Court Opinion

ID: 4391713
Source: CourtListenerOpinion
Date Created: 2019-04-29 17:00:28.352753+00
Date Added: 2024-06-11T14:51:54.898382
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

 IN THE MATTER OF 8SPEED8, INC.                    No. 17-16277

                                                     D.C. No.
 VIBE MICRO, INC.,                                2:14-cv-01618-
                                Appellant,             RFB

                      v.
                                                     OPINION
 SIG CAPITAL, LLC,
                                  Appellee.

          Appeal from the United States District Court
                   for the District of Nevada
        Richard F. Boulware II, District Judge, Presiding

          Argued and Submitted November 15, 2018
                  San Francisco, California

                       Filed April 29, 2019

    Before: Susan P. Graber, Stephanie Dawn Thacker, *
            and Mark J. Bennett, Circuit Judges.

    *
      The Honorable Stephanie Dawn Thacker, United States Circuit
Judge for the U.S. Court of Appeals for the Fourth Circuit, sitting by
designation.
2              IN THE MATTER OF 8SPEED8, INC.

                   Opinion by Judge Thacker;
                   Dissent by Judge Bennett

                          SUMMARY **

                           Bankruptcy

    The panel affirmed the district court’s decision affirming
the bankruptcy court’s denial of a request for statutory
damages made by a 50% shareholder in an involuntary
debtor following dismissal of the bankruptcy case.

    The panel held that the shareholder lacked standing to
seek damages under 11 U.S.C. § 303(i) because it was not
the debtor.

    Dissenting, Judge Bennett wrote that Miles v. Okun (In
re Miles), 430 F.3d 1083 (9th Cir. 2005), holding that a third
party could not seek damages under § 303(i), was not
dispositive, and the shareholder did not lack standing to seek
damages and attorneys’ fees that would be awarded to the
debtor, regardless of the debtor’s ability to defend itself in
the bankruptcy action, and notwithstanding that the
shareholder actually obtained a dismissal on behalf of the
debtor.

    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
             IN THE MATTER OF 8SPEED8, INC.               3

                       COUNSEL

Torrence E.S. Lewis (argued), Law Offices of Torrence E.S.
Lewis, Pittsburgh, Pennsylvania, for Appellant.

David A. Stephens (argued), Stephens Gourley & Bywater,
Las Vegas, Nevada, for Appellee.

                        OPINION

THACKER, Circuit Judge:

    This case asks whether a 50% shareholder of an
involuntary debtor may seek damages under 11 U.S.C.
§ 303(i). We hold that it may not. Accordingly, we affirm
the decision of the district court.

    In March 2012, 8Speed8, Inc. was incorporated in the
state of Nevada. Appellant Vibe Micro, Inc. is a 50% owner
of 8Speed8’s voting stock. Appellee SIG Capital, Inc. is a
creditor of 8Speed8 and owns 20 million contingent shares.

    On December 13, 2013, SIG filed the involuntary
bankruptcy petition at the center of this dispute. 8Speed8
never appeared in the bankruptcy action. Instead, on January
10, 2014, Vibe Micro filed a motion to dismiss the
bankruptcy. Vibe Micro also asked for costs, fees, and
actual and punitive damages under § 303(i). The bankruptcy
court held a hearing August 28, 2014. At the hearing, SIG
conceded that dismissal was appropriate. The bankruptcy
court agreed but denied Vibe Micro’s request for statutory
attorney’s fees and damages.
4            IN THE MATTER OF 8SPEED8, INC.

    The court concluded that Vibe Micro did not have
standing under § 301(i). The district court affirmed that
decision, and this appeal followed.

    We review the bankruptcy court’s interpretation of
bankruptcy statutes de novo. See Sofris v. Maple-Whitworth,
Inc. (In re Maple-Whitworth, Inc.), 556 F.3d 742, 745 (9th
Cir. 2009). No deference is given to the district court’s
review of that decision. See Higgins v. Vortex Fishing Sys.,
Inc., 379 F.3d 701, 705 (9th Cir. 2004).

