Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: March 18, 2009
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. LA 07-20764 SB. Honorable Samuel L. Bufford, Bankruptcy Judge, Presiding.
Before: HOLLOWELL, MONTALI and MARKELL, Bankruptcy Judges.
MEMORANDUM
C& C Jewelry Mfg., Inc. manufactures and sells jewelry (" C& C California"). It bought diamonds and other materials from four vendors referred to as the Laxmi Group. The Laxmi Group filed a chapter 7 involuntary bankruptcy petition against C& C California, alleging C& C California owed the Laxmi Group undisputed debts and was not paying its debts as they became due. The bankruptcy court granted summary judgment in favor of C& C California and against the Laxmi Group, on the basis that there was no genuine issue of material fact as to whether the debts to the Laxmi Group were in dispute as to liability or amount, which disqualified the members of the Laxmi Group as petitioning creditors under § 303(b).
Unless otherwise indicated, all chapter, " Code, " section, and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532 and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
The bankruptcy court made a tentative ruling in which it held C& C California's motion for summary judgment should be granted because the petitioning creditors did not meet their burden of demonstrating their claims were not subject to bona fide dispute. Further, it tentatively held that C& C California was generally paying its debts as they become due. However, at the close of oral argument, the bankruptcy court simply granted the summary judgment motion in C& C California's favor " on the grounds that we don't have three creditors before the Court as are required with undisputed debts . . . ."
C& C California then requested compensation for attorneys' fees, costs and damages incurred in defending the petition, which the bankruptcy court denied. We AFFIRM the bankruptcy court's ruling in favor of C& C California on summary judgment, as well as the bankruptcy court's order denying C& C California its attorneys' fees.
I. FACTS
C& C California was formed in 2001. It is run by Bob Connolly (" Connolly") and Mikhail Chekhman (" Chekhman"), each 50% shareholders and officers of the company. C& C California's suppliers provide materials for C& C California to design and manufacture into finished jewelry products. C& C California also buys materials from suppliers to create jewelry products for retail sale.
C& C California bought materials from the Laxmi Group. The Laxmi Group consists of the following related companies, run by related persons, Nitin Gajera and Bakul Gajera: (1) Laxmi Jewel, Inc. (" Laxmi Jewel"), a New York corporation that sells or consigns finished jewelry; (2) Milistar, Inc. (" Milistar"), a wholesale distributor of loose polished diamonds, also a New York corporation; (3) Laxmi Jewel Pvt. Ltd. (" Laxmi Private"), an Indian corporation that manufactures its own finished jewelry which it then sells wholesale; and, (4) Laxmi Diamond Pvt. Ltd. (" Laxmi Diamond"), an Indian corporation that cuts and polishes its own diamonds for wholesale.
In August 2003, Connolly and Chekhman founded a sister company, C& C Jewelry Mfg., Inc., in Texas, as a vehicle for a joint venture with the Laxmi Group (" C& C Dallas"). There were discussions, proposals, and initial business set up, but the parties were unable to come to any final joint venture or partnership agreement. Ultimately, the business relationship between C& C Dallas and the Laxmi Group unraveled. C& C Dallas began winding down business in May 2005.
In the fall of 2005, C& C California stopped ordering materials from the Laxmi Group. It also returned merchandise to the Laxmi Group for credit against open invoices. C& C California returned Laxmi Group materials and other merchandise to the Laxmi Group, which was accepted by the Laxmi Group although often with lower values attributed to the merchandise than the value attributed by C& C California. The merchandise was not directly returned to each Laxmi Group entity; rather, it was the parties' business practice to return all merchandise to one location, a New York office shared by Laxmi Jewel and Milistar, for credit on each of the Laxmi Group's accounts.
C& C California contends many of its merchandise returns were not applied to its open accounts. It further contends the Laxmi Group made deductions in the credit amounts that were not agreed to by C& C California. Finally, C& C California asserts the Laxmi Group did not apply the credits properly, namely, the Laxmi Group did not alert C& C California to which Laxmi Group account the credit would apply; or, alternatively, would instead apply the credit to C& C Dallas' open accounts.
The Laxmi Group contends all merchandise returned for credit was properly applied to C& C California's open accounts, and any deductions made on credits were agreed to and reflected differences in value attributed to third-party merchandise. It asserts it is still owed significant sums of money by C& C California. On November 20, 2007 (" Petition Date"), the Laxmi Group filed an involuntary chapter 7 bankruptcy petition against C& C California asserting claims in the total amount of $1,065,814.79. The attorney for the Laxmi Group made a mistake in filing the petition and proposed a corrected petition (" Involuntary Petition"), indicating claims totaling $378,464.06 and including an additional petitioning creditor, Suberi Brothers LLC, which held a claim of $1,587.00 (" Suberi") (the Laxmi Group and Suberi are the " Petitioning Creditors").
Apparently, the last page of the petition, listing the creditors and claim amounts, was confused with the involuntary petition filed against C& C Dallas.
C& C California filed a Motion to Dismiss Involuntary Petition Or, in the Alternative, for Abstention on January 14, 2008 (" Motion to Dismiss"). The Motion to Dismiss alleged the Petitioning Creditors lacked standing to file the petition because their claims are the subject of bona fide disputes as to liability or amount; that C& C California is generally paying its debts as they become due; and, that the Petitioning Creditors filed the petition in bad faith as a means to pressure C& C California to pay on disputed debts. Included with the Motion to Dismiss were declarations and exhibits.
