Court Opinion

ID: 9696521
Source: CourtListenerOpinion
Date Created: 2023-08-25 18:50:26.585168+00
Date Added: 2024-06-11T18:20:23.154081
License: Public Domain

NIELSEN, Bankruptcy Judge,
dissenting in part and concurring in part:
As I am troubled by my able colleagues’ application of an important bankruptcy statute, I respectfully dissent from sections I-C and II of the majority opinion. Specifically, the plain language of § 303(f)(1) requires that all petitioning creditors be served with an award motion. I must also dissent from a disregard of the error in the trial court’s refusal to determine whether the alleged debtor had previously waived the fee award it sought. I gladly join in affirming the bankruptcy court’s exercise of discretion to award fees and costs against appellant Sofris.
I
This appeal rests on a correct reading of § 303(i), which provides:
*575If 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 supplied).
A
We know that § 303(i) is the exclusive source for damages predicated upon the fifing of an involuntary bankruptcy petition. Miles v. Okun (In re Miles), 430 F.3d 1083, 1089-92 (9th Cir.2005) (state tort law action by non-debtors for damages from an involuntary bankruptcy is completely preempted by § 303).
The facts of this case involve conflicting claims regarding ownership and control of the alleged debtor. When the involuntary petition was dismissed, the alleged debtor failed to comply with an express court order to serve all petitioning creditors with its fee award request. The bankruptcy court nonetheless awarded fees and costs against some, but not all of the petitioning creditors. The question before us is how § 303(i) should be applied in this situation. The majority concludes that service on all petitioners is not required and imposes possible contribution liability on all of the petitioning creditors, whether they were served with the fee request or not.
The majority begins correctly. I join section I-A as it instructs that our statutory analysis starts with the language of the statute, that the § 303(i) scheme is construed as an integrated whole and that the Bankruptcy Code’s construction is an endeavor where a provision appearing possibly ambiguous in isolation can be clarified by consideration of the remainder of the statutory scheme.
I would add that where, as here, the statute’s language is plain, our sole function is to enforce it according to its terms. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (citation omitted). We give each word its common usage. Id.; see also Pioneer Investment Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 388, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993) (looking to the clear meaning of the word “neglect” by citing a dictionary definition). We must give meaning and import to every word in a statute. Negonsott v. Samuels, 507 U.S. 99, 106, 113 S.Ct. 1119, 122 L.Ed.2d 457 (1993). We presume that “ ‘Congress acts intentionally and purposely when it includes particular language in one section of a statute but omits it in another.’ ” BFP v. Resolution Trust Corp., 511 U.S. 531, 537, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) (citation omitted).
Applying these rules, Congress expressly stated “against the petitioners” in identifying those potentially liable for attorney fees and costs. § 303(f)(1). Simultaneously, it omitted this language in providing that a court may award punitive damages against “any petitioner that filed the petition in bad faith.” § 303(i)(2) (emphasis supplied). Thus, liability for a bad faith petition expressly need not be considered against all petitioners. Presuming that Congress has acted intentionally and purposefully in choosing different language for two adjacent subsections, the common meaning would be that all petitioning cred*576itors must be considered for potential § 303(i)(1) liability.
It is difficult to perceive how § 303(i)(1) — authorizing an award against “the petitioners” — can be read as “some” or a “few” of them. Such a reading is particularly suspect when Congress, in the same statute, provides express verbiage to identify less than all petitioners for bad faith awards in § 303(i)(2): “against any petitioner”. It is difficult to appreciate why the drafters would use both “the petitioners” and “against any petitioner” to mean exactly the same thing in adjacent subsections of the same statute. A natural reading of § 303(i) is that, absent bad faith, a fee and cost award is to be considered against all petitioners. “When the words of a statute are clear, ‘judicial inquiry is complete.’ ” Security Leasing Partners, LP v. ProAlert, LLC (In re ProAlert, LLC), 314 B.R. 436, 441 (9th Cir. BAP 2004) (citation omitted).
B
At least initially, the trial judge agreed with this construction of the statute. Upon discovering that the alleged debtor had not served all petitioning creditors, the court ordered service on all such parties:
Another reason I think I should continue this is, I think this motion should be served on all the petitioners and they should be given notice to the fact that they might be liable for costs, attorney’s fees and damages. It is a pretty serious matter. I think they should be — I want to be sure that they know what is going on.
Counsel replied:
Sure, your Honor. Well, fees were not requested against them because Michael Sofris was the spearhead and he was the main named petitioning creditor on the involuntary petition and there would be joint and separate liability. But in any event, notice can be served on them, even though' fees were not requested against them.
The court responded:
Okay. Well, I think — I think — well there is an issue, too, as to whether you can pick and choose.
Hrg. Tr. 2, January 4, 2006 (emphasis supplied).
At a subsequent hearing the court indicated:
