In Re: Vortex Fifhing Sys. v. Debtor Liberty Tool
| Decision Date | 04 June 2001 |
| Docket Number | No. 00-15259,00-15259 |
| Citation | 262 F.3d 985 |
| Parties | (9th Cir. 2001) IN RE: VORTEX FISHING SYSTEMS, INC., DEBTOR LIBERTY TOOL, & MANUFACTURING; VORETEX LURES LIMITED PARTNERSHIP; WES C. HIGGINS, OPINION APPELLANTS v. VORTEX FISHING SYSTEMS, INC., APPELLEE |
| Court | U.S. Court of Appeals — Ninth Circuit |
Counsel: Michael D. McGrath, Mesch, Clark & Rothschild, Tuscon, Arizona, for the creditors-appellants.
Steven M. Cox, Waterfall, Economidis, Hanshaw & Villamana, Tuscon, Arizona, for the debtor-appellee.
Appeal from the Ninth Circuit Bankruptcy Appellate Panel Ryan, Klein, and Perris, Judges, Presiding BAP No. AZ-99-01310-RyKP
Before: Harry Pregerson, Warren J. Ferguson, Michael Daly Hawkins, Circuit Judges.
OPINION
This is a case in which an ousted business partner has attempted to force an involuntary bankruptcy in order to gain a business advantage. It calls for this Court to determine the test to be used in determining whether a dispute is"bona fide" for the purposes of filing an involuntary bankruptcy petition under 11 U.S.C. §§ 303. We adopt the objective test used by the other circuits and affirm the Bankruptcy Appellate Panel's well-reasoned dismissal of the petition.
In 1990, Ray Scott and Wes Higgins signed an agreement to form Vortex Fishing Systems ("Vortex"), a company that manufactures blinking and beeping fishing lures. At the time, Scott agreed to provide capital as a minority shareholder while Higgins ran the business from Kalispell, Montana. In 1994, Scott still had not seen a profit and became more involved in the business. In what appears to have been a fairly acrimonious series of events, he flew into Kalispell, got an accountant, and became the majority shareholder in the summer of 1994. Today, Higgins maintains his fifty-five shares in the company. Scott's investment is now 7,945 shares.
By all accounts, Scott took over a company in serious debt, both to the IRS and to various creditors. Some of these debts were to current business contacts, while others were to nowdefunct companies that had originally developed the technology and equipment to make Vortex's lures. The pertinent debts are described in some detail below.
Vortex stayed in business and began to make progress on repaying its debts. In the late 1990's, Scott moved the company to Arizona. Around the same time, he was approached by Rodger Ford, a businessman interested in purchasing Vortex for his two sons. Although Scott and Ford failed to reach an agreement on terms for selling the company, Ford and Higgins subsequently met privately with each other to discuss Ford's continuing interest in Vortex.
Higgins and Ford began then exploring the possibility of filing an involuntary bankruptcy petition. Because Vortex had more than 12 creditors, at least three creditors with claims not subject to a bona fide dispute had to join the involuntary petition. 11 U.S.C. §§ 303(b). In 1998 and 1999, Higgins was assigned the claims of two of Vortex's putative creditors; he also has a claim as an agent in one of Vortex's predecessors, Vortex Lures Partnership ("VLP"). At the same time, Higgins and Ford contacted other creditors of Vortex to see who would be interested in joining a petition for involuntary bankruptcy.
The initial petition for involuntary bankruptcy, filed on January 25, 1999, included four petitioning creditors: Byron Lambert, Liberty Tool & Manufacturing, Inc. ("Liberty Tool"), Vortex Lures Ltd ("VLP"), and Viking Lures Manufacturing, Inc. ("Viking"). On February 4, 1999, Byron Lambert filed a motion to withdraw as a petitioning creditor, citing a misunderstanding of the nature of the procedure as its reason for withdrawing. The Bankruptcy Court granted this motion on February 24, 1999. On March 22, 1999, Bert and Leora Vincent, Higgins' in-laws, filed a motion to join the involuntary petition, which the Court granted. On March 24, 1999, the Bankruptcy Court conducted a hearing on the involuntary petition. On April 30, 1999 and May 3, 1999, respectively, two additional creditors, Telenational Marketing and Witchcraft Tape Products filed motions to join the involuntary petition.
On May 5, 1999, the Bankruptcy Court dismissed the involuntary petition without ruling on the recent motions to join or Vortex's opposition to these motions. The Bankruptcy Court found that the claims of Liberty Tool, VLP, Viking, and the Vincents were all subject to legal or factual dispute and that they were not bona fide creditors as required by 11 U.S.C. §§ 303(b)(1). It also found that Vortex was generally paying its debts as they came due.
