The opinion
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
FORT MYERS DIVISION
IN RE: GABRIEL C. MURPHY
INVESTMENT THEORY, LLC,
DIGITAL TECHNOLOGY, LLC,
GUARANTY SOLUTIONS RECOVERY
FUND I, LLC, WILLIAM M.
SCHEER, and LAURENCE G.
SCHEER,
Appellants,
v. Case No: 2:19-cv-631-FtM-29
Case No: 9:17-bk-7843-FMD
GABRIEL C. MURPHY,
Appellee.
OPINION AND ORDER
This matter comes before the District Court on the appeal of
two Orders from the United States Bankruptcy Court: (1) an Order
Denying Motion to Dismiss Involuntary Bankruptcy Petition and
Granting Alleged Debtor's Request for Abstention (Doc. #1-1), and
(2) an Order Denying Petitioning Creditors' Motion for
Reconsideration (Doc. #1-2).1 Appellants filed an Initial Brief
(Doc. #15); appellee, who is proceeding pro se, filed a pro se
1 The Court will hereinafter cite documents filed with the
District Court as “Doc.”, and documents filed in the Bankruptcy
case as “Bankr. Doc.” Copies of the relevant documents were
included in the record transmitted by the Bankruptcy Court. The
page numbers refer to the Court’s computer-generated number at the
upper right corner of the document.
Brief (Doc. #18), an Amended Brief (Doc. #29), and a Second Amended
Brief (Doc. #44); appellants filed a Reply Brief (Doc. #48), and
appellee then filed a Surreply Brief (Doc. #54).
Also before the Court is Appellee’s Motion to Remand For
Retrial on All Issues Before the Bankruptcy Court (Doc. #62), filed
on October 2, 2020, and appellee’s Additional Suggestions In
Support of Motion For Reversal and Remand (Doc. #63), filed on
October 5, 2020. Appellants filed an Objection and Response (Doc.
#64) on October 9, 2020.
For the reasons set forth below, appellee’s Motion to Remand
is denied. The Orders of the Bankruptcy Court being appealed by
appellants are vacated as to the issue of abstention only, and the
case is remanded to the Bankruptcy Court for further proceedings
on the Involuntary Petition.
I.
On September 5, 2017, Investment Theory, LLC (ITheory),
Digital Technology, LLC (DigiTech), and Guaranty Solutions
Recovery Fund 1, LLC (Guaranty Solutions) (collectively
Petitioning Creditors or appellants) filed an Involuntary Petition
under Chapter 7 of the Bankruptcy Code as to the alleged debtor
Gabriel C. Murphy (Debtor or appellee) asserting $6,914,459.23 in
business debts by the individual Debtor. (Doc. #6-7.) ITheory
and Guaranty Solutions asserted that their claims were based on
judgments, while DigiTech asserted its claim was based on a
promissory note and personal guaranty. (Id.)
Under the Bankruptcy Code, a certain number of certain types
of creditors may compel a certain type of debtor to participate in
bankruptcy proceedings by filing an involuntary petition against
that alleged debtor. See 11 U.S.C. § 303(a).2 It has never been
disputed that Gabriel C. Murphy is a qualifying debtor in the
Chapter 7 proceeding, which was commenced by the Petitioning
Creditors by the Involuntary Petition.
Title 11 U.S.C. § 303(b) contains the numerosity and claim
requirements which petitioning creditors must satisfy in order to
file an involuntary petition against an alleged debtor by the
filing of a petition under Chapter 7 or Chapter 11 --
(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 $15,775 more than the value of any lien
on property of the debtor securing such claims
held by the holders of such claims;
(2) if there are fewer than 12 such holders .
. . by one or more of such holders that hold
2 Section 303(a) provides: “(a) An involuntary case may be
commenced only under chapter 7 or 11 of this title, and only
against a person, except a farmer, family farmer, or a corporation
that is not a moneyed, business, or commercial corporation, that
may be a debtor under the chapter under which such case is
commenced.”