However, I do think it is appropriate to impose attorney’s fees and costs on the petitioning creditors here. I think that essentially a presumption in the law, [sic] I have discretion whether to award those or not. I think given this case, given the lack of evidence to show that the — that there wasn’t a bona fide dispute regarding the petitioning creditors’ claims, I am going to make the award.
So I am going to grant the attorney’s fees and costs as against all of the petitioning creditors, which I think I have to do under the statute. So, to that extent I am granting the motion and the total of that sum of course would be the $42,257.
Hrg. Tr. 9, February 1, 2006 (emphasis supplied).
But it was not to be. Although the court clearly stated its intent to sanction all petitioners, two of them (Sinclair and Zeff) were excluded from the award because they were not served as directed. This change in the intent to sanction all petitioners occurred in open court. Upon discovery of the service failure, the court summarily resolved the matter:
All right. Whoever they — whoever of the petitioning creditors got served — I thought that was all of them, at least initially, but maybe it wasn’t.
*577MR. FAITH: Initially that is correct, your Honor, but there were two more, I believed, that supplemented.
THE COURT: All right. Whoever got served, whoever had notice. I think that is clear, isn’t it?
Mr. Kaplan: Yes.
Id. at 10-11.
While it is clear that bankruptcy courts have authority to sanction less than all petitioning creditors under § 303(i), I doubt that discretion on such a serious matter can be exercised “on the fly” as occurred here. More importantly, mov-ants cannot, deliberately or through error, bring less than all petitioning creditors before the court under the clear meaning of § 303(i)(1).19
C
I also join the majority regarding the bankruptcy court’s broad discretion in § 303(i) awards. First, the statute’s use of the permissive “may,” rather than the mandatory “shall,” contemplates that fees and costs will not always be awarded. Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 705-06 (9th Cir.2004). A court exercises discretion in the award. Id. at 706.
Higgins adopted the “totality of the circumstances” as the appropriate award standard. Id. at 707. However, the panel cautioned it did not abandon the premise that any petitioning creditor should expect to pay debtor’s attorney’s fees and costs, if the petition is dismissed. An alleged debt- or’s motion for fees and costs raises a rebuttable presumption that reasonable fees and costs are authorized. This presumption reinforces the principle that fll-ing an involuntary petition is not lightly undertaken. It discourages inappropriate, frivolous filings. An involuntary petition should be a measure of last resort, since even if filed in good-faith, it can chill credit and supply sources and scare away customers. Id. at 707.
Higgins noted that:
[O]nce the debtor has satisfied the burden of demonstrating the reasonableness of the fees requested, ‘[i]t is then the petitioning creditors’ burden to establish, under the totality of the circumstances, that factors exist which overcome the presumption, and support the disallowance of fees.’ However, this does not give the petitioning creditor license to conduct additional discovery and present evidence on an issue that has already been decided. The rebutta-ble presumption framework allows the court, which by this point in the process has heard all the evidence surrounding dismissal, to make ‘an informed examination of the entire situation’ without the burden of conducting another mini-trial.
Id., (citations omitted).
Finally, bankruptcy courts consider additional relevant factors before awarding attorney’s fees and costs: (1) the merits of the involuntary petition; (2) any improper conduct of the alleged debtor; (3) reasonableness of the actions by petitioning creditors and (4) the motivation and objectives behind filing the petition. This list is not exhaustive. Id. at 707-708.
Here the bankruptcy court, possibly dealing with a demanding docket and well aware that it could not enter judgment against unserved petitioners, elected to *578conclude the matter by an award against those whom the alleged debtor managed to serve, rather than granting a second continuance due to service issues. This practical resolution nevertheless allowed the alleged debtor to elude the clear requirement of § 303(i)(1) that all petitioners are to be brought before the court.
D
I detect no undue procedural obstacle from a clear statutory reading that requires naming and serving all petitioners when seeking a § 303(i)(1) award. Judicial discretion and flexibility are preserved. Individual petitioners are free to make their case to the judge as to why the rebuttable presumption of a reasonable fee award should not be imposed against them. Indeed, I question how a bankruptcy court could engage in the broad “totality of the circumstances” review mandated by Higgins, when robbed of the opportunity to have all petitioners appear and potentially explain their individual roles in prosecuting the petition.20
II
The majority evades the requirement of presenting all petitioners to the court by a remarkable wholesale importation of common law tort remedies into a federal cause of action that is exclusively statutory. We are instructed that state tort lawsuits are not to be used for such damages. Miles, 430 F.3d at 1091. It is unclear what perceived ambiguity in § 303(i) drives this incorporation. But there must be something. Otherwise, we are to stop our work and simply enforce the statute according to its terms. Ron Pair Enters., 489 U.S. at 241, 109 S.Ct. 1026.
A
The majority states that § 303(i)(2) (the subsection not applicable to this case) mentions “damages proximately caused” and “punitive damages” and these terms are “... both familiar concepts in the common law of tort.”21 From this, it follows for them that Congress based its scheme of § 303(i) remedies on general common law tort principles, which traditionally result in joint and several liability.
