DVI Receivables XIV, LLC v. Maury Rosenberg ( 2015 )

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 13-14781
________________________
D.C. Docket Nos. 1:12-cv-23886-RSR; 10-bkc-03812-AJC
In re: MAURY ROSENBERG,
Debtor.
_________________________________________
DVI RECEIVABLES XIV, LLC,
DVI RECEIVABLES XVII, LLC,
DVI RECEIVABLES XVIII, LLC,
DVI RECEIVABLES XIX, LLC,
DVI FUNDING, LLC,
LYON FINANCIAL SERVICES, INC.,
U.S. BANK, N.A.,
DVI RECEIVABLES XVI, LLC,
Plaintiffs-Appellants,
versus
MAURY ROSENBERG,
Defendant-Appellee.
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________________________
Appeal from the United States District Court
for the Southern District of Florida
________________________
(February 27, 2015)
Before HULL, JULIE CARNES, and WALKER, ∗ Circuit Judges.
HULL, Circuit Judge:
DVI Receivables XIV, LLC; DVI Receivables XVI, LLC; DVI Receivables
XVII, LLC; DVI Receivables XVIII, LLC; DVI Receivables XIX, LLC; DVI
Funding, LLC (collectively, the “DVI Entities”); Lyon Financial Services, Inc.
d/b/a U.S. Bank Portfolio Services (“Lyon”); and U.S. Bank, N.A. (“USB”)
(collectively, “Appellants”) appeal the district court’s decision affirming the
bankruptcy court’s final order awarding appellee Maury Rosenberg attorney’s fees
and costs, pursuant to 11 U.S.C. § 303(i)(1). After careful review of the record and
the parties’ briefs, and with the benefit of oral argument, we affirm in part, vacate
in part, and remand for further proceedings.
I. BACKGROUND
The DVI Entities filed an involuntary bankruptcy petition against appellee
Rosenberg. After the bankruptcy court dismissed the petition, the court awarded
attorney’s fees and costs to appellee Rosenberg. We begin by describing the
∗
Honorable John M. Walker, Jr., United States Circuit Judge for the Second Circuit,
sitting by designation.
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alleged debts that the DVI Entities used as the basis for filing the involuntary
petition against Rosenberg.
A. Underlying Debt Dispute
Beginning in November 2000, certain limited partnerships affiliated with
Rosenberg (the “NMI LPs”) entered into equipment leases with DVI Financial
Services, Inc. (“DVI Financial”) to finance the acquisition of medical equipment.
Lessor DVI Financial bought the equipment and leased it to the NMI LPs, which
were to make lease payments to DVI Financial. As security for the payment of the
NMI LPs’ obligations under these leases, appellee Rosenberg executed an
individual limited guaranty to DVI Financial. DVI Financial agreed to act as the
servicing agent for the leases, which were part of complex securitization
transactions involving the parties on appeal.
The equipment leases and related assets were ultimately transferred from
lessor-servicing agent DVI Financial to the DVI Entities, appellants here. The
DVI Entities were special purpose entities created solely for the purpose of the
securitization transactions, by which the DVI Entities issued notes, secured by the
leases, to noteholders. In other words, DVI Financial, through the DVI Entities,
financed the purchase of the medical equipment (which they leased to the NMI
LPs) apparently by obtaining loans from and issuing notes to noteholders.
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In turn, appellants the DVI Entities assigned all of their rights and interests
in the equipment leases to appellant USB, the Trustee for the noteholders. After
DVI Financial filed for bankruptcy in August 2003, appellant Lyon took over
lessor DVI Financial’s servicing obligations with respect to the leases. At the time
it assumed the role of successor servicer for the DVI Entities, Lyon was a second-
tier subsidiary of USB.
In December 2003, Lyon, as successor servicer, sued Rosenberg and the
NMI LPs in Pennsylvania state court to recover the amounts allegedly owed under
the equipment leases. On August 12, 2005, Rosenberg, the NMI LPs, and two
other entities related to the NMI LPs entered into a settlement agreement with
Lyon to restructure the NMI LPs’ obligations under the leases. Lyon executed the
agreement in its capacity as the successor servicer for the DVI Entities and as
agent for Trustee USB. The DVI Entities were not parties to the settlement and did
not sign the agreement; rather, Jane Fox signed the agreement on behalf of Lyon as
Lyon’s Director of Operations.
As part of the 2005 settlement, Rosenberg executed another individual
limited guaranty, which superseded all prior guaranties. Rosenberg personally
guaranteed the sums identified in the guaranty agreement to “the Agent,” defined
as “Lyon Financial Services, Inc. d/b/a/ U.S. Bank Portfolio Services as successor
servicer for the [DVI Entities] and as agent for the Trustee.” The maximum
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amount of Rosenberg’s limited guaranty was $7,661,945.00, to be reduced each
month by a certain sum for each monthly payment made under the settlement
agreement. The obligations created by Rosenberg’s 2005 limited guaranty ran
solely to Lyon, and only Lyon could demand payment of such obligations. Also as
part of the 2005 settlement, Rosenberg executed a confession of judgment in favor
of Lyon.
In March 2008, Lyon notified Rosenberg of an alleged default due to the
NMI LPs’ failure to make the requisite monthly payments. In July 2008, Lyon, as
agent for Trustee USB, filed a complaint in confession of judgment against
Rosenberg and others in Pennsylvania state court to collect on the amounts
allegedly due under the 2005 confession of judgment and limited guaranty made in
connection with the equipment leases. The DVI Entities were not plaintiffs in this
state court action. In August 2008, Lyon obtained the requested judgment for
$4,724,866.16 against Rosenberg individually. At Rosenberg’s request, the
Pennsylvania state court stayed execution of the judgment pending resolution of a
dispute over the validity and amount of debt allegedly owed by Rosenberg to
Lyon.
