In re Zenga

• Decision Date: 17 January 2017
• Docket Number: Nos. 16–8022/8023,s. 16–8022/8023
• Citation: 562 B.R. 341
• Parties: IN RE: Vincent ZENGA; Robin Zenga, Debtors.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

562 B.R. 341

IN RE: Vincent ZENGA; Robin Zenga, Debtors.

Nos. 16–8022/8023

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued: November 9, 2016

Decided and Filed: January 17, 2017

ARGUED: Steven L. Lefkovitz, LEFKOVITZ & LEFKOVITZ, Nashville, Tennessee, for Debtors. Gene L. Humphreys, BASS, BERRY & SIMS PLC, Nashville, Tennessee, for Appellee. ON BRIEF: Steven L. Lefkovitz, LEFKOVITZ & LEFKOVITZ, Nashville, Tennessee, for Debtors. Gene L. Humphreys, BASS, BERRY & SIMS PLC, Nashville, Tennessee, for Appellee.

Before: HUMPHREY, OPPERMAN, and PRESTON, Bankruptcy Appellate Panel Judges.

OPINION

GUY R. HUMPHREY, Bankruptcy Appellate Panel Judge.

Creditor Ivan Qi ("Qi") filed involuntary petitions against husband and wife, Vincent and Robin Zenga (the "Zengas").¹ The Zengas filed a motion to dismiss the involuntary petition in each of their respective cases, arguing that 11 U.S.C. § 303(b)(1) required a minimum of three petitioning creditors to institute an involuntary bankruptcy against them because they each had 12 or more creditors. At the hearing on the motions, Qi argued that the Zengas were estopped from asserting that they had more than 11 creditors because in response to a post-judgment interrogatory asking them to identify their other creditors, they listed ten creditors. The bankruptcy court agreed with Qi, denied the Zengas' motions to dismiss the petitions, and entered orders for relief against them. The Zengas obtained stays of the orders for relief pending disposition of these appeals. For the reasons that follow, the Panel REVERSES the bankruptcy court's decision and vacates the orders for relief and REMANDS the cases for further proceedings consistent with this opinion.

ISSUES ON APPEAL

The Zengas raised the following issues on appeal:

1. Whether the bankruptcy court erred in granting orders for relief under Chapter 7 of the Bankruptcy Code against the Zengas?

2. Whether the bankruptcy court applied the doctrine of judicial estoppel or equitable estoppel in determining whether the number of petitioning creditors was correct under the statute? And whether the bankruptcy court erred in application of either of those doctrines?

3. Whether the requirement under 11 U.S.C. § 303(b) that when a person has 12 or more creditors there must be three petitioning creditors to commence an involuntary petition is jurisdictional in nature and, therefore, cannot be waived or modified on equitable grounds?

4. Whether a court may preclude a debtor from introducing evidence as to the 12 creditor threshold of 11 U.S.C. § 303(b) through an equitable doctrine, such as equitable estoppel, following the Supreme Court's decision in Law v. Siegel , ––– U.S. ––––, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014) ?

JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Middle District of Tennessee has authorized appeals to the Panel, and a final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, a final order "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States , 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citation omitted). An order for relief in an involuntary case is a final order. Mktg. & Creative Sols., Inc. v. Scripps Howard Broadcasting Co . (In re Mktg. & Creative Sols., Inc .), 338 B.R. 300, 302 (6th Cir. BAP 2006). As this Bankruptcy Appellate Panel has previously noted:

In granting the relief sought in an involuntary petition, the bankruptcy court must consider the factual as well as legal issues. Findings of fact are reviewed under the clearly erroneous standard. Fed. R. Bankr. P. 8013 ; Fed R. Civ. P. 52. "A finding of fact is clearly erroneous ‘when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.’ " United States v. Mathews (In re Mathews), 209 B.R. 218, 219 (6th Cir. BAP 1997) (quoting Anderson v. City of Bessemer City , 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985) ); see United States v. United States Gypsum Co. , 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746 (1948). Conclusions of law are reviewed de novo. Corzin v. Fordu (In re Fordu) , 209 B.R. 854, 857 (6th Cir. BAP 1997) ; Belfance v. Bushey (In re Bushey), 210 B.R. 95, 98 (6th Cir. BAP 1997). Furthermore, a bankruptcy court's interpretation of the Bankruptcy Code is reviewed de novo. In re Troutman Enters. , 253 B.R. [8] at 10 [ (6th Cir. BAP 2000) ]. De novo review means that the issue is decided as if it had not been heard before. Mapother & Mapother, P.S.C. v. Cooper (In re Downs) , 103 F.3d 472 (6th Cir.1996). No deference is given to the trial court's conclusions of law. In re Eastown Auto Co. , 215 B.R. 960 [ (6th Cir. BAP 1998) ] (citing Razavi v. Comm'r , 74 F.3d 125 (6th Cir.1996) ).

