In re Macke Intern. Trade, Inc.
| Decision Date | 08 June 2007 |
| Docket Number | BAP No. CC-05-1441-PaMaB.,BAP No. CC-05-1437-PaMaB.,Bankruptcy No. SV 05-14258-GM. |
| Parties | In re MACKE INTERNATIONAL TRADE, INC., Debtor. Lawrence I. Wechsler, Appellant/Cross-Appellee, v. Macke International Trade, Inc., Appellee/Cross-Appellant. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Alex Zarcone, Oliva & Associates, San Diego, CA, for Lawrence I. Wechsler.
Mark R. Campbell, Mark Campbell Law, Anaheim, CA, for Macke International Trade, Inc.
Before: PAPPAS, MARLAR1 and BRANDT, Bankruptcy Judges.
Venturing into an area of unsettled law, we hold that a bankruptcy court may, under appropriate circumstances, order a petitioning creditor to pay an alleged debtor's attorney's fees and costs when, upon finding that the interests of creditors and debtor would be better served, it dismisses an involuntary petition pursuant to § 305(a).2 We reject the petitioning creditor's appeal of such an award and also conclude that the bankruptcy court did not err in denying the creditor's request to offset the award against amounts due to the creditor under a judgment against the alleged debtor.
Finally, in connection with the debtor's cross-appeal, we also affirm the bankruptcy court's decision finding that the involuntary petition was not filed in bad faith, reducing the amount allowed for attorney's fees and costs by approximately one-half, and rejecting the debtor's request for punitive damages pursuant to § 303(i)(2).
Macke International Trade, Inc., a/k/a Malibu Pacific Investors, Inc., f/d/b/a Petcrew ("Macke" or "alleged debtor"), a corporation, manufactured and sold pet products.
In 1999, Lawrence Wechsler ("Wechsler"), a patent attorney and business competitor in the pet product industry, sued Macke in federal court, alleging that Macke had infringed his patent in connection with Macke's sale of certain "Handi-Drink" products. After protracted litigation, in February of 2005, Wechsler recovered a judgment against Macke and its owner, Anthony O'Rourke ("O'Rourke"), for approximately $650,000. Macke and O'Rourke, represented by the same counsel, appealed the judgment, and that appeal and a cross-appeal are pending in the U.S. Court of Appeals for the Federal Circuit.
During its six years of litigation with Wechsler, Macke incurred over $900,000 in attorney's fees, which it was unable to pay.3 Macke operated at a loss and had debts of over $1.5 million. Its three largest creditors were two of its former litigation attorneys and Wechsler. O'Rourke decided to wind up Macke's operations and assign its remaining assets for the benefit of its creditors. On January 13, 2005, Macke executed a General Assignment Agreement in favor of Equitable Transitions, Inc. ("Assignee").
Assignee liquidated Macke's hard assets in a sale consummated on June 17, 2005. It yielded only $10,500 in proceeds. Wechsler, although notified of the assignment process, did not file a claim to participate in any distributions by Assignee.
Meanwhile, in the Federal Circuit appeal, Wechsler threatened to move to disqualify Macke's and O'Rourke's counsel. Wechsler asserted that Assignee was the real party in interest, and that any continued dual representation was an unwaivable conflict of interest. Macke's counsel capitulated by preparing to withdraw. Macke and O'Rourke retained substitute appellate counsel, O'Rourke purchased Assignee's interest in the appeal, and the appeal proceeded.
On June 21, 2005, Wechsler filed an involuntary chapter 11 petition against Macke in bankruptcy court.
Macke responded with both an answer and a motion to dismiss the involuntary petition. The substantive grounds for dismissal were stated in the alternative. Primarily, Macke alleged, pursuant to § 303(i), that Wechsler was guilty of bad faith in filing the petition, and contended that he was attempting to gain a litigation advantage over Macke in the pending appeal by increasing O'Rourke's litigation costs in bankruptcy court. Macke also alleged that Wechsler had failed properly to investigate the administration of Macke's assets by Assignee before filing the involuntary petition, either by contacting Assignee or by conducting a debtor's examination.
Alternatively, Macke asked the bankruptcy court to dismiss the case under § 305(a) because dismissal would better serve the interests of the creditors and Macke. Macke maintained that all its assets had been liquidated in the wind-up of its business, that there was nothing to reorganize, and that little purpose could be served through a chapter 11 case.
