In Re Skyworks Ventures Inc. Alleged Debtor., 10-24459 (RTL).

• Decision Date: 15 July 2010
• Docket Number: No. 10-24459 (RTL).,10-24459 (RTL).
• Citation: 431 B.R. 573
• Parties: In re SKYWORKS VENTURES, INC. Alleged Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

431 B.R. 573

In re SKYWORKS VENTURES, INC. Alleged Debtor.

No. 10-24459 (RTL).

United States Bankruptcy Court D. New Jersey.

July 15, 2010.

Joseph J. DiPasquale, Esq., Trenk, DiPasquale, Webster, Della Fera & Sodono, P.C., West Orange, NJ, for Alleged Debtor.

Jay L. Lubetkin, Esq., Rabinowitz Lubetkin & Tully, L.L.C., West Orange, NJ, for Petitioning Creditor.

OPINION

RAYMOND T. LYONS, Bankruptcy Judge.

INTRODUCTION

The alleged debtor seeks attorney's fees, costs, compensatory damages and punitive damages against the petitioning creditor under Section 303(i) of the Bankruptcy Code. 11 U.S.C. § 303(i). Following the majority rule that reasonable attorney's fees and costs are awarded upon dismissal of an involuntary petition, the court will allow them under the circumstances of this case. Furthermore, the court finds that the petition was filed in bad faith in a two-party dispute as a litigation tactic to force a settlement. Although the alleged debtor has presented no evidence of actual damages, the court will award punitive damages after hearing further evidence.

JURISDICTION

This court has jurisdiction of this case under 28 U.S.C. § 1334(a) & (b), 28 U.S.C. § 157(a) and the Standing Order of Reference by the United States District Court for the District of New Jersey dated July 23, 1984, referring all cases and proceedings arising under Title 11 of the United States Code to the bankruptcy court. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate).

FINDINGS OF FACT AND PROCEDURAL HISTORY

The alleged debtor, Skyworks Ventures, Inc. (Ventures), moved to dismiss the involuntary chapter 7 petition and seeks attorney's fees, costs and damages against the petitioning creditor, Scarola Ellis LLP. The petitioning creditor cross moved to dismiss the petition and opposes any sanctions and award for fees. The court granted the motion to dismiss and retained jurisdiction over the request for fees, costs and damages.

Scarola Ellis is a New York law firm that claims Ventures owes the firm in excess of $200,000.00. Prior to these bankruptcy cases, Scarola Ellis provided legal services to Ventures for about two years. Ventures is a start-up company in the business of developing games for the internet. It raised $12 million in a series of stock offerings. Scarola Ellis represented Ventures in those matters as well as other corporate matters and litigation. During the two years between July 2007 and July 2009, Scarola Ellis billed Ventures approximately $1,100,000.00 for legal services. Ventures paid approximately $900,000.00, leaving a balance claimed of more than $200,000.00.

From time to time, Ventures complained about the amount of legal fees. Eventually, Scarola Ellis terminated the client relationship because of unpaid fees. In September 2009, Scarola Ellis initiated suit against Ventures in the United States District Court for the Southern District of New York. Ventures drafted an answer and counterclaim that it sent to Scarola Ellis, but did not file. Scarola Ellis voluntarily dismissed their suit on December 1, 2009. Settlement discussions were unproductive. Whereas Scarola Ellis was seeking payment for legal fees, Ventures sought not only cancellation of any debt but a refund of alleged over billings and compensation for alleged malpractice or breaches by the law firm. Soon thereafter, Scarola Ellis filed a second suit on December 7, 2009, but did not serve a summons or complaint for over five months. They had not served the summons and complaint at the time these bankruptcy cases commenced.

Ventures has a subsidiary, Skyworks Interactive, Inc. (Interactive). Seven creditors of Interactive filed an involuntary petition on March 31, 2010. In re Skyworks Interactive, No. 10-19593 (Bankr.D.N.J. filed Mar. 31, 2010). Scarola Ellis filed a motion to join as a petitioning creditor. Interactive filed an answer and counterclaim against the petitioning creditors. It also opposed Scarola Ellis's motion to join as a petitioning creditor alleging that the law firm was not a creditor of Interactive, but solely a disputed creditor of its parent company, Ventures. The court denied Scarola Ellis's motion to join as a petitioning creditor because no prior court authorization is required-a creditor may join in the petition as a matter right under 11 U.S.C. § 303(c). The court made no finding as to whether Scarola Ellis was a creditor of Interactive. Thereafter, Scarola Ellis filed a notice of joinder in the Interactive involuntary petition.

