{"id":1625,"date":"2024-07-03T12:59:12","date_gmt":"2024-07-03T12:59:12","guid":{"rendered":"https:\/\/usatrustedlawyers.com\/blog\/joinder-deadline-ok-bankruptcy-appellate-panel-rules\/"},"modified":"2024-07-03T16:40:18","modified_gmt":"2024-07-03T16:40:18","slug":"joinder-deadline-ok-bankruptcy-appellate-panel-rules","status":"publish","type":"post","link":"https:\/\/usatrustedlawyers.com\/blog\/joinder-deadline-ok-bankruptcy-appellate-panel-rules\/","title":{"rendered":"Joinder deadline OK, Bankruptcy Appellate Panel rules"},"content":{"rendered":"
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Listen to this article<\/div>\n<\/div>\n

In In Re: HH Technology Corp.<\/em>, a creditor filed a motion seeking to join an involuntary petition nearly eight weeks after the Bankruptcy Court judge\u2019s initial joinder deadline, arguing that there was \u201cgood cause\u201d to allow its late request.<\/p>\n

Being allowed to join was critical, as the involuntary petition needed at least three creditors attached to it to proceed under \u00a7303(b)(1) of the Bankruptcy Code, and the late-filing creditor stood to be the third.<\/p>\n

In challenging the dismissal of their involuntary bankruptcy petition, the three creditors argued that \u00a7303(c) \u201ccreates a statutory right to join an involuntary petition at any time prior to dismissal or grant of relief.\u201d<\/p>\n

But the appellees countered that their opponents were ignoring Bankruptcy Rules 1003(b) and 1013(a), as well as the Bankruptcy Court\u2019s inherent authority to set deadlines.<\/p>\n

They urged the BAP to adopt the holding of the 6th Circuit case In re DSC, Ltd.<\/em><\/a> that \u00a7303(c) \u201cmerely sets an absolute outside limit on the time within which certain qualifying creditors may join an involuntary petition \u2026 [but] does not prohibit a court from setting an earlier deadline, based upon its case management authority.\u201d<\/p>\n

The BAP agreed, ruling first that establishing the joinder deadline was within the Bankruptcy Court\u2019s \u201cformidable case-management authority\u201d and the \u201cgreat latitude\u201d judges have in exercising that authority.<\/p>\n

\u201cIn addition, DSC\u2019s approach best harmonizes the tension between \u00a7303(c) (permitting joinder \u2018before the case is dismissed or relief is ordered\u2019) and Bankruptcy Rule 1013(a) (requiring a court to \u2018determine the issues of a contested petition at the earliest practicable time and forthwith enter an order for relief [or] dismiss the petition\u2019) \u2014 a goal which finds support in well-established rules of statutory construction,\u201d Judge Peter G. Cary of Maine wrote for the panel.<\/p>\n

The BAP went on to rule that the Bankruptcy Court judge had properly denied the untimely joinder motion considering all the circumstances, including the late-filing creditor\u2019s awareness of the joinder deadline and the fact that it had previously consented to the debtor using an assignment for the benefit of creditors to wind up its business affairs.<\/p>\n

The 30-page decision is Lawyers Weekly No. 03-005-24.<\/p>\n

Judicial autonomy preserved<\/strong><\/h2>\n

\"FrancisThe decision is an important one, reaffirming the autonomy of the bankruptcy courts and their ability to fairly and efficiently hear involuntary cases, said one of the appellees\u2019 attorneys, Francis C. Morrissey of Braintree.<\/p>\n

\u201cNot allowing bankruptcy courts to manage their own dockets is a recipe for chaos in the bankruptcy courts,\u201d he said.<\/p>\n

Morrissey noted that the case arose from a Polish company trying to enforce a multi-million-dollar foreign default judgment.<\/p>\n

\u201cThe law is very, very clear: Bankruptcy courts are not collection agents,\u201d he said. \u201cBankruptcy is not there to be an adjunct to a judgment creditor\u2019s debt-collection activities. Involuntary cases aren\u2019t to be used to prosecute two-party disputes.\u201d<\/p>\n

\"IlyasThe appellants\u2019 attorney, Ilyas J. Rona of Boston, said his clients will likely seek further review from the 1st Circuit.<\/p>\n

Rona said the statutory language allowing creditors an unfettered right to join an involuntary petition \u201cis pretty straightforward and clear.\u201d<\/p>\n

