Court Opinion

ID: 2763726
Source: CourtListenerOpinion
Date Created: 2014-12-23 01:00:53.241636+00
Date Added: 2024-06-11T11:27:16.654045
License: Public Domain

Case: 14-10092             Document: 00512879597   Page: 1    Date Filed: 12/22/2014

            IN THE UNITED STATES COURT OF APPEALS
                     FOR THE FIFTH CIRCUIT

                                          No. 14-10092                    United States Court of Appeals
                                                                                   Fifth Circuit

                                                                                 FILED
                                                                         December 22, 2014
In the Matter of: JEFFREY BARON,
                                                                            Lyle W. Cayce
                 Debtor                                                          Clerk

------------------------------

DEAN FERGUSON; JEFFREY HALL; GARY LYON; ROBERT GARREY;
PRONSKE & PATEL, P.C., also known as Pronske Goolsby & Kathman,
P.C.; SCHURIG JETEL BECKETT TACKETT; POWERS, TAYLOR, L.L.P.;
DAVID PACIONE,

                 Appellants
v.

JEFFREY BARON,

                 Appellee

                      Appeal from the United States District Court
                           for the Northern District of Texas
                                USDC No. 3:13-CV-3461

Before SMITH, BARKSDALE, and HAYNES, Circuit Judges.
PER CURIAM:*

        *Pursuant to 5th Cir. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5th Cir.
R. 47.5.4.
    Case: 14-10092     Document: 00512879597      Page: 2    Date Filed: 12/22/2014

