18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 1 of 23 Main Document UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK -------------------------------------------------------------- x : In re : : EMC Hotels and Resorts LLC, : fka NYLO Nyack, LLC, : fka WY Time Hotel, LLC, : : Debtor. Chapter 7 Case No.: 18−22932−rdd -------------------------------------------------------------- x INVOLUNTARY DEBTOR’S MEMORANDUM OF LAW IN SUPPORT OF ITS MOTION SEEKING DISMISSMAL OF THE INVOLUNTARY CHAPTER 7 CASE PURSUANT TO 11 U.S.C. SECTIONS 303 AND FED. R. CIV. PRO. 12(b) MADE APPLICABLE BY FEDERAL RULE OF BANKRUPTCY PROCEDURE 1011 AND 9014 OR IN THE ALTERNATIVE ABSTENTION UNDER 11 U.S.C. § 305(a)(1) Dated: July 2, 2018 Robert L. Rattet, Esq. James B. Glucksman, Esq. Rattet PLLC Attorneys for Involuntary Debtor 202 Mamaroneck Avenue White Plains, New York 10601 (914) 381-7400 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 2 of 23 Main Document TABLE OF CONTENTS PRELIMINARY STATEMENT ........................................................................................ 1 JURISDICTION AND VENUE ......................................................................................... 2 STATEMENT OF FACTS ................................................................................................. 2 A. THE PENDING LAWSUITS AND INTEREST HOLDER STRIFE ..................... 3 AN INVOLUNTARY PETITION MUST BE DISMISSED PURSUANT TO 11 U.S.C. § 303(b)(1) WHERE A BONA FIDE DISPUTE EXISTS BETWEEN THE PETITIONING CREDITORS AND THE ALLEGED DEBTOR AS TO THE AMOUNT OF THE PETITIONING CREDITORS CLAIMS. ........................................................................... 5 STANDARD OF REVIEW FOR A MOTION SEEKING TO DISMISS AN INVOLUNTARY PETITION PURSUANT TO 11 U.S.C. SECTION 303(b)(1). .......... 10 POINT II ........................................................................................................................... 12 IN THE ALTERNATIVE, THIS COURT SHOULD ABSTAIN FROM THIS CASE IN THE BEST INTERESTS OF THE ALLEGED DEBTOR AND ITS CREDITORS....... 12 POINT III .......................................................................................................................... 17 PURSUANT TO 11 U.S.C. § 303(e), THE COURT SHOULD REQUIRE THE PETITIONING CREDITORS TO POST A BOND FOR DAMAGES, COSTS AND ATTORNEYS’ FEES ALLOWED PURSUANT TO 11 U.S.C. § 303(i) ....................... 17 A. Improper Use Test .............................................................................................. 18 B. Improper Purpose Test ....................................................................................... 19 RELIEF REQUESTED ..................................................................................................... 20 ii 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 3 of 23 Main Document TABLE OF AUTHORITIES Cases In re ABQ-MCB Joint Venture, 153 B.R. 338, 341 (Bkrtcy.D.N.M.,1993) .............. 14, 15 In re Ballato, 252 B.R. 553, 557 (Bankr. M.D. Fla. 2000) .................................................. 18 In re Bayshore Wire Products Corp., 209 F.3d 100 (2d Cir. 2000) ............................... 18, 19 In re BDC 56 LLC, 330 F.3d 111 (2d Cir. 2003) ............................................... 6, 7, 10, 11 In re Camelot, Inc., 25 B.R. 861, 864 (Bankr. E.D. Tenn.1982) ...................................... 19 In re Cantico Int’l, Ltd., 2008 WL 755022 (Bankr. S.D.N.Y. 2008) ................................... 18 In re Diamondhead Casino Corporation, 2016 WL 3284674, at *19 (Bkrtcy.D.Del., 2016) ................................................................................................................................. 14, 15 In re Dilley, 339 B.R. 1, 6 (1st Cir. BAP 2006)................................................................ 11 In re Euro-American Lodging Corp., 357 B.R. 700 (Bankr. S.D.N.Y. 2007) .......... 6, 7, 8 In re Landmark Dist., Inc., 189 B.R. 290, 306 (Bankr. N.J. 1995) ...................................... 18 In re Metrogate, LLC, 2016 WL 3150177 ........................................................................ 11 In re Monitor Single Lift I, Ltd., 381 B.R. 455, 464 (Bankr. S.D.N.Y. 2008) ................. 13 In re Mountain Dairies, Inc., 372 B.R. 623 (Bkrtcy. S.D.N.Y.,2007) ............ 6, 7, 8, 15, 16 In re Nina Merch. Corp., 5 B.R. 743, 748 (Bankr. S.D.N.Y. 1980) ................................. 14 In re Persico Contracting and Trucking, Inc., 2010 WL 3766555 .................................... 13 In re R. Eric Peterson Constr. Co., 951 F.2d 1175 (10th Cir. 1991) .................................... 17 In re Rosenberg, 414 B.R. 826 (Bkrtcy.S.D.Fla.,2009) ................................................. 8, 9 In re Schloss, 262 B.R. 111 (Bankr. M.D. Fla. 2000) ................................................... 17, 18 In re Schloss, 262 B.R. 111, 116 (Bankr. M.D. Fla. 2000) ................................................. 17 In re Taub, 439 B.R. 261, 273 (Bkrtcy.E.D.N.Y.,2010) ................................................... 11 In re TPG Troy, LLC, 793 F.3d 228 (2d Cir. 2015) ............................................. 10, 11, 12 In re Trina Assocs., 128 B.R. 858, 867 (Bankr. E.D.N.Y. 1991) ..................................... 13 In re Zarnel, 619 F.3d 156 (2d. Cir. 2010) .................................................................. 10, 11 Key Mech. Inc. v. BDC 56 LLC (In re BDC 56 LLC), 2002 WL 449856 *3 (S.D.N.Y. 2002) .............................................................................................................................. 