In re Dsc, Ltd., 06-1813.

• Citation: 486 F.3d 940
• Decision Date: 23 May 2007
• Docket Number: No. 06-1813.,06-1813.
• Parties: In re DSC, LTD., a Michigan corporation, Debtor. Riverview Trenton Railroad Company; Crown Enterprises, Inc., Plaintiffs-Appellants, v. DSC, Ltd., a Michigan Corporation, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

486 F.3d 940

In re DSC, LTD., a Michigan corporation, Debtor.

Riverview Trenton Railroad Company; Crown Enterprises, Inc., Plaintiffs-Appellants, v. DSC, Ltd., a Michigan Corporation, Defendant-Appellee.

No. 06-1813.

United States Court of Appeals, Sixth Circuit.

Argued: April 19, 2007.

Decided and Filed: May 23, 2007.

Appeal from the United States District Court for the Eastern District of Michigan, Thomas J. Tucker, J ARGUED: K. Scott Hamilton, Dickinson Wright, Detroit, Michigan, for Appellants. Geoffrey L. Silverman, Silverman & Morris, West Bloomfield, Michigan, for Appellee. ON BRIEF: K. Scott Hamilton, Dickinson Wright, Detroit, Michigan, for Appellants. Geoffrey L. Silverman, Karin F. Avery, Silverman & Morris, West Bloomfield, Michigan, for Appellee.

Before: MERRITT and MARTIN, Circuit Judges; FORESTER, Senior District Judge.^*

OPINION

FORESTER, Senior District Judge.

This litigation arose from an amended petition for involuntary bankruptcy filed by the Plaintiffs-Appellants, Riverview Trenton Railroad Company ("RTRR") and Crown Enterprises, Inc. ("Crown"), and two other entities against DSC, Ltd. ("DSC"). The bankruptcy court ultimately dismissed the amended involuntary petition due to the lack of a sufficient number of qualified creditors under 11 U.S.C. § 303(b)(1). Relying on 11 U.S.C. § 303(c) which allows joinder at any time "before the case is dismissed," RTRR and Crown argue that the bankruptcy court erred by establishing and enforcing a joinder deadline which resulted in the exclusion of an additional petitioning creditor. RTRR and Crown also argue that the bankruptcy court erred in determining that they did not qualify as petitioning creditors under § 303(b)(1). For the reasons set forth below, the decision of the bankruptcy court, subsequently affirmed by the district court, will be AFFIRMED.

I. FACTUAL AND PROCEDURAL BACKGROUND

This bankruptcy appeal arises out of a series of complex land purchases and related agreements between DSC and various entities beginning in the late 1990s. The complete factual background has been extensively detailed by the courts below and will not be repeated herein. Instead, only the specific events relevant to the issues on appeal are described below.

On January 27, 2005, Crown, RTRR and other entities filed a petition for involuntary bankruptcy pursuant to 11 U.S.C. § 303 against DSC. In response, DSC argued that several of these entities were not creditors of DSC, but rather creditors of DSC's affiliates, and that some of the petitioners had not filed the involuntary bankruptcy petition in good faith.

Then, on February 16, 2005, Crown, RTRR, and two other entities filed an amended involuntary bankruptcy petition. This amended petition did not include the petitioning creditors whose status DSC had previously challenged. Again, DSC responded that some of the new petitioners were not qualifying petitioning creditors and did not file in good faith. On February 18, 2005, the bankruptcy court entered its order setting February 28, 2005 as the deadline for other DSC creditors to join the involuntary petition, and notifying DSC's creditors that they must file a "Notice of Joinder" on or before that date if they wanted to join the amended involuntary petition. The trial on the amended involuntary petition was scheduled for the next day—March 1, 2005.

On February 28, 2005, O'Brien & Gere Engineers, Inc. ("O'Brien & Gere") notified DSC and the bankruptcy court via email that while they intended to join in the amended involuntary petition, they were unable to file joinder papers on that day. At the beginning of the trial on the next day, the petitioning creditors requested that O'Brien & Gere be allowed to join the amended involuntary petition; however, O'Brien & Gere still had not filed any notice of joinder and were not present at the trial. A notice of joinder on behalf of O'Brien & Gere was belatedly filed on March 1, 2005 after the court's deadline had expired. The bankruptcy court denied the joinder request on the grounds that O'Brien & Gere had a reasonable opportunity to join the petition, and that they had failed to meet the deadline.

