Credit Union Liquidity Services, L.L.C. v. Green Hills Development Co.
741 F.3d 651
5th Cir.2014Background
- Green Hills Development (debtor) took a $14.5M construction loan from Credit Union Liquidity Services (CULS), secured by a deed of trust; CULS disbursed most funds but refused a later draw; Green Hills later defaulted on the note.
- Green Hills formed a PID and issued bonds to finance development; it later fell behind on bond obligations.
- Green Hills sued CULS in Texas asserting numerous claims (fraud, breach, duress, reformation, offsets, statutory claims) that, if proven, could void or reduce the loan balance; CULS counterclaimed for the loan balance and moved for summary judgment.
- While the Texas litigation was pending, CULS filed an involuntary bankruptcy petition against Green Hills under 11 U.S.C. § 303. Green Hills moved to dismiss, arguing CULS lacked standing because its claim was subject to a bona fide dispute as to liability or amount.
- The bankruptcy court dismissed the petition (finding insufficient proof Green Hills was generally not paying debts and, alternatively, that CULS’s claim was subject to a bona fide dispute). The district court affirmed. The Fifth Circuit affirmed on the alternative ground that CULS lacked standing under § 303(b).
Issues
| Issue | Plaintiff's Argument (CULS) | Defendant's Argument (Green Hills) | Held |
|---|---|---|---|
| Whether CULS had standing under 11 U.S.C. § 303(b) (bona fide dispute as to liability or amount) | CULS: No bona fide dispute; the signed loan and default establish prima facie entitlement; parallel Texas litigation materials are not competent to show a bona fide dispute — only a judgment would suffice. | Green Hills: Its pending, multi-claim litigation directly contests liability/amount; unresolved related claims create an objective bona fide dispute and preclude standing. | Held: CULS lacked standing because its claim was subject to a bona fide dispute as to liability or amount; dismissal affirmed. |
| Whether bankruptcy court erred by considering Texas litigation filings and hearings as evidence of a bona fide dispute | CULS: Bankruptcy court improperly relied on pleadings/hearing transcripts; only final judgments are competent evidence. | Green Hills: Pending litigation and court rulings denying summary disposition are competent evidence that an objective dispute exists. | Held: Bankruptcy court properly considered the Texas litigation and independent review of the record supports finding a bona fide dispute. |
| Whether an offsetting counterclaim can create a bona fide dispute after BAPCPA | CULS: Offsetting counterclaims (esp. amount-only disputes) cannot establish a bona fide dispute for standing. | Green Hills: Post-BAPCPA § 303(b) includes disputes "as to liability or amount," so offsetting counterclaims can defeat standing. | Held: Post-BAPCPA text permits bona fide disputes as to amount; related counterclaims can deny standing. |
| Whether sanctions under Fed. R. App. P. 38 were warranted for frivolous appeal | Green Hills: Appeal is frivolous and abusive; sanctions appropriate. | CULS: Appeal raised arguable grounds; not frivolous. | Held: Denied — appeal not frivolous; misconduct below would be addressed by lower courts under other authorities. |
Key Cases Cited
- Subway Equip. Leasing Corp. v. Sims, 994 F.2d 210 (5th Cir. 1993) (establishes objective standard and burden-shifting for determining a bona fide dispute)
- Chicago Title Ins. Co. v. Seko Inv., Inc., 156 F.3d 1005 (9th Cir. 1998) (pre-BAPCPA decision limiting when a debtor’s counterclaim creates a bona fide dispute)
- Key Mech. Inc. v. BDC 56 LLC, 330 F.3d 111 (2d Cir. 2003) (pre-BAPCPA view that a directly related offset that could defeat the creditor’s claim may create a bona fide dispute)
- United States v. Am. Ry. Express Co., 265 U.S. 425 (1924) (appellate principle that appellee may defend judgment on any ground supported by the record)