JEFF BOHM, Chief Judge.
The Court writes this Memorandum Opinion to underscore that: (1) there is split case law on how to satisfy certain elements required to obtain an order granting an involuntary petition; and (2) the drafting of a joint venture agreement should take into account the rights of the joint venture itself to oppose an involuntary bankruptcy petition.
CorrLine filed a motion to dismiss the involuntary petition. [Doc. No. 13]. CorrLine contends that this Court should dismiss the petition for any one of the following reasons: (1) CorrLine has at least twelve creditors and therefore Tagos file the involuntary petition alone; (2) Tagos is an insider and the recipient of an avoidable transfer; (3) Tagos' claims are the subject of a bona fide dispute; (4) CorrLine is generally paying its debts as they become due; or (5) Tagos filed the petition in bad faith. Alternatively, CorrLine urges this Court to abstain from hearing the case because it is a two-party dispute and bankruptcy is not in the best interest of all the company's creditors.
This Court held a simultaneous hearing on Tagos' petition and CorrLine's motion to dismiss between June 27, 2014 and July 3, 2014. The parties adduced extensive testimony from several witnesses and introduced multiple exhibits. The Court then heard closing arguments from the parties' respective counsel on July 29, 2014. Having now considered the evidence, the oral arguments of counsel, and the applicable law, this Court finds that Tagos does have standing to bring its involuntary petition and that granting the petition is warranted. Moreover, the Court declines to abstain from adjudicating this dispute. The Court now makes the following Findings of Fact and Conclusions of Law
1. On September 20, 2012, TriGenex and Tagos executed that one certain Limited Liability Company Agreement of CorrLine International, LLC. [Tagos Ex. No. 1].
2. TriGenex and Tagos entered into the Limited Liability Company Agreement of CorrLine (the JV Agreement) in order to develop and market a groundbreaking
3. Section 6.01(a) of the JV Agreement provides that "the powers of the [CorrLine] shall be exercised by or under the authority of, and the business and affairs of [CorrLine] shall be managed under the direction of, the Managers." [Tagos Ex. No. 1 at 22].
4. Section 6.02(a) of the JV Agreement allows the board of managers to delegate authority to officers. [Id. at 23].
5. Section 6.12(a) of the JV Agreement provides that each officer shall be designated with the "authority and duties that are normally associated with that office." [Id. at 26].
6. Section 6.14 of the JV Agreement requires the consent of a majority of managers to: "(c) ... permit the commencement of a proceeding for bankruptcy, insolvency, receivership or similar action against [CorrLine] ... (j) enter into any employment, service or consultancy agreement or any other material cont[r]acts... or (n) enter into any agreement to do any of the foregoing." [Id. at 28-29] (emphasis added).
7. Section 6.07(a) of the JV Agreement requires that a majority vote must consist of at least one minority member vote — e.g., a Tagos member vote. [Id. at 24].
8. Section 10.01 of the JV Agreement also provides that CorrLine must "keep books and records of accounts and shall keep minutes of the proceedings of its Members and its Managers." [Id. at 34].
9. Section 12.01 of the JV Agreement states that CorrLine "shall dissolve and its affairs shall be wound up on the first to occur of the following: (a) the prior written consent of a majority of the Managers; or (b) entry of a decree of judicial dissolution of [CorrLine] under Section 11.314 of the TBOC [i.e., Texas Business Organizations Code]." [Id. at 38].
10. Section 13.01 of the JV Agreement states that "[w]henever [CorrLine] is to pay any sum to a Member, any amounts that such member owes to [CorrLine] may be deducted from that sum before payment." [Id. at 40] (emphasis added).
11. Section 13.09 of the JV Agreement provides that "[b]y executing this [JV] Agreement, each Member acknowledges that it has actual notice of (a) all of the provisions of this [JV] Agreement, and (b) all of the provisions of the Certificate." [Id. at 41]. The JV Agreement is signed by Loren Hatle (Hatle), on behalf of TriGenex, and Milton L. Scott (Scott), on behalf of Tagos. [Id. at 43].
12. Exhibit C of the JV Agreement lists Majority Managers as Christopher R. "Kip" Knowles (Knowles), Hatle, and Kirk Chrisman (Chrisman). It also lists Minority Managers as Scott and Rodney G. Ellis (Ellis). [Id. at 47].
13. The JV Agreement allows for capital contributions to be made by issuing Common Units "to such Persons, for such consideration and on such terms as the Managers may from time to time determine." [Id. at 16]. "Capital contributed in connection with the Common Units may consist of money paid, labor performed, or property received by [CorrLine], as well as any other consideration permitted under the TBOC [i.e., Texas Business Organizations Code] and any such amounts received by [CorrLine] therefore will be treated as a Capital Contribution." [Id.].
14. Section 4.05 of the JV Agreement discusses withdrawal of contributions. "No Member shall have the right to withdraw all or any part of such Member's Capital Contribution or to be paid interest in respect of its Capital Contributions. An unrepaid Capital Contribution is not a liability
15. Exhibit B of the JV Agreement lists an amount of "45,000" from CorrLine to Tagos under the heading "Common Units Issued." [Id. at 46]. Exhibit B also lists "55,000" from CorrLine to TriGenex under the heading "Common Units Issued" for a grand total of 100,000 units. [Id.]. There are no amounts listed under the heading "Initial Capital Contribution." [Id.].
16. On September 20, 2012, TriGenex and Tagos entered into that one certain Asset Contribution Agreement (the AC Agreement) whereby TriGenex would receive 55,000 common units in CorrLine, representing a 55% interest in CorrLine [Tagos Ex. No. 3 at 5], and preferred distributions totaling $1,500,000.00 in exchange for the assignment to CorrLine of intellectual property rights owned by TriGenex. [CorrLine Ex. No. 2 at 30]. The preferred distributions represent $300,000.00 of consideration for the intellectual property and $1,200,000.00 of consideration for services provided by TriGenex. [Id.]. Under the AC Agreement, Tagos would receive 45,000 common units in CorrLine, representing a 45% interest in CorrLine. [CorrLine Ex. No. 4 at 6, ¶ 2]. It is unclear from the AC Agreement what Tagos exchanged for its 45% interest.
17. On September 20, 2012, pursuant to the AC Agreement, TriGenex assigned its intellectual property rights to CorrX to CorrLine. [CorrLine Ex. No. 5].
18. On September 20, 2012, Tagos and CorrLine entered into a Services Agreement (the Services Agreement) whereby Tagos became obligated to provide certain services to CorrLine, including providing facilities, equipment and certain general business support services. [Tagos Ex. No. 9 at 1]. These general business support services include the following: (1) finance and accounting; (2) compliance and regulatory affairs; (3) risk management; (4) human resources; (5) information technology; (6) marketing, sales and business development; (7) supply chain management; (8) clerical and administrative functions; (9) office space and equipment; (10) computer and telecommunication equipment; and (11) business software solutions. [Id. at 8, ¶¶ 1-11]. Chrisman testified that the Services Agreement was understood to include working capital funding to CorrLine, infrastructure, financial support, and relationships at executive levels that TriGenex did not have. [July 1, 2014 Tr. 112:1-112:10 & 175:4-175:7]. However, the plain language of the Services Agreement does
19. The Services Agreement expressly provides that CorrLine must pay each invoice no later than ten business days after it receives the invoice. [Id. at 2]. Any invoice not paid within this time period "shall be recorded on the books of [CorrLine] as an account payable to [Tagos] and shall accrue, without interest, until such account payable is satisfied by [CorrLine]." [Id.]. However, upon termination of the Services Agreement, all accrued fees through the date of termination become due and payable to Tagos. [Id. at 1].
20. The Services Agreement further states that CorrLine has the right to request at any time "that the Monthly Services
21. From September 20, 2012 to November 18, 2013, Scott served as Chairman of the Board and Chief Executive Officer of CorrLine. [Tagos Ex. No. 44 at 2, ¶ 6 and 5, ¶ 17]. Scott is also the founder, CEO, and Chairman of the Board of Tagos. [June 27, 2014 Tr. 24:15-24:17 & 26:18-26:20].
22. Hatle served as Chief Operating and Technical Officer of CorrLine until November 18, 2013, when he replaced Scott as CEO and Chairman of the Board of CorrLine. [Tagos Ex. No. 44 at 2, ¶ 6 and 5, ¶ 17]. Hatle is also the founder, the CEO, and a Board Member of TriGenex. [Id. at 1, ¶ 2].
23. On September 20, 2012, Chrisman began serving as Secretary of CorrLine; however, he no longer holds this position on the board. [Findings of Fact Nos. 12 & 31].
24. On September 21, 2012, CorrLine held its first Managers Meeting. The minutes of this meeting are signed by Patel, Scott, Ellis, and Knowles. [Tagos Ex. No. 20 at 2-3]. Hatle and Chrisman did not sign the minutes, but were present. [Id. at 1-3]. Scott requested, and the Board approved, the opening of a bank account with Amegy Bank. [Id. at 2-3].
25. On December 12, 2012, Tagos entered into a Master Revolving Note and Term Note Agreement with Comerica Bank, under which Tagos' 45% interest in CorrLine was pledged as collateral pursuant to a blanket lien on all of Tagos' assets to secure the loans. [CorrLine Ex. No. 7 at 4, ¶ 8; CorrLine Ex. No. 8 at 5, ¶ 7; CorrLine Ex. No. 9 at 1-2].
26. On December 13, 2012, CorrLine held its second Managers Meeting. The minutes of this meeting are signed by Patel, Scott, Ellis, and Knowles. Hatle and Chrisman did not sign the minutes, but were present. Scott moved, and the Board approved, moving CorrLine's banking relationship to Comerica. [Tagos Ex. No. 20 at 5, 7].
27. In April of 2013, Tagos and CorrLine entered into an "Intercompany Senior Secured Working Capital Credit Facility" (the Credit Agreement). [CorrLine Ex. No. 27 at 1]. The Credit Agreement uses terms such as "Lender" and "Borrower" and describes an aggregate amount of $400,000.00 available to CorrLine as "revolving loans." [Id. at 2-3] (emphasis added). The Credit Agreement expressly provides that the $400,000.00 revolving loan facility to CorrLine "shall bear interest on the unpaid principal amount from the date borrowed through repayment." [Id. at 3] (emphasis added). The Credit Agreement also provides that the interest rate will be the same rate that Tagos pays under its Comerica line of credit, which was 4.25% at the time of the agreement. [Id. at 4]. Both CorrLine and Tagos agreed that CorrLine would use the revolving loan for "working capital purposes including but not limited to payment towards (a) payroll, (b) capital expenditures, (c) business development expenses such as travel and hotel expenses." [Id. at 3]. The Court notes that this exhibit is an unexecuted copy of the agreement. [Id. at 5]. However, this facility was specifically referred to and approved at CorrLine's Board of Managers Meeting on October 22, 2013. [Finding of Fact No. 30].
28. On June 25, 2013, CorrLine executed a promissory note in favor of Scott for $100,000.00 payable on demand and bearing interest at the Prime Reference Rate
29. On September 20, 2013, CorrLine executed a promissory note in favor of Ellis for $50,000.00 payable on demand and bearing interest at the Prime Reference Rate plus 1% per annum. [CorrLine Ex. No. 28 at 2, ¶ 1].
