 12(b)(6) motion to
dismiss—even when applied to an involuntary
petition—the "complaint" is construed in the
light most favorable to the "plaintiff," and all
facts alleged by it are accepted as true.
Woodard v. Andrus, 419 F.3d 348, 351 (5th
Cir. 2005) ("The complaint must be liberally
construed, with all reasonable inferences
drawn in the light most favorable to the
plaintiff."); accord, Causey v. Sewell
Cadillac-Chevrolet, Inc., 394 F.3d 285,
288 (5th Cir. 2004); Rascon v. Austin
I.S.D., 2006 WL 2045733, *2 (W.D. Tex.).
The "reverse summary judgment" standard
urged by the Movant is contrary to these well-
established presumptions.
It does appear, however, that the courts'
general approach to reviewing the sufficiency
of a complaint under Rule 12(b)(6) has
recently been "reinterpreted." The standard
had been well-established, as described by the
Fifth Circuit Court of Appeals:
Motions to dismiss for failure to state a
claim are appropriate when a defendant
attacks the complaint because it fails to state a
legally cognizable claim. Fed. R. Civ. P.
12(b)(6). The test for determining the
sufficiency of a complaint under Rule 12(b)(6)
was set out by the United States Supreme
Court as follows: "[A] complaint should not be
dismissed for failure to state a claim unless it
appears beyond doubt that the plaintiff can
prove no set of facts in support of his claim
which would entitle him to relief." Conley v.
Gibson, 355 U.S. 41, 45-46 (1957). See also
Grisham v. United States, 103 F.3d 24, 25-
26 (5th Cir. 1997).
Page 9
Subsumed within the rigorous standard of
the Conley test is the requirement that the
plaintiff's complaint be stated with enough
clarity to enable a court or an opposing party
to determine whether a claim is sufficiently
alleged. Elliott v. Foufas, 867 F.2d 877, 880
(5th Cir. 1989). Further, "[t]he plaintiff's
complaint is to be construed in a light most
favorable to the plaintiff, and the allegations
contained therein are to be taken as true."
Oppenheimer v. Prudential Sec. Inc., 94
F.3d 189, 194 (5th Cir. 1996). This is consistent
with the well-established policy that the
plaintiff be given every opportunity to state a
claim. Hitt [v. City of Pasadena], 561 F.2d
[606,] 608 [(5th Cir. 1977)]. In other words, a
motion to dismiss an action for failure to state
a claim "admits the facts alleged in the
complaint, but challenges plaintiff's rights to
relief based upon those facts." Tel-Phonic
Servs., Inc. v. TBS Int'l, Inc., 975 F.2d
1134, 1137 (5th Cir. 1992). Finally, when
considering a Rule 12(b)(6) motion to dismiss
for failure to state a claim, the district court
must examine the complaint to determine
whether the allegations provide relief on any
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possible theory. Cinel v. Connick, 15 F.3d
1338, 1341 (5th Cir. 1994).
Ramming v. United States, 281 F.3d
158, 161-62 (5th Cir. 2001), cert. denied sub
nom, Cloud v. U.S., 536 U.S. 960 (2002); see
also In re Calloway, 70 B.R. 175, 179
(Bankr. N.D. Ind. 1986) ("As is generally true,
motions to dismiss involuntary petitions
pursuant to Bankruptcy Rule 1011(b) and
Fed.R.Civ.P. 12(b) are disfavored and should
not be granted unless it appears certain that
the petitioners would not be entitled to an
order for relief under any facts they could
prove in support of their allegations. The
petition is to be construed in a light most
favorable to the petitioners, whose allegations
are taken as true.").
It is this "rigorous standard of the Conley
test" that appears to have been modified by the
Supreme Court recently, in Bell Atlantic
Corp. v. Twombly, ____ U.S. ____, 127
S.Ct. 1955 (2007). In Bell Atlantic, the Court
expressly rejected the "no set of facts"
language in Conley and substituted instead a
"plausibility" standard: a complaint must state
sufficient facts that plausibly suggest (rather
than being merely consistent with) the
plaintiff's entitlement to relief. Specifically, the
Court criticized those decisions that have
interpreted the "no set of facts" language in
Conley literally and in isolation as creating a
standard under which "any statement
revealing the theory of the claim will suffice
unless its factual impossibility may be shown
from the face of the pleadings ..." Id. at ____,
127 S.Ct. at 1968.
Page 10
While rejecting the particular language
used by the Conley Court as it had been
subsequently interpreted and applied by some
courts, the Bell Atlantic Court nevertheless
insisted that Conley had merely been
misunderstood and that it was not establishing
a new, more stringent standard. Instead, the
Court stated that its "analysis comports with
this Court's statements in the years since
Conley." Indeed, much of the analysis in Bell
Atlantic does not differ significantly from
how courts have applied Rule 12(b)(6) in the
past:
Federal Rule of Civil Procedure 8(a)(2)
requires only "a short and plain statement of
the claim showing that the pleader is entitled
to relief," in order to "give the defendant fair
notice of what the . . . claim is and the grounds
upon which it rests," Conley v. Gibson, 355
U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
While a complaint attacked by a Rule 12(b)(6)
motion to dismiss does not need detailed
factual allegations, . . . a plaintiff's obligation
to provide the "grounds" of his "entitle[ment]
to relief" requires more than labels and
conclusions, and a formulaic recitation of the
elements of a cause of action will not do . . ..
Factual allegations must be enough to raise a
right to relief above the speculative level, see 5
C. Wright & A. Miller, Federal Practice and
Procedure § 1216, pp. 235-236 (3d ed. 2004)
. . . ("[T]he pleading must contain something
more ... than ... a statement of facts that merely
creates a suspicion [of] a legally cognizable
right of action"), . . . on the assumption that all
the allegations in the complaint are true (even
if doubtful in fact) .....
Id. at ____, 127 S.Ct. at 1964-65
(citations and footnote omitted). Further,
although the Bell Atlantic Court was
examining an action brought under the
Sherman Act, it noted that "for most types of
cases, the Federal Rules eliminated the
cumbersome requirement that a claimant `set
out in detail the facts upon which he bases his
claim,'" Id. at ____, 127 S.Ct. at 1965,
quoting, with emphasis added, Conley v.
Gibson, 355 U.S. 41, 47 (1957).
It is well-established that, "Rule 8 of the
Federal Rules of Civil Procedure, 28 U.S.C.A.,
provides that a pleading shall set forth a short,
plain statement of the claim showing that the
pleader is entitled to relief." Black v. First
Nat. Bank of Mobile, Ala., 255 F.2d 373,
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375 (5th Cir. 1958) (also noting that "[a]bsent
from this rule is the old requirement of
common law and code pleading that the
pleader set forth 'facts' constituting a cause of
action") (internal quotations omitted), citing
John Walker & Sons v. Tampa Cigar
Co., 197 F.2d 72, 73 (5th Cir. 1952). Rule 8(a),
of course,
Page 11
prescribes the general rules of pleading for
claims for relief and is incorporated and made
applicable to an involuntary proceeding under
Fed.R.Bankr.P. 1018. See also In re Alta
Title Co., 55 B.R. 133, 141-42 (Bankr. Utah
1985) ("While it is conceivable that an
involuntary petition might be so clearly
defective on its face as to warrant dismissal,
generally it should be treated with the same
liberality as a civil complaint.") (footnotes
omitted); In re Longhorn 1979-II Drilling
Program, 32 B.R. 923, 926 (Bankr. Okla.
1983) ("An involuntary petition for
bankruptcy is considered with all the liberality
of the usual civil complaint."), citing
Abramson v. Boedeker, 379 F.2d 741 (5th
Cir.), cert. denied, 389 U.S. 1006 (1967) (same,
with respect to the Bankruptcy Act's
provisions on involuntary filings).
In Bell Atlantic, however, the Court
noted that:
Rule 8(a)(2) still requires a "showing,"
rather than a blanket assertion, of entitlement
to relief. Without some factual allegation in the
complaint, it is hard to see how a claimant
could satisfy the requirement of providing not
only "fair notice" of the nature of the claim, but
also `grounds' on which the claim rests. See 5
Wright & Miller § 1202, at 94, 95 (Rule 8(a)
"contemplate[s] the statement of
circumstances, occurrences, and events in
support of the claim presented" and does not
authorize a pleader's "bare averment that he
wants relief and is entitled to it").
Id. at ____, 127 S.Ct. at 1965 n.3.
With this background in mind, then, the
Court examines the Petitioner's pleading in
this case for its sufficiency. Specifically, Debtor
alleges that the Petitioner's use of Official
Form 5 for an Involuntary Petition, without
further detail or support, is insufficient in this
case (and perhaps in all cases, given the
language of the Form) to state a prima facie
case for relief under the Involuntary Petition.
The Form, as completed by Petitioner by
the checking of applicable boxes, states only
that:
[x] Petitioner(s) are eligible to file this
petition pursuant to 11 USC § 303(b).
[x] The debtor is a person against whom
an order for relief may be entered under title
11 of the United States Code.
[x] The debtor is generally not paying such
debtor's debts as they become due, unless such
debts are the subject of a bona fide dispute as
to liability or amount ....
Page 12
On the second page of the Form, where it is
asked to list information about all the
petitioning creditors, Petitioner has listed only
itself, has inserted "Fees for professional
services rendered" under the heading of
"Nature of Claim," and has listed $218,613.21
under the heading "Amount of Claim."
Movant specifically contends that the
Petition as so "drafted" does not allege facts
showing that Petitioner's claim is not
contingent or subject to a bona fide dispute as
to liability or amount.
It is true, in general, for purposes of a Rule
12(b)(6) motion, that "[a]lthough complaint is
to be liberally construed, it is still necessary
that complaint contain more than bare
assertions of legal conclusions." Emery v.
U.S., 920 F. Supp. 788 (W.D. Mich. 1996).
Official Form 5 does contain only conclusions
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as to the "not contingent" and "not subject to a
bona fide dispute" allegations of § 303(b)(1).
The factual allegations necessary to support an
involuntary petition, however, are relatively
few and relatively simple (in concept at least, if
not in proof). The Petition in this case shows
that Petitioner asserts a claim, shows the
amount of the claim and the nature of the
claim and, through reference to § 303(b),
incorporates allegations that address that
section's requirements that the claim not be
contingent nor the subject of a bona fide
dispute.
Addressing facts similar to those in this
case, the District Court in In re McDougald,
17 F.R.D. 2 (W.D. Ark. 1955), also considered
an involuntary petition (albeit one brought
under the Bankruptcy Act) that contained only
allegations of the amount and nature of the
claims of the petitioners. The McDougald
Court affirmed the bankruptcy referee's
decision to deny the motion to dismiss,
specifically holding that "in the absence of
affidavits or evidence to the contrary, the well
pleaded allegations of the creditors' petition,
for purposes of a motion to dismiss, must be
accepted as true." Id. at 5. This Court agrees.
Moreover, the allegations that the claim is
not contingent and is not the subject of a bona
fide dispute are obviously both negative
statements, such that the factual allegations
necessary to support them would consist not of
reciting facts, but rather of reciting the
absence of facts indicating a
Page 13
contingency or a bona fide dispute. Such a
showing requires no more, really, than an
allegation that the claim is not contingent nor
the subject of a bona fide dispute. That
allegation may reasonably be inferred by the
absence of facts that show there is some
contingency or bona fide dispute. Id. At the
least, by expressly alleging on the Official
Form that it is eligible to be a petitioning
creditor under § 303(b)(1), the Petitioner has
incorporated that section's language to an
extent that it should be considered to have
made the allegation that its claim is not
contingent nor subject to a bona fide dispute.
