Opinion
Case No. 09-51277.
12-7-2009
In re: JAMES E. LUNDEEN, SR., M.D., Chapter 7 Involuntary, Debtor.
I. Introduction
Umakant Purohit, M.D., William Midian, M.D. and John Nickels, M.D. ("Petitioning Creditors") have filed an involuntary petition against James E. Lundeen, Sr., M.D. ("Dr. Lundeen") under Chapter 7 of the Bankruptcy Code. The Petitioning Creditors allege that they are eligible to file the petition because they hold claims against Dr. Lundeen under a Chapter 11 plan. Dr. Lundeen contends that he does not have personal liability to the Petitioning Creditors.
The Court concludes that the Petitioning Creditors' alleged claims against Dr. Lundeen are the subject of a bona fide dispute as to liability. Pursuant to 11 U.S.C. § 303, therefore, the Court will dismiss the involuntary petition. The Court, however, finds no bad faith or other good cause for awarding costs or attorneys' fees to, or imposing sanctions on, any party or other participant in this matter. Finally, the Court denies as moot any other relief requested in this case.
This Memorandum Opinion constitutes the Court's findings of fact and conclusions of law. See Fed. R. Civ. P. 52 (made applicable here by Fed. R. Bankr. P. 7052).
II. Jurisdiction
The Court has jurisdiction to hear and determine this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(A). On August 10, 2009, the United States District Court for the Southern District of Ohio entered an order (Doc. 175) denying a motion to withdraw the reference filed by Dr. Lundeen.
III. Procedural History
On June 26, 2008, the Petitioning Creditors filed the involuntary petition (Doc. 1). Dr. Lundeen filed an answer (Doc. 24) and a motion to dismiss (Doc. 48). The United States Bankruptcy Court for the Northern District of Ohio, Eastern Division at Cleveland ("Cleveland Bankruptcy Court") transferred the case and related cases and adversary proceedings to the Court after determining that the appropriate venue was the Southern District of Ohio. See Amended Transfer Order (Doc. 81). On March 23, 2009, the Court convened a status hearing. See Transcript of Hearing (Doc. 90). On March 26, 2009, the Court entered a scheduling order (Doc. 84) establishing, among other things, discovery deadlines and a trial date with respect to the involuntary petition.
Dr. Lundeen filed additional documents in support of his motion to dismiss (Docs. 68 & 87), and the Petitioning Creditors filed responses thereto (Docs. 98, 101 & 102). The Petitioning Creditors filed a motion for sanctions (Doc. 56), a motion for filing restrictions (Docs. 101 & 102) and a motion seeking to strike certain of Dr. Lundeen's submissions (Doc. 174). Dr. Lundeen filed a motion for declaratory judgment (Doc. 92), a motion to vacate the Court's order denying his motion for a protective order (Doc. 128), a motion for sanctions (Doc. 138) and a motion to vacate the Court's order granting a motion to quash his subpoena and for sanctions (Doc. 160). The parties also filed various responses to those motions.
On June 25, 2009, the Court conducted a trial on the involuntary petition. See Transcript of Trial ("Transcript") (Doc. 168). On July 21, 2009, the Court entered an order directing the submission of post-trial memoranda (Doc. 171). The Petitioning Creditors submitted a post-trial memorandum (Doc. 176) ("Pet. Cr. Mem."), and Dr. Lundeen filed a post-trial memorandum and supplements thereto (Docs. 177, 178 & 179).
IV. Findings of Fact
Having reviewed the parties' submissions, the dockets of the various relevant bankruptcy cases and the evidence adduced at trial, the Court makes the following findings of fact:
A. Chapter 11 Cases
This involuntary case arises from Chapter 11 cases that Dr. Lundeen, as well as James E. Lundeen, Sr., M.D., Inc. ("Lundeen Inc.") and Lundeen Physical Therapy—Akron, Inc. ("Lundeen Physical Therapy" and, together with Lundeen Inc., "Corporate Debtor"), commenced in 1996. That same year, a committee of unsecured creditors consisting of physicians and other creditors ("Committee") and a Chapter 11 Trustee were appointed. See Docs. 25 & 72 in Case No. 09-51276. The estates of Lundeen Inc. and Lundeen Physical Therapy were substantively consolidated in the Chapter 11 cases by an order entered on June 3, 1997. See Doc. 234 in Case No. 09-51276. The estates of those corporations, however, were never consolidated with Dr. Lundeen's bankruptcy estate.
