Opinion
Case No. 11-57227
12-28-2011
In re: Gary L. Clarke and Connie J. Clarke, Alleged Debtors.
Involuntary Chapter 7
Judge
ORDER DENYING ALLEGED DEBTORS' MOTION TO DISMISS (DOC. NO. 13),
SEVERING INVOLUNTARY PETITION INTO TWO SEPARATE, JOINTLY
ADMINISTERED CHAPTER 7 INVOLUNTARY PROCEEDINGS AND REQUIRING
ALLEGED DEBTORS TO FILE ANSWERS
City National Bank of West Virginia ("City National"), filed this involuntary chapter 7 bankruptcy proceeding on July 11, 2011. The alleged debtors, Gary L. and Connie J. Clarke ("Clarkes"), filed a Motion to Dismiss on September 9, 2011. They assert that the United States Bankruptcy Code ("Code") requires three creditors to file the involuntary petition when alleged debtors have twelve or more creditors. During the hearing on their dismissal motion, the Clarkes also argued that a single involuntary petition filed against alleged joint debtors, divests this Court of subject matter jurisdiction.
Based upon testimony, exhibits, briefs and arguments of counsel, the Court finds and concludes that the Clarke's do not have twelve or more creditors, and that they are not entitled to dismissal. In addition, the Court finds and concludes that there is no jurisdictional bar, rather as a matter of procedure, the Court will sever the instant petition and treat it as two jointly administered Chapter 7 involuntary proceedings. Within 21 days of entry of this Order, the Clarkes must file two separate answers; otherwise, the Court will adjudicate the severed cases as two separate, jointly administered chapter 7 proceedings. A brief discussion follows.
First, the Court will address the Clarke's jurisdictional concerns. They correctly note that Section 303(a) of the Code refers to person rather than person(s). This provision governs the commencement of involuntary proceedings. Likewise, they are correct that Section 302(a) of the Code restricts joint petitions to voluntary cases commenced by an individual and their spouse.
Such concerns, however, are procedural not jurisdictional. See In re Bowshier, 313 B.R. 232, 239-40 (Bankr. S.D. Ohio 2004). In the Bowshier case, the alleged joint debtors also asserted that Congress intended to allow joint petitions only for voluntary cases. In re Bowshier at 235. Judge Walter of this Court concluded, however, that this issue did not divest the court of subject matter jurisdiction. Instead, as a matter of procedure, courts sever a joint involuntary petition to allow litigation to proceed on the merits against both debtors in their separate, jointly administered involuntary proceedings. See In re Bowshier, at 238-39. This Court agrees.
Turning to the merits of the Motion to Dismiss, the Bankruptcy Code requires that when alleged debtors have twelve or more creditors, three of those creditors must jointly file the involuntary petition. 11 U.S.C. § 303(b)(1) and (2). An alleged debtor can defend an involuntary petition filed by a single creditor by filing with the answer, "...a list of all creditors with their addresses, a brief statement of the nature of their claims, and the amounts thereof. ..." FRBP 1003(b).
In response, petitioning creditors have two options: a. request a reasonable opportunity to find creditors to join the petition to reach the requisite number of three (FRBP 1003(b)), or b. demonstrate by a preponderance of the evidence that the listed obligations involve insiders and/or the alleged debts are contingent or disputed as to liability and/or amount. 11 U.S.C. §303(b)(1) and (h)(1), In re Smith, 415 B.R. 222, 229 (Bankr. N.D. Tx. 2009).
The definition of an insider, contained in Section 101(31) of the Code, is broadly construed as "including" circumstances not delineated in that provision. Carl Zeiss Meditec AG v. Anstine (In re U.S. Medical, Inc.), 370 B.R. 340, 343 (10th Cir. BAP 2001). Rather, courts must consider the closeness of the relationship and whether the transactions are arm's length. In re Lee, 247 B.R. 311, 313 (Bankr. M.D. Fla. 2000). Courts deem friends to be insiders when they have allegedly made loans without customary documentation, detail, and security, and they have been excluded from the count of the requisite twelve creditors. In re Smith at 233.
The Clarkes failed to file the requisite lists of creditors until November 2, 2011, and only after prompted by the Court at the end of the November 1, 2011, hearing on their Motion to Dismiss. Their lists showed fourteen creditors each, including several "personal" loans.