\u201cIn this case, there were three petitioning creditors before the start of a trial, and it was a three-day trial, which consumed a lot of party resources and obviously a lot of the judge\u2019s time,\u201d Rona said. \u201cWe think that, consistent with the intent of the statute, the trial could have been obviated once a third creditor threw its hat into the ring.\u201d<\/p>\n

He added that the 1st Circuit may want to supply guidance on how a party pleads its way through an involuntary petition, given that transfers can disqualify creditors, and it is an open question as to whether defenses to such disqualifications are even to be considered in weighing whether an involuntary petition should be dismissed.<\/p>\n

\u201cOur position is that those defenses aren\u2019t to be considered,\u201d he said.<\/p>\n

Rona said it is understandable for a bankruptcy judge to want to use deadlines to manage her docket.<\/p>\n

But here, allowing the third creditor to join would have obviated a trial on the \u201cminutiae\u201d of whether there were more than 11 creditors in the case overall, he said.<\/p>\n

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\"RichardIf you lose a reasonable opportunity, you may have made your own bed and failed to sleep in it.<\/strong><\/p>\n<\/blockquote>\n

\u201cI don\u2019t think it would upset anything, and I don\u2019t think there was any prejudice to any parties,\u201d he said.<\/p>\n

But Boston bankruptcy attorney Richard N. Gottlieb agreed with the BAP\u2019s decision that setting a deadline struck a proper balance between what might otherwise be conflicting mandates in the bankruptcy rules.<\/p>\n

The creditor in HH Technology<\/em> had been given a \u201creasonable opportunity\u201d to join the petition, he noted.<\/p>\n

\u201cIf you lose a reasonable opportunity, you may have made your own bed and failed to sleep in it,\u201d Gottlieb said.<\/p>\n

Needham bankruptcy attorney Adam J. Ruttenberg agreed.<\/p>\n

\u201cYou cannot sit on your rights,\u201d he said. \u201cYou cannot assume you can do it later.\u201d<\/p>\n

Ruttenberg said the BAP also got it \u201cexactly right\u201d in terms of how to consider defenses to claims that preferential transfers should disqualify creditors. Many creditors will have received payments within the 90-day period before the petition was filed that are subject to \u201ceasy defenses,\u201d such as the \u201cordinary course of business\u201d defense or \u201cnew value\u201d defense, he noted.<\/p>\n

Given the evidence that one of the principals of the alleged debtor had started up an identical business, Gottlieb wondered whether it might have been more prudent for the creditor to have asserted claims against the new company.<\/p>\n

Unsuccessful involuntary bankruptcy petitioners put themselves on the hook, jointly and severally, for the debtor\u2019s legal fees and could also be assessed punitive damages, if the involuntary petition was deemed to have been filed in bad faith, he noted.<\/p>\n

Morrissey confirmed that his clients would indeed be seeking attorneys\u2019 fees, including those incurred in defending against the creditors\u2019 appeal.<\/p>\n

\u201cYou need to be very, very careful before you file an involuntary petition that there are no other ways to collect on a particular debt,\u201d Gottlieb said.<\/p>\n

Late strategy change<\/strong><\/h2>\n

In 2010, Polish chemical manufacturer Rokita obtained a foreign default judgment against HHT, an engineering company with offices in Massachusetts and Texas, for over $1 million in compensatory damages and approximately $12 million in lost profits and other damages.<\/p>\n

Rokita then sued in Massachusetts federal court to enforce the default judgment. In December 2021, the District Court partially granted Rokita\u2019s motion for judgment on the pleadings for just over $1 million. That same month, HHT ceased operations and elected to use an assignment for the benefit of creditors to wind up its business affairs. After the assignee accepted the assignment, it sent notification to HHT\u2019s creditors.<\/p>\n

Rokita did not assent to the assignment and commenced an involuntary Chapter 7 bankruptcy petition against HHT under \u00a7303(b)(2).<\/p>\n

The assignee filed a motion to dismiss the voluntary petition, which HHT joined. The assignee and HHT argued that HHT had more than 11 creditors, and, therefore, under \u00a7303(b)(1), the commencement of the involuntary bankruptcy against HHT was invalid because it lacked three petitioning creditors.<\/p>\n