B. 2008 Involuntary Petition
On November 7, 2008, Jane Fox, on behalf of the DVI Entities, filed an
involuntary Chapter 7 bankruptcy petition against Rosenberg in the U.S.
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Bankruptcy Court for the Eastern District of Pennsylvania. Each of the DVI
Entities asserted a claim against Rosenberg with respect to the 2005 individual
limited guaranty he had made in connection with the equipment leases. The DVI
Entities’ six claims totaled $5,363,361.56. The involuntary petition was later
transferred to the U.S. Bankruptcy Court for the Southern District of Florida.
Section 303 of the Bankruptcy Code governs the filing of involuntary
bankruptcy petitions and allows creditors to force debtors into liquidation under
Chapter 7 or reorganization under Chapter 11. 11 U.S.C. § 303. The petition must
be brought by at least three eligible creditors (unless there are fewer than twelve
eligible creditors), with each creditor holding a separate claim against the alleged
debtor, and the claims must not be contingent or subject to a bona fide dispute as to
liability or amount. See id. § 303(b).
The November 7, 2008 involuntary petition nominally listed the DVI
Entities as the “petitioning creditors.” Lyon was not expressly named on the
petition as a petitioning creditor, either in its capacity as successor servicer for the
DVI Entities or as agent for Trustee USB. However, abundant evidence showed
that Lyon actually filed the petition on behalf of each DVI Entity. The petition’s
signature blocks show that Jane Fox, the Director of Operations for Lyon, signed
the petition individually on behalf of each DVI Entity. 1 In addition, for each DVI
1
The petition was subsequently amended, and the amendment was also signed by Fox.
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Entity, the petition listed “Jane Fox c/o U.S. Bank Portfolio Services, as Servicer”
and “1310 Madrid Street, Suite 103[,] Marshall, MN 56258” as the name and
mailing address of the “Individual Signing in Representative Capacity.” Lyon did
business as “U.S. Bank Portfolio Services,” and this mailing address under Fox’s
signature was Lyon’s too.
Furthermore, the evidence showed that the DVI Entities had no knowledge
of the involuntary petition separate from Fox’s knowledge. At the time Fox
executed the involuntary petition in November 2008, Fox was not an officer,
director, or employee of any DVI Entity. Rather, Fox was the Director of
Operations for Lyon. There was no meeting of the directors or officers of any DVI
Entity to authorize Fox to sign the involuntary petition. In fact, no one at Lyon,
including Fox, ever corresponded with any DVI Entity before the filing of the
petition. Indeed, as of the petition date, five of the DVI Entities were not even in
good standing with the Delaware Secretary of State and had been administratively
dissolved. It was not until mid-January 2009 that Lyon’s in-house counsel, at
Fox’s direction, filed certificates of revival for the five DVI Entities to place them
in good standing again.
According to her deposition testimony concerning her role as the signer, Fox
believed that only Lyon had the authority to sign the involuntary petition, and that
none of the DVI Entities had the authority to do so on their own behalf because
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Lyon was granted broad authority to act for the DVI Entities. Fox testified that she
understood Lyon’s authority to include the filing of the petition on behalf of the
DVI Entities. While the DVI Entities were the original creditors in the underlying
transactions, Lyon on its own made the decision to file the petition against
Rosenberg and then Lyon actually filed it.
On December 3, 2008, Rosenberg moved to dismiss the involuntary
bankruptcy petition against him.
C. 2009 Dismissal Order
On August 21, 2009, the bankruptcy court granted Rosenberg’s motion to
dismiss and dismissed the involuntary petition with prejudice (“Dismissal Order”).
The bankruptcy court found, inter alia, that the DVI Entities were not eligible
creditors of Rosenberg because his 2005 guaranty did not run to the DVI Entities.
Rather, Rosenberg’s obligations under his individual limited guaranty, if any, ran
only to Lyon in its capacity as successor servicer and as agent for Trustee USB.
Moreover, the DVI Entities were not the “real parties in interest”—rather, they
were just “pass through vehicles” created solely to facilitate the securitization
transactions. The DVI Entities therefore lacked standing as a matter of law to file
an involuntary petition against Rosenberg.
Alternatively, the bankruptcy court also ruled that even if the DVI Entities
were real parties in interest, they, as well as Lyon, were judicially estopped from
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prosecuting the involuntary case. In its complaint against Rosenberg in
Pennsylvania state court, Lyon claimed that it was entitled to a judgment for
$4,724,866.16. Later, in the bankruptcy proceeding, Lyon took the inconsistent
position that Rosenberg’s obligations under the 2005 limited guaranty actually ran
to the DVI Entities.
The bankruptcy court dismissed the case in August 2009 but retained
jurisdiction to award Rosenberg his costs, reasonable attorney’s fees, and damages
(if appropriate) under 11 U.S.C. § 303(i). The Dismissal Order was appealed to,
and affirmed by, both the district court in 2011 and then this Court in 2012. DVI
Receivables XIV, LLC v. Rosenberg (In re Rosenberg), Case No. 10-24347 (S.D.
