In re Haymond

• Decision Date: 28 September 2021
• Docket Number: CASE NO: 21-32307
• Parties: IN RE: Gary Russell HAYMOND, Debtor.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas

633 B.R. 520

IN RE: Gary Russell HAYMOND, Debtor.

CASE NO: 21-32307

United States Bankruptcy Court, S.D. Texas, Houston Division, HOUSTON DIVISION.

Signed September 28, 2021

Matthew Brian Probus, The Probus Law Firm, Houston, TX, for Debtor.

Stephen Douglas Statham, Office of U.S. Trustee, Houston, TX, for Trustee.

MEMORANDUM OPINION

Eduardo Rodriguez, United States Bankruptcy Judge

Gary Russell Haymond seeks dismissal of the instant involuntary petition filed by Triple 7 Capital, LLC on two grounds—for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1) and for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Alternatively, Gary Russell Haymond seeks entry of summary judgment against Triple 7 Capital, LLC on the basis that there is no genuine issue of material fact as to whether the petitioning creditor's claim is contingent as to liability and the subject of a bona fide dispute as to liability or amount. On September 13, 2021, this Court conducted a hearing and for the reasons stated herein, the Court denies the motion to dismiss on both grounds and denies the motion for summary judgment.

I. BACKGROUND

1. On June 6, 2016, South Texas Innovations, d/b/a STI, LLC ("STI ") executed a promissory note to Triple 7 Capital, LLC ("Petitioning Creditor ") in the amount of $1,000,000 with a maturity date of December 1, 2016 ("Promissory Note ").¹ The Promissory Note was signed by "STI, LLC Gary Haymond" as Borrower.

2. The Promissory Note was not paid by December 1, 2016.²

3. After STI defaulted, Triple 7's managing member, Robbie Hass ("Hass ") contacted Gary Russell Haymond ("Haymond " or "Alleged Debtor ") several times to demand payment and to discuss a potential plan for repayment.³

4. As discussions between Hass and Haymond regarding a payment plan continued, STI made two payments—on April 4, 2017 in the amount of $106,435.15, and on May 1, 2017 in the amount of $97,354.⁴

5. On June 21, 2017, STI negotiated an extension of the maturity date of the Promissory Note to March 15, 2018. As consideration for that extended maturity date a Security Agreement was executed by Haymond Individually and as President of Garyrent Properties, LLC and as President of South Texas Innovations, LLC, and Haymond pledging his shares of Garyrent Properties, LLC ("Garyrent "), ("Security Agreement ").⁵

6. The Security Agreement contained the following language:

THIS SECURITY AGREEMENT (this "Agreement"), dated as of this 20th day of June, is made by and between Gary Haymond, individually, as guarantor for the Note described below , and as President of South Texas Innovations, LLC, a Texas Limited Liability Company and as President of Garyrent Properties, LLC (collectively the "Debtor"), with an address at 1617 Peach Leaf St., Houston, Texas and Triple 7 Capital LLC (the "Secured Party"), with an address at 9003 Meadow Vista Blvd, Houston, TX 77064-2007.⁶

...

(c) "Note " means that certain Promissory Note, dated as of the date hereof, made by Debtor, for the benefit of Secured Party, in the original principal amount of $ 995,792.00 and a maturity date of December 1, 2016. As of the date of this Agreement, $203,789.15 of the original Note amount was repaid on May 15, 2017.

7. Under the terms of the Security Agreement, Garyrent pledged real property it owned located at 1611 Peach Leaf St., Houston, Texas 77039 ("Peach Leaf Property "). The Security Agreement provided that if $400,000.00 was not paid to Petitioning Creditor on the Note on or before September 15, 2017, Petitioning Creditor had the option to purchase all of Haymond's membership interests in Garyrent for $1.00 and to take possession of the Peach Leaf Property.⁷

8. On October 12, 2017, Petitioning Creditor sent a demand letter purporting to accelerate the debt due under the Promissory Note because the payment of $400,000.00 was not made on or before September 15, 2017.⁸

9. On November 17, 2017, the Petitioning Creditor filed suit against STI, Garyrent, and Haymond in Montgomery County, Texas ("State Court Suit ").⁹

10. On August 3, 2018, three petitioning creditors filed an involuntary petition under chapter 7 of the Bankruptcy Code against STI in a case styled In re South Texas Innovations, LLC , Case No. 18-34245, in the United States Bankruptcy Court for the Southern District of Texas, Houston Division ("STI BK ").¹⁰ On October 30, 2018, an order for relief under chapter 11 was entered, converting the case to a case under chapter 11 of the Bankruptcy Code.¹¹

11. On March 11, 2019, Petitioning Creditor filed its secured proof of claim No. 34 in the STI BK, based on the Promissory Note and Security Agreement. The claim was for $1,460,957.29 and asserted a secured portion of only $1.00.¹²

12. On July 7, 2021, Petitioning Creditor filed an involuntary chapter 7 bankruptcy petition ("Involuntary Petition ") against Alleged Debtor¹³ asserting (1) that Alleged Debtor is generally not paying such debtor's debts as they become due, unless they are the subject of a bona fide dispute as to liability or amount, and (2) a claim in the amount of $1,690,359.05 that is subject to a matured loan which remains unpaid ("Claim ").