30. On October 22, 2013, CorrLine held another board meeting. Prior to the meeting, Nick Doskey (Doskey) — Controller and Treasurer of CorrLine — emailed Hatle, Ellis, Sean Muller (Muller) — a tax partner at Weaver, LLP — and Scott a copy of the meeting agenda. [Tagos Ex. No. 15]. Item V is titled "Adoption/Approval of Working Capital Facilities" and lists "Milton L Scott ($100,000.00)" and "Rodney Ellis ($50,000.00)." [Tagos Ex. No. 16 at 2].
31. At this October 22, 2013 meeting, Hatle made a motion and the Board unanimously approved the following working capital facilities for CorrLine: (1) $400,000.00 from Tagos; (2) $100,000.00 from Scott; and (3) $50,000.00 from Ellis. [Tagos Ex. No. 21 at 3]. Prior to the meeting, Hatle notified Chrisman and Knowles "that they would not be serving another term [as board members] after their first year term" expired. [Id. at 2]. Scott and Hatle were to "review a list of potential candidates" to replace the vacancies created by Chrisman and Knowles. [Id. at 1]. The minutes are unsigned. [Id. at 5].
32. On November 11, 2013, Tagos initially notified CorrLine and TriGenex that it would no longer provide funding, including working capital and payroll. [Tagos. Ex. No. 44 at 4, ¶ 15]. However, on November 15, 2013, Tagos funded CorrLine's payroll, but provided no subsequent funding. [Tagos Ex. No. 58 at 3]. Thus, on November 15, 2013, Tagos terminated future funding to CorrLine. [Tagos Ex. No. 44 at 4, ¶ 15].
33. On November 18, 2013, the CorrLine Board of Directors convened, and Scott discussed with Hatle, Chrisman, and Santiago Hernandez (Hernandez) Tagos' decision "not [to] accrue nor bill for revenues related to the management services agreement" while CorrLine employees were going without pay starting on November 1, 2013. [Tagos Ex. No. 47 at 2]. Tagos agreed to continue providing other agreed upon services during this time. [Id.].
34. On November 18, 2013, Scott resigned as the Chairman and CEO of CorrLine. [CorrLine Ex. No. 21].
35. This Court heard testimony from Hatle that just prior to Scott's resignation, and this Board Meeting, Scott transferred $325,999.00 out of CorrLine's bank account. [Tagos Ex. No. 48 at 2, ¶ 5; Tagos Ex. No. 44 at 5, ¶ 17; June 30, 2014 Tr. 111:1-111:3]. However, the only evidence presented showed that on November 18, 2013, the day of his resignation, Scott wired $90,932.66 to himself and $145,000.00 to Tagos from CorrLine's Bank of America account. [CorrLine Ex. No. 30]. The Court finds that Hatle's testimony is inaccurate and that Scott did in fact wire $90,932.66 to himself and $145,000.00 to Tagos from CorrLine's Bank of America account.
36. On November 18, 2013, Hatle was unanimously elected as the new Chairman and CEO of CorrLine. [CorrLine Ex. No. 65 at 2, ¶ 3].
37. On December 14, 2013, Chrisman sent an email to Doskey acknowledging that he "now understands the math ... and that [he has] no further questions or concerns about the interest calculation or Tagos Loan amount." [Tagos Ex. No. 13 at 1] (emphasis added).
39. On January 9, 2014, Hernandez sent Doskey an email notifying him that "[a]s of today you are relieved of your responsibility to CorrLine. This includes bookkeeping, AR, AP, cash management, and risk management." [Tagos Ex. No. 86 at 1]. According to Hernandez, the only responsibility Doskey still had was to "focus on closing out the year of end [sic] financial records" and to send Hernandez all invoices so Hernandez "can schedule proper payment." [Id.].
40. On February 1, 2014, Chrisman sent an email to Ron Rodd (Rodd) stating that the $400,000.00 from Tagos was a "debt" and that Chrisman and Rodd had previously discussed "the accelerated percentage of 10% — the suggested percentage that [CorrLine] originally made to pay the entire debt amount [$400,000.00]." [Tagos Ex. No. 65-12]. Chrisman, on behalf of CorrLine, also stated that CorrLine needed to repay the balance owed under the Credit Agreement to Tagos. [Id.].
41. On February 8, 2014, Hatle called a Special Managers Meeting to consider approval of the following resolution: "(a) $200,000 from pending EcoPetrol payments to be applied to Tagos Debt...." [Tagos Ex. No. 60]. The meeting agenda prepared by Hatle expressly characterizes the debt owed to Tagos as an "interest bearing debt owed to Tagos." [Id.]. The agenda also proposed capping the amount owed to Tagos at $400,000.00 effective November 1, 2013, and to "retain [the] current Services Agreement." Hatle signed the agenda for this Special Managers Meeting. [Id.].
42. The Special Managers Meeting called for by Hatle in February 2014, was never held and no further board meetings have been held since because the three TriGenex majority managers have intentionally boycotted these meetings. [July 1, 2014 Tr. 237:7-238:6].
43. As of March 5, 2014, CorrLine's Accounts Payable showed a total amount outstanding of $48,343.93. [Tagos Ex. No. 24 at 1]. Over $13,000.00 was more than 30 days past due. [Id.]. Only two of the 32 vendor invoices, totaling $213.66, were current. [Id.].
44. On March 6, 2014, CorrLine made a $50,000.00 payment to Tagos from its Frost Bank account in which the payee name was labeled "Tagos Loan." [Tagos Ex. No. 84].
45. On March 18, 2014, Tagos filed a state court action in the District Court of Harris County against CorrLine, TriGenex, Hatle, Chrisman, and Hernandez (the State Court Action) seeking the judicial dissolution of CorrLine, the appointment of a liquidating receiver, repayment of loans made by Tagos to CorrLine, and damages from an alleged breach of the Services Agreement for CorrLine's failure to pay the outstanding service fees due. [CorrLine Ex. No. 11]. Additionally, Tagos brought a derivative claim on behalf of CorrLine against Hatle, Chrisman, and Hernandez for breach of their fiduciary duties to CorrLine and Tagos, misappropriation of CorrLine assets, and violations of the Texas Business Organizations Code. [Id.].
46. On April 15, 2014, Hatle informed Scott and Tagos by letter that CorrLine
47. On April 24, 2014, counsel for Tagos, Eric Fryar, sent a letter to CorrLine demanding payment of, the outstanding loan amount owed to Tagos. Tagos demanded "immediate payment of all amounts due on working capital loans, plus the agreed interest rate, as set forth in Schedule 1." Schedule 1 lists the different debts owed to Tagos as of April 24, 2014:
• Debt for Tagos' working capital loan: $154,147.84 • Debt due under the Services Agreement: $524,708.49 •TOTAL debt owed to Tagos: $678,856.33
Schedule 2 lists debts for the $25,000.00 monthly payments to Tagos plus reasonable out-of-pocket expenses pursuant to the Services Agreement. According to Schedule 2, this total is $524,708.00. [Tagos Ex. No. 14 at 1-4].
48. On May 1, 2014, Doskey emailed Hatle, Chrisman, and Hernandez with concerns over the number of vendors whose balances were past due or not being paid timely. In Doskey's opinion, "AP [was] not being handled the way in [sic] it should in any properly run company and certainly not under the management services agreement." [Tagos Ex. No. 150]. Doskey identified the following specific concerns:
49. On June 2, 2014, CorrLine filed a first amended answer in the State Court Action submitting a general denial of all allegations in the original petition and asserting counterclaims against Tagos and Scott for breach of the Services Agreement, money had and received, breach of fiduciary duty for an alleged misappropriation of assets and for a pledge of Tagos' ownership interest in CorrLine to secure a loan, and violations of the Texas Theft Liability Act. [CorrLine Ex. No. 12 at 12-15]. Specifically, CorrLine alleges that Tagos breached the Services agreement by cancelling all funding to CorrLine, including payroll. [Id. at 12]. CorrLine also alleges that Scott breached his fiduciary duty when he made payments to Tagos the day before his resignation as CEO of CorrLine to satisfy a portion of the outstanding loan to Tagos. [Id. at 13]. Additionally, CorrLine alleges that Scott breached his duty when he pledged Tagos' interest in CorrLine to obtain a line of credit with Comerica Bank. [Id. at 14].
50. On May 7, 2014, the District Court of Harris County issued an order setting a two-week trial for September 15, 2014. [CorrLine Ex. No. 108].
51. On May 14, 2014 (the Petition Date), Tagos filed a Chapter 7 Involuntary Petition for Bankruptcy against CorrLine. [Doc. No. 1]. Scott, as CEO of Tagos, filed this pleading. [Doc. No. 1]. Subsequently, Tagos filed an amended Involuntary Petition (the Petition or the Involuntary Petition). [Doc. No. 25].
52. On June 4, 2014, CorrLine filed a motion to dismiss the Involuntary Petition (the Motion to Dismiss). [Doc. No. 13]. In the Motion to Dismiss, CorrLine mounts several attacks against Tagos' standing to bring the action. CorrLine also challenges Tagos' standing to file the Involuntary Petition as an insider. [Id. at 12]. CorrLine alleges that it had more than twelve creditors as of the Petition Date, and thus, Tagos cannot file the Involuntary Petition without at least two more creditors joining it. [Id.]. Finally, CorrLine alleges that Tagos cannot bring the Involuntary Petition because it is the holder of a claim subject to a bona fide dispute. [Id.]. CorrLine also urges dismissal of the Involuntary Petition because it has been paying its debts as they became due, and also because Tagos filed the Petition in bad faith. [Id. at 22-23]. Finally, in the alternative, CorrLine urges the Court to abstain under § 305(a) from adjudicating this dispute. [Id. at 26]. The Motion to Dismiss was signed and filed by Trey A. Monsour of the law firm K & L Gates LLP. [Id. at 29]. Underneath Mr. Monsour's signature, it is set forth that K & L Gates LLP is "counsel for CorrLine International, LLC." [Id.].
53. On June 16, 2014, Tagos filed a Reply in Opposition to the Motion to Dismiss (the Reply). [Doc. No. 23]. In the Reply, Tagos makes clear it is seeking liquidation of CorrLine's assets by a court-appointed trustee in order to satisfy the outstanding service fees owed under the Services Agreement and the outstanding loan balance under the Credit Agreement. [Id. at 1, ¶¶ 1-2].
54. On June 18, 2014, pursuant to Bankruptcy Rule 1003(b), CorrLine filed
55. Beginning June 27, 2014 through July 3, 2014, this Court held a simultaneous hearing on the Involuntary Petition and the Motion to Dismiss (the Hearing). At the Hearing, this Court heard testimony regarding, among other issues, the qualification of these creditors for numerosity purposes under Bankruptcy Rule 1003(b) and whether CorrLine is generally paying its debts as they become due.
Regarding each of the alleged creditors, this Court finds the following:
56. The Court finds that the following creditors carried unknown or uncertain amounts pursuant to the list attached to CorrLine's Answer and the list of creditors it submitted at the close of the Hearing (CorrLine's List of Creditors).
57. The parties dispute the amounts owed to the following creditors:
58. At a meeting of CorrLine's managers on October 22, 2013, the CorrLine Board of Managers appointed Doskey as the Controller and Treasurer of CorrLine. [Tagos Ex. No. 21 at 3].
