Involuntary Petition

OPINION1

LAURIE SELBER SILVERSTEIN, UNITED STATES BANKRUPTCY JUDGE.

This case began on September 19, 2014 when Jinsun, LLC, Equity Highrise, Inc., Sun Bear, LLC, and Lee Bear I, LLC (the "Original Petitioners") filed an involuntary chapter 7 petition ("Petition") against Luxeyard, Inc. ("Luxeyard").2 On November 16, 2015, Chris Clayton and the Jonathan Camarillo Trust (together, the "Joining Petitioners") filed joinders3 to the Petition pursuant to Bankruptcy Code section 303(c).4

Currently before the Court is Luxeyard's motion (the "Bar to Joinder Motion")5 seeking to bar the joinders pursuant to the judicially created "bar to joinder" doctrine. The Joining Petitioners, along with the one remaining Original Petitioner, Jinsun, LLC, object, arguing that the bar to joinder doctrine is bad law or, alternatively, that Luxeyard failed to satisfy its evidentiary burden under the doctrine.6 On April 8, 2016, the Court held an evidentiary hearing on the motion.7 Because Luxeyard has not met its burden to show that the Petition was filed in bad faith, the Court will deny the Bar to Joinder Motion.

Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b)(1). A motion to dismiss an involuntary petition is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (O).

Procedural Posture

This case has lingered. The Petition was filed on September 19, 2014. Luxeyard's initial deadline for responding to the Petition was October 15, 2014, which was extended, by stipulation, to November 4, 2014.8 On November 4, rather than answering the Petition, Luxeyard filed a motion to transfer the venue of this case to the United States Bankruptcy Court for the Central District of California, in the involuntary Chapter 7 case of LY Retail, Inc. (a subsidiary of Luxeyard).9 While at the time, the LY Retail, Inc. case had been dismissed, it was not yet closed by the Clerk of the Court.

On November 5, 2014, the Original Petitioners filed a certificate of counsel in which they requested that the Court enter an order for relief because Luxeyard had, at that point, failed to respond to the Petition in this Court.10 While the certificate of counsel mentioned the motion to change venue, it did not indicate that Luxeyard asserted in the motion that the Petition was filed in bad faith or that Luxeyard intended to defend against the Petition. The following day, the Court entered an order for relief.11 Luxeyard then asked the Court to reconsider the order.12 On January 21, 2015, following a series of filings and hearings on December 23, 2014 and January 16, 2015,13 the Court granted the reconsideration motion and vacated the order for relief.14 In the meantime, on December 17, 2014, the California Bankruptcy Court denied the motion to change venue, leaving the case in Delaware.15

On February 17, 2015, five months after the Petition was filed, Luxeyard filed a motion to dismiss (the "Motion to Dismiss")16 the Petition raising three defenses: (i) the Original Petitioners are not, in fact, creditors because the convertible debentures on which their claims rest have been converted to equity; (ii) even assuming the Original Petitioners are creditors, their claims are subject to a bona fide dispute; and (iii) the Petition was filed in bad faith. After responsive and reply filings were made, the Court scheduled a hearing on the Motion to Dismiss for June 22, 2015, which was later adjourned to July 13, 2015.17

At the hearing, Luxeyard was unprepared to develop an evidentiary record and presented no witnesses.18 But, Luxeyard asserted that factual issues remained. Upon questioning, Luxeyard's counsel stated that there may be relevant documents not before the Court.19 Further, Luxeyard was unprepared to address the securities law, issues surrounding its assertion that the convertible debentures had converted to equity.20 At the conclusion of the hearing, the Court indicated that given the record, or lack thereof, and the relevant legal issues, a further evidentiary hearing might be necessary.21 After an in-chambers review, the Court informed the parties that it was.

On August 24, 2015, the Court convened a status conference to address the scheduling of a further hearing on the Motion to Dismiss. At the conclusion of the status conference, the Court directed the parties to: (i) proceed with discovery in preparation for an evidentiary hearing on the Motion to Dismiss, (ii) present to Chambers an agreed upon scheduling order with the trial date open for Chambers to schedule; and, if they desired, (iii) provide an agreed record (i.e., documents) for consideration of the securities law issue as a matter of law. No scheduling order has been presented to the Court, nor have the parties supplied an agreed record on the securities law issue.

At a further status conference held on November 2, 2015, the Court was advised that three of the four Original Petitioners — Equity Highrise, Inc., Sun Bear, LLC, and Lee Bear I, LLC — were in the process of settling claims against them in the Alattar Action (defined below) and, as part of that settlement, they would withdraw from the Petition and consent to the dismissal of the involuntary case. Only Jinsun, LLC would remain as a petitioning creditor. After two more status conferences, on November 20, 2015, the Court entered orders approving the withdrawals from the Petition as to all Original Petitioners other than Jinsun.22 In the meantime, on November 16, 2015, the Joining Petitioners filed their joinders.

On January 19, 2016, the Court held yet another status conference to determine the course of the case.23 At this status conference, counsel for Luxeyard stated that, independent of the Motion to Dismiss, it intended to file a motion to bar the joinder of the Joining Petitioners.24 The Court directed Luxeyard to file the bar to joinder motion by January 29, 2016 and, upon doing so, to contact Chambers to schedule the hearing for a date in the near future.25

On February 1, 2016, Luxeyard filed the instant Bar to Joinder Motion. On February 25, 2016, counsel for the petitioners sent a letter to the Court requesting its assistance in advancing the case.26 Counsel noted that while the motion was filed, no hearing had been scheduled. In March, the Court addressed discovery disputes at the request of petitioners' counsel.27

On April 8, 2016 — over a year and a half from the date the Petition was originally filed — the Court held an evidentiary hearing on the Bar to Joinder Motion (the "Joinder Hearing"). The parties offered numerous documents into evidence and proffered the live testimony of Messrs. Mireskandari and Casey.28 This motion is ripe for consideration.

