Court Opinion

ID: 3209329
Source: CourtListenerOpinion
Date Created: 2016-06-04 01:01:03.846796+00
Date Added: 2024-06-11T08:39:44.842222
License: Public Domain

FILED
                                                                  JUN 03 2016
 1                         NOT FOR PUBLICATION
                                                             SUSAN M. SPRAUL, CLERK
                                                                U.S. BKCY. APP. PANEL
 2                                                              OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.    AZ-15-1130-KuJaJu
                                   )
 6   MEDPOINT MANAGEMENT, LLC,     )      Bk. No.    14-15234
                                   )
 7                  Debtor.        )
     ______________________________)
 8                                 )
     MEDPOINT MANAGEMENT, LLC,     )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )      MEMORANDUM*
11                                 )
     JASON JENSEN; MIKE DANZER;    )
12   7511 IRA INVESTMENTS, LLC;    )
     ROBERT BROWN,                 )
13                                 )
                    Appellees.     )
14   ______________________________)
15                    Argued and Submitted on May 20, 2016
                               at Phoenix, Arizona
16
                              Filed – June 3, 2016
17
              Appeal from the United States Bankruptcy Court
18                      for the District of Arizona
19    Honorable Daniel P. Collins, Chief Bankruptcy Judge, Presiding
20   Appearances:     Jonathan Frutkin of The Frutkin Law Firm Plc
                      argued for appellant Medpoint Management, LLC;
21                    Anthony Warren Austin of Fennemore Craig, P.C.
                      argued for appellees Jason Jensen, Mike Danzer,
22                    7511 IRA Investments, LLC and Robert Brown.
23
24
25
26        *
           This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8024-1.
 1   Before: KURTZ, JAIME** and JURY, Bankruptcy Judges.
 2                                INTRODUCTION
 3        Four creditors of alleged debtor Medpoint Management, LLC
 4   filed an involuntary chapter 71 petition against Medpoint.   The
 5   bankruptcy court granted Medpoint’s motion to dismiss because of
 6   Medpoint’s connection to the cultivation and sale of medical
 7   marijuana, which might be legal under Arizona law but still is
 8   illegal under federal law.    The petitioning creditors have not
 9   appealed the bankruptcy court’s dismissal.
10        In the process of dismissing the petition, the bankruptcy
11   court ruled that Medpoint was not entitled to recover from the
12   petitioning creditors its attorney’s fees, costs and punitive
13   damages, and the court denied as unnecessary Medpoint’s request
14   for an evidentiary hearing on those issues.    Medpoint appeals
15   those rulings.
16        The bankruptcy court never permitted the parties to fully
17   develop the record regarding the controlling factual issues,
18   including whether Medpoint generally was paying its (undisputed)
19   debts as they came due, whether the petitioning creditors’
20   motives and intentions were culpable and whether the petitioning
21   creditors acted in bad faith.    Accordingly, we will VACATE the
22   portion of the dismissal order denying Medpoint’s requests for
23
24        **
           Hon. Christopher D. Jaime, United States Bankruptcy Judge
     for the Eastern District of California, sitting by designation.
25
          1
26         Unless specified otherwise, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
27   all "Rule" references are to the Federal Rules of Bankruptcy
     Procedure, Rules 1001-9037. All “Civil Rule” references are to
28   the Federal Rules of Civil Procedure.

                                       2
 1   fees, costs and punitive damages, and we will REMAND for further
 2   proceedings.
 3                                  FACTS
 4        To provide context, we begin our factual recitation with a
 5   description of Medpoint’s business, its relationship with other
 6   key players, and the transactions leading up to the filing of the
 7   involuntary petition.2
 8        Medpoint is an Arizona limited liability company formed to
 9   provide a full range of management services to companies holding
10   certificates issued by the state of Arizona permitting them under
11   Arizona law to grow and sell medical marijuana.   Because Arizona
12   law requires all certificate holders to operate on a not-for-
13   profit basis, management service companies like Medpoint also
14   help the certificate holders maintain their nonprofit status by
15   managing their cash flow to ensure that revenues are distributed
16   to pay the certificate holders’ operating expenses, taxes and
17   management fees.
18        Medpoint only provided management services to one
19   certificate holder, Arizona Nature’s Wellness (“ANW”).    Medpoint
20   obtained that position in January 2013 by acquiring the
21   management service company then under contract with ANW – Tier
22   Management, LLC.   At the time of the acquisition, Mike Danzer
23   owned and controlled Tier.   He sold his interest in Tier to
24   Medpoint in exchange for $450,000, with $150,000 paid up front
25   and the remainder to be paid in installments of $150,000 each.
26
          2
27         Most of these background facts are not in dispute, so we in
     large part have relied upon the description of these facts
28   contained in the bankruptcy court’s final ruling.