59. Hernandez has never been installed as an officer of CorrLine. Hernandez claimed that his name appeared on an organizational chart presented to the board at the meeting on September 21, 2012, but the chart is not included in the minutes and has not been produced. [Tagos Ex. No. 20 at 1].
60. On January 9, 2014, Hernandez told Doskey in an email: "As of today you are relieved of your responsibility to CorrLine. This includes bookkeeping, AR, AP, cash management, and risk management." [CorrLine Ex. No. 98 at 1].
61. On January 16, 2014, Doskey forwarded Hernandez's email of January 9, 2014, to Hatle and stated:
[CorrLine Ex. No. 98 at 1].
62. Hatle never replied to Doskey's email of January 16, 2014. [CorrLine Ex. No. 98 at 1].
63. In the days leading up to the filing of the Involuntary Petition by Tagos, Doskey made certain payments to CorrLine's vendors. [June 30, 2014 Tr. 206:21-207:3; July 1, 2014 Tr. 70:4-71:11]. These payments were made with CorrLine funds. [July 1, 2014 Tr. 71:12-71:17].
64. Set forth below are seven alleged creditors. Doskey paid six of these alleged creditors with funds of CorrLine prior to the Petition Date. Doskey paid the seventh creditor on the date of the filing of the Involuntary Petition, either right before or right after it was filed. Doskey used CorrLine's funds to pay each of these seven creditors.
65. The Court notes that either CorrLine or Tagos alleges that the following creditors are insiders or employees of CorrLine, the putative Debtor. The Court finds the following with regard to their relationships with CorrLine:
66. This Court finds the following with regard to the uncontested creditors:
67. Based on the above findings, this Court has determined that no amount was due as of the Petition Date to the following sixteen (16) creditors: Comerica Credit Cards; ConCur; D.I. Pure; First Continental Diversified; Green Solutions; M Test; Myrmidon; ProGuard; Quickbooks; Rackspace; Salesforce.com; State Tax Advisors; Time Ledger; U.S. Postal Service; Vimeo; and Wortham & Sons. Therefore, the number of potentially qualified creditors currently stands at thirty-six (36).
1. Milton L. Scott: Scott answered the questions posed to him forthrightly, and he also did the best that he could in responding to questions that were somewhat confusing. The Court finds that Scott is a credible witness and gives substantial weight to his testimony.
2. Loren L. Hatle: Hatle is not a credible witness. He frequently responded to clear questions by giving non-responsive answers that attempted to cast aspersions on Scott's honesty and implored how honest he (Hatle) is.
Even more compelling, counsel for Tagos managed to adduce testimony revealing Hatle's willingness to make false statements under oath. For example, at the Hearing, Hatle admitted that he had signed a document agreeing that CorrLine's funds would be used to pay the attorneys who are representing him, individually, in the State Court Action. [June 30, 2014 Tr. 114:7-114:15]. Yet, at his 2004 examination of June 13, 2014, the following exchange took place between counsel for Tagos and Hatle:
[Hatle 2004 Exam Tr. 15:16-15:20; June 30, 2014 Tr. 115:20-115:25].
There is more. At the Hearing, Hatle testified that the funds Tagos infused into CorrLine were an investment, not a loan. Yet, at his 2004 examination on June 13, 2014, the following exchange took place between counsel for Tagos and Hatle:
[Hatle 2004 Exam Tr. 30:11-31:1; June 30, 2014 Tr. 124:20-125:1 & 126:16-126:23]
Thus, Hatle found himself in court back-pedaling on his statement that CorrLine was not liable to Tagos for funds which Tagos had in fact loaned to CorrLine.
Counsel for Tagos then reviewed with Hatle the minutes of the meeting of CorrLine's managers on September 21, 2012. [Tagos Ex. No. 20]. At that meeting, which Hatle attended as a member-manager, there was a motion made, seconded, and approved that CorrLine "would work on assessing banking and financing relationships for working capital line of credit opportunities." [Id.]. When asked to reconcile his position that CorrLine never had the intention to obtain loans with the board minutes reflecting that CorrLine had every intention of borrowing money, Hatle glibly responded that "[i]t all depends on the context that you are looking at." [June 30, 2014 Tr. 107:11-108:9]. When pushed further, he responded that "I look at a line of credit different than a loan." [Id. at 109:8]. Then, finally, when pushed further, Hatle stated that "I am not a sophisticated person" [Id. at 113:7-113:8] — thereby attempting to convince this Court that he really had no idea that CorrLine's business plan included borrowing money from a financial institution for working capital purposes. The Court finds Hatle's testimony to be disingenuous at best and outright perjurous at worst.
Tagos' Exhibit No. 44 is an affidavit that Hatle executed on June 2, 2014. In paragraph 18 of this affidavit, Hatle made the following statement under oath: "Moreover, although Tagos had caused CorrLine to obtain a $400,000.00 credit facility, it refused to grant CorrLine access to these funds to aid operations." [Tagos Ex. No. 44 at 5, ¶ 18]. When asked how he reconciled this statement in his affidavit with his testimony at the Hearing that CorrLine had no loans, Hatle responded that "I have my thought process confused by a different bunch of language than what's in a document that I swore to." [June 30, 2014 Tr. 132:21-132:23]. The Court declines to accept such a shallow explanation. Hatle's affidavit testimony directly conflicts with
Counsel for Tagos spent time examining Hatle about Tagos' Exhibit No. 58, which is a document entitled "Workable Agreement" — which concerned a meeting in December of 2013 that Hatle attended with Chrisman and Hernandez. In this document, it is set forth that: "The cessation of funding, specifically the manner in which it was implemented and communicated and then used as a bargaining tool to solicit a desired result is egregious." [Tagos Ex. No. 58 at 5, ¶ 11]. This document also sets forth that "CorrLine appears to be ... a debtor (money has been lent and is now owed) ... to Tagos." [Id. at ¶ 12]. When counsel for Tagos asked Hatle how he could reconcile this language — which clearly states that CorrLine was receiving funding in the form of a loan — with his position that CorrLine has no loans, Hatle's response was "[y]ou'll have to ask someone who is more acquainted with the language than I am." [June 30, 2014 Tr. 128:25-129:8].
Then there is the blunderbuss explanation that Hatle gave to a question that counsel for Tagos posed to him about Tagos' Exhibit No. 60. This one-page document reflects the agenda of a special manager's meeting that Hatle sent out on February 8, 2014, by which time Hatle had become Chief Executive Officer and Chairman of the Board of CorrLine. [Tagos Ex. No. 60]. Paragraph 5 reflects that the Board and Hatle were poised to consider the following: "Approval of Resolution to retain current Services Agreement, cap total past due owed to $400,000.00 effective 11/1/13, amend compensation mechanism, and adopt Technical Services Agreement." [Id. at 1, ¶ 5]. Thus, Hatle intended to approve CorrLine's retention of the Services Agreement with Tagos. And yet, throughout the Hearing, Hatle had railed against Tagos and Scott and attempted to convince this Court that Tagos had misled and committed fraud upon CorrLine in 2012 and 2013. When asked by counsel for Tagos to explain how he could reconcile these allegations with his intent in February of this year to retain the Services Agreement with Tagos, Hatle responded: "I don't want to be boxed in by language I'm not familiar with." [June 30, 2014 Tr. 147:17-147:18] (referring to the exhibit's language). To suggest that such an explanation is disingenuous is an understatement. It is clear to this Court that Hatle will say anything in an effort to convince this Court that Tagos in general, and Scott in particular, are entirely responsible for any problems with CorrLine and that Hatle himself is as honest as the sky is blue. His efforts are completely unavailing.
Finally, in an effort to convince this Court that CorrLine is in a sound financial condition at present, Hatle testified that the Company would have $1.0 million in sales by the end of July of this year. [Id. at 158:5-158:7]. However, when asked whether CorrLine has any purchase orders from any of the alleged customers, Hatle conceded that no such purchase orders exist. [Id. at 170:5-173:15].
In sum, the Court finds Hatle to be an extremely unjustifiably indignant individual who has difficulty telling the truth. The Court gives very little weight to his testimony.
3. Nick Doskey: Doskey answered the questions posed to him forthrightly. The Court finds that Doskey is a credible witness and gives substantial weight to his testimony.
4. Kirk Chrisman: Chrisman is not a particularly credible witness. His testimony was often self-serving and, at times, confusing and inconsistent. For example, at the Hearing, Chrisman claimed to sit on
Additionally, Chrisman testified that he was in charge of preparing the qualified creditor listing that was filed in this Court pursuant to Bankruptcy Rule 1003(b) on June 18, 2014. [July 1, 2014 Tr. 107:13-107:17]. Included in this listing was an amount owed to ConCur as of the Petition Date. [Doc. No. 27 at 9]. Yet, Chrisman himself was sending emails to ConCur the day before the Petition Date claiming that nothing was owed, and that CorrLine had cancelled the service. [Tagos Ex. No. 72-A]. Thus, Chrisman has represented to this Court in the written creditor listing that ConCur was a creditor as of the Petition Date; yet, his own emails one day before the Petition Date reflect the exact opposite position. This contradiction seriously undermines his credibility.
Particularly confusing was Chrisman's explanation as to why the funding provided by Tagos was not to be characterized as a loan, but rather a capital contribution. First, Chrisman asserted that the records were a "mess," and that therefore CorrLine did not actually know what was owed to Tagos. [July 1, 2014 Tr. 157:3-153:16]. However, Chrisman sent an email to Doskey on December 14, 2013 explaining that he "understands the math" and has no "further questions or concerns about the interest calculation or the Tagos Loan amount." [Finding of Fact No. 37] (emphasis added). Clearly Chrisman had no issue with the accuracy of the amounts Tagos claimed were owed on the loan in December 2013. Further, Chrisman testified that the money provided by Tagos was "never characterized as a loan." [July 1, 2014 Tr. 169:6]. Yet, Chrisman himself characterized the funds as such in the December 14, 2013 email to Doskey. [Finding of Fact No. 37].
Instead, Chrisman now contends that Tagos' funding obligation actually stemmed
Further, at the Hearing, Chrisman referred to his extensive experience in the financial services industry in an attempt to bolster his credibility regarding his opinion as to the loan dispute and other issues. [July 1, 2014 Tr. 167:12-167:17; July 2, 2014 Tr. 53:13]. However, subsequent testimony revealed that his experience
In sum, the Court finds Chrisman's testimony to be self-serving and unreliable, at best. The Court gives little weight to his testimony.
5. Santiago Hernandez: Hernandez answered the questions posed to him forthrightly. The Court finds that Hernandez is a credible witness and gives substantial weight to his testimony, however, his testimony was brief and limited in scope.
This Court has jurisdiction over this dispute pursuant to 28 U.S.C. § 1334(a) and 28 U.S.C. § 157(a). This dispute is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (O). This dispute is also a core proceeding pursuant to the general "catch-all" language of 28 U.S.C. § 157(b)(2). See In re Southmark Corp., 163 F.3d 925, 930 (5th Cir.1999) ("[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case."); In re Ginther Trusts, No. 06-3556, 2006 WL 3805670, at *19 (Bankr.S.D.Tex. Dec. 22, 2006) (holding that a matter may constitute a core proceeding under 28 U.S.C. § 157(b)(2) "even though the laundry list of core proceedings under § 157(b)(2) does not specifically name this particular circumstance").