Fla. Sept. 27, 2011), aff’d, 472 F. App’x 890 (11th Cir. 2012).2
D. Rosenberg’s 11 U.S.C. § 303(i) Adversary Proceeding
Meanwhile, on December 27, 2010, Rosenberg filed in the bankruptcy court
a separate adversary complaint against Appellants and Fox, initiating adversary
proceeding number 10-03812. In his adversary complaint, Rosenberg asserted
federal claims to recover attorney’s fees, costs, and damages he incurred because
of the filing of the involuntary petition, which the bankruptcy court had dismissed
2
During these two appeals of the Dismissal Order, Rosenberg did not request the district
court or this Court to award him the attorney’s fees he incurred in defending the appeals of the
Dismissal Order. Rather, as explained infra in part I.D, Rosenberg requested those fees first in
the bankruptcy court and through an adversary proceeding under § 303(i).
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in August 2009.3 Specifically, Rosenberg’s adversary complaint sought relief
under § 303(i) of the Bankruptcy Code. Relevant to this appeal, § 303(i)(1) grants
courts the discretion to award costs and attorney’s fees to discourage creditors
from improperly filing involuntary petitions under § 303. Section 303(i) provides:
If 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.
11 U.S.C. § 303(i).
Under the plain language of the § 303(i)(1) statute, there are two
prerequisites to obtain a judgment against the petitioners for attorney’s fees and
costs: (1) the bankruptcy court must have dismissed the involuntary petition other
than on consent of all petitioners and the debtor; and (2) the debtor must not have
waived his right to recover under § 303(i). In addition, if the involuntary petition
was filed in bad faith, § 303(i)(2) allows the court to award (A) “any damages”
3
Rosenberg’s adversary complaint named additional defendants and raised state law
claims for abuse of process and malicious prosecution. The bankruptcy court later dismissed
these additional defendants and state law claims, leaving only the federal law claims against the
DVI Entities, Lyon, USB, and Fox.
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proximately caused by the filing of a petition and (B) punitive damages. Id.
§ 303(i)(2).
In his adversary proceeding and regarding the 2009 Dismissal Order,
Rosenberg sought different types of recovery, including: (1) reasonable attorney’s
fees and costs incurred by two law firms (Weir & Partners, LLP and Genovese
Joblove & Battista, P.A.) on his behalf to defend against the involuntary petition,
obtain the dismissal of the petition in the bankruptcy court, and sustain the
dismissal in all appeals, pursuant to § 303(i)(1); (2) damages—including
compensatory, consequential, special, and punitive damages—suffered by
Rosenberg and proximately caused by the bad-faith filing of the petition, pursuant
to § 303(i)(2); and (3) the payment of all costs and expenses incurred by
Rosenberg to prosecute this adversary proceeding itself, pursuant to § 303(i).
On March 12, 2012, Rosenberg demanded a jury trial on all triable issues in
the adversary proceeding. Because Appellants and Fox did not consent to a jury
trial in the bankruptcy court, they filed a motion to withdraw reference of the
adversary proceeding, pursuant to 28 U.S.C. § 157(d), for a jury trial in the U.S.
District Court for the Southern District of Florida.
On August 10, 2012, U.S. District Judge Patricia Seitz granted the motion to
withdraw reference only as to Rosenberg’s bad-faith claims for damages under
§ 303(i)(2). Judge Seitz found that because claims for damages under § 303(i)(2),
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unlike claims for fees and costs under § 303(i)(1), require a finding of the
petitioner’s “bad faith,” they were analogous to common-law claims for malicious
prosecution and thus triable by a jury. Accordingly, Rosenberg’s § 303(i)(2)
claims were withdrawn for the purpose of a jury trial, but Rosenberg’s claims for
attorney’s fees and costs remained referred to the bankruptcy court.
E. Bankruptcy Court Bench Trial on Attorney’s Fees
While the jury trial issue as to bad-faith damages under § 303(i)(2) was
litigated in the district court, Rosenberg’s claims for attorney’s fees and costs
under § 303(i)(1) remained for adjudication in the bankruptcy court.
On August 28, 2012, the bankruptcy court conducted a bench trial on
Rosenberg’s § 303(i)(1) claims for attorney’s fees and costs. At trial, Rosenberg
sought to recover four categories of fees: (1) fees incurred to obtain the dismissal
of the involuntary petition in the bankruptcy court; (2) fees incurred to sustain that
dismissal on appeal in the district court and then in this Court; (3) fees incurred in
the adversary proceeding itself to recover the first two categories of fees, called
“fees on fees”; and (4) fees incurred to prosecute his bad-faith claims for damages
under § 303(i)(2).
During the trial, Appellants questioned whether fees incurred for the
adversary proceeding itself—including the bad-faith claims for damages—were
premature. Appellants requested that the bankruptcy court defer ruling on the
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premature issue of attorney’s fees related to the adversary proceeding until after
the district court’s jury trial on the bad-faith claims for damages because
Rosenberg had not yet prevailed on those bad-faith claims.
F. 2012 Attorney’s Fee Order Under § 303(i)(1)
On September 11, 2012, and after the bench trial, the bankruptcy court
entered an Order Determining Reasonable Amounts of Attorneys’ Fees and Costs
Recoverable Against Petitioning Creditors, Pursuant to 11 U.S.C. § 303(i)(1)
(“Attorney’s Fee Order”).
In its Attorney’s Fee Order, the bankruptcy court made these factual findings
concerning the filing of the involuntary petition: (1) Appellants had not proven that
Fox acted without the authority of Lyon; (2) Fox signed the petition as an officer of
Lyon, which was the successor servicer for the DVI Entities; and (3) Lyon, through
its agent Fox, acted as an agent for the DVI Entities in filing the petition. The
bankruptcy court concluded that, under certain circumstances, agents or principals
of petitioning creditors may be held liable under § 303(i), and that such liability
should be imposed in this instance on Lyon.