Simply put, there is not much more the
Petitioner could have said, and to require it to
file a separate pleading with the words "the
claim is not contingent nor the subject of a
bona fide dispute" is to elevate form over
substance in order to dispose of the matter on
a procedural basis. There is a strong policy in
favor of deciding litigation on the merits. See
Madison v. Purdy, 410 F.2d 99 (5th Cir.
1969) (a motion to dismiss on the basis of
pleadings alone should rarely be granted);
Hitt v. City of Pasadena, 561 F.2d 606,
608 (5th Cir. 1977) (noting, in the context of a
Rule 12(b)(6) motion, "the well-established
policy that the plaintiff be given every
opportunity to state a claim"); see also
Conley v. Gibson, 355 U.S. 41, 48 (1957)
("The Federal Rules reject the approach that
pleading is a game of skill in which one misstep
by counsel may be decisive to the outcome and
accept the principle that the purpose of
pleading is to facilitate a proper decision on
the merits.").1
Page 14
Moreover, Petitioner's use of Official
Form 5 differs qualitatively from a litigant's
use of one of the forms found in the Appendix
to the Federal Rules of Civil Procedure.2 The
latter are expressly illustrative only, and
"plainly demonstrate" that "all the Federal
Rules of Civil Procedure require is ̀ a short and
plain statement of the claim' that will give the
defendant fair notice of what the plaintiff's
claim is and the grounds upon which it rests."
Conley v. Gibson, 355 U.S. 41, 47-48 (1957)
(footnote omitted); see also Employers'
Mut. Liability Ins. Co. of Wis. v. Blue
Line Transfer Co., 2 F.R.D. 121, 123 (W.D.
Mo. 1941) (the forms for complaints
prescribed by the United States Supreme
Court in adopting the Federal Rules of Civil
Procedure "do not dispense with the necessity,
as occasion may require, for a statement of
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certain details or particulars which would
enable the defendant more readily to prepare
and file a responsive pleading") (emphasis
added).
In contrast, the Official Forms
promulgated in conjunction with the Federal
Rules of Bankruptcy Procedure are, if not
entirely and absolutely mandatory, certainly
"expected" to be used by practitioners. Federal
Rule of Bankruptcy Procedure 9009 provides
that "[t]he Official Forms prescribed by the
Judicial Conference of the United States shall
be observed and used with alterations as may
be appropriate." The instructions that
accompany the Official Forms, however, note
that "alteration will be appropriate in only rare
circumstances." Introduction and General
Instructions to Official and Procedural
Bankruptcy Forms (also noting that, although
the rule of substantial compliance applies,
"[t]he Official Forms, accordingly, are
obligatory in character"); see also Resnick, A.,
Collier on Bankruptcy, ¶ 1002.02[1], p.
1002-3 (15th ed. 2007) ("The petition
Page 15
commencing a case must conform to the
appropriate Official Bankruptcy Form
promulgated by the Judicial Conference of the
United States.").
The relatively few courts that have
addressed practitioners' changes to the Official
Forms do not encourage that practice,
emphasizing the need for uniformity and
noting the many constituencies involved in
reviewing and extracting information from the
Forms. For example, in In re Mitchell, 255
B.R. 345, 363 (Bankr. D. Mass. 2000), where
the court found that the debtors' affairs were
not so complex that they warranted altering
the Official Forms, it inferred from their
failure to use those Forms that they intended
to confuse rather than enlighten parties in
interest about their economic circumstances.
In In re Orrison, 343 B.R. 906, 909 (Bankr.
N.D .Ind. 2006), the court examined an
altered form of the voluntary petition, and
warned against "[a]lterations that `confuse[ ]
and confound[ ] a streamlined administrative
process,' . . . or which frustrate "a quick and
easy comprehension of the information
presented,'" noting generally that "[a]lthough
Rule 9009 allows alterations to the official
forms, that does not give parties a free pass to
make whatever changes they want whenever
they want to do so."
Admittedly, these cases involved
alterations of the Official Forms that omitted
and/or rearranged and/or obscured the
information prescribed by the Official Forms,
unlike the instant case involving the
supplementation of that information. They
nevertheless illustrate the courts' general
approach to the use of the Official Forms—at a
minimum, their use is strongly preferred, and
their legal sufficiency is generally assumed—
an assumption shared by not only the courts
and the clerks but also by the parties. As the
court in In re Mack, 132 B.R. 484, 484-85
(Bankr. M.D. Fla. 1991) noted:
Although F.R.B.P. 9009 permits flexibility
in the arrangement of the contents and allows
combinations of forms to permit economies in
their use, the petition, schedules, and
statements filed by a debtor must nevertheless
substantially comply with and conform to the
official forms. Advisory Committee Note to
F.R.B.P. 9009. The forms of petition,
schedules, and statements filed by the debtors
in these cases fail
Page 16
this test of substantial compliance as to both
their form and their content. They are
therefore legally insufficient and
unacceptable.
In addition, a review of the history of the
Federal Rule of Bankruptcy Procedure
governing petitions and involuntary filings
supports the conclusion that the use of the
Official Form in this case should be found
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 22 of 47
In re Rambo Imaging, L.L.P., Case No. 07-11190-FRM (Bankr. W.D. Tex. 11/8/2007) (Bankr. W.D. Tex., 2007)
sufficient to overcome the Rule 12(b)(6)
challenge. The 1983 version of Rule 1003
governed the filing of an involuntary petition,
and required substantial compliance with the
then applicable Official Form for an
Involuntary Petition:
Rule 1003. Involuntary Petition;
Case Ancillary to Foreign Proceeding.
(a) Commencement. A petition
commencing an involuntary case shall be filed
with the bankruptcy court and shall conform
substantially to Official Form 11.
The Advisory Committee Notes to the
1983 version of Rule 1003 further provided
that
Official Form No. 11 (Involuntary Case:
Creditors' Petition), is prescribed for use by
petitioning creditors to have a debtor's assets
liquidated under chapter 7 of the Code or the
business reorganized under chapter 11. It
contains the required allegations as specified
in § 303(b) of the Code. Official Form 12 is
prescribed for use by fewer than all the general
partners to obtain relief for the partnership as
governed by § 303(b)(3) of the Code and Rule
1004(b).
Advisory Committee Notes (1983) to
Fed.R.Bankr.P. 1003 (emphasis added). The
allegations in now abrogated Official Form 11
that addressed the eligibility requirements set
forth in § 303(b) are the same as those in the
current Involuntary Petition Official Form 5.
Although the Advisory Committee Notes to the
current Form now also acknowledge that
"[p]etitioners may wish to supplement the
allegations set forth in the form with a further
statement of facts," the Form used by
Petitioner in this case seems to have been
intended, at least by its drafters, to be
generally legally sufficient to allege a
petitioner's eligibility as part of its cause of
action for involuntary relief.
Further, when an allegation in the
involuntary petition was perceived to need
additional factual support, the drafters of the
Rules did expressly require that
supplementation. Current Rule 1003, which
now addresses the filing of involuntary
petitions by transferees of claims, requires that
the Official Involuntary Petition Form be
supplemented to allege facts regarding the
transfer to
Page 17
support the allegation that the petitioner is
"qualified." Fed.R.Bankr.P. 1003(a) ("A
transferor or transferee of a claim shall annex
to the original and each copy of the petition a
copy of all documents evidencing the transfer,
whether transferred unconditionally, for
security, or otherwise, and a signed statement
that the claim was not transferred for the
purpose of commencing the case and setting
forth the consideration for and terms of the
transfer."). This requirement to supplement
contrasts with the absence of any express
requirement of, or even reference to,
supplementation of the Official Form with
regards to the allegation of a petitioner's
general eligibility under § 303(b), further
supporting the conclusion that the Official
Form's allegations as to those requirements
are sufficient at this stage of the proceedings.
Moreover, nothing in Bell Atlantic
alters the general rule that, in considering a
pleading challenged under Rule 12(b)(6),
"[t]he plaintiff's complaint is to be construed
in a light most favorable to the plaintiff, and
the allegations contained therein are to be
taken as true." Oppenheimer v.
Prudential Sec. Inc., 94 F.3d 189, 194 (5th
Cir. 1996). This Court finds that, considering
all of the foregoing and when viewed in the
light most favorable to a petitioner, a properly
completed Official Form 5, Involuntary
Petition, will generally satisfy the notice
requirements under Rules 7008, 1011, and
1018. As the Advisory Committee Notes to the
Official Form state, "[a]dditional information
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 23 of 47
In re Rambo Imaging, L.L.P., Case No. 07-11190-FRM (Bankr. W.D. Tex. 11/8/2007) (Bankr. W.D. Tex., 2007)
concerning any allegation can be requested by
the debtor as part of the discovery process."
The Court agrees with Movant and the
Advisory Committee Notes to the Form that, in
some instances and for some allegations, the
better practice may be, and the petitioner "may
wish," to attach to the Official Form a pleading
with more specific facts. The Court holds,
however, that on its face the Petition in this
case is not so deficient as to fail to give notice
to Movant of Petitioner's claim to relief and
that, therefore, the Petition should not be
dismissed as facially insufficient.
Page 18
Dismissal for Failure to State a Claim:
Whether the Petition Is Deficient in
Light of Evidence Outside its "Four
Corners"
Movant also contends that, because of the
nature of an involuntary petition as compared
to a complaint in "ordinary" litigation, the
hearing on a Rule 12(b)(6) motion to dismiss
an involuntary petition—whether considered
as such or converted to a motion for summary
judgment—is necessarily an evidentiary
hearing.3 It argues that, when the evidence
presented at the hearing is considered, the
Debtor has failed to sustain its burden of proof
on the Motion to Dismiss.
As discussed above, Movant points to two
cases in particular as supporting its argument
that a Rule 12(b)(6) motion on an involuntary
petition requires an evidentiary hearing: In re
Silverman, 230 B.R. 46 (Bankr. D. N.J.
1998) and In re Iroquois Brands, Ltd.,
No. 91-01018, 1991 WL 639359, 1991 Bankr.
LEXIS 1915 (Bankr. S.D. Tex. March 7, 1991),
vacated by 1991 Bankr. LEXIS 2238 (Bankr.
S.D. Tex. May 24, 1991). While those courts did
consider extrinsic evidence on the Rule 12(b)
motions, there is no indication there was any
dispute over that procedure nor any allegation
of lack of notice or surprise. Rather, it appears
that both sides presented evidence without
raising the question of its appropriateness at
that stage of the proceedings.
Page 19
Even if the Court were to consider
evidence beyond the pleadings, however, it
would nevertheless still find that the Motion to
Dismiss should be denied. First, while Movant
pleaded and argued at the hearing that there
was a dispute regarding the Petitioner's claim,
the Court admitted no exhibits and Movant
offered no testimony in support of that
argument. It did, however, point to a number
of pleadings, orders, and documents filed in a
previous voluntary bankruptcy case filed by
the Debtor, Case No. 07-10041, and requested
the Court, in the Motion to Dismiss and at the
hearing, to take judicial notice of those. Even
under the liberal approach applicable to
decisions on Rule 12(b)(6) motions, the court
considers facts of which it takes judicial notice.
Gersten v. Rundle, 833 F.Supp. 906 (S.D.
Fla. 1993), aff'd, 56 F.3d 1389 (11th Cir. 1995),
cert. denied, 516 U.S. 1118 (1996) (for purposes
of Rule 12(b)(6), the court does not accept as
true facts alleged in a petition that are
internally inconsistent, or run counter to facts
of which court can take judicial notice, or when
they are merely conclusory allegations or
unwarranted deductions of fact).