11 Matter of Win-Sum Sports, Inc., 14 B.R. 389, 394 (Bkrtcy.Conn., 1981) ................. 14, 15 Platinum Financial Services Corp. v. Byrd (In re Byrd), 357 F.3d 433, 437 (4th Cir.2004) ....................................................................................................................................... 11 Statutes 11 U.S.C. § 303 ....................................................................................... 5, 8, 15, 16, 17, 19 11 U.S.C. § 305 ........................................................................................................... 12, 15 iii 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 4 of 23 Main Document PRELIMINARY STATEMENT The question presented on this motion is simple: whether an intense interest holder’s dispute can be hauled into bankruptcy court under the guise on an involuntary Chapter 7 filing. This involuntary petition seeks to invoke the jurisdiction of the Federal court system, by commencing a proceeding that has echoes in numerous other litigated matters pending in state court. Upon information and belief, the Debtor has approximately $600,000.00 of trade accounts payable whose accounts are paid on a substantially current basis. Yet only two of those trade creditors, Consolidated Cos Inc. d/b/a Best Landscaping (“Best Landscaping”), holding a claim for $20,080.06 as asserted in the petition, and Consolidated Cos Inc. d/b/a Best Landscaping (“Best Landscaping”) holding a claim of $15,303.06 as asserted in the petition, initiated the filing. The remaining entity, CJB Asset Management, LLC (“CJB”) holds a hotly contested claim for the round number of $10,000.00. The Debtor holds significant claims against CJB’s principal, John Krupa. See infra.1 EMC Hotels and Resorts, LLC (hereinafter “EMC” or “Involuntary Debtor”), by and through its attorneys’ Rattet PLLC, makes this Motion to Dismiss the Involuntary Chapter 7 Case, filed by Petitioning Creditors Evolve, CJB and Best Landscaping (collectively, “Petitioning Creditors”), pursuant to section 303 of Title 11 of the United States Code (the “Bankruptcy Code”), and Fed. R. Civ. Pro. 12(b)(1), made applicable to 1 The Debtor expects to submit additional affidavits prior to the hearing on this motion concerning the nature and amount of Petitioners’ debts, as well as the Debtor’s obligations. The claims of Best Landscaping and Evolve may be secured by mechanics liens, making their eligibility as petitioning creditors questionable. This issue is under research. 1 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 5 of 23 Main Document this proceeding by Federal Rule of Bankruptcy Procedure 1011 and 9014 (the “Bankruptcy Rules”). JURISDICTION AND VENUE The Court has jurisdiction over this Application pursuant to 28 U.S.C. §§ 157 and 1334. Consideration of the Application is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. This proceeding has been initiated pursuant to Bankruptcy Code § 303, and Bankruptcy Rules 1011 and 9014. The Debtor asserts that this Court lacks jurisdiction for prudential reasons inasmuch as there are pending proceeding in state court that cover the debtor and creditor relationships at issue in this case. The Debtor believes that two out of the three creditors, Evolve and Best Landscaping, were solicited to join the proceeding by CJB, whose claim is disputed and subject to counterclaims. STATEMENT OF FACTS The facts relevant to this matter are set forth in the accompanying Declaration of Edgar Melo Costa dated June 29, 2018 (ECF No. 13, the “Costa Declaration”).2 What is clear from the Costa Declaration and the recently filed Motion to Appoint Interim Trustee (the “Trustee Motion”)3 is that the filing this petition has nothing to do with the interests of creditors. Further, as the Costa Declaration states, the Hotel’s business and the affiliated Food and Beverage Business are very much alive, and the duty of a Chapter 7 Trustee purpose, as set forth in 11 U.S.C. §704(a)(1) is to “collect and reduce to money the property of the estate….” The disputes relate entirely to the 2 All exhibit references relate to attachments to the Costa Declaration. All capitalized terms not otherwise defined shall have the meanings ascribed to them in the Costa Declaration. 3 The Debtor will file separate opposition to the Trustee Motion. 2 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 6 of 23 Main Document relationships and changes of LLC interests of interest holders. A. THE PENDING LAWSUITS AND INTEREST HOLDER STRIFE As set forth in the Costa Declaration4, On or about November 6, 2017 Howard Dean, an interest holder in Key Real Estate Holdings, LLC (“Key”), the sole owner of the membership interests of the Debtor, commenced an action in Supreme Court, Rockland County entitled Howard Dean v. NYLO Nyack, LLC, Kerry Wellington, Donald Wellington, Michael Yanko, John Krupa, Index Number 035388/2017. NYLO Nyack LLC is one of the Debtor’s previous names. On June 11, 2018 HD Dev NYLO, LLC (“HD”), an entity controlled by Howard Dean commenced a special proceeding in Supreme Court, Rockland County entitled HD Dev NYLO, LLC v. NYLO Nyack, LLC, Key Real Estate Holdings, LLC, Wy Management, LLC-Aka, WY Hospitality and Real Estate Group, LLC-Aka, WYINC Development, LLC, Index Number 033312/2018 (the “HD Special Proceeding”). On June 14, 2018 Kerry Wellington filed a sexual harassment complaint against Mr. Costa. In connection with this complaint Ms. Wellington obtained an order of protection preventing Mr. Costa from being in close proximity to her. Then, Ms. Wellington proceeded to stay at the hotel from June 16, 2018 to June 26, 2018, in an effort to prevent Mr. Costa from being at the premises. She was using this order of protection as a sword, not a shield. On or about June 19, 2018 Petitioning Creditors Evolve Controls (“Evolve”), CJB Asset Management, LLC (“CJB”) and Consolidated Cos Inc. d/b/a Best Landscaping, (collectively, “Petitioning Creditors”) filed an Involuntary Petition for relief under 4 All of the facts set forth herein are discussed in the Costa Declaration or appear on the face of the relevant court dockets. 