in the aggregate at least $15,775 of such
claims;3
11 U.S.C. § 303(b). Thus, “[t]he petition must be brought by at
least three eligible creditors (unless there are fewer than twelve
eligible creditors), with each creditor holding a separate claim
against the alleged debtor, and the claims must not be contingent
or subject to a bona fide dispute as to liability or amount.” In
re Rosenberg, 779 F.3d 1254, 1258 (11th Cir. 2015).4 Failure to
satisfy these statutory requirements is grounds for dismissal of
the involuntary petition, but these requirements “do[] not
implicate subject matter jurisdiction.” In re Trusted Net Media
Holdings, LLC, 550 F.3d 1035, 1046 (11th Cir. 2008) (en banc).5
If the involuntary petition “is not timely controverted, the
court shall order relief against the debtor in an involuntary case”
under the appropriate bankruptcy chapter. 11 U.S.C. § 303(h). To
controvert an involuntary petition, a debtor “may file an answer,”
11 U.S.C. § 303(d), or may file a motion to dismiss. Fed. R.
Bankr. Pro. 1011(b). In a controverted case, “after trial” the
3 The dollar amounts have changed over time, but at the time
the Petition was filed in this case the amount was $15,775.
4 A Bankruptcy Rule purports to add another limitation not
set forth in the statute: “An entity that has transferred or
acquired a claim for the purpose of commencing a case for
liquidation under chapter 7 or for reorganization under chapter 11
shall not be a qualified petitioner.” Fed. R. Bankr. P. 1003(a).
5 Thus, contrary to appellants’ position (Doc. #15, pp. 22-
23), a motion challenging eligibility is not treated as a
jurisdictional challenge, at least in the Eleventh Circuit.
bankruptcy court may order relief if certain conditions are
satisfied. 11 U.S.C. § 303(h).
Here, Debtor controverted the Involuntary Petition by filing
a motion to dismiss. On September 28, 2017, Debtor filed a Motion
to Dismiss Involuntary Bankruptcy Petition Pursuant to Fed. R.
Bankr. Pro. 1011(b) (Doc. #6-8)(the Motion to Dismiss). The
Motion to Dismiss and its supporting Certification of the Debtor
(Doc. #6-9) asserted that DigiTech’s claim was contingent and the
subject of a bona fide dispute, and therefore DigiTech did not
qualify as a petitioning creditor and had no standing to file the
Involuntary Petition. (Doc. #6-8, pp. 3-5.) The Motion to
Dismiss also asserted that the Involuntary Petition was filed in
bad faith by all three Petitioning Creditors. (Id. pp. 5-6.)6
The Motion to Dismiss sought dismissal of the bankruptcy proceeding
with prejudice, a declaration that it was filed in bad faith, an
injunction against future involuntary petitions, punitive damages,
attorney fees, costs, and damages, and “such other and further
relief as this Court deems just.” (Id. at 7-8.) The Motion to
Dismiss did not mention abstention or request the Bankruptcy Court
to abstain from hearing the matter.
6 The Motion to Dismiss also alleged improper service of
process, but this argument was later withdrawn. (Doc. #6-17, pp.
5-6, 9.)
On October 9, 2017, the Petitioning Creditors filed a Response
to Debtor’s Motion to Dismiss (Doc. #6-11) denying that any claim
was objectively disputed and asserting that the bad faith issue
was premature since 11 U.S.C. § 303(i)(2) allows bad faith damages
only after the petition is dismissed. Debtor’s Reply (Doc. #6-
12) and Supplemental Certification (Doc. #6-13), filed on October
17, 2017, added the assertion that ITheory was not an eligible
petitioner because it had acquired the claim solely for the purpose
of becoming a petitioner, in violation of Bankruptcy Rule 1003(a).
The Bankruptcy Court conducted a preliminary hearing on
October 19, 2017. (Doc. #6-17.) Both sides agreed there were
disputed factual issues regarding the DigiTech claim, and that a
trial should be set on the Motion to Dismiss. On October 24,
2017, the Bankruptcy Court issued a notice scheduling a “trial in
the contested matter arising from the Motion to Dismiss Case
Involuntary Petition” for February 20, 2018. (Doc. #6-14.)
On November 7, 2017, the Petitioning Creditors filed a Motion
to Compel Debtor to Comply with Rule 1003(b), Federal Rules of
Bankruptcy Procedure (Doc. #6-15). The Motion to Compel noted
that Debtor’s Motion to Dismiss had not indicated the number of
his creditors, and that the number of creditors could impact the
required number of eligible petitioning creditors needed under 11
U.S.C. § 303(b)(1), (2), and hence the need for a trial on the
Motion to Dismiss.
