In re: Medpoint Management, LLC

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: June 3, 2016
• Docket: AZ-15-1130-KuJaJu
• Status: Unpublished

Opinion

FILED JUN 03 2016 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. AZ-15-1130-KuJaJu ) 6 MEDPOINT MANAGEMENT, LLC, ) Bk. No. 14-15234 ) 7 Debtor. ) ______________________________) 8 ) MEDPOINT MANAGEMENT, LLC, ) 9 ) Appellant, ) 10 ) v. ) MEMORANDUM* 11 ) JASON JENSEN; MIKE DANZER; ) 12 7511 IRA INVESTMENTS, LLC; ) ROBERT BROWN, ) 13 ) Appellees. ) 14 ______________________________) 15 Argued and Submitted on May 20, 2016 at Phoenix, Arizona 16 Filed – June 3, 2016 17 Appeal from the United States Bankruptcy Court 18 for the District of Arizona 19 Honorable Daniel P. Collins, Chief Bankruptcy Judge, Presiding 20 Appearances: Jonathan Frutkin of The Frutkin Law Firm Plc argued for appellant Medpoint Management, LLC; 21 Anthony Warren Austin of Fennemore Craig, P.C. argued for appellees Jason Jensen, Mike Danzer, 22 7511 IRA Investments, LLC and Robert Brown. 23 24 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8024-1. 1 Before: KURTZ, JAIME** and JURY, Bankruptcy Judges. 2 INTRODUCTION 3 Four creditors of alleged debtor Medpoint Management, LLC 4 filed an involuntary chapter 71 petition against Medpoint. The 5 bankruptcy court granted Medpoint’s motion to dismiss because of 6 Medpoint’s connection to the cultivation and sale of medical 7 marijuana, which might be legal under Arizona law but still is 8 illegal under federal law. The petitioning creditors have not 9 appealed the bankruptcy court’s dismissal. 10 In the process of dismissing the petition, the bankruptcy 11 court ruled that Medpoint was not entitled to recover from the 12 petitioning creditors its attorney’s fees, costs and punitive 13 damages, and the court denied as unnecessary Medpoint’s request 14 for an evidentiary hearing on those issues. Medpoint appeals 15 those rulings. 16 The bankruptcy court never permitted the parties to fully 17 develop the record regarding the controlling factual issues, 18 including whether Medpoint generally was paying its (undisputed) 19 debts as they came due, whether the petitioning creditors’ 20 motives and intentions were culpable and whether the petitioning 21 creditors acted in bad faith. Accordingly, we will VACATE the 22 portion of the dismissal order denying Medpoint’s requests for 23 24 ** Hon. Christopher D. Jaime, United States Bankruptcy Judge for the Eastern District of California, sitting by designation. 25 1 26 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 27 all "Rule" references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. All “Civil Rule” references are to 28 the Federal Rules of Civil Procedure.

2 1 fees, costs and punitive damages, and we will REMAND for further 2 proceedings. 3 FACTS 4 To provide context, we begin our factual recitation with a 5 description of Medpoint’s business, its relationship with other 6 key players, and the transactions leading up to the filing of the 7 involuntary petition.2 8 Medpoint is an Arizona limited liability company formed to 9 provide a full range of management services to companies holding 10 certificates issued by the state of Arizona permitting them under 11 Arizona law to grow and sell medical marijuana. Because Arizona 12 law requires all certificate holders to operate on a not-for- 13 profit basis, management service companies like Medpoint also 14 help the certificate holders maintain their nonprofit status by 15 managing their cash flow to ensure that revenues are distributed 16 to pay the certificate holders’ operating expenses, taxes and 17 management fees. 18 Medpoint only provided management services to one 19 certificate holder, Arizona Nature’s Wellness (“ANW”). Medpoint 20 obtained that position in January 2013 by acquiring the 21 management service company then under contract with ANW – Tier 22 Management, LLC. At the time of the acquisition, Mike Danzer 23 owned and controlled Tier. He sold his interest in Tier to 24 Medpoint in exchange for $450,000, with $150,000 paid up front 25 and the remainder to be paid in installments of $150,000 each. 26 2 27 Most of these background facts are not in dispute, so we in large part have relied upon the description of these facts 28 contained in the bankruptcy court’s final ruling.