Factual Findings

The Alleged Debtor

Luxeyard, the alleged debtor, is a publicly traded holding company, which owns LY Retail, LLC ("LY Retail") an entity that at one time conducted online sales of luxury consumer products.29 Luxeyard was co-founded by Amir Mireskandari, its interim CEO, and Kahled Alattar.30

Kevin Casey is the sole manager and only employee of Jinsun, LLC,31 which is now the lone Original Petitioner remaining in this case. Jinsun was formed in 2010 and its only business relates to investments.32 Jinsun has one member, Silver Star Holdings Trust (the "Trust").33 Mr. Casey is both the trustee and the beneficiary of the Trust.34 The Trust also is the sole member of another entity, Far East Strategies, Inc.; Mr. Casey is also the manager of this entity.35 In 2011, Far East Strategies was in the consulting and investment business.36

In mid-July 2011, Amir Mireskandari met with Kevan Casey (purportedly with his Far East Strategies hat on) to discuss the idea of raising money for LY Retail by issuing Luxeyard stock.37 At some point thereafter, Far East Strategies agreed to introduce investors to Luxeyard.38 At the time of this discussion, Luxeyard was a privately held company. To effectuate a stock issuance, in early 2012, Luxeyard completed a reverse merger with a publicly traded company39 and began issuing stock to investors. Luxeyard also issued convertible debentures in 2012 (the "2012 Convertible Debentures"). Notwithstanding the issuance of stock and the 2012 Convertible Debentures, LY Retail was forced to cease operations.40 Luxeyard unsuccessfully attempted to "re-launch" LY Retail in 2014.41

Luxeyard, Mr. Mireskandari, and Mr. Alattar, have alleged in multiple legal actions that Mr. Casey orchestrated Luxeyard's reverse merger and subsequent stock issuances as part of a fraudulent pump-and-dump scheme. Specifically, in August 2012, Luxeyard, LY Retail, and Amir Mireskandari (or some combination of them) filed a suit in Texas state court seeking damages resulting from the alleged pump-and-dump scheme (the "Pump and Dump Action").42 They assert that a group of knowing participants, led by Mr. Casey and including the Original Petitioners, obtained Luxeyard stock for little or no value, fraudulently inflated the stock's value, and sold the stock off at a profit for themselves. They assert that these actions caused a crash in Luxeyard's stock price, which damaged Luxeyard and all remaining stockholders.43 The defendants included Mr. Casey, the Original Petitioners, and the Jonathan Camarillo Trust (which is every petitioning creditor other than Chris Clayton). Mr. Casey, and presumably all other remaining defendants, deny these allegations.44

One month later, on September 21, 2012, Luxeyard, LY Retail, and Mr. Mireskandari executed a settlement (the "2012 Luxeyard Settlement), by which they settled the claims surrounding the pump and dump scheme with numerous defendants, including, as relevant here, Mr. Casey, Jinsun, LLC, the Jonathan Camarillo Trust, and the other Original Petitioners. The Luxeyard Settlement called for a payment to Luxeyard of $1,500,000, which was deposited into an LY Retail bank account as Luxeyard had no bank account at that time.45 Of course, none of the settling defendants admitted liability in connection with the underlying action, and Mr. Casey testified that he settled in order to, among other things, avoid the cost of litigation. Further, the settlement agreement specifically provides that "[t]his Agreement does not alter or effect [sic] any of the rights, liabilities or obligations of [Luxeyard] to the Defendants, if any, pursuant to" among other things, the "2012 Convertible Debentures."46

Subsequently, $200,000 of the settlement funds were transferred from Luxeyard to Mr. Mireskandari who asserted it was in partial repayment of a $650,000 loan from him to Luxeyard.47 No other creditors received payment from Luxeyard out of the settlement funds.48

Mr. Alattar was not a party to the 2012 Luxeyard Settlement. Three days prior to the execution of the 2012 Luxeyard Settlement, on September 18, 2012, Mr. Alattar filed a shareholder derivative suit in Texas state court (the "Alattar Action"), which largely mirrors the pump-and-dump related claims made in the Pump and Dump Action.49 In Mr. Alattar's initial complaint, he sued "everybody," including Luxeyard.50 But, as Mr. Mireskandari explained, Luxeyard and Mr. Alattar subsequently "joined forces,"51 and Luxeyard has realigned itself as a plaintiff in the Alattar Action.52

In his current complaint, Mr. Alattar asserts claims against 36 defendants including each of the Original Petitioners and the Jonathan Camarillo Trust.53 Mr. Alattar has settled his claims against various defendants in the Alattar Action, including some of those with whom Luxeyard settled in the 2012 Luxeyard Settlement. While Luxeyard, as plaintiff, has asserted claims against numerous of the 36 defendants, because of the Luxeyard Settlement, it has not asserted claims against the Original Petitioners or the Joining Petitioners.54 Luxeyard funds "most" of the Alattar litigation,55 which Mr. Mireskandari characterizes as "very extremely expensive."56

According to Mr. Mireskandari, Luxeyard's biggest asset is recoveries from the Alattar Action.57 Mr. Mireskandari testified that there is a "sharing agreement" whereby funds received pursuant to a settlement agreement in the Alattar Action are allocated among various entities and individuals.58 There is no written agreement memorializing this arrangement;59 rather, it is ad hoc. The settling parties determine, on a case-by-case basis, what the distribution will be.60 And, the allocation can be different every time.61

That such an arrangement exists is reflected in three settlement agreements that were submitted into evidence by Luxeyard. The Gann and Friedlander settlement agreement (made as of November 9, 2015) allocates a $275,000 settlement payment to the following persons in the following amounts (a) Alattar $91,666.67, (b) LY Retail Texas $91,666.67 and, (c) Luxeyard $91,666.67.62 The Acadia settlement agreement (made as of December 29, 2015) allocates a $1,750,000 settlement payment to the following persons in the following amounts: (a) Alattar $250,000, (b) Luxeyard $600,000, (c) LY Retail $600,000, (d) Ran Mires $100,000, and (e) Mr. Mireskandari $200,000.63 Finally, the Huttner settlement agreement (made as of April, 2015) allocates a $211,550 settlement payment to the following persons in the following amounts: (a) Alattar $150,000, (b) Daghighi $4,500, (c) Ran Mires, $4,500, (d) LY Retail Texas $3,500, (e) LY Retail California $3,500, (f) Luxeyard $40,000, (g) Alidad Mireskandari $500, and (h) Mireskandari $5,000.64