In particular, Movant referred the Court
to docket entries # 66, 76, 90, 95 in the earlier
case, as well as the exhibits to those
documents, as supportive of its argument that
the Debtor was not a party to any retention
agreement with the Petitioner, and that
therefore is not liable for the attorneys fees
that Petitioner claims are owed it for
representing the Debtor (and others). The
pleadings and documents Movant asks the
Court to take notice of, however, show at best
only that the Debtor needed the authority of a
certain percentage of its partners to retain
counsel. The only "evidence" that such
authority was not obtained by Petitioner is
Movant's bare, unsupported allegation in its
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 24 of 47
In re Rambo Imaging, L.L.P., Case No. 07-11190-FRM (Bankr. W.D. Tex. 11/8/2007) (Bankr. W.D. Tex., 2007)
Motion to Dismiss and its counsel's statement
at the hearing.4 In short, the court finds that,
Page 20
considering these documents, Movant has
failed to sustain its burden of producing some
evidence of a bona fide dispute, or at least
pointing out to the court that there is an
absence of evidence to support Petitioner's
allegation that its claim is not subject to a bona
fide dispute.
Movant has also pointed, however, to
docket entry # 27 in case no. 07-10041, which
is its Objection to Petitioner's claim filed in
that case. In that Objection, the Debtor
appears to admit that it retained Petitioner but
claims that the charges were excessive in light
of the agreement between the parties and the
quality of the work performed, and that the
Petitioner breached its duty of care in
representing Movant and so caused it damages
in excess of the amount of Petitioner's claim.
All of these allegations are, of course, highly
fact-intensive inquiries.
In response to Movant's argument
regarding its Objection to the claim,
Petitioner's counsel, who in addition to being
an officer of the court is, according to the face
of the Petition, a partner and authorized
representative of the Petitioner, stated at the
hearing that a portion of the claim has not
been disputed at all, and that such amount
exceeds the amount necessary under §
303(b)(1) to qualify Petitioner as an eligible
petitioning creditor. That statement was not
rebutted by any evidence presented by the
Movant. The court finds that, considered at
this stage of the proceedings in the light most
favorable to the Petitioner (the applicable Rule
12(b)(6) standard), that Petitioner's
representative's in-court statement is some
evidence that the claim is not subject to a bona
fide dispute.5
More important, however, is the fact that
Petitioner's proof of claim in the earlier case
has a presumption of prima facie validity.
Fed.R.Bankr.P. 3001(f) ("A proof of claim
executed and filed
Page 21
in accordance with these rules shall constitute
prima facie evidence of the validity and
amount of the claim."). That presumption is
overcome only if sufficient evidence is
presented by the objecting party. In re
Missionary Baptist Foundation of
America, Inc., 712 F.2d 206, 212 (5th Cir.
1983) ("A claim filed pursuant to § 501 enjoys
prima facie validity which may be overcome by
the trustee's presentation of evidence.")
(emphasis added); see also, In re O'Connor,
153 F.3d 258, 260 (5th Cir. 1998) ("If the
Trustee objects, it is his burden to present
enough evidence to overcome the prima facie
effect of the claim."); accord, In re Fidelity
Holding Co., Ltd., 837 F.2d 696, 698 (5th
Cir. 1988) ("The objecting party must then
produce evidence rebutting the claimant or
else the claimant will prevail."). The mere
filing of an objection to the claim, without
supporting evidence, is not enough. In re
Sims, 994 F.2d 210, 222 (5th Cir. 1993), cert.
denied sub nom, Sims v. Subway
Equipment Leasing Corp., 510 U.S. 1049
(1994) (holding that the alleged debtor's "mere
filing of such counterclaims against the
[petitioning] creditors is insufficient to
demonstrate the existence of a bona fide
dispute" let alone any bad faith of the
petitioners); accord, In re Medical Group,
Inc., 2005 WL 4677807, *2 (Bankr. E.D. La.
2005) ("Generally, the existence of pending
litigation between the debtor and creditor does
not make the claim subject per se to bona fide
dispute."). In this case, the Debtor's Objection
to the Petitioner's proof of claim was never
tried or ruled on before that bankruptcy case
was dismissed. Under these circumstances,
the Court finds that Movant's Objection in the
prior case to Petitioner's claim does not rebut,
for purposes of a Rule 12(b)(6) motion, the
latter's allegation that its claim is not subject
to any bona fide dispute.
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 25 of 47
In re Rambo Imaging, L.L.P., Case No. 07-11190-FRM (Bankr. W.D. Tex. 11/8/2007) (Bankr. W.D. Tex., 2007)
Moreover, this standard only makes sense
at this stage of the proceedings. On a Rule
12(b)(6) motion, "[t]he issue is not whether a
plaintiff will ultimately prevail but whether the
claimant is entitled to offer evidence to
support the claims." Jackson v.
Birmingham Bd. of Educ., 544 U.S. 167,
184 (2005), quoting Scheuer v. Rhodes,
416 U.S. 232 (1974). A petitioner's burden
should not be as high on a pre-trial motion to
dismiss as it would be at the trial on the
involuntary petition. All
Page 22
it must show at trial is "a prima facie case that
no bona fide dispute exists. Once this is done,
the burden shifts to the debtor to present
evidence demonstrating that a bona fide
dispute does exist. . . . The court's objective [at
trial on the merits] is to ascertain whether a
dispute that is bona fide exists; the court is not
to actually resolve the dispute." Sims, 994
F.2d at 221, quoting In re Rimell, 946 F.2d
1363, 1365 (8th Cir. 1991). Certainly, to merely
withstand a Rule 12(b)(6) motion, a petitioner
should not be required to prove by a
preponderance of the evidence that its claim is
valid, when the only "evidence" that it is not
are the allegations and arguments of the
alleged debtor contained in pleadings never
ruled on.
Accordingly, the Court finds that even
considering the evidence presented by
Movant, the Petition is sufficient to state a
claim for relief within the meaning of Rule
12(b)(6).
Summary and Conclusion
Finally, the Court notes that the purposes
of Rule 12(b) are not necessarily served by
dismissal of a contested involuntary petition
prior to a trial on the merits. One of the
purposes of Rule 12(b)(6) motions is to
quickly, inexpensively, and efficiently dispose
of litigation that on its face is clearly meritless.
Bell Atlantic, ___ U.S. at ___, 127 S.Ct. at
1966 ("when the allegations in a complaint,
however true, could not raise a claim of
entitlement to relief, `"this basic deficiency
should . . . be exposed at the point of minimum
expenditure of time and money by the parties
and the court"'"), quoting 5 Wright & Miller
§ 1216, at 233-234, in turn quoting Daves v.
Hawaiian Dredging Co., 114 F.Supp. 643,
645 (D. Hawai'i 1953)); Neitzke v.
Williams, 490 U.S. 319, 326-27 (1989) (the
procedure of Rule 12(b)(6) "streamlines
litigation by dispensing with needless
discovery and factfinding"). In this case,
however, the Rule 12(b)(6) procedures, rather
than enabling a swifter disposition of the
litigation, at best duplicate the already
streamlined procedures applicable to
involuntary petitions in bankruptcy, which
themselves expressly call for prompt
adjudication. See Fed.R.Bankr.P. 1013 ("The
court shall determine the issues of a contested
petition at the earliest
Page 23
practicable time and forthwith enter an order
for relief, dismiss the petition, or enter any
other appropriate order."); see also
Fed.R.Bankr.P. 1011(d), (e) (prohibiting
counterclaims by alleged debtors and limiting
pleadings that may be filed prior to
adjudication of the petition in an involuntary
proceeding). Therefore, while the use of Rule
12 is allowed in the context of an involuntary
petition, its benefits in this context appear to
be limited, and the Court finds that the better
approach (and one consistent with the policy
of disposing of litigation on the merits) for
issues such as those raised by the Motion to
Dismiss here, is a prompt trial on the merits.
Based on all of the foregoing, the Court
holds that the Motion to Dismiss should be
denied. An order consistent with these
findings and conclusions shall be entered.
---------------
Notes:
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 26 of 47
In re Rambo Imaging, L.L.P., Case No. 07-11190-FRM (Bankr. W.D. Tex. 11/8/2007) (Bankr. W.D. Tex., 2007)
1. Accord, Maty v. Grasselli Chemical
Co., 303 U.S. 197, 200 (1938) ("Pleadings are
intended to serve as a means of arriving at fair
and just settlements of controversies between
litigants. They should not raise barriers which
prevent the achievement of that end."); Sun
Bank v. Pelican Homestead & Sav.
Ass'n, 874 F.2d 274, 276 (5th Cir. 1989) ("The
Federal Rules of Civil Procedure are designed
for the just, speedy, and inexpensive
disposition of cases on their merits, not for the
termination of litigation by procedural
maneuver.") (footnotes omitted); Lindsey v.
Prive Corp., 161 F.3d 886 (5th Cir. 1998)
(noting, in the context of a motion for default
judgment, that there is "a strong policy in favor
of decisions on the merits"), citing 10 Wright,
C.A. et al., Federal Practice & Procedure §
2681, at 402 (2d ed. 1983); Phillips v.
Illinois Cent. Gulf R.R., 874 F.2d 984, 990
(5th Cir. 1989) (noting, in the context of a
motion to dismiss or transfer venue, "the
policy of deciding disputes on the merits" and
"the jurisprudential policy `of removing
whatever obstacles may impede an expedient
and orderly adjudication of cases and
controversies on their merits.'"), quoting
Goldlawr, Inc. v. Heiman, 369 U.S. 463,
466-67 (1962).
2. There are a few other areas of the law
besides bankruptcy, however, in which a
litigant's use of an official form for a complaint
under the Federal Rules of Civil Procedure also
need not be supplemented by specific facts.
See e.g., McZeal v. Sprint Nextel Corp.,
2007 WL 2683705, *2 (Fed. Cir. 2007)
(applying standards used by the Fifth Circuit
in addressing Rule 12(b)(6) motions and
noting that "a plaintiff in a patent
infringement suit is not required to specifically
include each element of the claims of the
asserted patent" but may limit itself to Official
Form 16 for its complaint).
3. As pointed out by Movant, Rule 12
authorizes the court to convert a Rule 12(b)(6)
motion to dismiss to a motion for summary
judgment if matters outside the pleadings are
considered. Fed.R.Civ.P. 12(b) ("If, on a
motion asserting the defense numbered (6) to
dismiss for failure of the pleading to state a
claim upon which relief can be granted,
matters outside the pleading are presented to
and not excluded by the court, the motion shall
be treated as one for summary judgment and
disposed of as provided in Rule 56, and all
parties shall be given reasonable opportunity
to present all material made pertinent to such
a motion by Rule 56.").
That Rule also provides, however, that the
court should not so convert a motion absent
notice and compliance with the procedural
safeguards afforded summary judgment
practice under, in this case, Fed.R.Bankr.P.
7056. Accord, Capital Films Corp. v.
Charles Fries Productions, Inc., 628
F.2d 387, 391 fn.1 (5th Cir. 1980) ("It is a well
established rule in this circuit that a motion to
dismiss, under Rule 12(b), when treated as a
motion for summary judgment, must also
abide by the procedural safeguards of Rule
56."); see also Hickey v. Arkla Industries,
Inc., 615 F.2d 239, 240 (5th Cir. 1980)
("parties are entitled to 10 days notice that a
12(b)(6) motion is being treated as a Rule 56
motion for summary judgment."). Because
those procedures were not followed in this
case, the Court will not convert the Rule
12(b)(6) motion to a motion for summary
judgment.
