Court Opinion

ID: 2975103
Source: CourtListenerOpinion
Date Created: 2015-09-22 17:28:58.007225+00
Date Added: 2024-06-11T11:43:54.660007
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RECOMMENDED FOR FULL-TEXT PUBLICATION
                                       Pursuant to Sixth Circuit Rule 206
                                               File Name: 07a0189p.06

                         UNITED STATES COURT OF APPEALS
                                          FOR THE SIXTH CIRCUIT
                                            _________________

                                                       X
                                             Debtor. -
 In re: DSC, LTD., a Michigan corporation,

 __________________________________________ -
                                                        -
                                                        -
                                                            No. 06-1813

                                                        ,
 RIVERVIEW TRENTON RAILROAD COMPANY; CROWN >
 ENTERPRISES, INC.,                                     -
                               Plaintiffs-Appellants, -
                                                        -
                                                        -
                                                        -
           v.
                                                        -
                                                        -
 DSC, LTD., a Michigan corporation,
                                Defendant-Appellee. -
                                                        -
                                                        -
                                                        -
                                                        -
                                                       N
                        Appeal from the United States District Court
                       for the Eastern District of Michigan at Detroit.
                     No. 05-72779—Patrick J. Duggan, District Judge.
                                             Argued: April 19, 2007
                                      Decided and Filed: May 23, 2007
      Before: MERRITT and MARTIN, Circuit Judges; FORESTER, Senior District Judge.*
                                               _________________
                                                     COUNSEL
ARGUED: K. Scott Hamilton, DICKINSON WRIGHT, Detroit, Michigan, for Appellants.
Geoffrey L. Silverman, SILVERMAN & MORRIS, West Bloomfield, Michigan, for Appellee.
ON BRIEF: K. Scott Hamilton, DICKINSON WRIGHT, Detroit, Michigan, for Appellants.
Geoffrey L. Silverman, Karin F. Avery, SILVERMAN & MORRIS, West Bloomfield, Michigan,
for Appellee.

         *
         The Honorable Karl S. Forester, Senior United States District Judge for the Eastern District of Kentucky, sitting
by designation.

                                                            1
No. 06-1813           In re DSC, Ltd.                                                           Page 2

                                        _________________
                                            OPINION
                                        _________________
         FORESTER, Senior District Judge. This litigation arose from an amended petition for
involuntary bankruptcy filed by the Plaintiffs-Appellants, Riverview Trenton Railroad Company
(“RTRR”) and Crown Enterprises, Inc. (“Crown”), and two other entities against DSC, Ltd.
(“DSC”). The bankruptcy court ultimately dismissed the amended involuntary petition due to the
lack of a sufficient number of qualified creditors under 11 U.S.C. § 303(b)(1). Relying on 11 U.S.C.
§ 303(c) which allows joinder at any time “before the case is dismissed,” RTRR and Crown argue
that the bankruptcy court erred by establishing and enforcing a joinder deadline which resulted in
the exclusion of an additional petitioning creditor. RTRR and Crown also argue that the bankruptcy
court erred in determining that they did not qualify as petitioning creditors under § 303(b)(1). For
the reasons set forth below, the decision of the bankruptcy court, subsequently affirmed by the
district court, will be AFFIRMED.
I.     FACTUAL AND PROCEDURAL BACKGROUND
       This bankruptcy appeal arises out of a series of complex land purchases and related
agreements between DSC and various entities beginning in the late 1990s. The complete factual
background has been extensively detailed by the courts below and will not be repeated herein.
Instead, only the specific events relevant to the issues on appeal are described below.
        On January 27, 2005, Crown, RTRR and other entities filed a petition for involuntary
bankruptcy pursuant to 11 U.S.C. § 303 against DSC. In response, DSC argued that several of these
entities were not creditors of DSC, but rather creditors of DSC’s affiliates, and that some of the
petitioners had not filed the involuntary bankruptcy petition in good faith.
        Then, on February 16, 2005, Crown, RTRR, and two other entities filed an amended
involuntary bankruptcy petition. This amended petition did not include the petitioning creditors
whose status DSC had previously challenged. Again, DSC responded that some of the new
petitioners were not qualifying petitioning creditors and did not file in good faith. On February 18,
2005, the bankruptcy court entered its order setting February 28, 2005 as the deadline for other DSC
creditors to join the involuntary petition, and notifying DSC’s creditors that they must file a “Notice
of Joinder” on or before that date if they wanted to join the amended involuntary petition. The trial
on the amended involuntary petition was scheduled for the next day -- March 1, 2005.
        On February 28, 2005, O’Brien & Gere Engineers, Inc. (“O’Brien & Gere”) notified DSC
and the bankruptcy court via email that while they intended to join in the amended involuntary
petition, they were unable to file joinder papers on that day. At the beginning of the trial on the next
day, the petitioning creditors requested that O’Brien & Gere be allowed to join the amended
involuntary petition; however, O’Brien & Gere still had not filed any notice of joinder and were not
present at the trial. A notice of joinder on behalf of O’Brien & Gere was belatedly filed on March 1,
2005 after the court’s deadline had expired. The bankruptcy court denied the joinder request on the
grounds that O’Brien & Gere had a reasonable opportunity to join the petition, and that they had
failed to meet the deadline.
        The trial continued, intermittently, until April 12, 2005. On April 26, 2005, the bankruptcy
court entered its order finding that Crown and RTRR were not qualified under 11 U.S.C. § 303(b)(1)
as petitioning creditors because there was a genuine issue of material fact as to DSC’s liability to
Crown and RTRR and/or the amount of Crown’s and RTRR’s claims against DSC. Although the
bankruptcy court did find that the other two petitioning creditors were qualified, because Crown and
RTRR were not qualified there were an insufficient number of qualifying petitioning creditors to
No. 06-1813           In re DSC, Ltd.                                                            Page 3