The bankruptcy court also found that it had the authority to award the fees
and costs that Rosenberg incurred not only (1) in obtaining the dismissal but also
(2) in defending the two appeals from the Dismissal Order (“appellate fees”). The
bankruptcy court reasoned that the denial of appellate fees—for sustaining the
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dismissal on appeal—would frustrate the legislative intent behind § 303(i). The
bankruptcy court rejected the argument that appellate fees must be sought in the
appellate court, finding that it was appropriate for a bankruptcy court to award
appellate fees under the § 303(i) statute in the Bankruptcy Code,
“[n]otwithstanding whether the District Court and/or the Eleventh Circuit might
well have granted fees.”
The bankruptcy court declined to defer consideration of the “fees on fees,”
which were Rosenberg’s fees incurred in the adversary proceeding to recover fees
and costs under § 303(i)(1). The bankruptcy court found that it was appropriate to
award fees and costs for the services provided in the adversary proceeding to date,
even though the proceeding had not yet concluded. The bankruptcy court reasoned
that “[a]n award of fees and costs in this Adversary Proceeding is not premised
upon which party ‘prevails’” in the proceeding, and, under § 303(i)(1), Rosenberg
had already “prevailed” on the merits.
As to which parties were subject to § 303(i) liability, the bankruptcy court
reiterated its “view that the term ‘petitioner,’ as used in [§] 303(i), may be
construed to include those agents and/or principals who sign the involuntary
petition on behalf of the creditors or who cause the petitioning creditors to file the
petition.” The bankruptcy court then turned to Lyon’s liability, finding: (1) Fox, as
an employee of Lyon, executed the involuntary petition and caused the filing of
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same; (2) Fox, on behalf of Lyon, exercised exclusive control over the DVI
Entities, acting within the scope of her employment as Director of Operations with
Lyon; (3) Lyon acted on behalf of USB, the Trustee for the securitized
transactions; (4) these parties—Fox, Lyon, and the DVI Entities—were
intertwined; and (5) based on principles of agency, Fox signed the petition as an
officer of Lyon which acted as the servicer and agent for the DVI Entities; and thus
(6) Lyon, as Fox’s principal, is liable for the fees and costs.4
Accordingly, the bankruptcy court held the DVI Entities and Lyon, as their
agent, jointly and severally liable for $1,034,295.45 of Rosenberg’s attorney’s fees
and approximately $39,019.37 in costs, minus certain costs incurred in connection
with Rosenberg’s claims against dismissed third parties. However, the bankruptcy
court did not indicate the amounts, or percentages, of the total fee award
corresponding to each of the four categories of fees sought by Rosenberg during
the bench trial. The bankruptcy court reserved jurisdiction to award additional fees
and costs “for the completion of the Adversary Proceeding, through the jury trial.”
The award in the Attorney’s Fee Order encompassed fees for work
performed by Rosenberg’s attorneys from November 11, 2008—shortly after the
4
After partially withdrawing reference of Rosenberg’s bad-faith claims for damages,
Judge Seitz denied a request to preclude Lyon/USB from being subject to liability for damages
under § 303(i)(2). Judge Seitz found that collateral estoppel barred the district court from
reconsidering the issue of Lyon/USB’s liability, which had been adjudicated in the bankruptcy
court. In any event, Judge Seitz agreed with the bankruptcy court’s determination that, under the
unique factual circumstances of this case, “Lyon/USB [were] subject to liability under Section
303(i) as agent/principal for the [DVI Entities].”
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filing of the involuntary petition on November 7, 2008—to August 25, 2012. The
attorneys’ work during this time period included: (1) fees incurred to obtain the
dismissal of the involuntary petition in the bankruptcy court on August 21, 2009;
(2) fees incurred to sustain that dismissal on appeal in the district court and then in
this Court, which affirmed the dismissal on July 6, 2012; (3) “fees on fees,”
representing fees incurred in the adversary proceeding itself to recover the first two
categories of fees; and (4) part of the fees incurred to prosecute Rosenberg’s bad-
faith claims for damages.
Some fees in the fourth category were incurred before August 25, 2012.
However, the majority of the fees to prosecute Rosenberg’s bad-faith claims for
damages were incurred after the entry of the 2012 Attorney’s Fee Order on
September 11, 2012, and thus are not part of the sum in that Order. As explained
below, the bad-faith-damages proceedings in the district court continued from
Judge Seitz’s August 10, 2012 order granting withdrawal of the reference through
the 2013 jury trial and until the September 29, 2014 ruling on Appellants’ post-trial
motion.
Rosenberg moved for entry of a final judgment against Appellants, seeking
to reduce the costs award by the amount disallowed in the Attorney’s Fee Order.
On April 11, 2013, the bankruptcy court granted Rosenberg’s motion and entered a
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final judgment which revised the total amount of attorney’s fees and costs awarded
in favor of Rosenberg to $1,032,287.04.
Appellants separately appealed the September 11, 2012 Attorney’s Fee
Order and the subsequent April 11, 2013 Order and Final Judgment. The two
bankruptcy appeals were consolidated in the district court.
As further background, Lyon’s parent company, U.S. Bank Corp. Equipment
Finance, was wholly owned by appellant USB. After entry of the 2012 Attorney’s
Fee Order, appellant Lyon subsequently merged with USB. Though both Lyon
and USB are listed as appellants, they are now a single entity. However, because
the bankruptcy court found Lyon—but not USB—liable for Rosenberg’s attorney’s
fees and costs, we refer only to Lyon in our discussion of liability, see infra part
III.C.