3 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 7 of 23 Main Document Chapter 7 of the Bankruptcy Code (the “Petition”). These creditors’ claims are in a minor amount. Nevertheless they are disputed in both liability and amount. CJB’s claims are especially disputed since CJB’s principal, John Krupa, allegedly participated with Kerry Wellington in closing the Wells Fargo operating bank accounts of BY Nyack Grill LLC (“BV”) on or about June 26, 2018. Mr. Krupa, a former employee of the Debtor and/or BV has, upon information and belief, a material role in the events underlying the bankruptcy filing. The burden is on CJB to demonstrate that its claim is liquidated in amount and undisputed. On June 20, 2018 Donald F. Wellington, Kerry Wellington’s father, commenced an action in Supreme Court, New York County entitled Donald F Wellington v. Edgar Melo Costa, 155822/2018 (the “First Wellington Action”), relating to the Debtor and to other entities (the “Wellington Action”)5. On June 30, 2018 Michael L. Simes, Esq., McGuireWoods LLP sent Alexander Spiro and Daniel Mach of Quinn Emanuel Urquhart & Sullivan, LLP an email which stated, in relevant part: We will be filing suit tomorrow morning in Rockland County on behalf of BV Grill Nyack, LLC against EMC Real Estate Holdings and Mr. Costa personally for the conversion of more than $600,000 in the past three months from the BV Grill account to his accounts. As soon as a judge is assigned, we will be heading to the courthouse to seek immediate, temporary relief and accelerated discovery in advance of a preliminary injunction hearing. You are welcome to attend. The proposed filing of this action (the “Second Wellington Action”) illustrates further that the “center of gravity” of these controversies is in the Bankruptcy Court. EMC Real Estate Holdings , LLC is the parent of the Debtor, and BV Grill Nyack, LLC is a 5 Upon information and belief, the Debtor is not named as a party as a result of this involuntary filing. Counsel for the Debtor is not representing Mr. Costa in this action. 4 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 8 of 23 Main Document subsidiary of the Debtor. The commencement of this action skirts if not violates the automatic stay. Significantly, the attorneys for Howard Dean and HD, Mitchell Pollack, filed a notice of appearance in this proceeding on June 22, 2018, three days after the involuntary petition was filed. The proximity of the filing of the HD Special Proceeding Debtor’s counsel respectfully submits that the timing of these events, i.e. the commencement of the HD Special Proceeding and the First Wellington Action, as well as apparently the new action by Wellington’s counsel, and HD’s filing of a Notice of Appearance creates an inference that this involuntary bankruptcy is a litigation tactic. ARGUMENT POINT I AN INVOLUNTARY PETITION MUST BE DISMISSED PURSUANT TO 11 U.S.C. § 303(b)(1) WHERE A BONA FIDE DISPUTE EXISTS BETWEEN THE PETITIONING CREDITORS AND THE ALLEGED DEBTOR AS TO THE AMOUNT OF THE PETITIONING CREDITORS CLAIMS 11 U.S.C. § 303(b) as amended in the 2005 states: (b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title-(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $14,425 [FN1] more than the value of any lien on property of the debtor securing such claims held by the holders of such claims; (2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $14,425 [FN1] of such claims; (emphasis supplied). 5 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 9 of 23 Main Document The phrase “as to liability or amount” was added to § 303(b)(1) and (h)(1) following the phrase “ bona fide dispute” by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, §§ 1234(a)(1)(A) and (a)(12), 119 Stat. 23 (April 20, 2005). Thus, Congress has, by this amendment, explicitly expressed its policy determination that any dispute regarding the amount of the creditors claim will render the claim subject to a bona fide dispute, necessitating an immediate dismissal of the case. See, e.g. In In re Euro-American Lodging Corp., 357 B.R. 700 (Bankr. S.D.N.Y. 2007); In re Mountain Dairies, Inc., 372 B.R. 623 (Bkrtcy. S.D.N.Y.,2007). Thus, under Fed.R.Civ.P. Rule 12(b)(1) as incorporated by Fed.R.Bankr.P. Rule 1011 this case must be dismissed for lack of subject matter jurisdiction. The claim of at least one of the petitioning creditors, CJB is hotly contested. The Debtor believes that there may not be an actual claim. In In re Euro-American Lodging Corp., 357 B.R. 700 (Bankr. S.D.N.Y. 2007), Chief Judge Bernstein stated that the 2005 BAPCPA amendment clarified and expanded the meaning of “bona fide dispute.” The Court, in Euro-American Lodging, Id. stated: A bona fide dispute exists where “there is an objective basis for either a factual or a legal dispute as to the validity of [the] debt.” FN11 In re BDC 56 LLC, 330 F.3d at 117-18; accord Platinum Fin. Servs. Corp. v. Byrd (In re Byrd), 357 F.3d 433, 437 (4th Cir.2004); Metz v. Dilley (In re Dilley), 339 B.R. 1, 6 (1st Cir. BAP 2006) (“Under the objective standard [there is a bona fide dispute], ‘if there is either a genuine issue of material fact that bears upon the debtor's liability, or a meritorious contention as to the application of law to undisputed facts [.]’ ”) (quoting In re Lough, 57 B.R. 993, 997 (Bankr. E.D.Mich.1986)); In re Elsa Designs, Ltd., 155 B.R. 859, 864 (Bankr.S.D.N.Y.1993) (the bona fide dispute inquiry involves a determination whether factual or legal challenges to claims have “any 6 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 10 of 23 Main Document genuine and objectively determinable legal merit.”) Once the Court identifies a bona fide dispute, the inquiry ends. “The court's objective is to ascertain whether a dispute that is bona fide exists; the court is not to actually resolve the dispute.” In re BDC 56 LLC, 330 F.3d at 118 (quoting *715 In re Rimell, 946 F.2d 1363, 1365 (8th Cir.1991)); accord In re Byrd, 357 F.3d at 437 (“The bankruptcy court need not resolve the merits of the bona fide dispute, but simply determine whether one exists.”); In re Dilley, 339 B.R. at 6 (“The bankruptcy court is not to resolve any genuine issues of fact or law; its inquiry is to determine if such an issue exists.”) (emphasis supplied). In re Euro-American Lodging Corp. 357 B.R. 700, 714 -715, FN11 (Bkrtcy.S.D.N.Y.,2007). The Court in Mountain Dairies, Id. stated: Schneider-Valley glosses over a significant instruction in In re BDC 56 LLC, that the Court is to ascertain whether a bona-fide dispute exists, but “is not to actually resolve the dispute.” 330 F.3d at 118 (emphasis added). See also, In re DSC, Ltd., 486 F.3d 940, 945 (6th Cir.2007) ( “Importantly, the court need not resolve any genuine issues of fact or law; it only must determine that such issues exist.”) (citations omitted); In re Regional Anesthesia Assocs., 360 B.R. 466, 477 (Bankr.W.D.Pa.2007) (“The outcome of a dispute need not be resolved, only its presence or absence.”). There is no doubt that the dispute over both the liability and amount of Schneider-Valley's claim against Mountain Dairies would continue after the entry of an order for relief. Schneider-Valley would have this Court find no dispute for the purposes of the threshold requirement of an undisputed claim and then have this Court resolve multi-faceted disputes over the amount of that claim. Moreover, In re BDC 56 LLC's definition of “bona fide dispute,” has likely been altered by BAPCPA. The application of the objective standard has presented courts with considerable difficulty, some of which may diminish with the added language “as to liability or amount.” Affirmative defenses to a creditor's claim suggest that a bona fide dispute exists, but the debtor's assertion of a counterclaim that does not go to the merits of the creditor's claim does not necessarily demonstrate a bona fide dispute. Prior to the 2005 amendments, some courts took the position that a debtor's counterclaim disputing the amount of a creditor's claim, and not the legitimacy or the existence of such claim, did not make the creditor's claim 7 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 11 of 23 Main Document the subject of a bona fide dispute. It appears that this result may change as a consequence of the 2005 amendments, since a dispute as to amount is sufficient to disqualify the petitioning creditor. 2 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 303.30[2] [b], 303-30 to 303-31 (15th rev. ed.2006) (footnotes omitted). Thus, after the amendments made by BAPCPA, “disputes as to amount-not just liability-are sufficient to create a bona fide dispute.” Id. at 303-32. See also, In re Euro-American Lodging Corp., 357 B.R. 700, 712 n. 8 (Bankr.S.D.N.Y.2007) (stating in dicta that the result of the BAPCPA amendment is that “any dispute regarding the amount that arises from the same transaction and is directly related to the underlying claim should render the claim subject to a bona fide dispute.”) (citations omitted); In re Regional Anesthesia Assocs., 360 B.R. at 469 (citing Collier on Bankruptcy). In re Mountain Dairies, Inc. 372 B.R. 623, 633. 634 (Bkrtcy. S.D.N.Y.,2007) (emphasis in text). Thus, within the meaning of 11 U.S.C. § 303(b), as amended, at least one of the petitioning creditor, CJB, is ineligible to file the involuntary Chapter 7 petition. The remaining creditors, Evolve and Best Landscaping, hold claims that are de minimus in comparison to the Debtor’s outstanding accounts payable, which are approximately $1,000,000 and upon information and believe are paid on a substantially current basis. In the case at bar, two of the claims are creditors asserting truly minor amounts, Evolve and Best Landscaping. The third, CJB, is a friend of Kerry Wellington, a former companion of Michael Yanko and Edgar Costa, who is in a serious dispute of a personal nature with Mr. Costa. As explained by the Court in In re Rosenberg, 414 B.R. 826 (Bkrtcy.S.D.Fla.,2009), the purpose of the 2005 amendments was to proscribe the improper use of involuntary bankruptcy proceedings to coerce settlements of disputed 8 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 12 of 23 Main Document debts. The Rosenberg, Id. Court stated: It is important to note that the phrase “as to liability or amount” was added to § 303(b)(1) by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Congress