                                  No. 14-10092
      Attorneys and law firms (creditors) challenge the district court’s disposition
of an appeal from bankruptcy court concerning creditors’ involuntary-bankruptcy
petition against Jeffrey Baron. The bankruptcy court, in part, awarded partial
summary judgment to creditors, holding that, under 11 U.S.C. § 303(b), no bona-
fide dispute exists as to the amount owed creditors. The district court remanded
this matter to the bankruptcy court, with instructions to dismiss the petition.
Creditors primarily contend that, by remanding but ordering dismissal, the
district court improperly denied them the opportunity to present evidence
showing, as required, that no bona-fide dispute exists under 11 U.S.C. § 303(b).
AFFIRMED IN PART; REVERSED IN PART; and REMANDED FOR
PROCEEDINGS CONSISTENT WITH THIS OPINION.
                                         I.
      At issue are unpaid attorney’s fees allegedly owed creditors. Baron retained
them in connection with his business ventures and subsequent bankruptcy of one
of his companies, Ondova Limited Company. See Netsphere, Inc. v. Baron, 703
F.3d 296 (5th Cir. 2012).
      Throughout the Ondova bankruptcy, Baron retained, but discharged,
numerous attorneys and law firms. In an attempt to curb Baron’s “vexatious
litigation tactics”, the bankruptcy court recommended, and the district court
appointed, a receiver over Baron’s assets (receivership order). Netsphere, Inc. v.
Baron, No. 3:09-CV-988-F, slip op. at 12 (N.D. Tex. 3 Feb. 2011) (order denying
emergency motion to vacate order appointing receiver and in the alternative,
motion for stay pending appeal); see also Netsphere, Inc. v. Baron, No. 3:09-CV-
988-F, slip op. (N.D. Tex. 24 Nov. 2010) (receivership order). As part of the
receivership order, the district court entered a stay, prohibiting any actions to
enforce claims without first obtaining leave of court. Netsphere, Inc. v. Baron, No.
3:09-CV-988-F, slip op. at 12–13. Baron appealed the appointment of the receiver.
      While Baron’s appeal was pending, and on motions filed by the receiver, the
district court held a hearing to determine the validity and amounts of creditors’
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claims. It determined Baron owed approximately $879,000 in fees to creditors,
and ordered disbursement of those fees (fee order). Baron appealed the fee order,
which was consolidated with his appeal of the receivership order.
      In December 2012, in Netsphere, Inc., our court reversed the receivership
order and remanded the matter to district court, with instructions to dissolve the
receivership. 703 F.3d at 302. The opinion, however, did not address the fee order.
To clarify any ambiguity in the opinion, our court issued a clarification order.
Netsphere, Inc. v. Baron, No. 10-11202, slip op. at 6–8 (5th Cir. 31 Dec. 2012).
Although the clarification order did not reference the fee order, it stated: “The
district court orders that were in place prior to the release of our opinion remain
in place”. Id.
      On the day our court reversed the receivership order, creditors filed the
Chapter 7 involuntary-bankruptcy petition against Baron that is the subject of
this appeal. Baron moved to dismiss, challenging creditors’ standing under 11
U.S.C. § 303(b)(1), by asserting a bona-fide dispute existed as to fees owed. While
Baron’s motion to dismiss was pending, creditors moved for summary judgment.
Based on the claimed preclusive effect of the fee order, creditors asserted that, as
a matter of law, they satisfied the standing requirements under § 303(b)(1). In
the alternative, creditors asserted the evidence presented showed no bona-fide
dispute existed regarding their claims; and, even if the evidence was insufficient,
an exception to the requirements of § 303(b) existed on the basis of Baron’s actions.
      Prior to the hearing on the summary-judgment motion, Baron and creditors
entered a joint stipulation, limiting the sole issue to be decided on summary
judgment to whether the fee order foreclosed any claims regarding the existence
of a bona-fide dispute under § 303(b). The joint stipulation also reserved creditors’
rights to “reurg[e] the evidence of their underlying claims at a later hearing”.
      The bankruptcy court denied Baron’s motion to dismiss; and, on 5 April
2013, it granted partial summary judgment for creditors. In its subsequent
opinion granting relief to creditors, it ruled the “Fee Order is tantamount to a final
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judgment that forecloses an argument of a bona fide dispute”. In re Baron, No.
12-37921-SGJ-7, 2013 WL 3233518, at *9 (Bankr. N.D. Tex. 26 June 2013)
(findings of fact and conclusions of law in support of order for relief on involuntary
bankruptcy petition, discussing the court’s grant of partial summary judgment).
      Accordingly, on 17–18 June 2013, the bankruptcy court held a trial on the
remaining issue: whether Baron was insolvent under 11 U.S.C. § 303(h). In the
above-referenced order for relief, the bankruptcy court concluded § 303(h) did not
present a bar to creditors’ involuntary petition because “Baron has long been not
paying his enormous legal fees as they generally become due”. Id. at *14.
      Baron appealed the bankruptcy court’s order for relief. In September 2013,
the district court allowed Novo Point LLC and Quantec LLC, companies affected
by the bankruptcy court’s order for relief, to intervene. A few months later, the
court reversed the bankruptcy court’s order for relief, vacated the fee order, and
remanded the case to the bankruptcy court “for the limited purpose of dismissal
of the involuntary bankruptcy action”. Baron v. Schurig, No. 3:13-CV-3461-L,
2014 WL 25519, at *1 (N.D. Tex. 2 Jan. 2014). In interpreting Netsphere, Inc., the
district court concluded our court implicitly overturned the fee order. It reasoned
that, because “the Fee Order is expressly based on the Receivership Order and the
establishment of the receivership, which were held improper”, then “the fate and
validity of the . . . Fee Order [were] necessarily tied to that of the Receivership
Order”.      Id. at *14.     Therefore, because the bankruptcy court based its
determination that creditors had standing on the preclusive effect of the now-
vacated fee order, the district court reversed the order for relief. Further, the
district court may have concluded that a bona-fide dispute existed, stating “there
is some evidence in the record to support a finding that a bona fide dispute exists,
at least with regard to the amount of the fee claims”. Id. at *13 (emphasis in
original).
      Although raised by Baron in district court, the court found it
unnecessary to rule on Baron’s § 303(h) claim regarding whether he was
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                                   No. 14-10092
insolvent, stating: “The court’s determination regarding the Order for Relief
moots the parties’ remaining grounds for relief and contentions. Accordingly,
the court need not address them.” Id. at *16.
                                        II.
      Creditors contend primarily that the district court erred in ordering
dismissal of the involuntary bankruptcy proceeding.           Because the court
vacated the fee order upon which the bankruptcy court relied in determining,
on summary judgment, that no bona-fide dispute existed, creditors maintain