pursue an involuntary bankruptcy against DSC under § 303(b)(1), which requires three creditors.
As a result, the bankruptcy court dismissed the amended involuntary petition.
        Crown and RTRR filed a motion for reconsideration with respect to dismissal of the amended
involuntary petition, arguing first that the evidence, including an alleged settlement agreement in
a related state court action and other agreements between DSC and the petitioning creditors,
established the existence of a clear and binding claim against DSC sufficient to qualify Crown and
RTRR as petitioning creditors under § 303(b)(1). Second, Crown and RTRR argued that the
bankruptcy judge lacked authority to set a deadline for DSC’s creditors to join the amended
involuntary petition, and that O’Brien & Gere should have been allowed to join the amended
involuntary petition as the third petitioning creditor. The motion for reconsideration was denied by
the bankruptcy court on June 24, 2005.
        In the meantime, a settlement was reached between DSC and O’Brien & Gere, and on June 7,
2005, O’Brien & Gere withdrew from participation in the bankruptcy proceeding. On July 1, 2005,
Crown and RTRR filed an appeal of the bankruptcy court’s dismissal of the amended involuntary
petition with the United States District Court for the Eastern District of Michigan pursuant to 28
U.S.C. § 158(a). The district court affirmed the decision of the bankruptcy court, and this appeal
followed.
II.     STANDARD OF REVIEW
       This Court first must address DSC’s argument that the appeal is moot based on O’Brien &
Gere’s settlement with DSC. Generally, appellate courts review the issue of mootness de novo. See
In re GWI PCS 1, Inc., 230 F.3d 788, 800 (5th Cir. 2000); In re Western Pac. Airlines, Inc., 181 F.3d
1191, 1194 (10th Cir. 1999); In re Filtercorp, Inc., 163 F.3d 570, 576 (9th Cir. 1998).
        Dismissal of a bankruptcy case is reviewed for abuse of discretion. In re Eastown Auto Co.,
215 B.R. 960, 963 (B.A.P. 6th Cir. 1998). A bankruptcy court abuses its discretion when “it relies
upon clearly erroneous findings of fact or when it improperly applies the law or uses an erroneous
legal standard.” Id. The findings of a bankruptcy court which support dismissal of the bankruptcy
case are factual determinations which are reviewed under the clearly erroneous standard.
Fed.R.Bank.P. 8013. A finding of fact is clearly erroneous “when although there is evidence to
support it, the reviewing court on the entire evidence is left with the definite and firm conviction that
a mistake has been committed.” Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985);
United States v. United States Gypsum Co., 333 U.S. 364 (1948). Conclusions of law are reviewed
de novo. In re Isaacman, 26 F.3d 629, 631 (6th Cir. 1994).
         On appeal of a bankruptcy decision from a district court, the appellate court employs the
same standards, evaluating the bankruptcy court’s decision directly, without being bound by the
district court’s legal determinations. In re Lowenbraun, 453 F.3d 314, 319 (6th Cir. 2006); In re
M.J. Waterman & Associates, Inc., 227 F.3d 604, 607 (6th Cir. 2000); In re Charfoos, 979 F.2d 390,
392 (6th Cir. 1992).
III.    INVOLUNTARY BANKRUPTCY PETITIONS AND 11 U.S.C. § 303
       Essentially, Crown and RTRR are challenging the bankruptcy court’s denial of O’Brien &
Gere’s joinder request and its finding that they were not qualifying petitioning creditors under 11
U.S.C. § 303(b)(1). Because DSC had more than twelve creditors, the filing of involuntary petitions
is governed by 11 U.S.C. § 303(b), which provides in pertinent part:
        An involuntary case against a person is commenced by the filing with the bankruptcy
        court of a petition under chapter 7 or 11 of this title - -
No. 06-1813               In re DSC, Ltd.                                                                        Page 4

