In re Vortex Fishing Systems, Inc.

• Court: U.S. Court of Appeals — Ninth Circuit
• Writing for the Court: FERGUSON, Circuit Judge
• Citation: In re Vortex Fishing Systems, Inc., 277 F.3d 1057 (9th Cir. 2001)
• Docket Number: 00-15259
• Decision Date: 28 August 2001
• Parties: In re: VORTEX FISHING SYSTEMS, INC., Debtor. Liberty Tool, & Manufacturing; Vortex Lures Limited Partnership; Wes C. Higgins, Appellants, v. Vortex Fishing Systems, Inc., Appellee.

277 F.3d 1057

In re: VORTEX FISHING SYSTEMS, INC., Debtor Liberty Tool, & Manufacturing; Vortex Lures Limited Partnership; Wes C. Higgins, Appellants, v. Vortex Fishing Systems, Inc., Appellee.

No. 00-15259

United States Court of Appeals, Ninth Circuit

Submitted June 4, 2001^*.

Filed August 28, 2001.

Amended January 17, 2002

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.

Before: PREGERSON, FERGUSON, HAWKINS, Circuit Judges.

Submitted June 4, 2001^* — San Francisco, California.

ORDER AND AMENDED OPINION

FERGUSON, Circuit Judge:

ORDER

The court's mandate, issued on September 20, 2001, is recalled.

The Opinion cited at 262 F.3d 985 (9th Cir.2001), is amended as follows:

On page 996, delete the text from section III.B. and substitute the following in its place:

Pursuant to court order, on March 22, 1999, Vortex submitted a list of its creditors to the Bankruptcy Court. It was agreed that this list could not be released without a court order. Appellants never moved for the list to be released. Instead, they argue that the Bankruptcy Court was required to notify each of the creditors on the list of the pending involuntary petition. They base their claim on Federal Rule of Bankruptcy Procedure 1003(b), which reads:

(b) Joinder of petitioners after filing. If the answer to an involuntary petition filed by fewer than three creditors avers the existence of 12 or more creditors, the debtor shall file with the answer a list of all creditors with their addresses, a brief statement of the nature of their claims, and the amounts thereof. If it appears that there are 12 or more creditors as provided in § 303(b) of the Code, the court shall afford a reasonable opportunity for other creditors to join in the petition before a hearing is held thereon.

FED. R. BANK. P. 1003(b).

Rule 1003(b) implements a portion of the § 303(c) joinder provision. After an involuntary petition is filed but before the case is dismissed or relief is ordered, any other creditor with a noncontingent, unsecured claim may join in the petition "with the same effect as if such joining creditor were a petitioning creditor" in the original petition. 11 U.S.C. § 303(c); In re Kidwell, 158 B.R. 203, 210-13 (Bankr.E.D.Cal.1993) (intervention is "of right" per Fed.R.Civ.P. 24(a)(1)); cf., Canute S.S. Co. v. Pittsburgh & WV Coal Co., 263 U.S. 244, 248-49, 44 S.Ct. 67, 68 L.Ed. 287 (1923) (Bankr.Act § 59f).

Any such joinder occurs in the context of expeditious litigation mandated by Federal Rule of Bankruptcy Procedure 1013(a): "[t]he court shall determine the issues of a contested [involuntary] petition at the earliest practicable time and forthwith" enter an appropriate dispositive order. FED. R. BANKR. P. 1013(a); Kidwell, 158 B.R. at 212. Similarly, the rules call for simplified litigation procedure consistent with expedition. E.g., FED. R. BANKR. P. 1011.

Rule 1003(b) requires that the Bankruptcy Court pause before hearing on the merits of an involuntary petition in only one circumstance. It must assure that other creditors have a "reasonable opportunity" to exercise their § 303(c) statutory power to join as petitioners when the alleged debtor's answer to the petition filed by fewer than three petitioners asserts that the petition fails the § 303(b)(1) three-petitioner requirement for debtors with twelve or more creditors. Kidwell, 158 B.R. at 209; In re Iowa Coal Min. Co., Inc., 242 B.R. 661, 668 (Bankr.S.D.Iowa 1999); Elsub, 70 B.R. at 799-800. The rule, which functions to provide an opportunity to moot a defense of insufficiency in the number of petitioners, is needed because all creditors do not necessarily receive notice of an involuntary case until there is an order for relief adjudicating the merits of the petition in favor of the petitioning creditors. FED. R. BANKR. P.2002(f)(1).

If there are three or more petitioners, then the rules do not require a "reasonable opportunity" to join and leave to judicial discretion the question of how much opportunity to afford other creditors to exercise their § 303(c) joinder right.

Both the "reasonableness" of the opportunity to join required by Rule 1003(b) in cases with one or two petitioners and the exercise of discretion over the opportunity to join in three-petitioner cases is measured in the context of the Rule 1013(a) mandate that the court resolve the merits of the involuntary petition "at the earliest practicable time."

There were four petitioners in this instance. Hence, the Bankruptcy Court had discretion over the notice to be afforded to other creditors before hearing the involuntary petition on the merits.

We cannot say, in the face of Rule 1013(a) and of the omission of the appellants to ask that the creditor list be released, that the Bankruptcy Court abused its discretion when it proceeded to determine the merits of the contested involuntary petition — i.e. whether Vortex was generally paying its debts as they came due — without requiring specific notification of other creditors.

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.

I.

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 now-defunct 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...