600 B.R. 168
Bankr. E.D.N.Y.2019Background
- Petitioning creditors (Sprei, Leser, Miller) filed involuntary Chapter 7 petitions against Anmuth Holdings, LLC and Dupont Street Developers, LLC on May 31, 2018 and against Quest Funding LLC on June 4, 2018 to halt drawdowns on standby letters of credit securing environmental remediation obligations.
- The petitions were filed hours after a state appellate court denied a stay pending appeal; petitioners admitted they would not have filed if a stay had been granted. Miller had pending state-court claims and an L/C agreement; Leser and Sprei were not parties to that agreement.
- Petitioners conceded at hearing and trial that the asserted claims were subject to a bona fide dispute, rendering them ineligible to be petitioners under 11 U.S.C. § 303.
- The alleged debtors (Anmuth and Quest) moved to dismiss and for sanctions under 11 U.S.C. § 303(i) and § 105; court dismissed the involuntary petitions but retained jurisdiction to decide sanctions. An evidentiary hearing followed.
- The court found petitioners acted to freeze funds and coerce settlement, made no reasonable pre‑filing inquiry, and engaged in post‑filing harassment (threats, public denunciations). It awarded attorneys’ fees and costs, punitive damages, nunc pro tunc dismissal, and a two‑year injunction against new filings without leave.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether dismissal was "on consent" (precluding §303(i)) | Petitioners: their non‑opposition or later acquiescence means dismissal was by consent | Debtors: they had to move to dismiss; petitioners never agreed to dismissal and opposed damages | Dismissal was not on consent; §303(i) remedies remain available to debtors |
| Entitlement to fees under §303(i)(1) and scope of recoverable fees | Petitioners: fees should be limited to dismissal‑related work | Debtors: §303(i) is fee‑shifting and covers all phases, including fees spent pursuing §303(i) relief | Court awarded reasonable fees and costs for all phases (fees on fees permitted) |
| Whether petitioners filed in bad faith (§303(i)(2)) | Petitioners: relied on counsel; unaware claims were disputed at filing | Debtors: filing timed to circumvent adverse state rulings, coercive, no inquiry, malicious post‑filing conduct | Court found bad faith under totality of circumstances and granted §303(i)(2) relief (punitive damages) |
| Compensatory damages and proof | Petitioners: contest causation and amount | Debtors: Quest lost business and reputation; seeks compensatory damages | Court found record insufficient to quantify compensatory damages; denied award for actual damages pending further proof |
| Allocation of liability, nunc pro tunc relief, and future filing restriction | Petitioners: (implicitly) argued against broad relief | Debtors: sought joint and several liability, retroactive dismissal, and injunction barring filings without leave | Court held petitioners jointly and severally liable, dismissed petitions nunc pro tunc to filing dates, and enjoined petitioners from future filings re: Brunner/entities for two years without leave |
Key Cases Cited
- Wilk Auslander LLP v. Murray, 900 F.3d 53 (2d Cir. 2018) (involuntary petitions can be abused as litigation tactics)
- Crest One Spa v. TPG Troy, LLC, 793 F.3d 228 (2d Cir. 2015) (presumption in Second Circuit that fees/ costs follow dismissal; §303(i) is fee‑shifting)
- Lubow Mach. Co. v. Bayshore Wire Prods. (In re Bayshore Wire Prods.), 209 F.3d 100 (2d Cir. 2000) (standards for bad faith under §303(i))
- In re Forever Green Athletic Fields, Inc., 804 F.3d 328 (3d Cir. 2015) (endorsing totality‑of‑circumstances test for bad faith)
- State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (U.S. 2003) (due process limits on punitive damages analysis)
- BMW of N. Am., Inc. v. Gore, 517 U.S. 559 (U.S. 1996) (guideposts for ratio and reprehensibility in punitive awards)
- Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (U.S. 1991) (constitutional acceptability of certain punitive‑to‑compensatory ratios)