Opinion ID: 768308
Heading Depth: 2
Heading Rank: 2

Heading: Award of Costs, Attorney's Fees, and Damages

Text: 21 The creditors next argue that the Bankruptcy Court abused its discretion in awarding costs, attorney's fees, and damages against them pursuant to 303(i)(1) and (2) because they did not act in bad faith. Section 303(i) provides: 22 If 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 23 (1) against the petitioners and in favor of the debtor for 24 (A) costs; or 25 (B) a reasonable attorney's fee; or 26 (2) against any petitioner that filed the petition in bad faith, for 27 (A) any damages proximately caused by such filing; or 28 (B) punitive damages. 29 11 U.S.C. 303(i). Under the terms of the statute, bad faith is not a prerequisite to an award of costs and attorney's fees under 303(i)(1). Cf. Susman, 854 F.2d at 160 (noting that bad faith on the part of the creditors is not the only situation in which fees may be awarded). We have no reason and the creditors have offered us no reason to believe that the Bankruptcy Court exceeded its allowable discretion in awarding costs and attorney's fees under 303(i)(1) in this case. Accordingly, we reject their challenge to the portion of the District Court's judgment that affirmed the 303(i)(1) award. 30 The creditors' challenge to the award of damages pursuant to 303(i)(2) gives us greater pause. Such an award requires a finding of bad faith. Moreover, there is a presumption of good faith in favor of the petitioning creditor, and thus the alleged debtor has the burden of proving bad faith. United States Fidelity & Guar. Co. v. DJF Realty & Suppliers, Inc., 58 B.R. 1008, 1011 (N.D.N.Y. 1986), quoted in LNC Invs., Inc. v. Secured Equip. Trust of Eastern Airlines, Inc. (In re Secured Equip. Trust of Eastern Air Lines, Inc.), No. 91 Civ. 5049 (MBM), 1992 WL 295943, at  (S.D.N.Y. Oct. 8, 1992). 31 Because 'bad faith' is not defined in the bankruptcy code, and because there is no legislative history addressing the intended meaning of this language, courts have used different approaches to determine whether a petition was filed in bad faith [for purposes of 303(i)(2)]. General Trading Inc. v. Yale Materials Handling Corp., 119 F.3d 1485, 1501 (11th Cir. 1997), cert. denied, 523 U.S. 1055 (1998). Some courts have used an improper use test, which finds bad faith when a petitioning creditor uses involuntary bankruptcy procedures in an attempt to obtain a 'disproportionate advantage' for itself, rather than to protect against other creditors obtaining disproportionate advantages, particularly when the petitioner could have advanced its own interests in a different forum. In re K.P. Enter., 135 B.R. 174, 179 n.14 (Bankr. D. Me. 1992); see also In re Better Care, Ltd., 97 B.R. 405, 410-11 (Bankr. N.D. Ill. 1989). Other courts have applied an improper purpose test, where bad faith exists if the filing of the petition was motivated by ill will, malice, or a desire to embarrass or harass the alleged debtor. See, e.g., In re Camelot, Inc., 25 B.R. 861, 864 (Bankr. E.D. Tenn. 1982). A third line of cases employs an objective test for bad faith based on what a reasonable person would have believed. Jaffe v. Wavelength, Inc. (In re Wavelength, Inc.), 61 B.R. 614, 620 (B.A.P. 9th Cir. 1986) (internal quotation marks omitted). Finally, as the Eleventh Circuit has observed, a number of courts have sought to model the bad faith inquiry on the standards set forth in Bankruptcy Rule 9011. See General Trading Inc., 119 F.3d at 1501-02; In re Fox Island Square Partnership, 106 B.R. 962, 967-68 (Bankr. N.D. Ill. 1989). According to the Eleventh Circuit: 32 An analysis under Rule 9011 inquires into a significant objective requirement bearing on the legal justification of a claim or defense: a reasonable inquiry into the facts and the law. In addition to requiring an objective inquiry, Rule 9011 requires a subjective inquiry as well: the bankruptcy proceeding cannot have been interposed for an improper purpose, such as to harass, to cause delay, or to increase the cost of litigation. 33 General Trading Inc., 119 F.3d at 1502 (citation omitted). 34 The Bankruptcy Court concluded that it did not need to choose among these approaches because Lubow Machine and McLean had filed the petition in bad faith under any of the tests. With respect to Lubow Machine, the Bankruptcy Court based its determination upon the fact that Lubow Machine knew, or was reckless in not knowing, that any debt that remained due and owing from the sale of the machine was the debt of [Stavropoulos] and not of Bayshore. The Bankruptcy Court further found that [i]f either Lubow Machine or McLean had made even the barest of a reasonable inquiry, each would have recognized that Bayshore was paying its debts as they became due. 35 Like the Bankruptcy Court, we see no need to choose among the various tests for bad faith in disposing of this case; however, unlike the Bankruptcy Court, we conclude that there is no basis for a finding of bad faith under any of the tests currently in usage. At the time the petition was filed, Lubow Machine and McLean had access to an affidavit in which Bayshore's president stated that [t]he understanding [when Bayshore was formed] was that Bayshore would pay to Lubow $200,000. While we agree with the Bankruptcy Court's post-trial conclusion that the debt for the purchase of the machine in fact runs from Stavropoulos to Lubow Machine, it is also clear that, at the time the petition was filed, Stavropoulos's affidavit provided Lubow Machine and McLean with a reasonable basis for believing that Bayshore was liable to Lubow Machine for the purchase of the machine. Indeed, in denying Bayshore's motion to dismiss, the Bankruptcy Court itself tentatively concluded that Bayshore was indebted to Lubow Machine for the purchase of the machine. There is thus no basis for the Bankruptcy Court's finding that Lubow Machine knew, or was reckless in not knowing, that any debt that remained due and owing from the sale of the machine was [Stavropoulos's] debt. Cf. Baker v. Latham Sparrowbush Assocs. (In re Cohoes Indus. Terminal, Inc.), 931 F.2d 222, 229 (2d Cir. 1991) ([A] court may not ordinarily consider a Chapter 11 bankruptcy petition to be frivolously filed if the court itself previously rejected a motion to dismiss the petition.). 36 Further, without addressing the merits of the 303(h)(1) issue presented on this appeal, we note that there was some evidence to suggest that Bayshore was not paying its debts as they became due at the time this proceeding was commenced. In July 1995, the creditors received the results of a lien search, which indicated that federal tax liens totaling over $24,000 had been filed against Bayshore. 5 At the time that the petition was filed in September 1995, Bayshore had no financial ledgers of any kind, so the creditors could not obtain any assurance from the company itself as to its solvency. Given these facts, we conclude that the Bankruptcy Court clearly erred in finding that [i]f either Lubow Machine or McLean had made even the barest of a reasonable inquiry, each would have recognized that Bayshore was paying its debts as they became due. Because there is no basis upon which to reject the presumption that the creditors acted in good faith, the Bankruptcy Court clearly erred in finding that Lubow Machine and McLean had filed the petition in bad faith. Accordingly, we reverse the award of damages pursuant to 303(i)(2).