         (1)      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 as to liability or amount, or an indenture trustee
                  representing such a holder, if such noncontingent, undisputed claims
                  aggregate at least $12,300 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), as amended effective April 20, 2005.1 The burden rests on the petitioning
creditors to establish that they are qualified under § 303(b)(1). In re Eastown Auto Co., 215 B.R.
at 968. To proceed under this section, at least three creditors must hold a claim against DSC that
is not contingent as to liability and that is not the subject of a bona fide dispute as to liability or
amount. 11 U.S.C. § 303(b)(1). Congress has made clear that it “intended to disqualify a creditor
whenever there is any legitimate basis for the debtor not paying the debt, whether that basis is
factual or legal.” In re Lough, 57 B.R. 993, 997 (Bankr. E.D. Mich. 1986). To determine whether
or not a claim is subject to a bona fide dispute, the Sixth Circuit Bankruptcy Appellate Panel has
established the following test:
         “If there is either a genuine issue of material fact that bears upon the debtor’s
         liability, or a meritorious contention as to the application of law to undisputed facts,
         then the petition must be dismissed.” . . . . In determining whether a claim is subject
         to a bona fide dispute, the bankruptcy court must not resolve any genuine issues of
         fact or law.
In re Eastown , 215 B.R.at 965 (quoting and citing In re Lough, 57 B.R. at 997). Importantly, the
court need not resolve any genuine issues of fact or law; it only must determine that such issues
exist. In re Lough, 57 B.R. at 997; In re Everett, 178 B.R. 132, 139 (Bankr. N.D. Ohio 1994). The
bankruptcy court determined that Crown and RTRR did not have a noncontingent, undisputed claim
against DSC; therefore, Crown and RTRR were not qualifying petitioning creditors under
§ 303(b)(1). Because there were only two qualifying petitioning creditors, and § 303(b)(1) requires
three, the bankruptcy court dismissed the amended involuntary petition.
       Also at issue in this appeal is the decision of the bankruptcy court to deny joinder to O’Brien
& Gere as additional petitioning creditors. Joinder of petitioning creditors is governed by 11 U.S.C.
§ 303(c). This section provides:
         After the filing of a petition under this section but before the case is dismissed or
         relief is ordered, a creditor holding an unsecured claim that is not contingent, other
         than a creditor filing under subsection (b) of this section, may join in the petition
         with the same effect as if such joining creditor were a petitioning creditor under
         subsection (b) of this section.
11 U.S.C. § 303(c). O’Brien & Gere’s joinder request was not filed until after expiration of the
bankruptcy court’s deadline for any notices of joinder to be filed and after the start of the trial. As
a result, the bankruptcy court denied O’Brien & Gere’s joinder request as untimely.