Venue is proper pursuant to 28 U.S.C. § 1408(1).
The 2011 Supreme Court decision in Stern v. Marshall sets forth certain limitations on the constitutional authority of bankruptcy courts to enter final orders. ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). This Court must therefore determine whether it has constitutional authority to enter a final order in the dispute at bar. This Court concludes that it does for the following reasons.
First, Stern involved a core proceeding brought under 28 U.S.C. § 157(b)(2)(C); whereas, the dispute at bar is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (O). Because the Supreme Court, in Stern, expressly set forth that its holding was a very narrow one, this Court concludes that Stern's holding is not of concern in the dispute at bar because 28 U.S.C. § 157(b)(2)(C) is not in play. See 131 S.Ct. at 2620 ("[W]e agree with the United States that the question presented here is a narrow one.") (internal quotation marks omitted).
Assuming, however, that a Stern analysis must be done for any type of core proceeding, this Court, for the reasons set forth below, nevertheless concludes that it has the constitutional authority to enter a final order in this dispute. In Stern, the debtor, pursuant to 28 U.S.C. § 157(b)(2)(C), filed a counterclaim based
While the dispute at bar requires the Court to consider certain state law, the Court is also required to analyze Code provisions and judicially-created bankruptcy law interpreting those provisions. In other words, the Court's final determination on the Involuntary Petition and the Motion to Dismiss does not turn on solely state law, but rather on both state law and bankruptcy law. Stern involved solely state law, and is therefore distinguishable from the dispute at bar. For these reasons, this Court concludes that Stern, is of no concern here. Thus, this Court has the constitutional authority to enter a final order in this dispute.
Tagos challenges CorrLine's ability to defend itself against the Involuntary Petition because there was no manager vote to approve CorrLine's hiring legal counsel to oppose the Involuntary Petition as required by the JV Agreement. Section 6.01 of the JV Agreement instills CorrLine managers with the power to make business decisions involving the company: "the powers of [CorrLine] shall be exercised by or under the authority of, and the business and affairs of [CorrLine] shall be managed under the direction of, the Managers." [Finding of Fact No. 3]. The JV Agreement specifies that CorrLine managers must consent to: "(j) enter into any employment, service or consultancy agreement or any other material cont[r]acts." [Finding of Fact No. 6]. Further, proper manager consent requires a majority vote consisting of at least one minority member vote — e.g., a Tagos member — under § 6.07(a) of the JV Agreement. [Finding of Fact No. 7].
By its own terms, the JV Agreement requires a majority of CorrLine managers —
Despite the lack of CorrLine manager approval, CorrLine argues that Hatle's position as CEO of CorrLine vests him with authority to hire counsel to oppose the Involuntary Petition. CorrLine construes Hatle's alleged authority to hire counsel from the behavior of former CorrLine CEO, Scott. CorrLine asserts that Scott, during his tenure as CEO, routinely ignored corporate formalities and exercised power without the requisite board approval, including hiring consultants and counsel. CorrLine cites to Texas law that allows a course of dealing in which the board has previously acquiesced to establish an
In another attempt to substantiate its authority to hire counsel to oppose the Petition without complying with § 6.07(a) of the JV Agreement, CorrLine points to § 6.02(a) of the JV Agreement, which allows the Board of Managers to delegate authority to officers and to § 6.12(a), which provides that each officer shall be designated with the "authority and duties that are normally associated with that office." [Findings of Fact Nos. 4 & 5]. In addition, CorrLine cites § 101.254 of the Texas Business Organizations Code, which provides that "each officer of [a LLC] vested with actual or apparent authority by the governing authority of the company is an agent of the company for purposes of carrying out the company's business ... [and][a]n act committed by [such an agent] for the purpose of apparently carrying out the ordinary course of business of the company ... binds the company...." TEX. BUS. ORGS.CODE § 101.254(a) & (b) (emphasis added).
CorrLine's reliance on these provisions is misplaced. Interpreting these provisions, Texas courts have held that "the settled rule in Texas is that an [officer], merely by virtue of his office, has no inherent power to bind the corporation except as to routine matters arising in the ordinary course of business." Templeton v. Nocona Hills Owners Ass'n., Inc., 555 S.W.2d 534, 538 (Tex.Civ.App.-Texarkana 1977, no writ) (citing cases) (emphasis added). Texas courts and other courts interpreting Texas law have consistently held that defending a lawsuit and hiring counsel to pursue or defend litigation is
Under the express terms of the Bankruptcy Code, a debtor may oppose an involuntary petition by filing an answer to the petition. Section 303(d) of the Code expressly sets forth that "the debtor, or a general partner in a partnership debtor that did not join in the petition, may file an answer to a petition under this section." 11 U.S.C. § 303(d) (emphasis added). Notwithstanding this provision, the well-established legal principle that "a corporation can appear in a court of record only by an attorney at law" requires a corporate debtor to retain legal counsel to answer an involuntary petition. Sw. Express Co. v. Interstate Commerce Comm'n, 670 F.2d 53, 55 (5th Cir.1982).
Here, CorrLine, the putative debtor, retained legal counsel to answer the Petition — indeed, the Answer is signed by
For the same reasons in striking the Answer, the Court denies the Motion to Dismiss. This Motion is signed by an attorney representing CorrLine [Finding of Fact No. 52] — and, as already noted above, CorrLine lacks authority to hire legal counsel without the proper and requisite manager approval under the JV Agreement. One court has broadened § 303(d) to allow a shareholder of the putative debtor to file a motion to dismiss an involuntary petition when there is a management deadlock because the company's only two shareholders are on either side of the case and believe that they do not have authority to file an answer for the corporation. See In re Westerleigh Dev. Corp., 141 B.R. 38 (Bankr.S.D.N.Y.1992). In Westerleigh, the court let stand a 50% shareholder's motion to dismiss an involuntary bankruptcy petition filed by the other 50% shareholder because the debtor-entity was in a management deadlock and could not properly defend itself without a board resolution. Id. at 41. The shareholder exception in Westerleigh should not be stretched to allow CorrLine, as putative debtor, to oppose the Petition in a motion separate and distinct from an answer when CorrLine lacks authority under the JV Agreement to retain counsel to represent the company in this dispute. If TriGenex, the 55% shareholder of CorrLine [Finding of Fact No. 16], had filed the Motion to Dismiss — instead of CorrLine — then, under Westerleigh, the shareholder exception would allow the Motion to Dismiss to stand.
However, assuming this Court is incorrect and CorrLine does, in fact, have authority to file the Motion to Dismiss in addition to the Answer, this Court nevertheless declines to abstain from this case for the following reasons. Section 305(a)(1) of the Code allows a court to dismiss a bankruptcy case if "the interests of creditors and the debtor would be better served by such dismissal...." 11 U.S.C. § 305(a)(1). Abstention is an extraordinary remedy. In re Xacur, 216 B.R. 187, 195 (Bankr.S.D.Tex.1997). Accordingly, a court should dismiss a case under § 305(a)(1) only when the interests of "both creditors and the debtor would be better served by dismissal." Id. (emphasis added). This decision must be made on a case-by-case basis. In re TPG Troy LLC, 492 B.R. 150, 160 (Bankr.S.D.N.Y.2013).
The decision to abstain is a "fact-sensitive" determination. In re Int'l Zinc Coatings & Chem. Corp., 355 B.R. 76, 82 (Bankr.N.D.Ill.2006). Thus, courts may "consider a wide variety of factors relevant to the facts of [a] particular case in determining whether to abstain under § 305." In re Spade, 258 B.R. 221, 231 (Bankr. D.Colo.2001). Courts have found the following factors relevant to the decision of whether to abstain:
In re Euro-Am. Lodging Corp., 357 B.R. 700, 729 (Bankr.S.D.N.Y.2007) (citations omitted). While each of these factors is considered, "not all are given equal weight in every case." TPG Troy, 492 B.R. at 160.
Given the current deadlock in CorrLine's board, which impedes its ability to continue as a viable entity, this Court gives great weight to the need for an immediate resolution that benefits both CorrLine and its creditors. Scott testified that Tagos seeks appointment of a trustee and an order for Chapter 7 liquidation in an effort to find an expedient remedy similar to that which Tagos is currently seeking in state court. [June 27, 2014 Tr. 167:19-168:22]. This Court has already spent substantial time trying this dispute and hearing oral arguments and is prepared to issue its order now, unlike the state court, which has set a two-week trial that is not to begin — at the earliest — until September 15, 2014. [Finding of Fact No. 50]. This Court's resolution of the dispute before the State Court Action has begun in earnest favors judicial economy and efficiency. Moreover, granting the Involuntary
As set forth in this Memorandum Opinion, the Court concludes that CorrLine is generally not paying its debts as they come due. [See infra Part IV.G.4.f.]. Current management has shown its inability to effectively manage the payment of its outstanding debts. Indeed, having heard the less than credible testimony of Hatle and Chrisman, this Court is very skeptical about their business acumen and ability to manage a company. Hatle has a degree, but not in finance [July 2, 2014 Tr. 71:14-71:18]; Chrisman has no degree and his employment history in finance is spotty and superficial at best [July 1, 2014 Tr. 262:9-263:17]. CorrLine cannot survive under the leadership of Hatle and/or Chrisman. Further, without funding from Tagos and no verifiable future sales commitments [see June 30, 2014 Tr. 170:5-173:15], CorrLine will continue to struggle to pay its debts — to the detriment of its creditors. For the forgoing reasons, it is in the interest of CorrLine and all creditors — not just Tagos — that a proper resolution is secured immediately.
Additionally, this Court is compelled to grant the Involuntary Petition because it is highly doubtful that CorrLine will be able to settle its debts without court supervision. Given the State Court Action, the Involuntary Petition, and CorrLine's numerous failed attempts to negotiate a repayment of the Tagos debt, it is clear that CorrLine has been unable to reach a settlement outside of court with its largest creditor, Tagos. Since CorrLine will be unable to settle its dispute with Tagos outside of court, it is in the best interest of CorrLine and its creditors
When an involuntary petition is filed, there is a presumption that it is filed in good faith. See In re Tichy Elec. Co., 332 B.R. 364, 373 (Bankr.N.D.Iowa 2005) (citing cases). Courts have also noted that the Code does not explicitly require a "good faith" filing, nor does it define what a "bad faith" filing is. Id. The Fifth Circuit, in a case involving the filing of an involuntary Chapter 11 petition, held that "[g]ood faith' implies an honest intent and genuine desire on the part of the petitioner to use the statutory process to effect a plan of reorganization and not merely as a device to serve some sinister or unworthy purpose." In re Metro. Realty Corp., 433 F.2d 676, 678 (5th Cir.1970).