Interactive and the seven original petitioning creditors reached an agreement to compromise their claims and moved to withdraw the involuntary petition against Interactive. The motion asserted that the petitioning creditors held the vast majority of claims against Interactive and that all other creditors were being paid according to terms or negotiated agreements. Scarola Ellis opposed the motion to withdraw the Interactive involuntary petition. Simultaneously, they filed an involuntary petition against the parent company, Ventures; then moved for joint administration of the Interactive and Ventures cases. The court granted the motion of the original petitioning creditors to withdraw the petition against Interactive and denied the motion for joint administration.

One of the petitioning creditors of Interactive was Gary Kitchen. He had been a principal of Interactive before it was acquired by Ventures, but had left the company and claimed a large amount of compensation. One of the partners of Scarola Ellis asked Mr. Kitchen if Ventures had any other creditors besides Scarola Ellis. He did not believe so. Based on this information, Scarola Ellis concluded they could file the involuntary petition against Ventures alone, without other petitioning creditors. However, in its motion to dismiss, Ventures listed twenty-one creditors.

DISCUSSION

Attorney's Fees and Costs

Section 303(i)(1) of the Bankruptcy Code allows the court to award costs and a reasonable attorney's fee against a petitioning creditor if an involuntary petition has been dismissed. 11 U.S.C. § 303(i)(1). The imposition of costs and fees is discretionary, but the majority rule typically awards fees and costs to the debtor upon dismissal. In re Silverman, 230 B.R. 46 (Bankr.D.N.J.1998). “As has been generally recognized, in light of Code section 303, petitioning creditors should carefully examine the risks undertaken in the filing of an involuntary petition.” In re Landmark Distributors, Inc., 189 B.R. 290, 306 (Bankr.D.N.J.1995). Ventures asks the court to follow the majority rule and enter judgment for its costs and fees.

Collier notes:

Most of the courts determining whether to award fees and costs under 303(i)(1) and damages under 303(i)(2) to the debtor have adopted a “totality of the circumstances” test, in which certain factors are to be considered. These include (1) the merits of the involuntary petition; (2) the role of any improper conduct on the part of the alleged debtor; (3) the reasonableness of the actions taken by the petitioning creditors; and (4) the motivation and objectives behind the filing of the petition.

2 Collier on Bankruptcy ¶ 303.33 (Alan N. Resnick & Henry J. Sommer eds., 2010) (citing Higgins v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.), 379 F.3d 701, 707 (9th Cir.2004)).

The Ninth Circuit recently held that Section 303(i)(1) is a fee shifting statute and that there is a presumption in favor of awarding fees. In re S. California Sunbelt Developers, Inc., 608 F.3d 456, 461-62 (9th Cir.2010); see also 2 Collier on Bankruptcy ¶ 303.33 (Alan N. Resnick & Henry J. Sommer eds. 2010) (“Given the policy behind section 303(i) and the effort to balance the competing rights of debtors and creditors under section 303 as a whole, the better argument is that the presumption for the award of costs and fees should be in favor of the debtor.”). Therefore, the Ninth Circuit places the burden of proof on the petitioners to show that fees should not be awarded. S. California Sunbelt Developers, Inc., 608 F.3d 456, 461-62.

Scarola Ellis argues that in light of all the circumstances, an award of costs and fees is not warranted. They say the petition was filed against Ventures in response to the settlement among Interactive and its creditors and that they had the best interests of all creditors, of both the parent and subsidiary, at heart. Scarola Ellis's altruism rings hollow. They filed the involuntary petition against Ventures after Interactive and its creditors reached a settlement to withdraw that petition. In their moving papers, the creditors alleged a settlement among the vast majority of Interactive creditors to compromise claims and defer payment, and that all other creditors of Interactive were being paid according to terms or negotiated payment arrangements. Scarola Ellis believed they were the only creditor of Ventures. Therefore, the motive for filing the involuntary against Ventures was not to protect creditors of either the parent or subsidiary, but the concern that they were the only creditor being left out. One can infer that Scarola Ellis hoped to induce a payment on their disputed claim by being an impediment to the withdrawal of the Interactive petition and by initiating the Ventures petition.

The historical policy of bankruptcy law is to serve as a collective debt-collection device for the benefit of creditors as a group. Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 3-4 (BeardBooks 1986). Scarola Ellis's actions were intended to benefit only themselves because they felt excluded from the group, and not to benefit the group as a whole. Under these circumstances, there is no reason to depart from the majority rule that fees and costs are typically awarded when an involuntary petition has been dismissed. Whether one adopts the presumption that fees should be awarded, as the Ninth Circuit has done, or...