United States Bankruptcy Appellate Panel of the Ninth Circuit
In re: QDOS, Inc., Debtor.
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,
and Submitted on September 26, 2019 at Pasadena, California
from the United States Bankruptcy Court for the Central
District of California Honorable Mark S. Wallace, Bankruptcy
Patrick Costello of Vectis Law Group argued for appellants;
Capozzola of The Law Offices of Damian D. Capozzola argued
Before: Taylor, Faris, and Spraker, Bankruptcy Judges.
Taylor, Bankruptcy Judge.
Hayden, Felice Terrigno, Jim Maddox, and the Wiese Family
Trust ("Petitioning Creditors") sought to place
QDOS, Inc. ("QDOS") into an involuntary chapter 11
proceeding. 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.
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.
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,
we REVERSE and REMAND for further proceedings.
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. On the petition, they stated that each of
their claims was for a loan.
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).
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
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.
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.
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.
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
eventual trial, Mr. Maddox did not appear.
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. 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
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).
bankruptcy court err when it dismissed the involuntary
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. ...