G. District Court Bad-Faith Damages Trial Under § 303(i)(2)
From February 19, 2013, through March 6, 2013, Judge Seitz conducted a
jury trial on Rosenberg’s § 303(i)(2) bad-faith claims for damages, which had been
withdrawn from the bankruptcy court on August 10, 2012. The jury found that
Appellants acted in bad faith in filing the involuntary petition and awarded
Rosenberg $1,120,000 in compensatory damages (for emotional distress, loss of
reputation, and loss of wages) and $5,000,000 in punitive damages.
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Appellants filed an amended Rule 50(b) motion for judgment as a matter of
law, seeking to reduce the damages award. See Fed. R. Civ. P. 50(b). Judge Seitz
granted in part and denied in part Appellant’s Rule 50(b) motion, concluding that
the evidence supported the jury’s finding of bad faith but not the verdicts for
punitive damages or compensatory damages for loss of reputation or loss of wages.
On September 29, 2014, Judge Seitz entered an amended final judgment in favor of
Rosenberg, holding the DVI Entities and USB, as Lyon’s successor in interest, 5
jointly and severally liable for only $360,000 in compensatory damages for
emotional distress 6 stemming from the bad-faith filing of the involuntary petition.
H. Appeal of 2012 Attorney’s Fee Order
On September 24, 2013, the district court affirmed the bankruptcy court’s
2012 Attorney’s Fee Order in all respects, addressing three issues in particular.
First, the district court found that the bankruptcy court did not err in awarding
Rosenberg his appellate fees for defending the dismissal in the appeals, as it was
“reasonable to conclude that the rationale behind Congress’s enhanced protection
of alleged debtors from involuntary petitions at the trial level extends to the
appellate level.”
5
As stated earlier, Lyon and USB had merged into a single entity by this point in time.
6
This appeal does not involve any issues as to the damages award. The parties’ cross-
appeals of the September 29, 2014 final judgment on damages are separately pending in this
Court.
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Second, the district court concluded that Appellants waived any challenge to
the bankruptcy court’s award of attorney’s fees incurred in litigating Rosenberg’s
§ 303(i)(2) bad-faith claims for damages before Judge Seitz in the district court
because Appellants raised that issue for the first time on appeal. Nevertheless, the
district court briefly considered the merits and rejected the argument that attorney’s
fees for prosecuting a bad-faith-damages claim under § 303(i)(2) are categorically
unavailable under § 303(i)(1).
Third, the district court found that the bankruptcy court did not err in
awarding fees and costs against Lyon, rather than only the DVI Entities. The
district court reasoned that the record shows (1) Fox, the Director of Operations of
Lyon, filed the involuntary petition without any authorization from the directors of
the DVI Entities; (2) Fox, acting within the scope of her employment as the
Director of Operations of Lyon, nevertheless exercised “exclusive control” over
the DVI Entities; (3) the DVI Entities were merely “pass through vehicles”
“created solely for the purposes of the securitization transactions” that gave rise to
the involuntary petition; (4) a unique, “intertwined” relationship existed between
the DVI Entities and Lyon; (5) the involuntary petition was signed by Lyon’s
Director of Operations in her professional capacity; and thus (6) the bankruptcy
court did not err in holding Lyon liable for the filing of the involuntary petition.
This appeal followed.
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II. STANDARD OF REVIEW
“In a bankruptcy case, this Court sits as a second court of review and thus
examines independently the factual and legal determinations of the bankruptcy
court and employs the same standards of review as the district court.” Brown v.
Gore (In re Brown), 742 F.3d 1309, 1315 (11th Cir. 2014) (quotation marks
omitted). Where, as here, the district court affirms the bankruptcy court’s order,
we review the bankruptcy court’s decision. Id. We review the bankruptcy court’s
factual findings for clear error and its legal conclusions de novo. Id.
III. DISCUSSION
On appeal, there are four categories of attorney’s fees we must address: (1)
fees incurred to obtain the dismissal of an involuntary petition in the bankruptcy
court; (2) fees incurred to sustain that dismissal on appeal to the district court and
this Court; (3) “fees on fees,” representing fees incurred in the adversary
proceeding itself to recover the first two categories of fees; and (4) fees incurred to
prosecute bad-faith claims for damages under § 303(i)(2). In addition, Appellants
argue that the bankruptcy court erred in entering a judgment for any attorney’s fees
and costs against Lyon, which they contended was not a “petitioner” under
§ 303(i).
As an initial matter, we note that Appellants do not challenge the award of
attorney’s fees incurred by Rosenberg to obtain the dismissal of the involuntary
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petition in the bankruptcy court or the attorney’s fees incurred by Rosenberg to
recover those fees. Appellants do challenge the award of any appellate fees, any
fees for prosecuting the bad-faith claims for damages, and any fees to recover
those two categories of fees. We turn to those issues.
A. Appellate Fees Under § 303(i)(1)
Appellants contend that § 303(i)(1) does not authorize the award of any fees
whatsoever incurred to sustain the bankruptcy court’s Dismissal Order at the
appellate level in the district court and this Court. Alternatively, even assuming
arguendo that § 303(i)(1) authorizes appellate fees related to sustaining that
dismissal, Appellants argue that appellate fees are within the exclusive purview of
appellate courts and may not be awarded by the bankruptcy court. Appellants
assert that, because Rosenberg failed to move for appellate fees while the
Dismissal Order was on appeal in the district court and this Court, he is not entitled
to receive them. This circuit has not previously addressed these issues.