4. The Debtor did file, after the hearing, a
pleading styled "Advisory on Petitioner's
(Mis)representations, Reply Brief Supporting
Debtor's Motion to Dismiss & Request for
Relief under § 303(i)." Attached to that
pleading are copies of a number of documents
that relate to Movant's arguments regarding
whether the Debtor properly authorized the
Petitioner's retention and therefore should be
required to pay for its services. Those attached
documents are not authenticated, however,
and no foundation for their admissibility has
otherwise been presented. For that reason,
and because the hearing was concluded and
the Court had not granted leave to offer
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 27 of 47
In re Rambo Imaging, L.L.P., Case No. 07-11190-FRM (Bankr. W.D. Tex. 11/8/2007) (Bankr. W.D. Tex., 2007)
additional evidence, it has considered the
Movant's post-hearing pleading only as
additional briefing and has not considered
either the factual statements in the Advisory
that are not supported by the record, nor the
attached documents, as evidence.
5. Nothing in this decision, however, should be
construed as indicating such proof would be
sufficient at a trial on the merits of the
Petition, however.
---------------
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 28 of 47
In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
Page 1
IN RE: HENRY ALAN GREEN
ALLEGED INVOLUNTARY CHAPTER 7,
DEBTOR
TERESA M. GREEN ALLEGED
INVOLUNTARY CHAPTER 7, DEBTOR Case No. 06-11761-FM. Case No. 06-11762-FM.
United States Bankruptcy Court, W.D.
Texas, Austin Division. April 9, 2007.
MEMORANDUM OPINION
FRANK MONROE, Bankruptcy Judge.
The Court held an initial hearing upon the
Involuntary Petition filed by Josephine Maita
initiating the above two cases and the Alleged
Debtors' Motions to Dismiss the same on
February 7, 2007 at 1:30 p.m. The initial
hearing was limited to several discreet issues
as set forth hereinafter. This is a matter which
arises under Title 11 and in a case under Title
11. It is, therefore, a core proceeding under 28
U.S.C. §157(b)(2). This Court has the
jurisdiction to enter a final order under 28
U.S.C.
Page 2
§1334(a) and (b), 28 U.S.C. §157(a) and (b)(1),
28 U.S.C. §151, and the Standing Order of
Reference of the United States District Court
for the Western District of Texas referring all
bankruptcy matters to the Bankruptcy Court.
Josephine Maita ("Maita") is the aunt of
the Alleged Debtor Teresa M. Green. Teresa M.
Green and Henry Alan Green are married.
Maita holds a judgment against both Henry
and Teresa Green in the face amount of
$555,188.98, which judgment was issued by
the Superior Court of California for the County
of Alameda on April 18, 2006. Maita registered
the California judgment in Texas in Cause No.
D-1-GN-06-001621 in the 126th District Court
of Travis County, Texas via Notice of Filing
Foreign Judgment Pursuant to the Uniform
Enforcement of Foreign Judgments Act. This
judgment is recorded in Vol. 06131, Page 1317
in the 126th District Court of Travis County,
Texas. Maita then filed an Abstract of
Judgment in the Official Public Records of
Travis County, Texas at Doc. No. 2006136046
on July 12, 2006.
This case is not the first brush with
bankruptcy that the Greens have had. They
initiated a voluntary Chapter 7 petition on
January 11, 2005 under Case No. 05-10196.
Maita was a creditor of the Greens at that time
although her claim had not been reduced to
judgment. Maita objected to the entry of a
discharge in that prior case. After trial, this
Court denied the Greens a discharge of their
indebtednesses finding violations of 11 U.S.C.
§727(a)(2)(A)
Page 3
and 11 U.S.C. §727(a)(4)(A).
The Greens had sold their home in
California in June 2004 with net cash
proceeds in excess of $1.1 million [only
$75,000.00 of which was non-exempt under
the laws of the State of California] liquidated
their Fidelity Investment account netting
$300,000.00 plus, and, along with an
additional $60,000.00, purchased for cash a
residence in Austin, Texas for approximately
$1.44 million. This Court found that the
Greens had invested virtually all of their non-
exempt property [almost three times the
amount to pay Maita her claim] in an exempt
homestead in Texas with the actual intent to
defraud Maita and the Greens' other creditors.
Additionally, the Debtors had failed to disclose
certain financial transactions which had
occurred in April 2004 as required by the
Schedules and Statements of Affairs.
The instant Involuntary Petitions were
filed by Maita primarily due to the change of
the federal exemption laws occasioned by the
passage of the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005. The
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 29 of 47
In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
relevant provision, 11 U.S.C. §522, was
amended so that if a debtor elects to exempt
property under state law and such debtor has
acquired during the 1215-day period preceding
the filing of the petition real property that the
debtor uses as a residence or a homestead,
then to the extent the value of the equity in
such property exceeds $125,000.00, it is not
entitled to be exempted. See 11 U.S.C.
§522(p)(1)(B) and (D).
Page 4
Accordingly, if Maita is successful in having an
order for relief entered in these two cases, the
Alleged Debtors' state law homestead
exemption on their house, now worth 1.7
million, will be limited to $125,000.00 thereby
freeing up more than enough funds to pay
Maita and all other creditors in full; still
leaving a significant excess for the benefit of
the Debtors.
ISSUES
1. If there are fewer than 12 holders of
such claims against either of the Greens, is
Maita precluded from being a petitioning
creditor because she is an insider? The
language of 11 U.S.C. §303(b)(2) says that if
there are fewer than 12 "such holders",
excluding an insider, then the involuntary case
can be commenced by one or more of "such
holders". The question is whether the language
excluding an insider from being counted as a
claim holder also excludes an insider from
being a petitioner.
2. Since Maita has an abstract of
judgment on file in Travis County, is she a
creditor "secured" by the homestead and,
therefore, ineligible to be a petitioning
creditor?
3. Is there an exception to the statutory
requirements set out in §303(b)(2) of the
Bankruptcy Code if the Greens each have more
than eleven creditors?
4. Which of the 19 alleged creditors
claimed by both of the Greens actually
qualifies as such under 11 U.S.C. §303(b)?
Stated another way, do either of the Greens
have twelve or more holders of
Page 5
such qualified claims?
Sub-Issue: Are non-recourse creditors to
be counted — i.e. what is the proper
interpretation of "holder of a claim against
such person" as used in 11 U.S.C. §303(b)(1)?
The rules of construction set out in 11 U.S.C.
§102(2) states that a "claim against the debtor"
includes a claim against property of the debtor
(non-recourse secured claims); however, 11
U.S.C. §303(b)(1) states that those creditors
whose claims are to be counted for involuntary
purposes are those which hold a "claim against
such person". Does that difference in language
mean that non-recourse creditors are excluded
from the count as well as community claims of
a spouse who has not actually incurred the
debt?
Conclusions of Law
1. If there are fewer than 12 holders of
such claims against either of the Greens, is
Maita precluded from being a petitioning
creditor because she is an insider?
It is undisputed in this case that Maita is
related to Teresa Green and therefore is an
insider as defined by 11 U.S.C. §101(31)(A)(i) of
the Bankruptcy Code. The Greens urge that 11
U.S.C. §303(b)(2) which excludes "any
employee or insider" of the debtor from being
included as one of the "holders of such claims"
for counting purposes also prevents Maita
from being a petitioning creditor under
§303(b)(2).
Page 6
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 30 of 47
In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
Section 303(b)(1) and (2) of the
Bankruptcy Code sets forth the qualifications
of a petitioning creditor.
(b) An involuntary case against a person is
commenced by the filing with the bankruptcy
court of a petition under Chapter 7 or 11 of this
title—
(1) by three or more entities, each of which
is either a holder of a claim against such
person that is not contingent as to liability or
the subject of a bonafide dispute as to liability
or amount, or an indenture trustee
representing such a holder, if such
noncontingent, undisputed claims aggregate
at least $12,300 more than the value of any
lien on property of the debtor securing such
claims held by the holders of such claims;
(2) if there are fewer than twelve such
holders, excluding any employee or insider of
such person and any transferee of a transfer
that is voidable. . . by one or more of such
holders that hold in the aggregate at least
$12,300 of such claims;"
11 U.S.C. §303(b)(1) and (2)(West 2007).
Courts have struggled with the issue of
whether, in cases involving 12 or less creditors,
an insider has standing to file an involuntary
petition. Some courts support the Greens'
position that an insider lacks standing to file
an involuntary in cases with fewer than 12
creditors. See In re Gills Creek Parkway
Assoc. L.P., 194 B.R. 59, 62 (Bankr. D.S.C
1995)(asserting in dicta that claims of
employees, insiders and transferees of debtor
are excluded from consideration in
determination of single creditor's eligibility to
file in involuntary petition); In re Runaway II,
Inc., 168 B.R. 193, 198 (Bankr. W.D. Mo.
1994)(dismissing case filed by insider where
there were less than 12 creditors); In re Kenval
Mktg. Corp., 38 B.R. 241, 244 (Bankr. E.D.
Pa.)("Creditors
Page 7
attempting to file under ... §303(b)(2) . . . are
precluded from successfully filing if they hold
voidable preferences."), reconsideration
denied, 40 B.R. 445 (Bankr. E.D. Pa. 1984); In
re Kreidler Import Corp., 4 B.R. 256, 259
(Bankr. D.Md. 1980)(rejecting "the
construction advanced... that preferred
creditors are not counted but are eligible to
join involuntary petition").
Runaway sheds the most light on this
view. Runaway noted:
The phrase, "such holders" is used twice in
§303(b)(2). The first use of "such holders"
refers back to §303(b)(1) where a holder is "a
holder of a claim against such person that is
not contingent as to liability or the subject of a
bonafide dispute". However, the first use of
"such holders" is immediately followed by
language excluding employees, insiders and
creditors holding avoidable transfers. These
exclusions modify the phrase "such holders" as
it is used in subsection (b)(2). The second use
of "such holders" refers to the first use of the
phrase in subsection (b)(2) and its exclusions.
The second use of the phrases "such holders"
directly modifies the "one or more" creditor
language. Thus, to file a petition under (b)(2),
a creditor must hold a claim that is not
contingent, subject to a bonafide dispute, nor
be the claims of an employee, insider or
transferee of an avoidable transfer.
Runaway 168 B.R. at 196
A number of courts, however, have
interpreted §303(b)(2) to allow an insider,
employee or transferee to file an involuntary
petition. See Sipple v. Atwood (In re Atwood),
124 B.R. 402, 405 n.2 (S.D. Ga.
1991)("Petitioning creditors. . . qualify [to file
an involuntary petition] even if their claim is
voidable."); In re Little Bldgs. Inc., 49 B.R.
889, 890-91 (Bankr. N.D. Ohio 1985)(denying
debtor's motion to dismiss involuntary
petition filed
Page 8
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In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
by insiders); In re Kitchen Assocs. Inc., 33 B.R.
214, 215 (Bankr. W.D. La. 1983)("Under the
plain meaning of 11 U.S.C. §303(b)(1) and (2),
employees of the debtor may be petitioning
creditors for involuntary bankruptcy of the
debtor."); In re Hopkins, 177 B.R. 1 (Bankr. D.
Me. 1995)(Former spouses and their children
may be petitioning creditors because their
entitlement to alimony and child support,
respectively, makes them entities holding
claims).
The Little Bldgs. court found contra to
Runaway that:
Under these provisions, a single
unsecured creditor may file an involuntary
petition against an alleged debtor if his claim
is not subject to a bonafide dispute and is for
at least $5,000 and if the alleged debtor has
fewer than twelve creditors. Although the
number of the alleged debtor's creditors may
or may not be disputed in this case, it is
important to note that §303(b)provides that in
calculating the number of an alleged debtor's
creditors, the claims of insiders and the claims
of transferees whose transfers are subject to
avoidance are not included. If after deducting
the claims of insiders and avoidance
transferees, an alleged debtor has fewer than
twelve creditors, a single creditor is eligible to
file an involuntary petition, irrespective of
whether or not that creditor is, or at one time
was, an insider. . .[T]he language of the section
states, with mathematic-like certainty, that the
claims of insiders are excluded only from
consideration in determining the number of an
alleged debtor's creditors. Insiders are still
eligible to initiate involuntary proceedings
against the entity they are or were associated
with.