Because Debtor had not filed an Answer and the Involuntary
Petition had not been filed by fewer than three creditors,
Bankruptcy Rule 1003(b) was not implicated.7 Nonetheless, on
December 4, 2017, the Bankruptcy Court granted the Motion to Compel
and ordered Debtor to comply with Rule 1003(b) and to file a list
of his known creditors. (Doc. #6-16.) On December 27, 2017,
Debtor filed Debtor’s List of Creditors As Of September 5, 2017
(Doc. #6-18) identifying 29 creditors. The number of creditors
was not contested by the Petitioning Creditors. On February 16,
2018, the Bankruptcy Court granted the Petitioning Creditors’
motion to continue the trial, re-scheduling trial for March 29,
2018. (Doc. #6-20.)
On February 28, 2018, the Petitioning Creditors filed an
Amended Involuntary Petition (Docs. #6-21, #6-22) reducing the
amount of DigiTech’s claim from $325,664.45 to $55,547.00. The
Amended Petition also checked the “Transfer of Claim” box and added
Statements from ITheory and Guaranty Solutions. (Doc#. #6-23, #6-
24.)
7 Fed. R. Bankr. P. 1003(b) provides: “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.”
On March 3, 2018, Debtor filed a Motion to Strike Amended
Involuntary Petition (Doc. #6-25), arguing it was untimely and
filed without leave of court. On March 27, 2018, the Petitioning
Creditors filed a Response To Debtor’s Motion to Strike Amended
Involuntary Petition, and Alternative Motion For Leave to File
Amended Petition Nunc Pro Tunc. (Doc. #6-153.) The Motion to
Strike was noticed for a preliminary hearing at the scheduled
trial. (Doc. #6-26.)
The last-minute pre-trial maneuvering continued by both
sides. On March 26, 2018, Debtor filed a forty-page pretrial
Memorandum in Support of Motion to Dismiss Involuntary Bankruptcy
Petition (Doc. #6-136). For the first time, Debtor asserted
abstention under Section 305 of the Bankruptcy Code as “a separate
basis for dismissal of a bankruptcy petition.” (Id., pp. 14, 15.)
The legal basis for abstention was set forth in approximately three
pages of argument. (Id., pp. 33-35.) The Petitioning Creditors
filed a Response to Debtor’s Memorandum (Doc. #6-155) on March 28,
2018. This Response briefly referred to the new abstention issue,
but argued that it and Debtor’s other arguments “are simply belied
by the facts.” (Id., p. 7.)
On March 28, 2018, William M. Scheer and Lawrence G. Scheer
(the Scheers), represented by the same attorney who was
representing the three Petitioning Creditors, filed a Joinder to
Involuntary Petition. (Doc. #6-154.) The Joinder asserted a
claim against Debtor for $51,440.00 based upon a judgment, plus
interest and attorney’s fees and costs. The Scheers were not
among the 29 creditors previously identified by Debtor.
At the commencement of trial, counsel for Debtor raised the
issue of the late addition of a new creditor:
MR. ZINN: The joinder that was filed regarding
the new -- the fourth creditor. This case has
been going on for seven months now and that
was filed less than 48 hours ago.
. . . .
We haven't had a chance to determine if this
is being filed in bad faith or what the
circumstances were that suddenly, on the eve
of trial, a fourth creditor is now joining the
petition, when they've had seven months to get
this creditor.
We believe there’s a bona fide dispute as to
them, but we haven't had time to conduct any
discovery with regard to it. That's why we
filed our motion to continue the trial. We
would like the ability at some point to, if
necessary, to dispute it.
I believe the name is Scheer. I can tell you
that we’ve done some research on it. The
reason why they’re not even on the creditor
list of the potential creditors is because
they have a dormant judgment under Kansas law.
(Doc. #6-156, pp. 16-17.) In response, counsel for Petitioning
Creditors made the suggestion on how to proceed:
MR. THAMES: Easy suggestion here, Your Honor.
The claim is not dormant because there is an
extension when you conduct discovery and it
extends the period. So as long as you've done
your discovery, it doesn't go dormant and
there is that. It's something we actually
looked at before we accepted them as a client
and did the joinder.
My suggestion on resolving this is -- this is
a motion to dismiss. And if we get past this,
we still have the second trial on whether or
not the Debtor is paying his debts --
generally paying his debts as they become due.
So when you get to that point, one of the
allegations of an involuntary petition is that
they're eligible petitioners.
So the issue -- he still has his opportunity
down the road if, for some reason, he thinks
that this -- that entity is not eligible, it's
not -- he still has his opportunity. And I
don't think we're trying -- you know, we're
not -- that trial hasn't even been set yet. So
there's plenty of time for them to address
that claim.
