In re John Richards Homes Bldg. Co., L.L.C.

• Decision Date: 25 April 2003
• Docket Number: No. 02-54689.,02-54689.
• Citation: 291 B.R. 727
• Parties: In re JOHN RICHARDS HOMES BUILDING CO., L.L.C., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

291 B.R. 727

In re JOHN RICHARDS HOMES BUILDING CO., L.L.C., Debtor.

No. 02-54689.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

April 25, 2003.

COPYRIGHT MATERIAL OMITTED

Norman L. Lippitt, Kenneth F. Neuman, Birmingham, MI, for petitioner.

Norman C. Ankers, Detroit, MI, Ruth E. Zimmerman, Lansing, MI, for alleged debtor.

Opinion Regarding Alleged Debtor's Damages

STEVEN W. RHODES, Chief Judge.

Following the dismissal of this involuntary petition, the Court conducted an evidentiary hearing on a request for compensatory and punitive damages by the alleged debtor, John Richards Homes Building Company, L.L.C. ("JRH"). The Court concludes that the petitioning creditor, Kevin Adell, filed this involuntary petition in bad faith and that JRH is entitled to compensatory damages in the amount of $4,100,000 and punitive damages in the amount of $2,000,000. The Court further concludes that JRH is entitled to an award of attorney fees and costs in the amount of $313,230.68.

I.

JRH's request for damages and attorney fees is based on 11 U.S.C. § 303(i), which provides:

(i) 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).

Thus, the Court is authorized to award JRH its reasonable attorney fees and costs. In addition, the Court may award compensatory and punitive damages if it finds that Adell filed the involuntary bankruptcy petition in bad faith. "[T]here is a presumption of good faith in favor of the petitioning creditor, and thus the alleged debtor has the burden of proving bad faith." United States Fidelity & Guar. Co. v. DJF Realty & Suppliers, Inc., 58 B.R. 1008, 1011 (N.D.N.Y.1986). In In re Cadillac by DeLorean & DeLorean Cadillac, Inc., 265 B.R. 574 (Bankr.N.D.Ohio 2001), the court discussed the bad faith determination under § 303(i) and stated:

The Sixth Circuit has not addressed this issue. On issues of good faith and bad faith, however, the Sixth Circuit generally looks to the totality of the circumstances. See Hardin v. Caldwell (In re Caldwell), 851 F.2d 852, 860 (6th Cir.1988); see also Industrial Ins. Servs., Inc. v. Zick (In re Zick), 931 F.2d 1124, 1127 (6th Cir.1991); Metro Employees Credit Union v. Okoreeh-Baah (In re Okoreeh-Baah), 836 F.2d 1030, 1033 (6th Cir.1988). This Court, therefore, adopts that as the appropriate test.

Id. at 582.

This Court agrees that in assessing whether Adell filed this involuntary petition in bad faith, it is appropriate to examine the totality of circumstances.

II.

JRH asserts that Adell filed the petition in a bad faith campaign to extort an unreasonable settlement of the parties' dispute and to destroy JRH's business due to Adell's personal antipathy toward John Shekerjian, JRH's principal.

Adell asserts that he filed the petition in good faith. Specifically, he states that he relied on the advice of experienced bankruptcy counsel who, before determining that an involuntary bankruptcy petition would be proper, investigated JRH's financial circumstances and the circumstances of JRH's debt to Adell. He also asserts that in filing the petition, he was motivated by a concern for JRH's trade creditors.

JRH is in the business of constructing new homes priced at over $1 million. Adell's claim against JRH arises from a contract for the sale of property and the construction of a new home. (Ex. 17.) The parties signed this contract on December 28, 2001. Pursuant to the contract, JRH agreed to sell to Adell a 1.8 acre parcel of property in Bloomfield Hills, Michigan, and to construct a home for Adell on the property. Adell agreed to pay a total of $3,030,000. The contract required JRH to commence construction "within a reasonable time after this Agreement is signed and plans are completed and permit is issued." (Ex. 17, para.8.)

The sale closed on February 28, 2002. The closing papers, signed by Adell, reflect that Adell agreed to allocate $1,750,000 for the purchase of the property and the balance to the building construction. (Exs. 1 and 2.) The deed also reflects this purchase price. (Ex. 3.) First Federal of Michigan financed the purchase for Adell.

In the next several months, two primary disputes developed. First, Adell asserted that the true value of the real property was $1 million rather than the $1.75 million stated in the closing papers and in the deed. Thus, he contended that the excess of $750,000 was actually an improper initial construction draw to which JRH was not entitled. Second, Adell asserted that the delays in commencing construction were unreasonable.

