In re Smith

• Citation: 243 BR 169
• Decision Date: 25 February 1999
• Docket Number: Bankruptcy No. 98-66418-WHD.
• Parties: In the Matter of David Lee SMITH, a/k/a David L. Smith, Debtor.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Georgia

243 B.R. 169 (1999)

In the Matter of David Lee SMITH, a/k/a David L. Smith, Debtor.

Bankruptcy No. 98-66418-WHD.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

February 25, 1999.

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Scott B. Riddle, Shapiro, Fussell, Wedge, Smotherman & Martin, Atlanta, GA, for David Lee Smith.

J. Littleton Glover, Jr., Glover & Davis, P.A., Newnan, GA, for Steinemann Development Company.

ORDER

W. HOMER DRAKE, Jr., Bankruptcy Judge.

Before the Court is David L. Smith's Motion for Directed Verdict, and for Recovery of Fees, Expenses, and Actual and Punitive Damages Against Petitioner Steinemann Development Company. After four days of trial in October, 1998, the Court took the matter under advisement. David L. Smith ("Smith") and Steinemann Development Company ("SDC") have submitted extensive pre and post-trial briefs on the issues involved in this proceeding. This matter falls within the subject matter jurisdiction of the Court, see 28 U.S.C. § 157(b)(2)(A & O), and the following constitutes the Court's findings of fact and conclusions of law. See FED.R.BANKR.P. 7052.

PROCEDURAL HISTORY

On April 8, 1998, SDC filed an involuntary Chapter 7 petition against Smith. On the face of the involuntary petition, SDC alleged that it was eligible to file the petition and that Smith was generally not paying his debts as such debts became due. Contemporaneous with the petition, SDC filed Supplemental Allegations wherein it claimed in paragraph three that Smith owed it between $600,000 and $900,000.

Smith has vigorously defended the involuntary petition. Early in the proceedings, Smith requested that SDC be required to post an indemnity bond. By Order entered on May 18, 1998, the Court required SDC to post a $100,000 bond.

On May 13, 1998, SDC filed a Motion for Voluntary Dismissal. Smith refused to consent to a dismissal of the case for fear that his rights under 11 U.S.C. § 303(i)¹ to seek costs, attorney's fees, and damages would be waived. Before the Court ruled on the dismissal motion, Smith filed the instant motion seeking the recovery of fees, expenses, and damages from SDC. By Order entered July 10, 1998, the Court dismissed the involuntary petition, but retained jurisdiction to consider Smith's request for fees and damages under § 303(i).

ISSUES PRESENTED

At issue in this controversy is (1) whether SDC had standing to file the involuntary petition; (2) whether Smith was generally paying his debts as they became due; and (3) whether SDC filed the involuntary petition in bad faith.² Bearing these issues in mind, the Court will carefully scrutinize SDC's actions as "the filing of an involuntary petition is an extreme remedy with serious consequences to the alleged debtor, such as loss of credit standing, inability to transfer assets and carry on business affairs, and public embarrassment." In re Reid, 773 F.2d 945, 946 (7th Cir.1985); see also In re Dino's, 183 B.R. 779, 783-84 (S.D.Ohio 1995) ("the danger of involuntary bankruptcy cannot be overlooked by the courts;" an involuntary petition is a charge that "ought not be made lightly"); In re SBA Factors of Miami, Inc., 13 B.R. 99, 101 (Bankr.S.D.Fla.1981). Having defined the issues and having noted the potential consequences of an involuntary case, the Court observes that the goal or purpose of an involuntary filing should be the equal distribution of assets among creditors. In re Arker, 6 B.R. 632, 636 (Bankr.E.D.N.Y.1980); cf. In re Central Hobron Assoc., 41 B.R. 444, 452 (D.Haw.1984) (providing a fresh start to debtors and ensuring the orderly ranking of creditors' claims are the policy reasons behind the bankruptcy system).

APPLICABLE STATUTE

Involuntary petitions in bankruptcy are governed by § 303, which provides in pertinent part:

(b) An involuntary case against a person is commenced by the filing . . .