This is the case number that the Clerk of this Court assigned the voluntary Chapter 11 case of Lundeen Inc. after it was transferred from the Cleveland Bankruptcy Court.
A plan of reorganization and disclosure statement were eventually filed in the Chapter 11 cases, drawing various objections. The Chapter 11 Trustee, the Committee and the Internal Revenue Service ("IRS"), among others, objected to the plan and/or disclosure statement and, by and through counsel, were involved in discussions and negotiations regarding the terms of an amended plan. See Docs. 277, 282, 283, 284 and 311 in Case No. 09-51276. Amended versions of a plan were filed and, on January 6, 1999, a fourth amended plan ("Plan") was filed as an attachment to a motion to modify a prior version. See Doc. 418 in Case No. 09-51276. Any objections to the Plan were resolved and, on January 25, 1999, the Cleveland Bankruptcy Court entered an order confirming the Plan. See Doc. 429 in Case No. 09-51276. The Plan was substantially consummated, a final decree was entered and the cases were closed. See Doc. 518 in Case No. 09-51276.
B. Relevant Provisions of the Plan
Several provisions of the Plan are relevant here. As does this Memorandum Opinion, the Plan uses the defined term "Corporate Debtor" to include Lundeen Inc. and Lundeen Physical Therapy, but not Dr. Lundeen. See Plan at 2. The Plan uses the defined term "Consolidated Debtors" to mean the Corporate Debtor and Dr. Lundeen collectively. See id. The term "Individual Debtor" as used in the Plan includes Dr. Lundeen only. See id.
Article I of the Plan defines "Claim" to mean:
any right to payment, or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, against the Consolidated Debtors, in existence on or as of the Petition Date, whether or not such right to payment or right to an equitable remedy is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, secured or unsecured.
Id. at 1-2.
Article II of the Plan classifies the various claims. Class 1(a) includes all administrative claims other than administrative claims of the IRS; Class 1(b) includes the administrative claims of the IRS. Class 2 consists of priority claims of the IRS and other governmental entities against the Consolidated Debtors. Class 3 consists of secured claims held by the IRS against the Consolidated Debtors. Class 4 and Class 5 consist of secured claims held by certain individuals (not the Petitioning Creditors). Class 6, in which the claims of the Petitioning Creditors fall, consists of "all of the unsecured claims as against the Consolidated Debtors, including any penalty claims of Class 2 creditors that are not secured by liens." Id. at 3.
Article III provides for the treatment of the classes described above. Section 3.1 of the Plan provides in part:
The treatment of the various classes is based upon the Consolidated Debtors' use of certain net operating loss carry forwards as described in Item VII of the Disclosure Statement which are deemed allowable by the Internal Revenue Service. These net operating loss carry forwards in the approximate amount of $341,537.00 shall be deemed allowed by the Internal Revenue
Service [and] will be used by the Consolidated Debtor [sic] upon the Entry of an order closing this case. a) (1) Class 1(a) Claims shall be paid in full at the rate of $3,000.00 per month (2) Class 1(b) Claims shall be paid in full at the rate of $2,000.00 per month[.] Any payments made by the Consolidated Debtors not otherwise allocated under this Section 3.1 shall to distributed to Classes 1(a) and 1(b) pro rata until all have been paid in full. Any payments made by the Consolidated Debtors over and above the required disbursement under this Section 3.1 shall be distributed to Classes 1(a) and 1(b) pro rata until both have been paid in full. Once either Class 1(a) or 1(b) have been paid in full, the money designated for that paid Class 1(a) or 1(b) shall be paid to the other until the other is also paid in full.
Id. at 3-4.
Unsecured creditors in Class 6 (such as the Petitioning Creditors) were to begin receiving payments after administrative claims, including administrative claims of the IRS, were paid in full. See id. at 4 ("Class 6 Claims shall be paid in full at the rate of $2,000.00 per month beginning at the time all Class 1(a) and 1(b) Claims have been paid in full.").
