In re Amc Investors, LLC

• Decision Date: 05 June 2009
• Docket Number: No. 08-12265(CSS).,No. 08-12264 (CSS).,08-12264 (CSS).,08-12265(CSS).
• Citation: 406 B.R. 478
• Parties: In re AMC INVESTORS, LLC, Alleged Debtor. In re AMC Investors II, LLC, Alleged Debtor.
• Court: U.S. Bankruptcy Court — District of Delaware

Page 478

406 B.R. 478

In re AMC INVESTORS, LLC, Alleged Debtor In re AMC Investors II, LLC, Alleged Debtor.

No. 08-12264 (CSS).

No. 08-12265(CSS).

United States Bankruptcy Court, D. Delaware.

June 5, 2009.

COPYRIGHT MATERIAL OMITTED

Joseph Grey, Stevens & Lee, P.C., Wilmington, DE, Chester Salomon, Constantine Pourakis Stevens & Lee, P.C., New York, NY, for Alleged Debtors, AMC Investors, LLC, and AMC Investors II, LLC.

Mark Collins, Marcos Ramos, Cory Kandestin, Richards, Layton & Finger, P.A., Wilmington, DE, for Petitioning Creditor, Eugenia VI Venture, Holdings, Ltd.

OPINION

SONTCHI, Bankruptcy Judge.

INTRODUCTION

The commencement of an involuntary bankruptcy case is governed by section 303 of the Bankruptcy Code. Under section 303(b), the holder of a claim subject to a "bona fide dispute" is not eligible to file an involuntary petition for relief.

The sole petitioning creditor in this case is the holder of a judgment against the alleged debtors. Although the judgment is under appeal, it has not been stayed. The alleged debtors argue that the pendency of the appeal renders the petitioning creditor's claim subject to a bona fide dispute and, thus, the cases must be dismissed as they were not filed by an eligible petitioner.

The Court finds that a claim based upon a judgment, in the absence of a stay, is not subject to a bona fide dispute for purposes of determining whether a petitioning creditor is eligible to commence an involuntary case. Thus, the Court will deny each of the alleged debtor's motions to dismiss and enter orders for relief.

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334.¹ Venue of this proceeding is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).

PROCEDURAL AND FACTUAL BACKGROUND²

Eugenia VI Venture Holdings, Ltd. ("Eugenia") entered into the Amended and Restated Credit Agreement ("Credit Agreement") with AMC Computer Corp. ("AMC Computer") in early 2003. Pursuant to the Credit Agreement, Eugenia extended up to $16 million in credit, secured by AMC Computer's working capital. AMC Investors, LLC and AMC Investors II, LLC (the "Alleged Debtors") are limited liability companies that control AMC Computer. Each of the Alleged Debtors executed an unconditional guaranty of AMC Computer's obligations to Eugenia under the Credit Agreement.

By May, 2005, AMC Computer was insolvent. Its board of directors voted to cease operations and approved an assignment for the benefit of creditors. In response, Eugenia notified AMC Computer that it was in default under the Credit Agreement, accelerated the outstanding obligations, and demanded immediate payment. Eugenia also demanded payment from the Alleged Debtors under their guarantees.

Eugenia filed suit against the Alleged Debtors in the New York Supreme Court to collect on the guarantees. The Alleged Debtors conceded liability but opposed the amount of damages sought by Eugenia. The trial court entered summary judgment in favor of Eugenia, awarding damages of approximately $8.3 million, consisting of principal of approximately $7.9 million, professional fees and expenses of approximately $400,000, and costs and disbursements of $590. The Alleged Debtors appealed. The New York Supreme Court — Appellate Division affirmed the entry of summary judgment on liability, but remanded for a trial on damages.

The trial court held a two-day bench trial on damages. Shortly after the conclusion of the trial, the court vacated the original judgment, and entered judgment in favor of Eugenia awarding damages of approximately $10.75 million, consisting of principal and interest of approximately $7.0 million, accounting fees of approximately $1 million, professional fees and expenses of approximately $2.75 million, and costs and disbursements of $1090 (the "Amended Judgment"). Eugenia subsequently filed a judgment lien in Florida for the amount of the Amended Judgment.

The Alleged Debtors appealed only that portion of the Amended Judgment awarding professional fees.³ The Amended Judgment was not stayed pending appeal. Prior to oral argument before the appellate court, Eugenia filed the involuntary petitions against the Alleged Debtors.⁴ Eugenia is the sole petitioning creditor and asserts a claim in the amount of approximately $10.7 million.

