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In re Hassell 2012 Joint Venture

United States District Court, S.D. Texas, Houston Division

July 24, 2017

In re Hassell 2012 Joint Venture, Debtor.

          MEMORANDUM OPINION AND ORDER

          GRAY H. MILLER UNITED STATES DISTRICT JUDGE

         Pending before the court are (1) an appeal filed by appellant R. Hassell Holding Co., Inc. (“RHHC”) (Dkt. 8 (appellant brief)); and (2) a motion to strike materials RHHC attached to its appellant's brief that were not part of the record on appeal filed by appellees James C. Hassell, Hassell Construction Company, Inc., and Hassell Management Services, L.L.C. (collectively, “HCCI”) (Dkt. 11). After considering the motion to strike and applicable law, the court is of the opinion the motion (Dkt. 11) should be GRANTED. After considering the appellate briefs and record evidence, the court is of the opinion that the Bankruptcy Court's order granting summary judgment should be AFFIRMED IN PART and otherwise REMANDED FOR ADDITIONAL FINDINGS OF FACT.

         I. Background

         On February 5, 2016, RHHC filed an involuntary petition under Chapter 7 of the Bankruptcy Code against Hassell 2012 Joint Venture (the “Joint Venture” or the “Alleged Debtor”). Dkt. 5-2 at 322. On June 2, 2016, HCCI moved for summary judgment on the involuntary bankruptcy petition, asserting that RHHC lacked evidence to support an essential element of the petition. See Dkt. 10; see also Dkt. 2-2 at 385 (motion for summary judgment); Dkt. 2-2 at 835 (memorandum opinion relating to order granting summary judgment); Dkt. 2-2 at 854 (order granting summary judgment). On September 23, 2016, the Bankruptcy Court granted the motion for summary judgment, holding that RHHC failed to present sufficient evidence that the Alleged Debtor was failing to pay undisputed debts as they came due. Dkt. 10; see also Dkt. 2-2 at 835. RHHC moved for reconsideration, and the Bankruptcy Court denied the motion. Dkt. 10; see also Dkt. 2-2 at 880 (motion to reconsider); Dkt. 2-2 at 911 (order denying motion to reconsider). RHHC timely filed a notice of appeal. Dkt. 1. RHHC filed its appellant's brief on January 26, 2017. Dkt. 8. HCCI filed its appellee's brief on February 24, 2017, and RHHC filed a reply on March 10, 2017. Dkts. 10, 12. The appeal in now ripe for consideration.

         II. Motion to Strike

         HCCI filed a motion to strike on February 24, 2017. Dkt. 11. In this motion, HCCI asserts that the appendix filed with RHHC's appellant brief contained a document that is not part of the record on appeal. Id. (citing Dkt. 9). HCCI specifically takes issue with Appendix Item 6, which is a request for abstract of judgment. See id.; see also Dkt. 9-6 (the contested document). RHHC did not file a response to the motion to strike. Under Local Rule 7.4, “[f]ailure to respond will be taken as a representation of no opposition.” S.D. Tex. L.R. 7.4. The court therefore deems the motion to strike unopposed. HCCI's motion to strike (Dkt. 11) is GRANTED. The court will not consider Appendix Item 6 when considering RHHC's appeal.

         III. Appeal

         This is an involuntary bankruptcy case. Under 11 U.S.C. § 303(b), an “involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of [the Bankruptcy Code], . . . [i]f such person is a partnership[, ] . . . by fewer than all of the general partners in such partnership; or . . . if relief has been ordered under [the Bankruptcy Code] with respect to all of the general partners in such partnership, by a general partner in such partnership, the trustee of such a general partner, or a holder of a claim against such partnership.” 11 U.S.C. § 303(b). Under 11 U.S.C. § 303(h), a Bankruptcy Court may order relief in an involuntary case only if “the debtor is generally not paying such debtor's debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount; or . . . within 120 days before the date of the filing of the petition, a custodian, other than a trustee, receiver, or agent appointed or authorized to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property, was appointed or took possession.” 11 U.S.C. § 303(h). The determination of whether a debtor is “generally not paying” its debts as they become due is made as of the date the original petition is filed. In re Sims, 994 F.2d 210, 222 (5th Cir. 1993). Courts consider various factors in determining whether a debtor is generally not paying its debts, including (1) “the number and amount of the unpaid debts in relation to the size of the debtor's operation”; (2) “the age and number of unpaid debts”; (3) “the total amount of indebtedness”; and (4) “the number of unpaid creditors.” In re Arriola Energy Corp., 74 B.R. 784, 790 (S.D. Tex. 1987) (Bue, J.). Another court sums up the factors as follows: “(1) the number of unpaid claims; (2) the amount of such claims; (3) the materiality of the non-payments; and (4) the debtor's overall conduct in her financial affairs.” In re Moss, 249 B.R. 411, 422 (N.D. Tex. Bankr. 2000).