Notwithstanding the different allocations in each settlement agreement, the Alattar/Luxeyard parties to the agreement are the same (i.e., Khaled Alattar, Babak Daghighi, Luxeyard, Inc., LY Retail, LLC (a Texas limited liability company), LY Retail, LLC (a California limited liability company), Amir Mireskandari, Ran, Mires, Clark & Associates, LLC (a Texas limited liability company), and certain lawyers).65 Ran, Mires, Clark & Associates LLC is a firm run by Mr. Mireskandari.66 Alidad Mireskandari is Mr. Mireskandari's brother, and Mr. Daghighi is Mr. Mireskandari's brother-in-law.67 From these settlements, Luxeyard received $131,666.67 from persons it settled with in the 2012 Luxeyard Settlement, namely, Mr. Gann, Mr. Friedlander, and Mr. Huttner. No evidence was presented regarding the account in which Luxeyard's $731,666.67 share of the above settlements was deposited or how the funds were used.

The Current Petitioning Creditors

Each of the petitioning creditors asserts a claim based on a 2012 Convertible Debenture. Assuming the 2012 Convertible Debentures were not converted to equity, they matured on January 31, 2014.68

Mr. Casey's investment was made through Jinsun.69 Prior to filing the Petition, Mr. Casey reviewed Luxeyard's 10-Q for the quarters ending in June and September of 2012, which were the most current forms then on file with the Securities and Exchange Commission.70 He testified that these filings contained a going concern qualification from Luxeyard's auditors and reflected balance sheet insolvency.71 He was also aware that settlement monies were being paid to Luxeyard and that Luxeyard did not have a bank account.72 Mr. Casey reviewed Luxeyard's auditor's papers; he testified that they show that no payments had been made to any debenture holders and the debentures had not been converted.73 Further, Mr. Casey, through his attorneys, made a demand on Luxeyard, under section 220 of the Delaware General Corporation Law, for financial and other information.74 Finally, he spoke with other creditors who confirmed they had not been paid on their debentures.75

Mr. Camarillo's investment is held in the Jonathan Camarillo Trust. He serves in the military and is currently stationed in Japan.76 Mr. Camarillo and Mr. Casey have been best friends for over twenty-five years; they speak to each other on a daily basis.77 Mr. Camarillo testified that Mr. Casey introduced him to multiple investments, including Luxeyard.

Chris Clayton was introduced to Luxeyard by Mr. Gann and made an investment of $100,000 in 2012.78 Mr. Casey contacted him to join the Petition, which was the first conversation he had ever had with Mr. Casey. He then reviewed his debenture and other documents, and spoke with the lawyer representing the Original Petitioners.79 After giving it some thought, he decided to join the Petition to collect on his 2012 Convertible Debenture. Prior to the call from Mr. Casey, Mr. Clayton had not made a demand on Luxeyard.

Previous Bankruptcy Cases

On December 27, 2012, three entities that are not party to this case filed an involuntary petition against Luxeyard in the United States Bankruptcy Court for the Central District of California (the "First Luxeyard Bankruptcy").80 Those petitioners asserted claims based on goods delivered to LY Retail.81 In the first two months of 2013, two of the Original Petitioners, Jinsun and Lee Bear I, LLC, filed joinders.82 Lee Bear I, LLC filed its joinder with another entity, Lazy Bear, LLC — those two entities were treated as one creditor.83 Jinsun and the Lee Bear/Lazy Bear entity asserted claims based on Luxeyard's alleged breach of a contractual indemnity obligation.

Luxeyard filed a motion to dismiss the Petition.84 It argued, in part, that every petitioning creditor other than Jinsun and the Lee Bear/Lazy Bear entity had incorrectly asserted a claim against Luxeyard.85 According to Luxeyard, those petitioners actually held claims against LY Retail. The petitioners argued that, although their contractual claims were against LY Retail, they nonetheless had claims against Luxeyard based on the theory that LY Retail was Luxeyard's alter ego.86 The court ultimately granted Luxeyard's motion to dismiss because it found that there existed a bona fide dispute as to the alter ego theory.87

Following the dismissal, Luxeyard filed a motion seeking damages from all the petitioners pursuant to Bankruptcy Code section 303(i).88 As part of that motion, Luxeyard alleged that the petitioners other than Jinsun and the Lee Bear/Lazy Bear entity filed the petition in bad faith because they had failed to perform adequate diligence regarding which entity was the contractual debtor and, upon learning of the mistake, failed to withdraw from the case. Luxeyard separately alleged that Jinsun and the Lee Bear/Lazy Bear entity filed their joinders, in part, for the bad faith purpose of furthering the alleged pump-and-dump scheme.89 On April 10, 2013, the Honorable Barry W. Russell denied the motion in its entirety, declining to even award fees and costs.90

As part of his ruling, Judge Russell found that bad faith did not exist.91 In his bench ruling, Judge Russell appeared to focus on the allegations of bad faith made against the petitioners other than Jinsun and the Sun Bear/Lee Bear entity.92 The court found that much of the problem that the petitioners had in identifying the correct debtor entity were due to the debtor treating Luxeyard and LY Retail as one entity.93 Judge Russell did not state any explicit findings regarding Luxeyard's bad faith allegation against Jinsun and the Lee Bear/Lazy Bear entity.