3 1 Danzer is one of the petitioning creditors. 2 Robert Brown and 7511 IRA Investments, LLC also are 3 petitioning creditors and also loaned money to Medpoint. Robert 4 Brown loaned Medpoint $100,000, and 7511 IRA Investments, LLC 5 loaned Medpoint $400,000. In addition, Medpoint entered into 6 consulting contracts with Danzer and another man named Jason 7 Jensen pursuant to which Medpoint promised to pay Danzer and 8 Jensen $5,000 per month each. Jensen is the fourth and final 9 petitioning creditor. 10 The person who currently owns and controls Medpoint, Yuri 11 Downing, admitted at his deposition that none of the petitioning 12 creditors have been repaid. He indicated that at least some of 13 the above-referenced debt is disputed, although the reasons he 14 offered for disputing the debt were thin. For instance, when 15 asked about Danzer’s and Jensen’s monthly consulting fees, 16 Downing indicated that the fees were not due because Medpoint 17 ultimately did not need or use Danzer’s or Jensen’s consulting 18 services. But Downing also admitted that there was nothing in 19 the consulting contracts making Medpoint’s obligation to pay the 20 consulting fees contingent on the actual provision of consulting 21 services. 22 Meanwhile, when asked whether Medpoint had the ability to 23 repay the $400,000 owed to 7511 IRA Investments, LLC, Downing 24 responded as follows: 25 A. Are we in a position to make that payment today? No. Are we in a position to make that payment in the 26 next 30 days? I cannot say. 27 Q. Are there prospects that you could be in a position in 30 days to make a $400,000 loan payment? 28

4 1 A. I'm still a dreamer and I still believe I can make things happen magically, so yes, I think I – I – the 2 answer is I don't know, but I'd sure like to try. 3 Depo. Tans. (Jan. 8, 2015) at 136:14-21. 4 Downing further admitted that, at the time of the petition 5 filing, Medpoint’s only regular source of income was an $8,000 6 per month licensing fee it is being paid for the use of the Bloom 7 name and trademark, which is still being used in ANW’s business. 8 At the time of Medpoint’s acquisition of Tier, in January 9 2013, Yuri Downing and Matt Morgan each owned and controlled one 10 of the two LLC members of Medpoint – Ask Nice Twice, LLC and Here 11 Is Now, LLC, respectively. Similarly, Morgan and Downing owned 12 and controlled another management services company, Bloom Master 13 Fund I, LLC, which was under contract with the certificate holder 14 for a Tucson marijuana dispensary. 15 In February 2014, Morgan divested himself of ownership and 16 control of both Medpoint and Bloom Master Fund I, LLC. At that 17 time, Morgan resigned from management and effectively conveyed 18 his interests in both companies to Downing. According to 19 Downing, with Morgan gone, he was looking for someone to help him 20 with management and operations at Medpoint and Bloom Master 21 Fund I, LLC, and he turned to Ed Vartughian for help. Downing 22 indicated that Morgan had introduced him to Vartughian, that he 23 did not know Vartughian well, and that he did not know who else 24 to turn to for help. Ultimately, Vartughian bought Downing’s 25 interest in Bloom Master Fund I, LLC and agreed to help Downing 26 “fix” Medpoint’s problems, but declined to purchase Medpoint. 27 Downing in essence claimed that Vartughian convinced ANW’s 28 board of directors to declare Medpoint in breach of its

5 1 management services contract with ANW and to terminate the 2 contract on that basis. This seems odd because ANW’s board 3 allegedly is a captive entity appointed by Medpoint, so Medpoint 4 supposedly had the ability to control the ANW board and its 5 decisions. ANW and Medpoint then entered into a settlement 6 agreement pursuant to which each side apparently agreed to 7 release the other from any claims arising from the management 8 services contract. Downing was unable to identify what amount of 9 management fees Medpoint might have forfeited as a result of the 10 settlement agreement. Downing expressed more concern about 11 Medpoint’s potential liability for mismanaging ANW’s business. 12 Whereas Downing characterized ANW’s termination of and 13 settlement with Medpoint as fixing Medpoint’s problems, the 14 petitioning creditors saw these dual transactions differently. 15 The petitioning creditors asserted that the two transactions 16 amounted to a fraudulent transfer of Medpoint’s crown jewel 17 asset: its management services contract with ANW. Bloom Master 18 Fund I, LLC, now apparently owned by Vartughian, ended up with a 19 potentially valuable management relationship with ANW. 20 Meanwhile, Medpoint ended up as a virtually empty shell with a 21 significant amount of debt owed to the petitioning creditors and 22 others. After the settlement with ANW, Medpoint’s only assets 23 consisted of: (1) the property rights associated with the Bloom 24 name and trademark; (2) the agreement with Bloom Master Fund I, 25 LLC licensing the Bloom name and trademark for $8,000 per month; 26 and (3) any claims arising from the termination by and settlement 27 agreement with ANW. 28 Shortly after the petitioning creditors filed the