Section 3.2 of the Plan addresses disbursements:
The Corporate Debtor will disburse the sum of $10,000.00 per month in the first year, $15,000.00 per month in the second year, and $20,000.00 per month thereafter until all creditors are paid in accordance with this Plan. Except as provided in Section 3.1, once a Class has been paid, the money designated for that Class will be distributed to the remaining classes of creditors on a pro rata basis. Any payments made by the Consolidated Debtor [sic], not otherwise allocated under Section 3.2, shall be distributed to the remaining classes of creditors on a pro rata basis, except as set forth in Section 3.1. Any payments made by the Consolidated Debtors over and above the disbursement required by this Section shall be distribute[d] to the remaining classes of creditors on a pro rata basis, except as set forth in Section 3.1. The Corporate Debtor will disburse any remaining funds in its Debtor-in-Possession accounts after proper
application of such funds and any such disbursement shall be credited against the payments due pursuant to Section 3.2.
Id. at 4-5.
Article IV of the Plan provides that "[e]xcept as otherwise set forth in Article 3.1 hereinabove with regard to the Internal Revenue Service, Confirmation of the Plan shall discharge the Consolidated Debtors from any debt that arose before the Confirmation Date and any debt of a kind specified as capable of being discharged under the Bankruptcy Code . . . ." Id. at 5. Article V of the Plan provides that an individual named Adam Berebitsky would be the "Disbursing Agent" for the first two years of the Plan and that "[t]hereafter, James E. Lundeen shall be the Disbursing Agent for the Consolidated Debtors." Id. at 5. Article V further provides that "[t]he Disbursing Agent will make monthly payments to creditors entitled to payment under the Plan." Id.
Article IX of the Plan provides in part that "[t]he Plan is contingent upon the business of the Consolidated Debtors being able to perform in accordance with the projections set forth in the disclosure statement." Id. at 7. Article XII of the Plan states: "The Individual Debtor shall be entitled to a reasonable salary during the course of the Plan. All income received by this Individual Debtor related to the practice of medicine shall be received as salary or dividend from the Corporate Debtor." Id. at 8. Article XIII of the Plan provides as follows:
If the Consolidated Debtors default [in] any obligation under the Plan, the Internal Revenue Service or secured creditors may notify the Corporate Debtor in writing of such default. The Consolidated Debtors shall have ten (10) days to cure any default under the Plan after receipt by the Corporate Debtor of such notice of default. If the Consolidated Debtors fail to cure such default, the Internal Revenue Service or such secured creditor may file an affidavit setting forth such failure to cure, including the written notice of default and the Court shall convert this case to a case under Chapter 7 of the Bankruptcy Code.
Id. at 9.
C. Events Transpiring after the Plan Was Confirmed
After the Plan was confirmed, claims in Class 1(a) and Class 1(b) were paid in full, and payments were made on certain other claims. However, the Petitioning Creditors and most of the other creditors holding general unsecured claims received no payments. Upon the motion of certain of those creditors, the Cleveland Bankruptcy Court entered an order reopening the Chapter 11 case of Lundeen Inc. See Doc. 526 in Case No. 09-51276. In December 2007, certain creditors (the current Petitioning Creditors were not among them) commenced involuntary cases against Dr. Lundeen and the Corporate Debtor. Following an evidentiary hearing, the Cleveland Bankruptcy Court ordered relief against the Corporate Debtor, but not against Dr. Lundeen, and issued an opinion on April 1, 2008 ("April 1 Opinion"), see Doc. 59 in Case No. 09-58929, holding that the petitioning creditors involved in that prior case had failed to carry their burden of proving that Dr. Lundeen was generally not paying his debts as they became due because "there was no evidence as to Dr. Lundeen's overall financial condition, including his income, his obligations other than those to the petitioning creditors, and his payment or non-payment of the other obligations." April 1 Opinion at 12. The Cleveland Bankruptcy Court also stated that "Dr. Lundeen, personally, and the two corporations are liable to the petitioning creditors under the joint plan." Id. at 10. The petitioning creditors in that case appealed the dismissal of the involuntary petition against Dr. Lundeen, but dismissed the appeal after the Petitioning Creditors commenced the current involuntary case.
The Cleveland Bankruptcy Court issued an order denying a previous motion to dismiss filed by Dr. Lundeen in this involuntary case. In connection therewith, the Cleveland Bankruptcy Court issued an opinion on September 8, 2008 ("September 8 Opinion") (Doc. 20) stating as follows:
Dr. Lundeen argues that the petition does not state a claim for relief because he is not personally liable to the petitioning creditors under the confirmed plan. This, however, is a factual argument which is not appropriately resolved on a 12(b)(6) motion. Moreover, this court interpreted the confirmed plan in Dr. Lundeen's previous involuntary proceeding and determined that he does have personal liability to creditors under the terms of the plan. Consequently, Dr. Lundeen's motion to dismiss the involuntary petition under rule 12(b)(6) must be denied.