Luxeyard appealed that ruling. After the Ninth Circuit Bankruptcy Appellate Panel dismissed Luxeyard's appeal of the order denying sanctions, on October 21, 2014 (after this case began), Luxeyard asked Judge Russell to reconsider his decision. After holding a hearing on the motion to reconsider, Judge Russell entered an order denying the motion on December 17, 2014.94

On March 20, 2013, entities that are not party to this case filed an involuntary petition against LY Retail in the United States Bankruptcy Court for the Central District of California (the "LY Retail Bankruptcy").95 In July 2014, LY Retail and the petitioning creditors in that case executed a settlement agreement that resulted in the dismissal of the case.96

The Parties' Legal Arguments

Luxeyard argues that, pursuant to the judicially created bar to joinder doctrine, the Court should deny the Joining Petitioners' request to join the Petition because it was originally filed in bad faith in order to achieve certain improper purposes.97 Jinsun and the Joining Petitioners argue that the doctrine, which has not yet been adopted by the Third Circuit,98 is bad law, and is therefore inapplicable.99 They also argue that the Petition was not filed in bad faith.

Discussion

Section 303(b) of the Bankruptcy Code contains three prerequisites for commencing an involuntary case against a debtor that, like Luxeyard, has at least twelve creditors: (1) there must be three or more petitioning creditors; (2) each petitioning creditor must hold a claim against the debtor that is not contingent as to liability or the subject of a bona fide dispute; and (3) the claims must aggregate at least $15,775 more than the value of liens on the debtor's property.100 If the alleged debtor challenges the petition, section 303(h) requires a court to also find that the debtor is generally not paying its debts as they becomes due, unless the unpaid debt is the subject of a bona fide dispute.101 A court must dismiss a petition if it does not meet these prerequisites.102

A related provision, found in section 303(c), provides that before a court enters an order dismissing a case additional creditors may join the petition with the "same effect" as if such joining creditors had been a party to the original petition.103 "This provision provides for joinder of creditors as a matter of right."104

The joinder permitted by section 303(c) creates a potentially troubling scenario where a petition as originally filed is deficient, but is later cured by the addition of a joining creditor. Some courts have expressed concern at this situation, noting that a creditor might attempt to "circumvent" the prerequisites of an involuntary bankruptcy by knowingly filing a deficient, original petition and then later curing the deficiency with a joinder.105 Courts have noted that the filing of a deficient petition is problematic because the prerequisites to an involuntary case are not "meaningless formalities," but rather serve to protect an alleged debtor from the negative effects of bankruptcy.106

In light of this concern, some courts have limited joinders using the judicially created bar to joinder doctrine. The doctrine provides that if a party files a petition in bad faith, a court will prohibit other creditors from curing the petition by later joining under section 303(c). The cases cited by the parties as well as the cases reviewed by the Court reveal that courts have applied the doctrine to one type of bad faith filing: when a petitioner knows at the time of filing that the petition does not satisfy the prerequisites of section 303.107 Application of the doctrine in such circumstances is consistent with the purpose of the doctrine, which is to protect the integrity of the statutory prerequisites.

Luxeyard argues that the doctrine should also apply to a second type of bad faith filing that was described in Forever Green. In that case, the Third Circuit held that an involuntary petition that meets the statutory prerequisites may nonetheless be dismissed if the petition was filed in bad faith.108 As such, Luxeyard argues that, if the Court determines that the Petition was originally filed in bad faith, it should bar the joinders and dismiss the Petition.109 Moreover, Luxeyard argues that because Jinsun is the only Original Petitioner that has not withdrawn from the Petition, the Court can bar the joinders if it finds that Jinsun alone filed the Petition in bad faith, presumably, even if the other Original Petitioners did not.110 Thus, under Luxeyard's proffered bar to joinder rule, if the Court finds that Jinsun filed the Petition in bad faith, the Court may bar the joinders.

Standard

"At its most fundamental level, the good faith requirement ensures that the Bankruptcy Code's careful balancing of interests is not undermined by petitioners whose aims are antithetical to the basic purposes of bankruptcy."111 After surveying standards used by other courts, the Third Circuit adopted the "totality of the circumstances" standard when reviewing an allegation that an involuntary petition was filed in bad faith. This standard is an amalgam of tests used by other courts, which incorporates both objective and subjective tests, including the "improper purpose" test, the "improper use" test, and the "Rule 11" test.112

The "improper purpose" test asks whether an involuntary petition was "motivated by ill will, malice or a desire to embarrass or harass the alleged debtor"113 or for some other purpose for which it is inappropriate to seek redress from any court. So, for example, it is not a proper purpose to file an involuntary petition to frustrate proceedings in other courts or to force a company out of business,114 as it would be improper to file a complaint in a state or federal court of general jurisdiction for those same purposes.

The "improper use" test assumes an appropriate purpose (i.e., an appropriate basis for filing a complaint in a state or federal court of general jurisdiction), but then asks whether it was proper to use the bankruptcy process to achieve that purpose.115 Certain purposes may be "entirely proper of themselves, such as customary debt collection or the resolution of intranecine [sic] corporate disputes."116 Filing an involuntary bankruptcy petition to achieve those purposes is, however, an improper use of the bankruptcy system if the circumstances do not "justify the particular remedy of involuntary bankruptcy."117 So, for example, a creditor may use the device of an involuntary petition when bankruptcy is necessary to assure equal distribution among creditors.118 As such, it is proper to file an involuntary petition to "protect against other creditors obtaining a disproportionate share of the debtor's assets."119

Conversely, it is an improper use of the bankruptcy system to file an involuntary petition to obtain a disproportionate advantage for a petitioner's own position.120 Examples of such disproportionate advantage include filing in order to trigger a contract provision that allowed one creditor to receive escrowed collateral,121 in order to change corporate control,122 or to cause a debtor to pay certain creditors first in order to reduce personal liabilities on a petitioner's guarantee.123 It is also improper to use bankruptcy as a substitute for customary debt collection against a solvent entity.124 In such circumstances, bankruptcy is not necessary for recovery — a petitioner can advance its own interest in a non-bankruptcy forum.125

