Appeal from the United States Bankruptcy Court for the Central District of California Honorable Peter H. Carroll, Chief Bankruptcy Judge, Presiding Bk. No. 11-20598-PC
SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
Argued and Submitted on September 21, 2012
at Pasadena, California
Before: HOLLOWELL, HAMMOND*fn2 and MARKELL, Bankruptcy Judges.
This appeal stems from the bankruptcy court's refusal to continue a hearing on a motion to dismiss an involuntary bankruptcy petition that the appellants brought against the appellee, and the subsequent entry of an award of fees in the appellee's favor. We AFFIRM.
Imani Fe was organized for the purpose of acquiring and developing an affordable housing project in South Central Los Angeles (the Project). Imani Fe hired Hilrock Corporation (Hilrock) as the general contractor on the Project. Hilrock, in turn, hired various subcontractors, including Coast to Coast Associates (Coast to Coast) and KR Electric. A dispute arose between Hilrock and the managing member of Imani Fe's general partner. Hilrock contended that it did not receive full payment for overhead and profit on the Project and that it was not reimbursed for advance costs and change orders. As a result, Hilrock recorded a mechanic's lien against the Property. In September 2010, Hilrock brought a state court action against Imani Fe for breach of contract, alleging damages in excess of $4.9 million and to foreclose on the lien.
On March 11, 2011, Toshio Kato aka Hilrock, along with Alberto Makabali aka Coast to Coast, and Robert Boghozian dba KR Electric (the Petitioning Creditors) filed a chapter 7*fn3 involuntary petition (Petition) against Imani Fe. The Petitioning Creditors asserted claims for unpaid contractor work performed on the Project. Hilrock asserted a claim of $4,950,102.43; Coast to Coast asserted a claim of $21,500.00 and KR Electric asserted a claim of $22,766.69.*fn4
On March 30, 2011, Imani Fe filed an answer contesting the petition and denying all material allegations. Imani Fe asserted that the Petitioning Creditors were ineligible to file the Petition because they did not hold three separate and distinct claims and held claims subject to a bona fide dispute. A status conference on the Petition was continued several times while the parties conducted discovery. During that time, Imani Fe successfully defended against two motions for relief from stay filed by Wilshire State Bank, whose claim was secured by the Property.
After concluding discovery, the Debtor filed, on October 11, 2011, a summary motion to dismiss the Petition or summary adjudication (Motion to Dismiss). Imani Fe asserted that deposition testimony from Coast to Coast and KR Electric 1 established that they were not its creditors, but creditors of 2 Hilrock. Imani Fe also asserted that Hilrock admitted that part 3 of its claim was invalid. Therefore, Imani Fe contended that 4 Hilrock's claim was subject to a bona fide dispute as to 5 liability and amount. As a result, Imani Fe argued that the 6 Petitioning Creditors were ineligible to file the Petition and 7 that the Petition was filed in bad faith. Imani Fe requested 8 that the bankruptcy court dismiss the Petition and retain 9 jurisdiction to decide whether to award attorneys' fees, costs 10 and/or punitive damages. A hearing on the Motion to Dismiss was 11 set for November 22, 2011.
12 On November 1, 2011, Hilrock filed an ex-parte application 13 to continue the hearing on the Motion to Dismiss for 30 days 14 (Motion to Continue). Hilrock asserted that its principal, 15 Gerald Schneiderman, had been hospitalized from October 8-25 16 (with hydrocephalus, which required brain surgery) and was 17 readmitted on October 31, 2011. Thus, Hilrock asserted that due 18 to Mr. Schneiderman's unavailability, it was unable to draft an 19 opposition to the Motion to Dismiss.
20 Neither Coast to Coast nor KR Electric filed a separate 21 opposition to the Motion to Dismiss and Imani Fe filed a notice 22 of their non-opposition on November 2, 2011. Hilrock filed a 23 reply to the non-opposition, stating that the Petitioning 24 Creditors anticipated filing a joint opposition to the Motion to 25 Dismiss, but were hampered by Mr. Schneiderman's hospitalization. 26 Imani Fe filed an opposition to the Motion to Continue, alleging 27 that counsel for Hilrock had not contacted it regarding a 28 stipulation and had not sufficiently explained why other members 1 of Hilrock, Coast to Coast, or KR Electric could not assist in 2 filing an opposition. No opposition to the Motion to Dismiss was 3 ever filed by any of the Petitioning Creditors; the Motion to 4 Dismiss was therefore unopposed.
5 On November 8, 2011, the bankruptcy court entered an order 6 denying the Motion to Continue. The hearing on the Motion to 7 Dismiss went forward as scheduled on November 22, 2011. Counsel 8 for the Petitioning Creditors asserted that he was unaware that 9 the Motion to Continue had been denied until he checked the 10 docket before the hearing. The bankruptcy court then retrieved 11 and reviewed the case docket, and noted that it waited for Imani 12 Fe's opposition to the Motion to Continue before ruling, that it 13 docketed the order denying the Motion to Continue, and that the 14 clerk's office sent, the same day, both electronic and mail 15 notifications of the order to all parties. The bankruptcy court 16 also noted that there was no response filed to the Motion to 17 Dismiss. Therefore, the bankruptcy court orally ruled that: 18 there being no response in opposition, and based upon the evidence in support of the [Motion to Dismiss], the 19 Court will adopt the statement of uncontroverted facts and conclusions of law in support of the summary motion 20 to dismiss and grant the summary motion to dismiss, the involuntary petition against the alleged Debtor Imani 21 Fe, L.P. and reserve jurisdiction over any issue concerning attorney's fees and costs under Section 303 22 of the Bankruptcy Code. 23 Hr'g Tr. (Nov. 22, 2011) at 4:2-9.
24 The bankruptcy court subsequently entered its order granting 25 the Motion to Dismiss (Dismissal Order) and retaining 26 jurisdiction to determine any motion brought under § 303(I) on November 28, 2011. The Petitioning Creditors did not appeal the Dismissal Order.*fn5
On January 13, 2012, the Debtor filed a motion pursuant to § 303(I) requesting $373,654.69 in attorneys' fees and $200,000 in punitive damages (Fee Request).
The Petitioning Creditors opposed the Fee Request. In their opposition, the Petitioning Creditors asserted that the Fee Request was untimely under the Rules because it was not filed within 14 days of the Dismissal Order. The Petitioning Creditors also argued the merits of the Petition and contended there was no dispute as to Imani Fe's liability or the amount of Hilrock's claim. The Petitioning Creditors asserted that Imani Fe's actions led the Petitioning Creditors to initiate litigation, not any frivolous motives on the part of the Petitioning Creditors. They also asserted that the amount of the requested attorneys' fees was excessive and unreasonable. Finally, the Petitioning Creditors asserted that any fees awarded should be offset by the amount Imani Fe owed them and that no punitive or other damages should be awarded.
A hearing on the Fee Request was held on February 7, 2012. At the hearing, the Petitioning Creditors reiterated their argument that the Fee Request was untimely, citing the Local Bankruptcy Rules (LBR). However, the bankruptcy court concluded that a bankruptcy rule could not abridge a substantive right provided by the Bankruptcy Code. Additionally, the bankruptcy 1 court determined that the Petitioning Creditors were not entitled 2 to setoff.
It found the amount of the attorneys' fees requested 3 was not unreasonable and that the costs were actually incurred 4 and necessary in defending against the Petition. However, the 5 bankruptcy court did not find that there was bad faith in 6 conjunction with the filing of the ...