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144 B.R. 972 United States Bankruptcy Court,
W.D. Pennsylvania. In re Leo C. FRAILEY, t/d/b/a
Frailey Trucking, Alleged Debtor. Bankruptcy No. 92-2835-BM. Sept. 22, 1992. [*974] COUNSEL: Earl D. Lees, Jr., DuBois, Pa., for alleged debtor. Richard
A. Pollard, Tucker Arensberg, P.C., Pittsburgh, Pa., for petitioning creditor
Mid-State Bank. Robert
B. Stewart, III, Huntingdon, Pa., for petitioning creditor Martin Oil Co., Inc. MEMORANDUM
OPINION BERNARD
MARKOVITZ, Bankruptcy Judge. Alleged
debtor Leo C. Frailey seeks to have an involuntary chapter 7 petition brought
against him dismissed and also seeks to recover costs and attorney’s fees and
compensatory and punitive damages from petitioning creditors. Frailey denies
that petitioning creditors have standing to bring the petition and asserts that
the claim of each petitioning creditor is subject to bona fide dispute. Petitioning
creditors maintain that all requirements for bringing an involuntary petition
have been met. The
involuntary petition will be dismissed for reasons set forth below. However,
alleged debtor’s request for costs, attorney's fees, and damages will be
denied. I FACTS Alleged
debtor is in the business of hauling goods and materials. At one time, he owned
twenty-six (26) vehicles and engaged twenty-seven (27) independent contractors
who hauled in their own vehicles under a license issued to Frailey Trucking,
Inc., a corporation owned by Mr. Frailey. In
March of 1990, alleged debtor financed the purchase of several tractors and trailers
through Mid-State Bank. He also obtained a line of credit from Mid-State. In
November of 1991, alleged debtor and Frailey Trucking, Inc. brought suit in
state court against Mid-State alleging that Mid-State had misapplied funds from
checking accounts they had at the bank by honoring checks issued on those
accounts that were obvious forgeries. Damages in excess of $1,000,000.00 are
sought. The case has not been resolved or adjudicated. On
January 28, 1992, alleged debtor refinanced his debt with Mid-State and
executed a judgment note in its favor in the amount of $693,609.17 plus annual
interest of 11.5%. Judgment on the note subsequently was entered in state court
in that amount. Alleged debtor thereafter filed a motion on May 7, 1991 to
strike or to reopen the judgment and to stay execution. The present status of
the motion is not known. Alleged
debtor opened a credit account in 1989 with Martin Oil Company, Inc. for
purchasing diesel fuel and other supplies for his vehicles from a truck stop
owned by Martin Oil. Only vehicles owned by alleged debtor himself were to be
serviced under the account. [*975] Martin Oil brought suit in state court against debtor and his former
wife in 1991 for the unpaid balance on the account of $59,644.79. Alleged debtor
answered the complaint and denied any liability to Martin Oil. He denied that
the charges for which Martin Oil seeks to be paid were made by him, by his
agents, or by any other party with authority to make such charges to his
account. The case has not been resolved or adjudicated. Alleged
debtor also purchased diesel fuel and supplies from L & B Garage, which was
owned by the Poormans. On October 31, 1989, alleged debtor and the Poormans
executed an article of agreement whereby alleged debtor agreed to purchase L
& B Garage from the Poormans. The specifics of the article of agreement are
not known. Alleged debtor operated the facility from October of 1989 until May
of 1990, when a dispute of unknown origin arose between the Poormans and
alleged debtor. A closing on the sale never took place. Christoff
Oil Company, Inc. supplied diesel fuel to L & B Garage from October of 1989
through May of 1990, the period when debtor operated the facility. In 1991,
Christoff Oil brought suit in state court against alleged debtor and L & B
Garage to recover the unpaid balance of $104,974.20 for deliveries made during
that period. According to Christoff Oil, alleged debtor had ordered the fuel
and had agreed to pay for it. Alleged debtor answered the complaint and denied any
liability. He denied that he, as opposed to L & B Garage, had ordered fuel
from Christoff Oil. The case has not been resolved or adjudicated. Alleged
debtor also opened a credit account with Good Brothers Tire and Service, Inc.