The "objective test" asks what a reasonable person would have believed and how they would have acted in the petitioner's situation.126 The "objective test" is not so much an analytical standard as it is an evidentiary standard. Courts applying the objective test believe that bad faith should be determined only with objective evidence of the reasonableness and appropriateness of filing an involuntary petition.127 Consequently, those courts hold that "the subjective motives held by any of the petitioning creditors are not to be weighed when determining whether bad faith has been established."128

Finally, under the "Rule 11" test, also called the "combined" or "two part" test, a court reviews both subjective motivations and the objective reasonableness of a petitioner's actions before filing an involuntary petition.129 When applying this test, courts are often guided by the standard applied to sanctions motions under Bankruptcy Rule 9011.130 The objective prong focuses on whether the petitioner made a reasonable inquiry into the facts and law surrounding the case prior to filing the involuntary petition. The subjective prong focuses on whether the petition was filed to achieve an improper purpose.131

Each of these tests overlap,132 and each is reflected in the factors enunciated in the Third Circuit's "totality of the circumstances" test. A court may consider any and all factors including, but not limited to, whether: the creditors satisfied the statutory criteria for filing the petition; the involuntary petition was meritorious; the creditors made a reasonable inquiry into the relevant facts and pertinent law before filing; there was evidence of preferential payments to certain creditors or of dissipation of the debtor's assets; the filing was motivated by ill will or a desire to harass; the petitioning creditors used the filing to obtain a disproportionate advantage for themselves rather than to protect against other creditors doing the same; the filing was used as a tactical advantage in pending actions; the filing was used as a substitute for customary debt-collection procedures; and the filing had suspicious timing.133 As the "totality of the circumstances" test implies, no one factor is dominant. Importantly, a petitioner is presumed to have filed its petition in good faith. As a result, an alleged debtor has the burden of showing a bad faith filing by a preponderance of the evidence.134

Luxeyard's main allegation is that Jinsun caused the Petition to be filed: (i) to avoid liability by gaining a tactical advantage in the Alattar Action and (ii) to force Luxeyard (through LY Retail) out of business.135 Luxeyard also makes several cursory allegations — some made for the first time at the Joinder Hearing — invoking all of the other Forever Green factors, and arguing that each militates against entering an order for relief.

Jinsun argues that its sole purpose in filing the Petition was to protect creditors. It asserts that Mr. Mireskandari is "siphoning off" funds that could go to pay creditors, and that "the protections of the Bankruptcy Code are appropriate — indeed, necessary — to establish a centralized location to collect assets, to recover avoidable transfers, to avoid further dissipation of funds, and to ensure that all of Luxeyard's creditors are paid."136

Analysis

Much of Luxeyard's argument addressed its general theory that Mr. Casey, though his various entities and others who are a part of his "group," orchestrated the pump-and-dump scheme and the two previous bankruptcies, and that the filing of the Petition is just a continuation of those bad acts.137

Initially, the question of whether the alleged pump-and-dump scheme actually occurred, and the role, if any, of Mr. Casey and Jinsun in that alleged scheme is a central factual issue in the hotly contested Alattar Action. That action has been pending for four years and involves numerous individuals and entities that are not parties to this contested matter. From what has been presented to the Court, it is not hard to conclude that any trial on the Alattar Action will last weeks, if not longer. It is evident, then, that the Court cannot find on the record developed at a half-day hearing that Mr. Casey and his "cohorts" orchestrated or participated in any scheme.138 Nonetheless, Luxeyard asks the Court to presume that the Alattar Action will succeed. It further asks the Court to accept a certain premise: that because Mr. Casey's group committed previous bad acts, all of Jinsun's subsequent actions, including the filing of the Petition, are fraudulent or in bad faith. But, as Luxeyard has the burden of proof on this issue, the Court cannot indulge in Luxeyard's presumption that Jinsun's actions in filing this bankruptcy case are an extension of a yet-unproven scheme.139 While the Court cannot, and will not, draw any conclusions with respect to the merits of the Alattar Action, its existence as well as the allegations made therein, are appropriately considered on this motion.

Further, Luxeyard alleges that the petitioning creditors are not, in fact, creditors because the 2012 Convertible Debentures they hold have met all the requirements for mandatory conversion to equity and, as such, the Petition does not meet the statutory requirements and is not meritorious.140 But, the Court can make no such finding. As already stated, the Court held a hearing on that issue in July, 2015, but Luxeyard was unprepared to present the underlying facts (i.e., all necessary documents) and to answer the Court's questions on the law. Since then, Luxeyard has chosen not to proceed with its Motion to Dismiss, and instead prosecuted this Bar to Joinder Motion. And, at the hearing, Luxeyard specifically stated it was not addressing "whether or not the petitioner satisfied the statutory requirements for filing, and whether or not there's a meritorious case."141 The bifurcation of issues between the two motions precludes a finding here that Jinsun is not a creditor or had reason to believe that its claim was subject to a bona fide dispute.

Finally, Luxeyard presented no testimony regarding its current or historical assets or liabilities (other than the proceeds from the Alattar Action) or whether Luxeyard is paying its debts as they become due. Luxeyard argues that the burden on the latter issue is on the petitioning creditors.142 While in the context of a motion to dismiss, the petitioning creditors would have the burden of proof on whether Luxeyard is paying its debts as they come due,143 the alleged debtor has the burden to prove bad faith. Where, as here, Luxeyard chose to move forward on its Bar to Joinder Motion based solely on Jinsun's bad faith, it was incumbent upon Luxeyard to bring its financial information forward. It did not.

In this context, the Court will analyze the remaining Forever Green factors.

Whether the creditors made a reasonable inquiry into the relevant facts and pertinent law before filing the Petition

Luxeyard argues that Jinsun did not perform "any due diligence that is required prior to initiating an involuntary bankruptcy case."144 To support this position, Mr. Mireskandari testified that no petitioner presented Luxeyard with a demand for payment.145 Luxeyard's argument appears to be that Mr. Casey performed inadequate due diligence because he did not reach out to Luxeyard and attempt to reach a consensual resolution to his claim.