To start, this case involves only a statutory award of attorney’s fees
authorized by the Bankruptcy Code in § 303(i)(1). Thus, we focus on the statutory
language of § 303(i)(1). That section has two preconditions to the discretionary
award of fees by the bankruptcy court, which are: (1) if the court dismisses the
petition other than by consent, and (2) if the debtor does not waive the right to
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judgment. 11 U.S.C. § 303(i). Both of these preconditions are undisputedly
satisfied here.
When these preconditions are met, § 303(i)(1) provides that the bankruptcy
court “may grant judgment . . . against the petitioners and in favor of the debtor
for—(A) costs; or (B) a reasonable attorney’s fee . . . .” Id. § 303(i)(1). Section
303(i)(1) does not limit the attorney’s fee to only the fees incurred in the
bankruptcy court. Rather, while the bankruptcy court is the court deciding what is
a reasonable attorney’s fee, nothing in § 303(i)(1) indicates that a court may award
only those fees incurred at the trial level. And nothing in § 303(i)(1) precludes
appellate fees or limits fees to only those incurred before the date of the dismissal.
Further, we reject Appellants’ argument that, even if § 303(i)(1) authorizes
appellate fees in sustaining a dismissal on appeal, only appellate courts, and not
bankruptcy courts at the trial level, may award them. Of course, under Federal
Rule of Appellate Procedure 38, appellate courts may award damages and costs if
an appeal is frivolous. See Fed. R. App. P. 38 (“If a court of appeals determines
that an appeal is frivolous, it may . . . award just damages and single or double
costs to the appellee.” (emphasis added)). For purposes of Rule 38, appellate
courts are usually in the best position to evaluate whether an appeal is frivolous or
had some merit.
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However, unlike Rule 38, the statutory award of fees in § 303(i)(1) has no
frivolity requirement. An alleged debtor is not required to show that an appeal
from the dismissal of an involuntary petition is frivolous to be eligible for fees and
costs under § 303(i)(1). That bankruptcy statute requires only that the involuntary
petition be dismissed by the bankruptcy court other than on consent of all parties,
and that the debtor did not waive his right to recover. See 11 U.S.C. § 303(i)(1). It
does not tie the recovery of attorney’s fees to a frivolity finding.
We recognize that the only other circuit to rule on this issue has interpreted
§ 303(i)(1) to preclude the bankruptcy court from awarding any appellate fees. See
Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 708-09 (9th Cir. 2004)
(“[Section] 303(i)(1), which expressly grants discretionary authority to award fees
at the trial level, should not be construed to grant similar authority to award fees at
the appellate level.”). In Higgins, the Ninth Circuit acknowledged that its
interpretation of § 303(i)(1) created “a discrepancy that only Congress can rectify.
Despite Congress’s clear intent to award attorney’s fees and costs to an alleged
debtor who successfully defends an involuntary bankruptcy bid, the debtor remains
exposed to appellate attorney’s fees unless it can be demonstrated that the appeal
was frivolous under Rule 38.” Id. at 709 n.3.7
7
In so holding, the Ninth Circuit relied on its prior decision in State of California
Employment Development Department v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147 (9th Cir.
1996), which did not involve the dismissal of an involuntary petition but rather appellate fees
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We disagree with Higgins. In bankruptcy cases, Rule 38 is not the exclusive
vehicle for awarding attorney’s fees incurred to defend an appeal from the
dismissal of an involuntary bankruptcy petition. Section 303(i)(1) is the statutory
vehicle here. Notably, § 303(i)(1) contains no requirement that the debtor show
that the petitioner acted in bad faith to recover the debtor’s attorney’s fees. Rather,
the precondition is a dismissal of the involuntary bankruptcy petition. Section
303(i)(1)’s precondition of a dismissal reflects Congress’s intent to award fees and
costs to alleged debtors whose involuntary petitions are dismissed. As observed
earlier, there is no language in § 303(i)(1) limiting “a reasonable attorney’s fee” to
those fees incurred only in initially obtaining the dismissal by the bankruptcy
court. Absent any express limiting language in § 303(i)(1), we decline to construe
§ 303(i)(1) as precluding appellate fees and limiting fee awards to only those
incurred before the date of the dismissal in the bankruptcy court. Section 303(i)(1)
compensates debtors who obtain a dismissal and successfully defend against
involuntary bankruptcy litigation, which may or may not end at the trial level.
We find further support for our conclusion in the distinction between fee-
shifting and sanctions provisions. See Bus. Guides, Inc. v. Chromatic Comm’s
awarded as contempt sanctions under 11 U.S.C. § 105(a) for the violation of an automatic stay.
In Del Mission, the Ninth Circuit concluded that “the only authority for awarding discretionary
appellate fees in bankruptcy appeals is Rule 38” and stated that Rule 38 “empowers only
appellate courts, not bankruptcy courts to award . . . attorney’s fees . . . incurred by an appellee in
response to a frivolous appeal.” 98 F.3d at 1153-54 (quotation marks omitted).
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Enters., Inc., 498 U.S. 533, 553, 111 S. Ct. 922, 934 (1991) (holding that Federal
Rule of Civil Procedure 11 was not a fee-shifting provision because Rule 11
sanctions (1) were not “tied to the outcome of [the] litigation,” instead turning on
whether a “specific filing” was well founded, and (2) shifted the costs of a
“discrete” portion of the litigation rather than the litigation as a whole). By
contrast, it appears that § 303(i)(1) is a fee-shifting statute because any fees are tied
to the outcome—the dismissal—and shift the costs of the litigation as a whole from
the alleged debtor to the creditors that improperly filed the bankruptcy petition.
