Source: https://law.justia.com/cases/federal/appellate-courts/F2/879/865/438867/
Timestamp: 2019-10-14 01:27:24
Document Index: 3736724

Matched Legal Cases: ['§ 303', '§ 303', '§ 303', '§ 303', '§ 303', '§ 303', '§ 303', '§ 303', '§ 303', '§ 303']

In re MEDLEY MANUFACTURING, INC., Debtor.Gary QUINTON, Appellant,v.MEDLEY MANUFACTURING, INC., Appellee.
No. 88-15002.
Argued and Submitted June 5, 1989.Decided July 11, 1989.
Gary Quinton filed an involuntary Chapter 11 bankruptcy petition against Medley Manufacturing, Inc. ("Medley"), claiming to be a creditor in the amount of $79,000. The bankruptcy court, after shortening the time Quinton had to respond to Medley's motion to dismiss, dismissed the petition on the grounds that Quinton's claim was subject to a "bona fide dispute" within the meaning of 11 U.S.C. § 303(b). On appeal, the Bankruptcy Appellate Panel ("BAP") upheld the dismissal and the shortening of time to respond.
We affirm. The bankruptcy court's finding of fact that Quinton's claim was subject to a "bona fide dispute" is not clearly erroneous. Furthermore, the court did not abuse its discretion in shortening the time that Quinton had to respond to the motion to dismiss.
A. In 1978, Gary Quinton became President of Medley, a Nevada corporation in the business of making toy slot machines. On February 24, 1981, to finance its operations, Medley borrowed $230,000 from Security Bank of Nevada. The loan was secured by two parcels of real properties: (1) Medley's factory, which is Medley's sole asset; and (2) a parcel owned by Joseph Arroyo.
On September 15, 1981, after borrowing money from American Savings and Loan and pledging the equity in his Reno family home as collateral, Quinton supposedly made an unsecured loan to Medley in the amount of $38,066.65.1 In 1983, Medley began experiencing "unusually difficult cash flow problems" and racked up considerable debt to private and government creditors, including the IRS.
B. On April 17, 1984, Medley (through Quinton, claiming to be its sole shareholder and director) filed a voluntary Chapter 11 bankruptcy petition, naming over 50 actual or disputed creditors. Then, on August 31, 1984, Quinton filed a claim against Medley in bankruptcy court for (1) the $47,000 loan at 19% interest; and (2) $32,000 for unpaid wages; for a total of $79,000.
Arroyo then filed a motion to dismiss the voluntary Chapter 11 petition, contending that the petition was not authorized by Medley's board of directors. On February 13, 1985, Judge Mooreman granted Arroyo's motion to dismiss the petition, finding that Quinton filed the bankruptcy petition "simply to wrest control of the liquidation away from Arroyo [who] had petitioned the state court to appoint him the receiver." Later that month, Arroyo terminated Quinton's affiliations with Medley.
C. When Medley defaulted on the loan, Security Bank instituted foreclosure on Medley's factory rather than on the Arroyo parcel. On January 14, 1987, Quinton filed an action in Nevada state court against Medley and Security Bank, and on February 17, 1987, the court granted a preliminary injunction halting the foreclosure on Medley's factory. Arroyo, who was not a party to these state proceedings, intervened and filed a motion to dissolve the injunction. The preliminary injunction was dissolved on April 27, 1987.
D. On April 27, 1987, the same day that the state court preliminary injunction was dissolved, Quinton filed an involuntary Chapter 11 petition against Medley in bankruptcy court. In this petition, Quinton claimed that Medley owed him $79,000.
On April 28, 1987, Medley moved to dismiss the involuntary petition on the grounds (1) that Quinton's claim was subject to a "bona fide dispute," and (2) that because Medley had more than 12 creditors, the petition required at least two additional creditors other than Quinton as per 11 U.S.C. § 303(b).
Also on April 28, Medley requested that its motion to dismiss be heard on an expedited basis, presumably to protect the Arroyo parcel from foreclosure. Later that same day, instead of allowing Quinton the usual 15 days to respond, the bankruptcy court entered an order setting an expedited hearing on May 5, but in response to Quinton's objections, gave Quinton until noon on May 8 to file a response.
On May 15, 1987, the bankruptcy court entered an Order dismissing the case on the grounds that Quinton's claim was subject to a "bona fide dispute", and immediately thereafter, Security Bank foreclosed on the Medley factory which was sold to Arroyo.
E. On appeal to the BAP, Quinton challenged the bankruptcy court's dismissal of the involuntary petition and also claimed that the bankruptcy court erred in shortening the time to respond. The BAP affirmed the judgment of the bankruptcy court. Quinton now appeals.
II. "Bona Fide Dispute"
A. As we are "in as good a position as the bankruptcy appellate panel to review the findings of the bankruptcy court," Matter of Comer, 723 F.2d 737, 739 (9th Cir. 1984), we review the decision of the bankruptcy court "independently." Matter of Glenn, 796 F.2d 1144, 1146 (9th Cir. 1986). Specifically, we review the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. Comer, 723 F.2d at 739.
