Opinion
Case No. 00-46044-BJH-7.
June 19, 2001
FINDINGS OF FACT AND CONCLUSIONS OF LAW
An involuntary petition under chapter 7 of the Bankruptcy Code (the "Involuntary Petition") was filed against Dale R. Grotjohn ("Grotjohn" or the "Alleged Debtor"). The Alleged Debtor denies the propriety of the filing of the Involuntary Petition. After reviewing the evidence admitted at the June 13, 2001 trial and the arguments of counsel, the Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, made applicable here by Federal Rule of Bankruptcy Procedure 7052.
I. FINDINGS OF FACT
1. The petitioning creditors, Robert H. Holmes, Trustee ("Holmes"), J. Thomas Miller ("Miller"), and Fred Hammond ("Hammond") (collectively, the "Petitioning Creditors") filed the Involuntary Petition against Grotjohn on November 8, 2000 (the "Petition Date").
2. Grotjohn admits that he is a person against whom an order for relief may be granted. See Debtor's Second Amended Answer to Amended Involuntary Petition Under Chapter 7 (the "Answer"), 6 2.
3. Grotjohn admits that he is not generally paying his debts as they become due. See id. 6 3.
4. Grotjohn had more than twelve creditors on the Petition Date. See Grotjohn Exhibit 12.
5. The Petitioning Creditors were involved in litigation against Grotjohn prior to the filing of the Involuntary Petition. Hammond holds a judgment against Grotjohn. Holmes, a lawyer, represented JEM Financial, Inc. (an entity owned by Miller's daughter and for which Miller is the president and Holmes is the general counsel) and certain other parties in a state court lawsuit against Grotjohn (the "State Court Suit") alleging, inter alia, securities fraud. Grotjohn filed a counterclaim against the plaintiffs in the State Court Suit alleging, inter alia, usury and RICO violations. The trial court granted summary judgment in plaintiffs' favor. On appeal, the Texarkana court of civil appeals reversed and remanded the State Court Suit for trial, finding that material questions of fact precluded summary judgment. See Grotjohn Precise Connexiones Int'l., S.A. v. JEM Fin., Inc., 12 S.W.3d 859, 877 (Tex.App.-Texarkana 2000, no writ) (Petitioning Creditors' Exhibit B5). However, in its decision, the court of appeals concluded that the plaintiffs correctly characterized an instrument entitled "Promissory Note/Convertible Debenture" as a security within the meaning of the Texas Securities Act (TEX. REV. CIV. STAT. ANN. ART. 581- 4(A) (West Supp. 1999)). See id. at 869-70. The filing of the Involuntary Petition stayed the State Court Suit.
While the McKown Note (as defined in 6 6, infra) was not specifically at issue in the State Court Suit, the form of the McKown Note is identical to the Promissory Note/Convertible Debenture held to be a security by the Texarkana court of appeals.
6. Grotjohn contends that the Involuntary Petition was improperly filed by the Petitioning Creditors because two (2) of those creditors, Holmes and Miller, took assignments of the claims they now assert against Grotjohn for the purpose of filing the Involuntary Petition in violation of Bankruptcy Rule 1003(a). Moreover, Grotjohn contends that the claim now held by Holmes, a Promissory Note/Convertible Debenture payable to D. Ray McKown (the "McKown Note"), is subject to a bona fide dispute and, as a result, Holmes is not a proper petitioning creditor. Specifically, Grotjohn contends that the McKown Note is subject to a usury defense and a statute of limitations defense. Finally, Grotjohn contends that the Involuntary Petition was filed in bad faith.
7. Holmes and Miller contend that (i) they did not acquire their claims for an improper purpose under the Bankruptcy Code or Rules, (ii) they can properly participate as petitioning creditors here, and (iii) the Involuntary Petition was filed in good faith. Holmes further contends that the McKown Note is not the subject of a bona fide dispute and that as the assignee of that claim, he is a qualified petitioning creditor.
8. While Holmes admits that the McKown Note is usurious on its face, Holmes contends that the usury allegation does not create a substantial factual or legal question bearing on Grotjohn's liability on the McKown Note. Rather, Holmes contends that the usury issue can only affect the amount of that liability. Specifically, Holmes contends that notwithstanding the usury issue raised by Grotjohn, at least $24,432.00 is owing on the McKown Note.