See 11 U.S.C. § 303(i)(1).
In Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 110 S. Ct. 2447 (1990),
the Supreme Court held that the sanctions provisions of Rule 11 did not authorize
the award of attorney’s fees incurred on appeal. In its analysis, however, the
Supreme Court noted: “As Rule 11 is not a fee-shifting statute, the policies for
allowing district courts to require the losing party to pay appellate, as well as
district court attorney’s fees, are not applicable.” Id. at 409, 110 S. Ct. at 2462.
This language suggests that the policies for awarding appellate fees are applicable
to cases involving fee-shifting statutes such as § 303(i)(1), subject to the
bankruptcy court’s discretion.
For all of these reasons, we conclude that under § 303(i)(1) the bankruptcy
court did not err in awarding Rosenberg attorney’s fees and costs incurred to
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successfully defend the Dismissal Order in the appeals to the district court and then
to this Court.
B. Fees for Prosecuting Bad-Faith Claims for Damages Under § 303(i)(2)
Whether an alleged debtor may recover attorney’s fees and costs incurred to
prosecute bad-faith claims for damages under § 303(i)(2) is also an issue of first
impression in this circuit. We return to the statutory language in § 303(i).
As discussed above, § 303(i)(1) provides that if the bankruptcy court
dismisses an involuntary petition, then the bankruptcy court may grant the debtor
reasonable attorney’s fees and costs. 11 U.S.C. § 303(i)(1). Section 303(i)(2)
further provides that if the petition was filed in bad faith, the bankruptcy court may
grant the debtor actual and punitive damages. Id. § 303(i)(2). The issue is whether
these two subsections are exclusive of each other or whether they can and should
be read together and harmonized.
Under an exclusive reading of the two subsections, a debtor can recover
attorney’s fees under § 303(i)(1) if the petition is dismissed and may recover
damages under § 303(i)(2) if the dismissed petition was filed in bad faith. Stated
another way, the award of attorney’s fees in § 303(i)(1) applies to only the
dismissal phase of the case (at trial and on appeal), and the award of damages in
§ 303(i)(2) applies only to the phase of prosecuting the bad-faith-filing claims.
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On the other hand, when read together and as a whole, the § 303(i)(1) award
of attorney’s fees applies to all phases of the § 303 action in which the involuntary
bankruptcy petition was dismissed and § 303(i)(2) provides for recovery of
damages if the petition was filed in bad faith.
Courts addressing this issue have concluded that a bankruptcy court may
award attorney’s fees under § 303(i)(1) incurred to prosecute bad-faith claims for
damages under § 303(i)(2). See, e.g., In re S. Cal. Sunbelt Developers, Inc., 608
F.3d 456, 463-64 (9th Cir. 2010)8 (“[I]f the court finds that the debtor is eligible
for an award of fees, then . . . the fee award presumptively encompasses all aspects
of the § 303 action, including proceedings on claims under § 303(i)(2).”); Glannon
v. Carpenter (In re Glannon), 245 B.R. 882, 894-95 (D. Kan. 2000); In re
Landmark Distribs., Inc., 195 B.R. 837, 845 (Bankr. D.N.J. 1996) (“[U]pon
dismissal of an involuntary petition pursuant to [§] 303(i), the court may grant
judgment against petitioning creditors and in favor of the alleged debtor for costs
and reasonable attorneys’ fees whether related to the alleged debtor’s efforts to
dismiss the petition pursuant to § 303(i)(1), or to prove bad faith or establish
damages pursuant to § 303(i)(2).”); In re Advance Press & Litho, Inc., 46 B.R.
700, 703 (Bankr. D. Colo. 1984) (“[N]othing in the Code or case authority limit[s]
8
Sunbelt Developers appears to be in tension with the Ninth Circuit’s prior decision in
Higgins, which held that § 303(i)(1) precludes any award of attorney’s fees incurred to sustain
the dismissal of an involuntary petition on appeal. See Higgins, 379 F.3d at 708-09.
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an award to the date of dismissal. Preparation for and attendance at the hearing on
attorney’s fees, costs and damages are also part of the matters which are
occasioned as a result of an Involuntary Petition. As such, they are compensable
under § 303(i).”).
The decision in Glannon contains the most comprehensive analysis of this
issue. In Glannon, the U.S. District Court for the District of Kansas found that
§ 303(i)(1), which allows for attorney’s fees and costs, “applies to all phases of a
§ 303 proceeding in which the bankruptcy petition was dismissed,” while
§ 303(i)(2), which allows for proximately caused and punitive damages, “provides
a debtor additional recovery if the court finds that the petition was filed in bad
faith.” 245 B.R. at 894. Construing the § 303(i) statute as a whole, the district
court in Kansas reasoned that attorney’s fees and costs were “recoverable under
§ 303(i) without drawing a distinction between the defensive phase, in securing
dismissal, or in the offensive phase, in being made whole where there was bad
faith.” Id.
We adopt this persuasive reading of the § 303(i) statute. We hold that under
§ 303(i)(1), a bankruptcy court has the discretion to grant attorney’s fees and costs
incurred to prosecute bad-faith claims for damages under § 303(i)(2).