Little Bldgs., 49 B.R. at 890-891.
Collier's also supports the Little Bldgs.
rationale that "[a]lthough insiders are not
counted as holders of claims for purposes of
establishing the numerosity requirement in
Section 303(b), these individuals can be
petitioning creditors if they satisfy the other
requirements." Collier on Bankruptcy
Page 9
¶303.03[2](c)(iv), at page 303-36(15th ed.
rev.). Collier takes the same position with
respect to creditors who have received
voidable transfers. Id. at ¶303.03[2](c)(v),
page 303-36-37.
And, quite frankly, there is another way to
read the statute rather than how the court in
Runaway chose to read it. The first "such
holders" in §303(b)(2) can refer back to
§303(b)(1) "holder of a claim" and the second
"such holders" in §303(b)(2) can just as easily
be read to refer back to "holder of a claim" in
§303(b)(1) as well.
The better reasoned reading of the statute
is that it does not exclude employees, insiders,
etc. from being petitioning creditors under
§303(b)(2). This is especially true when one
looks at the legislative reasoning as to why
these type creditors were excluded from
counting purposes in the first place. See In re
Skye Mktg. Corp., 11 B.R. 891, 897 (Bankr.
E.D.N.Y 1981). The Skye court points out:
The detailed rules governing the counting
of creditors have their origin in policy
considerations which, to an extent, are
conflicting. One such policy is based upon the
fear that involuntary bankruptcy proceedings
might be used by one or two recalcitrant
creditors as a means of harassing an honest
debtor. Populist Members of Congress, in
debating the bill which was later adopted as
the Bankruptcy Act of 1898, decried the
involuntary bankruptcy provisions as an
"engine of oppression" and "intended to bind
hand and foot the debtors of this country and
place them in the vise-like grip of the greedy
cormorants of the country." 31 Cong. Rec.
1803, 1851 (remarks of Congressmen Henry
and Sparkman), quoted in In re Gibralter
Amusements, Ltd., 291 F.2d 22, 27 (2d Cir.
1961)(Friendly, J., dissenting). In order to
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In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
allay these fears, the requirement of three
petitioners was adopted as a general rule, and
single creditor petitions were permitted
Page 10
only in cases in which there were fewer than
twelve creditors. Another fear was the
possibility that the threat of an involuntary
proceeding would be used to compel the
debtor to make preferential payments to one
or two litigious creditors. A competing
consideration was the avoidance of collusion
between the insolvent debtor and friendly
creditors through which an involuntary
petition might be defeated. To be sure, a
creditor who is being paid lacks an incentive to
join an involuntary proceeding because of the
risk that a portion of his claim would be sought
as a preference by the trustee while the balance
of his claim would be discharged in
bankruptcy. Insiders who have become
creditors of their businesses are deterred by
similar considerations from joining in an
involuntary petition. Indeed, in considering
the statutory predecessor of subsection (b)(2)1
it was said that (t)he detailed ground rules for
"counting creditors," laid down by s 59, sub e,
indicate that the principal Congressional fear
of abuse was not that a debtor would be too
easily petitioned into bankruptcy rather that
through connivance with friendly creditors
that insolvent debtor[s] might be able unfairly
to hamstring one or two large creditors. . .Id.
at 25 (citation omitted). Thus, the compromise
was to require three petitioners to join when
the eligible claimants number more than
twelve, a single petitioner when they do not,
and exclude from the class of claimants who
may be counted those who lack an incentive to
join an involuntary petition.
Congress continued to adhere to this
compromise in adopting the Bankruptcy
Reform Act of 1978. Those who would be
deterred from joining the effort to petition a
debtor into bankruptcy by their status as
preferred creditors are not to be counted
according to the dictates of section 303(b)(2)
of the Code.
Skye, 11 B.R. at 897-898.
Given this potential lack of incentive to
join or file an
Page 11
involuntary petition, one can postulate that
Congress could not have possibly intended
that the parties excluded for counting
purposes under (b)(2) should also lack
standing to file an involuntary petition. It is
because they may lack incentive to join in that
these parties were excluded from the count.
Congress sought to avoid possible collusion
between the insolvent debtor and friendly
creditors through which an involuntary might
be defeated by artificially increasing the total
number of creditors so at least three would be
required to file a petition. Here, Maita,
although an insider, is not in collusion with the
Debtors. She, in fact, seeks redress from the
fraud the Debtors have perpetrated upon her.
Maita may be a petitioning creditor under 11
U.S.C. §303(b)(2).
2. Since Maita has an abstract of judgment
on file in Travis County, is she a "secured"
creditor and, therefore, ineligible to be a
petitioning creditor?
To moot this question, Maita has waived
her judicial lien by written waivers filed with
the Court on February 27, 2007 in both Henry
and Teresa Greens' bankruptcy cases.
Attached to both waivers is a copy of the
Release of Abstract of Judgment executed by
Maita on February 22, 2007 and subsequently
filed of record in Travis County, Texas on
February 27, 2007 in the Official Public
Records.
Page 12
A secured creditor may waive security for
all or a portion of its claim, to meet the
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In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
aggregate unsecured debt requirement of
§303(b). In re All Media Properties, Inc., 5
B.R. 126, 141 (Bankr. S.D. Tex. 1980), affirmed
and bankruptcy court opinion noted with
approval at 646 F.2d 193 (5th Cir. 1981); In re
American Gypsum Co., 31 B.R. 187, 189
(Bankr. D.N.M. 1983); CC Britain Equities,
L.L.C. v. Allen-Main Associates Limited
Partnership (In re Allen-Main Associates
Limited Partnership), 223 B.R. 59 at 61 (2nd
Cir. BAP 1998).
Even without the waiver, the alleged
"secured" status of Maita's claim is a specious
argument.
The Greens asserted at trial that the
involuntary petitions should be dismissed
because, according to the Greens, the two
petitioning creditors do not hold unsecured
claims aggregating at least $12,300.00 as
required under 11 U.S.C. §303(b)(1). In taking
this position, the Greens have asserted that
Maita is a fully secured creditor in this
proceeding because she filed an abstract of her
judgment against the Greens in the Official
Public Records of Travis County, Texas
(Debtors' Exhibit 46) which the Greens argue
attaches to their homestead. Determination of
secured creditor's claim for purposes of an
involuntary petition is governed by state law.2
See In re Harman, 243 B.R. 671 (Bankr.
Page 13
N.D. Tex., 1999)
The filing of an abstract of judgment
under Texas law does not create a valid and
enforceable lien against a judgment debtor's
homestead. Hoffman v. Love, 494 S.W. 2d 591,
593-94 (Tex. Civ. App.-Dallas 1973), writ ref'd
n.r.e. per curiam at 499 S.W.2d 295 (Tex.
1973)(ruling that a purchaser of the property
had standing to challenge the validity of the
lien and that "a judgment, though duly
abstracted, never fixes a lien on the homestead
so long as it remains homestead"); Harms v.
Ehlers, 179 S.W. 2d 582, 583 (Tex. Civ. App.-
Austin 1944), writ ref'd, (ruling that because
the property in question had been the
homestead of the deceased judgment debtor
without interruption until the time of his
death, "no abstract of judgment lien could or
did attach thereto during his life" and the
property passed to his probate estate, free of
any lien.)
To support their contention that Maita is
fully secured, the Greens cite Davis v. Davis
(In re Davis), 170 F.3d 475 (5th Cir. 1999).
Here, the Fifth Circuit did not hold that the
filing of an abstract of judgment creates a valid
lien on a Texas homestead. The 5th Circuit's
holding was that the exemption provisions of
the Bankruptcy Code, as they existed at the
time of that decision, did not preempt state
exemption laws, so as to create a lien or other
Page 14
substantive collection right. In other words,
once the property is exempted from property
of the estate, the parties are relegated to their
rights and remedies under applicable
nonbankruptcy law. The Court stated in its
holding:
For all these reasons, we conclude that
§522(c)(1) does not "create liability" of exempt
property for specified debts following
bankruptcy. Instead, the section permits
creditors holding such claims to proceed
against the property after bankruptcy based on
the rights and remedies they would have had
under state law if bankruptcy had never been
filed.
Id. at 481.
Even if a lien is considered perfected
against the homestead, it is not enforceable
unless it secures payment for those certain
type debts enumerated in Tex. Const. Art. XVI,
§50. See Exocet, Inc. v. Cordes, 815 S.W.2d
350, 352 (Tex. App.-Austin 1991, no
writ)(Debtor's homestead is not exempt from
the perfected lien; rather, the homestead is
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In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
exempt from any seizure attempting to enforce
the perfected lien). Maita's judicial lien cannot
be enforced against the homestead. Maita,
therefore, cannot foreclose on the Greens'
homestead. Her lien would then, even if it
attaches, have no value, and she should be
considered totally unsecured.
Maita, even without waiver of her judicial
lien, can be a petitioning creditor because for
§303 purposes her abstract of judgment did
not create a lien which is enforceable against
the Greens' homestead.
Page 15
3. Is there an exception to the statutory
requirements set out in §303(b)(2) of the
Bankruptcy Code if the Greens each have more
than eleven creditors?
At trial Maita asserted that, if the Greens
had more than eleven creditors each, there
should be an exception to the statutory
requirements set out in Bankruptcy Code
§303(b) due to exigent circumstances relying
on In re Moss, 249 B.R. 411 (Bankr. N.D. Tex.
2000). See also In re Norriss Bros. Lumber
Co., Inc., 133 B.R. 599 (Bankr. N.D. Tex. 1991).
This is a judicially created exception when the
debtor has engaged in "fraud, trick, artifice or
scam" and where the debtor has made
fraudulent conveyances or preferential
transfers or engaged in other misconduct vis-
a-vis his or her creditors. Moss, 249 B.R. at
424.
Maita urges this Court to apply this
exception if the Greens prove the existence of
more than eleven creditors each. This Court
did find that the Debtors transferred property
having a value in excess of $1,000,000 within
one-year prior to their voluntary bankruptcy
filing with intent to hinder, delay or defraud
their creditors (Adversary Proceeding No. 05-
1085). In that same proceeding, this Court
found that there were numerous material
omissions and misstatements in the Greens'
bankruptcy Schedules and Statement of
Financial Affairs.
In addition, the record from this trial
indicates that the Greens are living an
extravagant lifestyle, while certain
Page 16
creditors of theirs remain unpaid. They
continue to live in a paid-for house that is now
worth $1.7 million and have the resources to
take luxury vacations.
The Court condones neither the Debtors'
past fraudulent behavior nor their current
behavior. However, this Court must abide by
the statutory construction of §303(b). The
statute is clear on its face and contains no
fraud exception. As such, the Court must rely
on its review of the Greens' claims to
determine whether an order for relief with
respect to this involuntary proceeding can be
entered.
4. Which of the 19 alleged creditors
claimed by both of the Greens actually
qualifies as such under 11 U.S.C. §303(b)?
Stated another way, do either of the Greens
have twelve or more holders of such qualified
claims?
Sub-Issues: What is the proper
interpretation of "holder of a claim against
such person" as used in 11 U.S.C. §303(b)(1)?
The rules of construction set out in 11 U.S.C.
§102(2) state that a "claim against the debtor"
includes a "claim against property of the
debtor" [which would include non-recourse
secured claims]; however, 11 U.S.C. §303(b)(1)
states that those creditors whose claims are to
be counted for involuntary purposes are those
which hold a "claim against such person".