On June 6, 2002, Adell filed suit in the Oakland County Circuit Court against JRH, Shekerjian, First Federal and others, alleging fraud and misrepresentation, silent fraud, innocent fraud, breach of contract, Consumer Protection Act violations, unjust enrichment, accounting and constructive trust. (Ex. 5.)

On June 18, 2002, JRH filed: (1) an answer denying the substance of Adell's claims; (2) affirmative defenses; and (3) a verified counter-complaint alleging breach of contract, business defamation, business libel, injurious falsehood, tortious interference with business relations and extortion. (Exs. 5 and 6.) JRH also filed an emergency motion for a temporary restraining order and a preliminary injunction.

Six days later, on June 24, 2002, Adell filed this involuntary petition against JRH. This petition alleged that Adell's claim was $800,000 for fraud and breach of contract, and that he was eligible to file the petition under 11 U.S.C. § 303(b), i.e., that his claim was not subject to a bona fide dispute.

On July 1, 2002, JRH filed a motion to dismiss. JRH asserted that Adell's claim was the subject of a bona fide dispute, as it was still in the very early stages of contested litigation. JRH also asserted that the petition was filed in bad faith and that therefore, JRH was entitled to substantial compensatory and punitive damages. JRH also requested attorney fees and costs.

On July 15, 2002, after a hearing, the Court dismissed the petition, finding that Adell "knew or surely must have known that his claim was the subject of a bona fide dispute, and therefore that he was not qualified to be a petitioning creditor." (Tr. of July 15, 2002, hr'g at 27-30.) The Court retained jurisdiction to resolve JRH's requests for compensatory and punitive damages and for attorney fees.

III.

After examining the totality of circumstances, the Court finds that JRH has established by a preponderance of the evidence that Adell filed the involuntary bankruptcy petition in bad faith. Indeed, the Court finds that the evidence overwhelmingly supports this conclusion:

1. As the Court found on July 15, 2002, when Adell filed this involuntary bankruptcy petition, he knew or should have known that his claims were the subject of a bona fide dispute. By then, JRH had responded to Adell's state court complaint by filing substantial defenses, affirmative defenses and counterclaims.

Adell testified that he was not aware of these responsive pleadings until after the involuntary bankruptcy petition was filed. There are four problems with this position:

First, his state court attorneys were aware of these pleadings before the petition was filed. His attorneys' failure to advise him of them in a timely way can be of no help to him.

Second, the nature of Adell's claims was such that he would certainly not require legal advice to understand that he and JRH would have real and substantial legal and factual disputes, and further that the litigation to resolve these disputes would be lengthy and costly. Even before JRH filed responsive pleadings, Adell could not have reasonably concluded that JRH would simply admit that it had committed the frauds and the other intentional wrongs that he had alleged.

Third, the evidence establishes that even if Adell was not aware of JRH's responsive pleadings, he already knew that his state court claims would be contested. At least twice before Adell filed the involuntary petition, JRH's attorneys specifically told Adell's attorneys that JRH would contest Adell's claims and that therefore an involuntary petition would be improper. First, after Adell threatened to file an involuntary bankruptcy petition during a meeting on June 3, 2002, attorney E. Michael Morris, representing JRH, sent a letter dated June 5, 2002, to attorney Dennis Dlugokinski representing Adell. (Ex. 10.) In that letter, Morris advised Dlugokinski that an involuntary petition would be improper and threatened "severe sanctions for damages in the event [Adell] files a frivolous petition for bankruptcy." Then, on or about June 18, 2003, attorney Steven Howell, representing JRH, spoke directly to attorney Bob Carson, representing Adell, and stated that JRH disputed Adell's claims and that the parties' dispute was "extremely contentious." (Tr. of Dec. 18, 2002, hr'g at 55-6.)

Fourth, Adell took no action to withdraw the involuntary petition when he did become aware of JRH's state court responses.

2. Adell knew of the serious harm that JRH would suffer as a direct consequence of the involuntary filing. Indeed the evidence establishes that Adell intended to cause that harm. At a meeting on June 3, 2002, Adell specifically asked Shekerjian, "Can the company take the hit to its reputation if an involuntary bankruptcy was [sic] filed?" (Id. at 37-8.) Adell denied this (Tr. of Jan. 14, 2003, hr'g at 77), but the Court finds that his denial lacks credibility.

Further evidence of Adell's intent to harm JRH is Adell's extraordinary effort and expense to hire a...