In re John Richards Homes Bldg. Co., L.L.C., 04-2154.

• Decision Date: 01 March 2006
• Docket Number: No. 04-2154.,04-2154.
• Citation: 439 F.3d 248
• Parties: In re JOHN RICHARDS HOMES BUILDING CO., L.L.C., Debtor. Kevin Adell, Plaintiff-Appellant, v. John Richards Homes Building Co., L.L.C., Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 248

439 F.3d 248

In re JOHN RICHARDS HOMES BUILDING CO., L.L.C., Debtor Kevin Adell, Plaintiff-Appellant, v. John Richards Homes Building Co., L.L.C., Defendant-Appellee.

No. 04-2154.

United States Court of Appeals, Sixth Circuit.

Argued: June 8, 2005.

Decided and Filed: March 1, 2006.

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ARGUED: G. Eric Brunstad, Jr., Bingham McCutchen LLP, Hartford, Connecticut, for Appellant. Norman C. Ankers, Honigan, Miller, Schwartz & Cohn, Detroit, Michigan, for Appellee. ON BRIEF: G. Eric Brunstad, Jr., Bingham McCutchen LLP, Hartford, Connecticut, Ralph E. McDowell, Michael B. Lewiston, Robert J. Diehl, Jr., Bodman LLP, Detroit Michigan, for Appellant. Norman C. Ankers, Judy B. Calton, Honigan, Miller, Schwartz & Cohn, Detroit, Michigan, Ruth Zimmerman, Honigman, Miller, Schwartz & Cohn, Lansing, Michigan, for Appellee.

Before: NELSON and CLAY, Circuit Judges; OBERDORFER, District Judge.^*

OPINION

OBERDORFER, District Judge.

After dismissing the involuntary bankruptcy petition filed by Kevin Adell against John Richards Homes Building Co., L.L.C. ("JRH"), the bankruptcy court found that the petition was filed in bad faith and awarded JRH costs, attorneys' fees, compensatory damages and punitive damages pursuant to 11 U.S.C. § 303(i) of the United States Bankruptcy Code. The district court affirmed that award. Adell now appeals that affirmance. Finding no error in the bankruptcy court's award or the district court's approval of it, we AFFIRM.

I. BACKGROUND

We set forth here an abbreviated version of the material events addressed by the bankruptcy court in adjudicating the merits of JRH's claim that Adell's petition for involuntary bankruptcy was in bad faith. A separate Appendix expands on these facts and summarizes more extensively the facts relating to the court's assessment of compensatory and punitive damages.

As the bankruptcy court found, in December 2001, Adell and JRH entered into a Residential Building and Purchase Agreement whereby JRH, in exchange for $3,030,000, agreed to sell Adell a 1.8 acre parcel of property in Bloomfield Hills, Michigan, and to construct a home for Adell on the property, with construction to begin "within a reasonable time after the completion of building plans and issuance of permits." Appendix ¶¶ 1-3. On February 28, 2002, the deal closed. The closing documents allocated $1,750,000 out of the $3,030,000 for the land purchase. Id. ¶ 4.

Over the next few months, Adell's relationship with JRH and its principal, John Shekerjian, soured. Id. ¶¶ 5-8. Adell began to complain about the pace of construction on his home and to contact JRH's former employees seeking negative information about JRH. He told Shekerjian that he wanted another builder to build his house and, apparently, barred JRH from the property. He also became upset about the amount he had paid for the land, contending that it was only worth $1 million instead of $1.75 million.

On June 6, 2002, after a number of conversations, meetings, letters and other interactions between Adell or his representatives and JRH or its representatives, Adell filed a civil suit against JRH and Shekerjian in the Oakland County Circuit Court. Id. ¶¶ 9, 10, 11, 12, 13, 14. The complaint included a number of claims, all of which essentially rested on two allegations: (1) that Shekerjian and JRH had orally told Adell that the land was worth $1,000,000, and that the home they would construct for him would have a value of $2,000,000, despite the fact that the executed sale documents allocated $1,750,000 to the value of the land, leaving at most $1,280,000 for the home construction; and (2) that Shekerjian for JRH had told Adell that construction would begin immediately after the sale closed, even though they knew that was impossible because there were "water problems" with the property and that the resulting delay in commencing construction was not "reasonable." On June 18, 2002, JRH and Shekerjian jointly filed an answer, denying the substance of all of Adell's claims, stating affirmative defenses, and including a verified counter-complaint. Id. ¶ 18.

During the time between when Adell filed his state court civil suit and JRH and Shekerjian filed their responsive pleadings, Adell contacted at least two of JRH's contractors, telling them that JRH was in financial trouble and trying to persuade them to join him in filing an involuntary bankruptcy petition against JRH. Id. ¶¶ 15-16. Both refused. Id.

