Opinion
01 Civ. 10169 (RWS)
March 22, 2002
SHAW, LICITRA, BOHNER, ESERNIO, SCHWARTZ PFLUGER Attorney for Appellants Garden City, NY By: JOHN H. HALL, JR., ESQ. Of Counsel.
CHADBOURNE PARKE Attorney for Appellee New York, N Y 10112 By: ANDREW P. BROZMAN, ESQ. JENNIFER C. DeMARCO, ESQ. of Counsel.
OPINION
Appellants Key Mechanical ("Key"); DWF, Inc. ("DWF"); and Mesta Construction Inc. ("Mesta") (collectively the "Appellants") appeal from a July 2, 2001 order of the United States Bankruptcy Court for the Southern District of New York (the "Order") dismissing an involuntary bankruptcy proceeding that the Appellants filed on May 31, 2001, against Appellee BDC 56 LLC ("BDC"). This motion is related to another filed by Appellants, appealing the Bankruptcy Court's denial of their motion to reconsider. That motion is discussed in a separate opinion.
For the foregoing reasons, the Order is affirmed.
The Parties
BDC is the owner, developer and operator of a recently constructed hotel in New York, the Chambers Hotel.
Appellants are contractors who performed construction work on the Chambers Hotel.
The Facts
BDC contracted with Appellants for construction on the Chambers Hotel.
Key installed heating, ventilation and air conditioning equipment in the Chambers Hotel pursuant to a contract dated December 13, 1999, between Key and the construction manager, HRH Construction Corp ("HRH"). BDC signed and approved the contract, and also took by assignment the rights and obligations of HRH with respect to the contract. Key claims that it is owed $231,957.34 from BDC.
DWF installed wood flooring in the Chambers Hotel pursuant to a contract between DWF and HRH dated May 3, 2000. BDC signed and approved the contract, and also took by assignment the rights and obligations of HRH with respect to the contract. DWF claims that it is owed $45,938.74 from BDC.
Mesta was a subcontractor of Tveter Carpet Co. ("Tveter"). Tveter contracted with Mesta to provide flooring work on the Chambers Hotel. Tveter is a Chapter 7 debtor, and its bankruptcy petition indicates that Tveter was owed $9,846.00 by BDC. BDC states it has fully paid Tveter. Mesta claims that is it owed $51,674.00 for materials and labor furnished to the Chambers Hotel.
On May 29, 2001, the Appellants filed an involuntary petition under Chapter 7 of the Bankruptcy Code against BDC. BDC filed a motion to dismiss under Fed.R.Civ.P. 12(b)(6) on June 13, 2001, alleging that Key and DWF lacked standing due to bona fide disputes with respect to the asserted claims and that Mesta lacked standing because it did not hold a claim against BDC.
On June 19, 2001, six additional contractors that were owed money for work performed and/or materials furnished at the Chambers Hotel joined in the involuntary bankruptcy petition. The creditors, who assert claims in the aggregate amount of $291,641.28, are: (1) Gilmour Supply Co. ("Gilmour"), a subcontractor of a Chapter 7 debtor, Kaplan-Breslaw Ash ("Kaplan"), a plumbing contractor; (2) North Shore Plumbing, another subcontractor of Kaplan; (3) Okin-Wallach Corp., another subcontractor of Kaplan; (4) Skyline Steel Corp ("Skyline"), which was a party to a contract with HRH; (5) Webster Plumbing Supply, another subcontractor of Kaplan; and (6) Terra Firma Construction Management General Contracting LLC, a subcontractor of an entity known as Caspi Development Co., Inc. The claims are in the amounts of (1) $12,863.37; (2) $8,292.87; (3) $10,724.26; (4) $117,088.00; (5) $33,578.14; and (6) $109,094.64, respectively. According to the record below, at least five of the six submitted signed affidavits that the claims were secured.
On June 22, 2001, the Bankruptcy Court conducted a hearing on the Dismissal Motion. By order dated July 2, 2001, the Court dismissed the Involuntary Petition, noting that if the pleadings and documents clearly establish that a claim is subject to a bona fide dispute, a trial is not mandatory to determine whether an involuntary petition is jurisdictionally defective. After hearing argument and reviewing the documentation filed by the parties, the Bankruptcy Court held that the Appellants lacked standing to file an involuntary petition against BDC under Bankruptcy Code § 303(b)(1) and the intervening creditors lacked standing to file under § 303(c). The Court's specific findings as to each party is discussed infra. The instant motion is an appeal of that order.