    Section 303(i) provides:

           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–

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

               (A) costs; or

               (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.

11 U.S.C. § 303(i) (emphasis added).
              IN THE MATTER OF 8SPEED8, INC.                  5

     In In re Miles, we considered whether third parties may
seek damages under § 303(i). See Miles v. Okun (In re
Miles), 430 F.3d 1083, 1093–94 (9th Cir. 2005).
Specifically, we examined two interpretations of standing to
seek § 303(i) damages: Either the presence of the phrase “in
favor of the debtor” in § 303(i)(1) (regarding costs and
attorney’s fees) limits standing to collect all § 303(i)
damages to the debtor, or the omission of that phrase from
§ 303(i)(2) (regarding other damages for bad faith filings)
allows persons other than the debtor to collect damages for
bad faith filings, but not costs and attorney’s fees. See id. at
1093. In evaluating those competing interpretations, we
considered legislative history, relevant caselaw, and public
policy to determine the proper reading of the statute. See id.
(citing Barstow v. IRS (In re Bankr. Estate of MarkAir, Inc.),
308 F.3d 1038, 1043–46 (9th Cir. 2002)). With those factors
in mind, we concluded that § 303(i) limits standing to
recover statutory damages resulting from an involuntary
bankruptcy proceeding to the debtor. Those same factors
compel a similar result here.

    First, the relevant House and Senate Reports suggest that
only the debtor has standing to seek § 303(i) damages. See
H.R.Rep. No. 95-595, at 324 (1977), reprinted in 1978
U.S.C.C.A.N. 5963, 6280; S.Rep. No. 95-989, at 34 (1978),
reprinted in 1978 U.S.C.C.A.N. 5787, 5820. According to
those reports, “if a petitioning creditor filed the petition in
bad faith, the court may award the debtor any damages
proximately caused by the filing of the petition.” Id. “This
specific reference to the ‘debtor’ is a strong indication that
Congress intended only the debtor to have standing to seek
damages.” Franklin v. Four Media Co. (In re Mike Hammer
Prods., Inc.), 294 B.R. 752, 754 (B.A.P. 9th Cir. 2003).
6             IN THE MATTER OF 8SPEED8, INC.

    Second, appellate courts in this circuit have twice
considered whether a non-debtor can seek damages under
§ 303(i), and twice those courts have decided it cannot. See
In re Miles, 430 F.3d at 1093–94; In re Hammer, 294 B.R.
at 753–54. Appellant’s attempts to distinguish Miles on its
facts are unavailing. Appellant notes that, in Miles, the
debtor actually appeared in the involuntary proceedings, but
in contrast, 8Speed8 never appeared in this case. Although
true, Appellant’s distinction does not require disparate
treatment.

     Appellants would have this court believe they are mere
martyrs, standing up for the interests of 8Speed8 when no
one else would. But, as valiant as Vibe Micro’s intentions
may have been, they were unnecessary. The Code has within
its sections a remedy for cases like this: Section 305 gives
the bankruptcy court the power to dismiss an involuntary
petition sua sponte. “The court, after notice and a hearing,
may dismiss a case . . . at any time if . . . the interests of
creditors and the debtor would be better served by such . . . .”
11 U.S.C. § 305(a); see also In re Accident Claims
Determination Corp., 146 B.R. 64, 67–68 (Bankr. E.D.N.Y.
1992) (dismissing an involuntary petition where the
petitioning creditors were intending to harass the debtor and
its principals); In re Westerleigh Dev. Corp., 141 B.R. 38, 41
(Bankr. S.D.N.Y. 1992) (dismissing an involuntary petition
after finding that the petition was filed by a corporate
shareholder to gain leverage over another shareholder).
Accordingly, Vibe Micro’s appearance in this case was just
as voluntary as was the appearance of the third parties in
Miles.

