Mouhaffel v. Southeast Holdings, LLC of Montana

UNITED STATES DISTRICT COURT

MIDDLE DISTRICT OF LOUISIANA

ASSAD MOUHAFFEL CIVIL ACTION

VERSUS

SOUTHEAST HOLDINGS, LLC NO: 18-01050-BAJ-RLB

OF MONTANA

RULING AND ORDER

Before the Court is an appeal of an order issued by the United States

Bankruptcy Court for the Middle District of Louisiana granting a Motion for

Attorney’s Fees, Costs, and Punitive Damages (Doc. 1) filed by Southeast

Holdings, LLC of Montana, Appellee, against Assad Mouhaffel, Appellant. For the

reasons that follow, the order of the Bankruptcy Court is AFFIRMED.

BACKGROUND

This appeal arises from the filing and dismissal of an involuntary petition. On

July 12, 2018, Mouhaffel filed an involuntary petition under Chapter 7 of the United

States Bankruptcy Code. The alleged debtor, Southeast Holdings, filed a Motion to

Dismiss, arguing that the petition did not meet the requirements under 11 U.S.C.

§303, and that Mouhaffel’s claim is the subject of a bona fide dispute as to hability in

pending lawsuits in more than one Louisiana state court.! Southeast argued that

' Mouhaffel is the holder of a promissory note for $480,000 of which Southeast was the payor.

Mouhaffel sued Southeast for the nonpayment of the note in Livingston and Ouachita Parish state

courts. A claim which is the subject of a bona fide dispute must be eliminated from any calculation of

whether a debtor generally was not paying his debts as they came due. Matter of Busick, 831 F. 2d 745

Mouhaffel’s petition was filed in bad faith to thwart the prosecution of its lawsuit

against Mouhaffel in state court. Mouhaffel argued that there is no bona fide dispute

and that dismissal is unwarranted. On August 31, 2018, the Bankruptcy Court held

a hearing on the motion.

On September 4, 2018, the Bankruptcy Court granted the Motion to Dismiss

in favor of Southeast and dismissed the petition. Soon after, Southeast filed a Motion

for Attorney’s Fees, Costs, and Punitive Damages seeking $8,516.20 in attorney's fees

and costs and the imposition of $10,000.00 in punitive damages against Mouhaffel for

filing the involuntary petition in bad faith. On October 26, 2018, the Bankruptcy

Court held a hearing on the motion and granted $8,141.20 in attorney's fees and

$5,000.00 in punitive damages. Thereafter, Mouhaffel timely filed a Notice of Appeal

challenging the Bankruptcy Court’s Order. Mouhaffel did not appeal the Bankruptcy

Court’s decision to dismiss the petition.

II. LEGAL STANDARD

In bankruptcy appeals, district courts review bankruptcy court rulings and

decisions under the same standards employed by federal courts of appeal. Carrieri v.

Jobs.com Inc., 393 F.3d 508, 517 (6th Cir. 2004). A bankruptcy court’s findings of fact

are reviewed for clear error and its conclusions of law de novo. Id. Under the “clearly

erroneous” standard, a district court will reverse “only if, on the entire evidence, we

are left with the definite and firm conviction that a mistake has been made.” Walker

v. Cadle Co., 51 F.3d 562, 565 (5th Cir. 1995).

(7th Cir, 1987). Ifa bona fide dispute is identified as to either law or the facts, then the creditor does

not qualify, and the petition must be dismissed. Id. at 750.

Therefore, in addressing Mouhaffel’s appeal of the Bankruptcy Court’s order,

the question the Court must answer is whether the Bankruptcy Court correctly

awarded attorney's fees and costs under 11 U.S.C. §3803G)(1) and punitive damages

under §303()(2).

HW, DISCUSSION

This appeal implicates 11 U.S.C. §808, which is the provision of the

Bankruptcy Code that governs involuntary petitions. An involuntary petition may be

commenced by a creditor under Chapter 7 or 11. The creditor who files is the

“petitioning creditor” and, the person or entity on whose behalf the petition is filed is

the “alleged debtor.” If a bankruptcy court dismisses an involuntary petition under

§303(i), the alleged debtor may be awarded attorney’s fees and costs at the discretion

of the bankruptcy court. Upon a finding of bad faith on the part of petitioning

creditor(s) in filing the petition, the Court may also impose punitive damages.