(Id., pp. 17-18.) The Court agreed, and elected to defer
consideration of the Scheers’ claim:
THE COURT: All right. Well, my preference
would be to defer the issue. It may be that
the Scheers’ eligibility as a petitioning
creditor is a moot point, depending on what
happens at this trial, and we won't have to
get to it.
(Id., p. 18.) If the result of the trial did not moot the need
for the Scheers as an eligible creditor, Debtor would be given the
opportunity to conduct discovery and look into the Scheer claim.
(Doc. #6-156, p. 18; Doc. #6-157, pp. 244-45.)
A five-day trial took place on March 29-30, 2018 and May 8-
11, 2018. On May 8, 2018, counsel for Debtor moved for a directed
verdict, arguing that the Petitioning Creditors had failed to meet
their initial burden under 303(b). (Doc. #6-167, pp. 36-37.)
During his argument counsel also stated:
And the last point, Your Honor, is Your Honor
has wide discretion under Bankruptcy Code
Section 305 to abstain from hearing this case,
. . . .
As Your Honor I’m sure has seen through the
testimony, this is basically a two-part
dispute. This is Mr. Murphy versus Mr.
Connolly and company and everybody he has gone
-– gotten to join him against Mr. Murphy, and
bankruptcy is not meant for these two-party
disputes and there’s litigation about this
case.
. . . .
And as to the abstention, I would also like to
point out that the creditors have only put
forth before this Court that the only asset,
the only potential asset of this bankruptcy
case is Mr. Murphy’s Kansas litigation claim.
They haven’t shown any other asset, and if
this bankruptcy were allowed to stand, the
only thing that would happen is Mr. Connolly
would purchase that asset from the trustee and
dismiss it and the case would be over.
(Doc. #6-167, pp. 44-45, 64-65.) Counsel for Petitioning
Creditors did not respond to the abstention issue, and the
Bankruptcy Court did not discuss or decide abstention in denying
the motion for directed verdict.
At the conclusion of the evidence, the parties agreed that in
lieu of oral closing arguments they would submit proposed findings
of facts and conclusions of law. Each side would be given the
opportunity to file objections to the proposals of their opponents.
On July 27, 2018, the Petitioning Creditors filed a Post-
Trial Memorandum (Doc. #6-163). The 76-page Memorandum did not
address the abstention issue. On the same date, Debtor filed a
30-page Post-Trial Brief (Doc. #6-164). The Brief argued that the
Involuntary Petition should be dismissed because it failed to meet
the numerosity, good faith, and transferred-claim requirements and
“[t]here are also sufficient grounds for the Court to abstain under
Section 305. . . .” (Id., p. 1.) The Brief presented three pages
of argument concerning the abstention issue. (Id., pp. 21-24.)
On August 8, 2018, Debtor filed 74-page Objections to
Petitioning Creditors’ Post-Trial Brief. (Doc. #6-166.) On the
same day, the Petitioning Creditors filed their 39-page Objections
to Debtors Proposed Findings of Fact and Conclusions of Law (Doc.
#6-165.) As to the abstention issue, the Objections stated:
Leaving aside the fact that such relief was
not requested in the Motion to Dismiss,
abstention is nonetheless inappropriate in
this instance because there are no claims
pending between the parties relative to the
Promissory Notes in any forum, and abstention
would deprive GSRF1 and the Scheers of the
opportunity to seek recovery through this
involuntary petition.
(Id., p. 37.)
On March 19, 2019, the Bankruptcy Court issued an Order
Denying Motion to Strike and Granting Leave to Amend Involuntary
Petition (Doc. #6-173). The Bankruptcy Court granted leave to
file the Amended Involuntary Petition nunc pro tunc to February
28, 2018. Also on March 19, 2019, the Bankruptcy Court issued the
Order Denying Motion to Dismiss [Amended] Involuntary Bankruptcy
Petition and Granting Alleged Debtor’s Request for Abstention
(Doc. #1-1, Exh. A). As to the Motion to Dismiss, the Court found
that DigiTech, Guaranty Solutions, and Investment Theory were all
qualified as petitioning creditors, and that Debtor had not met
his burden of proof to show the Involuntary Petition was filed in
bad faith. (Id., pp. 23-36.) The Motion to Dismiss was therefore
denied.
