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United States Bankruptcy Court, W.D.
Pennsylvania. In re PETRO FILL, INC., Alleged
Debtor. Bankruptcy No. 92-1188-BM. DATE: Aug. 19, 1992. [*27] COUNSEL: John M. O’Connell, Jr., O’Connell
& Silvis, Greensburg, Pa., for petitioning creditors. James
R. Walsh, Spence, Custer, Saylor, Wolfe & Rose, Johnstown, Pa., for alleged
debtor. JUDGE: Bernard Markoviz, Bankruptcy Judge. MEMORANDUM
OPINION Alleged
debtor, Petro Fill, Inc., seeks to have an involuntary chapter 7 petition
brought against it dismissed and to recover its costs and attorney’s
fees from petitioning creditors. Petro Fill denies that petitioning creditors
have standing to bring the petition and insists that it generally is paying its
debts as they become due. Petitioning
creditors maintain that all of the requirements for bringing an involuntary
petition have been met. The
involuntary petition will be dismissed for reasons set forth below. However,
Petro Fill’s request for costs and attorney’s fees will be
denied. I FACTS Petro
Fill was incorporated under the laws of South Carolina in 1987. It owns a
patented process for filling abandoned underground storage tanks with
polyurethane *28 foam which makes it unnecessary to remove the tanks. Petro
Fill is in the business of selling to others licenses for the use of its
patented process. On September 22, 1988, Petro Fill granted an exclusive
license to McKelvey Oil Company of Johnstown, Pennsylvania. The territory
covered by the license included all of Pennsylvania. McKelvey Oil paid a fee of
$25,000 for the license and agreed to pay a royalty equal to five percent (5%)
of the annual gross income derived from its use of the license. Petro Fill
retained the right to terminate the license upon written notice in the event
the royalty payment was less than $6,000. Petro Fill and McKelvey Oil also
entered into a similar license agreement at or about the same time for a
portion of Ohio. The
sole principals and shareholders of McKelvey Oil are William McKelvey and
Jeanne McKelvey. They exercise exclusive control and dominion over its affairs. On
January 2, 1989, approximately three (3) months after the above licensing
agreement had been entered into, William McKelvey and Michael Dugger executed
an agreement whereby Dugger sold forty-nine percent (49%) of the stock of Petro
Fill to William McKelvey for the sum of $325,000. Dugger retained the remaining
fifty-one percent (51%) of the stock. The agreement further provided that
Dugger would be President and CEO of Petro Fill; that McKelvey would be
Chairman of the Board of Directors; that they would be co-equals in the
management of Petro Fill; and that they would enjoy equal representation on its
board of directors. Petro
Fill moved its operations, at McKelvey’s insistence, from South
Carolina to Johnstown, Pennsylvania, where McKelvey Oil is located, immediately
after execution of the stock purchase agreement. Dugger also moved to Johnstown
at that time. All
of Petro Fill’s operations were conducted in Johnstown for
approximately the next nine (9) months. For reasons that are undetermined,
relations between Dugger and McKelvey soured during that period. Dugger left
Johnstown and returned to South Carolina in late-September or early-October of
1989 and resumed Petro Fill’s operations there. Upon
his return to South Carolina, Dugger sold additional licenses for New Jersey,
New York, Virginia, Washington, and Connecticut. Petro Fill received royalty
payments from all of these licensees except from the licensee for Connecticut,
whose license eventually was terminated. Between January 1, 1991 and June 30,
1992, Petro Fill’s operation in South Carolina generated a total of
$164,500.99 in cash revenues and disbursed a total of $169,629 in payment of
its debts. McKelvey
continued to operate Petro Fill in Johnstown after Dugger had departed for
South Carolina. It appears, however, that the Johnstown operation transacted
little or no business after October of 1989. It has sold no licenses since 1990
and has not demanded royalty payments from its licensees, including McKelvey
Oil. The
nature of the relationship between Petro Fill in Johnstown and Petro Fill in
South Carolina is shrouded in mystery. Contacts between Dugger and McKelvey
since October of 1989 have been minimal and sporadic. McKelvey has never
demanded that Dugger pay debts incurred by Petro Fill during his stay in
Johnstown. William
McKelvey and Jeanne McKelvey have not been paid any salary by Petro Fill since
sometime in 1991. Also, Petro Fill owes approximately $33,000 to Johnstown Bank
and Trust Company. The McKelveys guaranteed repayment of the debt and have made
interest payments on it. The bank has not made a demand for repayment of the
loan, has not declared a default, and is not a petitioning creditor. McKelvey
Oil Company had provided labor, postage, and photocopying services on behalf of
Petro Fill for which it has not been paid. Also, Petro Fill utilized equipment
belonging to McKelvey Oil with the *29 purported understanding that Petro Fill
would replace it, which it has not done. Relations