         By the time HCCI moved for summary judgment, the Bankruptcy Court had held that the Joint Venture was a general partnership and that RHHC was eligible to file an involuntary bankruptcy petition under § 303(b)(3) of the Bankruptcy Code. Dkt. 8. The issue on summary judgment was whether, under § 303(h)(1), the Joint Venture was “generally not paying such debtor's debts as such debts [became] due unless such debts are the subject of a bona fide dispute as to liability or amount.” Id. (quoting § 303(h)(1)). The Bankruptcy Court determined that “the ratio of delinquent to current debts is not supportive of a pattern of the [Joint Venture] generally not paying its debts as they become due. Furthermore, the totality of the circumstances reflects that the few debts remaining as of the petition date reflect a pattern of payment of debts by the [Joint Venture].” Dkt. 2-2 at 852. The Bankruptcy Court ultimately held that RHHC had “not demonstrated that the [Joint Venture] was not paying its undisputed debts as they became due” and accordingly granted summary judgment in HCCI's favor. Id. at 852-54.

         RHHC presents the following issues for appellate review: (1) whether the Bankruptcy Court erred in finding that the summary judgment burden shifted to RHHC; (2) the Bankruptcy Court incorrectly determined that RHHC had the burden to amend the bankruptcy schedules; (3) whether the Bankruptcy Court erred in concluding that the amended schedules had any probative value in light of the disclaimers contained within the amended schedules; (4) whether the Bankruptcy Court erred in its conclusion that debts that were the subject of litigation and arbitration were subject to a bona fide dispute; (5) whether the Bankruptcy Court's findings of fact and conclusions of law relating to current and delinquent debts remaining as of the petition date are clearly erroneous; (6) whether the Bankruptcy Court's finding that there was no evidence that the McCain debt was due as of the petition date is incorrect; (7) whether the Bankruptcy Court should have taken into consideration an outstanding claim by the U.S. Department of Labor; (8) whether the Bankruptcy Court's finding that the ratio of debts due as of the petition date to debts that were not due as of the petition date was 47% to 53% is incorrect; (9) whether the Bankruptcy Court inappropriately allowed HCCI to submit new evidence with their reply brief without giving RHHC an opportunity to examine and respond to the new evidence; and (10) whether the Bankruptcy Court incorrectly failed to find and conclude the RHHC satisfied its burden of showing there is a genuine issue of fact for trial. Dkt. 8 at 3-4.

         HCCI argues that the Bankruptcy Court properly granted its motion for summary judgment for the following reasons: (1) HCCI satisfied its burden by identifying a portion of the record that suggests RHHC could not satisfy its burden of proof; (2) the Bankruptcy Court correctly excluded debts subject to a bona fide dispute and debts that were not outstanding as of the petition date; (3) the Bankruptcy Court correctly concluded that there was insufficient evidence that the Joint Venture was generally not paying its undisputed debts as they came due as of the petition date; and (4) the Bankruptcy Court properly considered the summary judgment evidence attached to the reply, as RHHC had ample to time to respond to the rebuttal evidence and did not do so. Dkt. 10.

         The court will first set forth the legal standard for reviewing a Bankruptcy Court's order, and then it will analyze each of the alleged points of error.