When reviewing the due diligence factor the Court is not concerned with whether a petitioner exercised its negotiation options, but whether it "made a reasonable inquiry into the relevant facts and pertinent law before filing."146 Before filing the Petition, Mr. Casey had discussions with Luxeyard's former CEO and reviewed (i) Luxeyard's most recent quarterly securities and exchange filings, (ii) Mr. Mireskandari's testimony in the First Luxeyard Bankruptcy, and (iii) an outside audit report relating to the status of Luxeyard's debentures.147 Mr. Casey's review of these documents led him to conclude that the 2012 Convertible Debentures were due and owing, that Luxeyard was insolvent, and that it was improperly dissipating its assets.148 Mr. Casey also consulted an attorney regarding available relief in a bankruptcy case.149

Additionally, on February 11, 2014, Jinsun's attorney sent Luxeyard a letter noting that the 2012 Convertible Debentures had matured and had not been paid, and requesting, albeit under a shareholder statute, updated financial information.150 The letter was sent to Mr. Mireskandari, Luxeyard's registered agent, and Luxeyard's attorneys. In part, the letter states: "Jinsun, LLC has settled various lawsuits brought by Luxeyard; however, Luxeyard has not accounted for the proceeds of such settlements."151 Based on this unrebutted testimony, the Court finds that, prior to filing the Petition, Mr. Casey made a "reasonable inquiry" into the facts and law.

Whether there was evidence of preferential payments to certain creditors or dissipation of the alleged debtor's assets

In support of its claim that Luxeyard is improperly dissipating its assets, Mr. Casey submitted unrebutted evidence that in 2012, funds from the 2012 Luxeyard Settlement paid to Luxeyard were deposited in an LY Retail bank account,152 that $200,000 from the settlement proceeds was transferred to Mr. Mireskandari, and that Luxeyard did not pay any other creditors at that time.153 Mr. Casey also testified that based on the SEC filings he reviewed Luxeyard was balance sheet insolvent at the time. This information is dated, but was the best information available prior to the filing of the Petition, especially in light of Luxeyard's non-response to Jinsun's letter seeking current information.

Luxeyard's current handling of its affairs is consistent with its past practices. Presently, Luxeyard is receiving settlement funds, which Jinsun contends are similarly being siphoned off by Mr. Mireskandari. While, of course, Mr. Mireskandari does not admit absconding with Luxeyard's settlement funds, his testimony largely confirms Jinsun's concerns.

As discussed above, Mr. Mireskandari testified that settlement proceeds from the Alattar Action are Luxeyard's largest asset. These proceeds are being split among Mr. Alattar, Luxeyard, LY Retail, Mr. Mireskandari and Ram Mires (Mr. Mireskandari's firm), Alidad Mireskandari (Mr. Mireskandari's brother), and Mr. Daghighi (Mr. Mireskandari's brother-in-law brother) in an undocumented and random fashion.154 As between Luxeyard and Alattar, there is no way to know on this record if Luxeyard is getting its "fair share" of the entire settlement proceeds — especially given that it is funding the litigation. And, as among the non-Alattar entities, there is no way to know on this record whether the non-Alattar share is being split appropriately among Luxeyard, LY Retail, Ran Mires, Mr. Mireskandari, Alidad Mireskandari, and Mr. Daghighi. Further, there was no testimony regarding current or historical assets or liabilities, whether Luxeyard is paying its debts as they become due, or whether Luxeyard currently maintains a bank account into which it deposits its share of settlement proceeds.

Even ignoring Mr. Casey's testimony, the record made by Luxeyard raises more questions than it answers about Luxeyard's largest asset — the settlement proceeds — and whether that asset is being dissipated to the detriment of Luxeyard's creditors. The Court cannot rule out the possibility that Luxeyard's biggest asset is being dissipated. Nor can the Court rule out that consistent with previous practice and the loose, undocumented division of settlement proceeds, Luxeyard may currently be making preferential transfers to insiders, or even fraudulent conveyances.

Whether the filing was motivated by ill will or a desire to harass

Luxeyard argues that the ongoing Alattar Action creates a risk of liability for Mr. Casey and Jinsun and that, as a result of the litigation, Mr. Casey both seeks to obstruct those proceedings by filing the Petition and harbors ill will towards Luxeyard and its co-founders.155 Luxeyard further contends that Jinsun intended to use the Petition to exercise its ill will and put Luxeyard out of business. Mr. Casey flatly denies this motivation.

The Court cannot find that Jinsun filed this case to put Luxeyard out of business. Luxeyard's operating company, LY Retail, had not conducted meaningful business for some time prior to the Petition.156 Mr. Mireskandari testified that he attempted to re-launch the company's operations in 2014, but was ultimately unsuccessful.157 Additionally, Mr. Casey testified credibly that he believed that LY Retail was non-operational before he filed the petition.158 This leaves Luxeyard to argue that Mr. Casey intended to put a non-operating company "out of business," a position the Court cannot credit.

Embracing a somewhat related line of reasoning, Luxeyard argues that Jinsun intended to derail new funding that was meant to revitalize LY Retail. Mr. Mireskandari testified that in the summer of 2014 Luxeyard and an entity called Southwick Capital were working on a deal to provide Luxeyard with new funding that would have allowed Luxeyard to "re-launch" LY Retail.159 He also testified that Southwick Capital decided not to move forward with the deal after it learned of this involuntary petition.160 However, Luxeyard did not present any evidence that Mr. Casey knew about the pending deal with Southwick Capital or, more importantly, that he attempted to use the Petition to thwart the pending deal. The Court will not find that Mr. Casey filed the Petition intending to affect an event of which he was unaware.161

The Court easily finds, however, that, the filing was motivated, at least in part, out of Ill will or a desire to harass. There are numerous objective reasons for Mr. Casey to harbor animosity towards Mr. Mireskandari and Luxeyard. Mr. Casey, through his Trust and its various entities, is in the business of investing and investment consulting. Since 2012, Mr. Mireskandari and Luxeyard have been publically accusing Mr. Casey of securities fraud. Further, Mr. Mireskandari has provided information regarding Mr. Casey and Jinsun to the Federal Bureau of Investigation and the Office of the United States Attorney.162 And, Luxeyard continues to prosecute, through Mr. Alattar, litigation related to the pump-and-dump scheme that Mr. Casey and Jinsun previously settled. Under these circumstances, as Mr. Mireskandari candidly admitted, there is ill will between the parties.163 The Court does not credit Mr. Casey's testimony that none exists. Given the history between the parties, it is more likely than not that Mr. Casey filed the Petition, in part, out of animosity and simply to annoy and harass Mr. Mireskandari; at the very least, harassing Mr. Mireskandari was an added benefit.

