551 B.R. 262
E.D. Tex.2016Background
- Four petitioning creditors (Pyke, Rivers, DVB/Juderman-Van Brunt, and Rice) filed an involuntary Chapter 7 petition against Funnel Science on Oct. 5, 2014; Bankruptcy Court dismissed the petition for bona fide disputes and denied a finding of bad faith.
- Funnel Science moved to dismiss and separately sought attorneys’ fees under 11 U.S.C. § 303(i); Bankruptcy Court awarded a reduced fee judgment totaling $20,000 apportioned among three petitioners.
- Funnel Science sought a bond under § 303(e), full recovery of requested fees, and sanctions for successive motions; Bankruptcy Court declined to require a bond, reduced the fee award, apportioned liability, and denied sanctions.
- Petitioners later moved for reconsideration, asserting Funnel Science lacked authority to do business in Texas (Tex. Bus. Org. Code § 9.051) and thus could not obtain affirmative relief; those motions were denied.
- The District Court consolidated cross-appeals, reviewed factual findings for clear error and legal conclusions de novo, and affirmed the Bankruptcy Court’s dismissal, fee award, apportionment, denial of bond, and denial of sanctions.
Issues
| Issue | Petitioners' Argument | Funnel Science's Argument | Held |
|---|---|---|---|
| Whether petitioners filed in bad faith | Petitioners contended they relied on counsel and reasonably believed claims were not subject to bona fide dispute | Funnel Science argued evidence (emails, testimony, conduct) showed petitioners knew claims were disputed and acted to harass/collect | No clear error in Bankruptcy Court finding bona fide disputes and no bad faith; affirmed |
| Whether a bond under §303(e) should be required | (N/A) petitioners opposed bond as not noticed/heard and excessive | Funnel Science sought $100,000 bond to secure damages and fees incurred | Court affirmed denial: notice/hearing present, imposition discretionary, amount unsupported/waived |
| Whether awarded attorneys’ fees under §303(i)(1) were excessive | Petitioners argued fees were excessive/unjustified for tasks and discovery, meriting reduction | Funnel Science sought full $29k+; argued presumption favors fee award | Bankruptcy Court’s reduction to $20,000 was within discretion under totality of circumstances; affirmed |
| Whether fee apportionment should be joint-and-several | Petitioners supported apportionment tied to claims/culpability | Funnel Science sought joint-and-several liability for full award | Apportionment among three petitioners was within discretion; affirmed |
| Whether sanctions/fees for defending reconsideration motions were warranted | Petitioners argued motions raised standing/registration issues and were permissible | Funnel Science sought sanctions under §303(i), §1927, and Rule 11 for alleged misrepresentations and vexatious filings | No bad faith or sanctionable conduct found; Rule 11 safe-harbor not complied with by Funnel Science; denial affirmed |
| Whether Funnel Science lacked standing under Tex. Bus. Org. Code §9.051 to obtain affirmative relief | Petitioners argued unregistered foreign LLC cannot obtain affirmative relief in Texas courts and thus cannot recover fees | Funnel Science (and Bankruptcy Court) argued §9.051 is a state "door-closing" statute for diversity suits and does not bar federal bankruptcy claims under federal law; registration later cured practical concerns | Court reviewed de novo and agreed with Bankruptcy Court: §9.051 does not bar federal bankruptcy §303(i) fees; motions for reconsideration denied; affirmed |
Key Cases Cited
- In re Sims, 994 F.2d 210 (5th Cir.) (objective standard for bona fide dispute analysis)
- Green Hills Dev. Co., L.L.C. v. Credit Union Liquidity Servs., LLC, 741 F.3d 651 (5th Cir.) (effect of 2005 Bankruptcy Code amendments on bona fide dispute/counterclaim analysis)
- In re Seko Investments, Inc., 156 F.3d 1005 (9th Cir.) (pre-2005 treatment of separate counterclaims vs. recoupment)
- In re Dennis, 330 F.3d 696 (5th Cir.) (appellate standards: clear error for facts, de novo for law)
- In re Cahill, 428 F.3d 536 (5th Cir.) (abuse-of-discretion review of fee awards under §303(i))
- Teal Energy USA, Inc. v. GT, Inc., 369 F.3d 873 (5th Cir.) (application of state "door-closing" statutes in federal diversity context)