PATRICK M. FLATLEY, Bankruptcy Judge.
First United Bank & Trust ("First United") seeks entry of an involuntary order for relief against The Square at Falling Run, LLC ("The Square"), under Chapter 7 of the Bankruptcy Code.
Based upon the evidence and arguments presented by the parties, the court finds that First United has established grounds for relief under 11 U.S.C. § 303; accordingly, an order for relief will be entered.
On December 19, 2008, several entities controlled by common principals borrowed $2.48 million from First United on a non-revolving line of credit. The Square, which also shares principals common to the Borrowing Entities,
The Borrowing Entities defaulted on the note owed to First United. Subsequently, First United filed a complaint against The Square in the District Court for the Northern District of West Virginia (Case No. 1:11-cv-31) on March 18, 2011, alleging The Square's default on the December 19, 2008 loan agreement and Guaranty, demanding damages flowing from the default, and seeking the appointment of a receiver to take control of The Square's assets and operations.
First United asserts that the court should enter an involuntary order for relief against The Square because (1) it holds a non-contingent claim of $2.48 million that is not the subject of a bona fide dispute as to liability or amount; (2) its claim is at least $14,425.00 more than the value of any lien on The Square's property securing its claim; (3) The Square has fewer than 12 creditors;
The Square asserts that First United's claim is contingent and is the subject of a bona fide dispute, First United is its only creditor causing this case to be only a two-party dispute, and First United filed the involuntary petition in bad faith.
Without directing the court to any specific language in the Guaranty — in fact, the court finds none — The Square asserts that First United's claim is contingent and the subject of a bona fide dispute on the grounds that the December 19, 2008 Guaranty was contingent upon the building of a parking facility on the property leased from the City. The Square further asserts that, pursuant to the terms of its lease with the City, its leasehold interest in the property upon which the parking facility was to be built could not be encumbered except for the purpose of building the parking facility. Thus, The Square asserts that because the loan it guaranteed was a "workout loan," which was not made for the construction of a parking facility, First United's secured interest in the leasehold property is subject to bona fide dispute.
The initial burden rests on the petitioning creditors to establish a prima facie case that their claims are not contingent and that no bona fide dispute exists regarding such claims. In re Tucker, No. 5:09-bk-914, 2010 WL 4823917, at *3 (Bankr.N.D.W.Va. Nov. 22, 2010) (citing Platinum Fin. Servs. Corp. v. Byrd (In re Byrd), 357 F.3d 433, 437 (4th Cir.2004)). Once the prima facie case is established, the burden then shifts to the debtor to show that the claims are contingent or that a bona fide dispute exists. Tucker, 2010 WL 4823917, at *3.
Section 303(b) of the Bankruptcy Code (the "Code") authorizes the filing of an involuntary Chapter 7 petition by creditors who meet certain qualifications. To file an involuntary petition against a putative debtor, a creditor must hold a claim that is not "contingent as to liability or the subject of a bona fide dispute as to liability or amount." 11 U.S.C. § 303(b)(1).
The first creditor qualification criterion — not contingent as to liability — is defined by case law. The following formulation is widely accepted as the standard used for determining whether a claim is contingent under § 303(b):
In re All Media Properties, Inc., 5 B.R. 126, 133 (Bankr.S.D.Tex.1980); see e.g., Holland v. DePaulis (In re DePaulis), No. 3:07cv75, 2008 WL 4446999, at *6, 2008 U.S. Dist. LEXIS 74396, at *16-17 (W.D.N.C. Sept. 26, 2008); Brockenbrough v. Commissioner, IRS, 61 B.R. 685, 686 (W.D.Va.1986); In re Local Communs. Network, Inc., No. 07-12433, 2008 WL 52865, at *2-3, 2008 Bankr.LEXIS 14, at *8 (Bankr.E.D.Va. Jan. 2, 2008); In re Gills Creek Parkway Assocs., L.P., 194 B.R. 59, 62 (Bankr.D.S.C.1995); In re Galaxy Boat Mfg. Co., 72 B.R. 200, 203 (Bankr.D.S.C.1986).
When a petitioning creditor's claim is based upon a putative debtor's guaranty of a primary obligor's performance and payment, the court focuses on whether the guaranty is absolute. See 38A C.J.S. Guaranty § 79 (2011) ("In general, in the absence of an express provision, the duty of the guarantee to notify the guarantor of a default depends on whether [] the guaranty is absolute."). "A guaranty is deemed to be absolute unless its terms import some condition precedent to the liability of the guarantor." Esso Standard Oil Co. v. Kelly, 145 W.Va. 43, 48, 112 S.E.2d 461, 465 (W.Va.1960). But if a guaranty imposes some affirmative duty upon a petitioning creditor to provide a guarantor with notice of default or demand for payment, the court then focuses on whether such affirmative action was taken. See In re Vitro Asset Corp., et al., No. 11-32600-hdh-11, 2011 WL 1561025, at *3 (Bankr.N.D.Tex. April 21, 2011) ("Because the indentures require a demand on the guarantors and no such demand had been made when the involuntary petitions were filed, ... the guarantors' obligations were contingent as to liability.").