provided the following comments regarding these amendments: Sec. 1234. Involuntary Cases. Section 1234 of the Act amends the Bankruptcy Code's criteria for commencing an involuntary bankruptcy case. Current law renders a creditor ineligible if its claim is contingent as to liability or the subject of a bona fide dispute. This provision amends section 303(b)(1) to specify that a creditor would be ineligible to file an involuntary petition if the creditor's claim was the subject of a bona fide dispute as to liability or amount. It further provides that the claims needed to meet the monetary threshold must be undisputed. The provision makes a conforming revision to section 303(h)(1). Section 1234 becomes effective on the date of enactment of this Act and applies to cases commenced before, on, and after such date. H.R. Rep. 109-31(I), 2005 U.S.C.C.A.N. 88 (emphasis added). The primary purpose of disqualifying a creditor whose claim is subject to a bona fide dispute from filing an involuntary bankruptcy petition is to prevent such creditors from using involuntary petitions as a club to coerce the debtor to satisfy judgments when substantial questions may remain concerning the debtor's liability. See In re Tikijian, 76 B.R. 304, 313-14 (Bankr.S.D.N.Y.1987) (citing S. 7618, 98th Cong.2d Sess., June 19, 1984). As a result of the above amendment, any dispute regarding the amount of the petitioning creditors' claims that arises from the same transaction and is part of the underlying claim renders the claim subject to a bona fide dispute. In re Regional Anesthesia Assoc., P.C., 360 B.R. 466 (Bankr.W.D.Pa.2007). In re Rosenberg 414 B.R. 826, 845 -846 (Bkrtcy.S.D.Fla.,2009). Given the background supplied to the Court in the Trustee Motion, this case is motivated by serious disputes, even if this is not apparent from the face of Evolve’s and Best Landscaping’s claims. A bona fide dispute as to both the liability and amount of the claims 9 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 13 of 23 Main Document exists, and the petition must be dismissed. STANDARD OF REVIEW FOR A MOTION SEEKING TO DISMISS AN INVOLUNTARY PETITION PURSUANT TO 11 U.S.C. SECTION 303(b)(1). Creditors whose debts are the subject of a bona fide dispute are not eligible petitioning creditors. See In re TPG Troy, LLC, 793 F.3d 228 (2d Cir. 2015). The Court stated: Courts apply an objective test in determining whether a bona fide dispute exists. Key Mech. Inc. v. BDC 56 LLC (In re BDC 56 LLC ), 330 F.3d 111, 117–18 (2d Cir.2003), abrogated on other grounds by In re Zarnel, 619 F.3d 156 (2d Cir.2010). A court must “determine whether there is an objective basis for either a factual or a legal dispute as to the validity of the debt.” Id. at 117 (internal quotation marks and alteration omitted). There is a bona fide dispute if “there is either a genuine issue of material fact that bears upon the debtor's liability or a meritorious contention as to the application of law to undisputed facts.” Id. “[T]he legislative history makes it clear that Congress intended to disqualify a creditor whenever there is any legitimate basis for the debtor not paying the debt, whether that basis is factual or legal.” Id. (internal quotation marks omitted). An involuntary bankruptcy case cannot be the means of pressuring a debtor to pay a legitimately disputed debt. See id. at 117–18. Critically, while a court is called upon to determine the presence of a bona fide dispute, it is not called on to resolve such dispute. Id. at 118. The petitioning creditor bears the initial burden of coming forward with evidence to “establish a prima facie case that no bona fide dispute exists. Once a prima facie case has been established, the burden shifts to the debtor to demonstrate the existence of a bona fide dispute.” Id. Here, Creditors challenge the finding of a bona fide dispute by arguing that the bankruptcy court failed to examine the pending litigation to determine if there was a bona fide dispute regarding alter ego liability. It is true that the mere existence of pending litigation, here litigation relating to Troy's liability on the Notes, or the filing of an answer is insufficient to establish the existence of a bona fide dispute. See In re Ross, 63 B.R. 951, 960–61 (Bankr.S.D.N.Y.1986). But, as the bankruptcy court concluded, “pending litigation over a claim strongly suggests” the existence of a bona fide dispute, even if it does not suffice to firmly establish that existence. In re TPG Troy, LLC, 492 B.R. at 159–60 (collecting cases). 10 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 14 of 23 Main Document In re TPG Troy, LLC, 793 F.3d 228, 234 (2d Cir. 2015) In this case, there is an abundance of pending litigation. This involuntary proceeding was commenced virtually simultaneously with two other actions/special proceedings in state court. See also In re Metrogate, LLC, 2016 WL 3150177, at *8 (Bkrtcy.D.Del., 2016) (“The existence of affirmative defenses may suggest that bona fide disputes exist.29 Pending litigation strongly suggests, but does not necessarily establish, the existence of a bona fide dispute.”). “The determination of whether a bona fide dispute exists involves a burdenshifting test.” Key Mech. Inc. v. BDC 56 LLC (In re BDC 56 LLC), 2002 WL 449856 *3 (S.D.N.Y. 2002), aff’d In re BDC 56 LLC, 330 F.3d 111 (2d Cir. 2003). The petitioning creditors have the burden to show that their claims are not the subject of a bona fide dispute as part of their prima facie