921 F.3d 1193
9th Cir.2019Background
- 8Speed8, Inc., a Nevada corporation, faced an involuntary Chapter 7 petition filed by creditor SIG Capital on Dec. 13, 2013; 8Speed8 never appeared in the bankruptcy proceeding.
- Vibe Micro, a 50% voting shareholder of 8Speed8, moved to dismiss the involuntary petition on Jan. 10, 2014 and sought costs, attorney’s fees, and damages under 11 U.S.C. § 303(i) on behalf of the debtor.
- At a hearing SIG conceded dismissal was appropriate; the bankruptcy court dismissed the petition but denied Vibe Micro’s request for statutory fees and damages, concluding Vibe Micro lacked standing under § 303(i).
- The district court affirmed; the Ninth Circuit panel (Judge Thacker) affirmed, holding a non-debtor shareholder lacks standing to recover under § 303(i).
- Judge Bennett dissented, arguing Miles v. Okun did not categorically bar a closely aligned third party (here a 50% shareholder who stepped in because of corporate deadlock) from seeking awards on behalf of the debtor and would have remanded for factual findings.
Issues
| Issue | Plaintiff's Argument (Vibe Micro) | Defendant's Argument (SIG / Majority) | Held |
|---|---|---|---|
| Whether a 50% shareholder who appears for a non-appearing debtor may seek costs and reasonable attorney’s fees under § 303(i)(1) | Vibe Micro acted for the debtor due to corporate deadlock and may obtain awards "in favor of the debtor" even though the movant is not the named debtor | § 303(i)(1) awards are "in favor of the debtor" and only the debtor (or its representative with standing) may recover; Vibe Micro is not the debtor | No — shareholder lacked standing to recover § 303(i)(1) fees in its own name or as claimant for the debtor |
| Whether a non-debtor may recover damages under § 303(i)(2) for bad-faith filings | Vibe Micro sought damages to be awarded to the debtor after obtaining dismissal; closely related actors defending the debtor should be permitted remedies | Miles establishes § 303(i) limits recovery to the debtor; the statute’s text and history support limiting standing to the debtor | No — non-debtor shareholder cannot recover under § 303(i)(2); recovery limited to debtor |
| Whether In re Miles controls or is distinguishable when the third party steps into the debtor’s shoes because the debtor cannot act | Vibe Micro: Miles involved unrelated third parties; here the shareholder was acting for a non-functional debtor and sought awards for the debtor | Majority: Miles’ statutory interpretation and precedent (and legislative history) apply regardless; Vibe Micro’s voluntary appearance does not change standing | Majority: Miles is dispositive; distinction not sufficient to change result |
| Whether the case should be remanded for factual findings on whether Vibe Micro was the only actor able to defend the debtor and whether bad faith existed | Vibe Micro: factual determination needed (e.g., governance deadlock, who could appear, bad faith) before denying relief | Majority: statutory standing bars relief; discretionary awards still depend on debtor standing; no remand required for standing question | Dissent would remand for fact-finding; Majority affirms denial on standing grounds |
Key Cases Cited
- Miles v. Okun (In re Miles), 430 F.3d 1083 (9th Cir. 2005) (held § 303(i) damages recovery is limited to the debtor and interpreted § 303(i)(1) language to inform § 303(i)(2))
- In re Reid, 773 F.2d 945 (7th Cir. 1985) (describing harms from involuntary petitions and noting fee awards under § 303(i) are discretionary)
- Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701 (9th Cir. 2004) (discussing involuntary petition standards and deterrent purpose of fee-shifting)
- Franklin v. Four Media Co. (In re Mike Hammer Prods., Inc.), 294 B.R. 752 (B.A.P. 9th Cir. 2003) (concluded non-debtor creditors without affiliation lack standing to seek § 303(i) relief)
- In re Westerleigh Dev. Corp., 141 B.R. 38 (Bankr. S.D.N.Y. 1992) (allowed a 50% shareholder to contest an involuntary petition where corporate deadlock prevented the debtor from acting)