A. Award of Attorney’s Fees under §303(i)Q)

Under §3808G)(1), if the court dismisses an involuntary petition other than on

consent of all petitioners and the alleged debtor, and if the alleged debtor does not

waive the right to judgment under this subsection, the court may grant judgment

against the petitioning creditor(s) and in favor of the alleged debtor for costs and

reasonable attorney’s fees. Mouhaffel argues that the Bankruptcy Court erred in

using the proper test for awarding attorney's fees and costs. Mouhaffel further argues

that the Bankruptcy Court should have adopted a good faith presumption of which

the burden of rebutting the presumption is placed on the alleged debtor. (Doc. 7 at

pg. 7). Mouhaffel also asserts that whether the petitioner filed in bad faith is the

proper test to determine an award under this section.

The Court finds that the Bankruptcy Court was not required to apply a bad

faith test as a prerequisite to exercising its discretion to award attorney’s fees and

costs under this section. According to the plain language of §3038()(1), all that is

required is a dismissal of the petition on grounds other than the consent of all parties

and no waiver of the alleged debtor’s right to judgment under the section. Here, the

Bankruptcy Court dismissed the petition without a waiver from Southeast and on

grounds consistent with this section. Thus, the Court finds no error in the Bankruptcy

Court’s discretion to award attorney’s fees and costs to Appellee.

B. Award of Punitive Damages under §303(i)(2)

Under §8038G)(2), a bankruptcy court may grant judgment against any

petitioning creditor who filed in bad faith for any damages proximately caused by the

filing or punitive damages. Mouhaffel argues that the Bankruptcy Court did not use

the proper test to find bad faith. Mouhaffel further argues that he was entitled to a

good faith presumption of which Southeast had the burden to rebut under this section

as well.

1. Defining Bad Faith in the Context of Involuntary Petitions

The Bankruptcy Code does not define what constitutes bad faith for purposes

of §803G)(2). Mouhaffel argues that bad faith in the context of an involuntary petition

merely requires the Court to find that the creditor is motivated by “ill will, malice or

for the purpose of embarrassing or harassing the debtor.” (Doc. 7 at p. 8). Mouhaffel

finds support in this assertion in Jn re Sims, 994 F.2d 210,222 (5th Cir. 1993). In In

re Sims, the United States Court of Appeals for the Fifth Circuit found that the

district court erred in dismissing the involuntary petitions as bad faith filings. The

Fifth Circuit found that “there is no evidence that the filing of the petitions was

‘motivated by ill will, malice or for the purpose of embarrassing or harassing the

debtor|[s].”” fd. at 222. (quoting In re West Side Community Hospital, 112 B.R. 243,258

(Bankr. N.D. Ill 1990). The Fifth Circuit then proceeded to observe that,

“Furthermore, there was undisputed evidence that the creditors conducted a

reasonable inquiry into the facts and the law prior to filing the petitions, as required

by Bankruptcy Rule 9011.” fd.

The case of In re Stms reveals that the Fifth Circuit did not employ the single

prong test of “ill will, malice or for the purpose of embarrassing or harassing the

debtor” to define whether the petition was filed in bad faith, as Mouhaffel asserts.

The Fifth Circuit’s analysis in In re Sims is more akin to a totality of the

circumstances consideration rather than the establishment of a strict test to find bad

faith. The Fifth Circuit considered evidence of ill will, malice, or harassment for the

purpose for the filing to pinpoint the more blatant characteristics of bad faith.

However, to achieve the all-encompassing analysis that multi-factor considerations

are expected to yield, the Fifth Circuit's incorporation of Federal Rule of Bankruptey

Procedure 9011 was necessary; courts commonly associate non-compliance of Rule

9011 as bad faith.2 When a court evaluates compliance with this rule, it considers

2 See Inre Yorkshire LLC, 540 F.3d (6th Cir. 2008)(affirmed bankruptcy court’s imposition of sanctions

and holding that petitions were filed with a bad motive and no meanineful thought to the purposes of

many aspects of the filing, such as the purpose of the filing, the timing, the claims,

the defenses, and any evidentiary support. Each aspect becomes a separate

circumstance to consider. The Fifth Circuit considered all these circumstances in

reaching the conclusion that petitioners did not file in bad faith.

The Court finds that the Bankruptcy Court correctly employed a totality of

circumstances approach consistent with that of the Fifth Circuit in Jn re Stms. The

Bankruptcy Court considered the timing of the filing, the purpose of the filing, the

status of litigation in Louisiana courts, the validity of the debt, the few assets of

alleged debtor, whether the creditor conducted a reasonable inquiry into the facts,

and the result if the involuntary petition proceeded. (Doc. 5-1 at p. 29). The

Bankruptcy Court concluded that a good faith purpose for the filing was not apparent

given the circumstances.? The Bankruptcy Court even noted that had the petition

proceeded, Mouhaffel would have been the recipient of an avoidable transfer under

11 U.S.C. §547, which certainly would have been challenged by a Chapter 7 trustee.

(Id).

