Harry McMillan v. Donal Schmidt

614 F. App'x 206
Court of Appeals for the Fifth Circuit·Decided July 23, 2015·No. 14-10458·Unpublished·Cited by 6 cases

Opinions

PER CURIAM: *

This is an appeal of the district court’s dismissal of Appellant Harry McMillan’s motion for fees, costs, and damages arising from an improper petition for involuntary bankruptcy under 11 U.S.C. § 303. Thomas Aigner, a third party, entered into a Joint Prosecution Agreement with Ap-pellees Donal Schmidt and Thimothy Waf-ford to petition McMillan for involuntary bankruptcy based on a default judgment McMillan owed Aigner. The bankruptcy court dismissed the petition because it determined that Aigner transferred a portion of his interest in the claim to Schmidt and Wafford with the intention of beginning an involuntary action against McMillan. McMillan sought fees, costs, and damages against Aigner, Schmidt and Wafford. The bankruptcy court denied McMillan’s motion, and the district court affirmed as to Schmidt and Wafford.1 McMillan appeals the decision.

[208] I. FACTUAL AND PROCEDURAL BACKGROUND

Aigner filed an involuntary bankruptcy petition against McMillan under 11 U.S.C. § 303, seeking to enforce a default judgment of approximately three million dollars that Aigner obtained against McMillan in 1999. Though the judgment had gone dormant, Aigner revived it in 2011. On December 16, 2011, Aigner entered into a Joint Prosecution Agreement (“JPA” or “Agreement”) with Appellees Schmidt and Wafford.

Schmidt and Wafford’s relationship to McMillan is unrelated to Agner’s default judgment. Around 2008, McMillan consulted for Sun River, a company owning substantial mineral rights in New Mexico, in connection with its plan to become a publicly traded company. In exchange, McMillan received stock and warrants, and he became Sun River’s largest shareholder. Some time later, Schmidt became the CEO and Wafford the CFO of Sun River. In December 2011, relations broke down between McMillan and Schmidt/Wafford.

Shortly after relations soured between McMillan and the Appellees, Schmidt and Wafford entered into the JPA with Agner. The Agreement grants Schmidt and Waf-ford a- certain degree of control over Ag-ner’s involuntary-bankruptcy petition. Pursuant to the Agreement, Agner filed a petition for involuntary bankruptcy against McMillan on December 21, 2011. Only Agner — and not Schmidt or Wafford— signed the petition. McMillan moved to dismiss the petition and counter-claimed for costs, fees, and actual and punitive damages under § 303(i).

Ater nine days of evidentiary hearings, the bankruptcy court dismissed Agner’s petition. See Aigner v. McMillan, No. 11-47029-7, 2013 WL 2445042, at *7 (Bankr.N.D.Tex. June 4, 2013). It concluded that Agner was disqualified to serve as a petitioner for involuntary bankruptcy because, via the Agreement with Schmidt and Waf-ford, Agner acquired or transferred an interest in the claim “for the purpose of commencing an involuntary case” in violation of Bankruptcy Rule 1003(a). The bankruptcy court concluded, “[t]here can be no question but that the Agreement was executed and implemented for the purpose of commencing an involuntary case against McMillan.” Therefore, Ag-ner, Schmidt, and Wafford were not qualified creditors to petition for involuntary bankruptcy under § 303.

In reaching this disposition, the bankruptcy court noted that “the Case is but another battle in an ongoing war between McMillan and ... Sun River,” and that it “was commenced principally at the insistence] of Sun River as a tactical measure in its disputes with McMillan.” Ater examining the Agreement, the bankruptcy court concluded that “control over prosecution of the involuntary case against McMillan is largely ceded to Schmidt and Waf-ford,” who “have the power under the Agreement to force and maintain prosecution of the Case.” Finally, the court found that “Schmidt and Wafford sought out [Áigner] with the goal of forcing McMillan into bankruptcy.” Sun River, it concluded, is “the true prime mover for involuntary relief.” •

The bankruptcy court determined that Agner filed the § 303 petition in good faith. Yet it noted in footnote twenty of the order: “This is not to say that Sun River, Schmidt, and Wafford did not áct other than in good faith, but they are not petitioners and are therefore not before the court.” It is this last determination that McMillan appeals.

Reviewing the bankruptcy court’s conclusions of law de novo and its factual findings for clear error, the district court [209] affirmed, reaching two alternative resolutions. First, the district court held that as neither Schmidt nor Wafford was served with process in accordance with Bankruptcy Rule 7004(b)(1), “the bankruptcy court never had in personam jurisdiction over Schmidt and Wafford, because they had not appeared as parties in the proceeding below.” Therefore, “absent compliance with Rule 7004(b)(1), entertaining McMillan’s appeal would offend due process.” Second, although the district court found it “unnecessary” to address the bankruptcy court’s ruling that Schmidt and Waf-ford were not petitioners, and therefore performed no independent analysis of the legal question, it concluded that “the bankruptcy court did not commit reversible error in concluding that Schmidt and Wafford were not ‘petitioners,’ and in declining to award relief under Section 303(i) against them.”

Before this Court, McMillan argues that (1) Schmidt and Wafford are “petitioners” within the meaning of ,§ 303(i) and (2) the bankruptcy court may impose costs, fees, and damages on Schmidt and Wafford without McMillan having to commence an adversarial proceeding against the Appel-lees under Rule 7004(b)(1).

II. DISCUSSION

This Court has jurisdiction over McMillan’s appeal of the district court’s review of a bankruptcy court’s final order under 28 U.S.C. § 158(d)(1). This Court reviews the district court’s decision “by applying the same standard of review to the bankruptcy court’s conclusions of law and findings of fact that the district court applied.” In re Cahill, 428 F.3d 536, 539 (5th Cir.2005) (per curiam). “[Cjonclusions of law are reviewed de novo, findings of fact are reviewed for clear error, and mixed questions of fact and law are reviewed de novo.” In re Nat’l Gypsum Co., 208 F.3d 498, 504 (5th Cir.2000).

Section 303 of the Bankruptcy Code governs petitions for involuntary bankruptcy. “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” by an entity holding an undisputed, bona fide claim against the alleged debtor. 11 U.S.C. § 303(b). After the petition is filed, “a creditor holding an unsecured claim that is not contingent ... may join in the petition with the same effect as if such joining creditor were a petitioning creditor under subsection (b) of this section.” § 303(c) (emphasis added). Therefore, a “petitioning creditor” is an entity that files a petition under § 303(b) or one who joins the petition under § 303(c).

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Harry McMillan v. Donal Schmidt, 614 F. App'x 206 (5th Cir. 2015).

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