Each of the Alleged Debtors filed a motion to dismiss the involuntary petition filed against it, asserting that Eugenia is not an eligible petitioning creditor, or, in the alternative, that the Court should abstain. The issues have been fully briefed and are ripe for decision.

LEGAL DISCUSSION

The motions before the Court are brought under Federal Rule of Bankruptcy Procedure 1011(b). Rule 1011(b) provides that defenses and objections to an involuntary petition shall be presented in the matter prescribed by Rule 12 of the Federal Rules of Civil Procedure. The Alleged Debtors move for dismissal of the involuntary petitions under Rule 12(b)(1) and (6).⁵

A. Motion to Dismiss for Lack of Subject Matter Jurisdiction

The Alleged Debtors move to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1). They argue that unless and until Eugenia shows that its claim is not subject to a bona fide dispute, this court lacks subject matter jurisdiction.

The Court disagrees. The requirements of section 303(b) "are not jurisdictional in the technical sense of subject matter jurisdiction, but are instead substantive matters which must be proved or waived for petitioning creditors to prevail in involuntary proceedings."⁶ The requirement in section 303(b) that the claim not be subject to bona fide dispute "goes to the merits — an element that must be established to sustain an involuntary proceeding."⁷

Of course, district courts have "original and exclusive jurisdiction of all cases under title 11"⁸ and bankruptcy judges may hear those cases.⁹ The filing of an involuntary petition, even when the alleged debtor challenges whether the petitioning creditor's claim is valid, creates a "case under title 11" and falls within the subject matter jurisdiction of this Court.¹⁰

B. Motion to Dismiss for Failure to State a Claim

The Alleged Debtors also move to dismiss the petition under Rule 12(b)(6) for failure to state a claim.

i. Section 303 Requirements for Involuntary Petitions

Section 303 of the Bankruptcy Code governs involuntary petitions. Section 303(b) states, in relevant part:

(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 bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such non-contingent, 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 ... by one or more of such holders that hold in the aggregate at least $13,475 of such claims.¹¹

Furthermore, section 303(h)(1) requires that where a petition is timely controverted, "the court shall order relief against the debtor in an involuntary case ... [only if] the debtor is generally not paying such debtor's debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount."¹²

Taken together, these provisions establish a four-part test for consideration of a contested involuntary petition commenced by a sole petitioning claimholder:

(1) the petitioning claimholder's claim is not contingent as to liability or subject to a bona fide dispute as to liability or amount;

(2) the petitioning claimholder is undersecured by at least $13,475;

(3) there are fewer than twelve claimholders; and

(4) the alleged debtor is generally not paying its debts as they come due, unless such debts are the subject to a bona fide dispute as to liability or amount.¹³

In this case, the Alleged Debtors do not contest that: (1) Eugenia holds an unsecured judgment in an amount over $13,475; (2) Eugenia is the sole creditor; and (3) the Alleged Debtors are not paying their debts as they come due. Rather, the Alleged Debtors assert that the amount of Eugenia's claim is subject to a bona fide dispute and, as such, the petition should be dismissed because they were not filed by an eligible petitioner.

ii. Bona Fide Dispute

The Bankruptcy Code does not define "bona fide dispute." The Third Circuit has held that a bona fide dispute exists "[i]f there is a genuine issue of a material fact that bears upon the debtor's liability, or a meritorious contention as to the application of law to undisputed facts."¹⁴ "Under this standard, the bankruptcy court must determine whether there is an objective basis for either a factual or a legal dispute as to the validity of debt."¹⁵ However, the court's objective is to ascertain the existence of a dispute, not to actually resolve the dispute.¹⁶ The burden is on the petitioning creditor to first establish a prima facie case that no bona fide dispute exists. Once a prima facie case has been established, the burden shifts to the alleged debtor to demonstrate the existence of a bona fide dispute.¹⁷

iii. Unstayed Judgments

Eugenia argues that, as the holder of an unstayed final¹⁸ judgment, it possesses a claim that is not contingent or subject to bona fide dispute. The logic behind this argument is explained in In re Drexler:

[T]he court has concluded that ... a claim based upon an unstayed judgment as to which an appeal has been taken by the debtor is not the subject of a bona fide dispute. Once entered, an unstayed final judgment may be enforced in accordance with its terms and with applicable law or rules, even though an appeal is pending. The...