13. On July 10, 2021, Alleged Debtor filed the instant "Motion to Dismiss Pursuant to Fed. R. Civ. P. 12(b)(1) and (6) and Alternatively, to be Treated as a Motion for Summary Judgment Pursuant to Fed. R. Civ. P. 12(d) and 56(a)" ("Motion to Dismiss ").¹⁴

14. On July 30, 2021, Petitioning Creditor filed its response to the Motion to Dismiss ("Response ").¹⁵

15. On September 13, 2021, the Court held a hearing on the Motion to Dismiss ("Hearing ").¹⁶

II. JURISDICTION, VENUE, AND CONSTITUTIONAL AUTHORITY

This Court holds jurisdiction pursuant to 28 U.S.C. § 1334 and now exercises its jurisdiction in accordance with Southern District of Texas General Order 2012–6.¹⁷ This Court determines that pursuant to 28 U.S.C. § 157(b)(1), the instant matter before the Court is a core proceeding arising under title 11. The statutory authority for the contested matter before the court is 11 U.S.C. § 303(b). More specifically, this Court has been tasked with determining, inter alia, whether the claim of the Petitioning Creditor is contingent as to liability or is the subject of a bona fide dispute as to liability or amount under § 303(b)(1), and whether an order for relief should be entered against Alleged Debtor. Consideration of the entry of an order for relief on an involuntary petition is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O). Finally, venue is governed by 28 U.S.C. §§ 1408, 1409. Here, venue is proper because over the last 180 days before the filing of this Involuntary Petition, Alleged Debtor had his domicile, principal place of business, or principal assets located in this district longer than in any other district.¹⁸

This Court must evaluate whether it has constitutional authority to enter an order in this case. In Stern , which involved a core proceeding brought by the debtor under 28 U.S.C. § 157(b)(2)(C), the Supreme Court held that a bankruptcy court "lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim."¹⁹ This Court has the constitutional authority to enter a final order here because this is a core proceeding and there is no Stern issue. Interpreted narrowly, Stern is limited to one specific core proceeding, § 157(b)(2)(C), stripping bankruptcy courts of constitutional authority to enter a final order where a state law counterclaim is not resolved in the process of ruling on a creditor's proof of claim.²⁰ Neither § 157(b)(2)(C) nor state law claims are implicated in this proceeding, so this Court concludes that the narrow limitation imposed by Stern does not prohibit this Court from entering a final order here.²¹

Alternatively, even if Stern applies to all of the categories of core proceedings,²² this Court still concludes that Stern does not prohibit this Court from entering a final order in this dispute. In Stern the debtor filed a counterclaim based solely on state law; whereas, here, dismissal of an involuntary bankruptcy proceeding is based exclusively on express provisions of the Bankruptcy Code— 11 U.S.C. § 303(j) —and judicially created bankruptcy law interpreting those provisions. This Court is therefore constitutionally authorized to enter a final order or judgment.

III. ANALYSIS

As a preliminary matter, if the involuntary petition is contested, as in this case, then the court must enter an order for relief against a debtor under the chapter under which the petition was filed if "the debtor is generally not paying his debts as they come due unless such debts are the subject of a bona fide dispute as to liability or amount."²³ Alleged Debtor has raised several arguments in support of dismissal of the involuntary petition. The Court will consider each in turn.

A. Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(1)

1. Standard of review

Alleged Debtor first seeks dismissal under Federal Rule of Civil Procedure 12(b)(1).²⁴ Under Rule 12(b)(1),²⁵ this Court must dismiss the complaint if it finds that it lacks subject matter jurisdiction to hear the dispute.²⁶ "A case is properly dismissed for lack of subject matter jurisdiction when the court lacks the statutory or constitutional power to adjudicate the case."²⁷ "Ultimately, a motion to dismiss for lack of subject matter jurisdiction should be granted only if it appears certain that the plaintiff cannot prove any set of facts in support of his claim that would entitle plaintiff to relief."²⁸

A motion to dismiss under Rule 12(b)(1) is characterized as either facial or factual.²⁹ A facial attack is based solely upon the complaint itself, whereas a factual attack challenges the existence of the subject matter jurisdiction in fact, and is irrespective of the pleadings.³⁰ This means matters outside the pleadings—such as...