The Bankruptcy Court also considered abstention (id., p. 37;
Doc. #1-2, p. 40), finding that “Murphy has met his burden to
demonstrate that abstention and dismissal benefits both himself
and the Petitioning Creditors.” (Doc. #1-2, p. 40.) The
Bankruptcy Court identified four factors justifying abstention:
(1) the case was really a two-party dispute, with Guaranty
Solutions and the Scheers being peripheral to the case; (2) other
forums were available to protect the interests of Murphy and
Connolly and their related entities outside of bankruptcy; (3)
there was no evidence that Murphy had any assets, or that
liquidation of his assets would be more advantageous to the
creditors; and (4) the Petitioning Creditors' claims did not hinge
upon federal bankruptcy law, and a federal bankruptcy proceeding,
while possibly advantageous to Petitioning Creditors, was not
necessary to reach a just and equitable solution. (Doc. #1-2, pp.
39-40.) Pursuant to 11 U.S.C. § 305(a), the Bankruptcy Court
elected to abstain from hearing the involuntary petition. (Id.,
p. 41.)
On March 27, 2019, the Petitioning Creditors and the Scheers
filed a Motion for Reconsideration (Doc. #6-174) challenging the
Bankruptcy Court’s decision to abstain. They asserted: (1) The
Scheers did not participate in the trial since they were not a
party and the Court had tabled consideration of the Scheers’ claim;
(2) the extent of debtor’s assets had limited relevance to the
Motion to Dismiss; (3) the creditors’ interests are not adequately
protected outside the bankruptcy forum; and (4) the finding that
this was only a two-party dispute was premature since other
creditors were not given notice of the abstention issue as required
by to Fed. R. Bankr. P. 1003(b). On June 20, 2019, Debtor filed
an Opposition (Doc. #6-177) to the Motion for Reconsideration.
On August 15, 2019, the Bankruptcy Court issued an Order
Denying Petitioning Creditors’ Motion for Reconsideration (Doc.
#1-2, Exh. B). The Order addressed each of the four areas in its
original Order, re-affirming its stated reasons for abstention.
As to the 2-party dispute and lack of notice, the Bankruptcy Court
stated:
Under Federal Rule of Bankruptcy Procedure
1003(b), if an involuntary petition is filed
by fewer than three creditors and the debtor
in his answer avers the existence of 12 or
more creditors, § 303(b )(1)’s requirement of
three or more petitioning creditors is
triggered and the debtor must file a list of
creditors. The purpose of Rule 1003(b) is to
permit a single petitioning creditor to
contact other creditors to try to meet the
three-creditor threshold of § 303(b)(1). [ ]
Here, the Court has found the existence of
three petitioning creditors and Rule 1003(b)
does not apply.
(Id., pp. 15-16) (footnote omitted). The Bankruptcy Court
concluded that the petitioning creditors did not meet any of the
requirements for reconsideration under Fed. R. Civ. P. 59 or 60.
They have not argued an intervening change in
controlling law; they have not provided new
evidence that was not available at the Trial;
they have not demonstrated a clear error of
law; and they have not shown manifest
injustice. Likewise, Petitioning Creditors
have demonstrated no basis for relief under
Rule 60, as they have not shown newly
discovered evidence, mistake, or fraud.
(Id., p. 16.)
II. Standard of Review
A United States district court has jurisdiction to review an
order of the bankruptcy court dismissing or abstaining a case under
11 U.S.C. § 305. In re Goerg, 930 F.2d 1563, 1566 (11th Cir.
1991). The United States District Court functions as an appellate
court in reviewing “final judgments, orders, and decrees” of the
United States Bankruptcy Court. 28 U.S.C. § 158(a); In re Colortex
Indus., Inc., 19 F.3d 1371, 1374 (11th Cir. 1994). The legal
conclusions of the bankruptcy court are reviewed de novo, while
findings of fact are reviewed for clear error. In re Globe Mfg.
Corp., 567 F.3d 1291, 1296 (11th Cir. 2009). “De novo review
requires the court to make a judgment independent of the bankruptcy
court's, without deference to that court's analysis and
conclusions.” In re Piper Aircraft Corp., 244 F.3d 1289, 1295
(11th Cir. 2001). A finding of fact is clearly erroneous when,
“although there is evidence to support it, the reviewing court on
the entire record is left with a definite and firm conviction that
a mistake has been committed.” Crawford v. W. Electric Co., Inc.,
745 F.2d 1373, 1378 (11th Cir. 1984)(citing United States v. U.S.
Gypsum Co., 333 U.S. 364, 395 (1948)); In re Walker, 515 F.3d 1204,
1212 (11th Cir. 2008).