2. The Alleged Debtor is Not Required to Rebut a Good Faith

Presumption as a Prerequisite to the Award of Punitive Damages.

Mouhaffel contends that several courts have ruled that it is presumed that

bankruptcy); Matter of Carroll, 850 F.3d 811 (6th Cir, 2017)(bankruptey and district court found bad

faith when appellants engaged in conduct intended to harass and delay).

3 The Bankruptcy Court cited specific facts, such as the admission of Mouhaffel’s counsel during oral

arguments that the filing was a preemptive move in case of the invalidation of the property transfer,

Southeast’s non-eligibility for a discharge under Chapter 7, the fact that the obligation under the

promissory note was subject to bona fide disputes in two state courts, and that Mouhaffel filed the

petition soon after he lost a summary judgment motion in state court regarding the validity of the

promissory note. (Doc. 5-1).

petitioning creditors act in good faith when filing an involuntary petition, and it is

the alleged debtor’s burden to overcome that presumption for the imposition of

punitive damages. While a few district courts in this Circuit have recognized this

principle, Mouhaffel provides no Fifth Circuit caselaw to support this assertion.4 The

Court finds that Southeast’s rebuttal of Mouhaffel’s good faith presumption is not a

prerequisite to the Bankruptcy Court’s discretion to award punitive damages in this

matter. Although there is a very smali number of bankruptcy courts within the Fifth

Circuit who have adopted this approach, the Fifth Circuit has not mandated it. The

Court also finds that if this standard was adopted, the evidence provided in the record

strongly supports a finding that the good faith presumption was rebutted for the

reasons previously described. The totality of circumstances approach fully

encompassed all factors relevant to determine bad faith for purposes of punitive

damages imposed pursuant to §303()(2).

3. Southeast’s Request for Additional Attorney’s Fees Under §3038)(1)

Southeast requests that the Court award additional attorney’s fees for the

appeal. Southeast claims that the appeal is frivolous, and that the Court has power

to award additional attorney’s fees under 11 U.S.C. §308G)(1). Southeast cites one

4 Appellant cites In re Forever Green Athletic Fields, Inc., 500 B.R. 413,426 (Bankr. E.D. Pa. 2018);

DiLoreto v. Costigan,600 F. SuppL2d 671,690 (E.D. Pa. 2009); in re Petralex Stainless, Lid., 78 □□□

738,748 (Bankr. E.D. Pa. 1987); In re Kennedy, 504 B.R. 815 (Bankr. $.D. Miss. 2014); Aigner v.

McMillan, No, 11-47029, 2018 WL 2445042 (Bankr, N.D. Tex. 2013). The Bankruptcy Court for the

Middle District of Louisiana has not adopted the good faith presumption standard as a prerequisite to

imposing punitive damages. However, other bankruptcy courts in this district have adopted the good

faith presumption standard. See In re Synergistic Technologies, Inc., No, 07-317338, 2007 WL 2264700

(N.D. Tex. 2007); In re Treaty Energy Corporation, No. 138-11238, 2014 WL 6886643 (E.D. La. 2014);

Aigner v. McMillan, No. 11-47029, 20138 WL 2445042 (Bankr. N.D. Tex. 2013).

case from the Eleventh Circuit for support because the Fifth Circuit has not awarded

additional attorney’s fees for appeal under this section.5

The Court declines to award additional attorney’s fees here because the plain

language of §303(4)(1) does not empower this Court to award attorney’s fees. Section

308()(1) provides, “if a court dismisses a petition under this section....” a bankruptcy

court is the only court that can dismiss an involuntary petition; therefore, the award

of attorney's fees under § 303(i)(1) is solely within the power of a bankruptcy court.

This Court’s review of relevant Fifth Circuit caselaw suggests that a district court

may affirm an award previously imposed by the bankruptcy court or even reverse it.

However, the jurisdiction of this Court does not extend §303(1)(1) to award additional

attorney’s fees.

IV. CONCLUSION

Accordingly,

IT IS ORDERED that the Order of the Bankruptcy Court (Doc. 1) is

AFFIRMED.

Baton Rouge, Louisiana, this Dy of September, 2019.

(ba

JUDGE BRIAN oncy: ON

UNITED STATES_DIS?PRICT COURT

MIDDLE DISTRICT OF LOUISIANA

5 Appellee cites Jn re Rosenberg, 779 F.3d 1254, 1266 (11th Cir. 2015)(holding that §303(i)(1) does not preclude

an appellate court from awarding attorney’s fees incurred to defend an appeal).