they are entitled to a trial in bankruptcy court on the bona-fide-dispute issue.
Additionally, although raised in, but not addressed by, the district court, Baron
challenges, inter alia, the bankruptcy court’s finding him insolvent under
§ 303(h).
      In general, § 303(b) provides that creditors may commence an involun-
tary bankruptcy proceeding against the debtor if the aggregated claims of three
or more creditors (or only one creditor if there are less than 12 creditors in
total) equal at least $15,325.     11 U.S.C. § 303(b). Claims must “not [be]
contingent as to liability or the subject of a bona fide dispute as to liability or
amount”.    Id.   Further, § 303(h) provides that, whenever an involuntary
bankruptcy petition is filed and then timely controverted, the court, after a
trial, shall order relief against the debtor in the involuntary proceeding only if,
inter alia, “the debtor is generally not paying such debtor’s debts as such debts
become due unless such debts are the subject of a bona fide dispute as to
liability or amount”. 11 U.S.C. § 303(h).
      Our addressing the following three issues obviates the need to address
others presented by the parties.
                                        A.
      For the § 303(b) issue regarding a bona-fide dispute vel non, and as
conceded at oral argument in our court, creditors do not challenge the district
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                                  No. 14-10092
court’s ruling that our court’s opinion in Netsphere, Inc., reversed implicitly the
fee order. Therefore, in the light of the district court’s having ruled against the
partial summary judgment awarded creditors, the § 303(b) issue turns on
whether the district court erred in ordering dismissal, as opposed to remanding
the § 303(b) issue for trial in bankruptcy court. In other words, their partial
summary judgment’s having been vacated, creditors contend that they are
entitled to a trial on the bona-fide-dispute issue.
      “We review the district court’s reversal of the bankruptcy court’s grant
of summary judgment de novo.” In re Contractor Technology, Ltd., 529 F.3d
313, 319 (5th Cir. 2008) (citing In re Robertson, 203 F.3d 855, 858 (5th Cir.
2000)). Summary judgment is proper when, viewing the facts in the light most
favorable to the non-moving party, “there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law”. In re
Kinkade, 707 F.3d 546, 548 (5th Cir. 2013) (quoting Fed. R. Civ. P. 56(a)).
      The district court erred in its failure to take into account the parties’
joint stipulation. That stipulation reserved creditors’ right to a trial on the
bona-fide-dispute issue should the fee order have no preclusive effect. The
stipulation provided: “[T]he sole summary judgment issue to be presented to
the Court with respect to the bona fide dispute issue shall be whether prior
orders issued in the District Court and this Court in a related bankruptcy
matter legally foreclose any argument as to the existence of a bona fide dispute
as to [creditors’] claims” and “nothing herein shall prevent [creditors] from
reurging the evidence of their underlying claims at a later hearing . . . ”. By
vacating the fee order, the district court negated any preclusive effect of that
order. Hudson v. C.I.R., 71 F.3d 877, 1995 WL 725812, at *3 (5th Cir. 13 Nov.
1995) (citing Hicks v. Quaker Oats Co., 662 F.2d 1158, 1168 (5th Cir. Unit A,
1981)) (“When a trial court’s judgment is vacated, reversed, or set aside by an
appellate court, collateral estoppel will not preclude relitigation of the trial
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                                  No. 14-10092
court’s conclusions of law or findings of fact.”). In addition, as discussed supra,
it appears that the district court may have concluded that a general dispute of
material fact exists regarding a bona-fide dispute. In short, creditors are
entitled to a trial on the bona-fide-dispute issue.
                                        B.
      As also discussed supra, after granting summary judgment for creditors
on the § 303(b) issue, the bankruptcy court held a trial on Baron’s insolvency
vel non under § 303(h). Again, under § 303(h), a debtor is insolvent if the court
determines, inter alia, “the debtor is generally not paying such debtor’s debts
as such debts become due unless such debts are the subject of a bona fide
dispute as to liability or amount”. 11 U.S.C. § 303(h). Baron claims he was not
insolvent because he was under a receivership when creditors filed their
petition. As also discussed, although this issue was raised in district court, it
was among those the court ruled were not necessary to address.
      A bankruptcy court’s conclusions of law are reviewed de novo; its findings
of fact, for clear error. In re TransTexas Gas Corp., 597 F.3d 298, 304 (5th Cir.
2010) (citing Pullman-Standard v. Swint, 456 U.S. 273, 287 (1982) & In re
Martin, 963 F.2d 809, 813–14 (5th Cir. 1992)). “To the extent that we are
presented with a mixed question of law and fact, we consider the question de
novo, although we have recognized that the ‘underlying facts’ in mixed
questions should be reviewed for clear error.” In re Green Hills Dev. Co.,
L.L.C., 741 F.3d 651, 654–55 (5th Cir. 2014) (citations omitted).
      Baron asserts that, by being under a receivership when the bankruptcy
action was initiated, § 303(h) could not be applied to him. The bankruptcy
court determined Baron was insolvent under § 303(h) because “Baron has long
been not paying his enormous legal fees as they generally become due”. In re
Baron, 2013 WL 3233518, at *14. A finding of fact is clearly erroneous if, after
reviewing the record as a whole, the court is left with the definite and firm
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                                   No. 14-10092
conviction that a mistake has been made. E.g., In re McClendon, 765 F.3d 501,
504 (5th Cir. 2014) (citation and quotation omitted). Based on the evidence in
the record, the bankruptcy court’s finding is not clearly erroneous. E.g., In re
Immudyne, Inc., 196 F.3d 1258, 1999 WL 800230, at *1 (5th Cir. 20 Sept. 1999)
(per curiam).
                                         C.
      Baron claims creditors’ filing the involuntary bankruptcy petition
violated the district court’s stay, contained in the vacated receivership order,
by failing to first obtain leave of the district court to file the petition. Baron
supports his claim by citing cases in other circuits holding a creditor’s right to
seek relief in bankruptcy may be enjoined by a district court. See S.E.C. v.
Byers, 609 F.3d 87, 91–92 (2d Cir. 2010); Liberte Capital Grp., LLC v. Capwill,
462 F.3d 543, 551–52 (6th Cir. 2006).
      Although Baron raised this issue in bankruptcy court, neither it nor the
district court addressed it. The initial resolution of this issue is best left to the
bankruptcy court on remand.
                                        III.
      For the foregoing reasons, the judgment is AFFIRMED with regard to
vacating the fee order and REVERSED with regard to dismissing the
involuntary-bankruptcy action. This matter is REMANDED to district court
for remand to bankruptcy court for a trial on whether a bona-fide dispute exists
as to creditors’ fees and, consistent with this opinion, for such other
proceedings as may be appropriate.

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