R. Eric Peterson Const. Co., Inc., In re, 90-4122

• Decision Date: 13 December 1991
• Docket Number: No. 90-4122,90-4122
• Citation: 951 F.2d 1175
• Parties: 25 Collier Bankr.Cas.2d 1585, 22 Bankr.Ct.Dec. 680, Bankr. L. Rep. P 74,369 In re R. ERIC PETERSON CONSTRUCTION COMPANY, INC., Debtor. R. ERIC PETERSON CONSTRUCTION COMPANY, INC., Appellant, v. QUINTEK, INC., et al., Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1175

951 F.2d 1175

25 Collier Bankr.Cas.2d 1585, 22 Bankr.Ct.Dec. 680,

Bankr. L. Rep. P 74,369

In re R. ERIC PETERSON CONSTRUCTION COMPANY, INC., Debtor R. ERIC PETERSON CONSTRUCTION COMPANY, INC., Appellant, v. QUINTEK, INC., et al., Appellees.

No. 90-4122.

United States Court of Appeals Tenth Circuit.

Dec. 13, 1991.

Duane H. Gillman (Janet A. Goldstein with him on the brief), of McDowell & Gillman, P.C., Salt Lake City, Utah, for plaintiff-appellant.

Jeffrey Weston Shields (David R. Olsen with him on the brief), of Suitter Axland Armstrong & Hanson, Salt Lake City, Utah, for defendants-appellees.

Before BALDOCK, Circuit Judge, McWILLIAMS, Senior Circuit Judge, and EBEL, Circuit Judge.

EBEL, Circuit Judge.

In this appeal, we address whether a debtor met the prerequisites to maintain a claim of bad faith against petitioning creditors pursuant to section 303(i) of the Bankruptcy Code, 11 U.S.C. § 303(i), after the underlying involuntary bankruptcy petition was dismissed without objection by the debtor. ¹ This issue turns on whether the debtor consented to dismissal of the bankruptcy petition when it did not object to the creditors' voluntary dismissal of the bankruptcy petition, although at the same time specifically reserving a claim against the creditors under section 303(i) for the alleged bad faith filing of the bankruptcy petition. We hold that the debtor did not consent to the dismissal within the meaning of 11 U.S.C. § 303(i) and that the debtor therefore met the prerequisites to maintain the claim for damages against the petitioning creditors. ²

I. Facts

In September 1986, Quintek, Inc. ("Quintek"), along with several other subcontractors, petitioned the United States Bankruptcy Court for the District of Utah to place R. Eric Peterson Construction Company, Inc. ("Peterson") in involuntary bankruptcy pursuant to 11 U.S.C. § 303. Quintek's counsel sent letters to all subcontractors with whom Peterson did business informing them of the involuntary petition. That publicity, in addition to the filing, had a disastrous effect on Peterson's financial health.

Peterson opposed the bankruptcy petition, alleging that it had paid its bills in timely fashion and that the creditors' claims were the subject of bona fide disputes, making the petition nonmeritorious pursuant to 11 U.S.C. § 303(b)(1). Peterson further alleged that the petition itself had been filed without adequate investigation of the company's financial status.

In October 1987, the petitioning creditors moved to dismiss the involuntary petition pursuant to 11 U.S.C. § 303(j)(1). ³ At a hearing on the motion, the bankruptcy court asked if Peterson objected to dismissal. The following colloquy then occurred:

MR. BOONE [Counsel for Peterson]: I would like to indicate a reservation. The debtor does not object to the petition being dismissed, but it is the debtor's feeling that this petition was filed in bad faith and it wishes to assert a claim under 303( [i]. And we would like to reserve the right, if we would go along with the dismissal, subject to reserving in the Court's jurisdiction and the right to have the bad faith claim adjudicated under 303( [i].

MR. GOODMAN [Counsel for Quintek]: There are no objections to that, your Honor.

THE COURT: Case will be dismissed subject to the Court reserving jurisdiction to hear appropriate proceedings under 303( [i], which motion the Court will require to be brought, if at all, within 60 days.

Record, Vol. III, at 4-5. The written order of dismissal recited the following At the hearing, the Court considered the recommendations and arguments of counsel, including debtor's position that it did not oppose the Motion. The Court also considered debtor's request that the Court retain jurisdiction to consider debtor's claims under Bankruptcy Code § 303(i)(2).... Accordingly, IT IS HEREBY ORDERED that the involuntary petition filed in the proceeding be and hereby is dismissed. IT IS FURTHER ORDERED that the Court retains jurisdiction to consider any claim debtor may wish to assert under Bankruptcy Code § 303(i)(2).

Record, Vol. II, Doc. 53, at 1-2. Peterson proceeded to file its complaint alleging bad faith against the petitioning creditors pursuant to 11 U.S.C. § 303(i).