On appeal, the Bankruptcy Appellate Panel ("BAP") affirmed the Bankruptcy Court's dismissal of the involuntary petition. The BAP held that Byron-Lambert's claim had been properly dismissed and that the Bankruptcy Court had not clearly erred in determining that the claims of Liberty Tool, Vortex Lures, Viking, and the Vincents were subject to bona fide disputes. Regarding the latter petitions to join, the BAP ruled that Witchcraft Tape Products was a proper petitioning creditor, but held that any error regarding the Bankruptcy Court's failure to consider Telenational Marketing's motion for joinder was harmless because on May 6, 1999 Telenational filed a declaration stating that "Telenational Marketing has not joined in any petition for involuntary bankruptcy against Vortex Fishing Systems, Inc." (Emphasis in original).
The BAP also held that Bankruptcy Rule §§ 1003(b) did not require the Bankruptcy Court to give notice to Vortex's other creditors and upheld the court's determination that Vortex was generally paying its debts as they came due.
This timely appeal followed.1
Because appeals from the BAP are subject to de novo review, this Court independently reviews the Bankruptcy Court's decision. In re Mitchell, 209 F.3d 1111, 1115 (9th Cir. 2000). We review conclusions of law de novo and conclusions of fact for clear error. In re Chang , 163 F.3d 1138, 1140 (9th Cir. 1998). A bankruptcy court's exercise of discretion over a creditor's voluntary withdrawal of claims is reviewed for abuse of discretion. In re Lowenschuss, 67 F.3d 1394, 1399 (9th Cir. 1995).
We have not previously had occasion to decide the appropriate standard of review for determinations of whether there is a "bona fide dispute" for the purposes of 11 U.S.C. §§ 303. We agree with the other circuits that have held that this is essentially a factual inquiry and adopt a clearly erroneous standard of review. See In re Sims, 994 F.2d 210, 221 (5th Cir. 1993); In re Rimell, 946 F.2d 1363, 1365 (8th Cir. 1991). A bankruptcy court is not asked to evaluate the potential outcome of a dispute, but merely to determine whether there are facts that give rise to a legitimate disagreement over whether money is owed, or, in certain cases, how much.
Before we can review the substance of the Bankruptcy Court's decision, we must consider the standard that Court used to find that there was an insufficient number of petitioning creditors. Section 303 requires that creditors filing a petition for involuntary bankruptcy against a debtor have claims that are not subject to a bona fide dispute. 11 U.S.C. §§ 303(b)(1). Where there are twelve or more creditors, as here, three or more creditors without a bona fide dispute must file a petition, and the claims must aggregate at least $10,775. Id.; 11 U.S.C. §§ 104.
We have previously held that the burden is on the petitioning creditors to show that no bona fide dispute exists. In re Rubin, 769 F.2d 611, 615 (9th Cir. 1985). This Circuit has not defined a "bona fide dispute," however, nor is it defined by statute. In the instant appeal, the BAP adopted a test set out by the Seventh Circuit that requires the bankruptcy court to "determine whether there is an objective basis for either a factual or a legal dispute as to the validity of the debt." In re Busick, 831 F.2d 745, 750 (7th Cir. 1987).
Neither party contests this definition, and all other circuit courts that have considered the question have adopted some variation of Busick's "objective test, " first set out in In re Lough, 57 B.R. 993, 996-97 (E.D. Mich. 1986) (). See B.D.W. Assoc. v. Busy Beaver Bldg. Ctrs., Inc., 865 F.2d 65, 66-67 (3d Cir. 1989); Sims, 994 F.2d at 221 (5th Cir.); Rimell, 946 F.2d at 1365 (8th Cir.); Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1544 (10th Cir. 1988). See also In re Eastown Auto Co., 215 B.R. 960, 965 (6th Cir. BAP 1998).
The alternative interpretation, adopted by some bankruptcy courts but largely discarded now, would be to apply a subjective standard and ask whether the claims were made in good faith. See In re Johnston Hawks, Ltd., 49 B.R. 823 (Bankr. D. Haw. 1985). Neither party advocates for this standard, and we see no reason to complicate our analysis with a subjective inquiry. As we have previously noted of the debate,"[t]he ambiguity demonstrates why we should not use Latin where English will do." In re Seko Investment, Inc ., 156 F.3d 1005, 1007, n.1 (9th Cir. 1998). We join our sister circuits in adopting the objective test for disputes regarding liability or amount.2
We now turn to the claims of the Petitioning Creditors.
Byron-Lambert was the only initial petitioning creditor whose claim Vortex did not dispute. A week after the involuntary petition was filed, Byron-Lambert wrote to Higgins' attorney, and asked to withdraw its name as a petitioning creditor. Its manager wrote, "We find that the facts are not exactly as represented in your letter and we therefore ask that our name be...
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