6 1 involuntary petition, Medpoint filed an answer. In its answer, 2 Medpoint denied the allegation that it was not paying its debts 3 as they became due. Medpoint further alleged that many of the 4 claims it had not paid were the subject of bona fide dispute. 5 At the initial status conference held in November 2014, the 6 bankruptcy court set dates for a discovery deadline, for a 7 continued status conference and for trial on the merits of the 8 involuntary petition. By the time of the continued status 9 conference held on January 29, 2015, Medpoint had filed a motion 10 to dismiss the involuntary petition, and the petitioning 11 creditors had filed a response. Medpoint’s dismissal motion 12 asserted that the bankruptcy court should dismiss the involuntary 13 petition because Medpoint’s business involved illegal drugs. 14 Medpoint posited that the bankruptcy court could not and should 15 not supervise the administration of a debtor whose business was 16 so closely connected to the cultivation and sale of marijuana 17 because those activities were illegal under federal law. 18 Alternately, Medpoint argued that the petitioning creditors came 19 to the bankruptcy court with unclean hands because they all were 20 aware of the illegal nature of ANW’s business and Medpoint’s 21 connection to that business. Finally, Medpoint claimed that it 22 was entitled to damages under § 303(i) because the petitioning 23 creditor’s actions were motivated by a bad faith desire to take 24 control of ANW’s valuable medical marijuana certificate. 25 In response, petitioning creditors attempted to demonstrate 26 that Medpoint’s business at the time the involuntary petition was 27 filed was not so connected to the medical marijuana industry as 28 to justify dismissal. They further pointed out that there was no

7 1 proof that any of the revenue that Medpoint generated came 2 directly from the growing or sale of marijuana. 3 At the January 29, 2015 status conference, the bankruptcy 4 court ruled that it would take off calendar the trial date. The 5 court decided it would reserve the merits of the involuntary 6 petition and the issue of bad faith and damages against the 7 petitioning creditors until after it ruled on the motion to 8 dismiss. Thereafter, whenever the parties touched upon the 9 merits of the involuntary petition or upon the bad faith/damages 10 issue, the bankruptcy court steered them back to the issues 11 addressed in the motion to dismiss. For instance, after the 12 petitioning creditors raised a disputed point pertaining to the 13 bad faith issue, the bankruptcy court responded as follows: 14 THE COURT: I think I can cut you off on this subject because in my view that's a fact issue, and if I'm 15 going down that road we're trying the issue, not resolving it today. 16 * * * 17 THE COURT: Bad faith is not generally something you're 18 resolving on a motion in any event. 19 Hr’g Tr. (Jan. 29, 2015) at 54:5-25. 20 Furthermore, the court assured the parties that they would 21 be given a future opportunity to present evidence on the merits 22 and on the damages issue – if necessary. The following 23 exemplifies the court’s assurances: 24 THE COURT: It seems to me that unless there are stipulated facts that demonstrate bad faith, bad faith 25 is generally a factual issue. And if I ultimately conclude that I need a full blown hearing on bad faith, 26 I think it really has to be an evidentiary hearing. 27 Hr’g Tr. (March 4, 2015) at 68:5-9; see also Hr’g Tr. (Jan. 29, 28 2015) at 31:3-9, 64:3-17, 76:21-77:6.

