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In re QDOS, Inc.

United States Bankruptcy Appellate Panel of the Ninth Circuit

November 7, 2019

In re: QDOS, Inc., Debtor.
v.
QDOS, Inc., Appellee. Matthew Hayden; Felice Terrigno; Jim Maddox; Carl Wiese, as trustee for the Wiese Family Trust dated as of October 31, 2013, Appellants,

          Argued and Submitted on September 26, 2019 at Pasadena, California

          Appeal from the United States Bankruptcy Court for the Central District of California Honorable Mark S. Wallace, Bankruptcy Judge, Presiding.

          Patrick Costello of Vectis Law Group argued for appellants;

          Damian Capozzola of The Law Offices of Damian D. Capozzola argued for appellee.

          Before: Taylor, Faris, and Spraker, Bankruptcy Judges.

          OPINION

          Taylor, Bankruptcy Judge.

         INTRODUCTION

         Matthew Hayden, Felice Terrigno, Jim Maddox, and the Wiese Family Trust ("Petitioning Creditors") sought to place QDOS, Inc. ("QDOS") into an involuntary chapter 11 proceeding.[1] QDOS sought dismissal through a Civil Rule 12(b)(6) motion based on the assertion that none of the Petitioning Creditors were qualified to file the involuntary petition and, thus, the numerosity requirement of 11 U.S.C. § 303(b) was not met. The bankruptcy court recognized that the issue could not be resolved through a dismissal motion or other summary adjudication and held a trial. And because it determined that Mr. Terrigno was an investor, not a creditor, and because Mr. Maddox failed to appear, it agreed with QDOS and dismissed the petition.

         Petitioning Creditors appeal. They do not dispute the disqualification of Mr. Terrigno. Nor do they adequately dispute the bankruptcy court's conclusion that Mr. Maddox failed to satisfy his burden of proof that he qualified as a petitioning creditor. All that said, we conclude that the bankruptcy court erred.

         Under controlling Ninth Circuit law and the facts of this case, all creditors had the right to consider whether to join in the involuntary petition. But the bankruptcy court did not require QDOS to file an answer and the list of creditors required by Rule 1003(b) once it determined that triable issues existed. And it neither required Civil Rule 26 disclosures nor permitted discovery that would have otherwise allowed the Petitioning Creditors to give the required notice to creditors. The record reflects that QDOS's alleged 40 to 50 creditors had no reasonable opportunity to join in the involuntary petition. Dismissal based solely on an insufficiency in the number of petitioning creditors, thus, was error.

         Therefore, we REVERSE and REMAND for further proceedings.

         FACTS

         In May 2018, Carl Wiese (as trustee of the Wiese Family Trust dated as of October 31, 2013), Matthew Hayden, and Felice Terrigno filed an involuntary chapter 11 petition against QDOS.[2] On the petition, they stated that each of their claims was for a loan.

         QDOS moved to dismiss and requested § 303(i) damages; in the alternative, it sought abstention under § 305. It did not dispute the petition's allegation that it was not paying its debts as they came due; it focused solely on Mr. Terrigno and alleged that he did not hold a qualifying claim because he was an investor. It asserted that it had 12 or more claimholders, and, thus, the involuntary petition was not filed by three creditors as required by § 303(b).

         Petitioning creditors opposed the motion. Among other things, they argued that the grounds for dismissal relied on disputed facts which could not be resolved on a Civil Rule 12(b)(6) motion to dismiss.

         Two days before the hearing, the bankruptcy court issued a tentative ruling granting the motion because Mr. Terrigno was not a qualifying petitioner and, as a result, there were less than three qualifying petitioning creditors. It concluded that a Rule 1003(b) list was unnecessary because QDOS filed a motion instead of an answer.

         But then Mr. Maddox joined the involuntary petition; the bankruptcy court set a trial for two days later and directed each petitioning creditor to appear personally or risk removal from the list of petitioning creditors. The next day, Petitioning Creditors' counsel filed a document stating that they were unable to appear on less than 48 hours notice for a variety of reasons. So, the bankruptcy court continued the trial. Its order limited the time for additional joinders to the petition to the following three weeks.

         Six business days later, Petitioning Creditors filed an ex parte request for a telephonic conference on discovery matters because QDOS was unwilling to negotiate a workable document production schedule and refused to file a Rule 1003(b) list. QDOS opposed the ex parte request, and the bankruptcy court thereafter entered an order striking it.

         An additional delay in the hearing occurred. And the bankruptcy court altered the consequences of a failure to appear at the hearing from being struck from the list of petitioning creditors to the striking of the non-appearing petitioning creditor's declaration.

         At the eventual trial, Mr. Maddox did not appear.

         The bankruptcy court then entered a combined memorandum decision and order. It found that QDOS had more than 12 creditors for § 303(b)(1) purposes. It concluded that Mr. Terrigno was not a qualifying petitioning creditor because he was an equity holder.[3] Next, it concluded that Mr. Maddox was not a qualifying petitioning creditor for two reasons: first, his claim was subject to a partial bona fide dispute; and second, he failed to appear at the hearing as ordered and, as a result, failed to meet his burden of proof that he was a qualifying petitioning creditor. Petitioning Creditors timely appealed.

         JURISDICTION

         The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158(a)(3).

         ISSUE

         Did the bankruptcy court err when it dismissed the involuntary petition?

         STANDARD OF REVIEW

         We review de novo whether a particular procedure satisfies due process. Owens-Corning Fiberglass Corp. v. Ctr. Wholesale, Inc. (In re Ctr. Wholesale, Inc.), 759 F.2d 1440, 1445 (9th Cir. 1985); Garner v. ...


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