in 1989 and began purchasing tires for vehicles he owned. As of March 26, 1991,
alleged debtor owed Good Brothers a total of $22,036.00. On April 22, 1991,
alleged debtor executed an installment note with Armstrong Consumer Discount in
the amount of $22,036.00. The proceeds of the loan were applied towards the
debt owed to Good Brothers as of March 26, 1992. Alleged debtor continued
thereafter to purchase tires from Good Brothers. Many of the tires thus
purchased were recaps. Good
Brothers brought suit against alleged debtor in state court seeking to recover
$24,900.98 for tires purchased by alleged debtor for which it had not been
paid. Alleged debtor answered the complaint and denied liability. He responded
that the tires at issue were defective and claimed that Good Brothers had
refused to adjust his account accordingly and had failed to replace them with
tires which were merchantable and fit for the purpose for which they had been
sold. The case has not been resolved or adjudicated. On
April 20, 1992, alleged debtor executed three (3) deeds conveying various
interests in real property held exclusively by him to himself and to his second
wife as tenants by the entirety. He also conveyed at that time another parcel
of real property owned exclusively by him to himself and to his son. All four
(4) conveyances were duly recorded on May 5, 1992. On
June 24, 1992, an involuntary chapter 7 petition was brought by Mid-State
Bank, Christoff Oil, Martin Oil, and Good Brothers Tire and Service as
petitioning creditors. Mid-State claims that it is owed $713,000.00 for money
loaned to alleged debtor. Christoff Oil claims that it is owed $104,974.00 for
fuel sold to alleged debtor. Martin Oil claims that it is owed $59,644.00 for
fuel sold to alleged debtor. Good Brothers claims that it is owed $24,400.00
for tires sold to alleged debtor. Alleged
debtor answered the involuntary petition on July 2, 1992. He asserts that it
should be dismissed because the requirements set forth at 11 U.S.C.
§ 303 for bringing an involuntary petition have not been met.
According to alleged debtor, it should be dismissed because the debts
purportedly owed to petitioning creditors are all subject to bona fide
disputes. Alleged debtor also has brought a “counterclaim”
pursuant to 11 U.S.C. § 303(i) in which he seeks to recover
costs and attorney's fees and compensatory and punitive damages. A
hearing on the matter was held on August 28, 1992, at which time petitioning [*976] creditors and alleged
debtor were permitted to offer evidence. II ANALYSIS The
involuntary petition in this instance has been brought pursuant to 11 U.S.C.
§§ 303(b)(1) and (h)(1), which provide 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 clams
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…. These
sections basically provide that if the alleged debtor generally is not paying
debts as they become due, and an involuntary petition is brought by at least
three (3) creditors holding claims which are neither contingent as to liability
nor subject to bona fide dispute and which aggregate at least $5,000 more than
the value of liens on alleged debtor’s property, an order for relief may be
entered. A
contested involuntary petition must be closely scrutinized because involuntary
bankruptcy is an extreme measure that frequently carries serious consequences
for the involuntary debtor, such as loss of credit standing, interference with
business affairs, and even public embarrassment. See In re McDonald Trucking
Co., Inc.,
76 B.R. 513, 516 (Bankr.W.D.Pa.1987). The
test for determining whether there is a bona fide dispute for purposes of
Section 303 is relatively simple and limited in scope. If there is a genuine
issue of material fact that bears upon the alleged debtor's liability or a
meritorious contention as to the application of law to undisputed facts, there
is a bona fide dispute. See BDW Associates, Inc. v. Busy Beaver Building
Center, Inc. (In re BDW Associates, Inc.), 865 F.2d 65, 66-67 (3d
Cir.1989). An involuntary petition must be dismissed if either disjunct is
satisfied. Id. When
it is applying this test, the court must determine whether there is an
objective basis for either a legal or a factual dispute concerning the validity
of the debt. See Matter of Busick, 831 F.2d 745, 749 (7th
Cir.1987). The court need not resolve the dispute but need only determine that
it is bona fide. See In re Ramm Industries, Inc., 83 B.R. 815, 822
(Bankr.M.D.Fla.1988). A determination that a dispute is bona fide should not be
construed as portending how the court would resolve the merits of the dispute. See
In re Lough, 57 B.R. 993, 997 (Bankr.E.D.Mich.1986). The
petitioning creditor must come forward and establish a prima facie case that no
bona fide dispute exists. Once this is done, the burden then shifts to the
alleged debtor to present evidence demonstrating that a bona fide dispute does
exist. See In re Rimell, 946 F.2d 1363, 1365 (8th Cir.1991), cert. denied, 504 U.S. 941, 112
S.Ct. 2275, 119 L.Ed.2d 202 (1992) (citing to Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1544
(10th Cir.1988)). The
involuntary petition brought in this case will be dismissed because it has not
been brought by at least three (3) creditors having claims that are not subject
to bona fide dispute. [*977] A) Christoff Oil Company, Inc. As
has been noted, alleged debtor had executed an article of agreement with the
owners of L & B Garage in October of 1989 whereby he agreed to purchase the
facility from them. Subsequent thereto, alleged debtor operated the facility
from October of 1989 until May of 1990. According to Christoff Oil, alleged
debtor is liable to it for fuel and other supplies delivered to L & B
Garage during that period. Alleged
debtor has raised genuine issues of material fact which bear upon his liability
to Christoff Oil. He denies that he was in exclusive control of the facility at
the relevant time and maintains that he was merely operating the facility as
the agent of the owners of the facility, not on behalf of himself. Also, he
denies that he ever agreed to personally pay for deliveries made while he was
operating the facility. According to alleged debtor, any liability to Christoff
Oil belongs exclusively to the Poormans. The
credibility of alleged debtor is not at issue here. However, if his testimony
were to be believed by the finder of fact, his liability to Christoff could be
affected. B)
Martin Oil Company, Inc. The
claim of Martin Oil Company also is subject to bona fide dispute. Alleged
debtor denies that he is liable to Martin Oil. According to alleged debtor,
only vehicles owned by him were to be serviced on his account with Martin Oil.