At the November 1, 2011 hearing, however, the documentation for the asserted transactions was meager, and many of the alleged loans involved close friends, according to the testimony of the Clarkes. In addition, Dr. Clarke, a practicing optometrist, testified regarding his drug and alcohol abuse and the disastrous savings and loan stock investments, that both caused financial problems. Dr. Clarke further testified that he used some of the allegedly borrowed funds to buy drugs. Such personal and financial turmoil appears to be at the root of the undocumented and alleged loans with friends, and the belated attempts to characterize them as obligations requiring payments.
For example, a Lewis T. Bowman is on the list for a "personal loan" to Dr. Clarke. The balance is $87,112.42. Dr. Clarke testified that Mr. Bowman is a friend. The only written documentation of the terms, conditions and purpose of the alleged personal loan, in the original amount of $150,000.00, is a one-page copy of a handwritten note that precedes bank wire instructions. It states, "Dear Lewie, I just remembered the last time I signed a loan agreement. Therefore, I'll compose a sentence or two in this regards. On 12/14/09 Lewie Bowman wired $150,000.00 into Gary and Connie Clarke's U.S. Bank account # ... This $150,000.00 will be repaid in no longer that 60 days." A bank statement shows a wire deposit in this amount, but Dr. Clarke did not provide any additional documentation for such a large amount of money, subject to repayment in just two months.
Both of the Clarkes listed an $8,000.00 "business/personal" loan from a Mario Liberatore. Written documentation includes a copy of what appears to be a $4,000.00 certified check dated, November 10, 2010, that includes the names of Dr. Clarke and Mr. Liberatore. There is no documentation for the other half of this alleged loan. The Clarkes also failed to provide the terms and conditions of the alleged loan.
The Clarkes listed Wayne H. Collier for a $200,000.00 "personal loan." The written documentation provided to the Court is comprised of a copy of a one-sentence document that appears to bear the signature of Mr. Collier, dated on Christmas Day, 2010 and that of Dr. Clarke dated two months earlier, October 28, 2010. The one sentence reads, "I, Gary L. Clarke, borrowed $200,000.00 from Wayne H. Collier during the time period of 2008 through 2010. Dr. Clarke testified that Mr. Collier is a friend.
The Clarkes both listed a Steven Chapman as providing a $200,000.00 "personal loan," supported only by a copy of what appears to be a $200,000.00 check written on the account of Mr. Chapman's company, State Street Management LLC. It appears to be dated March 24, 2011. The only portion of the name on the authorized signature line that is legible is the middle initial "M" and the last name "Chapman." Dr. Clarke testified that Mr. Chapman is a friend.
Finally, Dr. Clarke listed Russ Elliott for a $4,000.00 "personal loan." The documentation, however, is troubling. Again, the Clarkes presented a mere one sentence long copy of a document stating, "I, Gary L. Clarke, borrowed $4,000.00 from Russ Elliott in 2010." It purports to be signed by Mr. Elliott and Dr. Clarke, but the signatures are both dated, October 27, 2011, This date is more than three months after the filing of the involuntary (July 11, 2011), and almost two months after the filing of the instant Motion to Dismiss (September 9, 2011).
Given the dearth of written documentation of the terms, conditions and purpose for the alleged loans, it is impossible to discern whether the obligations are subject to dispute and/or contingent. In addition, many of the transactions involve close friends of the Clarkes. These friends; however, did not appear at the hearing to offer corroborating testimony that the transactions indeed were loans, rather than attempts to bail out friends in financial distress and suffering from drug and alcohol dependency.
As a result, the Court finds and concludes, that a sufficient number of the transactions involve friends that constitute insiders. Further, due to the documentation deficiencies detailed above, the Court finds that a sufficient number of the obligations are contingent and/or subject to dispute as to liability and/or amount. For Dr. Clarke the revised count is nine creditors, and for Mrs. Clarke the revised count is eleven creditors. In addition, the amount the Clarkes listed as owed to City National, $2,400,000.00, dwarfs all other alleged obligations. On all these bases, the Motion to Dismiss is DENIED.
IT IS FURTHER ORDERED that the involuntary petition against the Clarkes will be severed into two separate, jointly administered Chapter 7 involuntary proceedings to cure the procedural defect. These two involuntary cases will be jointly administered.
IT IS FURTHER ORDERED that pursuant to Rule 1011(b) of the Federal Rules of Bankruptcy Procedure, the Clarkes have 21 days from the entry of this order to file two separate answers, or the Court will enter orders for relief under chapter 7.
IT IS SO ORDERED.
Copies to:
Myron Terlecky (via electronic service)
Vincent Holzhall (via electronic service)