Does that difference in language mean that
non-recourse creditors are excluded from the
count? And, does that mean that a claim
against one spouse in a
Page 17
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In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
community property state should not be
counted as a claim against the other spouse for
the purposes of §303(b)?
Bankruptcy Code §303(b) provides that
an involuntary case may be commenced by
three or more entities or if there are fewer than
twelve creditors, by one entity. To be counted
each creditor must be a holder of a "claim
against such person that is not contingent as to
liability or the subject of a bonafide dispute as
to liability or amount". 11 U.S.C.
§303(b)(1)(emphasis added) (West 2007). The
language "claim against the debtor" is defined
in §102 to include non-recourse claims against
the property of the debtor. 11 U.S.C.
§102(2)(West 2007). "Claim against such
person" in §303(b)(1) is, however, not defined.
"Community claim" is defined in §101(7)
as a "claim that arose before the
commencement of the case concerning the
debtor for which property of the kind specified
in section 541(a)(2) of this title is liable,
whether or not there is any such property at
the time of the commencement of the case". 11
U.S.C. §101(7)(West 2007). State substantive
community property laws generally allow
entities holding claims against one spouse
incurred during marriage to reach the
community property of both spouses. TEX.
FAM. CODE ANN. §3.202 (Vernon 2007). CA.
FAM. CODE ANN. §910 (West 2007). This is
true in both Texas and California. However, it
does not mean that the spouse is personally
liable for claims made against the other
spouse. Latimer v. City National Bank of
Colorado City, 715 S.W.
Page 18
2d 825 (Tex. App.-Eastland 1986, no
writ)(Wife of promissory note maker, whose
signature did not appear on any of the notes,
was not personally liable on them.); See CA.
FAM. CODE ANN. §914 (Statute defines the
specific instances when a spouse is personally
liable for debts incurred by the other spouse;
personal liability does not attach to all debts
incurred by a spouse during the marriage). The
only instances when personal liability is
imposed is when: (1) the individual's spouse
acts as an agent for the individual (and the
Family Code makes clear that one spouse does
not act as an agent for the other spouse solely
because of the marriage relationship); or (2)
the spouse incurs a debt "for necessaries".
TEX. FAM. CODE ANN. §3.201(a)(Vernon
2007). California has a similar liability
scheme. CAL FAM. CODE §914. Even though
Greens' counsel alludes in his closing
argument that some of the Greens' debts were
"for necessaries", there was no evidence
presented as to which debts, if any, constituted
such, and there were no assertions or evidence
regarding either of the Greens acting as an
agent for the other. Even so, giving the debtors
the benefit of liberal interpretation, the Court
has presumed one debt [Clinical Pathology] as
a "necessary" since it was a medical bill
concerning their child.
This means that a creditor with a personal
liability claim against the "incurring spouse"
cannot be counted as a holder of a claim
against a "non-incurring spouse" even though
it will have a "community claim" in the non-
incurring spouse's estate if an order
Page 19
for relief is entered. Collier on Bankruptcy,
§303.03[2][c][viii] at 303-37-38. 15th Ed. See
also, In re Karber, 25 B.R. 9, 13 (Bankr. N.D.
Tex. 1982)(citing Collier's). Stated another
way, even though a creditor of the non-
incurring spouse may have a community claim
against that spouses' interest in the parties'
community property, that is not sufficient. It is
clear that for a creditor to be "counted" under
§303(b)(1) it must hold a claim against the
"person", i.e. the alleged debtor must be
personally liable for the creditor's claim in
order for that creditor to be "counted". If a
claim against property was to be included,
Congress clearly could have said so. It did not.
And, the primary reason why claims against
property were most likely not included is that
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In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
holders of those claims have a remedy outside
of bankruptcy [foreclosure against their
collateral] whereas holders of unsecured
claims against the person do not. Therefore,
non-recourse secured creditors may not be
counted. And, unsecured creditors whose sole
remedy is to look to community property for
satisfaction of their debt [or to the personal
liability of the incurring spouse] may not be
counted as holders of "claims against the
person" of the non-incurring spouse under
§303(b). This Court reviews the claims to be
counted on this basis with due deference to
who has the burden of proof.
The Greens bear the initial burden of
proving that each has 12 or more creditors. In
re Rothery, 143 F.3d 546, 549(9th Cir.
Page 20
1998). Bankruptcy Rule 1003(b) instructs that
a debtor, who professes to have more than 12
creditors, must file an answer, including a list
of all creditors with their names and
addresses, a brief statement of the nature of
the claims and the amounts thereof. Once the
debtor files his list of creditors in compliance
with Bankruptcy Rule 1003(b), the petitioner
has the burden of showing that the debtor has
less than 12 bonafide creditors. In re Braten,
99 B.R. 579, 582 (Bankr. S.D.N.Y. 1989); see
also In re James Plaza Joint Venture, 67 B.R.
445, 448 (Bankr. S.D. Tex. 1986). Compliance
with Bankrutpcy Rule 1003(b) is a condition
precedent to the burden shifting to the
petitioning creditor. The Court will review the
creditors taking into consideration this
burden.
Creditor by Creditor Anaylsis
1) Charles Nettles, Mr. Nettles was the
Greens' former bankruptcy attorney in their
prior Chapter 7 proceeding and the related
discharge litigation who the Greens "stiffed" to
the tune of $ 6,100. (Debtors' Exhibit 1). Mr.
Nettles invoice is addressed to both Mr. and
Mrs. Green; he clearly represented both; and
he is a valid creditor of both.
2) General Electric Capital Corp. Henry
Green signed a personal guaranty of a secured
obligation of Maita Brothers, Inc. in 1998.
(Debtors' Exhibit 2). Mrs. Green did not
execute the guaranty and is not personally
liable on such. Mr. Green explained
Page 21
that Maita Brothers, Inc. entered into a
General Assignment for the Benefit of
Creditors in August, 2004 (Debtors' Exhibit
25) and that he has no idea what the Assignee
received from the sale of GECC's collateral.
Mr. Green did testify that he called and
obtained a balance due from GECC as of the
date of the trial of $37,560.00. Maita has the
burden of proving GECC is not a valid creditor.
Mr. Green's unobjected-to hearsay testimony
carries the day. GECC is to be counted as a
creditor of Mr. Green.
3) Zion Credit Corp. (Debtors' Exhibit 5).
This creditor is similar to that of General
Electric Capital Corp. Mr. Green testified that
he has had no communication from Zion since
the time of the Assignment for Benefit of
Creditors. But, he has called and obtained a
balance from Zion in the amount of $32,500 as
of the date of the trial. No documentation was
produced to verify how much is owed or how it
was calculated, and no accounting was
submitted with respect to the liquidation of
Zion's collateral. However, giving Mr. Green
the benefit of the doubt on his unobjected-to
hearsay testimony, the claim will be counted as
one of his creditors. It will not be counted as
one of Mrs. Green's.
4) Randy Bridges (Debtors' Exhibit 3).
This is a business debt of Henry Green only. It
arises out of a guaranty by Mr. Green and
others of a 2003 Promissory Note executed by
third parties, related to the business of Maita
Brothers, Inc. Mrs. Green has no personal
liability.
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In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
Page 22
5) Volkswagen Credit (Debtors' Exhibit 4).
This is an automobile lease signed only by
Teresa Green. The lease is currently not in
default and testimony indicated that the
Greens intend to continue paying on the lease
until paid in full. Maita contends that this
claim should not be counted as a lessor does
not have a "claim" under bankruptcy law
unless the lease is rejected under 11 U.S.C.
§365. This is not, however, the relevant
inquiry. The lease is a current claim against
"the person", Mrs. Green. There is personal
liability if it is not paid. It will be counted
against Mrs. Green only.
6) US Bank (Debtors' Exhibit 16). This is
also an automobile lease. The billing
statements reflect both Mr. and Mrs. Green as
lessees. This is a claim against both Mr. and
Mrs. Green.
7) Fidel Del Torro, DDS (Debtors' Exhibit
11). This party is providing ongoing
orthodontic care for one of the Green's
children. It is unclear whether this is actually a
"debt". The only evidence produced is an
unexecuted contract showing Mr. Green as the
"Responsible Individual". Mr. Green testified
that the agreed price for the total services is
$4,600 and that he made a down payment of
$1,086.00 with $3,394 to be paid in 18
monthly installments of $183.00. Dr. Del
Torro has future services to perform. However,
this is a personal services contract. There is no
liability unless and until services are rendered
by Del Torro. There is no contractual
obligation on either of the Greens if they
Page 23
choose to stop using Del Torro's services and
go to someone else. This is not a claim within
the meaning of §303(b) (1) as the payments
were current on the petition date.
8) Clinical Pathology (Debtors' Exhibit 6).
The only evidence of this debt is a billing dated
November 8, 2004 which is prior to the
Greens' first bankruptcy case. The Greens also
listed this debt in their schedules in the first
bankruptcy case. Henry Green acknowledged
that he has paid several other invoices to
Clinical Pathology since this invoice, and he is
paying for all current services provided by this
party. This, however, appears to be still owing
even though the Greens' discharge was denied
in their prior case. Maita presented no
evidence to the contrary. The bill is in the
name of the Green's child, Jordan. Neither Mr.
nor Mrs. Green's name appears on the bill. The
Court, will, in an abundance of caution,
consider the same as the responsibility of, and
a personal claim against, both Mr. and Mrs.
Green.
9. Graebel Van Lines (Debtors' Exhibit 7).
This is the balance owed Graebel for moving
services when the Greens moved from
California to Texas in 2004. The invoice is
directed to Henry Green only and will be
considered only a debt of Mr. Green.
10. Encore Bank (Debtors' Exhibit 12).
This is a home equity line of credit against the
Greens' property at 4201 Hidden Canyon
Cove. This line of credit is for $220,000 but is
only partially drawn against ($24,000 as of the
petition date). This is a non-recourse
Page 24
obligation. TEX. CONST. ART. XVI, §50(a) (6)
(C). As such, it is not a "claim against such
person" within the meaning of §303 and will
not be counted against either Mr. or Mrs.
Green.
11. Bank of America Visa (Debtors' Exhibit
13). This is a credit card in both Mr. and Mrs.
Greens' names. However, Mr. Green's
testimony was clear that this card is paid off
each month. He testified that his credit cards
are simply being used as a convenient way to
pay for ordinary routine expenses, and that he
usually does not carry a balance on them. They
are routinely paid in full each month. Debtors'
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 38 of 47
In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
Exhibit 13, page 17 indicates there was a
balance on the account of $663.03 as of the
petition date. Even though it was billed pre-
petition it was not due until November 14,
2006. And, it was in fact, paid in full on
November 8, 2006 in accord with the Greens'
normal practice. Regardless, and even though
a good argument could be made for this being
treated in the same manner as routine
recurring monthly bills such as utilities and
the like [and not counting it], in an abundance
of caution this will be counted as a creditor of
both Mr. and Mrs. Green.
12. CitiAdvantage World Master Card
(Debtors' Exhibit 14). This is a credit card
account allegedly used by both Mr. and Mrs.
Green but Plaintiff's Exhibit P-10 indicates it is
billed only to Mr. Green. Again, however, it is
the Debtors' practice to pay off their credit
card balances in full each month. Debtors'
Exhibit 14
Page 25
indicates there was no billed and unpaid
balance on the account as of the petition date.
Page 14 of the Exhibit indicates the balance of
the account then due was paid in full on
October 27, 2006. Page 16 shows the account
was not billed again until November 7, 2006
after the involuntary petitions were filed. This
is, therefore, a post-petition debt of Mr. Green.
As such, it cannot be counted as a pre-petition
creditor.