8 1 After supplemental briefing and additional oral argument on 2 the illegality issues raised by the motion to dismiss, the 3 bankruptcy court took the matter under submission and ultimately 4 issued a seventeen-page ruling granting the motion to dismiss. 5 In essence, the bankruptcy court concluded that the risks 6 associated with the potential forfeiture of Medpoint’s assets and 7 with the trustee’s inevitable violation of the Controlled 8 Substances Act, 21 U.S.C. §§ 801, et seq., in the process of 9 administering Medpoint’s assets, justified dismissal of the 10 involuntary petition under § 707(a). The court alternately 11 concluded that dismissal was appropriate because the petitioning 12 creditors who sought relief from the bankruptcy court all had 13 unclean hands, because they knew or should have known that 14 Medpoint’s operations were illegal under federal law. 15 The bankruptcy court further ruled that Medpoint was not 16 entitled to fees, costs or damages under § 303(i). The court 17 discussed the fees and damages issues as a single topic. While 18 the title the court gave to that discussion was “No Bad Faith,” 19 the introductory paragraph of that discussion identified the 20 issue to be addressed as whether Medpoint should be awarded its 21 fees, costs and damages under § 303(i)(1) and (2). There is no 22 discussion of the fees, costs and damages issues anywhere else in 23 the court’s order. 24 The court cited the seminal Ninth Circuit case on the 25 awarding of attorney’s fees under § 303(i)(1), Higgins v. Vortex 26 Fishing Sys., Inc., 379 F.3d 701, 707 (9th Cir. 2004), which 27 requires bankruptcy courts to consider the totality of the 28 circumstances. The bankruptcy court further noted that, if it

9 1 found bad faith, it also could award actual and punitive damages 2 against the petitioning creditors under § 303(i)(2). 3 In reaching its decision to deny all fees, costs and 4 damages, the bankruptcy court predominantly focused on the issue 5 of bad faith. The court explained its reasoning as follows: 6 The viability of an involuntary chapter 7 petition filed against a debtor on account of debts relating to 7 state-licensed medical marijuana operations is a novel question of law in this District. The Court does not 8 find that Petitioning Creditors’ acted unreasonably in filing the Petition. The record shows that Medpoint is 9 not and cannot meet its ongoing financial obligations to numerous creditors, in amount and number sufficient 10 to justify an involuntary petition under section 303(b). The record before this Court does not contain 11 facts to support a finding of Petitioning Creditors’ bad faith. As the Ninth Circuit BAP has noted, “[n]ot 12 every failed reason for filing an involuntary petition amounts to ‘bad faith.’” In re Macke Int’l Trade, 13 Inc., 370 B.R. 236, 257 (9th Cir. BAP 2007). Petitioning Creditors’ unclean hands do not equate to a 14 finding of their bad faith in this instance. Finding no bad faith, there is no need for a hearing on damages 15 proximately caused by a filing that is not in bad faith. 16 17 Order Granting Motion to Dismiss (April 6, 2015) at 14:9-20. 18 The bankruptcy court entered its dismissal order on April 6, 19 2015, and Medpoint timely filed its notice of appeal. 20 JURISDICTION 21 The bankruptcy court had jurisdiction under 28 U.S.C. 22 §§ 1334 and 157(b)(2)(A) and (O). We have jurisdiction under 23 28 U.S.C. § 158. 24 ISSUES 25 1. Did the bankruptcy court commit reversible error when it 26 declined to award any attorney’s fees against the 27 petitioning creditors? 28 2 Did the bankruptcy court commit reversible error when it

10 1 determined that the petitioning creditors had not acted in 2 bad faith, so Medpoint could not recover punitive damages 3 against the petitioning creditors? 4 STANDARDS OF REVIEW 5 The bankruptcy court’s denial of attorney’s fees under 6 § 303(i)(1) is reviewed for an abuse of discretion. Higgins, 7 379 F.3d at 705. The bankruptcy court’s decision not to hold an 8 evidentiary hearing also is reviewed for an abuse of discretion. 9 Gray v. Warfield (In re Gray), 523 B.R. 170, 172 (9th Cir. BAP 10 2014). The bankruptcy court abuses its discretion if it applies 11 an incorrect legal rule or its findings of fact are illogical, 12 implausible or without support in the record. United States v. 13 Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). 14 The bankruptcy court’s finding regarding the absence of bad 15 faith is reviewed under the clearly erroneous standard. Wechsler 16 v. Macke Int'l Trade, Inc. (In re Macke Int'l Trade, Inc), 17 370 B.R. 236, 245 (9th Cir. BAP 2007). The bankruptcy court’s 18 finding of fact is not clearly erroneous unless it is illogical, 19 implausible or without support in the record. Retz v. Samson 20 (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010). 21 DISCUSSION 22 Under § 303(i)(1), if an involuntary bankruptcy petition is 23 dismissed, the bankruptcy court may award attorney’s fees and 24 costs against the petitioning creditors. Under § 303(i)(2), if 25 the petitioning creditors filed the petition in bad faith, the 26 court also may award actual and punitive damages. 27 1. § 303(i)(1) Analysis 28 Section 303(i)(1) sets forth two exceptions to the right to