A status conference on the Motion to Dismiss was held January 15, 2008. At the status conference, the Petitioning Creditors argued they needed to conduct discovery to respond to the declarations and exhibits included with the Motion to Dismiss. The Petitioning Creditors served C& C California with discovery requests on January 23, 2008. On February 6, 2008, C& C California filed a supplement in support of its Motion to Dismiss contending that Petitioning Creditors should not need discovery regarding the nature and quality of their own claims.
On March 31, 2008, C& C California withdrew its Motion to Dismiss and filed an Answer the same day. It then filed a motion for summary judgment on June 3, 2008 (" Summary Judgment Motion") asserting the debt obligations to Petitioning Creditors were subject to a bona fide dispute as to liability or amount and that C& C California was a viable business that paid its debts as they became due.
The Petitioning Creditors filed a Memorandum of Points and Authorities in Opposition to the Debtor's Motion for Summary Judgment and in Support of the Petitioning Creditors' Request for Summary Judgment on June 16, 2008 (" Cross Motion"). The Petitioning Creditors also filed evidentiary objections to declarations of certain vendors of C& C California submitted with C& C California's Summary Judgment Motion alleging the declarations lacked foundation and/or contained hearsay. Further, the Petitioning Creditors filed a motion for a continuance of the hearing on the Summary Judgment Motion because they wanted time to depose and examine C& C California's accounting expert, who had submitted with the Summary Judgment Motion an opinion that C& C California was generally paying its debts when due (" Motion for Continuance").
On June 27, 2008, C& C California filed its reply and opposition to the Cross Motion. It also responded to the evidentiary objections made by the Petitioning Creditors and submitted its own evidentiary objections to certain declarations submitted by the Petitioning Creditors. The following day, it filed its opposition to the Motion for Continuance contending the Petitioning Creditors failed to propose dates or times for taking the deposition of the accounting expert or follow up with counsel to review any documents relied on in the report that they had not already had in their possession.
The hearing on the Motion for Continuance, the Summary Judgment Motion and Cross Motion was held on July 16, 2008. At the hearing, the bankruptcy court denied the Motion for Continuance. The bankruptcy court also determined there were not three eligible petitioning creditors with undisputed debts. It did not make a specific ruling on the evidentiary objections.
On July 25, 2008, the bankruptcy court entered an order allowing the corrected petition to be filed and entered an Order Denying Petitioning Creditors' Motion for Continuance. Also on that date, an order granting the Summary Judgment Motion was entered and the bankruptcy court dismissed the case. The Petitioning Creditors timely appealed both orders.
A corrected petition was filed July 21, 2008 reflecting the addition of Suberi as a petitioning creditor and listing the total of the claims as $378,464.06.
After the bankruptcy case was dismissed, on August 25, 2008, C& C California filed a Motion for Attorneys' Fees, Costs and Damages Pursuant to 11 U.S.C. § 303(i) (" Motion for Fees"). C& C California asserted the Petitioning Creditors filed the Involuntary Petition in bad faith and that it was forced to endure financial strain and extensive litigation costs to defeat the petition. C& C California requested $329,888.20. This amount included attorneys' fees, costs, compensatory damages and $100,000 in punitive damages. See 11 U.S.C § 303(i)(1), (2).
With its Motion for Fees, counsel for C& C California submitted a short declaration setting out the billable rates of those working on the matter, the total hours spent defending the petition, as well as the total costs incurred. It supplied, as evidence of its damages, an accounting of expenses incurred by C& C California as a result of the Involuntary Petition, such as traveling to meet with customers to reassure them of C& C California's viability, and receipts and invoices for costs associated with the expert witness and transcription fees. However, the copies of C& C California's detailed attorney billing statements were not included with the Motion for Fees.
The Petitioning Creditors opposed the Motion for Fees on September 9, 2008. The Petitioning Creditors asserted the Involuntary Petition was not filed in bad faith, but that C& C California's actions prolonged discovery and dragged out the case. Further, the Petitioning Creditors asserted the fees requested by C& C California were unreasonable.
C& C California filed a reply on September 16, 2008. C& C California submitted copies of its detailed attorney billing records along with its reply brief.
A hearing on the Motion for Fees was held on September 23, 2008. The bankruptcy court noted that the court did not have time to review the detailed billing statements because they were filed only with the reply. At the close of the hearing, the bankruptcy court denied C& C California's request for fees and damages stating that the Petitioning Creditors had rebutted any presumption of entitlement to fees under § 303(i). The bankruptcy court made no determination of bad faith on the part of the Petitioning Creditors. C& C California timely appealed.
There is some mention by the parties at oral argument on the Motion for Fees that the bankruptcy court determined, in a tentative ruling, there was no bad faith on the part of the Petitioning Creditors. The tentative ruling itself was not provided as part of the excerpts of the record.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § 157(b)(1). We have jurisdiction to hear appeals from final judgments, orders, and decrees under 28 U.S.C. § 158.
III. ISSUES
1) Did the bankruptcy court err in granting C& C California's Summary Judgment Motion, denying the Cross Motion, and dismissing the Involuntary Petition against C& C California when it found the Petitioning Creditors' claims were subject to bona fide disputes as to liability or amount and that C& C California was generally paying its debts as they became due?2) Did the bankruptcy court err in denying C& C California its attorneys' fees and damages?
IV. STANDARDS OF REVIEW
The bankruptcy court's grant or denial of a motion for summary judgment is reviewed de novo. Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir. 1998). Its findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. Einstein/Noah Bagel Corp. v. Smith (In re BCE West, L.P.), 319 F.3d 1166, 1170 (9th Cir. 2003). Mixed questions of law and fact are reviewed de novo. Carrillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th Cir. 2002).