B. The procedures for filing an involuntary Chapter 11 bankruptcy are set forth in 11 U.S.C. § 303. An involuntary case is commenced by the filing with the bankruptcy court of a petition:
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 $5,000 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) (emphasis added). If there are fewer than 12 creditors, the involuntary petition may be filed by only one creditor rather than three. 11 U.S.C. § 303(b) (2).2
C. In the judgment of both the bankruptcy court and the BAP, Quinton's claim against Medley was the subject of a "bona fide dispute." The bankruptcy court, citing various inconsistencies in Quinton's case, concluded that "Quinton has no real basis in fact for his claimed loan to Medley." ER 127. Furthermore, according to the BAP, "Quinton has not provided any evidence to substantiate his claim."3 ER 179. The bankruptcy court's finding of fact that Quinton's entire claim is subject to dispute is not clearly erroneous. Accordingly, we affirm.
III. Shortening The Time In Which Quinton Had To Respond
A. According to Bankruptcy Rule 1013(a), which concerns involuntary bankruptcy petitions, " [t]he court shall determine the issues of a contested petition at the earliest practicable time and forthwith enter an order for relief, dismiss the petition, or enter other appropriate orders." (emphasis added). This court has interpreted the phrase "at the earliest practicable time" to mean "when there is sufficient information to resolve the conflict before the court." Matter of Bishop, Baldwin, Rewald, Dillingham & Wong, Inc., 779 F.2d 471, 475 (9th Cir. 1985). Rule 140-4 of the Rules of the District of Nevada provides that " [u]nless ordered by the court, an opposing party shall have 15 days after service of the moving party's points and authorities within which to file and serve a memorandum of points and authorities in opposition to the motion."
B. Quinton argues that he "was damaged by the shortened time in that he was unable to properly prepare for the motion to dismiss" and that he was "prejudiced in that he was not given sufficient time to obtain creditors to join in his petition." It is true that the statute does allow other creditors to join an involuntary petition,4 and that according to Bankruptcy Rule 1003(b), if it appears there are 12 or more creditors, "the court shall afford a reasonable opportunity for other creditors to join in the petition before a hearing is held thereon."
C. The BAP, though, concluded that Quinton was not prejudiced by the order. In arriving at this judgment, the BAP pointed out that
Quinton had eight days (with a three day extension) to respond to the motion. Quinton knew from the start that Medley had more than twelve creditors.... Moreover, the other creditors are not objecting to the order.
ER 180 (emphasis added).
The rationale for the emphasized statement above is that if Quinton knew from the start that Medley had more than 12 creditors, he should have also known that the involuntary petition had to be filed by at least three creditors as per 11 U.S.C. § 303(b) (1). Quinton apparently attacks this reasoning from two perspectives. First, Quinton argues that the BAP improperly made a finding of fact that Quinton knew from the start that Medley had more than twelve creditors. Second, Quinton argues that the finding itself is erroneous.
D. Quinton contends that by making a finding of fact, the BAP momentarily forgot that it is a court of appeals. But Quinton's assertion is weak because the BAP was merely taking cognizance of facts already developed by the bankruptcy court.
Specifically, as previously mentioned, when Quinton filed the voluntary petition in 1984, he listed over 50 creditors of Medley. Five days before filing the involuntary petition, Quinton testified in state court that he felt "very confident that the financial situation of Medley has not changed substantially since 1985." Furthermore, during the hearing on Medley's motion to dismiss, the bankruptcy court commented on Quinton's admission that Medley's debts were substantially the same since 1984 when there were over fifty creditors.
Quinton also argues that he did not know Medley had so many creditors, and a finding of fact to the contrary is clearly erroneous. We disagree. But even if the BAP's finding of fact that Quinton knew that Medley had more than twelve creditors were clearly erroneous, there is no evidence that the bankruptcy court relied on this fact in deciding to shorten the time.
E. It should be kept in mind that we are reviewing the decision of the bankruptcy court, not of the BAP. In deciding to grant the motion shortening Quinton's time to respond, the bankruptcy court noted that it "reviewed the pleadings and papers on file herein" and that there existed "good cause" to file the order. Even if it were improper for the BAP to mention that Quinton knew that Medley had more than twelve creditors, it cannot be reasonably concluded that the bankruptcy court, which had the benefit of the parties and all the facts before it, abused its discretion in shortening Quinton's time to respond. Furthermore, it appears that the bankruptcy court was disinclined to allow other creditors to join the petition because of concerns that Quinton's petition was not filed in good faith. Finally, even if Quinton were granted the usual time to respond, his involuntary petition should still have been dismissed because his claim was subject to a "bona fide dispute."
F. The BAP reviewed the decision of the bankruptcy court shortening the time to respond and found that there was no abuse of discretion. We agree.
According to Quinton, Medley "apparently" issued a note to Quinton for $47,000 at 19% interest, but this note is not in the record below. The actual amount that Quinton claims to have borrowed from American was $47,000 at 19% interest, with the $38,066.65 representing the net amount of the loan after payment of closing costs and an $8,000 encumbrance
The implication of the statute is that "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." Matter of Busick, 831 F.2d 745, 750 (7th Cir. 1987) (quoting Matter of Lough, 57 B.R. 993, 997 (E.D. Mich. 1986))
The BAP pointed out that the only document Quinton produced was a bank statement showing a deposit of $38,066.65 to Medley's account on September 15, 1981, but that "this date does not even correlate with the date on which the loan was supposedly made." ER 179
According to 11 U.S.C. § 303(c), "a creditor holding an unsecured claim that is not contingent, other than a creditor filing under [11 U.S.C. § 303(b) ], may join in the petition with the same effect as if such joining creditor were a petitioning creditor under [11 U.S.C. § 303(b) ]." Six creditors did move to intervene, but their claims totaled less than $5,000 so they did not qualify under 11 U.S.C. § 303(b)