In re Silverman, Bankruptcy No. 97-51842.
| Decision Date | 13 November 1998 |
| Docket Number | Bankruptcy No. 97-51842. |
| Citation | 230 BR 46 |
| Parties | In re Eugene SILVERMAN, Alleged Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
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Alan S. Maza, Lehman, Lehman & Gruber, Livingston, NJ, for Alleged Debtor.
Eric Goldring, Goldring & Goldring, Red Bank, NJ, Steven Jurista, Wasserman, Jurista & Stolz, Millburn, NJ, for Petitioner Michael Cantor.
This matter is before the court on the alleged debtor's motion for the imposition of punitive damages against the petitioning creditor. The court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 151 and 157(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O). For the following reasons, the motion for punitive damages is granted in the amount of $50,000.
In the instant case, a single petitioning creditor, Michael Cantor ("Cantor" or the "petitioner") filed an involuntary chapter 7 petition on October 24, 1997 under section 303 of title 11, United States Code ("Bankruptcy Code" or "Code") against Eugene Silverman ("Silverman" or the "alleged debtor"). Cantor and Silverman had been friends and business associates for many years. They had engaged in many business ventures. Cantor has a stipulated net worth of $30,000,000. Silverman is a person of considerably more limited means. For reasons which are unclear from the record, their relationship turned sour and Cantor sued Silverman in the Superior Court of New Jersey on a $200,000 promissory note. Cantor moved for summary judgment, and in the alternative for partial summary judgment. That motion was denied on August 22, 1997.
As that case continued, Cantor prepared to file the involuntary bankruptcy case against Silverman. Cantor ordered a Uniform Commercial Code (U.C.C.) search and a judgment search against Silverman. Cantor did not inform the court, however, of the results of those searches. Although the standard under section 303(h)(1) of the Bankruptcy Code for entry of an order for relief in an involuntary case is that the debtor is generally not paying his debts as they come due, Cantor did not order a credit report on Silverman. Had he done so, Cantor would have discovered, as Silverman did by obtaining a credit report on himself on October 22, 1997, that of 31 reported accounts, every one reported the history as "never late" or "paid as agreed." Moreover, a creditor does not have standing under Code section 303(b)(1) to file an involuntary bankruptcy petition if his claim is the subject of a bona fide dispute. Although Cantor's motion for summary judgment or for partial summary judgment was denied in state court on August 22, 1997, he nevertheless filed an involuntary bankruptcy petition against Silverman.
Silverman filed an answer to the involuntary petition denying that Cantor had standing and arguing that the state court's denial of Cantor's motion for summary judgment conclusively established that his claim was the subject of a bona fide dispute. Furthermore, in his answer, Silverman argued that the petitioner failed to comply with the section 303 requirement that 3 or more creditors must join in the petition where the alleged debtor has 12 or more creditors. On December 29, 1997, Silverman filed a motion to dismiss the involuntary bankruptcy and for the imposition of sanctions and damages based on the allegations stated in the answer.
In the hearing on the motion to dismiss, the court ruled that because of the superior court's denial of Cantor's motion for summary judgment, principles of issue and claim preclusion prohibited Cantor from arguing that the existence and amount of his claim was not the subject of a bona fide dispute. In disputing that principles of issue preclusion applied as a result of the superior court's denial of summary judgment, Cantor denied that partial summary judgment had been requested in the alternative. Cantor made this argument in an attempt to convince this court that the superior court had not ruled that there was a genuine issue of material fact as to the entire amount of the debt. He sought to convince the court that at least $10,000 of the alleged debt was undisputed, so that Cantor would have standing under Code section 303(b)(1) to file an involuntary petition. The transcript of that hearing in the superior court plainly discloses, however, that Cantor did request partial summary judgment and that such request was also denied. This court held that the petitioner had no standing to file the involuntary petition and on February 13, 1998 the court entered an order dismissing the petition. Since dismissal was warranted based upon a finding of a bona fide dispute, the court did not decide whether the numerosity requirements of section 303(h)(1) of the Code were satisfied, although Silverman contends that he had more than 12 creditors at that time as well.