Macke further sought reimbursement of its attorney's fees and costs from Wechsler under § 303(i) or, alternatively, under the court's inherent authority. In addition, Macke sought sanctions against Wechsler's counsel for allegedly violating Rule 9011.
Wechsler responded to Macke's motion in written declarations. He alleged that he filed the involuntary petition in order to reach O'Rourke's income through a potential reconfiguration of Macke's business operations. He asserted that Macke's products were still being advertised for sale worldwide, that O'Rourke had attended a trade show in March of 2005, and that Macke/O'Rourke maintained websites on the internet for Petcrew and Handi-Drink. He disputed any lack of investigation on his part, and maintained that O'Rourke had been evasive in response to Wechsler's demands for information. Furthermore, Wechsler maintained that he had requested a list of Macke's creditors from Assignee in March of 2005, but Assignee had refused to comply.
Macke replied, denying that the company was a viable business and asserting that the product advertising referenced by Wechsler was designed merely to maintain the status quo pending the sale of Macke's assets. O'Rourke maintained in a declaration that his presence at the trade show was to help him in securing a consulting position with the buyer of Macke's assets.
The bankruptcy court allowed both sides to file supplemental briefs and declarations on the issues. Counsel for Macke, Mark Campbell ("Campbell"), filed a fee application for services rendered between July 6, 2005, and September 14, 2005, totaling $31,028.01 for approximately 102 hours of services. To this figure, Campbell added another 18 hours for his anticipated work on the supplemental brief and oral argument for the hearings. Therefore, although not substantiated by an updated fee statement that is part of the record on appeal, Campbell asked for an award reflecting 120 hours of services at 8325/hour for total fees and costs in the amount of $39,678.
The bankruptcy court heard argument on all issues over two days.4 It announced its decision at the conclusion of the hearing wherein, for the most part, it adopted its findings, analysis, and conclusions expressed in a tentative ruling it had issued prior to the hearing (hereafter "Tentative Ruling").
The bankruptcy court determined that it would dismiss the bankruptcy case under § 305(a) because it found to do so would be in the best interests of the debtor and creditors. In particular, the bankruptcy court reasoned that:
The court appears to have jurisdiction... but simply believes it is in the best interest of all parties not to exercise it. Although an assignment [of all of Macke's assets] is pending in state court, Wechsler decided not to participate in the assignment and is the only creditor who filed this petition. This is a two-party dispute between [Macke] and a single creditor with a long history of litigation. [Macke] has made allegations that this petition was filed by Wechsler in order to gain an advantage in the pending appeal. Finally, this filing appears to lack a bankruptcy purpose: [Macke] was not in need of debt adjustment, does not need a breathing spell from creditors, and does not need a discharge and a fresh start.... There appears to be nothing to reorganize or even liquidate. If there is, the Assignee had notice of the allegations made by Wechsler regarding additional assets and can pursue those in state court, if necessary. However, the continuation of this case would only lead to administrative expenses, and would be a waste of judicial resources.
Tentative Ruling at 10 (Oct. 25, 2005).
Having decided to dismiss the involuntary petition under § 305(a), the bankruptcy court next analyzed Macke's request for an award of attorney's fees and costs. It interpreted § 303(i)(1) to allow, subject to the court's discretion, an alleged debtor to recover fees and posts if an involuntary petition is dismissed for any reason other than with the consent of all the parties, or where the putative debtor has waived its right to recovery. The bankruptcy court noted the lack of a definitive decision from the Ninth Circuit concerning whether a fee award under § 303(i) could be made when a case was dismissed under § 305(a). It concluded that, although damages were not awardable, attorney's fees and costs were. It then determined that such an award was appropriate in this case based on the totality of the circumstances, which the court described as follows:
In this case, the involuntary petition meets the requirements of § 303(h): there is no argument that [Macke] is and was insolvent at the time of filing and there is no bona fide dispute. However, all of [Macke]'s assets have been sold as part of the assignment for the benefit of creditors and there is nothing to liquidate or reorganize under chapter 11 or any other chapter.... As to the evidence presented by Wechsler that [Macke] may be doing business abroad and conducting business through other websites, ... [these allegations can] be addressed in another forum.... Wechsler is the...
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