case. Key Mech. Inc. v. BDC 56 LLC (In re BDC 56 LLC), 330 F.3d 111, 118 (2d Cir. 2003); see also In re Dilley, 339 B.R. 1, 6 (1st Cir. BAP 2006); citing Platinum Financial Services Corp. v. Byrd (In re Byrd), 357 F.3d 433, 437 (4th Cir.2004); see also In re Taub, 439 B.R. 261, 273 (Bkrtcy.E.D.N.Y.,2010) (“Under the test adopted in BDC 56 LLC, the petitioning creditors bear the initial burden of coming forward with evidence to “establish a prima facie case that no bona fide dispute exists.”). This aspect of In re BDC 56 LLC), 330 F.3d 111, 118 (2d Cir. 2003 remains good law, notwithstanding In re Zarnel, 619 F.3d 156 (2d. Cir. 2010). Once the petitioning creditors meet their prima facie burden, the burden shifts to the involuntary debtor to establish that a bona fide dispute exists. In re Dilley, 339 B.R. at 6. The parties must sustain their respective burdens by a preponderance of the evidence standard. Id. at 7. The courts role in determining if a bona fide dispute exists should be limited only 11 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 15 of 23 Main Document to an inquiry into whether there is a bona fide dispute; and not a resolution on any genuine issues of fact or law. See In re TPG Troy, LLC, 793 F.3d 228, 234 (2d Cir. 2015) (“Critically, while a court is called upon to determine the presence of a bona fide dispute, it is not called on to resolve such dispute. Id. at 118. The petitioning creditor bears the initial burden of coming forward with evidence to “establish a prima facie case that no bona fide dispute exists. Once a prima facie case has been established, the burden shifts to the debtor to demonstrate the existence of a bona fide dispute.”). POINT II IN THE ALTERNATIVE, THIS COURT SHOULD ABSTAIN FROM THIS CASE IN THE BEST INTERESTS OF THE ALLEGED DEBTOR AND ITS CREDITORS The following factors are relevant to determining whether dismissal is warranted under 11 U.S.C. § 305(a)(1) of the Bankruptcy Code in the best interests of the Alleged Debtor and its creditors:  The economy and efficiency of administration;  Whether another forum is available to protect the interests of both parties or there is already a pending proceeding in state court;  Whether federal proceedings are necessary to reach a just and equitable solution;  Whether there is an alternative means of achieving an equitable distribution of assets;  Whether the debtor and the creditors are able to work out a less expensive out-ofcourt arrangement which better serves all interests in the case; 12 18-22932-rdd  Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 16 of 23 Main Document Whether a non-federal insolvency has proceeded so far in those proceedings that would be costly and time consuming to start afresh with the federal bankruptcy process; and  The purpose for which bankruptcy jurisdiction has been sought. See, e.g. In re Persico Contracting and Trucking, Inc., 2010 WL 3766555, at *4 (Bkrtcy.S.D.N.Y.,2010): The legislative history reveals that they were—Congress at least saw three initial considerations to take into account as to whether to abstain over a petition, whether voluntary or involuntary; one where the petition was filed by a small number of creditors and most creditors opposed the bankruptcy, whether there's a state insolvency proceeding or other out-of-court arrangement pending, and whether the dismissal is in the best interest of the debtor and all creditors. In Re: Audiovisual Workshop, Inc., 211 B.R. 154, 161 (Bankr.S.D.N.Y.1997) and In Re: Paper One Partners, LP, 283 B.R. 678. In re Persico Contracting and Trucking, Inc., 2010 WL 3766555, at *4 (Bkrtcy.S.D.N.Y.,2010) See also In re Monitor Single Lift I, Ltd., 381 B.R. 455, 464 (Bankr. S.D.N.Y. 2008); see also In re Trina Assocs., 128 B.R. 858, 867 (Bankr. E.D.N.Y. 1991). The Court, in Persico, Id. stated: This case on this record falls within the Court's discretion to so abstain. In considering whether to abstain and not accept an involuntary petition even if on its face it would qualify, the courts have developed several factors to consider. They were developed in light of initially the legislative history with respect to Section 305 as well as the purposes and policies of Section 303 in the Bankruptcy Code generally. In re Persico Contracting and Trucking, Inc., 2010 WL 3766555, at *4 (Bkrtcy.S.D.N.Y.,2010) Applying these factors, both the Involuntary Debtor and its creditors would benefit from dismissal under section 305(a)(1) of the Bankruptcy Code. First, , going forward with this bankruptcy case adds another layer of litigation and expense to the 13 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 17 of 23 Main Document disputes between the Involuntary Debtor and the Petitioners. Second, the matters in this case should be addressed in the litigations that have been ongoing for years between the Petitioners and the Alleged Debtor rather than in the Bankruptcy Court. Third, federal proceedings are unnecessary to reach a just and equitable result. In re Nina Merch. Corp., 5 B.R. 743, 748 (Bankr. S.D.N.Y. 1980) (finding that bankruptcy proceedings were not necessary to reach a just and equitable solution where there was no showing that “any of the petitioning creditors commenced the involuntary proceeding to secure an unfair advantage or engage in some type of overreaching” and no ongoing state court proceedings would be disrupted). Here, the Petitioners seek an advantage in their ongoing litigation. Courts have not hesitated to dismiss involuntary bankruptcies triggered by