    Third, reading § 303(i) to permit only the debtor to seek
damages is consistent with its purpose and the policy
interests underlying it. Section 303(i) is intended to alleviate
             IN THE MATTER OF 8SPEED8, INC.                 7

the consequences that involuntary proceedings impose on
the debtor. Those consequences include “loss of credit
standing, inability to transfer assets and carry on business
affairs, and public embarrassment.” In re Reid, 773 F.2d
945, 946 (7th Cir. 1985). A third party, who intervenes
freely in an involuntary action, does not face those same
consequences. Even if it did, § 303(i) would still not
guarantee costs, fees, or damages. An award under § 303(i)
—which states that the court “may” award costs, fees, or
damages—is not mandatory. See Susman v. Schmid (In re
Reid), 854 F.2d 156, 159 (7th Cir. 1988) (explaining that an
award of attorney’s fees under § 301(i) is “committed to the
discretion of the district court”); Bankers Tr. Co. BT Serv.
Co. v. Nordbrock (In re Nordbrock), 772 F.2d 397, 400 (8th
Cir. 1985) (stating that a motion for attorney’s fees is
addressed in the discretion of the court); In re Kidwell,
158 B.R. 203, 217 (Bankr. E.D. Cal. 1993) (stating that “the
better view is that [an award of costs and fees is]
discretionary and not mandatory”); In re Johnston Hawks
Ltd., 72 B.R. 361, 365 (Bankr. D. Haw. 1987) (stating that
“the award of attorney’s fees and costs is discretionary”).
Indeed, “the plain language of the statute clearly
contemplates that fees and costs will not be awarded in all
cases, even though a party will ordinarily incur attorneys’
fees in seeking to dismiss the petition.” In re Reid, 854 F.2d
at 159.

   AFFIRMED.

BENNETT, Circuit Judge, dissenting:

   The Majority holds that, under Miles v. Okun (In re
Miles), 430 F.3d 1083 (9th Cir. 2005), a third party who
appears for a debtor and successfully defends against an
8              IN THE MATTER OF 8SPEED8, INC.

involuntary bankruptcy petition can never request that the
debtor be awarded costs, a reasonable attorney’s fee, or
damages. The Majority finds that this is the case even when,
as here, the debtor never appeared in the involuntary
bankruptcy action, was prevented from appearing by its
deadlocked governance, and the third party who appeared on
behalf of the debtor successfully defended the involuntary
bankruptcy. This rule, according to the Majority, is absolute,
regardless of how closely related the third party is to the
debtor, and even though the third party only seeks an award
in favor of the debtor. 1 Because Miles never went so far, and
because I believe the Majority’s rule is inconsistent with
both the relevant statutory text and the policies underlying
the Bankruptcy Act, I respectfully dissent.

    Appellant Vibe Micro, Inc. owned 50% of the debtor
8Speed8’s vested voting shares. Appellee SIG, LLC owned
contingent shares in 8Speed8, which had not vested at the
time of the involuntary bankruptcy petition. 8Speed8’s
board of directors reflected its collective ownership, with a
director appointed from each of the owners, including SIG.
Any action taken on behalf of the company required a two-
thirds majority of the directors or the shareholders.

   On December 13, 2013, SIG filed an involuntary
bankruptcy petition against 8Speed8. According to Vibe
Micro, both SIG and Luxor Entertainment, Inc.—the other
50% shareholder—intended to liquidate 8Speed8 contrary to
Vibe Micro’s position and inconsistent with its interests.

    1
       I don’t believe Appellant’s position on this is unclear—it sought
fees and damages to be awarded to the debtor. My dissent goes to this
circumstance only—a third party asking that fees and damages be
awarded to the debtor in a case where the debtor has not appeared, and
the third party appeared on behalf of the debtor.
                IN THE MATTER OF 8SPEED8, INC.                         9

Since “no one else could or would appear,” Vibe Micro filed
a motion to dismiss on behalf of 8Speed8, which the
bankruptcy court granted. Vibe Micro also sought, on behalf
of the debtor, 1) costs or a reasonable attorney’s fee,
pursuant to 11 U.S.C. § 303(i)(1); and 2) “damages
proximately caused by” what it claimed was the bad faith
filing of the petition, pursuant to 11 U.S.C. § 303(i)(2). The
bankruptcy court granted Vibe Micro’s motion to dismiss,
but it (and later the district court) held that Vibe Micro did
not have standing to seek either fees or damages that would
be awarded to the debtor because Vibe Micro was not
actually “the debtor.”