9. At trial, Grotjohn did not seriously dispute Holmes' contention that at least $24,432.00 was owing on the McKown Note. Rather, Grotjohn asks the Court to focus on his statute of limitations defense. Specifically, Grotjohn contends that a four (4) year statute of limitations is applicable to the McKown Note and that a claim arising from that note was time barred on the Petition Date.
10. The Court finds that Holmes and Miller did not acquire their claims for an improper purpose; and thus, neither are disqualified from being a petitioning creditor here by virtue of their acquisition of claims shortly before the Involuntary Petition was filed. The Involuntary Petition was not filed in bad faith.
11. Hammond's claim is not subject to a bona fide dispute and he is qualified to be a petitioning creditor here. Similarly, Miller's claim is not subject to a bona fide dispute and he is qualified to be a petitioning creditor here.
12. A Finding of Fact may also be deemed a Conclusion of Law where appropriate.
II. CONCLUSIONS OF LAW
13. The Court has jurisdiction over this contested Involuntary Petition pursuant to 28 U.S.C. § 157 and 1334. This is a core proceeding. See 28 U.S.C. § 157 (b)(2)(A).
14. In In re Sims, 994 F.2d 210, 220 (5th Cir. 1993), the Fifth Circuit adopted an objective standard for determining when a debt was subject to a bona fide dispute under section 303(b)(1) of the Bankruptcy Code, thereby rendering the claim invalid for purposes of the filing of an involuntary bankruptcy petition. In adopting this objective standard, the Fifth Circuit followed the Third, Seventh, Eighth, and Tenth Circuits and relied upon the reasoning of In re Lough, 57 B.R. 993 (Bankr.E.D.Mich. 1986). In Lough, the court stated:
[I]f there is a bona fide dispute as to either the law or the facts, then the creditor does not qualify and the [involuntary] petition must be dismissed. The legislative history makes it clear that Congress intended to disqualify a creditor whenever there is any legitimate basis for the debtor not paying the debt, whether that basis is factual or legal. Congress plainly did not intend to require a debtor to pay a legitimately disputed debt simply to avoid the stigma of bankruptcy. Accordingly, if there is either a genuine issue of material fact that bears upon the debtor's liability, or a meritorious contention as to the application of law to undisputed facts, then the petition must be dismissed.
57 B.R. at 997. After adopting the reasoning of the Lough court, the Fifth Circuit in Sims further noted that
[T]he petitioning creditor must establish a prima facie case that no bona fide dispute exists. Once this is done, the burden shifts to the debtor to present evidence demonstrating that a bona fide dispute does exist. Because the standard is objective, neither the debtor's subjective intent nor his subjective belief is sufficient to meet this burden. The court's objective is to ascertain whether a dispute that is bona fide exists; the court is not to actually resolve the dispute. This does not mean that the bankruptcy court is totally prohibited from addressing the legal merits of the alleged dispute; indeed, the bankruptcy court 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.
994 F.2d at 221 (quoting Rimell v. Mark Twain Bank (In re Rimell), 946 F.2d 1363, 1365 (8th Cir. 1991)).
15. Applying these requirements here, the Court concludes that Grotjohn's liability on the McKown Note on the Petition Date is subject to a bona fide dispute. Holmes contends that his claim (which arises from the McKown Note) was not barred by limitations on the Petition Date because the six (6) year statute of limitations provided by section 3.118 of the Texas Uniform Commercial Code is the applicable statute of limitations. See TEX. BUS. COM. CODE § 3.118 (West 1995). On the other hand, Grotjohn contends that Chapter 3 of the Texas Uniform Commercial Code, entitled "Negotiable Instruments," and its six (6) year statute of limitations provided in section 3.118, has no application to the McKown Note. Specifically, Grotjohn points to section 3.102 (which states that "[t]his chapter applies to negotiable instruments" and not to "securities governed by Chapter 8"); section 3.104 (which defines negotiable instruments and when that definition is applied to the McKown Note, Grotjohn contends that it leads to the conclusion that the McKown Note is not a negotiable instrument); and the State Bar Committee Comments to section 3.118 (which states that "[b]ecause Chapter 3 only applies to negotiable instruments, actions on non-negotiable instruments will not be governed by the provisions of section 3.118 but will be governed by other Texas statutes of limitation."). In response, Holmes contends that he can find no case that has made the distinction between negotiable instruments and non-negotiable instruments that the statute and the State Bar Committee Comments suggest. As a result, Holmes contends that Texas courts are applying the six (6) year statute of limitations provided in section 3.118 to notes such as the McKown Note.
