544 B.R. 591
Bankr. W.D. Tex.2016Background
- Clean Fuel Technologies II, LLC (Clean Fuel2) was the alleged debtor; an involuntary Chapter 7 petition was filed against it by four creditors (ELH, Pro Tech, TOP, Terminal Supply) on May 27, 2015 and was tried July 16, 2015. The petition was dismissed on July 20, 2015.
- The court found petitioning creditors’ claims were subject to a bona fide dispute (in part based on the Fifth Circuit’s decision in In re Green Hills), and therefore the petitioners were ineligible under § 303(b). The dismissal was described as a close and technical call.
- Clean Fuel2 timely filed a counterclaim under 11 U.S.C. § 303(i) seeking $17,171 in attorneys’ fees and $1,880 in costs (plus $1,665 more for prosecuting the counterclaim). Trial on the counterclaim was held January 12, 2016.
- The petitioning creditors defended by arguing fees should be denied or reduced based on the totality of circumstances; they cited reasonableness of filing, motivation to appoint a Chapter 7 trustee, and disputed particular fee items.
- The court found a rebuttable presumption in favor of awarding fees after dismissal but, applying the totality-of-the-circumstances factors (merits of the petition, debtor’s conduct, reasonableness of creditors’ actions, and creditors’ motivation), concluded the presumption was rebutted and denied the counterclaim. The court also discounted fee items for services by debtor-owners/officers and non-testifying travel costs.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Entitlement to fees under 11 U.S.C. § 303(i)(1) after dismissal | Clean Fuel2: dismissal entitles debtor to reasonable attorneys’ fees and costs. | Petitioners: court has discretion; fees not warranted here. | Court: statutory prerequisites met but award is discretionary; presumption arises but may be rebutted. |
| Proper standard for awarding fees under § 303(i) | Clean Fuel2: (implicitly) fees should follow dismissal (presumption). | Petitioners: courts should apply totality of circumstances, no presumption. | Court: adopts majority harmonized approach — rebuttable presumption of fees, overcome by totality of circumstances. |
| Whether petitioners’ conduct and petition had merit | Clean Fuel2: petition was improper and subject to bona fide dispute. | Petitioners: petition was reasonable to protect assets and appoint trustee; had substantial merit. | Court: petition had substantial merit and dismissal was a close/technical call; this factor weighs against awarding fees. |
| Reasonableness of claimed fee items | Clean Fuel2: requested fees and costs (including services by Brown and Harrington) are reasonable. | Petitioners: many fees are improper (owner/officer attorneys, non-testifying travel); debtor did not incur real expense. | Court: reduces/denies recovery for fees reflecting services by debtor-owners/officers and non-testifying travel; overall denies counterclaim. |
Key Cases Cited
- In re Green Hills Dev. Co., LLC, 741 F.3d 651 (5th Cir. 2014) (bona fide dispute as to amount can render petitioning creditor ineligible to file involuntary petition)
- Crest One Spa v. TPG Troy, LLC (In re TPG Troy, LLC), 793 F.3d 228 (2d Cir. 2015) (§ 303(i) creates rebuttable presumption favoring fee awards that may be overcome by totality of circumstances)
- In re Maple-Whitworth, Inc., 556 F.3d 742 (9th Cir. 2009) (recognizes rebuttable presumption and totality test under § 303(i))
- Higgins v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys., Inc.), 379 F.3d 701 (9th Cir. 2004) (identifies totality-of-circumstances factors for § 303(i) awards)
- Susman v. Schmid (In re Reid), 854 F.2d 156 (7th Cir. 1988) (close dismissal questions weigh against fee awards)
- In re Sims, 994 F.2d 210 (5th Cir. 1993) (prior Fifth Circuit guidance on bona fide disputes, later addressed by Green Hills)