September 8 Opinion at 9—10 (footnote omitted)).
D. The Trial and the Post-Trial Briefs
During a day-long trial on the current involuntary petition, the Court heard the testimony of Dr. Lundeen and the Petitioning Creditors as well as the testimony of Darshan Mahajan, M.D. and Parshotam Gupta, M.D., who were petitioning creditors in the prior involuntary cases. See Transcript at 4—140;162—186. In addition, the Court received multiple exhibits into evidence submitted by the Petitioning Creditors, see id. at 140—162, and by Dr. Lundeen. See id. at 186—188. The Court also heard closing arguments.
During the trial, Dr. Lundeen maintained that he has no personal liability to the Petitioning Creditors based on, among other things, §3.2 of the Plan and its reference to the "Corporate Debtor." See id. at 12; 14; 22; 30—31; 178. He rejected the argument that, in the words of counsel to the Petitioning Creditors, §3.2 "is merely a conduit for the payments to be made by all the Consolidated Debtors[.]" Id. at 31:8-9. He also took the position that the statements in the April 1 Opinion and September 8 Opinion regarding his personal liability were obiter dicta. See id. at 38—44.
Dr. Lundeen testified regarding his interpretation of the Plan and what he understood to be the intent of the parties at the time the Plan was confirmed. On cross-examination by counsel to the Petitioning Creditors, Dr. Lundeen testified as follows:
Q. Based upon [§3.2] and the other provisions or evidence that you've just suggested, you claim that you're not only not personally liable to any of the creditors under the plan but that the intent of the plan was to shift what were your personal liabilities to the Corporate Debtor. A. That's correct. Q. And you claim that this is how the plan was presented to and understood by the Court and the creditors at the time of confirmation? A. They signed it. The Court approved it. Yes, sir. Q. And it was presented as having the intent of transferring all of your personal liabilities to the Corporate Debtor and relieving you of any obligation under the plan; is that correct? A. That's correct. That's the language in the plan. All that's for discharge of the Consolidated Debtors. That's stated in the plan.
Id. at 31—32.
On direct examination of himself, Dr. Lundeen further explained his understanding of the Plan:
Q. Now I'm going to ask myself what is the significance of the terms Consolidated Debtors and Corporate Debtor as defined in the plan and as applicable to the implementation. A. The intention of the plan was that the Corporate Debtor as defined in the glossary of terms, including only the corporate entities, will distribute the payments in accordance with this plan until all creditors are paid. That is what is required in this plan. These are required payments. The distinction to be made between Consolidated Debtor as defined in the plan and Corporate Debtor as defined in the plan is that the Consolidated Debtors were not barred from making payments and certain miscellaneous payments from the Consolidated Debtor would occur, for instance, where the Internal Revenue Service,
if it were to give a tax refund, that it might intercept that tax refund and this plan would state how it would apply a personal tax refund. So within this paragraph of 3.2 of implementation, when it refers to the Consolidated Debtor's payments, those are payments that are either voluntary, unintentional or beyond the control of the individual James E. Lundeen, Sr., M.D. such as where the IRS was holding a tax refund.
Id. at 167—68.
The Petitioning Creditors answered in the affirmative when their counsel asked them whether they believed that Dr. Lundeen "would be personally bound by the terms of the plan." See id. at 81—82; 91; 96—97. The evidence showed that the pre-Chapter 11 claims of at least one of the Petitioning Creditors may have been against the Corporate Debtor only, not against Dr. Lundeen. See id. at 98—103. The Petitioning Creditors rely on the Plan's references to Consolidated Debtors in §§ 3.1 and 3.2, arguing that the reference to Corporate Debtor in § 3.1 means that the Corporate Debtor was to be a conduit for payments to be made by all of the Consolidated Debtors. The Petitioning Creditors also rely on the Cleveland's Bankruptcy Court's statements regarding Dr. Lundeen's personal liability in the April 1 Opinion and the September 8 Opinion.