It is important to first note that the statute does not mention joint and several liability. Accordingly, this liability concept cannot itself cause an ambiguity that prevents application of the statute as written. Nor is there a need, in my view, for the extensive discussion of this liability theory that the majority provides. As they recognize, the error assigned by appellant is not that the sanction imposed involved joint and several liability. As they further recognize, we have yet to expressly read this liability concept into the award statute, treating it to date only by implication. I would leave a definitive discussion and possible incorporation of joint and several liability in some form, if at all, for another day and case, when it is clearly raised.22
B
The majority’s thorough discussion of joint and several liability, contribution and indemnity highlights the mischief that can *579occur by the wholesale application of common law tort concepts into an exclusively bankruptcy statutory cause of action. Under the majority’s analysis, there is no need to name or even notice all petitioners when a § 303(i)(1) award is sought against fewer than all. Unnamed and unserved petitioners do not escape liability, however. They can be brought to account, possibly long after the award was entered in their absence, when the named party decides it has paid a disproportionate and inequitable share of the liability. The named party can even assign this contribution right to others. While the unnamed parties might mount an indemnity defense, we are not told if they may ask the bankruptcy judge to reopen the original award itself. Vehicles to mount this satellite litigation might include a joinder motion,23 a third-party complaint in a separately filed adversary, third-party practice in the contested matter itself, (if the court so permits) or an independent contribution action.
The majority admits to “practical disadvantages” and “obvious inefficiencies of redundant litigation” arising under this incorporation. They correctly raise the possibility that issue or claim preclusion of the award “may be clouded” as to un-served petitioners. However salutary this tort scheme works in non-bankruptcy courts, in bankruptcy it is far better to establish a single forum granting all potentially liable parties the opportunity to appear when adjudicating a § 303(i)(1) matter in the first instance. More than an efficient procedure, it is, I believe, statutorily required.24
In sum, the remedial scheme of § 303(i) is comprehensive, specifically addressing the full range of remedies from costs and fees to compensatory and punitive damages. It is for Congress to decide what penalties are appropriate, when they are to be utilized and who benefits from them. Those unsatisfied with the remedies provided in the Bankruptcy Code should look to Congress for supplementation. Miles, 430 F.3d at 1092 (citing cases). For the purposes of this particular case, we need only apply the statute as written. We should close our tort books.
III
Appellant argues that the court erred in not enforcing an alleged settlement and release, executed on December 12, 2005. The petitioning creditors and alleged debt- or purportedly agreed that, in exchange for payment of $1,000, the award motion would be withdrawn. The agreement was signed by Robert Nathan, identified as the alleged debtor’s president.
Appellee disputed the release’s validity as a “bogus settlement” at the award hearing. The bankruptcy court entered the award without deciding the waiver’s validity, apparently believing that state court proceedings would eventually resolve the matter:
... if that is a valid settlement, that would sort of supersede what I do here anyway, if in fact that is a — you are talking about the point release, right? ... [i]f it turns out that that is a valid release, then it is a valid release.
Hrg. Tr. 1-2, February 1,2006.
The majority affirms this procedure, concluding that (1) Mr. Nathan was found to be posing as the debtor’s president and was an imposter and (2) regardless, if a *580state court subsequently ruled that Mr. Nathan’s faction was in control, then the waiver would be effective and sums paid could be collected in a subsequent suit. This affirmance allows abdication of bankruptcy court jurisdiction over this matter without a definitive ruling.
Since I lack the majority’s information on the unmasking of Mr. Nathan as an imposter25, I can only comment that if the bankruptcy court believed his agreement was unauthorized, it should have so ruled and rejected the waiver. It was inappropriate to leave the matter for subsequent resolution by our state colleagues.
We recently noted that a waiver by the debtor of the right to judgment is one of only two charted safe harbors from § 303(i) remedies. Wechsler v. Macke International Trade, Inc. (In re Macke International Trade, Inc.), 370 B.R. 236, 256-57 (9th Cir. BAP 2007). Coneordantly, our circuit characterizes the absence of a waiver as being one of “only two prerequisites” for an award under § 303(i)(1). Higgins, 379 F.3d at 705. It is an important matter. When clearly raised, as it was here, it must be disposed of prior to making an award.26 It cannot be left for subsequent resolution by another court.
IV
In conclusion, I perceive no error in the bankruptcy court’s award of attorney’s fees and costs against appellant and concur with the affirmance of that award. However, as the bankruptcy court was not permitted to consider an award against all petitioning creditors, solely because of a service failure and given the lack of an express finding that the alleged release was invalid as a waiver of such fees, I respectfully dissent from the majority’s disposition and would reverse and remand, on those issues.