There is thus a presumption that Tagos filed the Involuntary Petition in good faith. CorrLine has not offered credible evidence to overcome this presumption and demonstrate Tagos' bad faith. CorrLine argues that Doskey's payments to seven creditors the day before Tagos' filing of the Involuntary Petition is evidence of bad faith. [Findings of Fact Nos. 58-64]. The Court is not persuaded by CorrLine's argument because Doskey, in disbursing those funds, was acting within the scope of his authority as the Controller of CorrLine and as an employee of Tagos pursuant to the Services Agreement. Additionally, Tagos' reasons for filing the Involuntary Petition are reasonable, thereby indicating good faith. There is no indication that Tagos' desire to have its own debts repaid as quickly and efficiently as possible qualifies
The Bankruptcy Code allows an individual creditor to force a debtor into bankruptcy if certain criteria are met. Section 303 of the Code governs this particular remedy, and states, in relevant part, that:
11 U.S.C. § 303(b) & (h) (emphasis added).
Courts have interpreted this section of the Code as requiring a four-part analysis to determine if a single creditor has standing to bring an involuntary bankruptcy petition. Accordingly, a court must determine whether: (i) the petitioning creditor's claim is not contingent or the subject of a bona fide dispute as to liability or amount; (ii) the petitioning creditor's claim is undersecured by at least $15,325.00; (iii) the debtor has fewer than twelve creditors (excluding employees and insiders, transferees of voidable transfers, and holders of contingent or disputed claims); and (iv) the debtor is generally not paying its debts as they become due. In re Euro-Am. Lodging Corp., 357 B.R. 700, 712 (Bankr.S.D.N.Y.2007). The Court addresses each element below in addition to CorrLine's challenge to Tagos' standing to bring the Involuntary Petition as an "insider" under § 303(b)(2). [See Doc. No. 13 at 19, ¶ 46].
As noted above, § 303 allows a single creditor to file an involuntary bankruptcy petition to place an entity into bankruptcy. 11 U.S.C. § 303(b); See also In re Demirco Holdings, Inc., No. 06-70122, 2006 WL 1663237, at *4 (Bankr. C.D.Ill.2006). However, when a single creditor files an involuntary petition, some courts scrutinize it "closely to make sure it is not filed unfairly or abusively by a creditor to put [the debtor] into bankruptcy in order to gain leverage in resolving legitimate disputes." Id. These courts elevate the level of scrutiny when a single-creditor involuntary case involves a two-party dispute. Id. This heightened scrutiny has resulted in an "almost per se rule" that
The case at bar is, at present, a two-party dispute between Tagos and CorrLine. This Court discerns no persuasive evidence that Tagos filed the Involuntary Petition unfairly or abusively in order to gain improper leverage over CorrLine. It is undisputed that CorrLine agreed to pay Tagos a monthly $25,000.00 fee, plus reasonable out-of-pocket costs, for providing general business support services under the Services Agreement. [Findings of Fact Nos. 18 & 19]. Tagos demanded payment of these amounts, and CorrLine refused to pay. [Finding of Fact No. 47]. Additionally, Tagos requested that CorrLine repay the working capital loan, and CorrLine refused, contending that the funds were a capital injection and not a loan. [Finding of Fact No. 47; Doc. No. 13 at 16, ¶ 35]. Tagos' reason for filing the Involuntary Petition is to ensure the $140,000.00 loaned to CorrLine under the Credit Agreement, plus interest, and the amounts due under the Services Agreement are repaid as quickly as possible because "it is very expensive on both sides to litigate this and have this dragged out." [June 30, 2014 Tr. 31:23-31:24]. Under these circumstances, the Court finds that Tagos is not unfairly or abusively filing the Petition in order to gain leverage over CorrLine in resolving their dispute.
CorrLine contends that Scott and Tagos are insiders and recipients of voidable transfers, and thus Tagos lacks standing to bring the Involuntary Petition under § 303(b) of the Bankruptcy Code. This Court disagrees.
Section 303(b) states that:
11 U.S.C. § 303(b).
Some courts have interpreted § 303(b)(2) to prohibit insiders and recipients of voidable transfers from bringing involuntary petitions. See In re Gills Creek Parkway Assocs. LP, 194 B.R. 59, 62 (Bankr.D.S.C.1995) (holding that employees, insiders, and transferees cannot be single petitioning creditor); accord In re Runaway II, Inc., 168 B.R. 193, 196 (Bankr.W.D.Mo.1994). This interpretation turns on the "such holders" language found in §§ 303(b)(1) and (2). The Bankruptcy Court for the Western District of
In re Runaway II, 168 B.R. at 196.
In sharp contrast, other courts allow insiders, employees, and recipients of voidable transfers to file an involuntary petition under § 303(b)(2). See, e.g., In re Green, Nos. 06-11761-FM, 06-11762-FM, 2007 WL 1093791, at *4 (Bankr.W.D.Tex. April 9, 2007) ("The better reasoned reading of the statute is that it does not exclude employees, insiders, etc. from being petitioning creditors under section 303(b)(2)."); see also Sipple v. Atwood (In re Atwood), 124 B.R. 402, 405 n. 2 (S.D.Ga. 1991) (holding that a petitioning creditor and holder of a voidable claim may bring involuntary bankruptcy petition); In re United Kitchen Assocs. Inc., 33 B.R. 214, 215 (Bankr.W.D.La.1983) (holding that employees of the debtor may bring involuntary bankruptcy petition); 2 Collier on Bankruptcy ¶ 303.12[3] at 303-39 (16th ed. 2013) (advising that the better reading of § 303(b)(2) is to allow creditor employees, insiders, and transferees to file involuntary petitions).
This Court is persuaded that § 303(b) permits an insider or recipient of a voidable transfer to file an involuntary petition, as it is consistent with the legislative intent behind § 303(b). Congress excluded insiders and recipients of voidable transfers from the creditor numerosity calculation under § 303(b)(2) to alleviate its concern that an insolvent debtor and friendly creditors would collude to defeat an involuntary petition. If insiders or recipients of voidable transfers (i.e. those without incentive to file an involuntary bankruptcy as they are receiving payment) collude with a debtor to artificially increase the total number of creditors to more than twelve, it could block an involuntary petition. In re Green, 2007 WL 1093791, at *4 (citing In re Skye Mktg. Corp., 11 B.R. 891, 897 (Bankr.E.D.N.Y.1981)). Congress decided that "[t]hose who would be deterred from joining the effort to petition a debtor into bankruptcy by their status as preferred creditors are not to be counted" in the numerosity calculation. Id. at *5. As the legislative history indicates, Congress included the insider language in § 303(b) to remove barriers to bringing an involuntary petition. If the insider exclusion found within § 303(b) is construed to prevent insiders from filing an involuntary petition, it would erect a barrier to filing — a result directly in conflict with congressional intent. In keeping with legislative intent, § 303(b) should not be interpreted to bar insiders or recipients of voidable transfers from bringing involuntary petitions,
This Court is bound by Fifth Circuit precedent. The Fifth Circuit is silent on the issue. This Court finds the reasoning and conclusions preventing an insider and recipient of a voidable transfer from filing an involuntary petition unpersuasive. Rather, the Court is convinced the better reasoned reading of § 303(b) does not preclude insiders or recipients of voidable transfers from bringing an involuntary bankruptcy petition.
There is no question that Tagos is an insider of CorrLine; it owns 45% of this company, and Scott, the CEO of Tagos, is also a manager of CorrLine. [Findings of Fact Nos. 12, 15, 16 & 21]. While Tagos and Scott are both insiders, there is no policy rationale for finding Tagos ineligible to file the Petition. It is in Tagos' best interest to pursue bankruptcy, given that it is the single largest creditor of CorrLine — with $540,587.09 outstanding [Finding of Fact No. 47(a)] — and CorrLine has no intention to repay the amounts due to Tagos. Further, collusion between debtor and creditor is unlikely due to the acrimony between CorrLine and Tagos. Moreover, collusion is incompatible with Tagos' ultimate goal of Chapter 7 dissolution through the Involuntary Petition. Therefore, this Court concludes that Tagos is not barred from filing an involuntary bankruptcy petition against CorrLine, despite Tagos' insider status.
CorrLine also asserts that § 502(d) of the Code, which prohibits claims of transferees of avoidable transfers under § 547, bars Scott and Tagos from filing the Involuntary Petition. 11 U.S.C. § 502(d). Section 547 certainly allows preferential transfers to be avoided if the transfer is made to an insider between 90 days and one year from the petition date. 11 U.S.C. § 547(b)(4)(B). However, the two cases interpreting § 502(d), upon which CorrLine relies, concerned the standing of a creditor to bring a claim, vote on a plan confirmation, or bring an adversary action — not to bring an involuntary petition. See In re Enron Corp., 340 B.R. 180 (Bankr.S.D.N.Y.2006); In re Coral Petrol., Inc., 60 B.R. 377, 382 (Bankr.S.D.Tex. 1986). CorrLine offers no case law supporting its assertion that § 502(d) applies to an involuntary petition dispute, nor does this Court find any good reason why it should. Indeed, at this point, there is no trustee to whom Tagos could remit any preferential payments that it has received. Once this Court enters an order granting the Involuntary Petition, thereby triggering the appointment of Chapter 7 trustee, then Tagos will have to remit any such payment if it wants to have an allowable claim against the estate. For all of these reasons, the Court rejects the argument that § 502(d) prohibits creditors that have received preferential payments from filing an involuntary petition.
CorrLine also argues that Tagos waived the right to dissolve CorrLine through federal bankruptcy proceedings because § 12.01(b) of the JV Agreement limits dissolution of CorrLine to a state court venue. This section states, in relevant part, that:
[Finding of Fact No. 9].
This argument holds no weight. Without exception, "courts have uniformly held
Where there is a bona fide dispute, a bankruptcy court cannot hear or resolve the dispute. 11 U.S.C. § 303(b). In considering this prohibition, "[t]he court's objective is to ascertain whether a dispute that is bona fide exists; the court is not to actually resolve the dispute." See Subway Equip. Leasing Corp. v. Sims (In re Sims), 994 F.2d 210, 221 (5th Cir.1993) (quoting Rimell v. Mark Twain Bank (In re Rimell), 946 F.2d 1363, 1365 (8th Cir. 1991)) (internal quotation marks omitted). A bankruptcy court, however, may be required "to conduct a limited analysis of the legal issues in order to ascertain whether an objective legal basis for the dispute exists." Id. This is a factual finding based, in part, on the credibility of witnesses "and other factual considerations." Id.
A bona fide dispute can be established by a dispute as to the amount owed or to liability. See In re TPG Troy LLC, 492 B.R. 150, 159 (Bankr.S.D.N.Y. 2013). The Fifth Circuit adopts an "objective standard" when determining whether a bona fide dispute exists. Id. The burden of proving that no bona fide dispute exists rests with the petitioning creditor. Id. ("[T]he petitioning creditor must establish a prima facie case that no bona fide dispute exists."). The petitioning creditor must "satisfy the requirements of § 303 by a preponderance of the evidence." In re Moss, 249 B.R. 411, 418 (Bankr.N.D.Tex. 2000). If satisfied, the burden then shifts to the debtor "to present evidence demonstrating that a bona fide dispute does exist." In re Sims, 994 F.2d at 221 (quoting In re Rimell, 946 F.2d at 1365). Importantly, the Fifth Circuit holds that under the "objective standard" test, "neither the debtor's subjective intent nor his subjective belief is sufficient to meet [his] burden" of proving a bona fide dispute exists. Id. (quoting In re Rimell, 946 F.2d at 1365). Simply put, a debtor's subjective belief that the amount in controversy owed to the petitioning creditor is uncertain or unknown is insufficient for a court to find that a bona fide dispute exists. This Court must therefore objectively determine whether a bona fide dispute exists as to both amount and liability.
