In Re Forever Green Athletic Fields, Inc.
74 Collier Bankr. Cas. 2d 949, 2015 U.S. App. LEXIS 17959, 804 F.3d 328 (2015)
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Rule of Law:
Bad faith provides an independent basis for dismissing an involuntary bankruptcy petition, even if the petitioning creditors have met all objective statutory requirements for filing under 11 U.S.C. § 303, because bankruptcy courts, as courts of equity, must ensure petitions are filed for proper purposes consistent with the Bankruptcy Code.
Facts:
- Forever Green Athletic Fields, founded by Keith Day, sells artificial turf playing fields.
- In 2005, Forever Green initiated a $5 million lawsuit (the Bucks County Action) against ProGreen, a competitor partly owned by Charles Dawson, for diversion of corporate assets.
- Also in 2005, Charles and Kelli Dawson, a former Forever Green sales representative and his wife, filed a lawsuit (the Louisiana Action) against Forever Green for unpaid commissions and wages.
- On March 2, 2011, the Louisiana court issued a consent judgment in favor of the Dawsons against Forever Green for over $300,000, which Forever Green has not paid.
- After the Louisiana judgment, ProGreen sought to terminate the arbitration of the Bucks County Action, arguing Forever Green's insolvency and the Dawsons' ability to garnish arbitration fees.
- Charles Dawson, holding the consent judgment, intended to "find any available asset that Forever Green may have and try to use the lien to seize it," and used the judgment to obtain a writ of execution against the arbitrator, leading to the arbitration's suspension.
- Charles Dawson and his counsel threatened to force Forever Green into bankruptcy if it did not agree to terminate the arbitration, with counsel suggesting involuntary bankruptcy as the "best way to get to [Forever Green’s] assets."
- Forever Green had essentially ceased operations, winding down its affairs and holding $6 million in assets (predominantly the $5 million claim against ProGreen) and $2.3 million in debts, with Keith Day personally funding Forever Green's litigation.
Procedural Posture:
- In 2005, Forever Green Athletic Fields, Inc. (Forever Green) sued ProGreen for $5 million in the Bucks County Action for diversion of corporate assets.
- In 2005, Charles and Kelli Dawson (Dawsons) sued Forever Green in the Louisiana Action for unpaid commissions and wages.
- On March 2, 2011, the Louisiana court entered a consent judgment in favor of the Dawsons for over $300,000 against Forever Green.
- The parties to the Bucks County Action agreed to arbitrate their claims.
- On March 30, 2011, ProGreen filed a motion to terminate the arbitration, citing Forever Green's insolvency and the Dawsons' judgment.
- The Dawsons transferred their Louisiana judgment to Pennsylvania and obtained a writ of execution against the arbitrator and his law firm.
- The arbitrator suspended the arbitration.
- Forever Green filed a complaint in state court (the Philadelphia Action) to reinstate the arbitration.
- Two weeks before the Dawsons' brief was due in the Philadelphia Action, the Dawsons and Cohen Seglias Pallas Greenhall & Furman (a law firm owed $206,000 by Forever Green) filed an involuntary Chapter 7 bankruptcy petition against Forever Green in Bankruptcy Court.
- Forever Green moved to dismiss the involuntary petition as a bad-faith filing.
- The Bankruptcy Court convened an evidentiary hearing and granted Forever Green's motion to dismiss, finding Charles Dawson acted in bad faith.
- The Dawsons appealed the Bankruptcy Court's decision to the United States District Court for the Eastern District of Pennsylvania.
- The District Court affirmed the Bankruptcy Court's dismissal.
- Charles C. Dawson and Kelli Dawson (Appellants) appealed the District Court's decision to the United States Court of Appeals for the Third Circuit.
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Issue:
Does bad faith provide an independent basis for dismissing an involuntary bankruptcy petition, even when the petitioning creditors have satisfied all statutory filing requirements under 11 U.S.C. § 303?
Opinions:
Majority - FUENTES, Circuit Judge
Yes, bad faith provides an independent basis for dismissing an involuntary bankruptcy petition, even if the petitioning creditors have satisfied all objective statutory requirements. The Court rejected the Dawsons' argument that satisfying the objective criteria of § 303(b)(1) and (h)(1) (three creditors, claims aggregating over $15,325, debtor not paying debts) precludes a bad-faith inquiry. The reference to bad faith in § 303(i)(2) (damages for bad-faith filings) implies that bad faith can also be a basis for dismissal. Furthermore, the "only if" language in § 303(h)(1) means that not paying debts is a necessary but not sufficient condition for relief, leaving room for other considerations. The core reasoning rests on the equitable nature of bankruptcy courts, which must patrol the border between good- and bad-faith filings to protect the integrity of the bankruptcy system and ensure its mechanisms are used for proper purposes—like protecting against preferential treatment or asset dissipation, rather than for personal gain or harassment. Policy considerations, such as the severe consequences of an involuntary petition, also support dismissing bad-faith filings to encourage proper use of the system. Applying the "totality of the circumstances" standard, the Bankruptcy Court did not abuse its discretion in finding Charles Dawson acted in bad faith. His conduct, including using the consent judgment to derail arbitration, threatening bankruptcy, and filing the petition days before a legal brief was due, indicated a strategic aim to force payment and obstruct Forever Green's asset recovery efforts, rather than acting for the collective benefit of creditors. The Court declined to rule on the "bar to joinder" rule because no creditors attempted to join the petition before dismissal, rendering the argument moot.
Analysis:
This case clarifies that bankruptcy courts retain their inherent equitable power to dismiss involuntary petitions filed in bad faith, even when the objective statutory requirements are met. It establishes a "totality of the circumstances" test for evaluating bad faith, providing a flexible framework for courts to assess creditor motives. This ruling reinforces the idea that bankruptcy is a system for collective creditor action and orderly debt resolution, not a tool for individual creditors to gain tactical advantages or harass debtors. It serves as a warning against using involuntary bankruptcy as a substitute for customary debt collection or as leverage in other litigation.