    Involuntary bankruptcy is a drastic course of action that
carries significant consequences, and “[f]iling an
involuntary petition should be a measure of last resort.”
Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 707 (9th
Cir. 2004). The fee-shifting and damages provisions of
§ 303(i) are intended to deter frivolous filings. See id.
(regarding fee-shifting under § 303(i)(1)); In re Fox Island
Square P’ship, 106 B.R. 962, 968 (Bankr. N.D. Ill. 1989)
(regarding damages under § 303(i)(2)) (“This deterrent
should be directed not merely to the petitioning creditor in
the case at bar, but also should serve as an example for
similar circumstances in future cases.” (quoting In re
Advance Press & Litho, 46 B.R. 700, 706 (Bankr. D. Colo.
1984)). Appropriate deterrence serves not only to protect
debtors from the very significant (and often irreparable)
consequences that flow from an involuntary bankruptcy
petition 2, but also to try to insulate the bankruptcy court from

     2
       “An allegation of bankruptcy is a charge that ought not to be made
lightly. It usually chills the alleged debtor’s credit and his sources of
supply. It can scare away his customers. It leaves a permanent scar, even
if promptly dismissed.” In re SBA Factors of Miami, 13 B.R. 99, 101
10              IN THE MATTER OF 8SPEED8, INC.

being unnecessarily and improperly used as a tool to resolve
disputes. See Advance Press, 46 B.R. at 702 (“It is . . .
obvious that the use of the bankruptcy court as a routine
collection device would quickly paralyze this court.”
(quoting In re SBA Factors of Miami, 13 B.R. 99, 101
(Bankr. S.D. Fla. 1981)). For these reasons, “there must be
available some remedy for the improper filing of an
involuntary petition.” In re Ed Jansen’s Patio, Inc., 183 B.R.
643, 644 (Bankr. M.D. Fla. 1995) (permitting the assignee
for benefit of creditors to assert a claim for costs, fees, and
damages on behalf of the debtor under § 303(i)).

     In keeping with the purpose and nature of § 303(i),
parties with a close relationship to a debtor, who have
actually defended against an involuntary bankruptcy
petition, have been allowed to collect damages and fees. See,
e.g., Fox Island, 106 B.R. at 967 (holding that non-
petitioning partners can collect damages for defending the
partnership against an involuntary petition filed by other
partners); see also Havens v. Leong P’ship, 586 B.R. 760
(Bankr. N.D. Cal. 2018) (holding that an alleged partner in a
fictitious partnership had standing to seek damages), appeal
docketed, No. 18-15679. 3

(Bankr. S.D. Fla. 1981); see also 2 Collier on Bankruptcy ¶ 303.37 (16th
ed. 2018) (“Since the Code was enacted in 1978, some people have used
section 303 as a means of harassment; this was an effective technique in
the sense that even if the wrongful cases were dismissed (after effort to
be sure), they resulted in serious consequences for the victim of the
wrongful filing.”).
    3
       In fact, the cases in which non-debtors successfully claimed
damages each involved a debtor who did not appear and a third party
closely aligned with the debtor. Compare, e.g., Ed Jansen’s Patio,
183 B.R. at 644 (assignee for benefit of non-petitioning creditors) and In
                IN THE MATTER OF 8SPEED8, INC.                        11