Generally, a decision on abstention is reviewed for an abuse
of discretion. Seminole Tribe of Florida v. Stranburg, 799 F.3d
1324, 1328 (11th Cir. 2015); Green v. Jefferson County Com'n, 563
F.3d 1243, 1248 (11th Cir. 2009); Daewoo Motor Am., Inc. v. Gen.
Motors Corp., 459 F.3d 1249, 1256 (11th Cir. 2006). A court abuses
its discretion “if it applies an incorrect legal standard, applies
the law in an unreasonable or incorrect manner, or follows improper
procedures in making its decision.” Isaiah v. JPMorgan Chase
Bank, 960 F.3d 1296, 1308 (11th Cir. 2020).
III.
Appellants’ issues relate only to the abstention
determination made by the Bankruptcy Court.8 Appellants argue
that the procedures utilized by the Bankruptcy Court deprived them
of due process as to the abstention issue, and that the Bankruptcy
Court wrongly decided the abstention issue. A brief preliminary
discussion of abstention is in order.
A. Bankruptcy Court Abstention Under 11 U.S.C. § 305
By statute, a bankruptcy court may abstain from considering
a case otherwise within its jurisdiction. The statute provides
in relevant part:
(a) The court, after notice and a hearing, may
dismiss a case under this title, or may
suspend all proceedings in a case under this
title, at any time if--
(1) the interests of creditors and the debtor
would be better served by such dismissal or
suspension;
. . .
(c) An order under subsection (a) of this
section dismissing a case or suspending all
proceedings in a case, or a decision not so to
dismiss or suspend, is not reviewable by
appeal or otherwise by the court of appeals
under section 158(d), 1291, or 1292 of title
8 Debtor did not file a Notice of Appeal as to the Bankruptcy
Court’s unfavorable determinations regarding the Petitioning
Creditors’ eligibility and lack of bad faith, so those
determinations are not before the Court. Accordingly, Appellee’s
Motion to Remand For Retrial on All Issues Before the Bankruptcy
Court (Doc. #62) is denied.
28 or by the Supreme Court of the United States
under section 1254 of title 28.
11 U.S.C. § 305. A Bankruptcy Rule provides that “[t]he court
shall not dismiss a case or suspend proceedings under § 305 before
a hearing on notice as provided in Rule 2002(a).” Fed. R. Bankr.
P. 1017(d). Bankruptcy Rule 2002(a), in turn, provides for at
least 21-day notice by mail. Fed. R. Bankr. P. 2002(a).
On the merits of an abstention motion,
courts that have addressed abstention under §
305 consider several factors, including: (1)
whether another forum is available or there is
already a pending action in another court; (2)
whether the creditor and debtor are actively
engaged in an out of court workout; (3) the
purpose for which bankruptcy jurisdiction has
been sought; (4) whether the bankruptcy will
unnecessarily interfere with state or federal
regulatory schemes; and (5) the effect the
bankruptcy proceeding will have on the
debtor's business [ ] However, these factors
are not exhaustive and courts routinely employ
a myriad of other factors in determining
whether abstention under § 305 is proper. [ ]
Additionally, some courts have acknowledged
that abstention may be appropriate in
situations where the bankruptcy action is
essentially a two-party dispute, provided the
petitioning creditor can obtain adequate
relief in a non-bankruptcy forum. [ ] However,
§ 303(b)(2) specifically envisions two party
dispute situations because in certain
situations it allows a single creditor holding
a claim in excess of $15,325 to commence an
involuntary bankruptcy case, so long as the
claim is not contingent as to liability or
subject to a bona fide dispute. 11 U.S.C. §
303(b)(2) (stating an involuntary petition may
be commenced “by one or more [creditors]”)
(emphasis added);[ ]. Moreover, the Court
recognizes that these are merely factors for
a court to consider and no one factor standing
alone represents a threshold issue that
requires abstention. It is at the discretion
of the court to weigh each factor in reaching
its decision.
In re FMB Bancshares, Inc., 517 B.R. 361, 371–72 (Bankr. M.D. Ga.
2014) (internal citations omitted).
B. Appellate Issues
While the three Petitioning Creditors and the Scheers raise
five separately phrased issues on appeal, each issue essentially
asserts that the procedures utilized by the Bankruptcy Court which
led to its abstention decision violated appellants’ due process
rights “by not providing them with adequate notice that the
abstention request would be considered concomitantly with the
trial of the motion to dismiss” and “without the notice required
by Bankruptcy Rules 1017(d) and 2002(a).” (Doc. #48, p. 9; Doc.