The trial continued, intermittently, until April 12, 2005. On April 26, 2005, the bankruptcy court entered its order finding that Crown and RTRR were not qualified under 11 U.S.C. § 303(b)(1) as petitioning creditors because there was a genuine issue of material fact as to DSC's liability to Crown and RTRR and/or the amount of Crown's and RTRR's claims against DSC. Although the bankruptcy court did find that the other two petitioning creditors were qualified, because Crown and RTRR were not qualified there were an insufficient number of qualifying petitioning creditors to pursue an involuntary bankruptcy against DSC under § 303(b)(1), which requires three creditors. As a result, the bankruptcy court dismissed the amended involuntary petition.

Crown and RTRR filed a motion for reconsideration with respect to dismissal of the amended involuntary petition, arguing first that the evidence, including an alleged settlement agreement in a related state court action and other agreements between DSC and the petitioning creditors, established the existence of a clear and binding claim against DSC sufficient to qualify Crown and RTRR as petitioning creditors under § 303(b)(1). Second, Crown and RTRR argued that the bankruptcy judge lacked authority to set a deadline for DSC's creditors to join the amended involuntary petition, and that O'Brien & Gere should have been allowed to join the amended involuntary petition as the third petitioning creditor. The motion for reconsideration was denied by the bankruptcy court on June 24, 2005.

In the meantime, a settlement was reached between DSC and O'Brien & Gere, and on June 7, 2005, O'Brien & Gere withdrew from participation in the bankruptcy proceeding. On July 1, 2005, Crown and RTRR filed an appeal of the bankruptcy court's dismissal of the amended involuntary petition with the United States District Court for the Eastern District of Michigan pursuant to 28 U.S.C. § 158(a). The district court affirmed the decision of the bankruptcy court, and this appeal followed.

II. STANDARD OF REVIEW

This Court first must address DSC's argument that the appeal is moot based on O'Brien & Gere's settlement with DSC. Generally, appellate courts review the issue of mootness de novo. See In re GWI PCS 1, Inc., 230 F.3d 788, 800 (5th Cir.2000); In re Western Pac. Airlines, Inc., 181 F.3d 1191, 1194 (10th Cir.1999); In re Filtercorp, Inc., 163 F.3d 570, 576 (9th Cir.1998).

Dismissal of a bankruptcy case is reviewed for abuse of discretion. In re Eastown Auto Co., 215 B.R. 960, 963 (B.A.P. 6th Cir.1998). A bankruptcy court abuses its discretion when "it relies upon clearly erroneous findings of fact or when it improperly applies the law or uses an erroneous legal standard." Id. The findings of a bankruptcy court which support dismissal of the bankruptcy case are factual determinations which are reviewed under the clearly erroneous standard. Fed. R.Bank.P. 8013. A finding of fact is clearly erroneous "when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985); United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746 (1948). Conclusions of law are reviewed de novo. In re Isaacman, 26 F.3d 629, 631 (6th Cir.1994).

On appeal of a bankruptcy decision from a district court, the appellate court employs the same standards, evaluating the bankruptcy court's decision directly, without being bound by the district court's legal determinations. In re Lowenbraun, 453 F.3d 314, 319 (6th Cir.2006); In re M.J. Waterman & Associates, Inc., 227 F.3d 604, 607 (6th Cir.2000); In re Charfoos, 979 F.2d 390, 392 (6th Cir.1992).

III. INVOLUNTARY BANKRUPTCY PETITIONS AND 11 U.S.C. § 303

Essentially, Crown and RTRR are challenging the bankruptcy court's denial of O'Brien & Gere's joinder request and its finding that they were not qualifying petitioning creditors under 11 U.S.C. § 303(b)(1). Because DSC had more than twelve creditors, the filing of involuntary petitions is governed by 11 U.S.C. § 303(b), which provides in pertinent 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 $12,300 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;....

11 U.S.C. § 303(b)(1), as amended effective April 20, 2005.¹ The burden rests on the petitioning creditors to establish that they are qualified under § 303(b)(1). In re Eastown Auto Co., 215 B.R. at 968. To proceed under this section, at least three creditors must hold a claim against DSC that is not contingent as to liability and that is not the subject of a bona fide dispute as to liability or amount. 11 U.S.C. § 303(b)(1). Congress has made clear that it "intended to disqualify a creditor whenever there is any legitimate basis for the debtor not paying the debt, whether that basis is factual or legal." In re Lough, 57 B.R. 993, 997 (Bankr.E.D.Mich. 1986). To determine whether or not a claim is subject to a bona fide dispute, the Sixth Circuit Bankruptcy Appellate Panel has established the following test:

"If there is either a genuine issue of material fact that bears upon the debtor's liability, or a meritorious contention as to the application of law to undisputed facts, then...