11 1 request attorney’s fees upon dismissal: when the debtor waives 2 the right to attorney fees or when all of the parties consent to 3 the dismissal. In re Macke Int'l Trade, Inc., 370 B.R. at 251. 4 We have refused to recognize additional exceptions and have, in 5 essence, held that, aside from the exceptions referenced above, 6 § 303(i) applies whenever an involuntary petition is dismissed, 7 regardless of the grounds for dismissal. Id. at 251-53. 8 While the awarding of fees under § 303(i)(1) always is 9 discretionary, id. at 252, the Ninth Circuit Court of Appeals has 10 articulated a number of guidelines that bankruptcy courts in this 11 circuit must follow in applying the statute. Bankruptcy courts 12 are required to consider the totality of the circumstances. 13 Higgins, 379 F.3d at 705. When relevant, the bankruptcy court’s 14 consideration must include the following factors, among others: 15 “1) ‘the merits of the involuntary petition,’ 2) ‘the role of any 16 improper conduct on the part of the alleged debtor,’ 3) ‘the 17 reasonableness of the actions taken by the petitioning 18 creditors,’ and 4) ‘the motivation and objectives behind filing 19 the petition.’” Id. at 707-08 (quoting In re Scrap Metal Buyers 20 of Tampa, Inc., 233 B.R. 162, 166 (Bankr. M.D. Fla. 1999)). 21 Accord, In re S. Cal. Sunbelt Developers, Inc., 608 F.3d 456, 22 462-63 (9th Cir. 2010). 23 While the Higgins court expressed the expectation that the 24 above-referenced factors would be “definitive in most cases,” the 25 Higgins court also acknowledged that these factors are not meant 26 to be exhaustive and that the bankruptcy court could exercise its 27 discretion to consider other relevant factors. Higgins, 379 F.3d 28 at 708.

12 1 The Higgins court held that its adoption of the totality of 2 circumstances test did not abrogate the presumption that, upon 3 dismissal, the petitioning creditors should be held liable for 4 the fees the alleged debtor incurred in defending against the 5 involuntary petition. Higgins explained the reasoning behind the 6 presumption in the following manner: 7 Although we adopt the totality of the circumstances test as the appropriate standard under § 303(i)(1), we 8 do not abandon the premise that any petitioning creditor in an involuntary case should expect to pay 9 the debtor's attorney's fees and costs if the petition is dismissed. . . . This [rebuttable] presumption 10 helps reinforce the idea that the filing of an involuntary petition should not be lightly undertaken, 11 and will serve to discourage inappropriate and frivolous filings. Filing an involuntary petition 12 should be a measure of last resort because even if the petition is filed in good-faith, it can chill the 13 alleged debtor's credit and sources of supply, and scare away his customers. 14 15 Id. at 707 (citations, ellipses and internal quotation marks 16 omitted). 17 As the Ninth Circuit subsequently clarified, once the 18 involuntary petition was dismissed, “[t]he burden was on [the 19 petitioning creditor] to rebut the presumption by establishing 20 that fees and costs were unwarranted under the totality of 21 circumstances.” Sofris v. Maple-Whitworth, Inc. 22 (In re Maple-Whitworth, Inc.), 556 F.3d 742, 746 (9th Cir. 2009); 23 see also Laxmi Jewel Inc. v. C&C Jewelry Mfg., Inc. (In re C&C 24 Jewelry Mfg., Inc.), 2001 WL 36340326 at *14 (Mem. Dec.) (9th 25 Cir. BAP Apr. 14, 2009) (“The presumption imposes on the 26 petitioning creditors the burden of presenting evidence to meet 27 the presumption, but it does not shift the burden of proof to the 28 petitioning creditors.”).