#15, p. 10.) Appellants also assert that to reach its abstention
decision the Bankruptcy Court “applied incorrect legal principles,
utilizing improper procedures, leading to a clearly erroneous
result.” (Doc. #48, p. 10; Doc. #15, p. 11.)
For the reasons set forth below, the Court finds that the
procedures utilized to determine whether to abstain violated due
process and that the Bankruptcy Court utilized an incorrect
abstention standard. Therefore, the decision to abstain was an
abuse of discretion, and will be vacated.
(1) Due Process
The Second Circuit has recently summarized relevant due
process principles:
Parties whose rights are to be affected are
entitled to be heard; and in order that they
may enjoy that right they must first be
notified.” Fuentes v. Shevin, 407 U.S. 67, 80,
92 S. Ct. 1983, 32 L. Ed. 2d 556 (1972)
(internal quotation marks omitted). “[I]n the
absence of effective notice, the other due
process rights . . . such as the right to a
timely hearing . . . are rendered
fundamentally hollow.” Kapps v. Wing, 404 F.3d
105, 124 (2d Cir. 2005). For notice to be
effective, it must inform the affected party
of what “critical issue” will be determined at
the hearing. See Turner v. Rogers, 564 U.S.
431, 447, 131 S. Ct. 2507, 180 L. Ed. 2d 452
(2011). In addition, “[p]art of the function
of notice is to give the charged party a chance
to marshal the facts in his defense.” Wolff v.
McDonnell, 418 U.S. 539, 564, 94 S. Ct. 2963,
41 L. Ed. 2d 935 (1974). Adequate notice must
“reasonably . . . convey the required
information that would permit [a driver] to
present [his or her] objections” to the
continuation of a suspension. Spinelli, 579
F.3d at 172 (citation and internal quotation
marks omitted).
Nnebe v. Daus, 931 F.3d 66, 88 (2d Cir. 2019).
The procedures used with regard to the abstention issue in
this case did not comport with either due process or the Bankruptcy
Rules. Debtor’s September 28, 2017 Motion to Dismiss raised only
two issues: The eligibility of DigiTech to qualify as a
petitioning creditor and the bad faith of all three Petitioning
Creditors. Thus, the Notice for trial issued by the Bankruptcy
Court on October 24, 2017 could only have included those issues.
The Petitioning Creditors filed an Amended Involuntary Petition on
February 28, 2018, roughly a month before the new trial date, and
drew a rapid objection from Debtor arguing the attempted amendment
was untimely and needed leave of court. Nonetheless, three days
prior to trial Debtor filed a Memorandum which raised for the first
time abstention as a separate basis for dismissal. Debtor did not
seek leave of court to amend his Motion to Dismiss and the
abstention request was certainly untimely in terms of the upcoming
trial. On the first day of trial, Debtor objected to the Scheer
Joinder, which had been filed the day before trial, and the
Bankruptcy Court deferred consider of the Scheer Joinder until
after the trial. No “housekeeping” attention was given to the
abstention issue raised in Debtor’s Memorandum.
Trial began with Petitioning Creditors proceeding to
establish their eligibility under Section 303.9 After two days,
Debtor made an oral motion for directed verdict. Debtor included
a request for directed verdict on the abstention issue, despite
the burden being on Debtor and Debtor not having presented any
9 Appellants argue that Guaranty Solutions did not participate
in the trial of the Motion to Dismiss because it was not named in
the Motion to Dismiss. (Doc. #48, p. 12.) This is incorrect.
Debtor’s Motion to Dismiss (Doc. #6-8) asserted that all
“Creditors” filed the petition in bad faith (id., p. 5, ¶13),
defined “Creditors” to include Guaranty Solutions (id. at 1, ¶2),
and sought damages, attorney fees, and costs from all three
entities, including Guaranty Solutions (id. at 7-8).
evidence yet. The Bankruptcy Court denied the directed verdict
on the eligibility issues, and did not discuss abstention at all.