between Dugger and McKelvey continued to worsen even after Dugger had returned
to South Carolina. Dugger attempted to convene a meeting of Petro Fill’s
board of directors in South Carolina for the purpose of removing McKelvey as an
officer and director of the corporation. A preliminary injunction was issued in
state court in Pennsylvania on March 26, 1991 which prohibited Dugger and Petro
Fill from convening such a meeting. The meeting was never held. On
March 17, 1992, an involuntary chapter 7 petition was brought against Petro
Fill by William McKelvey, Jeanne McKelvey, and McKelvey Oil as petitioning
creditors. They allege that they are creditors of Petro Fill and that Petro
Fill generally is not paying its debts which are not subject to bona fide
dispute as they become due. Petro
Fill answered the involuntary petition on April 9, 1992. It denied that
petitioning creditors have standing to bring a petition and denied that it
generally is not paying its debts as they become due. According to Petro Fill,
petitioning creditors have failed or refused to provide it with information
pertaining to the debts of the Johnstown operation. It alleges that all debts
pertaining to the South Carolina operation are being paid in a timely manner. In
addition, Petro Fill has brought a “counterclaim” in which it
alleges that the involuntary petition is the result of a shareholder dispute
concerning control of the corporation and is designed to liquidate it in
bankruptcy without having to litigate the dispute in state court. Petro Fill
seeks to recover its costs and counsel fees pursuant to 11 U.S.C. Section
303(i). II ANALYSIS Involuntary
bankruptcy proceedings are governed by 11 U.S.C. § 303, which
provides in relevant part as follows: (b)
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— (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, or an indenture trustee representing such a holder, if such
claims aggregate at least $5,000 more than the value of any lien on property of
the debtor securing such claims held by the holders of such claims; …. (h)
If the petition is not timely controverted, the court shall order relief
against the debtor in an involuntary case under the chapter under which the
petition was filed. Otherwise, after trial, the court shall order relief
against the debtor in an involuntary case under the chapter under which the
petition was filed, only if— (1)
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; …. (i)
If the court dismisses a petition under this section other than on consent of
all petitioners and the debtor, and if the debtor does not waive the right to
judgment under this subsection, the court may grant judgment— (1)
Against the petitioners and in favor of the debtor for— (A)
costs; or (B)
a reasonable attorney’s fee…. A
contested involuntary petition must be carefully scrutinized because such an
action is extreme in nature and carries with it serious consequences for the
alleged debtor, such as a loss of credit standing, interference with its
general business affairs, and public embarrassment. See In re McDonald
Trucking Co., Inc., 76 B.R. 513, 516 (Bankr.W.D.Pa.1987). [*30] A The
Bankruptcy Code nowhere defines the phrase “generally not paying”.
The report of the Bankruptcy Commission contains the following comment in that
regard: The
scope and meaning of generally unable and generally failed are left to the
courts. It is not possible to lay down guidelines that will fit all cases. Report
of the Commission on the Bankruptcy Laws of the United States, 1973, Part II at
75, n. 3. The
relevant standard for determining whether or not an alleged debtor generally is
paying its debts is not a mechanical one. See In re All Media Properties,
Inc.,
5 B.R. 126, 143 (Bankr.S.D.Tex.1980), aff’d, 646 F.2d 193 (5th
Cir.1981). Rather, it is flexible and involves consideration of the totality of
the circumstances and requires a balancing of the interests of the alleged
debtor against the interests of its creditors. See Bartmann v. Maverick Tube
Corp.,
853 F.2d 1540, 1546 (10th Cir.1988) A
determination that an alleged debtor generally is not paying its debts as they
become due requires a more general showing of their financial condition and
debt structure than simply establishing the existence of a few unpaid bills. See
In re Dill,
731 F.2d 629, 632 (9th Cir.1984). The
extent of a petitioning creditor’s interest in this regard depends on
whether that creditor can get adequate relief elsewhere. If they can go into
state court to satisfy the debt, bankruptcy courts should adamantly refuse to
enter an order for relief. See In re Central Hobron Associates, 41 B.R. 444, 451
(Bankr.D.Hawaii 1984) (citations omitted). An involuntary petition should be
dismissed where petitioning creditors have adequate remedies under state law. See
In re Kass,
114 B.R. 308, 309 (Bankr.S.D.Fla.1990). The
burden of establishing that Petro Fill generally is not paying its debts as
they become due is upon petitioning creditors. See Bartmann v. Maverick Tube
Corp.,
853 F.2d at 1546. Consideration
of the totality of the circumstances presented in this case compels the
