In re Smith
| Citation | 415 B.R. 222 |
| Decision Date | 03 September 2009 |
| Docket Number | No. 09-30531-HDH-7.,09-30531-HDH-7. |
| Parties | In re Milton M. SMITH, Alleged Debtor. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas |
Andrew R. Korn, Korn Bowdich & Diaz, LLP, Dallas, TX, Martin Keith Thomas, Thomas & Sobol, Dallas, TX, for Debtor.
On January 30, 2009, Rhodes Properties filed a Chapter 7 Involuntary Petition against Milton M. Smith, the Alleged Debtor, pursuant to 11 U.S.C. § 303. Mr. Smith contested the relief sought by Rhodes Properties, Ltd. ("Rhodes"), and moved for dismissal. Rhodes and the Debtor then agreed on a discovery and briefing period and the Court held a trial on the Involuntary Petition on July 13th and 23rd with post trial briefs submitted on July 30, 2009. After consideration of the evidence presented at trail, the Court finds that the motion to dismiss the Involuntary Petition should be denied, and an order for relief should be entered against Mr. Smith.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157, 1334 and the standing order of reference in this district. The proceedings with respect to an Involuntary Petition are core pursuant to 28 U.S.C. § 157(b).
Mr. Smith asks that the Involuntary Petition be dismissed on four grounds:
1. The state court judgment obtained by Rhodes Properties is on appeal, and therefore subject to bona fide dispute, making Rhodes ineligible to file the Involuntary Petition;
2. Mr. Smith denies that he has fewer than twelve creditors, and therefore 11 U.S.C. § 303(b)(1) requires that the Involuntary Petition be signed by three or more creditors;
3. The Court lacks jurisdiction over this matter; and
4. This is a two party dispute, Rhodes Properties has an adequate remedy at law in the Texas state courts and therefore the Involuntary Petition should be dismissed on equitable abstention grounds.
On April 20, 2001, BABS Holding Co. ("BABS") agreed to purchase certain assets owned by Rhodes for $18,000,000.00, with $14,000,000.00 of the purchase price paid in cash at closing and $4,000,000.00 to be paid pursuant to a promissory note. The transaction closed on May 21, 2001. Rhodes asserts that as part of the May 21, 2001 sale, Mr. Smith, who was the majority owner of BABS and its president, executed a guaranty.
Rhodes sued Mr. Smith on the guaranty after BABS defaulted on the note in a petition against Mr. Smith in the 160th Judicial District Court, Dallas County, Texas on April 20, 2007. The state court granted summary judgment on the guaranty claim against Mr. Smith on December 10, 2007, and amended that order on January 5, 2008.
Mr. Smith filed a motion for reconsideration, which was denied on March 4, 2008, and later filed an appeal to the Dallas Fifth District Court of Appeals. On March 27, 2008, the state court signed an order severing the claims and counterclaims between the Rhodes and Mr. Smith. On March 24, 2008, three days prior to the severance order, Mr. Smith formed the Milton M. Smith Irrevocable Trust in the Cook Islands (the "Cook Islands Trust") into which he assigned the bulk of his assets.
Thereafter, on July 22, 2008, Mr. Smith filed an affidavit with the state court stating that he had a negative net worth and depositing the sum of $1.00 into the court's registry for the purpose of suspending enforcement of the judgment while on appeal. On August 5, 2008, the state trial court entered a post-judgment injunction which enjoined the Debtor from dissipating or transferring assets outside the normal course of business without prior court approval. On January 29, 2009, Mr. Smith withdrew the $1.00 deposit and attempted to have the state court injunction dissolved. Rhodes filed the Involuntary Petition the following day.
Pursuant to section 303 of the Bankruptcy Code, an involuntary case may be filed against a person by the filing with the bankruptcy court of a petition under Chapter 7 or 11—
(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 as to liability or amount ... [that] aggregate at least $13,475 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $13,475 of such claims;
11 U.S.C. § 303(b). If the involuntary petition is contested, then the court must enter relief against a debtor under the chapter under which the petition was filed if "the debtor is generally not paying his debts as they come due unless such debts are the subject of a bona fide dispute as to liability or amount." 11 U.S.C. § 303(h).
Mr. Smith filed a list under Federal Rule of bankruptcy Procedure 1003(b) naming 12 or more creditors, therefore Rhodes has the burden of showing that Smith actually has less than 12 creditors under § 303(b). Rhodes must satisfy the requirements of 11 U.S.C. § 303 by a preponderance of the evidence. In re Moss, 249 B.R. 411, 418 (Bankr.N.D.Tex.2000) (citing Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)).
The Bankruptcy Code does not define "bona fide dispute." The Fifth Circuit has held that a debt is the subject of a bona fide dispute when "there is an objective basis for either a factual or legal dispute as to the validity of the debt." In re Sims, 994 F.2d 210, 220 (5th Cir.1993), cert. denied sub nom. Sims v. Subway Equipment Leasing Corp., 510 U.S. 1049, 114 S.Ct. 702, 126 L.Ed.2d 669 (1994). "Because the standard is objective, neither the debtor's subjective intent nor his subjective belief is sufficient to meet this burden." Id. at 221.