                                      3
 1   Danzer is one of the petitioning creditors.
 2        Robert Brown and 7511 IRA Investments, LLC also are
 3   petitioning creditors and also loaned money to Medpoint.   Robert
 4   Brown loaned Medpoint $100,000, and 7511 IRA Investments, LLC
 5   loaned Medpoint $400,000.   In addition, Medpoint entered into
 6   consulting contracts with Danzer and another man named Jason
 7   Jensen pursuant to which Medpoint promised to pay Danzer and
 8   Jensen $5,000 per month each.   Jensen is the fourth and final
 9   petitioning creditor.
10        The person who currently owns and controls Medpoint, Yuri
11   Downing, admitted at his deposition that none of the petitioning
12   creditors have been repaid.   He indicated that at least some of
13   the above-referenced debt is disputed, although the reasons he
14   offered for disputing the debt were thin.   For instance, when
15   asked about Danzer’s and Jensen’s monthly consulting fees,
16   Downing indicated that the fees were not due because Medpoint
17   ultimately did not need or use Danzer’s or Jensen’s consulting
18   services.   But Downing also admitted that there was nothing in
19   the consulting contracts making Medpoint’s obligation to pay the
20   consulting fees contingent on the actual provision of consulting
21   services.
22        Meanwhile, when asked whether Medpoint had the ability to
23   repay the $400,000 owed to 7511 IRA Investments, LLC, Downing
24   responded as follows:
25        A. Are we in a position to make that payment today?
          No. Are we in a position to make that payment in the
26        next 30 days? I cannot say.
27        Q. Are there prospects that you could be in a position
          in 30 days to make a $400,000 loan payment?
28

                                      4
 1        A. I'm still a dreamer and I still believe I can make
          things happen magically, so yes, I think I – I – the
 2        answer is I don't know, but I'd sure like to try.
 3   Depo. Tans. (Jan. 8, 2015) at 136:14-21.
 4        Downing further admitted that, at the time of the petition
 5   filing, Medpoint’s only regular source of income was an $8,000
 6   per month licensing fee it is being paid for the use of the Bloom
 7   name and trademark, which is still being used in ANW’s business.
 8        At the time of Medpoint’s acquisition of Tier, in January
 9   2013, Yuri Downing and Matt Morgan each owned and controlled one
10   of the two LLC members of Medpoint – Ask Nice Twice, LLC and Here
11   Is Now, LLC, respectively.   Similarly, Morgan and Downing owned
12   and controlled another management services company, Bloom Master
13   Fund I, LLC, which was under contract with the certificate holder
14   for a Tucson marijuana dispensary.
15        In February 2014, Morgan divested himself of ownership and
16   control of both Medpoint and Bloom Master Fund I, LLC.    At that
17   time, Morgan resigned from management and effectively conveyed
18   his interests in both companies to Downing.   According to
19   Downing, with Morgan gone, he was looking for someone to help him
20   with management and operations at Medpoint and Bloom Master
21   Fund I, LLC, and he turned to Ed Vartughian for help.    Downing
22   indicated that Morgan had introduced him to Vartughian, that he
23   did not know Vartughian well, and that he did not know who else
24   to turn to for help.   Ultimately, Vartughian bought Downing’s
25   interest in Bloom Master Fund I, LLC and agreed to help Downing
26   “fix” Medpoint’s problems, but declined to purchase Medpoint.
27        Downing in essence claimed that Vartughian convinced ANW’s
28   board of directors to declare Medpoint in breach of its

