IN THE MATTER OF 8SPEED8, INC. VIBE MICRO, INC., Appellant, v. SIG CAPITAL, LLC, Appellee.
No. 17-16277
United States Court of Appeals for the Ninth Circuit
April 29, 2019
D.C. No. 2:14-cv-01618-RFB. Appeal from the United States District
Before: Susan P. Graber, Stephanie Dawn Thacker, and Mark J. Bennett, Circuit Judges.
FOR PUBLICATION
OPINION
Before: Susan P. Graber, Stephanie Dawn Thacker,* and Mark J. Bennett, Circuit Judges.
Opinion by Judge Thacker; Dissent by Judge Bennett
SUMMARY**
Bankruptcy
The panel affirmed the district court‘s decision affirming the bankruptcy court‘s denial of a request for statutory damages made by a 50% shareholder in an involuntary debtor following dismissal of the bankruptcy case.
The panel held that the shareholder lacked standing to seek damages under
Dissenting, Judge Bennett wrote that Miles v. Okun (In re Miles), 430 F.3d 1083 (9th Cir. 2005), holding that a third party could not seek damages under
COUNSEL
Torrence E.S. Lewis (argued), Law Offices of Torrence E.S. Lewis, Pittsburgh, Pennsylvania, for Appellant.
David A. Stephens (argued), Stephens Gourley & Bywater, Las Vegas, Nevada, for Appellee.
OPINION
THACKER, Circuit Judge:
This case asks whether a 50% shareholder of an involuntary debtor may seek damages under
In March 2012, 8Speed8, Inc. was incorporated in the state of Nevada. Appellant Vibe Micro, Inc. is a 50% owner of 8Speed8‘s voting stock. Appellee SIG Capital, Inc. is a creditor of 8Speed8 and owns 20 million contingent shares.
On December 13, 2013, SIG filed the involuntary bankruptcy petition at the center of this dispute. 8Speed8 never appeared in the bankruptcy action. Instead, on January 10, 2014, Vibe Micro filed a motion to dismiss the bankruptcy. Vibe Micro also asked for costs, fees, and actual and punitive damages under
The court concluded that Vibe Micro did not have standing under
Section 303(i) provides:
If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment—
(1) against the petitioners and in favor of the debtor for—
(A) costs; or
(B) a reasonable attorney‘s fee; or
(2) against any petitioner that filed the petition in bad faith, for—
(A) any damages proximately caused by such filing; or
(B) punitive damages.
In In re Miles, we considered whether third parties may seek damages under
First, the relevant House and Senate Reports suggest that only the debtor has standing to seek
Second, appellate courts in this circuit have twice considered whether a non-debtor can seek damages under
Appellants would have this court believe they are mere martyrs, standing up for the interests of 8Speed8 when no one else would. But, as valiant as Vibe Micro‘s intentions may have been, they were unnecessary. The Code has within its sections a
Third, reading
the consequences that involuntary proceedings impose on the debtor. Those consequences include “loss оf credit standing, inability to transfer assets and carry on business affairs, and public embarrassment.” In re Reid, 773 F.2d 945, 946 (7th Cir. 1985). A third party, who intervenes freely in an involuntary action, does not face those same consequences. Even if it did,
AFFIRMED.
BENNETT, Circuit Judge, dissenting:
The Majority holds that, under Miles v. Okun (In re Miles), 430 F.3d 1083 (9th Cir. 2005), a third party who appears for a debtor and successfully defends against an
involuntary bankruptcy petition can never request that the debtor be awarded costs, a reasonable attorney‘s fee, or damages. The Majority finds that this is the case even when, as here, the debtor nеver appeared in the involuntary bankruptcy action, was prevented from appearing by its deadlocked governance, and the third party who appeared on behalf of the debtor successfully defended the involuntary bankruptcy. This rule, according to the Majority, is absolute, regardless of how closely related the third party is to the debtor, and even though the third party only seeks an award in favor of the debtor.1 Because Miles never went so far, and
Appellant Vibe Micro, Inc. owned 50% of the debtor 8Speed8‘s vested voting shares. Appellee SIG, LLC owned contingent shares in 8Speed8, which had not vested at the time of the involuntary bankruptcy petition. 8Speed8‘s board of directors reflected its collective ownership, with a director appointed from each of the owners, including SIG. Any action taken on behalf of the company required a two-thirds majority of the directors or the shareholders.
On December 13, 2013, SIG filed an involuntary bankruptcy petition against 8Speed8. According to Vibe Micro, both SIG and Luxor Entertainment, Inc.—the other 50% shareholder—intended to liquidate 8Speed8 contrary to Vibe Micro‘s position and inconsistent with its interests.