    Similarly, the Southern District of New York found that
a 50% shareholder had standing to contest an involuntary
bankruptcy petition: “[T]he debtor in the instant case is
unable to answer the petition because its only two
shareholders are on either side of the case, with neither
having authority to act for the corporation.” 4 In re
Westerleigh Dev. Corp., 141 B.R. 38, 40 (Bankr. S.D.N.Y.
1992); see also In re Synergistic Techs., Inc., No. 07-31733-
SGJ-7, 2007 WL 2264700, at *5 (Bankr. N.D. Tex. Aug. 6,
2007) (“[W]hen there is a corporate governance deadlock
that prevents a corporate debtor from taking a position with
regard to an involuntary bankruptcy petition, the court
should allow shareholders to assert positions [including
requests for damages under § 303(i)] on behalf of the alleged
debtor.”). Decisions allowing third parties that successfully
defend against involuntary bankruptcy petitions to seek fees
and damages that would be awarded to the debtor are in
accord with the actual language of § 303(i)(1) which permits
a judgment for fees or costs “against the petitioners and in
favor of the debtor,” and are certainly not inconsistent with
§ 303(i)(2), which permits an award of damages against a

re Synergistic Techs., Inc., No. 07-31733-SGJ-7, 2007 WL 2264700, at
*6 (Bankr. N.D. Tex. Aug. 6, 2007) (33% shareholder and board
member), with Franklin v. Four Media Co. (In re Mike Hammer Prods.,
Inc.), 294 B.R. 752 (B.A.P. 9th Cir. 2003) (holding creditors, who had
no other affiliation to the debtor, did not have standing to seek costs or
damages under § 303(i)).
    4
       The Majority cites Westerleigh for the proposition that a
bankruptcy court can dismiss a petition sua sponte if it is filed by a
shareholder to gain leverage against another shareholder. Maj. Op. at 6.
But the bankruptcy court in Westerleigh did not act sua sponte. Rather,
the court found that the non-petitioning 50% shareholder had standing to
contest the involuntary bankruptcy petition and granted that
shareholder’s motion to dismiss. 141 B.R. at 41.
12           IN THE MATTER OF 8SPEED8, INC.

petitioner that files a petition in bad faith. See Ed Jansen’s
Patio, 183 B.R. at 644.

    Here, Vibe Micro owned 50% of the debtor’s stock and
stepped into the debtor’s shoes to defend against the
involuntary bankruptcy proceeding, and the party that filed
the involuntary bankruptcy petition was itself a shareholder
and on the board of directors. SIG admitted that 8Speed8
was essentially non-functional because of the shareholders’
disputes: “[T]here was a breakdown. There was a lack of
communication. There was a shareholder meeting called that
was—that not all the shareholders wanted to attend.” Any
action on behalf of 8Speed8 required a two-thirds majority,
either of the board (which included SIG) or of the
shareholders (which were split 50–50). There is no
indication that a vote of any kind ever took place. Under
these circumstances, it is likely that Vibe Micro was the only
party willing or able to defend 8Speed8 against involuntary
bankruptcy, as it has asserted. The bankruptcy court should
have at least determined whether Vibe Micro was correct in
its assertion that, but for its actions, the debtor’s interests
would have gone wholly unrepresented and undefended. If
Vibe Micro was truly the only party willing and able to act
for 8Speed8, it should have been allowed to seek fees and
damages under § 303(i).

    The cases cited by the Majority do not support its rule.
In re Mike Hammer Productions, Inc., which the Majority
cites for the proposition that “Congress intended only the
debtor to have standing to seek damages,” Maj. Op. at 5,
stands only for the commonsense proposition that if a party
lacks standing to contest an involuntary bankruptcy
petition—as creditors do in most circumstances—then it also
lacks standing to collect costs, fees, or damages under
§ 303(i). Franklin v. Four Media Co. (In re Mike Hammer
               IN THE MATTER OF 8SPEED8, INC.                    13

Prods., Inc.), 294 B.R. 752, 754–55 (B.A.P. 9th Cir. 2003).
The case says nothing about third parties who step into a
debtor’s shoes. 5 In fact, the court in Hammer appears to
recognize that third parties have standing to seek damages
when they represent the debtor. 294 B.R. at 755 (noting that
in Ed Jansen’s Patio, 183 B.R. at 644, the “assignee for
benefit of creditors” was eligible to recover damages as a
“representative of the debtor’s estate”; observing that the
third party with standing in Fox Island, 106 B.R. at 968, had
“represented the Partnership”; and citing approvingly to an
American Law Reports analysis of § 303(i)(1)(B) entitled
“Standing of parties other than alleged debtor to seek award
of attorney’s fees”).