                                      5
 1   management services contract with ANW and to terminate the
 2   contract on that basis.   This seems odd because ANW’s board
 3   allegedly is a captive entity appointed by Medpoint, so Medpoint
 4   supposedly had the ability to control the ANW board and its
 5   decisions.   ANW and Medpoint then entered into a settlement
 6   agreement pursuant to which each side apparently agreed to
 7   release the other from any claims arising from the management
 8   services contract.    Downing was unable to identify what amount of
 9   management fees Medpoint might have forfeited as a result of the
10   settlement agreement.   Downing expressed more concern about
11   Medpoint’s potential liability for mismanaging ANW’s business.
12        Whereas Downing characterized ANW’s termination of and
13   settlement with Medpoint as fixing Medpoint’s problems, the
14   petitioning creditors saw these dual transactions differently.
15   The petitioning creditors asserted that the two transactions
16   amounted to a fraudulent transfer of Medpoint’s crown jewel
17   asset: its management services contract with ANW.   Bloom Master
18   Fund I, LLC, now apparently owned by Vartughian, ended up with a
19   potentially valuable management relationship with ANW.
20   Meanwhile, Medpoint ended up as a virtually empty shell with a
21   significant amount of debt owed to the petitioning creditors and
22   others.   After the settlement with ANW, Medpoint’s only assets
23   consisted of: (1) the property rights associated with the Bloom
24   name and trademark; (2) the agreement with Bloom Master Fund I,
25   LLC licensing the Bloom name and trademark for $8,000 per month;
26   and (3) any claims arising from the termination by and settlement
27   agreement with ANW.
28        Shortly after the petitioning creditors filed the

                                       6
 1   involuntary petition, Medpoint filed an answer.   In its answer,
 2   Medpoint denied the allegation that it was not paying its debts
 3   as they became due.   Medpoint further alleged that many of the
 4   claims it had not paid were the subject of bona fide dispute.
 5        At the initial status conference held in November 2014, the
 6   bankruptcy court set dates for a discovery deadline, for a
 7   continued status conference and for trial on the merits of the
 8   involuntary petition.   By the time of the continued status
 9   conference held on January 29, 2015, Medpoint had filed a motion
10   to dismiss the involuntary petition, and the petitioning
11   creditors had filed a response.   Medpoint’s dismissal motion
12   asserted that the bankruptcy court should dismiss the involuntary
13   petition because Medpoint’s business involved illegal drugs.
14   Medpoint posited that the bankruptcy court could not and should
15   not supervise the administration of a debtor whose business was
16   so closely connected to the cultivation and sale of marijuana
17   because those activities were illegal under federal law.
18   Alternately, Medpoint argued that the petitioning creditors came
19   to the bankruptcy court with unclean hands because they all were
20   aware of the illegal nature of ANW’s business and Medpoint’s
21   connection to that business.   Finally, Medpoint claimed that it
22   was entitled to damages under § 303(i) because the petitioning
23   creditor’s actions were motivated by a bad faith desire to take
24   control of ANW’s valuable medical marijuana certificate.
25        In response, petitioning creditors attempted to demonstrate
26   that Medpoint’s business at the time the involuntary petition was
27   filed was not so connected to the medical marijuana industry as
28   to justify dismissal.   They further pointed out that there was no

                                       7
 1   proof that any of the revenue that Medpoint generated came
 2   directly from the growing or sale of marijuana.
 3        At the January 29, 2015 status conference, the bankruptcy
 4   court ruled that it would take off calendar the trial date.        The
 5   court decided it would reserve the merits of the involuntary
 6   petition and the issue of bad faith and damages against the
 7   petitioning creditors until after it ruled on the motion to
 8   dismiss.       Thereafter, whenever the parties touched upon the
 9   merits of the involuntary petition or upon the bad faith/damages
10   issue, the bankruptcy court steered them back to the issues
11   addressed in the motion to dismiss.      For instance, after the
12   petitioning creditors raised a disputed point pertaining to the
13   bad faith issue, the bankruptcy court responded as follows:
14        THE COURT: I think I can cut you off on this subject
          because in my view that's a fact issue, and if I'm
15        going down that road we're trying the issue, not
          resolving it today.
16
          *     *     *
17
          THE COURT: Bad faith is not generally something you're
18        resolving on a motion in any event.
19   Hr’g Tr. (Jan. 29, 2015) at 54:5-25.
20        Furthermore, the court assured the parties that they would
21   be given a future opportunity to present evidence on the merits
22   and on the damages issue – if necessary.      The following
23   exemplifies the court’s assurances:
24        THE COURT: It seems to me that unless there are
          stipulated facts that demonstrate bad faith, bad faith
25        is generally a factual issue. And if I ultimately
          conclude that I need a full blown hearing on bad faith,
26        I think it really has to be an evidentiary hearing.
27   Hr’g Tr. (March 4, 2015) at 68:5-9; see also Hr’g Tr. (Jan. 29,
28   2015) at 31:3-9, 64:3-17, 76:21-77:6.