Whether the filing of the Petition had suspicious timing

Luxeyard alleges that the timing of the filing of the original petition was suspicious.164 Luxeyard presented evidence showing that, two months before the petition was filed, the LY Retail Bankruptcy was resolved and, separately, that the Alattar Action was remanded to the Texas state court.165 Luxeyard suggests that the efforts to remove the Alattar Action to federal court and the pending LY Retail Bankruptcy were meant to delay the Alattar Action, or at least distract Mr. Mireskandari's attention, and that once those tactics ran their course the Petition was the next delay tactic. The petitioners offer an alternative explanation for the timing: that the Petition was filed nearly two years to the day after the 2012 Luxeyard Settlement, thus preserving the ability of a trustee to review the circumstances surrounding the settlement, including the transfer of proceeds to Mr. Mireskandari. Both of these explanations are plausible.

Whether the filing was used as a substitute for customary debt-collection procedures

Luxeyard next contends that the Petition was "used as a substitute for a debt-collection device."166 Luxeyard specifically alleges that the Petition was filed in "an attempt to forum shop and gain an advantage for Jinsun, Casey, Camarillo, and other defendants in the [Alattar Action]."167 "While this argument is not sufficiently fleshed out, it appears that Luxeyard believes the filing here was meant to take jurisdiction away from the Texas court in the Alattar Action. Nothing about the filing of the Petition, however, automatically determines the forum in which the Alattar Action will proceed, even as to Luxeyard's claims as a plaintiff in that case or to any counterclaims against Luxeyard.

Luxeyard further contends that "if the Petitioning Creditors were actually seeking payment for their claims, they should have brought a claim to do so in New York pursuant to their Debenture Purchase Agreements."168 There is no question that a New York state court would be able to enter a judgment against Luxeyard, if appropriate, based on non-payment of the 2012 Convertible Debentures. But, here, Luxeyard did not adduce any evidence regarding its ability to satisfy any judgment obtained in state court. Mr. Mireskandari's testimony raises significant questions about the settlement proceeds, how they are being divided, and what is happening with Luxeyard's share. Based on the record, the Court cannot determine that the petitioning creditors can recover without the tools available in bankruptcy, including accounting for Luxeyard's assets.

The remaining factors: obtaining a disproportionate advantage; gaining a tactical advantage

Luxeyard's remaining arguments may fall within one or more of the remaining Forever Green factors.

(i) Alleged interference with/advantage in the Alattar Action

First, Luxeyard appears to argue that the Petition was filed so that Jinsun could obtain a disproportionate advantage over others by improving its position in the Alattar Action. Mr. Mireskandari testified that continuing the Alattar Action against Jinsun and Mr. Casey is expensive and that a bankruptcy trustee, if one is appointed, may find further litigation to be cost prohibitive. His testimony suggests that a trustee in bankruptcy would settle for less than Mr. Alattar and Mr. Mireskandari would settle for — thus benefitting Mr. Casey, and not Luxeyard's other creditors.

On a more general note, Luxeyard argues the more basic proposition that the filing of the Petition by Jinsun, a defendant in state court litigation, is merely an attempt to defeat a possible judgment against Jinsun and Mr. Casey, and thus, to gain a tactical advantage in the Alattar Action. Jinsun's simplistic counter-argument is that Luxeyard has no pending claims against Mr. Casey and Jinsun, all of which were settled in the 2012 Luxeyard Settlement. This, of course, ignores the reality that Mr. Allatar's claims against Mr. Casey and Jinsun are still pending and that Luxeyard shares in recoveries on these claims albeit in some indeterminate amount.

At first blush, Luxeyard's argument has some appeal, and harkens back to Forever Green. But, Forever Green is distinguishable. In Forever Green the single petitioning creditor, ProGreen, was a competitor of Forever Green (the alleged debtor). ProGreen's principle, Mr. Dawson, held a prepetition judgment against Forever Green which was not satisfied. In turn, Forever Green filed a lawsuit against ProGreen for diversion of corporate assets, which was proceeding in arbitration. Forever Green had ceased operations; its largest asset was the potential proceeds from its lawsuit against ProGreen. Mr. Dawson attempted to satisfy his judgment by whatever means possible, including interfering with the arbitration. He filed a motion to terminate the arbitration and issued a writ of execution to the arbitrator, which sought to garnish that portion of the arbitrator's fee paid by Forever Green. Determining he now had a conflict with Mr. Dawson, the arbitrator suspended the arbitration. When Forever Green began legal action seeking to reinstate the arbitration, ProGreen followed through with a previous threat and filed an involuntary bankruptcy petition. The bankruptcy court found: (i) that Mr. Dawson's intention was to use the involuntary to "frustrate" Forever Green's litigation of its claim against ProGreen and to collect on his consent order ahead of other creditors that held higher priority claims, and (ii) that, had Dawson done a reasonable investigation prior to filing the case, he would have learned that Forever Green was not dissipating its assets.

Like in Forever Green, Jinsun is a defendant in a lawsuit that represents Luxeyard's largest asset. But, Jinsun has taken no steps prepetition or postpetition to directly shut down the Alattar Action, which has continued (except, apparently, as temporarily stayed by the Texas court) throughout the almost two years this matter has been pending. And, Jinsun did a reasonable investigation which led it to reasonably believe that assets were being dissipated. Further, there is no evidence that Mr. Casey is attempting to coerce Luxeyard into paying Jinsun's debt outside of the bankruptcy distribution process or that Jinsun is seeking to have its claim paid ahead of others with higher priority.