He further maintains that the charges for which Martin Oil seeks payment were
incurred for vehicles not owned by him. Some of the charges, he contends, were
for services rendered to drivers of his vehicles who had quit working for him
prior to the purchasing of the fuel. He further contends that some of the
charges were for fuel purchased by independent contractors who owned their
vehicles but who hauled under his permits. Such
allegations, if proved, would seem to have a bearing upon alleged debtor’s
liability to Martin Oil. At the very least, there is an objective basis for
disputing the debt. C)
Good Brothers Tire and Service, Inc. Good
Brothers' claim is based on alleged debtor's failure to pay for tires he
purchased from them. Alleged
debtor does not deny that he purchased tires from Good Brothers. Rather, he
asserts that many of the tires he purchased were defective and maintains that
he therefore is entitled to a setoff which is greater than the amount of the
debt claimed by Good Brothers. The
basis upon which alleged debtor would be entitled to such a setoff has not been
articulated in great detail. However, alleged debtor obviously believes the
downtime on his vehicles and the lost profits, as a result of defective tires,
exceed the debt owed on the self-same tires. It is not our option to judge the
merits of this defense. Suffice it to say this claim is subject to a bona fide
dispute. Additionally,
debtor advises that he has many and various creditors that he pays on a regular
basis. No serious challenge was offered to this averment and no serious
evidence was offered by the petitioning creditors that debtor was not generally
paying his just debts as they became due. The
reason why an involuntary petition was brought at this time is readily
discernible. Petitioning creditors are alarmed that alleged debtor recently
conveyed a substantial portion of his real property to himself and to his
second wife as tenants by the entirety. They understandably are concerned that
this property would be immune from levy and execution should they prevail
against him in their actions in state court. Their primary motive in bringing
this involuntary petition was to avail themselves of various provisions of the
Bankruptcy Code in order to avoid those transfers and to make those assets
available for distribution to creditors. Although it is easily understood, this
reason is inappropriate in this instance. A
bankruptcy court should refuse to enter an order for relief where petitioning
[*978] creditors can go into state court to satisfy a debt. See In re Central
Hobron Associates, 41 B.R. 444, 451 (Bankr.D.Hawaii 1984). The petition
should be dismissed if petitioning creditors have adequate remedies under state
law. See In re Kass, 114 B.R. 308, 309 (Bankr.S.D.Fla.1990). Assuming
that they prevail in state court, petitioning creditors would appear to have an
adequate remedy at state law which would enable them to levy and execute
against the real property. If alleged debtor has conveyed his interest in real
property so as to place it beyond the reach of his creditors, those conveyances
may be avoided as fraudulent under Pennsylvania law. See 39 P.S.
§§ 351 et seq. Aside from the fact that this
convenient and efficient forum is unavailable, there appears to be little or no
prejudice to petitioning creditors if the present involuntary petition is
dismissed at this time. One
final matter remains to be addressed. As noted, alleged debtor asserts that the
present involuntary petition was brought in bad faith. He seeks to recover
attorney's fees and costs as well as compensatory and punitive damages pursuant
to 11 U.S.C. §§ 303(i)(1) and (2), which provide as
follows: (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; or (2)
against any petitioner that filed the petition in bad faith, for— (A)
any damages proximately caused by such filing; or (B)
punitive damages. Alleged
debtor offered no evidence pertaining to these matters at the hearing on its
motion to dismiss the involuntary petition. As no evidence relating to costs,
damages, and/or attorney’s fees was offered at trial, no order directing
payment thereof will be entered. An
appropriate order shall be issued. ORDER
OF COURT AND
NOW at Pittsburgh this 22nd day of September, 1992, in accordance with the
accompanying Memorandum Opinion, it is ORDERED, ADJUDGED and DECREED that the
involuntary chapter 7 petition brought by petitioning creditors be and is
hereby DISMISSED. No attorney’s fees, costs, or damages shall be awarded to
alleged debtor, Leo C. Frailey, t/d/b/a Frailey Trucking. |