Here, there is no bona fide dispute as to either amount or liability. CorrLine owes Tagos $540,587.09. [Finding of Fact No. 47(a)]. Tagos produced numerous documents and testimony sufficient to prove that the amount owed is $540,587.09. [See Findings of Fact Nos. 18, 19, 27, 31, 37, 40, 41, 44, 46 & 47]. While Hatle and Chrisman, on behalf of CorrLine, contend that there is a bona fide dispute as to its liability and the amount owed, this Court gives very little weight to their testimony. [See supra Credibility of Witnesses — Loren Hatle and Kirk Chrisman]. Instead, there is overwhelming evidence that: (1) Tagos provided $140,000.00 under the Credit Agreement to CorrLine as a loan — not as a capital contribution — and that Tagos expected and CorrLine agreed to repay Tagos this amount, plus interest; and (2) Tagos performed under the Services Agreement and that CorrLine failed to pay the monthly fee of $25,000.00, plus reimbursable expenses. [Findings of Fact Nos. 18, 19, 27, 30, 31, 32, 33, 37, 40, 41, 44, 46 & 47].
CorrLine attempts to create a dispute as to liability by alleging that the loan documents were not executed, and thus the
CorrLine next contends that there is a bona fide dispute as to liability because the Credit Agreement is invalid due to lack of managerial approval. [July 1, 2014 Tr. 157:3-157:17]. This assertion is patently false. Minutes from the board meeting held on October 22, 2013 indicate that the Credit Agreement was in fact unanimously approved, including an affirmative vote by Hatle.
CorrLine also refutes the existence of the Credit Agreement because Tagos was allegedly already obligated to provide funding under the terms of the Services Agreement. [July 1, 2014 Tr. 157:3-157:17]. However, the plain language of the Services Agreement does
Further, the agenda from the Special Managers Meeting held on February 8, 2014, which proposed that $200,000.00 of proceeds from sales to EcoPetrol (a CorrLine customer) would "be applied to Tagos Debt" reveals the lender/borrower relationship between CorrLine and Tagos. [Finding of Fact No. 41] (emphasis added). The agenda describes CorrLine's debt to Tagos as an "interest bearing debt." [Id.] (emphasis added). Hatle's testimony that he was unaware or did not understand that the funds from Tagos constituted an interest-bearing loan is wholly unconvincing — if not completely disingenuous — given that Hatle himself signed and sent the agenda of this Special Managers meeting. [Id.]. Under these circumstances, the Court finds that CorrLine and Hatle were fully
Just as there is no bona fide dispute as to CorrLine's liability to Tagos, there is no bona fide dispute as to the amount CorrLine owes Tagos under the Credit Agreement. CorrLine owes Tagos $140,000.00, plus $9,980.51 in interest, which amounts to a total debt of $149,980.51. [Finding of Fact No. 47(a)]. From October 5, 2012, through March 13, 2014, Tagos provided CorrLine with funds of $420,000.00, of which CorrLine has only repaid $280,000.00, leaving an outstanding principal balance of $140,000.00 — plus interest of $9,980.51. [Id.]. CorrLine contends that the amount due is in dispute because the records "[were] a mess" and therefore it does not know what it owes under the Credit Agreement. [July 1, 2014 Tr. 157:3-157:17]. Yet, in an email sent to Doskey in December of 2013, Chrisman, the Vice President of CorrLine [Finding of Fact No. 65(a)], himself acknowledged the existence of the loan and stated that he "understood the math," conveying that he did not dispute the amounts that Tagos claimed were owed to it under the Credit Agreement as of December 2013. [Finding of Fact No. 37]. This Court has already found that CorrLine, and Hatle in particular, knew that the funds received under the Credit Agreement were interest-bearing loans to be repaid to Tagos. [See Findings of Fact Nos. 27, 31, 41 & 44]. It is clear that CorrLine has simply manufactured these "disputes" in order to defeat the Involuntary Petition. Further, it is well established that the previous recognition of a debt is evidence that no bona fide dispute exists, and that self-serving testimony is insufficient to prove the existence of a bona fide dispute. See Wishgard, LLC v. Se. Land Servs., LLC (In re Wishgard, LLC), No. 13-20613-CMB, 2013 WL 1774707, at *6 (Bankr. W.D.Pa. Apr. 25, 2013); In re Faberge Rest. of Florida, Inc., 222 B.R. 385, 389 (Bankr.S.D.Fla.1997). Therefore, this Court finds that the outstanding balance of $149,980.51 under the Credit Agreement is
There is also no bona fide dispute as to CorrLine's liability or the amount CorrLine owes to Tagos under the Services Agreement. [Findings of Fact Nos. 18, 19 & 20]. The Services Agreement provides that in exchange for certain business support services, CorrLine would pay Tagos $25,000.00 each month, plus reasonable out-of-pocket expenses incurred by Tagos in rendering these services. [Finding of Fact No. 18]. In essence, the Services Agreement provided CorrLine with Tagos' business, marketing, and management experience. The evidence reflects that Tagos performed under the Services Agreement by providing the following services: (1) finance and accounting, (2) compliance and regulatory affairs, (3) risk management, (4) human resources, (5) information technology, (6) marketing, sales and business development, (7) supply chain management, (8) clerical and administrative functions, (9) office space and equipment, (10) computer and telecommunication equipment, and (11) business software solutions. [Id.]. The evidence is also conclusive that CorrLine failed to pay the monthly $25,000.00 fee and the out-of-pocket expenses billed to it. [Findings of Fact Nos. 47 & 47(a)].
A schedule of the outstanding Services Agreement fees owed to Tagos and related invoices indicate a total amount owed of $390,606.58 as of October 2013. [Finding of Fact No. 47(a)]. Furthermore, the Special Managers Meeting agenda that Hatle sent on February 8, 2014,
Simple arithmetic dictates that the total amount due to Tagos under the Credit Agreement and the Services Agreement is $540,587.09 ($149,980.51 + $390,606.58). There is no bona fide dispute as to this debt. For the reasons already stated, this Court finds that: (1) CorrLine agreed to and had notice of the amount due to Tagos; and (2) CorrLine failed to pay Tagos. Hatle's contention that he believed the funds received under the Credit Agreement were not loans from Tagos to CorrLine is completely unbelievable. Additionally, the Services Agreement expressly provides that CorrLine will pay Tagos $25,000.00 monthly, plus out-of-pocket expenses, and there is no question CorrLine agreed to pay this obligation. [Findings of Fact Nos. 18 & 19].
In the alternative, CorrLine argues that the presence of the State Court Action is proof of a bona fide dispute. The pending litigation in the District Court of Harris County does not automatically prove a bona fide dispute exists. See In re Norriss Bros. Lumber Co., 133 B.R. 599, 604 (Bankr.N.D.Tex.1991) ("The mere existence of State Court litigation and the assertion by an alleged debtor of various defenses or counterclaims is not per se a bona fide dispute."); In re TLC Med. Grp., Inc., No. 04-15739, 2005 WL 4677807, at *2 (E.D.La.2005) ("Generally, the existence of pending litigation between the debtor and creditor does not make the claim subject per se a bona fide dispute."); but see Credit Union Liquidity Servs. v. Greenhills Dev. Co. (In re Green Hills Dev. Co.), 741 F.3d 651, 659 (5th Cir.2014) (finding that "[b]ankruptcy courts routinely consider the existence and character of pending but unresolved litigation as evidence of a bona fide dispute"). Thus, pending litigation "suggests, but does not establish, the existence of a bona fide dispute." In re TPG Troy LLC, 492 B.R. 150, 159 (Bankr.S.D.N.Y.2013) (emphasis added).
Additionally, CorrLine argues that the existence of its counterclaims against Tagos in the State Court Action bolsters the existence of bona fide dispute. See Focus Media, Inc. v. Nat'l Broad. Co. (In re Focus Media, Inc.), 378 F.3d 916, 926 (9th Cir.2004) (holding that a counterclaim "gives rise to a bona fide dispute only when (1) it does not arise from a wholly separate transaction and (2) netting out the claims of debtors could take the petitioning creditors below the amount threshold of § 303"); see also In re Green Hills Dev. Co., 741 F.3d at 660 (holding that "a creditor whose claim is the object of unresolved, multiyear litigation should not be permitted to short-circuit [the state court process] by forcing the debtor into bankruptcy"); In re Ferri, 59 B.R. 656, 657 (Bankr.E.D.N.Y.1986) (holding that because debtor "asserted `substantiable'
CorrLine has asserted counterclaims against Tagos in the State Court Action arising out of the same Services Agreement and Credit Agreement transactions. [Finding of Fact No. 49]. The Court has considered each of the counterclaims related to either the Services Agreement or the Credit Agreement in the State Court Action and does not believe the claims are legitimate — or "bona fide." In its one of its counterclaims, CorrLine asserts that Tagos breached the Services Agreement because it cancelled all funding to CorrLine, including payroll. [Id.]. Yet, there is no such funding obligation in the plain language of the Services Agreement. [Finding of Fact No. 18]. Thus, the counterclaim fails to assert a legitimate dispute. Next, CorrLine alleges that, the day preceding his resignation as CEO of CorrLine, Scott breached his fiduciary duty when he oversaw payments from CorrLine to Tagos to satisfy a portion of the outstanding loan to Tagos. [Finding of Fact No. 49]. CorrLine asserts a claim under the Texas Theft Liability Act for the these alleged misappropriations. [Id.]. However, as CEO at the time of the withdrawal, Scott had the authority to make payments on behalf of CorrLine. [See Findings of Fact Nos. 4, 5 & 21]. Furthermore, Tagos has already credited the partial payment in calculating the amount that CorrLine still owes. [Finding of Fact No. 47]. Therefore, no legitimate dispute is presented by these two counterclaims.
CorrLine also asserts that Scott breached his fiduciary duty when Tagos pledged its 45% interest in CorrLine as collateral for a line of credit with Comerica. [Finding of Fact No. 49]. However, this allegation has no bearing on CorrLine's liability or amounts due to Tagos under either the Services Agreement or the Credit Agreement. As a result, this Court finds that the counterclaims asserted in the State Court Action are insufficient to prove a bona fide dispute exists as to amount or liability for both the service fees and the Tagos loan.
Furthermore, even if this Court were to find that there is some dispute as to a portion of Tagos' claim, it does not disqualify Tagos from filing the Involuntary Petition. See In re TLC Med. Grp., Inc., No. 04-15739, 2005 WL 4677807, at *2 (E.D.La.2005) ("A dispute as to a portion of a claim does not disqualify a creditor from filing an involuntary petition.") (emphasis added) (citation omitted). For example, if this Court were to find that a bona fide dispute exists over the amount of Tagos' loan to CorrLine, the disputed amount would be only a portion of the debt owed Tagos. The other portion of the debt — $390,606.58 owed under the Services Agreement — would be undisputed, thereby leaving the obligation without a bona fide dispute.
Finally, CorrLine contends that a bona fide dispute exists as to the loan amount because Tagos amended its original involuntary
For all of the reasons set forth above, this Court concludes that Tagos has met its burden under § 303(h)(1) of establishing that the debts owed to it by CorrLine are not the subject of a bona fide dispute as to liability or amount.