13. Citi Advantage Card (Debtors' Exhibit
19). This is another credit card, but the account
is billed in the name of Joan Green, Henry
Green's mother. Mr. Green testified that he
and his wife each have a card on this account
and that they are permitted users. He also
testified that his credit report showed him
responsible for this debt. However, he did not
produce the credit report. And, most, if not all
of the charges incurred appear to be his
mother's charges. The Greens produced no
other evidence reflecting that they were liable
on this account other than copies of their
credit cards for the account merely reflecting
that they may be authorized users (Debtors'
Exhibit 22). This account cannot be included
for counting purposes.
14. Eanes Independent School District
(Debtors' Exhibit 9). Page 1 of Debtors' Exhibit
9 is a proof of claim filed in the Greens' prior
bankruptcy. It is for ad valorem taxes for a
prior year on the homestead at 4201 Hidden
Canyon Cove. Mr. Green testified that this bill
had been paid pre-petition and that it is
Page 26
his practice to pay his property taxes annually.
Page 2 of the Exhibit is a copy of the 2006 bill.
Even though the taxes are not due and payable
until January 31, 2007, personal liability
attaches as of January 1, 2006. Therefore, this
qualifies as a pre-petition claim against the
person of both Mr. and Mrs. Green. In re
Midland Indus. Service Corp., 35 F.3d 164,
166 (5th Cir. 1994).
15. Akawie & La Pietra (Debtors' Exhibit
8). This is a bill from a California law firm
addressed to Henry Green (billed "care of"
Stanley Green in San Jose, CA), for legal
services rendered relating to the business of
Maita Brothers, Inc. The testimony elicited
from Mr. and Mrs. Green regarding this claim
is that the law firm represented both the
Greens in connection with Maita's judicial
collection of the note. The law firm negotiated
a Confession of Judgment (Debtors' Exhibit
24) that Mr. and Mrs. Green executed. As such,
this should be considered a liability of both Mr.
and Mrs. Green.
16. Drs. Des Rosier and Werneke
(Debtors' Exhibit 15). This is a medical bill for
services provided to Teresa Green. This is
solely Teresa Green's debt.
17. Kent Kuhlmann. Henry Green testified
that when he was in California in the summer
or fall of 2006, that he borrowed $ 600 from
his friend, Mr. Kuhlmann, to purchase
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 39 of 47
In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
birthday gifts for his wife and two of his
children. He also testified he had not repaid
this loan as of the petition date. There is no
written
Page 27
documentation of this claim except for the
affidavit of Mr. Kuhlmann. Maita objected to
the use of this affidavit as hearsay, and the
Court sustained the objection. Further, saying
a debt is a debt does not necessarily make it so
without some documentation. Maita has
rebutted the presumption that this is a valid
creditor. The burden shifted to the Debtors to
prove the legitimacy of the debt. The Greens
have not met their burden on this one. This
claim cannot be counted. The testimony of Mr.
Green is not believable especially since he had
access to three credit cards, two of which were
routinely paid off on a monthly basis at the
time of the alleged loan.
18. Donna Brown (Debtors' Exhibit 20).
This is a debt of $24.50 owed by Mr. Green to
an attorney for work performed prior to the
Greens' first bankruptcy. It is clear from the
Exhibit that Ms. Brown had a retainer
substantially exceeding this amount and that
when she returned the unearned portion of the
retainer, she did not deduct the $24.50
because it was "pre-bankruptcy" debt. Mrs.
Green's name does not appear anywhere on
this account and should not be counted for
purposes of her petition. Further, it is a de
minimus claim that should not be counted
against Mr. Green. Denham v. Shellman Grain
Elevator, Inc., 444 F.2d 1376 (5th Cir. 1971).
19. Citifinancial Retail Services (Debtors'
Exhibit 18). This is a consumer account of Mr.
Green, which reflects a balance of
Page 28
$2,649.94 as of May 7, 2006, nearly six
months before the petition date. Two monthly
statements provided in Exhibit 18 indicate that
no payments are due on the account and no
interest accrues until April, 2007. There is no
documentary evidence in the record showing
the balance owing on the petition date
although the Court presumes it to be the same
as existed May 7,2006. Mrs. Green's name
does not appear on this account nor was there
any evidence that she is personally liable. It is
a claim to be counted against Mr. Green only.
The total claims for each are as follows:
Total Claims of Henry Green
1. Charles Nettles
2. General Electric Capital Corp.
3. Zion Credit Corp.
4. Randy Bridges
5. U.S. Bank
6. Clinical Pathology
7. Graebel Van Lines
8. Bank of America Visa
9. Eanes Independent School District
10. Akawie & La Pietra
11. Citifinancial Retail Services
Total Claims of Teresa Green
1. Charles Nettles
2. Volkswagon Credit
3. U.S. Bank
4. Clinical Pathology
5. Bank of America Visa
6. Eanes Independent School District
7. Akawie & La Pietra
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 40 of 47
In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)
8. Drs. Des Rosier and Werneke
Each of the Greens' has less than twelve
claims. As such,
Page 29
Maita has met the filing requirements
pursuant to §303(b) of the Bankruptcy Code
and the involuntary petitions can be
commenced against both Mr. and Mrs. Green
by Maita as the sole petitioning creditor of
each involuntary petition.
The Court, however, did not try the issue
of whether the alleged Debtors were generally
paying their debts as they become due as
required by §303 (h) of the Bankruptcy Code.
It is necessary for this issue to be tried before
the Court can enter the full relief requested.
---------------
Notes:
1. Section 59(e) of the Bankruptcy Act, 11
U.S.C. s95(e) provided as follows: In
computing the number of creditors of a
bankrupt for the purpose of determining how
many creditors must join in the petition, there
shall not be counted (1) such creditors as were
employed by the bankrupt at the time of the
filing of the petition; (2) creditors who are
relatives of the bankrupt or, if the bankrupt is
a corporation, creditors who are stockholders
or members, officers or members of the board
of directors or trustees or of other similar
controlling bodies of such bankrupt
corporation; (3) creditors who have
participated, directly or indirectly, in the act of
bankruptcy charged in the petition; (4)secured
creditors whose claims are fully secured; and
(5) creditors who have received preferences,
liens, or transfers void or voidable under this
Act.
2. Other than his exempt homestead, Harman,
[the debtor], had no real property upon which
the abstracted judgment could attach a
judgment lien. Harman at 674 (Although
debtor owned the homestead as of the
involuntary petition date and petitioning
creditors had abstracted their judgments, the
court made no further mention of the exempt
homestead and yet determined that the
petitioning creditors were unsecured).
---------------
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 41 of 47
In re Lundeen, Case No. 07-19422 (Bankr. N.D. Ohio 2/20/2008) (Bankr. N.D. Ohio, 2008)
Page 1
In re: JAMES E. LUNDEEN, SR., Involuntary Chapter 7, Alleged Debtor.
Case No. 07-19422.United States Bankruptcy Court, N.D.
Ohio, Eastern Division.February 20, 2008.
MEMORANDUM OF OPINION RE: MOTION TO POST BOND
MORGENSTERN-CLARREN, Bankruptcy Judge.
Header ends here.
The alleged debtor filed a motion for an order requiring the petitioning creditors to post a bond under 11 U.S.C. § 303(e).1 The petitioning creditors responded.2 The court heard oral argument on the motion on February 19, 2008.3 For the reasons stated below, the motion is denied.4
JURISDICTION
Jurisdiction exists under 28 U.S.C. § 1334 and General Order No. 84 entered by the United States District Court for the Northern District of Ohio. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O).
Page 2
FACTS AND DISCUSSION
Bankruptcy code § 303(e) states: "After notice and a hearing, and for cause, the court may require the petitioners under this section to file a bond to indemnify the debtor for such amounts as the court may later allow under subsection (i) of this section." 11 U.S.C. § 303(e). Subsection (i) of § 303 allows the court to award an involuntary debtor costs, attorneys fees, and damages against a petitioning creditor in certain circumstances, such as when a creditor filed the petition in bad faith. 11 U.S.C. § 303(i). The legislative report accompanying § 303(e) states that,
"[t]he bonding requirement will discourage frivolous petitions as well as spiteful petitions based on a desire to embarrass the debtor (who may be a competitor of a petitioning creditor) or to put the debtor out of business without good cause." 11 U.S.C. § 303 note (1978); see also 2 COLLIER ON BANKRUPTCY ¶ 303.11 (Alan N. Resnick & Henry J. Sommer eds., 15th rev. ed. 2008) (citing legislative history).
The bankruptcy code does not mandate that a bond be posted, involuntary debtors are not entitled to a bond as a matter of course, and such a bond is not routinely required of petitioners on request of a debtor. See In re Contemporary Mission, Inc., No. 5-82-00915, 1983 Bankr. LEXIS 6916, at *6 (Bankr. D. Conn. Jan. 31, 1983); In re Reed, 11 B.R. 755, 757 (Bankr. S.D. W. Va. 1981). The burden is on the alleged debtor to show the need for a bond by showing, for example, that the petition was filed in bad faith or with an improper motive. Hutter Assocs., Inc. v. Women, Inc. (In re Hutter Assocs., Inc.), 138 B.R. 512, 516 (W.D. Va. 1992).
In this case, the alleged debtor requests that the petitioning creditors post a bond because he filed a motion to dismiss the involuntary petition. At oral argument, counsel for the alleged debtor further stated that he believes the petition was filed in bad faith. Counsel also stated that the alleged debtor has been personally harmed by the filing of the petition as two of his credit
Page 3
cards were canceled, one with a statement that it was because of the bankruptcy.
As to the first issue, the alleged debtor did file a motion to dismiss the involuntary petition with damages under § 303(i),5 but the mere fact that such a motion was filed does warrant the issuance of a bond. See id.; In re Contemporary Mission, Inc., 1983 Bankr. LEXIS 6916, at *6 (noting that
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 42 of 47
In re Lundeen, Case No. 07-19422 (Bankr. N.D. Ohio 2/20/2008) (Bankr. N.D. Ohio, 2008)
requiring creditors to post a bond simply because the debtor filed a motion to dismiss would make the "for cause" provision of § 303(e) meaningless).
As to the second issue, the alleged debtor did not produce any evidence or make any arguments as to why he believes the petition was filed in bad faith. While animosity does exist between the parties, the petitioner in an involuntary bankruptcy is presumed to be acting in good faith, and the alleged debtor did not show that these creditors filed this petition for any other reason than to collect on debts which they believe to be valid. See In re Hutter Assocs., Inc., 138 B.R. at 516.
Finally, issues regarding the alleged debtor's damages relate to his motion to dismiss and do not show cause as to why a bond is needed should the alleged debtor prevail on that motion. The cancellation of a credit card by a third party does not show bad faith or improper motive.
CONCLUSION
For the reasons stated, the alleged debtor's motion to post bond is denied. A separate order will be entered to memorialize this decision.
Page 4
ORDER
For the reasons stated in the memorandum of opinion entered this same date, the alleged debtor's motion to post bond is denied. (Docket 7).
IT IS SO ORDERED.
---------------
Notes:
1. Docket 7.
2. Docket 11. The petitioning creditors include Parshotam Gupta, Floyd Heller, Jerold Ladin, Estelle Lukasek, Darshan Mahajan, and Mahendra Patel.
3. Docket 9.
4. In the court's view, the value of this opinion is solely to decide the bond issue in this case and not as an addition to the general jurisprudence. For that reason, the opinion is not intended for commercial publication.
5. Docket 6.
---------------
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 43 of 47
In re Apollo Health Street, Inc. (Bankr.N.J., 2011)
IN RE: Apollo Health Street, Inc.,
Debtor.