The Ninth Circuit has held that determination of whether a " bona fide dispute" exists under § 303 is essentially a factual inquiry reviewed under a clearly erroneous standard. Liberty Tool & Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.), 277 F.3d 1057, 1064 (9th Cir. 2002) (" We agree with the other circuits that have held that this is essentially a factual inquiry and adopt a clearly erroneous standard of review.") (citing Rimell v. Mark Twain Bank (In re Rimell), 946 F.2d 1363, 1365 (8th Cir. 1991) (Because the determination " will often depend . . . upon an assessment of witnesses' credibilities and other factual considerations, the bankruptcy court's determination in this regard is a factual finding that may be overturned on appeal only if it is clearly erroneous.")).
However, when the issue of whether there is a bona fide dispute is made in the context of a summary judgment analysis, it is not based upon an assessment of the credibility of witnesses or other facts in evidence. See, e.g., Key Mechanical Inc. v. BDC 56 LLC ( In re BDC 56 LLC), 330 F.3d 111, 117, 119 (2d Cir. 2003). Therefore, we review this issue de novo rather than applying a clearly erroneous standard.
Summary judgment is proper when the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c), applicable in bankruptcy court by Rule 7056. An issue is " genuine" only if there is an evidentiary basis on which a reasonable fact finder could find for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute is " material" only if it could affect the outcome of the suit under governing law. Id . At the summary judgment stage, the court does not weigh the evidence and determine the truth of the matter, but determines whether there is a genuine issue for trial. Id . at 249.
We review a denial of a motion for continuance of a hearing and the bankruptcy court's refusal to permit further discovery for an abuse of discretion. Mackey v. Pioneer Nat'l Bank, 867 F.2d 520, 523 (9th Cir. 1989); Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 705 (9th Cir. 2004). Under an abuse of discretion standard, we will not reverse the bankruptcy court unless we have a definite and firm conviction that it committed clear error in the conclusion it reached after weighing all of the relevant factors. Law Offices of David A. Boone v. Derham-Burk (In re Eliapo), 468 F.3d 592, 596 (9th Cir. 2006).
A bankruptcy court's interpretation of the Code regarding attorneys' fees is reviewed de novo. Wechsler v. Macke Int'l Trade, Inc. (In re Macke Int'l Trade, Inc.), 370 B.R. 236, 245 (9th Cir. BAP 2007). A decision whether to award attorneys' fees and costs under § 303(i) is reviewed for an abuse of discretion. Higgins v. Vortex Fishing Sys., Inc., 379 F.3d at 705.
V. DISCUSSION
Section 303 governs involuntary bankruptcies. Section 303(b) provides that an involuntary case may be commenced:
(1) by three or more entities, each of which is either a holder of a claim against such person [defined in 303(a)] that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $13,475 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims.
Thus, § 303(b)(1) " prevents two types of claims from being the basis of an involuntary petition: those that are 'contingent as to liability' and those that are 'the subject of a bona fide dispute.'" Chicago Title Ins. Co. v. Seko Invs., Inc. (In re Seko Invs., Inc.), 156 F.3d 1005, 1007 (9th Cir. 1998). The exceptions are intended to prevent creditors from using the bankruptcy process as a means of coercing alleged debtors to pay legitimately disputed debts. Id . at 1008; Lawrence Ponoroff, Involuntary Bankruptcy and the Bona Fides of a Bona Fide Dispute, 65 Ind. L.J. 315, 316, 333-338 (1990) (legislative history shows there has always been a concern that creditors would use § 303 as a means to " bludgeon a debtor into payment of dubious claims or satisfaction of obligations open to legitimate question"); In re Mountain Dairies, Inc., 372 B.R. 623, 634-5 (Bankr. S.D.N.Y. 2007) (courts are wary of encouraging parties to use the bankruptcy system as a quick resolution to their money disputes); In re Tobacco Road Assocs., LP, 2007 WL 966507, *6 (E.D. Pa. Mar. 30, 2007) (bankruptcy court is not correct venue for adjudicating disputes about whether a debt is owed).
Section 303(b) sets the threshold for filing an involuntary petition; if it is met and the alleged debtor does not contest the petition, then the petitioning creditors are entitled to entry of an order for relief. 11 U.S.C. § 303(h) (" If the petition is not timely controverted, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed.").
However, if the alleged debtor does controvert the petition, then relief may only be granted if the " debtor is generally not paying such debtor's debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount." 11 U.S.C. § 303(h)(1).
The Petitioning Creditors contend they are eligible to commence an involuntary proceeding against C& C California because their claims are not subject to any bona fide dispute as to liability or amount, and there is no dispute at least as to the statutory threshold amount. Further, the Petitioning Creditors argue C& C California is generally not paying its debts as they become due. However, C& C California asserts the opposite, arguing that each of the Petitioning Creditors' claims is the subject of a long-standing disagreement as to what amount, if any, is outstanding; and, that C& C California is a viable business that pays its debts when due.
A. Claims Subject to Bona Fide Dispute
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, § § 1234(a)(1)(A) and (a)(12), 119 Stat. 23 (April 20, 2005) (" BAPCPA"), amended § 303(b) and (h) to modify " bona fide dispute" to refer to disputes " as to liability or amount." (Emphasis added). The statute previously referenced only claims not contingent or subject to a bona fide dispute as to liability.