After the trial, the Petitioning Creditors submitted affidavits of attorneys for the IRS, the Chapter 11 Trustee and the Committee (who also was one of the attorneys for the Petitioning Creditors at the trial) regarding their views of the Plan and Dr. Lundeen's liability thereunder. Those individuals, however, did not testify during the trial and were not subject to cross-examination by Dr. Lundeen.
V. Legal Analysis
A. The Involuntary Petition Must Be Dismissed.
1. The Applicable Standards
Under § 303(b), in order to commence an involuntary case against a person, a creditor must be "a holder of a claim against such person 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). Thus, when deciding whether involuntary relief should be ordered, "the preliminary question is whether a petitioning creditor holds a claim against the alleged debtor that is `not contingent as to liability or the subject of a bona fide dispute.'" Nat'l City Bank v. Troutman Enters., Inc. (In re Troutman Enters., Inc.), 253 B.R. 8, 12 (B.A.P. 6th Cir. 2000). "If there is a legitimate legal or factual basis for the alleged debtor not to pay the claim, then the creditor is not eligible to file an involuntary petition." Id. "Congress has made clear that it `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.'" Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 945 (6th Cir. 2007) (quoting In re Lough, 57 B.R. 993, 997 (Bankr. E. D. Mich.1986)). "`[I]f 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.'" Booher Enters. v. Eastown Auto Co. (In re Eastown Auto Co.), 215 B.R. 960, 965 (B.A.P. 6th Cir. 1998) (quoting Lough, 57 B.R. at 997). "In deciding whether the claims of the petitioning creditors are subject to a legitimate dispute of law, a bankruptcy court is not prohibited from addressing the legal merits of the alleged dispute . . . ." Mktg. & Creative Solutions, Inc. v. Scripps Howard Broad. Co. (In re Mktg. & Creative Solutions, Inc.), 338 B.R. 300, 305 (B.A.P. 6th Cir. 2006). "The bankruptcy court is expected to make an inquiry sufficient to determine whether a legitimate question exists about the application of law to the undisputed facts presented." Id.
"The burden rests on the petitioning creditors to establish that they are qualified under § 303(b)(1)." DSC, Ltd., 486 F.3d at 944. "The petitioning creditor must establish a prima facie case that a bona fide dispute does not exist, by a preponderance of the evidence." Mktg. & Creative Solutions, 338 B.R. at 305. If the petitioning creditor meets the initial burden, "the burden of proof then shifts to the putative debtor to show otherwise." Id.
2. The Petitioning Creditors Have Failed to Carry their Burden.
Under the standards discussed above, if they are to prevail, the Petitioning Creditors must establish, by a preponderance of the evidence, a prima facie case that a bona fide dispute does not exist with respect to Dr. Lundeen's personal liability under the Plan. For the reasons explained below, the Court concludes that the Petitioning Creditors have failed to carry their burden.
The Court is not ruling on the merits of whether Dr. Lundeen has personal liability under the Plan. Rather, the Court examines the issue of liability only for the purpose of determining whether a bona fide dispute exists with respect to that issue.
In their post-hearing memorandum, the Petitioning Creditors state that "the language of the Confirmed Plan is ambiguous as to whether the `Consolidated Debtors'—which include the two Corporate Debtors and Dr. Lundeen individually—are jointly liable." Pet. Cr. Mem. at 14. See also id. at 15 (describing the Plan as containing an "ambiguity as to liability"). A statement made in a brief may constitute a concession. See Vazquez v. Cent. States Joint Bd., 547 F. Supp. 2d 833, 856 (N.D. Ill. 2008) ("Assessment of the first ground for dismissal is substantially shaped by multiple concessions Plaintiffs have made in their briefs."); In re Darling Lumber, Inc., 56 B.R. 669, 674 n.5 (Bankr. E.D. Mich. 1986) ("[S]tatements of the parties made in their briefs may be treated as concessions or admissions . . . ."). Thus, the Petitioning Creditors have conceded that the Plan is ambiguous with respect to Dr. Lundeen's personal liability. Given this conceded ambiguity, the Court must dismiss the involuntary case. See In re Taylor Agency, Inc., 281 B.R. 354 (Bankr. S.D. Ala. 2001). In Taylor Agency, entities holding judgments against a corporation filed an involuntary petition against it as well as against an individual who allegedly had guaranteed the debts of the corporation. The bankruptcy court found that the indemnity agreement on which the petitioning creditors based their claims against the individual was ambiguous as to whether she had guaranteed the debts of the corporation. See Taylor Agency, 281 B.R. at 359. On the basis of this ambiguity, the court concluded that a bona fide dispute existed regarding the individual debtor's liability and dismissed the involuntary petition against her. See id. Likewise, the Court concludes that the conceded ambiguity regarding liability under the Plan gives rise to a bona fide dispute here.