                                          8
 1        After supplemental briefing and additional oral argument on
 2   the illegality issues raised by the motion to dismiss, the
 3   bankruptcy court took the matter under submission and ultimately
 4   issued a seventeen-page ruling granting the motion to dismiss.
 5   In essence, the bankruptcy court concluded that the risks
 6   associated with the potential forfeiture of Medpoint’s assets and
 7   with the trustee’s inevitable violation of the Controlled
 8   Substances Act, 21 U.S.C. §§ 801, et seq., in the process of
 9   administering Medpoint’s assets, justified dismissal of the
10   involuntary petition under § 707(a).   The court alternately
11   concluded that dismissal was appropriate because the petitioning
12   creditors who sought relief from the bankruptcy court all had
13   unclean hands, because they knew or should have known that
14   Medpoint’s operations were illegal under federal law.
15        The bankruptcy court further ruled that Medpoint was not
16   entitled to fees, costs or damages under § 303(i).   The court
17   discussed the fees and damages issues as a single topic.    While
18   the title the court gave to that discussion was “No Bad Faith,”
19   the introductory paragraph of that discussion identified the
20   issue to be addressed as whether Medpoint should be awarded its
21   fees, costs and damages under § 303(i)(1) and (2).   There is no
22   discussion of the fees, costs and damages issues anywhere else in
23   the court’s order.
24       The court cited the seminal Ninth Circuit case on the
25   awarding of attorney’s fees under § 303(i)(1), Higgins v. Vortex
26   Fishing Sys., Inc., 379 F.3d 701, 707 (9th Cir. 2004), which
27   requires bankruptcy courts to consider the totality of the
28   circumstances.   The bankruptcy court further noted that, if it

                                      9
 1   found bad faith, it also could award actual and punitive damages
 2   against the petitioning creditors under § 303(i)(2).
 3        In reaching its decision to deny all fees, costs and
 4   damages, the bankruptcy court predominantly focused on the issue
 5   of bad faith.   The court explained its reasoning as follows:
 6        The viability of an involuntary chapter 7 petition
          filed against a debtor on account of debts relating to
 7        state-licensed medical marijuana operations is a novel
          question of law in this District. The Court does not
 8        find that Petitioning Creditors’ acted unreasonably in
          filing the Petition. The record shows that Medpoint is
 9        not and cannot meet its ongoing financial obligations
          to numerous creditors, in amount and number sufficient
10        to justify an involuntary petition under section
          303(b). The record before this Court does not contain
11        facts to support a finding of Petitioning Creditors’
          bad faith. As the Ninth Circuit BAP has noted, “[n]ot
12        every failed reason for filing an involuntary petition
          amounts to ‘bad faith.’” In re Macke Int’l Trade,
13        Inc., 370 B.R. 236, 257 (9th Cir. BAP 2007).
          Petitioning Creditors’ unclean hands do not equate to a
14        finding of their bad faith in this instance. Finding
          no bad faith, there is no need for a hearing on damages
15        proximately caused by a filing that is not in bad
          faith.
16
17   Order Granting Motion to Dismiss (April 6, 2015) at 14:9-20.
18        The bankruptcy court entered its dismissal order on April 6,
19   2015, and Medpoint timely filed its notice of appeal.
20                              JURISDICTION
21        The bankruptcy court had jurisdiction under 28 U.S.C.
22   §§ 1334 and 157(b)(2)(A) and (O).    We have jurisdiction under
23   28 U.S.C. § 158.
24                                 ISSUES
25   1.   Did the bankruptcy court commit reversible error when it
26        declined to award any attorney’s fees against the
27        petitioning creditors?
28   2    Did the bankruptcy court commit reversible error when it