The pre-BAPCPA rule developed through case law in the Ninth Circuit is that a dispute over the amount of a debt is not considered a " bona fide dispute" under § 303(b) unless the dispute arises from the same transaction and the alleged debtor's counterclaims or offsets, if netted out, would take the total debt below the statutory threshold. Focus Media, Inc. v. Nat'l Broad. Co. Inc. (In re Focus Media, Inc.), 378 F.3d 916, 926 (9th Cir. 2004); Seko, 156 F.3d at 1009-10; Mountain Dairies, 372 B.R. at 633-34 (" Prior to the 2005 amendments, some courts took the position that a debtor's counterclaim disputing the amount of a creditor's claim, and not the legitimacy or the existence of such claim, did not make the creditor's claim the subject of a bona fide dispute."). Therefore, if " at least a portion of the debt that is the subject of the petition is undisputed, the undisputed portion is sufficient to create a debt under [§ 303(b)] not subject to a bona fide dispute." Focus Media, 378 F.3d at 926 (citations omitted).
Under pre-BAPCPA law:
This may lead to the peculiar result that a counterclaim [or dispute as to amount owed to a petitioning creditor] isn't a 'bona fide dispute' under section 303(b), but is a 'bona fide dispute' under section 303(h)(1). This result comes about not because 'bona fide dispute' has a different meaning in the two subsections, but because it modifies different terms. Compare 11 U.S.C. § 303(b) (referring to 'a claim against such person that is not . . . the subject of a bona fide dispute'), with id. § 303(h)(1) (allowing an alleged debtor to avoid an involuntary filing when the 'debtor's debts . . . are the subject of a bona fide dispute').
Seko, 156 F.3d at 1010 n.7.
The Ninth Circuit has not yet interpreted the new language of § 303(b) and (h); however, other courts have held that an objective legitimate dispute as to an amount owed on a petitioning creditor's claim is sufficient to demonstrate a bona fide dispute and forestall a petitioning creditor from maintaining an involuntary petition under § 303(b). Mountain Dairies, 372 B.R. at 633-34 (" Thus, after the amendments made by BAPCPA, 'disputes as to amount - not just liability - are sufficient to create a bona fide dispute.'"); In re Euro-Am. Lodging Corp., 357 B.R. 700, 712 (Bankr. S.D.N.Y. 2007) (citing, 2 Alan N. Resnick & Henry J. Sommer, COLLIER ON BANKRUPTCY ¶ 303.30[2][b], (15th rev. ed. 2006) (The 2005 amendment presumably eliminated [the netting out of claims to below the threshold] part of the test)); Reg'l Anesthesia Assocs. PC v. PHN Physician Servs. (In re Reg'l Anesthesia Assocs. PC), 360 B.R. 466, 470 (Bankr. W.D. Penn. 2007); but see In re Demirco Holdings, Inc., 2006 WL 1663237, at *3 (Bankr. C.D. Ill. June 9, 2006) (" Without clear legislative intent, this Court cannot presume such a change in the law . . . .")
The Petitioning Creditors argue that " for a bona fide dispute to be relevant, it must at least have the potential to reduce the total of petitioner's claims to an amount below the statutory threshold." See Appellant's Cross Motion. Petitioning Creditors contend C& C California owes at least $13,475 to the Laxmi Group and therefore their claims are not subject to bona fide dispute. We disagree. The more than 1800 pages of record and evidence submitted by the parties demonstrates there are numerous accounting disputes and no final figures are presented that definitively demonstrate what amounts, if any, are owed to the Laxmi Group entities. Thus, whether or not BAPCPA changes the Ninth Circuit rule is ultimately not determinative in this case because the Petitioning Creditors have not demonstrated their claims are undisputed even as to a threshold amount.
In order for a bona fide dispute to exist, the alleged debtor must do more than just disagree with the amount of the claim. Rather, the court must determine there is " an objective basis for either a factual or legal dispute as to the validity of the debt." In re Vortex Fishing Sys., Inc., 277 F.3d 1057, 1064 (9th Cir. 2002) (citations omitted).
The majority of circuits have adopted this objective standard. See In re Bimini Island Air, Inc., 370 B.R. 408, 412 (Bankr. S.D. Fla. 2007). Under BAPCPA, it may be more accurate to articulate the standard as determining whether there is an " objective basis for either a factual or legal dispute as [to] the amount or the liability of the petitioning creditors' claims." In re C.W. Mining Co., 2008 WL 4279635, *3 (Bankr. D. Utah Sept. 17, 2008). The court need not " evaluate the potential outcome of a dispute" but must " determine whether there are facts that give rise to a legitimate disagreement over whether money is owed, or, in certain cases, how much." Vortex, 277 F.3d at 1064.
Petitioning creditors bear the burden of proving all statutory requirements of § 303. Id . Once met, the burden then shifts to the alleged debtor to show there is a dispute as to a material fact. Id .; In re A& J Quality Diamonds, Inc., 377 B.R. 460, 463 (Bankr. S.D.N.Y. 2007). In the context of an involuntary petition, if there is a genuine issue of material fact that bears upon the debtor's liability or amount of the claim, then the petition must be dismissed. In re Lough, 57 B.R. 993, 997 (Bankr. E.D. Mich. 1986); In re Busick, 831 F.2d 745, 750 (7th Cir. 1987) (if there is a bona fide dispute as to either the law or the facts, then the creditor does not qualify and the petition must be dismissed.); Vortex, 277 F.3d at 1064. In other words, in order for the Panel to reverse the bankruptcy court's dismissal of the petition, it would have to find that the Petitioning Creditors are entitled to summary judgment under § § 303(b) and (h).
