In re Eastown Auto Co.
| Decision Date | 23 January 1998 |
| Docket Number | BAP No. 97-8056,97-8057. |
| Citation | 215 BR 960 |
| Parties | In re EASTOWN AUTO CO., Alleged Debtor. BOOHER ENTERPRISES, Appellant, v. EASTOWN AUTO CO., Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Sixth Circuit |
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Alfred W. Schneble III, on brief, Dayton, OH, for Appellant.
Arthur R. Hollencamp, on brief, Hollencamp & Hollencamp, Dayton, OH, for Appellee.
Before: BAXTER, RHODES, and STOSBERG, Bankruptcy Appellate Panel Judges.
Booher Enterprises ("Booher"), Don E. Graham and Jamie Smith filed an involuntary Chapter 7 petition against Eastown Auto Co. ("Eastown"). Eastown filed a motion to dismiss, asserting that an insufficient number of eligible creditors had signed the petition. The bankruptcy court found that because Eastown had more than twelve eligible creditors, the bankruptcy code required that at least three eligible petitioning creditors join the petition. The bankruptcy court also found that two of the petitioning creditors, Booher and Graham, did not qualify as petitioning creditors. The bankruptcy court accordingly dismissed the involuntary petition. Booher appealed. For the following reasons, the Panel affirms.
In affirming, the Panel adopts the test of In re Lough, 57 B.R. 993, 997 (Bankr. E.D.Mich.1986) for determining whether the petitioning creditors are qualified under 11 U.S.C. § 303(b) and also for determining the number of the alleged debtor's eligible creditors. In this case, in finding that there was only one qualified petitioning creditor, the bankruptcy court properly applied Lough. However, the court did not apply Lough in determining the number of eligible creditors. Nevertheless, the Panel concludes that there is sufficient evidence in the record for it to determine the number of eligible creditors under Lough and that a remand is unnecessary. Applying the Lough test, the Panel concludes that the bankruptcy court properly determined that Eastown had twelve or more creditors.
Booher raises two issues on appeal. First, Booher argues that the bankruptcy court erred in finding that there were more than twelve creditors. Second, Booher asserts that the bankruptcy court erred by vacating an order approving the "memorandum of intent to join as a creditor" filed by creditor Joey Beilharz.1
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Southern District of Ohio has authorized appeals to the BAP. The parties have consented to the transfer of this appeal to the BAP.
A "final order" of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (Citations omitted). An order dismissing an involuntary petition is a final order.
Dismissal of a bankruptcy case is reviewed for abuse of discretion. In re McDonald, 118 F.3d 568 (7th Cir.1997); In re Green, 64 B.R. 530 (9th Cir. BAP 1986). 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." Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d 472 (6th Cir.1996). A bankruptcy court's findings supporting dismissal of a bankruptcy petition are factual determinations. In re Hollis, 150 B.R. 145 (D.Md.1993). Findings of fact are reviewed under the clearly erroneous standard. FED. R. BANKR.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, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 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. Nicholson v. Isaacman (In re Isaacman), 26 F.3d 629 (6th Cir.1994). De novo means deciding the issue as if it had not been heard before. In re Downs, 103 F.3d 472. No deference is given to the trial court's conclusions of law. Razavi v. Commissioner, 74 F.3d 125 (6th Cir.1996).
On January 31, 1997, Booher, Smith and Graham filed an involuntary Chapter 7 petition against Eastown. In the petition, Booher did not list the nature or amount of its claim. Smith stated that he had a $12,300 judgment. Graham claimed that Eastown owed him $5,850. On February 14, 1997, Eastown filed a motion to dismiss, asserting that the petition lacked the required number of petitioning creditors because there were bona fide disputes regarding the claims of the petitioning creditors.
On March 27, 1997, the bankruptcy court entered an order setting a deadline for other unsecured creditors to join the petition. The order stated that counsel for Booher consented to the April 1, 1997 deadline. On April 1, 1997, Booher's attorney filed a "memorandum of intent to join as petitioner" on behalf of the Internal Revenue Service. On April 2, 1997, Joey Beilharz filed a "memorandum of intent to join as a creditor." That memorandum stated that Beilharz's claim was based on a $6,873.23 judgment entered on October 24, 1996. Booher filed a motion to approve Beilharz's untimely memorandum. On April 16, 1997, the bankruptcy court entered an order granting the motion.
On April 23, 1997, Eastown filed a motion to vacate the April 16 order, asserting that the order was entered before its attorney had received the motion in violation of FED. R. BANKR.P. 9006(d), and that there was no basis for an ex-parte order. On the same day, Eastown also filed a motion in limine, requesting that the court determine whether the IRS and Beilharz had become petitioning creditors simply by filing memoranda of intent.
On May 1, 1997, the court conducted a hearing on the motion to vacate the April 16 order and on the motion in limine. When the court asked Beilharz's attorney to clarify whether Beilharz was a petitioning creditor, the attorney indicated that Beilharz had authorized the memorandum of intent to join, but nothing further. The court found that the memorandum of intent was filed after the deadline and that the creditor had not actually joined the petition. Therefore, the court vacated the April 16 order. (Transcript of May 1, 1997 hearing at 35.)
On May 1, 1997, the court also conducted a hearing on the motion to dismiss. The court held that the IRS could not be considered a petitioning creditor because although it had filed a memorandum of intent to join the petition by the deadline, it had not actually joined the petition as of the hearing and did not appear at the hearing. The court also determined that Eastown had more than twelve creditors. The court then examined the claims of the three petitioning creditors to determine whether they were subject to bona fide disputes. The court found that the claims of Booher and Graham were subject to bona fide disputes and that they were not eligible to be petitioning creditors. Because there were more than twelve creditors and fewer than three eligible petitioning creditors, the court granted the motion to dismiss. Booher filed this timely appeal.
Creditors may place an entity in bankruptcy against its will under 11 U.S.C. § 303, which provides:
11 U.S.C. § 303(b)(1) & (2).
Under either subsection (1) or (2), § 303(b) allows an involuntary petition to be brought only by holders of claims that are "not contingent as to liability or the subject of a bona fide dispute." 11 U.S.C. § 303(b)(1). "The legislative history makes it clear that Congress 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).
Lough set forth the test for determining whether a claim is subject to a bona fide dispute. "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 the petition must be dismissed." Id. In determining whether a claim is subject to a bona fide dispute, the bankruptcy court must not resolve any genuine issues of fact or law. Id.
This test has been adopted by the third, seventh, eighth, and tenth circuits. See Rimell v. Mark Twain Bank (In re Rimell), 946 F.2d 1363 (8th Cir.1991), cert. denied, 504 U.S. 941, 112 S.Ct. 2275, 119 L.Ed.2d 202 (1992); B.D.W. Associates, Inc. v. Busy Beaver Bldg. Centers, Inc., 865 F.2d 65 (3d Cir. 1989); Bartmann v. Maverick Tube Corp., 853 F.2d 1540 (10th Cir.1988); In re Busick, 831 F.2d 745 (7th Cir.1987). Many bankruptcy courts have also used this test. See, In re Atwood, 124 B.R. 402, 408 (S.D.Ga. 1991); In re Leach, 92 B.R. 483, 487 (Bankr. D.Kan.1988);...
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