Opinion
BANKRUPTCY NO. 01-11201 CHAPTER 7
January 8, 2002
DENNIS J. ROMAN, ESQ., PITTSBURGH, PA, ATTORNEY FOR WESTPORT INSURANCE CORP.
MICHAEL J. YURCHESHEN, ESQ., PITTSBURGH, PA, ATTORNEY FOR PETITIONING CREDITORS.
WILLIAM J. SCHAAF, ESQ., ERIE, PA, ATTORNEY FOR STEPHEN H. HUTZELMAN, ESQ., UNITED STATES TRUSTEE, PITTSBURGH, PA.
MOTION TO DISMISS THE ANSWER AND AFFIRMATIVE DEFENSES TO CHAPTER 7 INVOLUNTARY BANKRUPTCY PROCEEDING OF WESTPORT INSURANCE CORPORATION
OPINION
The within case was commenced with the filing of an involuntary Petition by Larry Z. Kukuda, Karoline Kukuda, John Tobias and Henry Ingram (collectively "Petitioning Creditors") against Michael Angelo Corry Inn, Inc. ("Debtor") under Chapter 7 of the Bankruptcy Code on June 11, 2001.
On July 17, 2001, Westport Insurance Corporation ("Westport") filed an Answer and Affirmative Defenses to the Involuntary Petition ("Response") at the Clerk's Office in Pittsburgh, which did not arrive at this Court's Erie office until July 19, 2001. Meanwhile, an Order for relief was entered on July 17, 2001 in Erie and Gary V. Skiba, Esq. was appointed as Trustee. Upon consideration of the Response, the Order for relief and the appointment of Gary V. Skiba, Esq. as Trustee were vacated.
Westport asserts that it is a shareholder, having purchased all of the outstanding shares of the Debtor corporation at a sheriff's sale on or about March 1, 2000. In its capacity as shareholder, Westport opposes the Involuntary Petition and the entry of an Order for relief.
Westport's interest in the Debtor arises as the issuer of a malpractice insurance policy covering Stephen H. Hutzelman, Esq. The major asset of the estate is a $425,000 judgment (the "Judgment") against Stephen H. Hutzelman, Esq. Westport, as stockholder, does not intend to cause the Debtor to execute on the Judgment which was entered against its insured.
Westport asserts that the Petitioning Creditors are ineligible to file the Involuntary Petition because they do not hold legitimate claims; that if any of them does hold a claim, such claim is contingent in nature; and any such claim "is clearly the subject of a bona fide dispute." Westport further denies the allegation that Debtor is generally not paying its debts as they become due.
The Petitioning Creditors assert that Westport lacks standing to answer the Petition and that Westport's Answer and Affirmative Defenses must be dismissed and an order for relief entered. Westport responds that it has standing under 11 U.S.C. § 101(13) and (41) and Fed.R.Bankr.P. 9001(5).
We find that Westport lacks standing; that its Answer and Affirmative Defenses must be stricken; and that an Order for relief is appropriate.
Discussion
11 U.S.C. § 303(d) provides that "[t]he 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). Similarly, Fed.R.Bankr.P. 1011(a) provides:
Rule 1011. Responsive Pleading or Motion in Involuntary and Ancillary Cases.
(a) Who May Contest Petition. The debtor named in an involuntary petition or a party in interest to a petition commencing a case ancillary to a foreign proceeding may contest the petition. In the case of a petition against a partnership under Rule 1004(b), a nonpetitioning general partner, or a person who is alleged to be a general partner but denies the allegation, may contest the petition.
The Court in the case of In re Westerleigh Dev. Corp., 141 B.R. 38 (Bankr.S.D.NY 1992) discusses the standing of shareholders to contest an involuntary Petition:
A creditor is not authorized to contest an involuntary petition because a creditor may have an incentive to protect a preference or to gain some unfair advantage of the expense of other creditors. In re New Era Co., 115 B.R. 41 (Bankr.S.D.N.Y. 1990) (citing supporting cases), aff'd., 125 B.R. 725 (S.D.N.Y. 1991). Similarly, there is no express statutory authority for stockholders to contest an involuntary petition filed against their corporation. In re The Ceiling Fan Distributor, Inc., 37 B.R. 701 (Bankr.M.D.La. 1983). However, this is not an inflexible rule. In the Ceiling Fan case, the court assumed that under certain circumstances, stockholders might be permitted to contest an involuntary petition against their corporation where there was a plan or scheme to achieve fraud "or other proscribed conduct." Id. at 702. Similarly, the district court in In re Oakland Popcorn Supply, Inc., 213 F. Supp. 665 (N.D.Cal. 1963) said:
While it is true that stockholders of a bankrupt corporation have no statutory right to contest an involuntary petition, it is within the discretion of the bankruptcy court to permit them to do so. Id. at 667 (citations omitted).
Id. at 40.
Here, the shareholder, Westport, has as its purpose in opposing an Order for relief the thought that it should remain in control of whether or not the Debtor seeks to collect on the Judgment and avoidance of a review by an independent Chapter 7 Trustee. Should a Chapter 7 Trustee determine that there are valid claims against the Debtor, the Trustee would seek to enforce the Judgment, at least to the extent of the amount of the valid claims and for the costs of administration. Any funds recoverable by the Trustee on the Judgment would come from Westport's pocket.
Westport's interest in opposing the involuntary Petition is similar to that of a creditor with an interest to protect that conflicts with the interest of creditors.
Accordingly, we find that Westport lacks standing to contest the Petition and that Westport's Answer and Affirmative Defenses to Chapter 7 Involuntary Bankruptcy Petition must be stricken and an Order for relief issued.
An appropriate Order will be entered.
ORDER
This day of January, 2002, in accordance with the accompanying Opinion, it shall be, and hereby is, ORDERED as follows:
1. The ANSWER AND AFFIRMATIVE DEFENSES TO CHAPTER 7 INVOLUNTARY BANKRUPTCY PETITION filed by Westport Insurance Corporation is STRICKEN.
2. The Clerk is directed to issue an Order for Relief.