    The Majority primarily relies on Miles to support its
holding that a third party can never collect damages,
contending that “Appellant’s appearance in this case was just
as voluntary as the third parties in Miles.” Maj. Op. at 6. But
Miles involved true third parties—relatives of the debtors—
who filed a separate suit in state court and who never
appeared in the underlying bankruptcy cases. 430 F.3d at
1086. Vibe Micro is not such an independent third party—it
was acting as a 50% shareholder during a corporate
governance breakdown. Vibe Micro has always asserted that
no other entity was willing to defend 8Speed8, and Vibe
Micro claimed fees and damages, not after the fact and not
for itself, as in Miles, but in the bankruptcy proceeding and
for the debtor, as part of its motion to dismiss filed on the
debtor’s behalf.

    5
      There was no suggestion that the non-petitioning creditors in
Hammer were acting on behalf of the debtor—they were, in fact,
simultaneously suing the debtor in state court. See 294 B.R. at 753.
14              IN THE MATTER OF 8SPEED8, INC.

     Miles primarily dealt with the meaning of § 303(i)(2),
which allows for “damages against any petitioner”
proximately caused by the bad faith filing of an involuntary
petition. Miles found that the language in § 303(i)(1)—that
fees and costs could only be awarded “in favor of the
debtor”—should be read into § 303(i)(2). 430 F.3d at 1093–
94. Consequently, § 303(i)(2) did not allow relatives of the
debtors to recover damages they personally suffered, even if
proximately caused by the bad faith filing of an involuntary
petition against their family members. Id. at 1094. Miles says
nothing about a non-debtor who obtains a dismissal for the
debtor and requests that damages be awarded to the debtor
under § 303(i)(2). Moreover, reading the words “in favor of
the debtor” into § 303(i)(2), as Miles does, would seem to
support, rather than defeat, the claim made here by Vibe
Micro. And, Miles certainly should not be read to bar a non-
debtor who successfully obtains dismissal of a petition from
obtaining “judgment . . . in favor of the debtor for . . .
A) costs; or B) a reasonable attorney’s fee” pursuant to
§ 303(i)(1). 6 Such a rule is inconsistent with the purposes
underlying § 303(i) and takes Miles beyond both its facts and
its holding.

    Of course, Vibe Micro should not automatically get its
fees and damages. I would remand this case for factual

     6
       We do not here face the question of whether Miles bars a third
party closely related to the debtor from collecting fees or damages for
itself when it acts on behalf of a non-appearing debtor in successfully
defending against an involuntary bankruptcy proceeding (though I note
the policies underlying the statute would counsel in favor of allowing
such awards). As noted, we are here faced only with the question of
whether a third party closely related to the debtor can obtain fees or
damages for the debtor in a case where the debtor did not appear, and the
third party obtained a dismissal of the involuntary petition on the
debtor’s behalf.
             IN THE MATTER OF 8SPEED8, INC.                 15

findings that were never made. The bankruptcy court would
need to, inter alia, 1) determine whether any party other than
Vibe Micro could have appeared on 8Speed8’s behalf, see
Fox Island, 106 B.R. at 967 (making a factual finding that a
non-petitioning partner represented the partnership);
2) decide whether the filing was in bad faith; and 3) calculate
the appropriate damages and fees—if any—in light of the
totality of the circumstances, Higgins, 379 F.3d at 707. I
cannot agree with the Majority’s determination that Vibe
Micro lacks standing to seek fees and damages that would
be awarded to the debtor, regardless of the debtor’s ability to
defend itself in the bankruptcy action, and notwithstanding
that Vibe Micro actually obtained a dismissal on behalf of
the debtor. Accordingly, I respectfully dissent.