In November 1987, in the context of considering a request by Peterson for examination of the creditors pursuant to Bankruptcy Rule 2004, one of the creditors argued that Peterson had consented to dismissal of the involuntary petition and that the bankruptcy court therefore had been stripped of jurisdiction to hear the bad faith claim. ⁴ The bankruptcy court rejected that argument, finding that "the debtor did not consent but simply did not contest the dismissal of the case, at least it did not consent within the meaning of Section 303(i)." Record, Vol. IV, at 22. Ultimately, the creditors moved for summary judgment, alleging that no evidence of bad faith existed that would entitle Peterson to relief. In October 1989, the bankruptcy court granted this motion.

Peterson appealed the bankruptcy court's summary judgment to the United States District Court for the District of Utah, alleging that genuine issues of material fact remained on the issue of bad faith. In July 1990, after submission of briefs on the issue of whether Peterson had presented sufficient evidence of bad faith to avoid summary judgment, but before oral arguments, the district court affirmed the bankruptcy court's summary judgment order on the grounds, raised sua sponte, that the bankruptcy court had no jurisdiction to hear the claim. The district court found that Peterson had consented to dismissal of the bankruptcy petition and that Peterson had therefore failed to comply with the jurisdictional prerequisites to maintain an action under 11 U.S.C. § 303(i). The basis for this conclusion was the written order of dismissal of the involuntary petition, which recited that Peterson "did not oppose" the motion for dismissal. Because neither party had raised the issue of consent on appeal, the district court did not have the transcript of the bankruptcy court's dismissal hearing when it made its sua sponte jurisdiction ruling.

Peterson filed a timely appeal from the district court's order. Peterson argues that it did not consent to dismissal of the petition and that it had no opportunity to argue its lack of consent to the district court. We have jurisdiction to hear the appeal pursuant to 28 U.S.C. § 158(d).

II. Standard of Review

We must construe the meaning of the word consent in section 303(i), and we must determine whether Peterson's undisputed conduct constituted consent as a matter of law. We consider these issues de novo. United States v. Morgan, 922 F.2d 1495, 1496 (10th Cir.), cert. denied, --- U.S. ----, 111 S.Ct. 2803, 115 L.Ed.2d 976 (1991); In re Ruti-Sweetwater, Inc., 836 F.2d 1263, 1266 (10th Cir.1988).

III. Discussion

Section 303 of the Bankruptcy Code, 11 U.S.C. § 303, governs petitions for involuntary bankruptcy. When a bankruptcy court dismisses a petition for involuntary bankruptcy, the debtor may, under certain circumstances, recover costs and, in the case of a bad faith filing, it may also recover damages from the petitioning creditors. Section 303(i) provides in relevant part: ⁵If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment--

(1) against the petitioners and in favor of the debtor for--

(A) costs;

(B) a reasonable attorney's fee; or

. . . . .

(2) against any petitioner that filed the petition in bad faith, for--

(A) any damages proximately caused by such filing; or

(B) punitive damages.

(emphasis added). Thus, the text of the statute makes a damage award contingent on three prerequisites. First, the court must have dismissed the petition. Second, the dismissal must be other than on consent of all petitioners and the debtor. Third, the debtor must not have waived its right to recovery under the statute. In the instant case, no one disputes that the bankruptcy judge dismissed the petition or that Peterson did not waive its rights under the section. The only question remaining is whether Peterson consented to dismissal.

We are aware of only two cases that have addressed the meaning of consent in this statute. See In re Int'l Mobile Advertising Corp., 117 B.R. 154, 157 (Bankr.E.D.Pa.1990), aff'd, No. 90-6349, 1991 WL 156588, 1991 U.S. Dist. LEXIS 11294 (E.D.Pa. Aug. 13, 1991); In re Kelton Motors, Inc., 121 B.R. 166, 186-87 (Bankr.D.Vt.1990).

In International Mobile Advertising, the debtor and petitioning creditor filed a joint motion to dismiss. The Order for Dismissal noted explicitly that "the Debtor has not waived its rights to damages caused by the filing of the within proceeding." 117 B.R. at 155. The debtor then sought damages pursuant to section 303(i). Even though it was clear that the debtor had not waived its claim, the bankruptcy court held that the debtor could not recover damages because both the debtor and the petitioning creditor had consented to dismissal. The court stated, "The parties cannot, by agreement, empower a federal court to hear a matter which it lacks statutory jurisdiction to consider." Id. at 157. On appeal, the district court broadened the bankruptcy court's holding by ruling that the Senate Judiciary Committee Report accompanying the bill that enacted section 303 "together with the express language in the statute clearly indicate that Congress intended that the remedy provided for in Section

303 be reserved for contested petitions and not in situations where the petitions are, by mutual consent, voluntarily dismissed." International Mobile Advertising, 1991 WL 156588, at * 1, 1991 U.S. Dist. LEXIS 11294, at * 3, n.1 (emphasis added). Kelton Motors reached the opposite result. In that case, the debtor filed for Chapter 11 protection...