That said, there remains an issue of timing. The bankruptcy court may grant
only “reasonable” attorney’s fees under § 303(i)(1). And determining
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reasonableness necessarily requires consideration of the litigation as a whole and
the total number of hours reasonably expended. At the time of the 2012 Attorney’s
Fee Order, the bad-faith proceedings had only just begun. They continued for two
years thereafter. Indeed, as Appellants point out, on March 13, 2013, in the
bankruptcy court, Rosenberg filed a motion to supplement the award, seeking
approximately $2.1 million in additional fees and costs incurred in the bad-faith
proceedings after the Attorney’s Fee Order on September 11, 2012. 9
It was premature for the bankruptcy court in its 2012 Attorney’s Fee Order
to award the fees relating to Rosenberg’s bad-faith claims for damages before the
conclusion of the bad-faith proceedings in the district court. We note that none of
the cases cited above involved fees relating to bad-faith claims for damages that
were awarded before the end of the bad-faith phase of the proceedings. Further,
the strong policy against piecemeal appeals involving the bad-faith claims supports
our determination that the fee award was prematurely entered in 2012.
For these reasons, we vacate the limited portion of the award attributable to
the attorney’s fees and costs incurred by Rosenberg solely to prosecute his bad-
faith claims for damages under § 303(i)(2). We remand for the district court to
9
That motion to supplement, which is still pending in the bankruptcy court, does not
affect our jurisdiction to decide this appeal of the Attorney’s Fee Order and corresponding final
judgment, entered on April 11, 2013.
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remand to the bankruptcy court to remove this fourth category of fees and then to
consider such fees along with the motion to supplement the award. 10
C. Lyon’s Liability as Petitioner
Appellants contend that, under the unambiguous meaning of the term
“petitioner” in § 303(i), only the petitioning creditors (and not their agents or
principals) may be liable for attorney’s fees and costs. According to Appellants,
because Lyon was not expressly listed as a “petitioner” on the involuntary petition,
the bankruptcy court erred by entering judgment against Lyon.
We disagree. First, we do not view this case as presenting an issue of third
party or agency liability—rather, the narrow question is whether Lyon was in fact
the actual petitioner here and thus properly held liable under § 303(i)(1).
Virtually all of the evidence supports that Lyon was the de facto petitioning
creditor. Lyon, through Fox, executed the 2005 settlement agreement containing
the individual limited guaranty that Rosenberg made in connection with the
equipment leases. The DVI Entities were not parties to this settlement, and any
payment obligations created by the limited guaranty were owed to Lyon, not to the
DVI Entities. Lyon successfully sued Rosenberg in Pennsylvania state court to
10
The parties dispute the amount of fees that will have to be removed and recalculated
because they were incurred for services related to Rosenberg’s bad-faith claims for damages.
Appellants contend that approximately $600,000 of the total award was comprised of fees
incurred in the damages proceeding and fees on fees. Rosenberg concedes only $26,925.50 for
work related solely to the bad-faith claims. This is a dispute for the bankruptcy court to resolve
on remand.
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collect on the amounts allegedly due under the limited guaranty—the same alleged
debts nominally asserted by the DVI Entities in the involuntary petition against
Rosenberg.
A few months after the state court entered judgment in Lyon’s favor, Fox,
Lyon’s Director of Operations, signed and filed the involuntary petition on behalf
of the DVI Entities. The DVI Entities were special purpose entities created solely
for the purpose of the underlying securitization transactions giving rise to the
petition, and five of them had been administratively dissolved as of the petition
date. Under Fox’s signatures, the petition listed the name and address of U.S.
Bank Portfolio Services, which was Lyon’s fictitious business name and address.
Under these circumstances, the bankruptcy court did not clearly err in
finding that Lyon and the DVI Entities were “intertwined,” and that Lyon, through
Fox, signed the involuntary petition albeit in the name of the DVI Entities.
Abundant evidence demonstrates that Lyon, the only entity that signed the petition
and caused it to be filed, was the petitioning creditor within the meaning of
§ 303(i)(1). Thus, we cannot say that the bankruptcy court erred in holding Lyon
liable for Rosenberg’s attorney’s fees and costs. 11
11
It is therefore unnecessary to decide whether § 303(i)(1) precludes the application of
agency law principles, or to delineate any agency relationships among the parties. See Big Top
Koolers, Inc. v. Circus-Man Snacks, Inc., 528 F.3d 839, 844 (11th Cir. 2008) (appellate court can
affirm on any ground supported by the record).
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IV. CONCLUSION
For the foregoing reasons, we affirm the district court’s affirmance of the
bankruptcy court’s award of the following three categories of attorney’s fees and
costs: (1) fees to obtain the dismissal, (2) appellate fees, and (3) fees on fees. We
vacate the district court’s affirmance of the bankruptcy court’s award of the fourth
category of fees and costs—those incurred to prosecute Rosenberg’s bad-faith
claims for damages—as prematurely entered in 2012.
Because the bankruptcy court’s 2012 Attorney’s Fee Order did not segregate
the amounts of the four categories of fees, we remand the case to the district court
with instructions to remand to the bankruptcy court: (1) to deduct from the total
award the limited amount of fees and costs that were incurred solely for the legal
work done to prosecute Rosenberg’s bad-faith claims for damages; and (2) to
reconsider that deducted fee and cost amount along with the motion to supplement.
Nothing herein should be read as intimating how the bankruptcy court should
exercise its discretion regarding those fees or the reasonableness of the fees
requested, as those are issues for the bankruptcy court to address in the first
instance. However, given the duration, complexity, and result of the litigation, the
bankruptcy court should enter detailed findings and conclusions regarding what
fees it does or does not award.
AFFIRMED IN PART, VACATED IN PART, AND REMANDED.
32