1. Laxmi Private
Laxmi Private asserts it is owed $9,203.17 on outstanding accounts for goods sold. In support of its claim, Laxmi Private submitted a table entitled " Accounts Receivable" (" A/R Table") which itemizes invoices, dated March 30 through September 30, 2005; and credits, applied to the account December 30, 2005, through July 6, 2006. The itemized invoices total $2,756,102.99 to which $2,746,899.82 was applied (consisting of three payments and nine merchandise credits). The difference makes up its asserted claim.
Attached to the A/R Table are individual invoices supposedly referenced on the A/R Table. However, in many instances, the amount of the invoice does not match the amount of the itemized entry on the A/R Table. Therefore, the total amount of the itemized invoices shown on the A/R Table may not be accurate.
Laxmi Private contends this debt is not disputed. It argues C& C California admits it owes the same amount because a summary of obligations prepared by Chekhman in April 2007, and sent to the Laxmi Group (the " Chekhman Email") lists the gross amount of unpaid goods delivered by Laxmi Private to C& C California as $1,845,026.13 (which constitutes the same amount of the unpaid invoices, from July 25 through September 30, 2005, referenced in the A/R Table).
The Chekhman Email itself does not describe what the figures entered on the table represent. Nitin Gajera interpreted the amounts listed for each of the Laxmi Group entities to represent the gross amount of unpaid goods delivered to C& C California (and C& C Dallas).
However, the Chekhman Email does not establish a definitive amount of money owed to each entity as of the Petition Date. The Chekhman Email has a figure entered for each Laxmi Group entity, totaled to $2,223,601.64. Underneath, there is a series of credits, payments, and wire transfers that had yet to be applied, at least according to C& C California's calculations, to the Laxmi Group accounts.
Below the list of credits, memos, payments and wire transfers is a figure of $2,148,905.17. This figure is subtracted from the total under the Laxmi Group entities ($2,223,601.64), indicating that they were yet to be applied to the amounts corresponding to the Laxmi Group.
The Chekhman Email was prepared by Chekhman after a meeting on April 3, 2007, with Nitin Gajera (" Gajera") concerning the open accounts. Chekhman contends in his declaration that the Chekhman Email was prepared after the meeting to summarize what credits should be applied to C& C California's outstanding invoices as part of on-going negotiations with the Laxmi Group over the disagreements in accounting. However, according to Chekhman, the Laxmi Group did not respond to his email and there were no further negotiations. Gajera contends, in his declaration, that the Chekhman Email reflected the gross amount of unpaid goods sold and delivered by the Laxmi Group and evidenced C& C California's debt obligations.
Gajera stated he left the April 3, 2007 meeting with approximately $300,000 in merchandise to be applied to the Laxmi Group's accounts. Given that there were significant credits yet to be applied to the outstanding amounts as listed on the Chekhman Email, and that Gajera took additional merchandise for credit at the time, the amounts listed on the Chekhman Email corresponding to each of the Laxmi Group entities cannot be an accurate reflection (or admission) of the outstanding balances owed to each entity even as of the time it was prepared in April 2007. Further, the Chekhman Email does not reflect any activity on the accounts during the seven-month period between the time it was prepared and the Petition Date.
Laxmi Private also provides C& C California's Accounts Payable Invoice Register (" Laxmi Private Register") to demonstrate its claim is undisputed in the amount of $9,203.17, along with C& C California's Accounts Payable Aging Report as of November 30, 2007 (" Aging Report"). Each of the documents shows a different amount still owed to Laxmi Private.
The Laxmi Private Register shows an itemization of invoices from August 1, 2005, through September 30, 2005, totaling $1,845,026.13 and leaving an open balance in the amount of $401,070.03. The Aging Report shows an invoice total (based on entries dated September 9, 2005 through October 30, 2006) of $197,249.74. The Laxmi Private Register shows C& C California made payments on invoices until September 9, 2005. However, those payments are not similarly reflected on the A/R Table during the same time frame.
Furthermore, there are no credits shown on the A/R Table after July 6, 2006, even though the Aging Report shows credits deducted through October 30, 2006. As a result, neither the A/R Table, the Aging Report or the Checkhman Email demonstrate an accurate debt amount still outstanding as of the Petition Date. Accordingly, there is a genuine issue of material fact as to how much C& C California owes Laxmi Private.
2. Milistar
Milistar asserts a claim in the amount of $307,110.64, comprised of $209,925.91 due on accounts and $97,184.73 in interest (at a rate of 2% per month). It supports its claim with a Statement (" Milistar Statement") that itemizes certain invoices (from January 13, through October 12, 2005), due dates, totals, credits, interest and balance remaining. No credits are recorded on the Milistar Statement.
Milistar's invoices state, " In case the seller retains account for collection of amount due under terms of this agreement the buyer agrees to pay the actual attorneys' fees or reasonable collection agency's fees with interest and the costs of the court. Net according to terms there after 2% monthly and 24% annually." C& C California has not argued the accrual of interest is improper.
Along with the Milistar Statement are individual copies of invoices referenced on the Milistar Statement. Additionally, there are individual credit slips from C& C Dallas, not C& C California, to Laxmi Jewel.