I. Jurisdiction
This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 158 (a)(1), which gives the federal district courts jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy judges entered in cases and proceedings referred to bankruptcy judges under 28 U.S.C. § 157.
II. Standard of Review
Rule 8013 of the Rules of Bankruptcy Procedure provides that a "district court . . . may affirm, modify or reverse a bankruptcy court's judgment, or order, or decree and remand with instructions for further proceedings. Findings of fact shall not be set aside unless clearly erroneous. . . ." Conclusions of law are review de novo. In re Montgomery, 37 F.3d 413 (8th Cir. 1994); see In re Maxwell Newspapers, Inc., 981 F.2d 85, 89 (2d Cir. 1992).
There is some disagreement among the parties as to what standard should apply here. The law is clear, however, that a bankruptcy court's conclusions as to whether there is a bona fide dispute warrant a clearly erroneous standard of review. E.g., In re Vortex Fishing Systems, 227 F.3d 1057, 1064 (9th Cir. 2002); In re Sims, 994 F.2d 210, 221 (5th Cir. 1993); In re Rimell, 946 F.3d 1363, 1365 (8th Cir. 1991);In re Mavellia, 149 B.R. 301, 306 (Bankr. E.D.N.Y. 1991). The Bankruptcy Court's other determinations in this case are subject to de novo review.
Discussion
I. The Bankruptcy Court's Finding that a Bona Fide Dispute Exists Between Key, DWF, and BDC Was Not Clearly Erroneous
Section 303 of the Bankruptcy Code, which governs who is eligible to file an involuntary petition, states in pertinent 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, each of which is . . . a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute. . . .11 U.S.C. § 303 (b)(1) (emphasis supplied). The requirement that claims be free from such disputes was added to § 303(b) by the Bankruptcy Amendments and Federal Judgeship Act of 1984. See Pub.L. No. 98-353, 98 Stat. 333, 392 (1984); see also In re Braten, 86 B.R. 340, 342 (Bankr. S.D.N.Y. 1988)
Although the term "bona fide dispute" is not explicitly defined by Congress, when assessing a claim, most courts follow the standard set forth by the Seventh Circuit:
[T]he bankruptcy court must determine whether there is an objective basis for either a factual or legal dispute as to the validity of debt. However, "[t]he statute does not require the court to determine the outcome of any dispute, only its presence or absence. Only a limited analysis of the claims at issue is necessary."In re Busick, 831 F.2d 745, 750 (7th Cir. 1987) (quoting In re Busick, 65 B.R. 630, 637 (N.D. Ind. 1986)); accord In re Rimmell, 946 F.2d 1363, 1365 (8th Cir. 1991); Bartmann v. Maverick Tube Corp., 853 F.2d 1549, 1543 (10th Cir. 1988); In re Elsa Designs Ltd., 155 B.R. 859, 863-64 (Bankr. S.D.N.Y. 1993); In re Nargassans, 103 B.R. 446, 449 (Bankr. S.D.N.Y. 1989)
Determination of whether a bona fide dispute exists involves a burden-shifting test. Petitioning creditors bear the burden of establishing a prima facie case that no bona fide dispute exists. In re Elsa Designs, Ltd., 155 B.R. 859, 863 (Bankr. S.D.N.Y. 1993); In re Rimmell, 946 F.2d 1363, 1365 (8th Cir. 1991). The burden then shifts to the alleged debtor to demonstrate that a bona fide dispute does exist. In re Audio Visual Workshop, Inc., 211 B.R. 154 (Bankr. S.D.N.Y. 1997); In re Elsa, 155 B.R. at 863.
The Bankruptcy Court's conclusion that BDC was engaged in a bona fide dispute with Key and DWF was not clearly erroneous. Moreover, it is consistent with the types of disputes that other courts have found to be bona fide disputes. E.g., In re West Side Community Hosp. Inc., 112 B.R. 243, 254-55 (Bankr. N.D.Ill. 1990) (disputes with regard to physical condition of hospital premises, missing equipment and ability of petitioning creditor seller to transfer HMO membership to alleged debtor buyer were bona fide); In re Kujawa, 112 B.R. 968, 971-72 (Bankr. E.D. Mo. 1990) (legal and factual disputes with construction contract were bona fide). Indeed, as one commentator put it, "it is difficult to imagine a scenario where a defaulted contractor would qualify as a creditor and a bona fide dispute would not exist." Deborah S. Griffin, Post-Termination Considerations for the Defaulted Contractor, 17-Jan. Construction Lawyer 24, 29 (Jan. 1997).