After post-trial written submissions by both sides, the Bankruptcy
Court discussed abstention for the first time. The decision
abstaining from further proceedings in the case was literally the
first time any party was on notice that the Bankruptcy Court would
actually consider this issue. The Petitioning Creditors’ Motion
for Reconsideration was the first opportunity they had to discuss
an issue after knowing it was being allowed by the Bankruptcy
Court.10
The Bankruptcy Court thus considered an important issue with
significant consequences when it was raised in a Memorandum three
days before trial and effectively amended the Motion to Dismiss,
which had been pending for over six months, without granting leave
of court or considering a proper motion to amend. Abstention was,
by Debtor’s own characterization, a separate basis for dismissal.
(Doc. #6-136, p. 14.) While there was some factual overlap with
the bad faith issue, there had been no pretrial proceedings or
discovery regarding abstention. Not only were the original
10 Appellants adequately raised due process concerns in its
Motion for Reconsideration, and have not waived or forfeited any
of the issues on appeal. Hi-Tech Pharm., Inc. v. HBS Int'l Corp.,
910 F.3d 1186, 1193-94 (11th Cir. 2018). While the bane of a
trial court, new arguments and citations related to an issue may
be presented for the first time to an appellate court. Sec'y,
U.S. Dep't of Labor v. Preston, 873 F.3d 877, 883 n.5 (11th Cir.
2017).
Petitioning Creditors blindsided, but the Scheers were told their
Joinder would be deferred even though the abstention issue was not
deferred as to the Scheers or any other creditor. The Bankruptcy
Court abused its discretion by deciding to abstain from the case
after following these procedures.
Appellee suggests that abstention was tried by the implied
consent of the parties.
A party cannot be said to have implicitly
consented to the trial of an issue not
presented by the pleadings unless that party
should have recognized that the issue had
entered the case at trial. Often such consent
can be inferred from the failure to object to
the introduction of evidence relevant to an
unpleaded issue. . . . The introduction of
evidence arguably relevant to pleaded issues
cannot serve to give a party fair notice that
new issues are entering the case.
Wesco Mfg., Inc. v. Tropical Attractions of Palm Beach, Inc., 833
F.2d 1484, 1487 (11th Cir. 1987). The evidence cited by the
Bankruptcy Court in support of abstention was admitted in
connection with the bad faith assertion in the Motion to Dismiss,
not the abstention referenced in the eleventh-hour Memorandum.
Since the evidence was admissible as to the bad faith issue
expressly raised in the Motion, a failure to object does not
suggest that the parties acknowledged or consented to trial of the
abstention issue.
While appellee is undoubtedly correct that the Bankruptcy
Court had the ability to consider abstention sua sponte, this does
not negate the obligation to give proper notice. In any event,
the Bankruptcy Court did not raise the issue sua sponte, and the
notice it gave was not sufficient.
(2) Abstention Standard
Even if the Bankruptcy Court had given proper notice, it
applied the wrong legal standard in deciding that abstention was
warranted in this case. The Bankruptcy Court found that “Murphy
has met his burden to demonstrate that abstention and dismissal
benefits both himself and the Petitioning Creditors.” (Doc. #1-
2, p. 40.) The legal standard set forth in the statute, however,
allows abstention if the Bankruptcy Court finds (“after notice and
a hearing”) that “the interests of creditors and the debtor would
be better served by such dismissal or suspension. . . .” 11
U.S.C. § 305(a)(1). The finding of the Bankruptcy Court did not
determine whether the interests were “better served” by
abstention.
The Court will therefore vacate the portion of the two Orders
addressing abstention. The case will be remanded to the
Bankruptcy Court to proceed with the matter pursuant to 11 U.S.C.
303(h).
Accordingly, it is hereby
ORDERED:
1. The United States Bankruptcy Court's Order Denying Motion
to Dismiss Involuntary Bankruptcy Petition and Granting
Alleged Debtor's Request for Abstention (Doc. #1-1) and
Order Denying Petitioning Creditors' Motion for
Reconsideration (Doc. #1-2, p. 7) are VACATED as to the
abstention decision only.
2. The case is REMANDED to the Bankruptcy Court for further
proceedings consistent with this Opinion and Order and 11
U.S.C. § 303(h).
3. Appellee’s Motion to Remand For Retrial on All Issues
Before the Bankruptcy Court (Doc. #62) is DENIED.
4. The Clerk shall forthwith transmit a copy of this Opinion
and Order to the Bankruptcy Court, terminate all deadlines
and motions (Doc. #57) as moot, and close the file.
DONE and ORDERED at Fort Myers, Florida, this 5th day of
January, 2021.
ON E
JOHN E. STEELE
SHNIOR UNITED STATES DISTRICT JUDGE
Copies:
Parties of Record