13 1 On appeal, there is no dispute between the parties that 2 binding Ninth Circuit precedent required the bankruptcy court to 3 apply the above-referenced standards in order to determine 4 Medpoint’s entitlement to recover its fees and costs. Rather, 5 the parties disagree as to whether the court correctly applied 6 these standards. 7 Medpoint claims that the bankruptcy court did not make 8 findings indicating that it had considered the totality of the 9 circumstances and did not acknowledge or apply the presumption 10 that Medpoint was entitled to recover its attorney’s fees. We 11 agree. In light of the procedural posture of the case, we are 12 convinced that the bankruptcy court could not have correctly 13 considered the totality of the circumstances or correctly applied 14 the requisite presumption because the parties never were given 15 the opportunity to fully develop the evidentiary record. The 16 bankruptcy court determined the fate of the involuntary petition 17 based solely on the illegality under federal law of the 18 cultivation and sale of marijuana and the risks arising from that 19 illegality if a chapter 7 trustee were to administer Medpoint’s 20 bankruptcy estate. The court had before it the parties’ papers 21 in support of and in opposition to the dismissal motion, which 22 included some evidence. The parties presented the court with a 23 number of contracts and other documents, including Downing’s 24 declaration and the transcript from his deposition. While there 25 was some evidence in these papers that might have enabled the 26 court to make some inferences regarding the first Higgins factor 27 – whether Medpoint was paying its debts as they came due – we are 28 not persuaded that the court gave the parties sufficient

14 1 opportunity to present all of the relevant evidence on this 2 issue. To the contrary, the court made it clear at the 3 January 29, 2015 status conference and at the March 4, 2015 4 dismissal motion hearing that the merits of the involuntary 5 petition only would be tried if the petition survived Medpoint’s 6 dismissal motion. 7 Additionally, the parties had no genuine opportunity to 8 present evidence addressing the fourth Higgins factor – regarding 9 the petitioning creditors’ motivations and objectives in filing 10 the petition. This factor requires the bankruptcy court to infer 11 from the record the petitioning creditors’ subjective state of 12 mind in filing the petition. Higgins, 379 F.3d at 707; see also 13 In re Macke Int'l Trade, Inc., 370 B.R. at 252-53 & nn. 13, 14 14 (reflecting on the purity of the petitioner’s intentions and 15 motives). The bankruptcy court was ill-equipped to make a 16 finding regarding this factor given that the parties were 17 instructed more than once to focus exclusively on the illegality 18 issues raised in the dismissal motion. Obviously, some of the 19 evidence presented during the course of the dismissal motion 20 proceedings is relevant in determining the petitioning creditors’ 21 state of mind, but the limited scope of the dismissal motion 22 proceedings doubtlessly kept the parties from presenting all of 23 the relevant evidence. 24 Citing Jaffe v. Wavelength, Inc. (In re Wavelength, Inc.), 25 61 B.R. 614, 620 (9th Cir. BAP 1986), the bankruptcy court here 26 applied an objective standard in the process of finding that the 27 petition was not filed in bad faith. Under our own precedent, 28 this was the appropriate standard for determining bad faith for