                                     10
 1        determined that the petitioning creditors had not acted in
 2        bad faith, so Medpoint could not recover punitive damages
 3        against the petitioning creditors?
 4                           STANDARDS OF REVIEW
 5        The bankruptcy court’s denial of attorney’s fees under
 6   § 303(i)(1) is reviewed for an abuse of discretion.    Higgins,
 7 379 F.3d at 705.   The bankruptcy court’s decision not to hold an
 8   evidentiary hearing also is reviewed for an abuse of discretion.
 9 Gray v. Warfield (In re Gray), 523 B.R. 170, 172 (9th Cir. BAP
10   2014).   The bankruptcy court abuses its discretion if it applies
11   an incorrect legal rule or its findings of fact are illogical,
12   implausible or without support in the record.    United States v.
13   Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc).
14        The bankruptcy court’s finding regarding the absence of bad
15   faith is reviewed under the clearly erroneous standard.    Wechsler
16   v. Macke Int'l Trade, Inc. (In re Macke Int'l Trade, Inc),
17   370 B.R. 236, 245 (9th Cir. BAP 2007).    The bankruptcy court’s
18   finding of fact is not clearly erroneous unless it is illogical,
19   implausible or without support in the record.    Retz v. Samson
20   (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010).
21                               DISCUSSION
22        Under § 303(i)(1), if an involuntary bankruptcy petition is
23   dismissed, the bankruptcy court may award attorney’s fees and
24   costs against the petitioning creditors.    Under § 303(i)(2), if
25   the petitioning creditors filed the petition in bad faith, the
26   court also may award actual and punitive damages.
27   1.   § 303(i)(1) Analysis
28        Section 303(i)(1) sets forth two exceptions to the right to

                                     11
 1   request attorney’s fees upon dismissal: when the debtor waives
 2   the right to attorney fees or when all of the parties consent to
 3   the dismissal.    In re Macke Int'l Trade, Inc., 370 B.R. at 251.
 4   We have refused to recognize additional exceptions and have, in
 5   essence, held that, aside from the exceptions referenced above,
 6   § 303(i) applies whenever an involuntary petition is dismissed,
 7   regardless of the grounds for dismissal.   Id. at 251-53.
 8        While the awarding of fees under § 303(i)(1) always is
 9   discretionary, id. at 252, the Ninth Circuit Court of Appeals has
10   articulated a number of guidelines that bankruptcy courts in this
11   circuit must follow in applying the statute.   Bankruptcy courts
12   are required to consider the totality of the circumstances.
13   Higgins, 379 F.3d at 705.   When relevant, the bankruptcy court’s
14   consideration must include the following factors, among others:
15   “1) ‘the merits of the involuntary petition,’ 2) ‘the role of any
16   improper conduct on the part of the alleged debtor,’ 3) ‘the
17   reasonableness of the actions taken by the petitioning
18   creditors,’ and 4) ‘the motivation and objectives behind filing
19   the petition.’”   Id. at 707-08 (quoting In re Scrap Metal Buyers
20   of Tampa, Inc., 233 B.R. 162, 166 (Bankr. M.D. Fla. 1999)).
21   Accord, In re S. Cal. Sunbelt Developers, Inc., 608 F.3d 456,
22   462-63 (9th Cir. 2010).
23        While the Higgins court expressed the expectation that the
24   above-referenced factors would be “definitive in most cases,” the
25   Higgins court also acknowledged that these factors are not meant
26   to be exhaustive and that the bankruptcy court could exercise its
27   discretion to consider other relevant factors.   Higgins, 379 F.3d
28   at 708.

                                      12
 1        The Higgins court held that its adoption of the totality of
 2   circumstances test did not abrogate the presumption that, upon
 3   dismissal, the petitioning creditors should be held liable for
 4   the fees the alleged debtor incurred in defending against the
 5   involuntary petition.   Higgins explained the reasoning behind the
 6   presumption in the following manner:
 7        Although we adopt the totality of the circumstances
          test as the appropriate standard under § 303(i)(1), we
 8        do not abandon the premise that any petitioning
          creditor in an involuntary case should expect to pay
 9        the debtor's attorney's fees and costs if the petition
          is dismissed. . . . This [rebuttable] presumption
10        helps reinforce the idea that the filing of an
          involuntary petition should not be lightly undertaken,
11        and will serve to discourage inappropriate and
          frivolous filings. Filing an involuntary petition
12        should be a measure of last resort because even if the
          petition is filed in good-faith, it can chill the
13        alleged debtor's credit and sources of supply, and
          scare away his customers.
14
15   Id. at 707 (citations, ellipses and internal quotation marks
16   omitted).
17        As the Ninth Circuit subsequently clarified, once the
18   involuntary petition was dismissed, “[t]he burden was on [the
19   petitioning creditor] to rebut the presumption by establishing
20   that fees and costs were unwarranted under the totality of
21   circumstances.”   Sofris v. Maple-Whitworth, Inc.
22   (In re Maple-Whitworth, Inc.), 556 F.3d 742, 746 (9th Cir. 2009);
23   see also Laxmi Jewel Inc. v. C&C Jewelry Mfg., Inc. (In re C&C
24   Jewelry Mfg., Inc.), 2001 WL 36340326 at *14 (Mem. Dec.) (9th
25   Cir. BAP Apr. 14, 2009) (“The presumption imposes on the
26   petitioning creditors the burden of presenting evidence to meet
27   the presumption, but it does not shift the burden of proof to the
28   petitioning creditors.”).