Rhodes' claim consists of a final judgment from the state court against Mr. Smith that has not been stayed on appeal. See Scurlock Oil Co. v. Smithwick, 724 S.W.2d 1, 6 (Tex.1986) (). Mr. Smith argues that the state court judgment was taken in error and will be reversed by the Dallas court of appeals, making it subject to bona fide dispute.
The majority of decisions analyzing this issue have found that final judgments from state courts that have not been stayed on appeal are not subject to bona fide dispute. In re AMC Investors, LLC, 406 B.R. 478, 484 (Bankr.D.Del.2009) (citing In re Norris, 1997 WL 256808, at *5 (5th Cir.1997) (per curiam), In re Euro-American Lodging Corp., 357 B.R. 700, 712; In re Amanat, 321 B.R. 30, 37 (Bankr.S.D.N.Y.2005); In re Raymark Indus., 99 B.R. 298, 300 (Bankr.E.D.Pa.1989)); see also In re Everett, 178 B.R. 132, 140 (Bankr.N.D.Ohio 1994) (); In re Smith, 123 B.R. 423, 425 (Bankr. M.D.Fla.1990) (), aff'd, 129 B.R. 262 (M.D.Fla.1991); In re Drexler, 56 B.R. 960, 967 (Bankr.S.D.N.Y.1986).
In an unpublished decision, the Fifth Circuit has held that final judgment that has not been stayed is not subject to a bona fide dispute for the purposes of section 303(b)(1) and 303(h)(1). In re Norris, 1997 WL 256808, 114 F.3d 1182 (5th Cir. 1997), cert. denied, 522 U.S. 935, 118 S.Ct. 343, 139 L.Ed.2d 266. Citing the objective test in Sims, the Fifth Circuit said that "[t]o hold otherwise would require the bankruptcy court to review the state court judgment in order to predict [the alleged debtor's] chance of success on appeal (which would be particularly troubling in that a state court judgment is at issue), and would undermine the objective standard adopted in Sims." Id.
Mr. Smith asserts that there is no per se rule that a final unstayed judgment cannot be subject to bona fide dispute, citing a Fourth Circuit decision, and saying that the bankruptcy court must therefore determine the likelihood of Mr. Smith's success on appeal. See In re Byrd, 357 F.3d 433 (4th Cir.2004) (); see also In re Graber, 319 B.R. 374, 379 (Bankr.E.D.Pa.2004). However, as discussed by the Delaware bankruptcy court in the recent AMC Investors decision, In re AMC Investors, LLC, 406 B.R. at 485 (citing Norris, 1997 WL 256808, at *5). The court in AMC Investors decision discusses the difficulty of the Fourth Circuit's approach:
The inherent difficulty and lack of necessity in engaging in such analysis is borne out by Byrd itself, as the court only made a cursory examination into the pending appeals, finding the alleged debtor presented no evidence to support his likelihood of success on appeal and, thus, "failed to raise any substantial factual or legal questions about the continued viability of those judgments." The same analysis would have been reached simply by respecting the trial court's determination of this matter on the merits and the absence of a stay pending appeal. ... Byrd renders the entry of a judgment as completely irrelevant in determining the existence of a claim. This cannot be the correct reading of the statute. As the court in Drexler correctly noted, "[o]nce...
To continue reading
Request your trial
-
In re Bos
...is "or the receiver or trustee empowered to execute this report as required by Chapter 605, Florida Statutes."71 See In re Smith , 415 B.R. 222, 233 (Bankr. N.D. Tex. 2009).72 2 Collier on Bankruptcy ¶ 101.31, at p. 101–40 (16th ed. 2015).73 It is unclear why Bos did not list Wharfside as a......
-
In re Corrline Int'l, LLC
...burden to put the debtor to the test.” In re Euro–Am. Lodging Corp., 357 B.R. 700, 714 (Bankr.S.D.N.Y.2007) ; see also In re Smith, 415 B.R. 222, 229 (Bankr.N.D.Tex.2009) (if debtor's creditor list is filed, burden shifts to the petitioning creditor); In re Sadler, No. 6–10091–FRM, 2006 Ban......
-
In re Newbury Operating LLC
...was paying anywhere close to 50% of his liabilities, so he was not generally paying his debts as they became due); In re Smith, 415 B.R. 222, 231 (Bankr. N.D. Tex. 2009) (while the debtor was paying small recurring debts, he was not paying 99 percent of his debts in the aggregate amount and......
-
Curtis v. Chapman Family Trust (In re Chapman)
...re Northstar Offshore Grp ., LLC, 616 B.R. 695, 737 (Bankr. S.D. Tex. 2020).81 ECF No. 1, Ex. 11.82 ECF Nos. 5, 16.83 In re Smith , 415 B.R. 222 (Bankr. N.D. Tex. 2009).84 ECF No. 15 (Plaintiff contends that "[s]tatutory insider status by affiliation/derivation is expressly contemplated und......