15 1 purposes of applying § 303(i)(2). Id.; see also In re Macke 2 Int'l Trade, Inc., 370 B.R. at 256-57 (following 3 In re Wavelength, Inc. regarding the objective standard of bad 4 faith). However, for purposes of § 303(i)(1), the Higgins 5 factors typically require the bankruptcy court to assess both the 6 petitioning creditors’ objective reasonableness as well as their 7 subjective motives and intent. Higgins, 379 F.3d at 707. The 8 bankruptcy court, here, made no explicit finding regarding the 9 petitioning creditors’ subjective motives and intent. We 10 sometimes can affirm in the absence of a required finding when 11 the record is fully developed and when it gives us a full 12 understanding of the controlling issues. See Jess v. Carey 13 (In re Jess), 169 F.3d 1204, 1208-09 (9th Cir. 1999); Swanson v. 14 Levy, 509 F.2d 859, 860-61 (9th Cir. 1975). But that is not the 15 case here. The record needs further development on the issue of 16 the petitioning creditors’ subjective motives and intent. 17 We acknowledge that Higgins indicates that bankruptcy courts 18 ordinarily are not required to conduct a mini-trial on the 19 alleged debtor’s entitlement to attorney’s fees if the court 20 already has held a trial on the merits of the petition. Higgins, 21 379 F.3d at 707. Summary judgment or similar proceedings – where 22 each side is given the opportunity to present evidence on the 23 full range of relevant issues – also might sufficiently develop 24 the record to obviate the need for a subsequent evidentiary 25 hearing on the propriety of awarding attorney’s fees. See, e.g., 26 In re Macke Int'l Trade, Inc., 370 B.R. at 242 (in the context of 27 a motion to dismiss under § 305(a), both sides given opportunity 28 to file declarations and briefs on the full range of relevant

16 1 issues); In re C&C Jewelry Mfg., Inc., 2001 WL 36340326 at *3-4 2 (summary judgment proceedings held on the merits, followed by 3 separate motion for § 303(i) fees and damages addressing issue of 4 petitioning creditors’ bad faith). 5 Nonetheless, given the specific procedural posture of this 6 case and given the unique factual circumstances presented, the 7 bankruptcy court could not have correctly considered the totality 8 of the circumstances without further development of the record. 9 Simply put, the bankruptcy court erred by not giving the parties 10 the opportunity to present evidence pertaining to the full range 11 of factors relevant to the application of § 303(i)(1). 12 2. § 303(i)(2) Analysis 13 For the same reason, we also conclude that the court did not 14 correctly apply § 303(i)(2). As set forth above, our precedent 15 requires the bad faith determination under § 303(i)(2) to focus 16 on the petitioning creditors’ objective reasonableness. See 17 In re Macke Int'l Trade, Inc., 370 B.R. at 256-57; 18 In re Wavelength, Inc., 61 B.R. at 620. The bankruptcy court, 19 here, correctly referenced the objective reasonableness standard, 20 and made a handful of findings in support of its conclusion that 21 the petition was not filed in bad faith. The bankruptcy court 22 pointed out that the dispositive issue – the illegality under 23 federal law of Medpoint’s business – was a novel question of law. 24 The court further inferred from the existing record that Medpoint 25 was unable to “meet its ongoing financial obligations to numerous 26 creditors, in amount and number sufficient to justify an 27 involuntary petition under section 303(b).” Order Granting 28 Motion to Dismiss (April 6, 2015) at 14:13-14.

17 1 While there definitely is some evidence in the record to 2 support the bankruptcy court’s finding regarding Medpoint’s 3 financial difficulties, we nonetheless are troubled by this 4 finding. The court more than once instructed the parties that 5 the issue of whether Medpoint was generally paying its 6 (undisputed) debts as they came due only would be addressed at a 7 subsequent trial if the motion to dismiss was denied. This had a 8 chilling effect on the parties’ presentation of evidence 9 pertaining to this issue. Therefore, as Medpoint has asserted, 10 the bankruptcy court should not have denied Medpoint’s request 11 for an evidentiary hearing on its entitlement to damages under 12 § 303(i)(2). 13 At bottom, the bankruptcy court enjoys considerable 14 discretion in deciding whether to hold an evidentiary hearing, 15 but that discretion is circumscribed by the requirements of due 16 process. See Tyner v. Nicholson (In re Nicholson), 435 B.R. 622, 17 635-37 (9th Cir. BAP 2010), partially abrogated on other grounds 18 by, Law v. Siegel, 134 S.Ct. 1188, 1196–98 (2014). We are aware 19 of In re Nicholson’s observation that “Bad faith is a ‘highly 20 factual determination’ but does not generally require an 21 evidentiary hearing.” Id. at 637. Even so, due process 22 necessarily requires that the parties be given some opportunity 23 to present evidence on material disputed factual issues. The 24 parties, here, were not given that opportunity. 25 CONCLUSION 26 For the reasons set forth above, we VACATE the portion of 27 the bankruptcy court’s dismissal order denying Medpoint’s request 28 for fees, costs and damages, and we remand for further

18 1 proceedings. 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28