When a single petitioning creditor alleges that there are fewer than twelve creditors, Bankruptcy Rule 1003(b) allows the putative debtor to prove the existence of twelve or more creditors:
FED. R. BANKR.P. 1003(b).
When the putative debtor pleads that there are twelve or more creditors and also files a list of these creditors, "it then becomes the petitioning creditor['s] burden to put the debtor to the test." In re Euro-Am. Lodging Corp., 357 B.R. 700, 714 (Bankr.S.D.N.Y.2007); see also In re Smith, 415 B.R. 222, 229 (Bankr.N.D.Tex. 2009) (if debtor's creditor list is filed, burden shifts to the petitioning creditor); In re Sadler, No. 6-10091-FRM, 2006 Bankr. LEXIS 4464, at *8-9 (Bankr. W.D.Tex.2006). If the putative debtor fails to file a list of twelve or more creditors in accordance with Bankruptcy Rule 1003(b), then the debtor has not met his burden of proof. See id. at *9 (holding that a putative debtor's non-compliance with Rule 1003(b) estops the debtor from including creditors in the numerosity calculation). Compliance with Bankruptcy Rule 1003(b) "requires, at a minimum, that a debtor, provide a list of all creditors with their names and addresses, a brief statement of the nature of the claims, and the amounts thereof." Id. (emphasis added).
On June 18, 2014, CorrLine filed the Answer to the Involuntary Petition and
The Court concludes that CorrLine has not met its burden of proof with regard to thirteen of the fifty-two listed creditors because it failed to disclose an amount due to these creditors. [Findings of Fact Nos. 56(a)-(h) & 56(j)-(n)]. Rather, CorrLine set forth the amount owed as "unknown." [Id.]. Therefore, this Court will exclude the following thirteen (13) alleged creditors due to CorrLine's failure to disclose or offer credible evidence of a specific amount due: Blue Cross Blue Shield; Calcasieu, Louisiana; ChemTel; Code 42 Software; EAH Spray Equipment; Humana; J2 My Fax; Media Temple; River Oaks Courier; State of Illinois; State of Texas; Terrebonne, Louisiana; and the Texas Workforce Commission.
CorrLine's List of Creditors also alleges that Mike Reynolds is a qualified creditor with an amount due between "$6,000-$10,000." [Finding of Fact No. 56(i)]. The only evidence produced of the amount due to Mr. Reynolds was an email between Hatle and him, in which Mr. Reynolds claims that "CorrLine owes [him] in excess of $6,000.00." [Id.]. The email from Mr. Reynolds to Hatle is not credible evidence because the number of appearances listed is not consistent with the amount requested by Mr. Reynolds (nine appearances at approximately $1,000/appearance versus "in excess of $6,000"). Thus, to the extent that a request of $9,000.00 is inconsistent with a request for "more than $6,000.00," this claim is fatally imprecise. In re Sadler, 2006 Bankr.LEXIS 4464 at *9. Because CorrLine has not provided this Court with a verifiable specific amount of this alleged debt, the Court finds that Mike Reynolds should also not be counted as a qualified creditor for purposes of numerosity under Bankruptcy Rule 1003(b). Thus, the total number of qualified creditors currently stands at twenty-two (22).
When determining the number of qualified creditors, this Court must abide by Fifth Circuit precedent and exclude de minimis claims. See Denham v. Shellman Grain Elevator, Inc. (In re Denham), 444 F.2d 1376, 1378 (5th Cir.1971) (excluding claims of $5.00 to $25.00). In In re Denham, the Fifth Circuit held that "small insignificant debts" of less than $25.00 are to be considered de minimis and should be excluded from the court's determination of the number of creditors. Id. Conversely, the Fifth Circuit has also decided that claims between $600.00 and $800.00 are not de minimis and should be counted as creditors. See Blackmon v. Runyan (In re Runyan), 832 F.2d 58, 60 (5th Cir. 1987). More recently, the Bankruptcy Court for the Middle District of Florida — citing Denham — recognized claims of up to $275.00 as de minimis. In re Smith, 123 B.R. 423, 425 (Bankr.M.D.Fla.1990). But see In re Moss, 249 B.R. 411, 419 (Bankr.N.D.Tex. 2000) (refusing to recognize $275.00 claims as de minimis, but finding claims amounting to $20.99, $58.00, $10.62, and $25.00 were de minimis). Other courts have come to conclusions similar to the Florida bankruptcy court. See In re Smith, 415 B.R. 222, 232 (Bankr.N.D.Tex.2009) (finding claims up to $187.39 to be de minimis).
In support of its approach, Tagos also points out that § 104(a)(1) expressly authorizes Consumer Price Index adjustments to the dollar values used throughout the Code, such as the minimum unsecured claim that a petitioning creditor must have under § 303(b)(2) to be eligible to file an involuntary petition. See 11 U.S.C. §§ 104(a)(1) & 303(b). This Court finds that Tagos' "inflation" argument has merit; however, this Court believes that $500.00 is too high. Instead, relying on the most recent decisions of courts on this issue, this Court finds that $275.00 should be the threshold amount. See In re Smith, 123 B.R. at 425; In re Smith, 415 B.R. at 232. Therefore, the Court excludes the following debts in determining the number of qualified creditors:
After removing de minimis claims, the list of qualified creditors now stands at seventeen (17).
Although this Court reads Denham to exclude de minimis claims, other courts have read Denham to exclude only amounts that are both small and recurring. See Sipple v. Atwood (In re Atwood), 124 B.R. 402, 406 (S.D.Ga.1991) (holding that "even small claims may be counted unless they are also recurring"). In Denham, the Fifth Circuit noted, in dicta, that it does not consider claims that are small and recurring for purposes of numerosity. See Denham, 444 F.2d at 1379 ("[I]t was not the intent of Congress to allow recurring bills such as utility bills and the like to create a situation which, by refusal of these small creditors to join in an involuntary petition, can defeat the use of the Bankruptcy Act by a large creditor....").
Small, recurring debts have been understood to include "small, recurring debts, such as a monthly utility bill or rental payment." In re Atwood, 124 B.R. at 406 (emphasis added). However, Merriam-Webster's Dictionary defines "recurring" as "occurring or appearing at intervals." This understanding of the term "recurring" does not require monthly billings; rather, it only requires that the bills be periodic in nature (Merriam-Webster's lists "periodic" as a synonym of "recurring"). Therefore, this Court construes the term "small and recurring" to mean small in amount and recurring over time, but not necessarily in one-month intervals. This Court previously concluded that small claims are those with an amount owed of $275.00 or less. [See supra Part IV. G.4.b.]. The Court will consider whether
Thus, assuming this Court's original interpretation of Denham is incorrect and based on this Court's understanding of what constitutes "small and recurring" claims, the number of qualified creditors now stands at eighteen (18).
The filing of an involuntary petition commences a case and creates an estate. 11 U.S.C. §§ 303(b) & 541(a). Property of the estate consists of "all legal and equitable interests of the debtor in property as of commencement of the case" and "[p]roceeds, product, offspring, rents, or profits of or from property of the estate... after the commencement of the case." 11 U.S.C. § 541(a)(1), (a)(6). Section 303(b) of the Code provides that creditors who receive a voidable transfer of the estate are not to be counted in determining if the debtor has twelve or more creditors as of the Petition Date. See 11 U.S.C. § 303(b)(2). Of particular concern in this
One court has even construed §§ 303(b) and 549 to exclude creditors who have been paid in full "shortly after" the filing of an involuntary petition. See In re Crain, 194 B.R. 663, 666 (Bankr.S.D.Ala. 1996) (holding that the creditors "were paid in full or on account shortly after the petitions were filed and [could not] be counted") (emphasis added). At the same time, courts have recognized that the "post-petition payment of a petitioning creditor does not disqualify it from being such." Id. at 667; see also In re All Media Props., Inc., 5 B.R. 126, 137 (Bankr.S.D.Tex.1980), aff'd, 646 F.2d 193 (5th Cir.1981); In re Braten, 99 B.R. 579, 582 (Bankr.S.D.N.Y.1989); In re Carvalho Indus., Inc., 68 B.R. 254, 256 (Bankr.D.Or. 1986); In re Sjostedt, 57 B.R. 117, 120 (Bankr.M.D.Fla.1986).
Tagos, the petitioning creditor, contends that several creditors received voidable transfers from the CorrLine bankruptcy estate under § 549 and should be excluded from the numerosity calculation. It is important to note that whether the funds used to pay these creditors was from a post-petition sale or collection of pre-petition accounts receivable, either would have necessarily been drawn from property of the estate. To illustrate, CorrLine is in the business of selling an anti-corrosion coating — a tangible product. [Finding of Fact No. 2]. This product would have been held in inventory as of the Petition Date and, thus, was an asset of the estate. Therefore, any cash received from the sale of inventory after the Petition Date would necessarily be generated from the assets of the estate. See Moratzka v. Visa U.S.A. (In re Calstar, Inc.), 159 B.R. 247, 252 (Bankr.D.Minn. 1993) (holding that post-petition credit card sales of inventory were assets of the estate). The same logic applies for cash receipts from accounts receivable balances generated from these post-petition sales. Id. Likewise, post-petition collections of accounts receivable that existed as of the Petition Date also constitute cash generated from the assets of the estate. Thunderbird Motor Freight Lines, Inc. v. Penn.-Dixie Steel Corp. (In re Penn-Dixie Steel Corp.), 6 B.R. 817, 827 (Bankr. S.D.N.Y.1980) (holding that monies collected from "accounts receivable owing to [the debtor] are `proceeds' from property of the estate, and, thus, are likewise property of the estate").
The examples of this concept are numerous; however, it is enough to say that any cash used to pay creditors following the Petition Date was necessarily an asset of the CorrLine bankruptcy estate or constituted proceeds from the disposition of an asset of the CorrLine estate. See Towers v. Wu (In re Wu), 173 B.R. 411, 414 (9th Cir. BAP 1994) (holding that earnings attributable to invested capital, goodwill, accounts receivable, employee contracts and client relationships predating the petition are the property of the estate, not property of the debtor); West v. Hsu (In re Advanced Modular Power Sys., Inc.), 413 B.R. 643, 672 (Bankr.S.D.Tex.2009) (cash generated from continued post-petition operation of the bankrupt entity constituted an asset of the estate); accord Johnson v.
Section 303(b) of the Code also excludes "employee[s] and insider[s]" from the numerosity calculation. 11 U.S.C. § 303(b)(2). The Code defines an insider of a corporation
The term "insider" may also include attorneys; however, this is not an ironclad rule. Kepler v. Schmalbach (In re Lemanski), 56 B.R. 981, 983 (Bankr. W.D.Wis.1986). An attorney is an insider if "he exercises such control or influence over the debtor as to render their transactions not arms-length." Id. One court has pointed out that "an attorney, who invariably acquires confidential client information and whose relationship is governed by rules of professional conduct, may come under this categorization." In re Rimell, 111 B.R. 250, 254 (holding that an attorney representing the debtor in an involuntary petition could not be counted as a creditor). However, aside from Rimell, this Court is not aware of any case law that has characterized attorneys as insiders. See In re Premiere Network Servs., Inc., No. 04-33402-HDH-11, 2005 WL 6452038, at *3 (Bankr.N.D.Tex. July 1, 2005) (holding that the existence of attorney-client relationship between creditor and debtor did not cause creditor to be considered an insider).