a. Key
The Bankruptcy Court found that there existed clear and documented evidence of a continuing dispute with regard to Key's claim. The Court looked to the fact that BDC claims that Key failed to complete its obligations under the contract, was on notice of various defaults under its contract, and understood that BDC was preparing to hire another contractor. In re BDC LLC, No. 01-13145 (RLB), Order, at 4 (July 2, 2001). "In reviewing the facts concerning this involuntary petition, I am not resolving the dispute between the two parties but simply finding that there still exists a bona fide dispute amongst them." Id.
Appellants put forward two arguments. First, they state that while there is dispute about some portion of the debt, at least $35,182.66 is not in dispute. If at least a portion of the debt that is the subject of the petition is undisputed, that portion is sufficient to create a debt under Section 303(b)(1) not subject to a bona fide dispute. In re Willow Lake Partners, 156 B.R. 638, 643 (Bankr. W.D. Mo. 1993); In re F.R.P. Indus. Inc., 73 B.R. 309, 312 (Bankr. N.D. Fla. 1987). However, the numbers used to reach the $35,182.66 figure appear to be taken from correspondence between Key and BDC, and do not factor in all potential direct and indirect damages that BDC faced as a result of Key's failure to complete its work. The Bankruptcy Court was not charged with determining whether those as-yet-undetermined damages are less than, equal to or greater than the so-called undisputed amount. It is enough that there is a dispute as to the amount.
Appellants also claim that there remain "genuine issues of material fact," noting that the Bankruptcy Court treated BDC's motion to dismiss as one for summary judgment. Appellants state there is a question of fact as to "whether or not something is owed to Key." App.'s Reply Brief at 5. It is exactly because there exists a question of fact as to whether or not (and how much of) something is owed to Key that a bona fide dispute exists.
The Bankruptcy Court's decision is therefore not clearly erroneous as to Key.
b. DWF
The Bankruptcy Court looked to the fact that DWF had failed to fulfill contractual prerequisites for payment in finding that a bona fide dispute existed. Order, at 4. Under Section 10.1(f) of the contract between DWF and BDC, DWF has not yet fully pursued its lien rights for a claim of non-payment under the lien law of the State of New York. Thus, "a right to payment has not yet risen under the contract . . . and accordingly is subject to a bona fide dispute." Id.
Section 10.1(f) provides that DWF is entitled to assert a claim for payment of any amounts owing under its contract only if it:
has fully pursued its lien rights against the Project for which claim of non-payment is made under the lien law of the State of New York, including a foreclosure action against same . . . The Contractor hereby expressly waives
any and all claims with respect to any unpaid sums against Construction Manager under this Contract, unless and until the Lien Action is fully complete.
Section 10.1(f).
Appellants argue that the provision was never intended to apply to BDC, but was meant to insulate the construction manager, HRH, if BDC paid it instead of the subcontractors. Thus, even though BDC was assigned the rights and responsibilities under the contracts, Appellants argue that it should not receive the benefit of Section 10.1(f). The Appellants cite no authority for the proposition that a party who assumes the rights and obligations under a contract can be barred from enjoying some of those rights because of the original intention of the drafters without any direct contractual language to that effect. II. No need for Trial
In any case, there is an alternative argument that a bona fide dispute exists. BDC contends that the work done by DWF was unsatisfactory and that there exists a bona fide dispute as to recovery. The summary facts provided by Appellants fail to convince this Court otherwise.
No trial is required in order to determine if a bona fide dispute exists. "[I]f the court documents and arguments clearly establish that a claim is or is not subject to a bona fide dispute, a trial is unnecessary to determine whether the petition is jurisdictionally defective." In re Elsa, 155 B.R. at 363; In re B.B.S.I. Ltd., 81 B.R. 227 (Bankr. E.D.N.Y. 1998).
Appellants state that a hearing must be held because "the determination will often depend upon an assessment of witness credibilities and other factual considerations." App.'s Br. at 10 (citation omitted). In light of the submissions in this case, there was no need to rely on witness credibility.
