In re Earl's Tire Service, Inc.
| Decision Date | 10 November 1980 |
| Docket Number | Civ. A. No. 80-154. |
| Parties | In re EARL'S TIRE SERVICE, INC., a/k/a Earle's Tire Service, Inc., Debtor. DUNLOP TIRE AND RUBBER CORPORATION, a corporation of the State of Delaware, Plaintiff, v. EARL'S TIRE SERVICE, INC., a/k/a Earle's Tire Service, Inc., a corporation of the State of Delaware, and Pirelli Sales Atlantic, Inc., Defendants, and John I. Ellis, Trustee, Counterclaimant. |
| Court | U.S. District Court — District of Delaware |
Francis J. Murphy, Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for plaintiff-appellant.
James B. Tyler, III, Young, Conaway, Stargatt & Taylor, Wilmington, Del., for the Trustee.
This is an appeal from an order of the Bankruptcy Court granting the motion of the trustee to dismiss three counts of an adversary complaint filed by Dunlop Tire and Rubber Corporation. For the reasons stated below the judgment of the Bankruptcy Court will be affirmed.
On October 24, 1979, Pirelli Sales Atlantic, Inc. ("Pirelli"), filed an involuntary bankruptcy petition against Earl's Tire Service, Inc. ("Earl's Tire") pursuant to section 303(b)(2) of the Bankruptcy Code, 11 U.S.C. § 303(b)(2). As Pirelli was the sole petitioning creditor, the petition included the necessary allegation that Earl's Tire had less than 12 creditors.1 Earl's Tire did not file an answer or any motions in response to the petition and Bankruptcy Judge Balick entered an order for relief on November 20, 1979.
Earl's Tire filed a list of creditors on December 11, 1979, which indicated that it had more than 12 creditors.2 On December 20, 1979, the date set for the first meeting of creditors, Dunlop Tire and Rubber Corporation ("Dunlop") filed a two-count complaint against Earl's Tire and Pirelli seeking to have the Bankruptcy Court either dismiss the bankruptcy petition, or vacate or modify the automatic stay of enforcement of judgments against Earl's Tire that had been entered pursuant to section 362 of the Bankruptcy Code, 11 U.S.C. § 362. Dunlop amended its complaint on January 18, 1980, by adding two more counts. The substance of the claims raised in Counts I, III and IV was that the bankruptcy action was not properly commenced under section 303(b) of the Code because Pirelli, at the time it filed its petition, either knew or should have known that Earl's Tire had more than 12 creditors.3 Dunlop's conceded purpose in filing the complaint was to prevent its July 27, 1979, attachment of a substantial debt owed by Interstate Tires Services, Inc., to Earl's Tire from being declared a voidable preference under 11 U.S.C. § 547(b)(4)(A).4
The Trustee moved to dismiss the complaint on the grounds that Dunlop, as a creditor, did not have standing under section 303(d) to oppose a bankruptcy petition and that Dunlop's complaint was in any event untimely. Dunlop responded to these arguments by characterizing its complaint as an attack upon the subject matter jurisdiction of the Bankruptcy Court, a procedural defect which, Dunlop argued, the Court would be required to notice on its own motion at any time during the proceedings.
Judge Balick, in a February 7, 1980, hearing held that the Bankruptcy Court did have subject matter jurisdiction, reasoning that Dunlop's claims went only to the Court's personal jurisdiction over Earl's Tire; Dunlop's complaint was therefore unavailing as only the debtor may move to dismiss an involuntary petition on the ground of lack of personal jurisdiction. Judge Balick also held that Dunlop's complaint was in any event untimely, as it should have been filed prior to the time the Bankruptcy Court entered its order for relief.
The heart of Dunlop's appeal is its claim that the Bankruptcy Court lacked subject matter jurisdiction because Pirelli "fraudulently" alleged in its petition that there were less than 12 creditors. The Trustee argues first that Dunlop's notice of appeal to this Court was not timely filed. The Trustee also argues that Dunlop's complaint in the Bankruptcy Court was not timely filed and that Dunlop lacked standing to seek dismissal of the petition.
Bankruptcy Judge Balick, on February 8, 1980, entered an order granting the Trustee's motion to dismiss Counts I, III and IV of Dunlop's complaint. Dunlop, on February 19, 1980, filed a motion for reargument pursuant to Rule 923 of the Rules of Bankruptcy Procedure.5 Judge Balick entered an order denying the motion for reargument on February 26, 1980. Dunlop, on March 7, 1980, filed a notice of appeal from Judge Balick's orders granting the motion to dismiss and denying reargument.
