Sunday, February 21, 2016

Movie References Abound in Opinion Denying Fees to Alleged Debtor

With the Academy Awards just a week away, one Texas judge has demonstrated his love of film in an opinion chock full of movie references.    The opinion is also a helpful guide to recovery of attorneys' fees under 11 U.S.C. Sec. 303(i).   In re Clean Fuel Technologies II, LLC, No. 15-30827 (Bankr. W.D. Tex. 2/4/16), which can be found here

The Court set the tone for the opinion in the opening paragraphs:
This case involves an unsuccessful Involuntary Petition filed under Chapter 7 of the Bankruptcy Code against an alleged debtor. The Court previously dismissed the Involuntary Petition, finding that the petitioning creditors did not meet the eligibility requirements established by statute and recent Fifth Circuit precedent. Now, The Empire Strikes Back through a Counterclaim—the alleged debtor seeks recovery of attorney’s fees and costs against the unsuccessful petitioning creditors under § 303(i) of the Bankruptcy Code.

The Court finds that, upon dismissal of an involuntary petition, a presumption arises in favor of awarding attorneys’ fees and costs to the alleged debtor. In this case, however, the Court determines, based on the totality of the circumstances, the presumption of an award of attorneys’ fees and costs to the alleged debtor has been overcome. As a result, the petitioning creditors in this case have dodged a Bullitt and the Counterclaim filed by this alleged debtor must be denied.
Opinion, p. 1.   The helpful footnotes explain that The Empire Strikes Back was released by Lucasfilm in 1980 and earned an Academy Award for Best Sound, while Bullitt was released by Warner Brothers in 1968 and earned the Academy Award for Best Film Editing.    

As explained by the Court, four petitioning creditors filed an involuntary petition against Clean Fuel Technologies II, LLC.    The Court found that the claims of the petitioning creditors were each disputed as to amount but not liability.   Acknowledging an apparent conflict in Fifth Circuit precedent, the Court followed the more recent decision, In re Green Hills Dev. Co., LLC, 741 F.3d 651 (5th Cir. 2014), which disallowed a petitioning creditor if the amount of the debt was in dispute.  Because the debts of each of the four petitioning creditors was disputed at least in part, the court dismissed the petition.

The Alleged Debtor then brought a counterclaim to recover their attorneys' fees.    The Court noted that section 303(i) stated that the Court "may" award attorneys' fees.    After noting a split of authority as to the Court's ability to award fees, the Court adopted a presumption in favor of awarding fees which could be rebutted based on the totality of the circumstances.
This Court finds that the majority “presumption” approach—i.e., that a presumption exists that an award of attorneys’ fees and costs will be made against unsuccessful petitioning creditors, but that the presumption may be rebutted based on the totality of the circumstances—is the most persuasive approach. In this Court’s view, the “presumption” approach recognizes the seriousness of filing an involuntary petition by creating a presumption that fees will be awarded against creditors if they are unsuccessful. Yet this “presumption” approach still affords the court discretion on whether to award fees, consistent with the statutory term “may” used in § 303(i). This Court will, therefore, adopt this harmonized “presumption” approach.
Opinion, p. 11.    The Court decided to deny the award of attorneys' fees based on the fact that the involuntary petition had merit despite being dismissed, that the petitioning creditors acted for a proper motive and that the debtor's attorney was also an officer of the debtor who operated his law practice out of the debtor's place of business.    The Court denied the counterclaim for attorneys' fees based on "the particular (and somewhat peculiar) facts and circumstances in this unsuccessful involuntary bankruptcy case."   Opinion, pp. 16-17.    In my opinion, it looks like the court denied the fee request because the involuntary petition was brought for a proper purpose and could have succeeded but for the overly technical requirement that the entire debt be undisputed.