         1
          According to the Historical and Statutory Notes to § 303: “This section and the amendments made by this
section [amending this section] shall take effect on the date of the enactment of this Act [Apr. 20, 2005] and shall apply
with respect to cases commenced under title 11 of the United States Code before, on, and after such date.” Thus, the
2005 amendments to 11 U.S.C. § 303 apply to this case.
No. 06-1813           In re DSC, Ltd.                                                            Page 5

IV.     ANALYSIS
        A.      DSC’S SETTLEMENT WITH O’BRIEN & GERE DOES NOT
                MOOT THIS APPEAL.
        On appeal, DSC argues that the appeal of the bankruptcy court’s decision to deny joinder as
to O’Brien & Gere has been rendered moot based upon DSC’s settlement with O’Brien & Gere
subsequent to the dismissal of the amended involuntary petition. Because Crown and RTRR failed
to seek a stay of the dismissal order, DSC contends that it conducted its affairs as a non-debtor,
including entering into the settlement with O’Brien & Gere. As a result, DSC argues that the
settling creditors could be prejudiced and subjected to litigation for recovery of the settlement
money should the bankruptcy court’s order be reversed.
        However, DSC’s concerns over prejudice to its creditors do not moot the arguments of
Crown and RTRR on appeal. A claim becomes moot only “when the plaintiff receives the relief
sought or when it is factually, not legally, impossible to receive such relief.” Liberles v. Cook
County, 709 F.2d 1122, 1127 (7th Cir. 1983). The burden of demonstrating mootness is on DSC,
and this burden requires a showing “that the outcome of this appeal could not affect the legal
interests of the parties.” Ohio v. Madeline Marie Nursing Homes Nos. 1 and 2, 694 F.2d 449, 463
(6th Cir. 1992).
        DSC cannot satisfy its burden. Although DSC argues that its creditors may be prejudiced
by the failure to obtain a stay of the dismissal order, DSC cannot show that Crown and RTRR will
not be able to obtain any effective relief if this court reverses the bankruptcy court’s dismissal of the
involuntary bankruptcy petition. As a result this appeal, as a general matter, is not moot.
        DSC also argues that O’Brien & Gere’s post-dismissal settlement with DSC moots any
appeal of the bankruptcy’s court’s refusal to grant O’Brien & Gere’s belated joinder request. DSC
contends that because O’Brien & Gere were never joined, they were entitled to withdraw, without
court approval, at any time. However, the issue before this court is whether the bankruptcy court
erred in refusing to allow O’Brien & Gere to join in the first instance, not whether they should be
allowed to voluntarily withdraw at any time. Had the bankruptcy court permitted O’Brien & Gere’s
joinder as a qualified petitioning creditor, there would have been three qualified petitioning creditors
sufficient to satisfy § 303(b)(1), and the petition should not have been dismissed. Thus, O’Brien &
Gere’s subsequent settlement and withdrawal does not affect this court’s ability to review the
bankruptcy court’s decision to establish and enforce a joinder deadline.
        B.      THE BANKRUPTCY COURT DID NOT ERR IN
                ESTABLISHING AND ENFORCING ITS JOINDER
                DEADLINE.
        The Court now turns to the issue of whether the bankruptcy court erred when it imposed the
February 28, 2005 deadline for DSC’s creditors to join the amended involuntary petition and then
denied the untimely notice of joinder filed by O’Brien & Gere. By setting the deadline, and then
denying O’Brien & Gere’s belated joinder request, O’Brien & Gere could not be counted as
qualified petitioning creditors for the purpose of determining whether there was a sufficient number
of creditors to pursue an involuntary petition against DSC. Crown and RTRR argue that under 11
U.S.C. §303(c), joinder is a matter of right before a case is dismissed or relief is ordered, and that
the bankruptcy court may not impose any conditions on that right, including a deadline for joinder.
        The bankruptcy court rejected Crown and RTRR’s argument on two grounds. First, the
bankruptcy court concluded that Crown and RTRR had waived the argument because they failed to
object to the February 28, 2005 joinder deadline at any time before the Court entered its order
dismissing the amended involuntary petition. Second, the bankruptcy court concluded that it has
No. 06-1813            In re DSC, Ltd.                                                                Page 6