(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute . . ., if such claims aggregate at least $10,775 . . .; or

(2) if there are fewer than 12 such holders, excluding any employee or insider of such person . . ., by one or more of such holders that hold in the aggregate at least $10,775 of such claims;

* * * * * *

(h) . . . after trial, the court shall order relief against the debtor in an involuntary case . . ., only if —

(1) the debtor is generally not paying such debtor\'s debts as such debts become due unless such debts are the subject of a bona fide dispute. . . . ;

* * * * * *

(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. To summarize the relevant portions of the statute, if the alleged debtor has twelve or more eligible creditors, an involuntary petition may be filed by three creditors which hold claims against the alleged debtor that are not contingent as to liability or the subject of a bona fide dispute. If the alleged debtor has fewer than twelve creditors holding claims that are not contingent as to liability or the subject of a bona fide dispute, one such creditor may file an involuntary petition. Regardless of the number of petitioning creditors, the amount of the petitioning creditors' claims must total $10,775.³ Assuming the petitioning creditors have standing to file a petition, relief is appropriate only if the alleged debtor is generally not paying his debts as they become due. However, debts which are subject to a bona fide dispute are not considered in the "generally not paying" analysis. Further, legal fees and expenses may be awarded to the alleged debtor if the case is dismissed. Damages may be imposed against the petitioning creditors upon a finding that the involuntary petition was filed in bad faith.

BACKGROUND AND DISCUSSION

I. Origin of SDC's Claim Against Smith

Smith has been a real estate developer/broker in the Atlanta metropolitan area for the past twenty-five (25) years. (Tr. at 45, ll. 15-22). Frank C. Steinemann, Jr. ("Steinemann"), is the Chairman of SDC. (Tr. at 188, ll. 17-18). Steinemann is likewise a real estate developer. (Tr. at 190, ll. 1-4).

In the Summer of 1995, Smith was under contract to purchase certain property in Fulton County located near Georgia 400 and Northridge Drive (hereinafter "Northridge Property"). (Tr. at 125, l. 23 — p. 126, l. 1). Smith's and Steinemann's paths crossed in June of 1995 when Smith approached Steinemann about financing the Northridge Property transaction. (Tr. at 125, l. 23 — p. 126, l. 15).

Smith and SDC reached a financing agreement ("Agreement") with respect to the Northridge Property transaction, which was executed on June 29, 1995. (SDC Ex. 1). The deal called for SDC to (i) accept an assignment of the purchase rights to the Northridge Property and (ii) pay $1.3 million towards the purchase of the Northridge Property. (SDC Ex. 1, ¶ 1; Tr. at 233, l. 20 — p. 235, l. 12). Further, SDC agreed to sell the Northridge Property back to Smith for $1.3 million, plus a predetermined profit amount, which turned out to be $175,000. (SDC Ex. 1, ¶ 2; Tr. at 233, l. 20 — p. 235, l. 12; Tr. at 236, ll. 3-9). To further sweeten the deal for SDC, Smith granted SDC the right to receive an assignment of an option to purchase another piece of property known as the Club Drive Property. (SDC Ex. 1, ¶ 3; Tr. at 127, ll. 2-17; Tr. at 233, l. 20 — p. 235, l. 12).⁴ In essence, the deal was structured in such a way that SDC could either take the profit from the increased purchase price of the Northridge Property ($175,000) or accept the assignment of the Club Drive Property.

Prior to financing the transaction, SDC received from Smith what was labeled a personal financial statement. (SDC Ex. 2). As of May 31, 1995, Smith represented his net worth to be in excess of $7.4 million. (Id.). Paragraph seven of the Agreement provides in pertinent part:

As a material inducement to Steinemann to enter into the transaction contemplated by this Agreement and upon which it is stipulated that Steinemann is reasonably relying, Smith hereby warrants, represents and agrees as follows:

(j) All information provided by Smith to Steinemann related to the Property, the Pinetree Deal and the Club Drive Deal is accurate to his knowledge and belief and does not omit any material fact known by Smith or believed by Smith to exist.

(k) The financial statement of Smith dated as of May 31, 1995 delivered this date to Steinemann is true and accurate as of this date.

(SDC Ex. 1, ¶ 7). At trial, Smith admitted making the foregoing representations. (Tr. at 124, l. 9 — p. 125, l. 13). Smith also made the following representation in paragraph five of Exhibit E to the Agreement:

Smith warrants and represents to Steinemann and to FCS that no other person or entity has any interest in the Club Drive Purchase Contract or any similar right to obtain an interest in the Club Property by, through or under AIM or Smith (including, without limitation, any rights of JPI, which Smith warrants have expired) and agrees to defend, indemnify and hold harmless FCS and Steinemann from and against any claim, liability, loss expense, including without limitation, attorneys fees, arising out of or related to the existence or assertion of any such interest or right.

(SDC Ex. 1, Exhibit E, ¶ 5).

As per the Agreement, SDC purchased the Northridge Property and then transferred it back to Smith on August 14, 1995. (Tr. at 236, ll. 13-17). However, sometime prior to August 14, 1995, an entity known as...