shareholder disputes. See, e.g. In re Diamondhead Casino Corporation, 2016 WL 3284674, at *19 (Bkrtcy.D.Del., 2016); In re ABQ-MCB Joint Venture, 153 B.R. 338, 341 (Bkrtcy.D.N.M.,1993); Matter of Win-Sum Sports, Inc., 14 B.R. 389, 394 (Bkrtcy.Conn., 1981). The Court, in In re Diamondhead Casino Corporation, 2016 WL 3284674, at *19 (Bkrtcy.D.Del., 2016) in dismissing an involuntary proceeding stated: Not surprisingly, a petitioning creditor's desire to change management because it disagrees with the direction they are taking (or not taking), is not the subject of many bankruptcy decisions. As the Petitioning Creditors note, the few cases cited by Diamondhead for the proposition that dismissal is appropriate when a petitioning creditor is seeking to resolve intra-company management and stockholder disputes are distinguishable on their facts. These cases are essentially two party disputes, or disputes among partners or equity holders in closely held companies, often when the company is paying its debts as they become due.143 Nonetheless, the basic principle that stockholder 14 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 18 of 23 Main Document disputes are not appropriately remedied by an involuntary petition holds true. As the Win–Sum court noted, the desire to replace management with a bankruptcy trustee to make business decisions as an alternative to state court proceedings to resolve stockholder problems is a factor warranting dismissal. Similarly, in In re Petro Fill, Inc., the fact that a petitioning creditor who was also a stockholder and director had standing to bring an action under state law for dissolution of the alleged debtor played a role in the Court dismissing that involuntary petition.144 These cases confirm that vindicating stockholder rights is not a proper purpose for a bankruptcy proceeding. As in Win–Sum and Petro Fill, the Petitioning Creditors have adequate stockholder remedies in state court. In re Diamondhead Casino Corporation, 2016 WL 3284674, at *19 (Bkrtcy.D.Del., 2016) See also Matter of Win-Sum Sports, Inc., 14 B.R. 389, 394 (Bkrtcy.Conn., 1981) (“I believe that for abstention purposes pursuant to s 305(a)(1), the Win-Sum post-petition payments and the motivation of the petitioners become pertinent and significant.”) See also In re ABQ-MCB Joint Venture, 153 B.R. 338, 341 (Bkrtcy.D.N.M.,1993)(“It appears to this Court that MCB is using the bankruptcy process solely for the purpose of moving state court litigation to this forum.”) The Involuntary Debtor must now defend itself in this bankruptcy proceeding, which has negatively impacted its businesses and taken away resources from important day to day operations. Therefore, Debtor respectfully submits that dismissal is both appropriate and warranted. The Court, in Mountain Dairies, Id. stated: Even if Schneider-Valley were an eligible petitioner under 11 U.S.C. § 303, this Court would be compelled to abstain pursuant to 11 U.S.C. § 305 because this is essentially FN7 a two-party dispute for which the parties have adequate remedies in state court. The bankruptcy court is not a collection agency. See, e.g., In re Century Tile and Marble, Inc., 152 B.R. 688, 689 (Bankr.S.D.Fla.1993) (creditors' attorney admonished and sanctioned for “utilizing the bankruptcy court as a collection agency instead of going to state court where collection 15 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 19 of 23 Main Document claims are properly filed”); In re Glover, Inc., 43 B.R. 322, 325 n. 9 (Bankr.D.N.M.1984). FN7. This statement may appear inconsistent because the Court has noted elsewhere that certain amounts asserted are due to, and from, entities that are not present here. The dispute here appears to be centered around written and oral agreements, with Schneider-Valley and Schneider-Dairy as suppliers, and Mountain Dairies, Star Dairy and White's Dairy as dealers. Thus, the fact that multiple entities are involved on both sides has complicated Schneider-Valley's attempt to prove undisputed amounts in this involuntary case, but it does not change the fact that the dispute is essentially a dispute between a supplier and a dealer. Though Schneider-Valley has argued that it is “not the Debtor's only creditor” (Response to Debtor's Supplemental Memorandum of Law, ECF Docket No. 18, p. 2; Tr. at 1516), Schneider-Valley is the only petitioning creditor, and no other creditor joined in the petition as allowed by 11 U.S.C. § 303(c). In re Mountain Dairies, Inc. 372 B.R. 623, 635 (Bkrtcy. S.D.N.Y.,2007) (emphasis supplied). This involuntary petition is most certainly a shareholder’s dispute, unrelated to the interests of creditors. Mountain Dairies, Id. cited as an additional factor in favor of abstention “whether another forum is available to protect the interests of both parties or there is already a pending proceeding in state court”, citing In re 801 South Wells Street, L.P., 192 B.R. 718, 723 (Bankr.N.D.Ill.1996). In this case there not only is another forum; it has been availed to commence not one, but two actions by the petitioning creditors against the Debtor. 