Having gotten through the technical stuff, here are Judge Mott's multiple movie references:
Now, The Empire Strikes Back (fn1) through a Counterclaim—the alleged debtor seeks recovery of attorney’s fees and costs against the unsuccessful petitioning creditors under § 303(i) of the Bankruptcy Code. 
Note 1:  STAR WARS: EPISODE V – THE EMPIRE STRIKES BACK (Lucasfilm 1980) (Academy Award for Best Sound).
As a result, the petitioning creditors in this case have dodged a Bullitt (fn2) and the Counterclaim filed by this alleged debtor must be denied.
Note 2: BULLITT (Warner Brothers 1968) (Academy Award for Best Film Editing).
The Manager of Clean Fuel2 from its Inception (fn5) in May 2014 through March 2015 was Mr. Warren.
Note 5: INCEPTION (Warner Brothers 2010) (Academy Award for Best Achievement in Cinematography).
As a result, Dangerous Liaisons (fn6) were created when Clean Fuel2 was born in May 2014.
Note 6: DANGEROUS LIAISONS (Lorimar Film Entertainment 1988) (Academy Award for Best Costume Design).
The Crash (fn7) of the venture occurred after a controversial meltdown meeting in December 2014.
 Note 7:  CRASH (Bob Yari Productions 2004) (Academy Award for Best Picture).
A There Will Be Blood (fn8) attitude quickly developed, with litigation erupting between the parties in various courts, much of which is ongoing.
Note 8:  THERE WILL BE BLOOD (Miramax 2007) (Academy Award for Best Achievement in Cinematography).
In substance, this is the foundation behind the decision of the Petitioning Creditors to file the Involuntary Petition against Clean Fuel2—they lacked any remedy for The Hurt Locker (fn10) in which they found themselves.
 Note 10:  THE HURT LOCKER (Voltage Pictures 2008) (Academy Award for Best Picture).
To start, some courts have noted that § 303(i) of the Bankruptcy Code can function as an “automatic” fee-shifting statute. This approach follows the “English Rule”—the loser pays. In simple terms, the unsuccessful petitioning creditor is Unforgiven (fn12) and must automatically pay the reasonable attorneys’ fees and costs of the alleged debtor.
 Note 12: UNFORGIVEN (Warner Brothers 1992) (Academy Award for Best Picture).
At the same time, the Court recognized and the evidence in this case showed that Clean Fuel2 was not operating as a business at the time the Involuntary Petition was filed. Although perhaps An Inconvenient Truth (fn14)—it was readily apparent that Clean Fuel2 was a defunct non-operating entity. Clean Fuel2 had very little cash funds and was not paying creditors. 
Note 14:  AN INCONVENIENT TRUTH (Lawrence Bender Production 2006) (Academy Award for Best Documentary).
The evidence also demonstrated that Clean Fuel2 had not operated as a business since early 2015—several months before the Involuntary Petition was filed. Clean Fuel2 had only a few hundred dollars in the bank in the months preceding the Involuntary Petition and had received very few deposits and written very few checks. The existing management of Clean Fuel2 appeared unconcerned with the Gravity (fn15) of its dire financial condition and had taken little or no real action to address the collection and liquidation of its remaining tangible assets and pay creditors.
Note 15:   GRAVITY (Warner Brothers 2013) (Academy Award for Best Achievement in Cinematography).
In a Reversal of Fortune,(fn 17) the Court finds that the Petitioning Creditors have overcome the rebuttable presumption that attorneys’ fees and costs should be awarded to Clean Fuel2 on its Counterclaim under § 303(i)(1) of the Bankruptcy Code.
Note 17:  REVERSAL OF FORTUNE (Sovereign Pictures 1990) (Academy Award for Best Actor).

Some readers might question why Judge Mott chose to insert eleven gratuitous references to Academy Award winning motion pictures in an otherwise dry and technical opinion.    I think it shows that beneath the judge's stone-faced demeanor on the bench lies a quick and irreverent wit.  It also shows that this is a man who enjoys his job.   While these insights may not be particularly deep or profound, they say something about the man beneath the robe.   

This is not Judge Mott's first foray into popular culture.   In the case of In re SCC Kyle Partners, Ltd., 2013 Bankr. LEXIS 2439 (Bankr. W.D. Tex. 2013), a case about chapter 11 cram-down interest rates, he cited the Rolling Stones for the proposition that "You can't always get what you want, but you get what you need."    In In re LMR, LLC, 496 B.R. 410 (Bankr. W.D. Tex. 2013), a case about the reorganization of a hotel, he quoted George Bernard Shaw for the proposition that "The great advantage of a hotel is that it is a refuge from home life."

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