On June 24, 2002, less than a week after JRH and Shekerjian filed their responses in the state court case and without any further discussion or communication, Adell, as the sole petitioning creditor, filed an involuntary bankruptcy petition against JRH pursuant to 11 U.S.C. § 303(b)(2). Id. ¶ 20. According to the petition, Adell's own claim against JRH for fraud and breach of contract was in the amount of $800,000. Id. Adell sought to maximize the publicity attending his filing by hiring a public relations firm, Marx Layne, to publicize alleged defects in JRH's performance of its construction and financial obligations. Id. ¶¶ 21-22.

On July 1, 2002, JRH filed a motion to dismiss the petition. JA 30-32. Noting that Adell's claim against JRH cited in the petition was also the basis for Adell's state court civil complaint against JRH and Shekerjian, and that JRH and Shekerjian had recently filed pleadings denying all of Adell's claims, JRH argued that Adell's claim was the subject of a "bona fide dispute," precluding its use as the basis for the petition. JA 30. JRH also argued that Adell was required to have at least three petitioning creditors because JRH was an entity with 12 or more creditors. JA 31. Should the petition be dismissed, JRH asked the bankruptcy court to award it fees, costs and damages pursuant to 11 U.S.C. § 303(i). JA 31. On July 12, 2002, Adell's bankruptcy attorneys filed a notice that three additional creditors had joined in the filing of the petition. JA 33.

On July 15, 2002, the bankruptcy court held a hearing on JRH's motion to dismiss. Ruling from the bench, the court granted the motion, concluding that Adell was not qualified to serve as a creditor in an involuntary bankruptcy because his claim against JRH was not undisputed. The court explained:

The record that is before the Court overwhelmingly establishes that there is a bona fide dispute concerning this petitioning creditor's claim against the Alleged Debtor . . . [and]

. . . that there are significant genuine issues of material fact concerning any disposition of the issues raised in the [state court case], . . . such fundamental issues as which of the parties breached the contract, which of the parties was the first to breach the contract. There are clear issues of fact concerning particularly the fraud claim and the statutory claim.

JA 71-72. Having rejected the sole petitioning creditor, Adell, the bankruptcy court ruled that it could not permit the joinder of other putative creditors. JA 74. Adell did not appeal the bankruptcy court's dismissal of the petition.

After a period of discovery, followed by a two-day evidentiary hearing, the bankruptcy court granted JRH's motion on April 25, 2003.¹ In a thorough opinion, the court found that Adell filed the involuntary bankruptcy petition against JRH in bad faith and awarded JRH compensatory damages in the amount of $4,100,000, punitive damages in the amount of $2,000,000, and attorneys' fees and costs in the amount of $313,230.68. JA 195-218.

Adell appealed to the district court. On August 5, 2004, in another thorough opinion, the district court ratified the bankruptcy court decision. JA 296-330. Adell then filed the present appeal.

II. DISCUSSION

A. Legal Standards

Section 303(i) of the Bankruptcy Code provides:

If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment—

(1) against the petitioners and in favor of the debtor for—

(A) costs; or

(B) a reasonable attorney's fee; or

(2) against any petitioner that filed the petition in bad faith, for—

(A) any damages proximately caused by such filing; or

(B) punitive damages.

11 U.S.C. § 303(i). Applying this provision, the bankruptcy court in the present case determined that Adell filed his involuntary bankruptcy petition against JRH in bad faith and awarded JRH costs, fees, and damages. On appeal, Adell challenges all aspects of the bankruptcy court's decision: (1) its finding that he filed the involuntary bankruptcy petition in bad faith; (2) its award of $4.1 million in compensatory damages; (3) its award of $2 million in punitive damages; and (4) its award of costs and attorneys' fees.

We review the bankruptcy court's findings of fact for clear error and any conclusions of law de novo. In re Baker & Getty Fin. Servs., Inc., 106 F.3d 1255, 1259 (6th Cir. 1997). We evaluate the bankruptcy court decision directly, without being bound by the district court's determinations, and conduct an independent examination of the record. In re Charfoos, 979 F.2d 390, 392 (6th Cir.1992). "We will not disturb the bankruptcy court's findings of fact unless there is the "most cogent evidence of mistake of justice." In re Baker, 106 F.3d at 1259."

B. Bad Faith

Adell seeks to reverse the bankruptcy court's finding that he filed the involuntary petition against JRH in bad faith. A bankruptcy court's determination that an involuntary petition was filed in bad faith is a question of fact which will be reversed only if clearly erroneous. See In re Washtenaw/Huron Inv. Corp. No. 8, 160 B.R. 74, 79 (E.D.Mich.1993); In re Landmark Distribs., Inc., 189 B.R. 290, 309 (Bankr.D.N.J.1995).

As the bankruptcy court in the present case recognized, "[t]here is a presumption of good faith in favor of the petitioning creditor, and thus the alleged debtor has the burden...