The Trustee argues that Dunlop failed to satisfy the requirement of Bankruptcy Rule 802(a) that a notice of appeal be filed within 10 days from the entry of the order or judgment being appealed. The Trustee's theory is that Dunlop's February 19 motion for reargument was untimely because it was not filed within 5 days of the February 8 order, as required by former Rule 16 of the Local Rules of Civil Practice of the District of Delaware.6 Therefore, because the initial motion for reargument was untimely, the Trustee argues that any subsequent filing of a notice of appeal from an order denying reargument must of necessity have also been untimely. The Trustee concedes that, had Dunlop filed a timely motion for reargument, the 10-day period for filing a notice of appeal would have started to run on February 26, the date Judge Balick denied reargument.7
The Trustee's argument that the notice of appeal was untimely must fail. The motion for reargument, which under Bankruptcy Rule 923 must be treated as a motion under Rule 59 of the Federal Rules of Civil Procedure, was filed within 10 days of the February 8 order (excluding February 18, a holiday, pursuant to Rule 6(a), Fed.R. Civ.P.). The motion for reargument was therefore timely because of the rule laid down in Citizens' Acceptance Corp. v. United States, 320 F.Supp. 798, 805 n. 16 (D.Del. 1971), rev'd on other grounds, 462 F.2d 751 (3d Cir. 1972), that a motion for reargument filed within the 10-day period set by Rule 59 of the Federal Rules of Civil Procedure is timely, notwithstanding the fact that the motion does not satisfy the local rule requiring motions for reargument be made within 5 days. Since the notice of appeal was filed within 10 days from denial of reargument on February 26, it was timely under Bankruptcy Rule 802(b).
Dunlop, in characterizing its claim as an attack on the subject matter jurisdiction of the Court, is attempting to confer on itself as a creditor the "standing" to oppose an involuntary bankruptcy petition that it would otherwise lack. Under section 303(d) of the Bankruptcy Code, only a debtor, or a partner in a partnership debtor, may file an answer to an involuntary bankruptcy petition. Prior to 1938 the bankruptcy statutes had expressly provided that any creditor could file pleadings in opposition to an involuntary bankruptcy petition. In that year, however, the Bankruptcy Act was amended to expressly deny this right to creditors. The legislative history makes clear that the reason for the change was the concern of Congress that a creditor's purpose in opposing an involuntary petition invariably was to protect a preference or to gain some other unfair advantage at the expense of other creditors, contrary to the Bankruptcy Act's policy of providing an equitable distribution of assets among all creditors. See, e.g., Carlson Plywood Co., Inc. v. Vytex Plastics Corp., 519 F.2d 556, 557-58 (7th Cir. 1975). Dunlop, therefore, has no right to plead defects in the petition filed by Pirelli. If however, as Dunlop claims, the Bankruptcy Court lacked subject matter jurisdiction, then both that court and this Court would be obligated to notice that defect sua sponte.
An examination of the authorities yields no support for the proposition that the Bankruptcy Court lacks subject matter jurisdiction when a creditor, with knowledge that the debtor has 12 or more creditors, files an involuntary bankruptcy petition without joining the required 2 additional creditors. This Court has recognized that "subject matter jurisdiction deals with the Court's competence `to hear and determine cases of the general class to which the proceedings in question belong; the power to deal with the general subject involved in the action.'" Standard Oil Co. v. Montecatini Edison S.p.A., 342 F.Supp. 125, 129-30 (D.Del.1972). Congress has expressly authorized the bankruptcy courts to exercise "jurisdiction of all cases under title 11," and has vested in the bankruptcy courts "exclusive jurisdiction of all of the property ..." of debtors in such cases. See 28 U.S.C.A. § 1471(a), (c), (e) (Supp.1980).8 Since all parties concede that Earl's Tire was qualified to be a debtor under the Bankruptcy Code, it is difficult to perceive how an arguable defect in the procedural mechanism for commencing a bankruptcy action would deprive the court of its subject matter jurisdiction. Indeed, the case law indicates that the number of petitioning creditors is unrelated to the question of the Bankruptcy Court's subject matter jurisdiction. The Supreme Court, in rejecting a creditor's challenge to the sufficiency of the number of petitioning creditors, has stated that "the filing of a petition, sufficient upon its face, ... clearly gives the bankruptcy court jurisdiction of the proceeding." Canute Steamship Co. v. Pittsburgh Coal Co., 263 U.S. 244, 248, 44 S.Ct. 67, 68, 68 L.Ed. 287 (1923). Proof of the requisite number of petitioning creditors is required only if challenged by the alleged bankrupt, Harris v. Capehart-Farnsworth Corp., 225 F.2d 268, 270 (8th Cir. 1955), and unlike subject matter jurisdiction, the bankrupt may waive its right to three petitioning creditors by failing to make a timely objection. See General Kontrolar Co. v. Allen, 124...
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