During a status conference on that motion on April 21, 2022, Bankruptcy Court Judge Janet E. Bostwick issued an order warning that the court would not consider any joinder motions filed after May 23, 2022, \u201cabsent a showing of good cause,\u201d and Rokita did not object.<\/p>\n

A second creditor, Morimatsu, timely joined the involuntary petition. Three days before the May 23 deadline, Rokita requested a 30-day extension, which was denied.<\/p>\n

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<\/i>In Re: HH Technology Corp.<\/strong><\/p>\n

THE ISSUE:<\/strong> Can a bankruptcy court set a deadline for creditors to join an involuntary petition at a point in time earlier than dismissal or grant of relief?<\/p>\n

DECISION:<\/strong> Yes (1st Circuit Bankruptcy Appellate Panel)<\/p>\n

LAWYERS:<\/strong> Ilyas J. Ronas of Milligan, Rona, Duran & King, Boston (appellants)<\/p>\n

D. Ethan Jeffery and Christopher M. Condon, of Murphy & King, Boston; Francis C. Morrissey of Morrissey, Wilson & Zafiropoulos, Braintree (appellees)<\/p>\n<\/div>\n<\/div>\n

Although it had previously consented to the assignment, DFT filed a motion seeking to join the involuntary petition on July 16, 2022, nearly eight weeks after the expiration of the initial joinder deadline.<\/p>\n

DFT argued that there was good cause to allow its late request because it had just discovered new information, including that one of HHT\u2019s principals had formed a new entity that appeared to be operating the same business with the same employees at a nearby location.<\/p>\n

But on July 18, 2022, Bostwick ruled that DFT had failed to show good cause to join the petition, reasoning that DFT had been represented by counsel, knew about the deadline, and could have sought additional information or sought an extension before it expired.<\/p>\n

In post-trial briefings after a two-day hearing on the motion to dismiss, Rokita and Morimatsu argued that, for the purposes of determining creditor numerosity, 10 of the purported creditors should not be counted because of \u201cnumerous genuine issues of material fact.\u201d Alternatively, they argued that HHT should bear the burden of proving affirmative defenses to the claim that the disputed creditors had received preferential transfers.<\/p>\n

On March 31, 2023, Bostwick entered the dismissal order, explaining that Rokita and Morimatsu had failed to satisfy their burden of establishing that HHT had fewer than 12 eligible creditors.<\/p>\n

She further ruled that Rokita and Morimatsu had failed to meet their burden of showing that creditors were ineligible because they were transferees of voidable transfers.<\/p>\n

Rokita, Morimatsu and DFT then appealed Bostwick\u2019s dismissal order \u201cand all interlocutory orders that merge into\u201d that final order, including the ones related to the joinder deadline.<\/p>\n

Petitioning creditors\u2019 burden<\/strong><\/h2>\n

As to the dismissal order, the appellants had raised three challenges, the BAP noted. They argued that, as a rule, bankruptcy courts should not consider affirmative defenses to avoidability in the context of a motion to dismiss an involuntary petition.<\/p>\n

Second, even if it were appropriate to consider such defenses generally, HHT\u2019s failure to plead them should have barred the Bankruptcy Court from considering them, the appellants argued.<\/p>\n

Finally, they contended that the Bankruptcy Court erred by placing the burden of proving that those defenses were unavailable to certain of the listed creditors on Rokita and Morimatsu, rather than on HHT.<\/p>\n

But in the 1st Circuit, once an involuntary debtor answers the petition and files its required list of creditors, the burden of disputing the existence and eligibility of creditors to be counted towards the numerosity requirement \u201cunequivocally shifts to the petitioning creditors,\u201d the BAP noted.<\/p>\n

The panel went on to rule that the Bankruptcy Court had appropriately considered defenses to the appellants\u2019 preference claims and had correctly placed on Rokita and Morimatsu the burden of establishing the unavailability of the \u00a7547(c) affirmative defenses.<\/p>\n

The BAP added that even if the Bankruptcy Court erred in articulating the burden of proof, it was harmless error because the assignee and HHT had met the burden of proving the existence of potential \u00a7547 defenses, even if they were not required to do so. <\/strong><\/p>\n

The panel also found that the failure of the assignee and HHT to plead the affirmative defenses to \u00a7547 voidability claims was not fatal, in part because the appellants had been late in raising the \u00a7547 claims in the first instance.<\/p>\n

<\/p>\n

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