Milistar contends the amount is undisputed because the Chekhman Email also lists $209,925.91 corresponding to Milistar's account. As noted above, the amounts corresponding to each Laxmi Group entity on the Chekhman Email do not include the itemized credits C& C California believed it was still owed, nor to which account those credits would be applied. Further, the amounts corresponding to each Laxmi Group entity does not reflect any of the other payments or credits that may have been applied to the account between April 7, 2007, and the Petition Date.
Milistar also submitted C& C California's Account Payable Invoice Register (" Milistar Register") listing an open balance of $209,925.91. The Milistar Register does not match C& C California's Aging Report, also submitted to establish Milistar's claim. The Aging Report does not show any entries after July 2005, even though the Milistar Register and Milistar Statement show entries through October 2005. None of the documents show a full accounting through the Petition Date. Therefore, the evidence submitted by Milistar demonstrates that there is a genuine issue of material fact as to the amount outstanding on Milistar's account as of the Petition Date.
3. Laxmi Jewel
Laxmi Jewel asserts a claim in the amount of $30,547.40. To evidence this claim, it provides a statement (" Laxmi Statement") listing three outstanding invoices from November 16, 2005, to April 14, 2006, totaling $138,633.75, and individual copies of the invoices along with a series of credit slips. The credit slips are made out to " Milistar/Laxmi Jewel." The deduction of these credits from the three asserted outstanding invoice balance of $138,633 forms the basis of Laxmi Jewel's claim.
Laxmi Jewel argues the amount is undisputed based upon the Chekhman Email, C& C California's Aging Report, and Accounts Payable Invoice Register (" Laxmi Register"). The Aging Report lists the same three invoices referenced in the Laxmi Statement as unpaid, but shows an outstanding balance of $118,897.75. The Laxmi Register shows there were payments made on two of the three invoices referenced on the Laxmi Statement and two credits (one post-petition) with a total open balance of $20,233.91. Because the Laxmi Register shows payments made on two of the three invoices referenced on the Laxmi Statement, the asserted amount outstanding by Laxmi Jewel may not be accurate. Furthermore, the Laxmi Register shows an open balance as of March 15, 2006, as $19,468.75 (which is the third invoice amount as reflected on the Laxmi Statement) and a credit recorded April 21, 2006, in the amount of $19,711.00, which would satisfy the debt.
This, along with the credits and payments listed on the Chekhman Email and the additional merchandise C& C California sent Gajera after their April 3, 2007 meeting, establishes that there is an objective factual dispute as to what amounts, if any, are owed by C& C California to Laxmi Jewel.
4. Laxmi Diamond
Laxmi Diamond submits two invoices it contends remain unpaid, dated March 3, 2005, and July 17, 2005, totaling $30,015.85. This amount is reflected on C& C California's Aging Report, the Chekhman Email, and the Accounts Payable Invoice Register (" Diamond Register") as unpaid invoices. Based solely upon Laxmi Diamond's evidence (setting aside the inaccuracies inherent in the Chekhman Email), the Aging Report and Diamond Register provide sufficient evidence that the debt to Laxmi Diamond remained unpaid and owing as of the Petition Date.
5. Suberi
Suberi submits two invoices, one dated November 24, 2004, and the other dated January 6, 2005. The November invoice has a handwritten note on the bottom indicating a balance due of $916.40. The principal of Suberi states, in his declaration, the claim is based on diamonds it provided to C& C California for use in manufacturing finished jewelry, which was ultimately not performed and the product not returned. This evidence sufficiently demonstrates a prima facie showing that the debt remains unpaid.
Therefore, based upon the evidence submitted by the Petitioning Creditors, Laxmi Diamond and Suberi established a prima facie case that their claims were not subject to a bona fide dispute as to liability or amount. However, because C& C California has more than twelve creditors, two Petitioning Creditors is insufficient to commence an involuntary petition. 11 U.S.C. § 303(b)(1).
Furthermore, C& C California argues the claims of the Petitioning Creditors are subject to a bona fide dispute as to both liability and amount. Its main contention is that between April 21, 2006 and November 2007, it returned goods and merchandise worth about $655,500 to the Laxmi Group (the Laxmi/Milistar office in New York) that was not applied to C& C California's accounts with the Laxmi Group, and which, if it had, would have extinguished all outstanding debt to the Laxmi Group.
C& C California supports its contention by submitting five credit memos addressed to Laxmi/Milistar or Laxmi:
7/11/06
19, 118
9/11/06
$47,790
10/30/06
$35,576
2/15/07
$143,730
4/4/07
$290,893
All of these alleged credits were sent by C& C California and received by the Laxmi Group after July 11, 2006. Thus, even if these credits were properly applied to the Laxmi Group's accounts, they are credits dated after any the entries reflected on the Laxmi Group's A/R Table, Milistar Statement, and Laxmi Statement. Accordingly, there is no genuine issue of material fact that the debts owed by C& C California to the Laxmi Group are disputed as to amount and liability. Indeed, these credits would eliminate the outstanding debts ($378,178) asserted by the Petitioning Creditors.
Gajera asserts the 7/11/06 credit was applied to Laxmi Private in the amount of $48,640 on September 11, 2006; the 7/11/06 credit and the 10/30/06 credit was applied to C& C Dallas' outstanding balances to Laxmi Private in the amount of $14,773.00 and $35,576.00, respectively. Additionally, Gajera submits the $434,623 was applied against Laxmi Private on February 15, 2007, as $107,181 and April 4, 2007, as $256,188.00. These latter credits are not reflected on the A/R Table and would bring the outstanding balance to well below Laxmi Private's asserted $9,203.17 outstanding balance. There would also remain a dispute about the value of the returned merchandise; C& C California alleges it did not agree to the deductions made on the merchandise by the Laxmi Group.