the authority, under the Bankruptcy Code and applicable rules, to manage its caseload in an orderly,
fair and efficient manner, including setting joinder deadlines. The bankruptcy court noted that
Crown and RTRR specifically requested an expedited trial, and allowing joinder of any new creditor
at any date after February 28, 2005 would not have been conducive to an orderly trial, set for the
next day, and would have been unfair to DSC.
         Turning first to the issue of waiver, the record reveals that the petitioning creditors never
objected to the joinder deadline or argued that the bankruptcy court lacked any authority to set such
a deadline until the filing of their motion for reconsideration. In fact, Crown and RTRR participated
in the creation of the deadline, originally requesting a joinder deadline of February 23, 2005, which
the bankruptcy court extended until February 28, 2005 at the request of DSC. At the beginning of
the trial on the amended involuntary petition, Crown and RTRR failed to state any objection to the
joinder deadline and acknowledged that O’Brien & Gere had reasonable notice and a reasonable
time to file their notice of joinder. No one representing O’Brien & Gere was present when the trial
began on March 1, 2005. By failing to raise the issue of the bankruptcy court’s authority to set a
joinder deadline during the pendency of the matter before the bankruptcy court, the petitioning
creditors have waived this issue. See Wiley v. United States, 20 F.3d 222, 226 (6th Cir. 1994)
(objections raised for the first time in a reconsideration motion are deemed to have been waived).
         Notwithstanding this waiver, the bankruptcy court did not err in establishing the joinder
deadline and denying O’Brien & Gere’s untimely joinder request. Section 303(c) states that “[a]fter
the filing of a petition under this section but before the case is dismissed or relief is ordered, a
creditor . . . may join in the petition with the same effect as if such joining creditor were a petitioning
creditor. . . .” 11 U.S.C. §303(c). On its face, the statute gives O’Brien & Gere the right to join a
petition anytime after it is filed and before it is dismissed or relief is ordered. The bankruptcy court,
however, relied on the Federal Rules of Bankruptcy Procedure and its inherent authority to set
deadlines to justify establishing and enforcing the joinder deadline. Specifically, the bankruptcy
court relied on Rule 1003(b) of the Federal Rules of Bankruptcy Procedure, which states:
        (b)     Joinder of petitioners after filing. If the answer to an involuntary petition
                filed by fewer than three creditors avers the existence of 12 or more creditors,
                the debtor shall file with the answer a list of all creditors with their addresses,
                a brief statement of the nature of their claims, and the amounts thereof. If it
                appears that there are 12 or more creditors as provided in § 303(b) of the
                Code, the court shall afford a reasonable opportunity for other creditors to
                join in the petition before a hearing is held thereon.
Fed.R.Bank.P. 1003(b). “Any such joinder occurs in the context of expeditious litigation mandated”
by Rule 1013(a) of the Federal Rules of Bankruptcy Procedure. In re Vortex Fishing Systems, Inc.,
277 F.3d 1057, 1061 (9th Cir. 2002). Rule 1013(a) provides that “[t]he court shall determine the
issues of a contested [involuntary] petition at the earliest practicable time and forthwith” enter an
appropriate dispositive order. Fed.R.Bank.P. 1013(a). Thus, in a case such as this, where there are
more than 12 creditors, Rule 1003(b) requires the bankruptcy court to afford reasonable notice to
other creditors while simultaneously resolving the merits of the involuntary petition “at the earliest
practicable time.” Id.
        Thus, there is tension between the statutory right of joinder created by § 303(c) and the rules
of procedure the bankruptcy court is bound to enforce. The Bankruptcy Appellate Panel for the
Sixth Circuit was faced with the issue of whether setting a deadline for creditors to join an
involuntary petition violates § 303(c) in the case of In re Eastown Auto Co., 215 B.R. 960. The
court, however, avoided the issue because it found that no creditors had sought to join the petition
prior to the trial court’s dismissal of the involuntary petition. Id. at 970.
No. 06-1813           In re DSC, Ltd.                                                           Page 7