Id.

The standard of review regarding the application of estoppel has been called into question recently by the Sixth Circuit Court of Appeals.

In Lewis v. Weyerhaeuser , 141 Fed.Appx. 420, 423–24 (6th Cir. 2005), we questioned the continuing viability of our de novo standard for judicial estoppel, noting the Supreme Court's characterization of the doctrine as an equitable remedy "invoked by the court at its discretion," New Hampshire v. Maine , 532 U.S. 742, 750, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (citation omitted), and recognizing that the "majority of federal courts" review for abuse of discretion.

Kimberlin v. Dollar Gen. Corp ., 520 Fed.Appx. 312, 313 n.1 (6th Cir. 2013). Other circuits have held that the standard of review for equitable estoppel is abuse of discretion. See Radio Sys. Corp. v. Lalor , 709 F.3d 1124, 1130 (Fed. Cir. 2013) ; Bah. Sales Assoc., LLC v. Byers , 701 F.3d 1335, 1340 (11th Cir. 2012). The Sixth Circuit B.A.P. has previously held that "[e]quitable estoppel involves mixed questions of law and fact." Rossi v. Westenhoefer (In re Rossi) , No. 11–8048, 2012 WL 913732, at *2 (6th Cir. BAP Mar. 20, 2012) (citing Noonan v. Sec'y of Health & Human Servs . (In re Ludlow Hosp. Soc'y, Inc .), 124 F.3d 22, 25 n.6 (1st Cir. 1997) ). However, the result of each of the Zenga appeals is the same whether the bankruptcy court's application of estoppel is reviewed de novo, as a mixed question of law and fact, or for an abuse of discretion because, by definition, it is an abuse of discretion to apply an erroneous legal standard. The bankruptcy court's use of estoppel was erroneous because Qi failed to establish the elements of either judicial or equitable estoppel.

FACTS

Qi obtained judgment against the Zengas for $2,500,000 in state court and filed separate involuntary chapter 7 bankruptcy petitions against each of them. The Zengas filed motions to dismiss the involuntary petitions, asserting that because they have 12 or more creditors, the involuntary petitions required at least three petitioning creditors. The Zengas also assert that the cases should be dismissed because the cases are not in the best interest of creditors.

The bankruptcy court held a hearing on the motions to dismiss at which Qi argued that the Zengas were estopped from presenting evidence that they had more than 11 creditors due to their responses to post-judgment sworn interrogatories which were previously served in the state court proceedings. The bankruptcy court agreed with Qi, denied the motions to dismiss, and entered orders for relief against them. The Zengas filed separate appeals.

DISCUSSION

Bankruptcy Code § 303 provides for the filing of involuntary bankruptcy petitions, stating in part:

(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title—

(1) by three or more entities ...

(2) if there are fewer than 12 such holders ..., by one or more of such holders that hold in the aggregate at least $ 15,775 of such claims;....

11 U.S.C. § 303(b).

In this case, the involuntary petitions were filed by Qi alone after he relied on the answers to the post-judgment interrogatory responses provided by the Zengas which described ten creditors in addition to Qi—one creditor under the 12 creditor threshold requiring three or more petitioning creditors. In addition to the original responses to the interrogatories, prior to filing the bankruptcy petitions, Qi also requested the Zengas to supplement their responses. The Zengas failed to do so. Based upon these facts, the bankruptcy court determined that the Zengas were estopped from establishing in the bankruptcy court that they had more than 11 creditors. The Zengas contest that determination, asserting that: the numerical threshold of § 303(b)(1) is jurisdictional in nature and, therefore, cannot be overridden through use of an equitable doctrine; the Supreme Court's decision in Law v. Siegel , –––U.S. ––––, 134 S.Ct. 1188, 1194–95, 188 L.Ed.2d 146 (2014), precludes the use of equitable doctrines such as estoppel in the bankruptcy courts; the bankruptcy cases should be dismissed because they are not in the best interest of their creditors; and the bankruptcy court erroneously applied the doctrines of judicial and equitable estoppel.

I. The Number of Petitioning Creditors is Not Jurisdictional

The Zengas argue that the number of petitioning creditors required to file an involuntary petition is jurisdictional and, therefore, equitable doctrines such as estoppel may not be utilized to supplant the statutory requirement of three petitioning creditors. Courts that have examined this issue following the Supreme Court's decision in Arbaugh v. Y & H Corp ., 546 U.S. 500, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006), have determined that the threshold is not jurisdictional. The Panel agrees with the post–Arbaugh decisions which hold that the threshold requirement is not...