The Petitioning Creditors make four arguments for why they should prevail despite the conceded ambiguity of the language of the Plan, but none of those arguments dissuades the Court from concluding that a bona fide dispute exists. First, the Petitioning Creditors argue that the April 1 Opinion and the September 8 Opinion take Dr. Lundeen's personal liability out of the realm of bona fide dispute. See Pet. Cr. Mem. at 10—12. The Petitioning Creditors contend that the April 1 Opinion is controlling under the doctrine of the law of the case. The April 1 Opinion, however, was entered in a different case commenced by other petitioning creditors; the doctrine of law of the case, therefore, does not apply. See Sudbury, Inc. v. Dlott (In re Sudbury, Inc.), 149 B.R. 489, 493 (Bankr. N.D. Ohio 1993) ("The problem with attempting to derive an answer here from the law of the case doctrine is that these proceedings are in fact different cases . . . ."). The September 8 Opinion also is unavailing. In that opinion, the Cleveland Bankruptcy Court described Dr. Lundeen's argument regarding personal liability as a "factual argument which is not appropriately resolved" at that time. In addition, unlike this Memorandum Opinion, the September 8 Opinion was entered without a trial having been conducted on the involuntary petition filed by the current Petitioning Creditors. The Court is not ruling on the correctness of the statements the Cleveland Bankruptcy Court made regarding Dr. Lundeen's personal liability in its thorough and carefully written opinions. Rather, the Court concludes only that, given the context in which those statements were made, the opinions do not remove the issue of personal liability from bona fide dispute.
In addition, the statements regarding personal liability could be construed as obiter dicta if they were unnecessary to the Cleveland Bankruptcy Court's decision to not order relief against Dr. Lundeen. See United States v. Del Percio, 870 F.2d 1090, 1098 n.1 (6th Cir. 1989) ("Since discussion of these issues was not necessary to the district court's resolution of this case, we believe that the relevant portions of the district court's opinion constitute obiter dicta."). The Petitioning Creditors concede that "[i]t is unclear . . . whether [the Cleveland Bankruptcy Court's] finding [in the April 1 Opinion] was necessary to support a valid and final judgment on the merits because . .. the first involuntary petition against the Debtor [was dismissed] on other grounds[.]" Pet. Cr. Mem. at 11 n.3.
The Petitioning Creditors' second argument in support of Dr. Lundeen's personal liability is that the Plan effectuated a deemed consolidation of his estate with that of the Corporate Debtor. See Pet. Cr. Mem. at 12. Deemed consolidation, which has been described as "an ill-defined and murky concept lying somewhere in the midst of substantive and partial consolidation[,]" does not lead the Petitioning Creditors out of the thicket of bona fide dispute. Indeed, the only case on which the Petitioning Creditors rely in support of this argument is inapposite. See In re Genesis Health Ventures, Inc., 280 B.R. 95 (Bankr. D. Del. 2002), aff'd, No. 02-1322 (D. Del. Apr. 1, 2003), aff'd, 402 F.3d 416 (3d Cir. 2005). The plan of reorganization at issue in Genesis Health Ventures contained an extensive provision expressly providing for the deemed consolidation of the "Genesis Debtors":
Kristopher Aungst, Deemed Consolidation: Slightly Liquidated, Somewhat Bankrupt and Other Fairytale Creatures, 28-May Am. Bankr. Inst. J. 30, 30 (2009).
Subject to the occurrence of the Effective Date, the Genesis Debtors shall be deemed consolidated for the following purposes under the Plan of Reorganization: [I] no distributions shall be made under the Plan of Reorganization on account of the Genesis Intercompany Claims; [II] all guaranties by any of the Genesis Debtors of the obligations of any other Genesis Debtor arising prior to the Effective Date shall be deemed eliminated so that any Claim against any Genesis Debtor and any guaranty thereof executed by any other Genesis Debtor and any joint and several liability of any of the Genesis Debtors shall be deemed to be one obligation of the deemed consolidated Genesis Debtors; and [III] each and every Claim filed or to be filed in the Reorganization Case of any of the Genesis Debtors shall be deemed filed against the deemed consolidated Genesis Debtors and shall be deemed one Claim against and obligation of the deemed consolidated Genesis Debtors.