        The issue is now squarely before this Court. While § 303(c) allows joinder “before the case
is dismissed or relief is ordered,” the Court agrees with the bankruptcy court’s holding that the
statute “merely sets an absolute, outside limit on the time within which certain qualifying creditors
may join an involuntary petition. It means that a would-be joining creditor must join, if at all, before
the Court has dismissed an involuntary bankruptcy petition.” The statute does not prohibit a court
from setting an earlier deadline, based upon its case management authority, in order to ensure
orderly, fair, and efficient proceedings. This is especially true in the context of an involuntary
bankruptcy proceeding, where the court is required to expedite such proceedings. Fed.R.Bank.P.
1013(a). Accordingly, for these reasons and the reasons set forth in the bankruptcy court’s Order
denying the petitioning creditors’ motion for reconsideration, the Court finds that the bankruptcy
court did not err in establishing and enforcing the February 28, 2005 joinder deadline. The decision
of the bankruptcy court establishing and enforcing the joinder deadline will be affirmed.
       C.      THE BANKRUPTCY COURT DID NOT ERR IN HOLDING
               THAT CROWN AND RTRR WERE NOT QUALIFIED
               PETITIONING CREDITORS UNDER § 303(b)(1).
        After denying O’Brien & Gere’s belated joinder request, the bankruptcy court was left with
only four petitioning creditors: Crown, RTRR, Voest Alpine Industries, Inc. (“Voest”), and Ebner
Furnaces, Inc. (“Ebner”). The bankruptcy court found that Voest and Ebner were qualified
petitioning creditors under § 303(b)(1), and that finding has not been challenged on appeal. At the
conclusion of the trial of this matter, the bankruptcy court concluded that Crown and RTRR did not
qualify as petitioning creditors, and thus dismissed the amended involuntary petition for an
insufficient number of qualified petitioning creditors pursuant to § 303(b)(1).
        Crown and RTRR have appealed the bankruptcy court’s finding that they were not qualified
petitioning creditors on two grounds. First, Crown and RTRR argue that a settlement agreement
reached in a state court action against DSC and others creates a noncontingent undisputed claim
against DSC sufficient to confer petitioning creditor status on Crown and RTRR. Second, Crown
and RTRR make an alternative argument that certain pre-settlement agreements, namely the
Environmental Obligations Implementation Agreement (“EOIA”) and the Right of First Refusal
Agreement (“RFRA”), are sufficient to confer qualifying petitioning creditor status against DSC.
        The bankruptcy court heard testimony and argument on Crown and RTRR’s claim against
DSC based on the settlement agreement, the EIOA, and the RFRA and determined that none of these
agreements set out a noncontingent, undisputed claim against DSC. Because Crown and RTRR did
not qualify as petitioning creditors, the bankruptcy court then dismissed the amended involuntary
petition for an insufficient number of qualified creditors under § 303(b)(1).
        After carefully considering the record on appeal, the briefs of the parties, and the applicable
law, and having had the benefit of oral argument, this Court finds that the bankruptcy court was not
clearly erroneous in its holding that Crown and RTRR were not qualified petitioning creditors under
§ 303(b)(1). The bankruptcy court has clearly articulated its rationale in its bench opinion of
April 26, 2005, and further analysis by this court would be redundant and unnecessary.
Accordingly, the bankruptcy court’s decision denying qualified petitioning creditor status to Crown
and RTRR and dismissing the amended involuntary petition for an insufficient number of qualified
creditors under § 303(b)(1) will be affirmed.
V.      CONCLUSION
       For the reasons set forth above, the decision of the bankruptcy court dismissing the amended
involuntary bankruptcy petition is AFFIRMED.