conclusion that Petro Fill generally is paying its undisputed debts as they
become due. Although
the debts that have not been paid by Petro Fill unquestionably are not
insignificant, the reason why they have not been paid apparently is directly
attributable to a disagreement of unknown etiology between Petro Fill’s
only shareholders and the resultant deadlock in managing the corporation which
ultimately led to bifurcation of its operations in South Carolina and
Pennsylvania. The
interest of Petro Fill’s general unsecured creditors, excluding
petitioning creditors, in all likelihood would not be best served by entry of
an order for relief. Prepetition debts incurred by Petro Fill in connection
with its operations in South Carolina generally have been paid as and when they
became due. The only prepetition debts that have not been paid as and when they
became due are certain debts which were incurred during the brief period when
Petro Fill conducted its entire operation in Johnstown. As has been noted, this
case has been brought under chapter 7. Were an order for relief entered, it is
doubtful that creditors of Petro Fill’s South Carolina operation would
receive as much by way of distribution as they did prior
to the filing of the involuntary petition. No
weight should be accorded in this case to the interest of petitioning
creditors. The debts allegedly owed to petitioning creditors have not been paid
because of the acrimonious dispute between Petro Fill’s sole
shareholders and the resultant deadlock concerning its control and operation. Petitioning
creditors appear to have an adequate remedy at state law which would provide
them with relief. They could bring a petition in state court seeking the
involuntary dissolution of Petro Fill pursuant to 15 Pa.C.S.A. § 1981
(Purdon’s Supp.1992), which provides in pertinent part as follows: (a)
General Rule.—Upon application by a shareholder or director of a
business [*31] corporation, the court may entertain proceedings for the involuntary
winding up and dissolution of the corporation when any of the following is made
to appear: …. (3)
the directors are deadlocked in the direction of the management of the business
and affairs of the corporation and the shareholders are unable to break the
deadlock and that irreparable injury to the corporation is being suffered or is
threatened by reason thereof…. William
McKelvey would seem to have standing as a shareholder and director of Petro
Fill to bring such an action. Petitioning
creditors conceded at the hearing on Petro Fill’s motion to dismiss
that they indeed could have brought an action in state court that would have
accomplished the same result as they seek in this court. However, they elected
instead to accomplish their objective by bringing an involuntary bankruptcy
petition because they believed that it would be simpler and more cost-effective
to do so. As
has been noted, an involuntary bankruptcy petition should be dismissed where
adequate state law remedies are available to petitioning creditors. See In
re Kass,
114 B.R. at 319. Accordingly, no weight should be given in this case to the
interest of petitioning creditors. Bankruptcy, especially a chapter 7
proceeding, is not to be regarded as a suitable alternative to dissolution of a
deadlocked corporation in state court when the latter remedy is readily
available. Finally,
it is beyond question that entry of an order for relief would not be in the
best interest of Petro Fill. The South Carolina operation of Petro Fill remains
viable and in general has managed to pay debts incurred since it returned there
as and when they became due. It has the potential of becoming a successful
business venture. If an order for relief were to be entered, Petro Fill would
cease to operate and would be liquidated. The
appropriate interests, when balanced against one another, overwhelmingly compel
the conclusion that an order for relief should not be entered and that the
involuntary chapter 7 petition should be dismissed. The substantial interest of
Petro Fill and of its prepetition creditors other than petitioning creditors in
Petro Fill’s continued operation free of the constraints of bankruptcy
far outweigh the limited, self-serving interest of petitioning creditors in
Petro Fill’s liquidation in bankruptcy. B Petro
Fill seeks to recover costs and attorney’s fees incurred in opposing
the involuntary petition pursuant to 11 U.S.C. Section 303(i)(1). Petro
Fill offered no evidence pertaining to these matters at the hearing on its
motion to dismiss the involuntary petition. As a consequence, no costs or fees
will be awarded to it. An
appropriate order shall be entered. ORDER
OF COURT AND
NOW at Pittsburgh this 19th day of August, 1992, in accordance with the
accompanying Memorandum Opinion, it is hereby ORDERED, ADJUDGED and DECREED
that the involuntary chapter 7 petition brought by petitioning creditors,
William G. McKelvey, Jeanne W. McKelvey, and McKelvey Oil Company, Inc., be and
is hereby DISMISSED. No costs or attorney’s fees shall be awarded to
alleged debtor, Petro Fill, Inc. |