Here, the following provision contained in the Guaranty evidences that The Square is not an absolute guarantor in that its duty to perform arises only after request or demand by First United: "If Borrower fails to perform or observe any covenants, conditions and agreements required of Borrower ... the Guarantors shall, upon request of Lender, perform such covenant, condition or agreement, including but not limited to prompt payment of the Indebtedness...." Pl.'s Exhibit 7, page 4 (emphasis added). Thus, request or demand for payment is a condition of The Square's liability on the Guaranty. The Square has no duty to act under the terms of the Guaranty until First United requests or demands payment.
The court finds, however, that The Square received the required notice of default and demand for payment from First United upon the filing of the three-count, March 18, 2011 complaint in the district court (Doc. No. 3 in Case No. 1:11-cv-31), which occurred before First United filed this involuntary petition against The Square. As Beverly Sines, Chief Credit Officer at First United, testified, First United brought its district court action against The Square because the Borrowing Entities defaulted on the December 19, 2008 loan, and First United wanted to demand payment from The Square as Guarantor. First United's filed complaint specifically alleges default under the Borrowing Entities' loan agreement and The Square's leasehold deed of trust, and demands judgment against The Square as guarantor in the principal amount of $1,502,087.11.
To the extent that The Square also asserts that First United's claim against it as Guarantor is contingent because its obligation to guaranty the indebtedness to First United was contingent upon the building of a parking structure, the purpose of the Guaranty is of no consequence; the fact remains that the indebtedness guaranteed by The Square is due and owing — making the claim noncontingent.
Likewise, the court rejects The Square's assertion that First United's claim is the subject of a bona fide dispute. The Square asserts that there may be some dispute surrounding the propriety of the December 19, 2008 loan and Guaranty. Any assertions in that regard, however, are made in the context of this involuntary case being filed in bad faith and have no impact on the court's determination regarding whether First United's claim is contingent or the subject of a bona fide dispute.
The Square asserts that First United filed this involuntary petition against it in bad faith on the grounds that First United
Notwithstanding § 303, if requested, a court must determine whether an involuntary petition has been filed in good faith, and must dismiss a bad faith filing. United States Optical, Inc. v. Corning, Inc. (In re United States Optical, Inc.), No. 92-1496, 1993 WL 93931, *3, 1993 U.S.App. LEXIS 6960, *9 (4th Cir. April 1, 1993); Atlas Machine & Iron Works, Inc. v. Bethlehem Steel Corp., 986 F.2d 709, 716 (4th Cir.1993). "A filing is presumed to be in good faith, and the existence of bad faith must be proven by the debtor by a preponderance of the evidence." U.S. Optical, at *3, 1993 U.S.App. LEXIS 6960, at *9. The Fourth Circuit employs a combined approach to determine whether an involuntary petition has been filed in bad faith: an objective standard that focuses on whether a reasonable person in the position of the creditor would have filed, and a subjective standard that examines the petitioner's motivation. Id. No single factor is determinative; rather, a court must consider the totality of the circumstances. Id.
Here, the court finds that, aside from presenting no evidence at the evidentiary hearing in this matter, The Square's argument and cross-examination of First United's witnesses failed to show bad faith by First United. Objectively speaking, The Square failed to show how invoking the bankruptcy process is not something a reasonable creditor in First United's position would do. Although The Square asserts that it "does not make sense that a party who won its case in district court ... would then go on and file a bankruptcy to stay enforcement of that Order," the facts of this case lead the court to a different conclusion. First United is the only creditor of The Square that the court is aware of and a secured creditor of several entities related to The Square.
Thus, First United is trying to take advantage of synergies that can be achieved by having the businesses of both entities to the Ground Lease being administered in bankruptcy by a common trustee, and attempting to receive payment according to the bankruptcy priority scheme from any value that may be realized from the common administration of related debtor entities. Such action is an objectively reasonable attempt to maximize potential recovery from the assets of related bankruptcy estates.