As a result, the Petitioning Creditors cannot establish their eligibility to file the Involuntary Petition. However, even if the Petitioning Creditors could establish that their debts were not subject to a bona fide dispute to disqualify them from eligibility under § 303(b), summary judgment was still properly granted because C& C California demonstrated there was no genuine issue of material fact that it was generally paying its debts as they became due.
B. Generally Paying Debts When Due
Claims subject to a bona fide dispute as to liability or amount are not included in the calculation of whether a debtor is generally paying its debts. See 11 U.S.C. § 303(h)(1); compare Matter of Busick, 831 F.2d 745, 746 (7th Cir. 1987) (1984 amendments to § 303 demand that claims subject to a bona fide dispute must be eliminated from any calculation of whether the debtor is generally not paying its debts); with Semel v. Dill (In re Dill), 731 F.2d 629, 632 (9th Cir. 1984) (pre-1984 amendment case approving analysis of including disputed noncontingent debts in the 303(h)(1) analysis); see also Seko, 156 F.3d at 1009-10.
In the Ninth Circuit, a flexible " totality of the circumstances" test is used to determine whether a debtor is generally paying its debts as they come due. Vortex, 277 F.3d at 1072; Focus Media, 378 F.3d at 928-29. The test is to be applied as of the date of the filing of the involuntary petition. In re St. Marie Dev. Corp. of Montana, Inc., 334 B.R. 663, 671 (Bankr. D. Mont. 2005).
A finding that C& C California is generally not paying its debts " requires a more general showing of the debtor's financial condition and debt structure than merely establishing the existence of a few unpaid debts." In re Dill, 731 F.2d 629, 632 (9th Cir. 1984); Vortex, 277 F.3d at 1072; Focus Media, 378 F.3d at 929. The following factors are generally considered under the totality of the circumstances: (1) the number of unpaid claims; (2) the amount of such claims; (3) the materiality of the nonpayments; and, (4) the debtor's overall conduct of its financial affairs. Id .; In re Euro-Am. Lodging Corp., 357 B.R. 700, 713 (Bankr. S.D.N.Y. 2007).
Petitioning Creditors' Opening Brief on appeal does not argue C& C California was not generally paying its debts as they became due. In their Reply Brief, as in their Counter Motion, Petitioning Creditors contend C& C California was not generally paying its debts because C& C California's Aging Report reflected 47.3% of C& C California's debts were more than 120 days past due as of the Petition Date. (In making this calculation, the Petitioning Creditors improperly included their own debts). Additionally, the Petitioning Creditors contend the Aging Report lists more than 22 entities (comprised of the so-called " Diamond Vendors") as having debts over 120 days past due.
The bulk of Petitioning Creditors' argument under § 303(h) centers around their objection to the inclusion of an expert report (" Expert Report") by a forensic accountant, Dominic Lobuglio (" Lobuglio"), for C& C California, who opined that C& C California was generally paying its debts as they became due. The Petitioning Creditors argue they were not able to properly examine Lobuglio or the documents upon which he relied in forming the Expert Report. Furthermore, they assert the Financial Reports used by Lobuglio were " tenuous, " " unreliable" and contained " numerous unexplained financial fluctuations."
The Petitioning Creditors requested a continuance of the hearing on the Summary Judgment Motion and Cross Motion so that they could take the deposition of Lobuglio in order to examine the bases for his opinions, including his methodology and reasoning. The bankruptcy court denied this request stating that Petitioning Creditors seemed to have had the opportunity, but did not take advantage of the opportunity by following up with counsel for C& C California to schedule a deposition time.
According to the email exchange between counsel on the issue, the Petitioning Creditors had the bulk of the documents upon which Lobuglio relied as part of the discovery conducted prior to the Summary Judgment Motion and Counter Motion. The only documents not provided prior to the Summary Judgment Motion were the payroll and sales tax returns and operations schedules for C& C California's China operations. Petitioning Creditors had C& C California's financial statements, bank statements, vendor ledgers and aging reports and accounting records. Therefore, we do not find the bankruptcy court abused its discretion in denying Petitioning Creditors' Motion for Continuance in order to conduct further discovery on this issue.
Petitioning Creditors, who bear the burden of demonstrating the statutory elements of § 303, failed to present a prima facie case that C& C California was not generally paying its debts as they became due.
The figures supplied by Petitioning Creditors as to the percentage of debts over 120 days old does not demonstrate that C& C California is generally not paying its debts as they become due. As part of a totality of circumstances analysis, the bankruptcy court in Focus Media found (and the appellate court agreed) that " having 80% of debts over 90 days old [on invoices with 90 day terms] is not paying ones debts as they become due." 378 F.3d 916, 929 (9th Cir. 2004). By Petitioning Creditors' own analysis of C& C California's records, only 47.4% of the total invoice amount, even improperly including their own claims, was open longer than 120 days. Further, only approximately 50% of the Diamond Vendors (again including Petitioning Creditors' claims) had accounts open longer than 120 days. As a result, the Petitioning Creditors did not establish that C& C California was not generally paying its debts as they became due.
C& C California submitted declarations from eight of its Diamond Vendors asserting their accounts were generally on 120 day terms as is the industry standard. Laxmi Diamond's invoices also evidence a 120 day payment term.