Genesis Health Ventures, 280 B.R. at 96. Given this provision, the issue in Genesis Health Ventures was whether consolidation reduced the amount of quarterly fees owed to the United States Trustees, not whether a consolidation of some kind had occurred. See id. at 99 ("The crux of the issue, however, is not whether the debtors' reorganization plan constituted a substantive consolidation or a deemed consolidation."). By contrast, the Plan does not contain a provision similar to that present in Genesis Health Ventures expressly providing for deemed consolidation. Moreover, the Petitioning Creditors concede that the Plan is ambiguous with respect to liability. Accordingly, Genesis Health Ventures and the concept of deemed consolidation provide no basis for the Court to conclude that Dr. Lundeen's personal liability is beyond bona fide dispute.
Given their concession that the Plan is ambiguous with respect to Dr. Lundeen's personal liability, the Petitioning Creditors next turn to principles of contract interpretation. See Pet. Cr. Mem. at 10—15. They contend that the principle under which ambiguous provisions are construed against the drafter (i.e., Dr. Lundeen as one of the proponents and alleged drafters of the Plan) applies here. Dr. Lundeen argues that the principle does not apply here because the drafter of the Plan was counsel to the Corporate Debtor, not his personal counsel. Either way, principles of contract interpretation do not remove the issue of Dr. Lundeen's personal liability from bona fide dispute. It is true that, "[i]n interpreting a confirmed plan, courts use contract principles, since the plan is effectively a new contract between the debtor and its creditors." Official Comm. of Unsecured Creditors v. Dow Corning Corp. (In re Dow Corning Corp.), 456 F.3d 668, 676 (6th Cir. 2006). But "[s]tate law governs those interpretations," id., and the law of the applicable state (here, Ohio) would not construe ambiguous Plan language against Dr. Lundeen under these circumstances:
We find that the trial court erred in construing the Purchase Agreement against appellant as the drafting party. Ohio courts have generally resolved contract ambiguities against the drafter only where parties lacked equal bargaining power to select contract language. In the case sub judice, appellant and appellee Fitzpatrick Enterprises are both sophisticated real estate companies that have been involved in the real estate business for years. There was no unequal bargaining power between the two.
4746 Dressler, LLC v. Fitzpatrick Enters., 2009 WL 2457126 at *5 (Ohio Ct. App. Aug. 3, 2009 (citations omitted)). Here, no unequal bargaining power existed between the parties involved in the formulation of the Plan. On one side there were the Corporate Debtor and Dr. Lundeen; on the other side there were sophisticated creditors such as the IRS, as well as the Committee (on which experienced physicians such as the Petitioning Creditors served). Moreover, the Chapter 11 Trustee was involved in the case at the time the Plan was confirmed. Under applicable Ohio law, therefore, the Court cannot construe language that the Petitioning Creditors concede to be ambiguous against Dr. Lundeen.
The Petitioning Creditors also point out that, "[u]nder Ohio law, courts are permitted to consider extrinsic evidence of the parties' intent where the language of a contract is ambiguous." Pet. Cr. Mem. at 14. The Petitioning Creditors' testimony and other extrinsic evidence, however, persuade the Court only that there is a bona fide dispute. Although the Petitioning Creditors submitted affidavits of attorneys for the IRS, the Chapter 11 Trustee and the Committee regarding their views of Dr. Lundeen's personal liability, those individuals did not testify during the trial and were not subject to cross-examination.
Finally, the Petitioning Creditors contend that the Court can enter relief against Dr. Lundeen in an exercise of its equitable powers under § 105 of the Bankruptcy Code. See Pet. Cr. Mem. at 16. "However, `whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.'" Chase Manhattan Mortgage Corp. v. Shapiro (In re Lee), 530 F.3d 458, 473 (6th Cir. 2008) (quoting Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988)). Here, ordering relief against Dr. Lundeen under § 105 would contravene the express requirement set forth in § 303 that the claims of petitioning creditors not be subject to bona fide dispute as to liability. The Court, therefore, cannot order relief against Dr. Lundeen under § 105.