III. Mesta's Standing
A subcontractor does not have a contractual claim against an owner that is not party to its contract. But Section 4 of New York Lien Law provides that a subcontractor can proceed on a mechanic's lien if there are funds due and owing to the general contractor under the primary contract at the time of the filing of the lien. Rure Assoc. Inc. v. Di Nardi Constr. Corp., 917 F.2d 1332 (2d Cir. 1990). A lien, however, "is only valid up to the amount, if any, still due and unpaid to the contractor. . . . If there are no monies due, then there is no fund to which the subcontractor's lien can attach." Ace Contracting Co. v. Garfield Arma Assocs., 148 Misc.2d 475, 560 N.Y.S.2d 832 (1990) (citation omitted); see Chelsea Equipment Servs. Corp. v. New York City Health Hosp. Corp., 1997 WL 790581, at *4 (S.D.N Y Dec. 24, 1997); 104 Contractors, Inc. v. R.T. Golf Assocs., 270 A.D.2d 817, 705 N.Y.S.2d 752 (2000)
Appellants state that funds were due and owing to the general contractor with which Mesta subbed. That contractor, Tveter, is a Chapter 7 debtor, and its bankruptcy petition indicates that Tveter was owed $9,846.00 from BDC. BDC offered testimony to the effect that Tveter had been paid in full. This disagreement presents an genuine issue of material fact that should have prevented the Bankruptcy Court from deciding that Mesta lacked standing. A more developed factual record could have eliminated this problem.
This result does not mean that Appellant's appeal must be granted. Mesta standing alone cannot pursue the involuntary petition filed under § 303(b)(1). That provision calls for three creditors and a minimum of $10,000 in claims. Mesta fails on both accounts, as it can only claim $9,846 of the money it alleges it is owed by BDC. Further, as discussed below, the intervening petitioners also lack standing so cannot provide the two additional entities necessary.
This Court does not address whether any of the Appellants could file under § 303(b)(2) as that issue was not briefed.
IV. Six Creditors' Standing
Section 303(c) of the Bankruptcy Code, which governs who is eligible to join an involuntary petition for bankruptcy after it has been filed, states in pertinent part:
(c) After the filing of a petition under this section but before the case is dismissed or relief or ordered, a creditor holding an unsecured claim that is not contingent, other than a creditor filing under subsection (b) of this same section, may join in the petition with the same effect as if such joining creditor were a petitioning creditor under subsection (b) of this section.11 U.S.C. § 303 (c); see also In re Kidwell, 158 B.R. 203, 210 (Bankr. E.D.Cal. 1993) ("The sole statutory qualification for joining is that the creditor must hold an nonexempt unsecured claim.")
The Bankruptcy Court held that the creditors lacked standing. As Appellants point out, there appears to be a typographical error in the Order, as the Court relied on the fact that the creditors lacked secured claims, rather than unsecured claims. It is likely an error, however, rather than a misinterpretation of the law, because it is counter-factual that the creditors lacked secured claims.
At the time of the order, all six creditors claimed that they had only secured claims, in the form of statutory liens. Since then, some of the creditors have stated that they were willing to waive a certain portion of their secured claims in order to join the suit. In addition, Appellants claim for the first time in their Reply Brief that five of the six creditors have unsecured claims of quantum meruit against BDC.
The quantum meruit claims fall prey to the requirement that there not be a bona fide dispute as to the amount. In re Braten, 86 B.R. 340, 343 (Bankr. S.D.N.Y. 1988). While BDC did not have the opportunity to respond to these claims, which appeared for the first time in the Appellant's reply brief, there are certain to be disputes as to the amount owed and if any amount is owed at all.
The issue of whether creditors may be considered unsecured creditors under § 303(c) by waiving a portion of the secured claim appears to be a novel issue in this Circuit. However, the Second Circuit Bankruptcy Appellate Panel has held that secured creditors may do so to qualify under § 303(b). In re Allen-Main Assocs., 223 B.R. 59, 61 (2d Cir. B.A.P. 1998) (citing 2 Collier on Bankruptcy ¶ 303.08; In re East-West Assocs., 106 B.R. 767, 771 (S.D.N.Y. 1989)). It is thus likely that creditors may waive secured claims in order to qualify under § 303(c). However, it does not appear from the record that the secured creditors have in fact actually waived the secured claims. Until they do so, they lack standing. A mere promise to waive the claim will not suffice to confer standing. This is unfortunate for the additional creditors, as creditors may only intervene prior to the dismissal of the petition for involuntary bankruptcy. § 303(c).
For the foregoing reasons, the Order is affirmed.
It is so ordered.