                                     13
 1        On appeal, there is no dispute between the parties that
 2   binding Ninth Circuit precedent required the bankruptcy court to
 3   apply the above-referenced standards in order to determine
 4   Medpoint’s entitlement to recover its fees and costs.   Rather,
 5   the parties disagree as to whether the court correctly applied
 6   these standards.
 7        Medpoint claims that the bankruptcy court did not make
 8   findings indicating that it had considered the totality of the
 9   circumstances and did not acknowledge or apply the presumption
10   that Medpoint was entitled to recover its attorney’s fees.    We
11   agree.   In light of the procedural posture of the case, we are
12   convinced that the bankruptcy court could not have correctly
13   considered the totality of the circumstances or correctly applied
14   the requisite presumption because the parties never were given
15   the opportunity to fully develop the evidentiary record.   The
16   bankruptcy court determined the fate of the involuntary petition
17   based solely on the illegality under federal law of the
18   cultivation and sale of marijuana and the risks arising from that
19   illegality if a chapter 7 trustee were to administer Medpoint’s
20   bankruptcy estate.   The court had before it the parties’ papers
21   in support of and in opposition to the dismissal motion, which
22   included some evidence.   The parties presented the court with a
23   number of contracts and other documents, including Downing’s
24   declaration and the transcript from his deposition.   While there
25   was some evidence in these papers that might have enabled the
26   court to make some inferences regarding the first Higgins factor
27   – whether Medpoint was paying its debts as they came due – we are
28   not persuaded that the court gave the parties sufficient

                                     14
 1   opportunity to present all of the relevant evidence on this
 2   issue.   To the contrary, the court made it clear at the
 3   January 29, 2015 status conference and at the March 4, 2015
 4   dismissal motion hearing that the merits of the involuntary
 5   petition only would be tried if the petition survived Medpoint’s
 6   dismissal motion.
 7        Additionally, the parties had no genuine opportunity to
 8   present evidence addressing the fourth Higgins factor – regarding
 9   the petitioning creditors’ motivations and objectives in filing
10   the petition.   This factor requires the bankruptcy court to infer
11   from the record the petitioning creditors’ subjective state of
12   mind in filing the petition.   Higgins, 379 F.3d at 707; see also
13   In re Macke Int'l Trade, Inc., 370 B.R. at 252-53 & nn. 13, 14
14   (reflecting on the purity of the petitioner’s intentions and
15   motives).   The bankruptcy court was ill-equipped to make a
16   finding regarding this factor given that the parties were
17   instructed more than once to focus exclusively on the illegality
18   issues raised in the dismissal motion.   Obviously, some of the
19   evidence presented during the course of the dismissal motion
20   proceedings is relevant in determining the petitioning creditors’
21   state of mind, but the limited scope of the dismissal motion
22   proceedings doubtlessly kept the parties from presenting all of
23   the relevant evidence.
24        Citing Jaffe v. Wavelength, Inc. (In re Wavelength, Inc.),
25   61 B.R. 614, 620 (9th Cir. BAP 1986), the bankruptcy court here
26   applied an objective standard in the process of finding that the
27   petition was not filed in bad faith.   Under our own precedent,
28   this was the appropriate standard for determining bad faith for