CASE NO.: 11-22970 (NLW)
UNITED STATES BANKRUPTCY
COURT FOR THE DISTRICT OF NEW
JERSEY
Dated: May 23, 2011
NOT FOR PUBLICATION
OPINION
Before: HON. NOVALYN L.
WINFIELD
APPEARANCES:
Warren J. Martin, Jr., Esq.
Robert M. Schechter, Esq.
Porzio, Bromberg & Newman, PC
Attorneys for Petitioning Creditors
Dennis O'Grady, Esq.
Mark E. Hall, Esq.
Riker, Danzig, Scherer, Hyland & Perretti
LLP Headquarters Plaza
One Speedwell Avenue
Morristown, NJ 07962 Co-Counsel for
Alleged Debtor
Deryck A. Palmer, Esq.
Andrew M. Troop, Esq.
Israel Dahan, Esq.
Cadwalader, Wickersham & Taft, LLP
Co-Counsel for Alleged Debtor
Page 2
Procedural History
This matter was brought before the court
by Apollo Health Street, Inc. ("Apollo, Inc.")
on a motion to direct the Petitioning Creditors
to post a bond pursuant to 11 U.S.C. § 303(e)
to secure a possible recovery of fees, costs, and
other damages under 11 U.S.C. § 303(i). The
Petitioning Creditors opposed Apollo, Inc.'s
motion, arguing that the court's dismissal of
the involuntary petition obviates the need,
purpose and statutory authority to require
them to post a bond. As set forth below, the
court determines that Apollo, Inc.'s request for
a bond is appropriately made,
notwithstanding dismissal of the involuntary
petition, and that a hearing is required to set
the amount of the bond, if sufficient cause for
a bond is shown.
The court has jurisdiction to consider the
matter before it pursuant to 28 U.S.C. § 1334
and the Standing Order of Reference issued by
the United States District Court for the District
of New Jersey on July 23, 1984. The matter is
a core proceeding under to 28 U.S.C. §
157(b)(2)(A).
Statement of Facts
The involuntary Chapter 7 petition was
filed against Apollo, Inc. on April 26, 2011 by
Bloomfield Center Alliance, Inc., Michael C.
Nudo, Ariel J. Morales, William J. Colgan,
Med-Link Computer Science, LLC, 2 Broad
Street Assocs., 71 Washington Street Assoc.,
LLC, Senorita's Mexican Restaurant, LLC,
Merrel Mount, Prominent Ticket Service and
Goldkhin Wholesale Enterprises, Inc.
("Petitioning Creditors"). One week later, on
May 2, 2011 Apollo, Inc. filed its motion to (i)
dismiss the petition, (ii) impose sanctions and
(iii) direct petitioning creditors to post a bond.
The motion to dismiss was accompanied by an
application to shorten
Page 3
time for hearing, and on May 2, 2011 the court
entered an order which shortened the hearing
date to May 10, 2011.
Counsel for Apollo, Inc. and the
Petitioning Creditors agreed to proceed first
with the testimony and documentary evidence
on the issue of whether Apollo, Inc. was
generally paying its debts as they came due. At
the conclusion of testimony, counsel for
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 44 of 47
In re Apollo Health Street, Inc. (Bankr.N.J., 2011)
Apollo, Inc. moved pursuant to Fed. R. Civ. P.
52(c) for judgment. On May 16, 2011, the Court
delivered its oral opinion dismissing the
involuntary petition and concluding that
Apollo, Inc. was generally paying its
obligations as they came due.1 On the same
date, the court heard argument on whether to
direct the Petitioning Creditors to post a bond
pursuant to § 303(e) to secure a possible
recovery of fees, costs, and other damages
from the Petitioning Creditors under § 303(i).
An hour and a half before the hearing, the
Petitioning Creditors filed a brief and then
argued in court that Apollo, Inc.'s request to
post a bond should be denied as a matter of law
because, according to the Petitioning
Creditors, no reported cases that in any way
mention or address § 303(e) hold that a bond
should be posted in a dismissed case. The
court reserved ruling on the Petitioning
Creditors' oral motion to allow the parties an
opportunity to file supplemental briefs on
whether a request for bond should be denied
as a matter of law under § 303(e) once an
involuntary petition has been dismissed.
Page 4
Discussion
"Section 303(e) permits the court in its
discretion, after notice and a hearing, to order
the posting of a bond where cause has been
shown." In re Contemporary Mission, Inc.,
1983 Bankr. LEXIS 6916, at *6 (Bankr. D.
Conn. Jan. 31, 1983). Specifically, the relevant
subsections in § 303 provide:
(e) After notice and a hearing,
and for cause, the court may
require the petitioners under
this section to file a bond to
indemnify the debtor for such
amounts as the court may later
allow under subsection (i) of this
section.
(i) If the court dismisses a
petition under this section other
than on consent of all petitioners
and the debtor, and if the debtor
does not waive the right to
judgment under this subsection,
the court may grant judgment—
(1) against the petitioners and in
favor of the debtor for--
(A) costs; or
(B) a reasonable
attorney's fee; or
(2) against any petitioner that
filed the petition in bad faith,
for--
(A) any damages
proximately
caused by such
filing; or
(B) punitive
damages.
Section 303(e) was enacted to:
... discourage frivolous petitions
as well as the more dangerous
spiteful petitions, based on a
desire to embarrass the debtor
(who may be a competitor of a
petitioning creditor) or to put
the debtor out of business
without good cause (an
involuntary petition may put a
debtor out of business even if it
is without foundation and is later
dismissed).
H.Rep. No. 95-595, 95th Cong., 1st Sess. at 323
(1977); see U.S. Code Cong. & Admin.News
1978, p. 6279; see also In re Ransome Grp.
Investors I., LP, 423 B.R. 556, 558 (Bankr.
M.D. Fla. 2009). "A bond can have a sobering
effect in a case that is off to a shaky start and
that is fraught with controversy about the bona
fides of the petitioners." In re Kidwell, 158
B.R. 203, 218 (Bankr. E.D. Cal. 1993).
Page 5
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 45 of 47
In re Apollo Health Street, Inc. (Bankr.N.J., 2011)
However, the courts have recognized that
"[p]etitioning creditors in involuntary cases
should not be routinely required to post a bond
upon the alleged debtor's request. because the
Bankruptcy Code does not impose a
mandatory bond requirement." In re Ransome
Grp. Investors I, LP, 423 B.R. at 558 (citing In
re Reed, 11 B.R. 755, 757 (Bankr. S.D. W. Va.
1981)). Instead, "the Court 'may' require the
petitioning creditors to post a bond, and that
such a requirement should only be imposed
upon the Court's finding of 'cause.'" Id.
The statute does not specify or require a
particular time frame for posting a bond.
Rather, it imposes three prerequisites for the
court's exercise of its discretion: (a) notice, (b)
a hearing and (c) cause. Significantly, § 303(e)
also plainly states that the purpose of a bond is
to indemnify the debtor from an allowance of
fees, costs and damages that the court may
award under § 303(i). While the Petitioning
Creditors recite a lengthy list of cases that they
claim support their contention that a bond
cannot be imposed after dismissal of an
involuntary petition and prior to consideration
of an award under § 303(i), the cases in fact
simply establish that on the facts and posture
of the case, the courts did not impose a bond.
See In re Mod-U-Lanes, Inc., 51 B.R. 660, 663
(Bankr. M.D. Fla. 1985) (dismissing
involuntary petition without addressing
whether the petitioning creditors should post
a bond because the debtor asked to either (i)
dismiss the case or (ii) post a bond under §
303(e)); see also In re Green Hills Dev. Co.,
LLC, 445 B.R. 647, 666-67 (Bankr. S.D. Miss.
2011) (dismissing involuntary petition without
addressing the debtor's request for a bond).
The Petitioning Creditors point to no case
standing for the proposition that posting of a
bond under § 303(e) cannot be required after
dismissal of an involuntary petition.
What constitutes "[t]he showing [of
cause] which the debtor must make [for
posting a
Page 6
bond under § 303(e)] is not clear from the
statute." In re Contemporary Mission, Inc.,
1983 Bankr. LEXIS 6916, at *6. The legislative
history recited above suggests a congressional
intent that courts require a bond to insure that
petitioning creditors do not employ an
involuntary petition for an improper purpose.
But, this cannot be the sole purpose of § 303(e)
because the statutory language provides that
the bond is to indemnify the debtor if the court
makes an award under § 303(i). Plainly then, a
fundamental purpose of § 303(e) is to insure
that if an award is made under § 303(i) the
debtor had a ready means of recovery for its
losses.
Some courts have held that because there
is presumption of good faith in favor of the
petitioning creditors, "the putative debtor
must establish a prima facie case of bad faith
before petitioning creditors may be required to
post a bond." In re Secured Equip. Trust of E.
Air Lines, 1992 WL 295943, at *6 (S.D.N.Y.
Oct. 08, 1992); see also In re Hutter Assocs.,
Inc., 138 B.R. 512, 516 (W.D. Va. 1992). Other
courts have imposed a bond even without an
indication of bad faith when additional
evidentiary hearings were required prior to a
determination of whether or not the
involuntary petition should be dismissed. See
In re Cinnamon Lake Corp., 48 B.R. 70, 74
(Bankr. M.D. Fla. 1985). Significantly, in
either case a hearing has been held to
determine whether cause for a bond exists.
This court does not find any support in the
legislative history, statutory language or case
authority for the Petitioning Creditors'
contention that the court is precluded, as a
matter of law, from imposing a bond under §
303(e) once the involuntary petition has been
dismissed. As Apollo, Inc. points out, the
literal language of the statute provides that the
court can require a bond, after notice, a
hearing and upon showing of cause to
indemnify the debtor for amounts that may
later be allowed under § 303(i). Granted, none
of the reported cases under § 303(e)
Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 46 of 47
In re Apollo Health Street, Inc. (Bankr.N.J., 2011)
Page 7
addressed the issuance of a bond post-
dismissal. However, this only indicates that
such cases came before the courts under
different facts and procedural posture.
In the matter at hand Apollo, Inc. moved
not only to dismiss the involuntary case but
also to require the Petitioning Creditors to post
a bond. The parties mutually agreed to proceed
first with evidence on the issue of whether
Apollo, Inc. was generally not paying its debts
as they came due. Given that Apollo, Inc. is an
operating company with many customers,
employees and trade vendors, the courts
believes that it was wise to determine whether
the criteria for an involuntary petition were
met. This approach had the benefit of limiting
any injury to Apollo, Inc. occasioned by the
involuntary petition and thereby limiting
damages which can be claimed. Further, it may
be a reason to limit the size of a bond, but it
cannot be a basis to dispense with a hearing to
establish whether a bond should be imposed.
Apollo, Inc. has not yet had an
opportunity to demonstrate that cause exists
to post a bond. While significant evidence has
been provided on the issue of whether Apollo,
Inc. was paying its obligations as they came
due, there has been no evidentiary hearing
regarding the basis for a bond. During the May
16, 2011 hearing Apollo, Inc. was ready to go
forward to establish cause for purposes of
posting a bond. Only the Petitioning Creditors'
contention that this matter should be decided
as a matter of law prevented the hearing.
Page 8
Conclusion
A hearing is needed pursuant to 11 U.S.C.
§303(e) in order to determine whether cause
exists to require the Petitioning Creditors to
post a bond to secure a possible recovery of
fees, costs, and other damages under 11 U.S.C.
§303(i).
NOVALYN L. WINFIELD
United States Bankruptcy Judge
--------
Notes:
1. Following its oral opinion, this court
issued a written opinion on May 18, 2011.
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Case 15-34872 Document 9 Filed in TXSB on 11/01/15 Page 47 of 47