Second, Luxeyard argues that Jinsun filed the Petition to gain a tactical advantage in both the Alattar Action and the First Luxeyard Bankruptcy by making three specific assertions. Luxeyard introduced two filings from the Allatar Action: a Motion to Stay the Allatar Action filed by several defendants, including Mr. Casey, and a Suggestion of Bankruptcy filed by Mr. Casey.169 In the Motion to Stay Case, Mr. Casey and other defendants ask the Texas court to stay the Alattar Action pending the appointment of a trustee in the First Luxeyard Bankruptcy pending in California. In the Suggestion of Bankruptcy, Mr. Casey asserts that the automatic stay of section 362 applies to him, as someone to whom Luxeyard owed indemnification obligations, and he requests, again, that the Alattar Action be stayed in its entirety. These filings could show that Mr. Casey did not hesitate to use the First Luxeyard Bankruptcy to interfere with the Alattar Action, but, in and of themselves, these filings do not show that Mr. Casey used this bankruptcy case to interfere with the Alattar Action.170

Luxeyard also contends that after the filing of this involuntary bankruptcy case, certain, unidentified co-defendants in the Alattar Action "confused" the judge by discussing this case, and, as a result of the confusion, the Texas court stayed the entire Alattar Action. This case remained dormant until the Court granted certain co-defendants' motion to lift the stay.171 But, Luxeyard does not allege that Mr. Casey ever spoke with those who made the filings or directed, advised, or otherwise asked them to attempt to obtain a stay. And, more importantly, it adduced no evidence to that affect. Luxeyard's vague assertions that Jinsun filed the Petition with the general hope that some other defendant would use the bankruptcy case as a justification to take some action that would derail or at least slow down, the Alattar Action is too attenuated from the factual record for the Court to agree with Luxeyard's conclusion.172

(ii) Alleged interference with/advantage in the First Luxeyard Bankruptcy

Luxeyard also argues that Jinsun used this case to obstruct the First Luxeyard Bankruptcy. As set forth above, Judge Russell dismissed the First Luxeyard Bankruptcy, but denied Luxeyard's motion for attorneys' fees, costs, and damages under section 303(i). Luxeyard filed a motion for reconsideration of that ruling. Jinsun filed an opposition in which Jinsun argued that Luxeyard no longer had standing to prosecute the reconsideration motion because the Court had entered (later vacated) an order for relief in the case and a chapter 7 trustee had been appointed.173 Importantly for purposes of the Bar to Joinder Motion, however, Luxeyard's reconsideration motion was filed approximately one month after Jinsun filed the Petition. As the filing in the First Luxeyard Bankruptcy predates this case, the Court cannot find that Jinsun filed the Petition with the intent to forestall an unfiled motion in the First Luxeyard Bankruptcy.174

(iii) Alleged involvement in prior involuntary bankruptcies

Luxeyard alleged that the Messrs. Casey and Gann, who is affiliated with Original Petitioners Sun Bear, LLC, and Lee Bear I, LLC, "orchestrated all three petitions."175 Luxeyard, however, presented no evidence that Mr. Casey orchestrated the two previous bankruptcies.

Conclusion: Luxeyard has not met its burden to show the Petition was filed in bad faith

"As courts of equity, bankruptcy courts are equipped with the doctrine of `good faith' so that they can patrol the border between good-and bad-faith filings."176 At first blush, this case appears to test the limits of that boundary, but upon closer examination, it is clear that Luxeyard has not met its burden to show that the Petition was filed in bad faith.

As the Court observed at the outset, there is no evidence that the Petition did not meet the requirements in section 303. Specifically, there is no evidence in the record that Jinsun does not have a claim based on the 2012 Convertible Debentures or that its claim is subject to bona fide dispute. While Jinsun did settle Luxeyard's pump and dump allegations, the 2012 Luxeyard Settlement did not alter or affect "any of the rights, liabilities or obligations of [Luxeyard] to the Defendants, if any, pursuant to" the 2012 Convertible Debentures. Thus, for purposes of this motion, the Court must assume that the statutory prerequisites are met and the Petition is meritorious. Moreover, the lack of evidence that Luxeyard is paying its debts as they become due or that it is solvent suggests that filing the Petition to collect a debt was not an improper use of the bankruptcy system. From an objective and Rule 11, standpoint, Jinsun did its due diligence as to both the facts and the law prior to the filing of the Petition. Based on the best public evidence available it determined that Luxeyard was balance sheet insolvent and that it was unclear whether Luxeyard was properly managing its settlement funds. It attempted to obtain more current information from Luxeyard, but its attempts were rebuffed. From a subjective standpoint, the case boils down to two competing, but not mutually exclusive propositions: that the Petition was filed for the improper purposes of harassing Luxeyard and Mr. Mireskandari and to distract from the Alattar Action, and for the proper purpose of preventing further dissipation of Luxeyard's assets. Luxeyard's own testimony raises questions regarding the allocation of the settlement proceeds in the Alattar Action, whether Luxeyard is getting its fair share of those proceeds, and whether Luxeyard is preferring some of its creditors to others.

On this Bar to Joinder Motion, Luxeyard has the burden of proof to show bad faith. It has simply not met this burden. Based on the record, the only evidence that points in its favor is that Jinsun was partially motivated to file the Petition by its animosity towards Luxeyard. But, there is at least equal evidence that Jinsun filed the Petition for a proper purpose — to prevent dissipation of Luxeyard's self-described largest asset — and satisfies the other Forever Green factors. The Court cannot find, therefore, that Jinsun filed the Petition in bad faith.

Conclusion

Luxeyard presented a novel bar to joinder rule. Luxeyard has failed, however, to carry its burden to prove bad faith by a preponderance of the evidence. As a result, regardless of whether the Court finds that Luxeyard's rule is applicable — a decision the Court declines to make — it denies the Bar to Joinder Motion. An order will follow.