B. No Judgment for Costs, Attorney's Fees or Damages Is Warranted.
Section 303(i) provides as follows:
(i) If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment— (1) against the petitioners and in favor of the debtor for— (A) costs; or (B) a reasonable attorney's fee; or (2) against any petitioner that filed the petition in bad faith, for— (A) any damages proximately caused by such filing; or (B) punitive damages.
The Court is dismissing the involuntary petition other than on consent of all of the Petitioning Creditors and Dr. Lundeen. In addition, Dr. Lundeen has not waived the right to judgment for costs, attorney's fees or damages. Accordingly, the Court has the discretion under § 303(i) to grant Dr. Lundeen judgment for costs or a reasonable attorney's fee and for damages, including punitive damages, against any of the Petitioning Creditors who filed the petition in bad faith. The Court also has the discretion to not grant such a judgment based on the totality of the circumstances. See In re DSC, Ltd. 387 B.R. 174, 177 (Bankr. E.D. Mich. 2008). See also Alexander v. Waddey & Patterson, P.C., 115 Fed. Appx. 801 (6th Cir. Oct. 28, 2004) (affirming bankruptcy court's denial of damages, costs, and fees); DBH Ltd. v. Barrons (In re DBH Ltd.), 23 Fed. Appx. 422 (6th Cir. Nov. 6, 2001) (affirming bankruptcy court's denial of fees under § 303(i)(1) based on "totality of the circumstances"). Considering the totality of the circumstances, including the credibility of the witnesses and the complexity of the bona-fide-dispute issue in the context of this case, the Court declines to award costs or an attorney's fee.
Dr. Lundeen also seeks damages based on the alleged bad faith involved in filing the involuntary petition. But "[t]here is a presumption of good faith in favor of the petitioning creditor, and thus the alleged debtor has the burden of proving bad faith." Adell v. John Richards Homes Bldg. Co. (In re John Richards Homes Bldg. Co.), 439 F.3d 248, 254 (6th Cir. 2006) (internal quotation marks omitted)). "[D]etermining whether an involuntary bankruptcy petition was filed in bad faith requires the bankruptcy court to look at the totality of circumstances." Id. (internal quotation marks omitted). Here, although the Petitioning Creditors were not successful after trial, the Court finds no evidence that they believed when they filed the involuntary petition that the allegations in the petition were untrue. See DSC, 387 B.R. at 182 ("[T]he Court concludes that [the petitioning creditors] acted reasonably in both filing and pursuing their involuntary bankruptcy petition against DSC, even though ultimately they were (barely) unsuccessful[.]"). After considering the totality of the circumstances, the Court does not find that the Petitioning Creditors filed the petition in bad faith.
Dr. Lundeen also seeks sanctions against counsel to the Petitioning Creditors under Rule 9011 of the Federal Rules of Bankruptcy Procedure. "Rule 9011 parallels Fed. R. Civ. P. 11, and the jurisprudence under Rule 11 informs the interpretation and application of Bankruptcy Rule 9011." Pereira v. Dow Chem. Co. (In re Trace Int'l Holdings, Inc.), 287 B.R. 98, 111 (Bankr. S.D.N.Y. 2002). "The imposition of sanctions is discretionary, and should only be imposed if it is patently clear that a claim has absolutely no chance of success, and all doubts should be resolved in favor of the signing attorney." Id. (internal quotation marks omitted)). The Court does not find that it would have been patently clear to counsel at the time the involuntary petition was filed that the petition had no chance of success. Although the balance tipped slightly in favor of Dr. Lundeen, the Court finds that his alleged personal liability was a close question and that the Petitioning Creditors and their counsel had a good faith (albeit wrong ) belief that Dr. Lundeen's personal liability was not in bona fide dispute. Accordingly, the Court finds no basis to sanction counsel to the Petitioning Creditors under Rule 9011 of the Federal Rules of Bankruptcy Procedure.
VI. Conclusion
Each of the Petitioning Creditors' claims against Dr. Lundeen is subject to a bona fide dispute as to liability. The Court, therefore, will enter a separate order in accordance with this Memorandum Opinion dismissing the involuntary petition. The Court, however, will not enter a judgment against any party or other participant in this matter for costs, attorneys' fees or any other item. Any other pending relief requested by the parties in the motions listed in this Memorandum Opinion is denied as moot.
IT IS SO ORDERED.