. The majority reports that their close examination of Vortex Fishing reveals that our circuit affirmed an award made against only some petitioners. I've already indicated my belief that bankruptcy courts can do this, under procedurally proper circumstances. My reading of Vortex fails however, to discern that this precise issue was either raised or decided in that case.

. If service on all petitioners could be established as impossible, I would presume the court could still act against those capable of being served. That is certainly not the circumstances of this case.

. As no authority is cited for this proposition, I’m allowed to quibble that my government dictionary advises proximate cause is also a criminal term and that punitive damages are sometimes available in breach of contract actions. Black’s Law Dictionary 234, 418 (8th ed.2004).

.Since the statute neither includes nor excludes this concept, I see no reason to prohibit bankruptcy courts from entering multiple party liability on a basis other than joint and several in an appropriate case.

. If I am correct that the statute requires the movant to bring all petitioners before the court, then to require the respondent to do, by a Civil Rule 21 motion, that which the movant should have done is hardly equitable.

. The majority’s holding regarding unserved petitioners’ contribution liability creates due process concerns. See, e.g., Miller v. Cardinale (In re DeVille), 361 F.3d 539, 548-49 (9th Cir.2004) (discussing particularized notice requirements for sanctions).

. The majority reports an inquiry outside this record reveals a subsequent superior court ruling in favor of one faction. Since there is no indication this was presented to the bankruptcy court, I see no relevance. I would grant appellant’s request to strike certain exhibits, including a state court judgment never presented to the bankruptcy court and keep our investigators home. See Dorothy W. Nelson, et al., Ninth Circuit Civil Appellate Practice, ¶ 4:16 at 4-3 (2001) (citing United States v. Walker, 601 F.2d 1051, 1054-55 (9th Cir.1979)); Morrison v. Hall, 261 F.3d 896, 900 (9th Cir.2001).

. It may not be necessary to conduct a full evidentiary hearing. The majority believes that a court ruling has been entered between the parties or their privies regarding the alleged debtor's ownership and control. If a binding, final judgment has been entered, it would constitute the basis for a summary preclusion ruling by the bankruptcy court.