Lubow Machine v. Bayshore Wire Products

• Decision Date: 01 August 1999
• Docket Number: Docket No. 99-5016
• Citation: 209 F.3d 100
• Parties: (2nd Cir. 2000) In Re: Bayshore Wire Products Corp., Debtor. Lubow Machine Co., Inc. and Marksmen Manufacturing, Inc., Creditors-Appellants, v. Bayshore Wire Products Corp., Appellee
• Court: U.S. Court of Appeals — Second Circuit

Page 100

209 F.3d 100 (2nd Cir. 2000)

In Re: Bayshore Wire Products Corp., Debtor.

Lubow Machine Co., Inc. and Marksmen Manufacturing, Inc., Creditors-Appellants, v. Bayshore Wire Products Corp., Appellee.

Docket No. 99-5016

August Term, 1999

UNITED STATES COURT OF APPEALS For the Second Circuit

Argued: November 8, 1999

Decided: March 21, 2000

Appeal from a judgment of the United States District Court for the Eastern District of New York (Joanna Seybert, Judge), affirming as modified the judgment of the Bankruptcy Court (Melanie L. Cyganowski, Bankruptcy Judge), which dismissed the petition for Chapter 7 relief and awarded costs, attorney's fees, and damages under 11 U.S.C. 303(i)(1) and (2). We affirm the District Court insofar as it affirmed the dismissal of the petition and the award of costs and attorney's fees pursuant to 303(i)(1), but we find no basis to support the Bankruptcy Court's finding that the petition was filed in "bad faith" and therefore reverse the judgment to the extent that it affirmed the award of damages pursuant to 303(i)(2).

Affirmed in part and reversed in part.

Bruce H. Kaplan, Hamburger, Maxson & Yaffe, LLP, Melville, NY (Richard Hamburger, of counsel), for Creditors-Appellants.

Kevin G. Snover, North Babylon, NY, for Appellee.

Before: Winter, Chief Judge, Cardamone, and Straub, Circuit Judges.

Straub, Circuit Judge:

Creditors-Appellants Lubow Machine Co., Inc. ("Lubow Machine") and Marksmen Manufacturing, Inc. ("Marksmen") appeal from a judgment entered on February 3, 1999 (Joanna Seybert, Judge), which affirmed as modified a judgment of the United States Bankruptcy Court for the Eastern District of New York (Melanie L. Cyganowski, Bankruptcy Judge) dismissing their petition for Chapter 7 relief against Bayshore Wire Products Corporation ("Bayshore") and awarding costs, attorney's fees, and damages under 11 U.S.C. 303(i)(1) and (2). For the reasons that follow, we affirm the judgment of the District Court insofar as it affirmed the dismissal of the petition and the award of costs and attorney's fees pursuant to 303(i)(1), but we reverse the judgment to the extent that it affirmed the award of damages pursuant to 303(i)(2) because the Bankruptcy Court clearly erred in finding that the petition was filed in "bad faith."

BACKGROUND

Bayshore was founded in 1991 by Socratis Stavropoulos and Myron Lubow, the President of Lubow Machine. Stavropoulos served as Bayshore's president from the company's inception. On September 22, 1995, Lubow Machine, Marksmen, and Roger McLean filed an involuntary petition for relief under Chapter 7 against Bayshore, asserting claims of $144,300.00, $520.00, and $2,528.55, respectively. On the same date, Lubow Machine and McLean moved by order to show cause for the appointment of an interim trustee to operate Bayshore and manage its property. After a hearing, the Bankruptcy Court granted the creditors' application in its entirety.

Bayshore subsequently sought reconsideration of that decision and moved to dismiss the petition for lack of subject matter jurisdiction pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure on the ground that there were less than three petitioning creditors whose claims were not subject to a bona fide dispute. Before the Bankruptcy Court had ruled on these motions, three unsecured creditors CNA Insurance Company, Gary S. Shaw, and Robert Deligdish joined the involuntary petition in accordance with 11 U.S.C. 303(c), asserting claims of $341.53, $300.00, and $320.44, respectively. The Bankruptcy Court subsequently denied Bayshore's motions for reconsideration and dismissal. It reached this decision after noting, solely on the basis of the papers before it, that (1) the claims of Marksmen, Shaw, and Deligdish were subject to a bona fide dispute because the debts had either been paid or were unknown to Bayshore, (2) the claims of McLean and CNA Insurance Company were undisputed, and (3) Lubow Machine appeared to be a petitioning creditor whose claim was not subject to a bona fide dispute.

