In re Forever Green Athletic Fields, Inc.

• Decision Date: 16 October 2015
• Docket Number: No. 14–3906.,14–3906.
• Citation: 804 F.3d 328
• Parties: In re: FOREVER GREEN ATHLETIC FIELDS, INC., Debtor. Charles C. Dawson ; Kelli Dawson, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

804 F.3d 328

In re: FOREVER GREEN ATHLETIC FIELDS, INC., Debtor. Charles C. Dawson ; Kelli Dawson, Appellants.

No. 14–3906.

United States Court of Appeals, Third Circuit.

Argued: July 9, 2015.

Opinion Filed: Oct. 16, 2015.

Aris J. Karalis, Esq. [ARGUED], Robert W. Seitzer, Esq., Philadelphia, PA, Attorneys for Debtor, Forever Green Athletic Fields, Inc.

Steven K. Eisenberg, Esq. [ARGUED], Stern & Eisenberg, Warrington, PA, Attorney for Appellants, Charles C. Dawson and Kelli Dawson.

Frederic J. Baker, Esq., United States Department of Justice, Philadelphia, PA, Attorney for Trustee, Frederic J. Baker.

Robert H. Holber, Esq., Media, PA, Attorney for Trustee, Robert H. Holber.

Before: FUENTES, NYGAARD, and ROTH, Circuit Judges.

OPINION OF THE COURT

FUENTES, Circuit Judge.

Creditors who file an involuntary bankruptcy petition against a debtor must satisfy several statutory requirements before obtaining relief. See 11 U.S.C. § 303. Everyone agrees the creditors who filed the petition in this case met those requirements. The question is whether their petition may nonetheless be dismissed as a bad-faith filing. We hold that bad faith provides an independent basis for dismissing an involuntary petition. For the following reasons, we will affirm.

I.

The parties are familiar foes. Founded by Keith Day, Forever Green Athletic Fields sells artificial turf playing fields. In 2005, Forever Green sued one of its competitors, ProGreen, for $5 million for diversion of corporate assets (the “Bucks County Action”). Charles Dawson, who is an owner of ProGreen and a former Forever Green sales representative, would be liable if damages are awarded in that suit.

That same year, Charles and his wife, Kelli Dawson, sued Forever Green for unpaid commissions and wages (the “Louisiana Action”). On March 2, 2011, after years of litigation, the Louisiana court entered a consent judgment in favor of the Dawsons. With interest and other costs, this judgment now totals more than $300,000. To date, Forever Green has not paid a penny on this judgment.

While the Louisiana Action was still running its course, the parties to the Bucks County Action agreed to arbitrate their claims. However, on March 30, 2011, just a few weeks after the consent judgment was entered in the Louisiana Action, ProGreen filed a motion to terminate the arbitration. In support of this motion, ProGreen argued that “it has become clear that [Forever Green] is insolvent” and that Keith Day does not “have the ability or desire to pay the Arbitrator's fees and expenses.” Supp.App. 505. In addition, ProGreen said that “Charles and Kelli Dawson have a $300,000+ judgment against [Forever Green] and expect judgments in the same amount against [Day] very soon. As such, any monies paid as advance deposits to the Arbitrator by [Forever Green] are subject to execution and garnishment.” Id. The next month, the Dawsons transferred their judgment in the Louisiana Action to Pennsylvania and obtained a writ of execution against the arbitrator and his law firm. At that point, with his fees in peril, the arbitrator recognized he was adverse to the Dawsons, so he suspended the arbitration until the fee issue was resolved.

During his deposition, Charles Dawson offered some strategic insight into these actions. With the consent judgment in hand, he intended to “[f]ind any available asset that Forever Green may have and try to use the lien to seize it.” Id. at 710. He testified, “I'm going to use that judgment to levy any monies I can find anywhere, whether it be the arbitrator or anyone else. So, yeah, if we can get the lien paid, that's my number one objective. If I can get it paid, I'm very happy.” Id. at 711.

In response to the suspension of the arbitration, Forever Green filed a complaint in state court trying to reinstate the arbitration (the “Philadelphia Action”). Day testified that Forever Green was forced to file this complaint because “Charles Dawson and his counsel were determined to derail the arbitration and this was our own legitimate response to it.” Id. at 198. According to Day, Charles Dawson and his counsel had “threatened to put [Forever Green] into bankruptcy” if Forever Green did not agree to terminate the arbitration.Id. at 199. After Forever Green commenced the Philadelphia Action, the Dawsons' counsel sent a letter to Forever Green saying that the arbitration was in an “indefinite state of suspension” and “[u]nless and until the [consent judgment] for about $300,000.00 is paid off in full, that indefinite state of suspension will continue.” Id. at 568.