Since “no one else could or would appear,” Vibe Micro filed a motion to dismiss on behalf of 8Speed8, which the bankruptcy court granted. Vibe Micro also sought, on bеhalf of the debtor, 1) costs or a reasonable attorney‘s fee, pursuant to
Involuntary bankruptcy is a drastic course of action that carries significant consequences, and “[f]iling an involuntary petition should be a measure of last resort.” Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 707 (9th Cir. 2004). The fee-shifting and damages provisions of
being unnecessarily and improperly used as a tool to resolve disputes. See Advance Press, 46 B.R. at 702 (“It is . . . obvious that the use of the bankruptcy court аs a routine collection device would quickly paralyze this court.” (quoting In re SBA Factors of Miami, 13 B.R. 99, 101 (Bankr. S.D. Fla. 1981))). For these reasons, “there must be available some remedy for the improper filing of an involuntary petition.” In re Ed Jansen‘s Patio, Inc., 183 B.R. 643, 644 (Bankr. M.D. Fla. 1995) (permitting
In keeping with the purpose and nature of
Similarly, the Southern District of New York found that a 50% shareholder had standing to contest an involuntary bankruptcy petition: “[T]he debtor in the instant case is unable to answer the petition because its only two shareholders are on either side of the case, with neither having authority to act for the corporation.”4 In re Westerleigh Dev. Corp., 141 B.R. 38, 40 (Bankr. S.D.N.Y. 1992); see also In re Synergistic Techs., Inc., No. 07-31733-SGJ-7, 2007 WL 2264700, at *5 (Bankr. N.D. Tex. Aug. 6, 2007) (“[W]hen there is a corporate governance deadlock that prevents a corporate debtor from taking a position with regard to an involuntary bankruptcy petition, the court should allow shareholders to assert positions [including requests for damages under
petitioner that files a petition in bad faith. See Ed Jansen‘s Patio, 183 B.R. at 644.
Here, Vibe Micro owned 50% of the debtor‘s stock and stepped into the debtor‘s shoes to defend against the involuntary bankruptcy proceeding, and the party that filed the involuntary bankruptcy petition was itself a shareholder and on the board of directors. SIG admitted that 8Speed8 was essentially non-functional because of the shareholders’ disputes: “[T]here was a breakdown. There was a lack of communication. There was a shareholder meeting called that was—that not all the shareholders wanted to attend.” Any action on behalf of 8Speed8 required a two-thirds majority, either of the board (which included SIG) or of the shareholders
The cases cited by the Majority do not support its rule. In re Mike Hammer Productions, Inc., which the Majority cites for the proposition that “Congress intended only the debtor to have standing to seek damages,” Maj. Op. at 5, stands only for the commonsense proposition that if a party lacks standing to contest an involuntary bankruptcy petition—as creditors do in most circumstances—then it also lacks standing to cоllect costs, fees, or damages under
Prods., Inc.), 294 B.R. 752, 754-55 (B.A.P. 9th Cir. 2003). The case says nothing about third parties who step into a debtor‘s shoes.5 In fact, the court in Hammer appears to recognize that third parties have standing to seek damages when they represent the debtor. 294 B.R. at 755 (noting that in Ed Jansen‘s Patio, 183 B.R. at 644, the “assignee for benefit of creditors” was eligible to recover damages as a “representative of the debtor‘s estate“; observing that the third party with standing in Fox Island, 106 B.R. at 968, had “represented the Partnership“; and citing approvingly to an American Law Reports analysis of
The Majority primarily relies on Miles to support its holding that a third party can never collect damages, contending that “Appellant‘s appearance in this case was just as voluntary as the third parties in Miles.” Maj. Op. at 6. But Miles involved true third parties—relatives of the debtors—who filed a separate suit in state court and who never appeared in the underlying bankruptcy cases. 430 F.3d at 1086. Vibe Micro is not such an independent third party—it was acting as a 50% shareholder during a corporate governance breakdown. Vibe Micro has always asserted that no other entity wаs willing to defend 8Speed8, and Vibe Micro claimed fees and damages, not after the fact and not for itself, as in Miles, but in the bankruptcy proceeding and for the debtor, as part of its motion to dismiss filed on the debtor‘s behalf.
Miles primarily dealt with the meaning of
Of course, Vibe Micro should not automatically get its fees and damages. I would remand this case for factual
findings that were never madе. The bankruptcy court would need to, inter alia, 1) determine whether any party other than Vibe Micro could have appeared on 8Speed8‘s behalf, see Fox Island, 106 B.R. at 967 (making a factual finding that a non-petitioning partner represented the partnership); 2) decide whether the filing was in bad faith; and 3) calculate the appropriate damages and fees—if any—in light of the totality of the circumstances, Higgins, 379 F.3d at 707. I cannot agree with the Majority‘s determination that Vibe Micro lacks standing to seek fees and damages that would be awarded to the debtor, regardless of the debtor‘s ability to defend itself in the bankruptcy action, and notwithstanding that Vibe Micro actually obtained a dismissal on behalf of the debtor. Accordingly, I respectfully dissent.