Regarding The Square's contention of First United's subjective bad faith, the court finds that First United did not file
Although not specifically articulated, The Square asserts as part of its bad faith argument the factors considered by a court when analyzing whether § 305 abstention is appropriate in a bankruptcy case. Generally, abstention under § 305 is considered separate and apart from any analysis of an involuntary petition under § 303, but because The Square raises the issue as part of its allegation of First United's bad faith, the court considers the argument as it relates to the bad faith analysis.
In that regard, the Square directs the court to several cases, including this court's decision in In re Watson, No. 10-1292, 2010 WL 4497477 (Bankr.N.D.W.Va. Nov. 1, 2010), to support its argument that the filing of a bankruptcy case as a "litigation tactic" evidences bad faith. Those cases, however, are inapposite to this case. Watson involved a voluntary Chapter 7 filing by a consumer debtor that was essentially a one-creditor dispute aimed solely at avoiding the repayment of any amount purportedly due on the debtor's obligation to his largest creditor when the debtor had means to pay his creditors in full.
Likewise, the court finds In re Macke Intern. Trade, Inc., 370 B.R. 236 (9th Cir. BAP 2007) unpersuasive because it involved the dismissal of an involuntary petition under § 305 of the Bankruptcy Code where, among other things, there was an absence of a bankruptcy purpose to reorganize, there was pending litigation in another forum, and another forum would be more appropriate for the resolution of any lingering dispute between the parties.
Here, however, there is a valid bankruptcy purpose to be served by a Chapter 7 case. The Square has no business purpose outside bankruptcy; it is insolvent and incapable of achieving its business objectives. But there may be value to be salvaged through bankruptcy. The Chapter 7 process allows for leveraging a potential return to creditors through the administration of this bankruptcy estate
Moreover, abstention under § 305 requires that a court must avoid balancing the harm to the debtor versus the harm to creditors and focusing merely on whether one party will be better served than another by the exercise of abstention. Instead, the court must find that both parties will be served by abstaining. In re Smith, 415 B.R. 222, 238 (Bankr.N.D.Tex.2009) ("[R]ather, the interests of both the debtor and its creditors must be served by [abstaining under § 305].")(emphasis added). Here, although The Square asserts that the court should abstain in this matter because it is merely a two-party dispute that is already pending in district court, it has failed to show how it and First United would both be better served by the court abstaining from entering an order for relief. In fact, it appears to the court that First United is better served adjudicating its rights in this court because it can take advantage of the automatic stay and any potential assets a Chapter 7 trustee may be able to administer,
References by The Square to the cases of In re Knedlik, Nos. WW-08-1011-KuKJu and 07-15547, 2008 WL 8444815 (9th Cir. BAP June 30, 2008) and In re Hatcher, 218 B.R. 441 (8th Cir. BAP 1998) are unpersuasive because they involve instances where debtors abused the bankruptcy process to stay secured creditors. In fact, Hatcher was not an involuntary proceeding but a voluntary Chapter 11 filing that was dismissed under § 1112(b) for lack of good faith, and Knedlik involved a nefarious debtor who attempted to forestall his creditors by using his mother in order to obtain relief under the Bankruptcy Code by enlisting her to file, not just one, but several involuntary petitions against him. Thus, the factual background of each of those cases is markedly different from the case currently before the court.
Finally, In re Grossinger, 268 B.R. 386 (Bankr.S.D.N.Y.2001) is of no avail to The Square's argument. It involved the filing of an involuntary petition by a creditor of the debtor who had a simple, nominal claim that the creditor should have pursued
In sum, because involuntary petitions are presumed to be filed in good faith, and given the paucity of The Square's evidence offered to rebut the presumption that the involuntary petition was filed in good faith, consideration of the totality of the circumstances — on both objective and subjective counts — fail to show that the involuntary petition was filed in bad faith.
First United has established its standing under § 303(b)(2) to bring this involuntary petition against The Square, as well as grounds for relief under § 303(h). An order for relief under Chapter 7 of the Bankruptcy Code, therefore, is granted.
The court will enter a separate order consistent with this memorandum opinion.
On January 10, 2012, a joint stipulated order staying the case and setting a March 1, 2012 telephonic status conference was entered by the court. At the March 1, 2012 status conference, it was clear that some, but not all, of the parties had engaged in negotiations and were optimistic about settlement. The Square, however, had not been included in those negotiations, and some parties expressed concern that a decision on the involuntary petition might be the best use of judicial resources. At the request of the parties, however, the court continued the status conference for one week to allow the parties to confer in that regard, at which time all of the parties were in agreement that a decision on the involuntary petition was needed. Thus, the court is now ruling on the involuntary petition a year after its filing.
Order adopting-in-part Report and Recommendation of Magistrate Judge Kaul (Doc. No. 26 in 1:11-cv-00031-IMK-JSK).