                                     15
 1   purposes of applying § 303(i)(2).     Id.; see also In re Macke
 2   Int'l Trade, Inc., 370 B.R. at 256-57 (following
 3   In re Wavelength, Inc. regarding the objective standard of bad
 4   faith).   However, for purposes of § 303(i)(1), the Higgins
 5   factors typically require the bankruptcy court to assess both the
 6   petitioning creditors’ objective reasonableness as well as their
 7   subjective motives and intent.   Higgins, 379 F.3d at 707.    The
 8   bankruptcy court, here, made no explicit finding regarding the
 9   petitioning creditors’ subjective motives and intent.    We
10   sometimes can affirm in the absence of a required finding when
11   the record is fully developed and when it gives us a full
12   understanding of the controlling issues.    See Jess v. Carey
13   (In re Jess), 169 F.3d 1204, 1208-09 (9th Cir. 1999); Swanson v.
14   Levy, 509 F.2d 859, 860-61 (9th Cir. 1975).    But that is not the
15   case here.   The record needs further development on the issue of
16   the petitioning creditors’ subjective motives and intent.
17        We acknowledge that Higgins indicates that bankruptcy courts
18   ordinarily are not required to conduct a mini-trial on the
19   alleged debtor’s entitlement to attorney’s fees if the court
20   already has held a trial on the merits of the petition.    Higgins,
21 379 F.3d at 707.   Summary judgment or similar proceedings – where
22   each side is given the opportunity to present evidence on the
23   full range of relevant issues – also might sufficiently develop
24   the record to obviate the need for a subsequent evidentiary
25   hearing on the propriety of awarding attorney’s fees.    See, e.g.,
26   In re Macke Int'l Trade, Inc., 370 B.R. at 242 (in the context of
27   a motion to dismiss under § 305(a), both sides given opportunity
28   to file declarations and briefs on the full range of relevant

                                      16
 1   issues); In re C&C Jewelry Mfg., Inc., 2001 WL 36340326 at *3-4
 2   (summary judgment proceedings held on the merits, followed by
 3   separate motion for § 303(i) fees and damages addressing issue of
 4   petitioning creditors’ bad faith).
 5        Nonetheless, given the specific procedural posture of this
 6   case and given the unique factual circumstances presented, the
 7   bankruptcy court could not have correctly considered the totality
 8   of the circumstances without further development of the record.
 9   Simply put, the bankruptcy court erred by not giving the parties
10   the opportunity to present evidence pertaining to the full range
11   of factors relevant to the application of § 303(i)(1).
12   2.   § 303(i)(2) Analysis
13        For the same reason, we also conclude that the court did not
14   correctly apply § 303(i)(2).   As set forth above, our precedent
15   requires the bad faith determination under § 303(i)(2) to focus
16   on the petitioning creditors’ objective reasonableness.    See
17   In re Macke Int'l Trade, Inc., 370 B.R. at 256-57;
18   In re Wavelength, Inc., 61 B.R. at 620.    The bankruptcy court,
19   here, correctly referenced the objective reasonableness standard,
20   and made a handful of findings in support of its conclusion that
21   the petition was not filed in bad faith.    The bankruptcy court
22   pointed out that the dispositive issue – the illegality under
23   federal law of Medpoint’s business – was a novel question of law.
24   The court further inferred from the existing record that Medpoint
25   was unable to “meet its ongoing financial obligations to numerous
26   creditors, in amount and number sufficient to justify an
27   involuntary petition under section 303(b).”    Order Granting
28   Motion to Dismiss (April 6, 2015) at 14:13-14.

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 1        While there definitely is some evidence in the record to
 2   support the bankruptcy court’s finding regarding Medpoint’s
 3   financial difficulties, we nonetheless are troubled by this
 4   finding.   The court more than once instructed the parties that
 5   the issue of whether Medpoint was generally paying its
 6   (undisputed) debts as they came due only would be addressed at a
 7   subsequent trial if the motion to dismiss was denied.    This had a
 8   chilling effect on the parties’ presentation of evidence
 9   pertaining to this issue.   Therefore, as Medpoint has asserted,
10   the bankruptcy court should not have denied Medpoint’s request
11   for an evidentiary hearing on its entitlement to damages under
12   § 303(i)(2).
13        At bottom, the bankruptcy court enjoys considerable
14   discretion in deciding whether to hold an evidentiary hearing,
15   but that discretion is circumscribed by the requirements of due
16   process.   See Tyner v. Nicholson (In re Nicholson), 435 B.R. 622,
17   635-37 (9th Cir. BAP 2010), partially abrogated on other grounds
18   by, Law v. Siegel, 134 S. Ct. 1188, 1196–98 (2014).    We are aware
19   of In re Nicholson’s observation that “Bad faith is a ‘highly
20   factual determination’ but does not generally require an
21   evidentiary hearing.”   Id. at 637.   Even so, due process
22   necessarily requires that the parties be given some opportunity
23   to present evidence on material disputed factual issues.     The
24   parties, here, were not given that opportunity.
25                               CONCLUSION
26        For the reasons set forth above, we VACATE the portion of
27   the bankruptcy court’s dismissal order denying Medpoint’s request
28   for fees, costs and damages, and we remand for further

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