         A. Standard of Review

         In reviewing a decision of the Bankruptcy Court, this court functions as an appellate court, applying the standards of review generally applied in federal appeals courts. Webb v. Reserve Life Ins. Co. (In re Webb), 954 F.2d 1102, 1103-04 (5th Cir. 1992); see also Coston v. Bank of Mavren (In re Coston), 991 F.2d 257, 261 n.3 (5th Cir. 1993) (en banc) (citing Griffith v. Oles (In re Hipp, Inc.), 895 F.2d 1503, 1517 (5th Cir. 1990)). This court generally reviews orders granting summary judgment de novo, “guided by the same standard as the Bankruptcy Court: Federal Rule of Civil Procedure 56.” In re Camey, 258 F.3d 415, 418 (5th Cir. 2001) (citing Stults v. Conoco. Inc., 76 F.3d 651, 654 (5th Cir. 1996)); see also In re Oparaji, 698 F.3d 231, 235 (5th Cir. 2012). However, the court reviews findings of fact made by the Bankruptcy Court under the clearly erroneous standard. In re Crowell, 138 F.3d 1031, 1033 (5th Cir. 1998); In re Beaubouef, 966 F.2d 174, 177 (5th Cir. 1992).

         B. Analysis

         The court will analyze each of the issues raised by RHHC in seriatim.

         1.Meeting the Initial Burden

         The court reviews the first issue presented by RHHC's de novo because it concerns a question of law.

         RHHC argues that Bankruptcy Court improperly applied Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986), because it found that the burden shifted to RHHC to come forward with an issue of material fact even though HCCI's motion only contended that RHHC had no evidence to prove its case. Dkt. 8. RHHC contends that, under Celotex, the movant must identify portions of the record that demonstrate the absence of a material fact and cannot merely state that the non-movant has no evidence to support its case. Id.

         HCCI argues that their motion correctly identified the portion of the record demonstrating the absence of a genuine issue of material fact that the Joint Venture was not paying its debts as they became due. Dkt. 10 (citing Dkt. 2-2 at 385-93 (motion for summary judgment)). The motion contains the following heading: “No Evidence of Not Paying Debts As they Come Due.” Dkt. 2-2 at 391. The motion then notes that the Bankruptcy Court cannot order relief in an involuntary bankruptcy case unless the debtor is generally not paying debts as they are due, and the financial documents and job cost reports produced by RHHC provided “no evidence that there are any unpaid debts” of the Joint Venture. Dkt. 2-2 at 392.

         RHHC argues, in reply, that “[s]ome reference to documents that were produced has to state a specific reason why [HCCI] believed that the voluminous documents ultimately presented no genuine issue of material fact whether the Debtor was paying its debts as they became due.” Dkt. 12.

         The court disagrees with RHHC. In Celotex, the U.S. Supreme Court noted that the “party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the ‘pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, ' which it believes demonstrate the absence of a genuine issue of material fact.” 477 U.S. at 323. However, it determined that there was “no express or implied requirement in Rule 56 that the moving party support its motion with affidavits or other similar materials negating the opponent's claim.” Id. Here, HCCI pointed to the evidence offered and stated that it did not present an issue of material fact that the Joint Venture was not paying its debts. See Dkt. 2-2 at 392. It was then up to the non-movant at that point to demonstrate that there was an issue of material fact. The court, after conducting a de novo review, finds that Bankruptcy Court did not err in determining that the burden shifted to RHHC. The objection presented in RHHC's first issue is OVERRULED. The Bankruptcy Court's finding on this issue is AFFIRMED.

         2. Burden to Amend the Bankruptcy Schedules

         The court reviews the second issue presented by RHHC de novo because it concerns a question of law.

         The Bankruptcy Court stated:

Despite the extensive discovery that has taken place, and the amount of time RHHC has had to review the documents, RHHC has not amended the schedules and statement of financial affairs to identify any debts. If the discovery resulted in evidence that there were debts owed by the Partnership, RHHC had an affirmative duty to amend its schedule and statement of financial affairs to reflect them
. . . . .

Dkt. 2-2 at 841.

         RHHC contends that this finding was in error because it did not have a burden to amend the Bankruptcy Schedules. Dkt. 8. RHHC notes that it is a general partner of the Joint Venture, and it argues that only the debtor (the Joint Venture) has an obligation to file and amend the schedules and statements, citing Bankruptcy Rule 1007(a)(2). Dkt. 8.

         HCCI, citing Bankruptcy Rule 1007(g), asserts that general partners have a duty to prepare and file schedules of assets and liabilities and, as such, have a corresponding duty to amend those schedules if they are incorrect. Dkt. 10. HCCI additionally contends that, regardless, RHHC waived this argument for purposes of appeal because it did not raise this argument in the Bankruptcy Court until it ...


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