C& C California provided its cumulative general ledger showing C& C California has more assets than liabilities. It submitted evidence that all payroll obligations, payroll taxes, and corporate tax obligations have been regularly paid in a timely and consistent manner. It also submitted evidence demonstrating its approximately 45 administrative creditors were paid within 12 days of the due date of each invoice. Even without relying on the Expert Report or the declarations submitted by the Diamond Vendors, there is no evidence demonstrating material nonpayments of obligations, or an overall conduct of financial affairs that suggests C& C California cannot meet its payment obligations. Accordingly, the evidence submitted demonstrates there is no genuine issue of material fact that C& C California is generally paying its debts as they become due.
C. Attorneys' Fees and Damages
Section 303(i)(1) permits an alleged debtor to bring a claim for an award of fees and costs if: (1) the involuntary petition was dismissed by the court; (2) the dismissal was not stipulated to by the debtor and all the petitioning creditors; and (3) the debtor did not waive its rights to judgment. 11 U.S.C. § 303(i)(1)(A)-(B). Additionally, the statute provides that in the event of bad faith, actual and punitive damages may be awarded. 11 U.S.C. § 303(i)(2); Jaffe v. Wavelength, Inc. (In re Wavelength, Inc.), 61 B.R. 614, 619 (9th Cir. BAP 1986).
Section 303(i) is a fee-shifting statute in which Congress authorized an award of fees and costs to the prevailing party. See In re Macke Int'l Trade, Inc., 370 B.R. 236, 252 (9th Cir. BAP 2007). However, the statute states the bankruptcy court may award fees and costs, rendering any award under § 303(i) discretionary. Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 706 (9th Cir. 2004).
In the Ninth Circuit there is a rebuttable presumption that a debtor who has successfully contested an involuntary petition will be awarded fees and costs. Macke Int'l Trade, 370 B.R. at 250. The presumption imposes on the petitioning creditors the burden of presenting evidence to meet the presumption, but it does not shift the burden of proof to the petitioning creditors. See Fed.R.Evid. 301. Therefore, in order to rebut the presumption, the petitioning creditors need only produce some evidence that attorneys' fees and costs are not warranted. The burden of persuasion remains at all times on the debtor. In re Scrap Metal Buyers of Tampa, Inc., 253 B.R. 103, 109 (M.D. Fla. 2000).
The petitioning creditors may overcome the presumption by demonstrating an award of attorneys' fees and costs is inappropriate given the totality of the circumstances. Higgins, 379 F.3d at 706; Sofris v. Maple-Whitworth, Inc. (Matter of Maple-Whitworth, Inc.), 556 F.3d 742, 746 (9th Cir. 2009). Under a totality of the circumstances analysis, the bankruptcy court may consider: (1) the relative culpability among the petitioners, (2) the motives or objectives of individual petitioners in joining the involuntary petition, (3) the reasonableness of the respective conduct of the debtors and petitioners, and (4) other individualized factors. Id . The list is not exhaustive. A bankruptcy court may choose to consider other material factors it deems relevant. Higgins, 379 F.3d at 708.
At the hearing on the Motion for Fees, each party attempted to cast the other in negative light. The court mentioned that C& C California's detailed billing statements were not filed with the Motion for Fees; and there was some discussion about whether the fees were properly segregated for the work done on behalf of C& C California (and not on behalf of C& C Dallas).
At the end of the hearing, the bankruptcy court orally ruled that Petitioning Creditors rebutted the presumption of an award of fees, although it did not enumerate the factors used in its determination. But see id. (bankruptcy court did not need to explicitly state it used the totality of the circumstances test as long as it considers the factual basis for withholding fees).
A bankruptcy court's totality of the circumstances analysis is highly discretionary. Id . at 707; see also Maple-Whitworth, 556 F.3d at 745-46. The bankruptcy court need only make " an informed examination" of the entire situation to determine if an award of litigation expenses to the alleged debtor furthers the purposes and policies of the Code. Higgins, 379 F.3d at 707; Macke Int'l Trade, 370 B.R. at 252. Here, the bankruptcy court " evaluated all of the factors relevant to this case" and determined the case was " not a case where attorneys' fees should be awarded." Accordingly, we do not find the bankruptcy court abused its discretion when it denied the Motion for Fees.
Similarly, we do not find the bankruptcy court abused its discretion in denying C& C California an award for damages. The bankruptcy court has the discretion to award damages caused by a bad faith filing. 11 U.S.C. § 303(i)(2). The term " bad faith" is not defined in the Code; therefore, courts have used different approaches to determine whether a petition has been filed in bad faith. See In re Diloreto, 388 B.R. 637, 645 (Bankr. E.D. Pa. 2008) (compiling cases adopting various tests for determining bad faith). However, the bankruptcy court, at least on the record before us, did not determine whether or not the petition was filed in bad faith. The bankruptcy court determined that an award of attorneys' fees, costs, and damages was not appropriate in this case based upon its conclusion that the Petitioning Creditors had rebutted the presumption entitling C& C California to fees and costs. We do not find the bankruptcy court reached its conclusion erroneously.
CONCLUSION
There is no genuine issue of material fact that Petitioning Creditors' claims are not subject to a bona fide dispute as to liability or amount, or that C& C California was paying its debts as they became due. Accordingly, we AFFIRM the bankruptcy court's grant of summary judgment to C& C California dismissing the Involuntary Petition. Further, we do not find that the bankruptcy court abused its discretion in its determination that attorneys' fees were not warranted in this case and AFFIRM the order denying C& C California's Motion for Fees.