16. Whether the six (6) year statute of limitations provided in section 3.118 of the Texas Uniform Commercial Code applies to Holmes' claim (which arises from the McKown Note) is a bona fide legal dispute. If the six (6) year statute of limitations applies, then a claim arising from the McKown Note is not time barred. However, if a four (4) year statute of limitations is applicable to that claim, it was time barred on the Petition Date. The parties' dispute over the applicable statute of limitations is bona fide.
The limitation period for collection of a debt is four (4) years. See TEX. CIV. PRAC. REM. CODE § 16.004(a)(3).
17. In light of this bona fide dispute over Grotjohn's liability on the McKown Note, Holmes is not qualified to be a petitioning creditor. Because section 303(b)(1) of the Bankruptcy Code requires that the Involuntary Petition be filed by three creditors holding non-contingent, non-disputed claims aggregating at least $10,775.00, the Involuntary Petition must be dismissed. See 11 U.S.C. § 303(b)(1).
After questioning by the Court during closing arguments (which questions suggested the Court had concerns about the existence of a bona fide dispute over Grotjohn's liability on the McKown Note), the Petitioning Creditors requested a continuance of the hearing to enable them to seek out other creditors to join in the involuntary filing in accordance with Bankruptcy Rule 1003(b). The Petitioning Creditors claimed surprise that (i) Grotjohn was contending that the McKown Note was not a negotiable instrument, and (ii) Grotjohn had more than twelve (12) creditors. The Court denied the requested continuance as untimely. Moreover, Bankruptcy Rule 1003(b) is not applicable here. Grotjohn advised the Petitioning Creditors and the Court that he contended that he had more than twelve (12) creditors at a hearing on the Petitioning Creditors' motion for summary judgment held on May 22, 2001. At that hearing Grotjohn also contended that the McKown Note was not a negotiable instrument. Moreover, Grotjohn filed a list of his creditors (totaling 40 creditors) with the Court on May 31, 2001. At a pretrial conference held on June 5, 2001, the Petitioning Creditors and Grotjohn both announced ready for trial and agreed to a trial date of June 13, 2001 at 9:00 a.m. Not until after the close of the evidence, and upon becoming concerned that the Court might conclude that the McKown Note was subject to a bona fide dispute, did the Petitioning Creditors claim "surprise" and ask for more time to seek to have other creditors join in the Involuntary Petition. Grotjohn opposed any continuance. Decisions regarding motions for continuance are within the court's sound discretion and are reversed only where there is found to be an abuse of the discretion. See Sturgeon v. Airborne Freight Corp., 778 F.2d 1154, 1157 (5th Cir. 1985); Skins and Leather Co., Inc. v. Twin City Leather Co., 246 B.R. 743, 748 (N.D.N Y 2000); Wachovia Bank of Ga., N.A. v. Apex Tech. of Ga., Inc, 144 B.R. 649, 652 (S.D.N.Y. 1992). In considering whether to grant a continuance to allow the presentation of additional evidence, courts have considered whether: (i) the additional evidence would be valuable enough to warrant the delay in the judicial process and the burden on the other parties in the matter; or (ii) the requesting party acted with proper diligence in its efforts to timely present the additional evidence during the proceedings in questions. See In re Roberts, 210 B.R. 325, 331 (Bankr.N.D.Iowa 1997); Wachovia Bank of Ga, N.A., 144 B.R. at 652-53.
The Petitioning Creditors were not surprised by Grotjohn's contentions at trial. The Petitioning Creditors had Grotjohn's list of creditors roughly one week before the pretrial conference and two weeks before trial. The Petitioning Creditors made no showing or representation that they had taken any action based on the receipt of that list, e.g., that they had attempted to enlist the participation of another petitioning creditor. Neither did the Petitioning Creditors represent to the Court that they were or had been injured as a result of obtaining the list of creditors when they did. If there was a legitimate surprise, the Petitioning Creditors should have brought the surprising issues to the Court's attention at the pretrial conference on June 5 or, at a minimum, at the outset of the trial on June 13. An oral motion for continuance after the evidence was closed was neither proper nor timely and was properly denied. See Sturgeon, 778 F.2d at 1158-59 (affirming District Court's denial of plaintiff's motion for continuance where plaintiff did not file motion until after jury selection).
18. A Conclusion of Law may also be deemed a Finding of Fact where appropriate. An Order dismissing the Involuntary Petition will be entered concurrently herewith.