Trial was held in December 1995. On July 30, 1996, the Bankruptcy Court issued a Decision and Order, which was subsequently amended on August 19, 1996 and September 24, 1996. In the amended Decision and Order, the Bankruptcy Court relied upon its earlier finding that the claims of Marksmen, Shaw, and Deligdish were subject to a bona fide dispute. Based on the testimonial and documentary evidence presented at trial, the Bankruptcy Court concluded contrary to its earlier tentative conclusion that Stavropoulos rather than Bayshore was liable for the primary debt allegedly due to Lubow Machine and that a bona fide dispute existed as to all other debts allegedly owed by Bayshore to Lubow Machine. The Bankruptcy Court then ruled that the involuntary Chapter 7 bankruptcy proceeding had been improperly commenced under 11 U.S.C. 303(b)(1) because there were only two petitioning creditors whose claims were not contingent or subject to a bona fide dispute. The Bankruptcy Court held, in the alternative, that (1) pursuant to 11 U.S.C. 303(h)(1), relief was inappropriate because the creditors had failed to show that Bayshore was generally not paying its debts as they became due, and (2) pursuant to 11 U.S.C. 305(a)(1), the interests of the creditors and the alleged debtor were better served by dismissal of the case.

The Bankruptcy Court also ruled that Bayshore was entitled to an award of costs and reasonable attorney's fees in accordance with 303(i)(1), to be paid by all of the petitioning creditors. The Bankruptcy Court further concluded that Lubow Machine and McLean filed the involuntary bankruptcy petition in bad faith and therefore held them liable for any damages proximately caused by such filing and punitive damages pursuant to 303(i)(2).

On January 9, 1997, the Bankruptcy Court issued a judgment ordering Lubow Machine, Marksmen, and McLean to pay Bayshore $26,735.00 in attorney's fees and $23,087.27 in costs and damages, and ordering Lubow Machine and McLean to pay an additional $10,000.00 in punitive damages. McLean and Bayshore subsequently entered into a stipulation of settlement that was endorsed by the Bankruptcy Court and approved by the District Court.

On appeal, the District Court affirmed the Bankruptcy Court's dismissal of the case pursuant to 303(b)(1) and 303(h)(1); modified the award of costs and damages against Marksmen to make clear that it was made pursuant to 303(i)(1) and not 303(i)(2); and reversed the Bankruptcy Court's dismissal of the case under 305(a).

This timely appeal from the judgment of the District Court ensued.

DISCUSSION

On appeal, the creditors argue that the Bankruptcy Court erred in dismissing the petition because (1) the petition was brought by three or more creditors whose claims meet the requirements of 303(b)(1) and (2) Bayshore was not generally paying its debts as they became due, rendering relief appropriate under 303(h)(1). The creditors further contend that the Bankruptcy Court abused its discretion in awarding costs, attorney's fees, and damages against them pursuant to 303(i)(1) and (2). We address these arguments in turn.¹ Like the District Court, we review the Bankruptcy Court's findings of fact for clear error, see Casse v. Key Bank Nat'l Ass'n (In re Casse), 198 F.3d 327, 332 (2d Cir. 1999), its conclusions of law de novo, see id., and its decision to award costs, attorney's fees, and damages for abuse of discretion, see Susman v. Schmid (In re Reid), 854 F.2d 156, 159 (7th Cir. 1988).

I. Dismissal of the Petition

When the petition was filed in 1995, 303(b)(1) permitted an involuntary case to be commenced "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 $10,000 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims." 11 U.S.C. 303(b)(1).² The Bankruptcy Court dismissed the creditors' petition because it concluded that only McLean and CNA Insurance Company were "holder[s] of a claim . . . that is not contingent as to liability or the subject of a bona fide dispute" and therefore that the requirements of 303(b)(1) had not been met. On appeal, the creditors argue that Lubow Machine has a claim that is neither contingent nor the subject of a bona fide dispute. They assert that Bayshore owes Lubow Machine over $143,000 including $122,300 for the purchase of a machine designed to manufacture wire gridwork and shelving, $14,500 for repairs done to the machine, $4,800 for Bayshore's monthly rent for July 1992, and $2,700 for the cost of a replacement air compressor.

With regard to the alleged debt for the purchase of the machine, it is difficult to reconcile the creditors' position with the language of Bayshore's shareholders' agreement. The agreement provides in pertinent part:

The machine was purchased by Socratis Stavropoulos in June of 1991 from Lubow Machine Co. Inc. with the understanding that Myron Lubow would get half the shares for his idea, invention and direction already given to the corporation as of June 20, 1992.

. . . Balance of money owed by Socratis Stavropoulos to Lubow Machine Co. Inc. will be paid out after the business makes enough money and a formula has to be created.

The agreement was signed by Lubow once and by Stavropoulos twice once in his personal capacity and once in his capacity as the President of Bayshore. At trial, there was also evidence that Stavropoulos had repaid Lubow Machine at least $77,700 of the debt for the machine in checks issued from his personal account or the bank account of an entity controlled by him.³ In light of the shareholders' agreement, Stavropoulos's signature in his personal capacity, and the history of payments by Stavropoulos, we agree with the Bankruptcy Court that any debt for the purchase of the...