The court held that Silverman was entitled to all costs and attorney's fees associated with the involuntary proceeding under Code section 303(i)(1), including those incurred after dismissal of the petition. The court further concluded that Cantor acted in bad faith by filing the petition after the state court held that genuine issues of material fact existed with respect to the alleged debt. The court dismissed the involuntary petition, but retained jurisdiction to determine fees, costs and damages.
Cantor filed a motion for reconsideration in which he argued that the claim was not the subject of a bona fide dispute, alleging that Silverman admitted in a deposition taken on March 24 and 25, 1998 that money was currently due and owing and that he was fairly confident that the amount was greater than $50,000. However, the court held that whether a bona fide dispute exists is evaluated at the time the involuntary petition is filed. Bona fide disputes are eventually resolved by litigation or settlement, but it is the status of the dispute on the petition date which is crucial for standing under Code section 303(b)(1). On June 5, 1998 the court therefore denied the petitioner's motion for reconsideration.
On August 10, 1998, a hearing was held on Silverman's request for fees, costs and damages pursuant to sections 303(i)(1) and 303(i)(2). Due to the difficulty of quantifying compensatory damages and the adverse effect discovery as to damages might have on his relations with other creditors, some of which Silverman alleges had already been damaged by the filing of the involuntary bankruptcy case, Silverman withdrew his request for compensatory damages on May 26, 1998. Therefore, the court limited its August 10th hearing to fees, costs and punitive damages. The court awarded attorney's fees and costs to the alleged debtor totaling $45,264.75 and $1242.90 respectively through August 4, 1998. On August 25, 1998, the court signed an order, entering judgment against Cantor in favor of Silverman in the amount of $46,507.65. The court retained jurisdiction, however, to consider any supplemental applications for fees and costs incurred in connection with the petitioner's involuntary filing. In the hearing on the request for damages the court ordered a supplemental certification of fees and costs to be filed within 7 days and a response to be filed within 7 days thereafter.1
The court acknowledged in the hearing on the request for damages that Silverman requested sanctions against the petitioner's former counsel in the letter memorandum dated August 4, 1998. Since the request for sanctions pursuant to Fed.R.Bankr.P. 9011 was not made by way of separate motion, it is not properly before the court and the court therefore declines to consider the issue at this time. The issue presently before the court is whether punitive damages are warranted, what factors are relevant to such a determination and, if punitive damages are warranted, what amount will satisfy the dual purposes of punishment and deterrence.
Silverman asserts that punitive damages are warranted in the amount of $900,000. Recognizing that courts have not articulated a formula in measuring such damages, Silverman contends that damages should be evaluated on a case by case basis. Accordingly, the totality of the circumstances must therefore be considered, including the petitioner's intentions, the harm suffered by the alleged debtor and the petitioner's ability to pay. Silverman's request of $900,000 represents 3% of Cantor's net worth, which Silverman contends is an appropriate amount to effectuate the dual policies of deterrence and punishment without being unduly harsh.
Cantor argues at length that the involuntary petition was not filed in bad faith and consequently, punitive damages are not authorized. Cantor asserts that Silverman acted in bad faith. In addition, Cantor argues that although the award of fees and costs is within the discretion of the court, such an award is not mandatory and the circumstances do not justify such an award. In his brief in opposition to the imposition of punitive damages, Cantor states "even if this Court were to ultimately find that Cantor acted in bad faith by filing the Involuntary Petition, due to the absence of egregious and malicious conduct, punitive damages should not be awarded." The court had, however, already found that the petition was filed in egregious bad faith in light of the state court ruling denying summary judgment. (Tr. of Hrg. on Mot. to Dismiss Invol. Petition at 22.) Furthermore, the court had also already rendered its decision on the imposition of attorney's fees and costs at the hearing on Silverman's motion to dismiss. Finally, Cantor contends that an award of $900,000 is excessive, unreasonable, oppressive and extreme in light of the totality of the circumstances.
Section 303(i) of the Bankruptcy Code authorizes the imposition of fees, costs and damages if an involuntary petition is dismissed...
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