The judge in the Philadelphia Action issued a scheduling order for the parties to brief the issues identified in Forever Green's complaint. The Dawsons' brief was due on May 3, 2012. They never filed it. Instead, they chose a different tack.

Two weeks before their brief was due, the Dawsons and the law firm Cohen Seglias Pallas Greenhall & Furman, which was owed $206,000 from Forever Green, filed an involuntary Chapter 7 bankruptcy petition against Forever Green. Justifying this decision, Charles Dawson said that his counsel “suggested the best way to get to [Forever Green's] assets would be involuntary bankruptcy.” App. 268. It is undisputed that the Dawsons and Cohen Seglias satisfied the statutory criteria for commencing an involuntary bankruptcy case because (1) they are three creditors, (2) they each hold an uncontested claim against Forever Green, and (3) their claims aggregate at least $15,325 more than the value of liens on Forever Green's property. See 11 U.S.C. § 303(b). Despite the petitioning creditors' facial compliance with the statute, Forever Green moved to dismiss the petition as a bad-faith filing.

The Bankruptcy Court convened an evidentiary hearing on the motion. In addition to receiving evidence of the parties' course of conduct in the years leading up to the filing, the Bankruptcy Court heard testimony about Forever Green's financials. It was established that Forever Green has essentially shut down its business—in 2012, its operating account had no activity and its balance never exceeded $30. Forever Green's focus has been on winding down its affairs and recovering assets for its approximately 50 creditors. As for the balance sheet, Forever Green has $6 million in assets, the largest by far being its claims against ProGreen for $5 million. On the other side of the ledger, Forever Green has $2.3 million in debts, including a $1.3 million secured line of credit.

Although Forever Green itself has not been paying any of its debts, Day has personally paid off hundreds of thousands of dollars of Forever Green debt. He explained that he has paid debts for which he had “financial personal guarantees.” App. 256. Day acknowledged that neither he nor Forever Green has paid anything to the Dawsons, but he said that secured creditors and certain unsecured creditors are ahead of them in the pecking order. Day also is personally funding all of Forever Green's current litigation, including this suit and the suspended arbitration against ProGreen.

After the parties made their pitches as to whether the petition was filed in bad faith, the Bankruptcy Court ruled in Forever Green's favor and granted the motion to dismiss. It explained that, because bankruptcy courts are courts of equity, a petitioning creditor (for involuntary bankruptcies) or debtor (for voluntary bankruptcies) must come to the court for a proper purpose. Involuntary Chapter 7 proceedings, it said, are intended to protect creditors from debtors who are making preferential payments to other creditors or from the dissipation of the debtor's assets. Creditors who file petitions for other reasons—such as to collect on a personal debt, to gain an advantage in pending litigation, or to harass the debtor—act in bad faith. The Bankruptcy Court concluded that, even though the petitioning creditors met the statutory filing requirements, Charles Dawson was a bad-faith creditor because he was motivated by two improper purposes: to frustrate Forever Green's efforts to litigate its claim against ProGreen and to collect on a debt. The District Court affirmed. The Dawsons (without Cohen Seglias) filed this appeal.¹

II.

We discuss three issues on appeal. First, whether an involuntary petition may be dismissed as a bad-faith filing. Second, whether the Bankruptcy Court erred in finding bad faith. And third, whether other good-faith creditors could have cured the petition.

A.

Section 303 of the Bankruptcy Code, which governs involuntary cases under Chapter 7 or 11, contains three requirements for commencing an action against a debtor who has twelve or more creditors: (1) there must be three or more petitioning creditors; (2) each petitioning creditor must hold a claim against the debtor that is not contingent as to liability or the subject of a bona fide dispute; and (3) the claims must aggregate at least $15,325 more than the value of liens on the debtor's property. 11 U.S.C. § 303(b)(1). It is undisputed that the Dawsons and Cohen Seglias satisfied these three requirements. The Code further provides that 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.” Id. § 303(h)(1). The parties agree Forever Green is not paying its debts.

Section 303 has one reference to bad faith. It says that if the court dismisses an involuntary petition, it may award damages against any creditor “that filed the petition in bad faith.” Id. § 303(i)(2). As one might expect, because the only mention of bad faith is in § 303(i)(2) and deals with post-dismissal damages, the vast majority of litigation concerning bad faith centers on that provision. In the typical case, the creditors do not satisfy the § 303(b) requirements for filing the petition in the first instance (e.g., fewer than three creditors filed the petition or the creditors' claims were subject to bona fide disputes). Following dismissal,...