Therefore, this Court rejects Tagos' argument that all of CorrLine's attorneys and other professionals are insiders whose claims must be excluded. Accordingly, this Court declines to exclude from the numerosity calculation the following professionals, who are creditors of CorrLine,
However, this Court finds that the following creditors should be excluded from the numerosity calculation because they are currently officers of CorrLine and therefore insiders:
Therefore, the number of qualified creditors now stands at seven (7)
In order for a court to enter an order granting an involuntary petition, the petitioning creditor must show that the putative debtor is generally not paying its debts as they become due. 11 U.S.C. § 303(h)(1). The burden is on the petitioning creditor to prove this element by a preponderance of the evidence. See Norris v. Johnson (In re Norris), No. 96-30146, 1997 WL 256808, at *3 (5th Cir. Apr. 11, 1997). The determination is made as of the filing date. In re Sims, 994 F.2d 210, 222 (5th Cir.1993). Thus, the fact that debts may have been paid post-petition does not have any bearing on the determination. Id.; see also In re Edwards, 501 B.R. 666, 683 (Bankr.N.D.Tex. 2013) (holding that "the fact that [the] debts may have been paid post-petition cannot be considered in deciding whether [the debtor] was generally paying his debts as they became due on the Involuntary Petition Date").
The Code has not explicitly defined what "generally not paying debts" means; however, courts have offered various guidance on the issue. In fact, this Court previously stated that:
In re All Media Props., Inc., 5 B.R. 126, 143 (Bankr.S.D.Tex.1980), aff'd, 646 F.2d 193 (5th Cir.1981).
Other courts have taken a similar approach. For example, the Bankruptcy Court for the Northern District of Texas considered the following factors: "(1) the number of unpaid claims; (2) the amount of such claims; (3) the materiality of the non-payments; and (4) [the debtor's] overall conduct in [its] financial affairs." In re Edwards, 501 B.R. at 682.
Tagos contends that CorrLine is generally not paying its debts as they come due. This Court agrees. First, CorrLine's March 2014 accounts payable (AP) aging — the most recent available at the time of trial — shows a total of $48,343.93 outstanding with over $13,000.00 more than 30 days past due. [Finding of Fact No. 43]. Even more telling, only two of the 32 vendor invoices were not past due as of the AP report date. [Id.]. Yet, when Tagos, through Doskey, was managing the accounts payable pursuant to the Services Agreement, CorrLine only had $9,731.19 outstanding, of which only about $600.00 was over 30 days past due. [Tagos Ex. No. 23]. Additionally, Tagos provided an email from Doskey in which he expressed his concern over accounts payable management. [Finding of Fact No. 48]. In the email, Doskey pointed out seven specific vendors that have continuously been paid late. [Id.]. This evidence proves that CorrLine's current management team experienced difficulty in properly managing its accounts payable and paying the company's debts as they become due.
This Court also notes several instances of late payments that are particularly disturbing. First, CorrLine was delinquent in paying its payroll taxes to the IRS for two pay periods during 2014. [Finding of Fact No. 66(d)]. The late payments resulted in a penalty of $1,799.91, which remained unpaid as of the Petition Date. [Id.]. Also, Tagos introduced evidence that Seatex, Ltd., CorrLine's primary blender and shipping agent of the CorrX product, was consistently paid late during 2014. [Tagos Ex. No. 25 at 16; Tagos Ex. No. 61 at 1]. Doskey credibly testified that CorrLine's untimely payments to Seatex were particularly troubling because CorrLine's relationship with Seatex is critical to its operational well-being and its ability to sell the CorrX product. [July 1, 2014 Tr. 42:6-42:23]. The late payments to both the IRS and Seatex are clearly material because poor relationships with both entities would have a seriously detrimental impact on CorrLine's ability to operate and remain a going concern.
Moreover, the two debts owed to Tagos amount to $540,587.09, which clearly were not paid as of the Petition Date (nor have they been paid since the Petition Date). [Finding of Fact No. 47(a)]. There is no question that: (1) on September 20, 2012, the Debtor and Tagos executed the Services Agreement, whereby Tagos would provide various services to the Debtor; (2) the Debtor is required to pay Tagos a monthly fee for services in the amount of $25,000.00; (3) under the Services Agreement, the Debtor is required each month to reimburse Tagos for its reasonable out-of-pocket costs incurred by Tagos while rendering its services; (4) Tagos rendered services for several months; (5) the Debtor has failed to pay for everything that is owed; and (6) the amount owed is $390,608.58. [Findings of Fact Nos. 18, 19 & 47(a)]. Additionally, a total of $149,980.51 is owed to Tagos for money loaned to CorrLine under the Credit Agreement. [Finding of Fact No. 47(a)].
While CorrLine argues that the amounts under the Services Agreement and Credit Agreement were not due as of the Petition Date and should not be considered in the "paying debts as they become due" analysis, this argument is unpersuasive. In support of its argument, CorrLine points to Note F of the financial statements, which states that the Services Agreement fees and Tagos Loan balances would be paid as cash becomes available. [CorrLine Ex. Nos. 102-107]. However, all amounts owed under the Services Agreement became immediately payable when Hatle terminated this agreement, pursuant to the acceleration clause contained therein. [Findings of Fact Nos. 19 & 46]. Therefore, even if CorrLine is correct that the loan amount is not yet due because of insufficient funds — and CorrLine is wrong on this point — the Services Agreement fees are definitely due based on the unambiguous acceleration clause: "[P]rovided, however, that in the event of a termination..., [CorrLine] shall be obligated to [Tagos], in full, all current and accrued fees and expenses owing and payable hereunder through the effective date of such termination." [Tagos Ex. No. 9 at 1]. Even if the amounts due to Tagos are considered to be limited to those owed under the Services Agreement, the total of those amounts still comprise over 72% of CorrLine's outstanding debts.
Additionally, CorrLine's employees have been forced to defer payment of their salaries so that CorrLine can pay off its other creditors. [See Finding of Fact No. 33]. CorrLine's list of creditors included a total of $21,000.00 owed to its employees Hernandez, Chrisman, Hatle, and Bock. [Findings of Fact Nos. 65(a), 65(b), 65(d) & 65(g)]. Not only has CorrLine been unable to timely pay its creditors; it has also been unable to pay its own employees on a timely basis.
In sum, CorrLine has consistently demonstrated an inability to pay its debts as they come due, particularly since Chrisman, Hatle, and Hernandez took over the AP process from Tagos and Doskey. Further, CorrLine has adamantly expressed its unwillingness to pay off its largest outstanding debt: the $540,587.09 owed to Tagos. CorrLine's management has shown a complete disregard for the timely payment of even its most important creditors: the IRS and SeaTex Ltd. — as well as its own employees. Applying the holdings from All-Media and Edwards, this Court concludes that CorrLine is generally not paying its debts as they become due. As such, Tagos has satisfied this element of § 303(h)(1).
Some courts have recognized an exception to the three-creditor requirement when there is evidence of fraud, trick or scam. In re Norriss Bros. Lumber Co., 133 B.R. 599, 609 (Bankr.N.D.Tex.1991) (citing cases). These courts have found that "arguable fraudulent conveyances and arguable preferential transfers to [the debtor's] attorneys and others constitute special circumstances ..." which justify waiving the three-creditor requirement in an involuntary bankruptcy petition. Id.; See also In re Smith, 415 B.R. 222, 238 (Bankr.N.D.Tex.2009) (recognizing a "`special circumstances' exception to the three creditor requirement when [an] alleged debtor [has] participated in fraudulent transfers and prepetition payments," but, finding that the special circumstances exception does not apply when there are four creditors).
Here, this Court has found evidence that Hatle intentionally manipulated invoice information from the M Test to artificially increase the creditor count. [Finding of Fact No. 57(h)]. Specifically, on June 3, 2014 — 19 days after the Petition Date — Hatle emailed a Mr. Swan, an employee of M Test, requesting that M Test send an invoice for the conductivity meter that it had sold to CorrLine. [Id.]. Swan obliged Hatle and sent him an original invoice dated June 4, 2014, with a due date for the invoice of July 4, 2014. [Id.]. Once Hatle received this original invoice, he immediately emailed Swan and requested him to change the invoice date to May 1, 2014 — i.e., 13 days prior to the petition date. [Id.]. Hatle informed Swan that he needed to change the invoice date from June 4, 2014 to May 1, 2014 for "some technical reasons." [Id.]. Once again, Swan obliged Hatle and sent another invoice showing the invoice date to be May 1, 2014. [Id.]. There is no doubt in this Court's view that Hatle requested Swan to send this second invoice in order to manufacture evidence to convince this Court that M Test was a creditor as of Petition Date and therefore should be included in this Court's numerosity analysis. Stated differently, Hatle manufactured this evidence in an effort to reduce the risk that this Court would find that CorrLine has fewer than twelve (12) creditors, thereby allowing solely Tagos to prosecute the Involuntary Petition.
Moreover, in discovery, Tagos managed to unearth a third invoice allegedly from M Test. This invoice reflects a shipment date for the conductivity meter of May 14, 2014. [Id.]. When confronted with the fact that there were three different versions of the same M Test invoice, Hatle could not offer an explanation for the existence of the third invoice. [Id.]. Indeed, Hatle could not explain what the "technical reasons" were for his requesting Swan to send a second invoice. [Id.]. Rather, Hatle testified that he had never seen
In sum, this Court concludes that Tagos has standing to file the Involuntary Petition against CorrLine pursuant to § 303 of the Bankruptcy Code. Tagos' status as an insider and recipient of certain voidable transfers does not preclude it from filing the Involuntary Petition. Furthermore, Tagos' claims for amounts owed under the Services Agreement and the Credit Agreement are not the subject of a bona fide dispute. There is no question that CorrLine agreed to pay Tagos $25,000.00 a month, plus reasonable pass through expenses, for providing general business support services, and it is abundantly clear that CorrLine has refused to pay these fees. There is also no question that CorrLine owes Tagos the sum $149,980.51 under the Credit Agreement and that CorrLine has refused to pay this amount. Further, CorrLine has failed to provide any credible evidence that Tagos filed the Involuntary Petition in bad faith, and therefore, the Court must presume it was filed in good faith. Moreover, the Court has reviewed the evidence provided for all fifty-two (52) alleged creditors of CorrLine, and finds that, at most, eight creditors are qualified.
The Court also concludes that CorrLine does not have authority to retain K & L Gates to file and prosecute the Answer and the Motion to Dismiss. Such retention requires the consent of a majority of managers of CorrLine with at least one affirmative vote coming from a minority member; these conditions have never been met. Alternatively, even if CorrLine has authority to retain K & L Gates to file and prosecute the Answer and the Motion to Dismiss, because this Court grants the Involuntary Petition, it necessarily denies the requests in the Answer and the Motion to Dismiss for a dismissal of the Petition. Finally, this Court denies the alternative relief requested in the Motion to Dismiss — namely, to abstain from adjudicating this dispute. Rather, this Court finds ample reason and need to immediately issue a final order and thereby maximize the chances that all claims — including those of Tagos — will be paid in the Chapter 7 process.
For the foregoing reasons, the Court grants the Involuntary Petition and denies the Motion to Dismiss. An order granting the Involuntary Petition and denying the Motion to Dismiss will be entered on the docket simultaneously herewith.