16 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 20 of 23 Main Document POINT III PURSUANT TO 11 U.S.C. § 303(e), THE COURT SHOULD REQUIRE THE PETITIONING CREDITORS TO POST A BOND FOR DAMAGES, COSTS AND ATTORNEYS’ FEES ALLOWED PURSUANT TO 11 U.S.C. § 303(i) Pursuant to 11 U.S.C. § 303(i), “[i]f 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.” An involuntary debtor may be entitled to fees, costs, and damages if three conditions are met: (1) the involuntary petition is dismissed; (2) the dismissal is without the consent of all petitioning creditors; and (3) the debtor did not waive its right to recover under § 303. In re Schloss, 262 B.R. 111, 116 (Bankr. M.D. Fla. 2000); citing In re R. Eric Peterson Constr. Co., 951 F.2d 1175 (10th Cir. 1991). As such, if an involuntary petition is dismissed, pursuant to 11 U.S.C. § 303(c)(1), attorneys fees and costs may be awarded without any finding of bad faith. However, “[a]n award may be enhanced by compensation for damages and possibly the imposition of punitive damages if it has been established by a preponderance of the evidence that the petition was filed in bad faith.” In re Schloss, 262 B.R. 111, 116 (Bankr. M.D. Fla. 2000). “It has been generally recognized that petitioning creditors should 17 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 21 of 23 Main Document carefully examine the risks undertaken when considering filing an involuntary petition.” In re Ballato, 252 B.R. 553, 557 (Bankr. M.D. Fla. 2000); citing In re Landmark Dist., Inc., 189 B.R. 290, 306 (Bankr. N.J. 1995). Courts have applied four separate tests to determine whether an involuntary petition was filed in bad faith: (1) the improper use test; (2) the improper purpose test; (3) the objective test; and (4) the Rule 9011 test. In re Cantico Int’l, Ltd., 2008 WL 755022 (Bankr. S.D.N.Y. 2008); citing In re Bayshore Wire Products Corp., 209 F.3d 100, 105 (2d Cir. 2000). Although the Second Circuit Court of Appeals has not settled on one particular test, the Court in In re Hentges, 351 B.R. 758 (Bankr. N.D. Okla. 2006), found the Bayshore decision “instructive,” and analyzed each separate test. The Debtor believes that it is entitled to Section 303(i)(2) damages under each test, and particularly the “improper use” and “improper purpose” tests. A. Improper Use Test Under the “improper use test,” a petition is filed in bad faith when the petitioning creditor is acting to advance its own interests, rather than protecting against other creditors gaining disproportionate advantages. In re Schloss, 262 B.R. 111 (Bankr. M.D. Fla. 2000). Under this test, bad faith is found where the involuntary petition is filed notwithstanding the petitioning creditor’s access to other remedies. “An involuntary petition is clearly not a substitute for customary collection procedures.” In re Schloss, 262 B.R. at 116-17 (bad faith involuntary filing has been found where the petitioning creditors filed the involuntary petition solely to collect on a judgment.). It appears to the Debtor that the involuntary petition was filed in an effort to further its state court shareholder dispute with the Debtor, while forcing it to incur unnecessary time 18 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 22 of 23 Main Document and expense in making this motion. These issues are being vigorously litigated in state court and an additional forum is not needed. Here, the Debtor and the Debtor’s principal are currently defending itself in several state court actions relating to the Debtor. One of those dissidents, Howard Dean, even commenced a special proceeding in Supreme Court, Rockland County entitled HD Dev NYLO, LLC v. NYLO Nyack, LLC, Key Real Estate Holdings, LLC, Wy Management, LLC-Aka, WY Hospitality and Real Estate Group, LLC-Aka, WYINC Development, LLC, Index Number 033312/2018 on June 11, 2018, eight days before this involuntary proceeding was filed. B. Improper Purpose Test The “improper purpose” test, provides that bad faith exists if the filing of the petition was motivated by ill will, malice, or a desire to embarrass or harass the alleged debtor. In re Bayshore Wire Products Corp., 209 F.3d 100, 105 (2d Cir. 2000); citing In re Camelot, Inc., 25 B.R. 861, 864 (Bankr. E.D. Tenn.1982). Here, as set forth more fully in the Costa Declaration, it is apparent to the Involuntary Debtor that the purpose behind forcing it into chapter 7 bankruptcy is spite and malice on the part of Kerry Wellington, Donald Wellington, Howard Dean and John Krupa. The Petitioning Creditors malicious and ill attempted maneuver constitutes bad faith pursuant to 11 U.S.C. § 303(i)(2), and entitles the Involuntary Debtor to any damages proximately caused by such filing and punitive damages. The Involuntary Debtor is seeking entry of an order dismissing this bankruptcy case, without the consent of the Petitioning Creditors. Therefore, if the Motion is granted, the Involuntary Debtor will be entitled to costs, attorneys’ fees and damages as a result of the Petitioning Creditors’ bad faith filing. Furthermore, the Involuntary Debtor asks this Court 19 18-22932-rdd Doc 16 Filed 07/02/18 Entered 07/02/18 11:27:14 Pg 23 of 23 Main Document to compel the Petitioning Creditors to file a bond to indemnify the Involuntary Debtor for such amounts. RELIEF REQUESTED WHEREFORE, the Involuntary Debtor requests that the Court enter the following relief: A. an Order dismissing the Involuntary Chapter 7 proceeding; B. award the Involuntary Debtor costs, reasonable attorneys’ fees, and punitive damages; C. a bond to indemnify the Involuntary Debtor for fees, costs, and damages it has sustained as a result of the petition; and D. such other and further relief as is just and proper. Dated: July 2, 2018 White Plains, New York RATTET, PLLC Attorneys for Involuntary Debtor 202 Mamaroneck Avenue White Plains, New York 10601 Telephone: (914) 381-7400 BY: /s/ Robert L. Rattet_________ Robert L. Rattet E. 20