A shareholder, even one purporting to act for the debtor, does not have the right to recover its costs and attorneys’ fees when an involuntary petition was dismissed, according to District Judge Richard F. Boulware, II of Las Vegas.
The alleged debtor was a closely-held corporation with two or three shareholders. One shareholder, who was also a creditor, filed an involuntary petition against the corporation. Although the corporation never appeared in the involuntary bankruptcy, another shareholder, claiming to own 50% of the stock, appeared and filed a motion to dismiss. Although the opinion does not say so, the corporation may not have appeared in the bankruptcy as the result of a deadlock among shareholders.
Eventually, the petitioning creditor decided to dismiss the petition. The bankruptcy judge dismissed the petition but denied the shareholder’s claim for costs and attorneys’ fees under Section 303(i), saying that the shareholder did not have standing to recover costs. Unless dismissal was on consent of the petitioners and the debtor, that section provides that the court can assess costs and “reasonable attorneys’ fees” against the petitioners “and in favor of the debtor.”
Judge Boulware upheld the bankruptcy court in a May 22 opinion. He said the governing authority was the Ninth Circuit’s In re Miles, 430 F.3d 1083 (9th Cir. 2005).
In Miles, the court held that the statute was “ambiguous” in terms of whether damages can be awarded only in favor of the debtor. To avoid abuse of the system, the appeals court held that “rather sparse authority” led to the conclusion that only a debtor has standing under Section 303(i).
The shareholder argued that Miles was inapposite because it was acting “on behalf of the debtor.” However, Judge Boulware inferred “from the bankruptcy court’s ruling, that it determined [the shareholder] not to have been the debtor.”
Bound by Miles, Judge Boulware upheld the denial of costs and fees for lack of standing. The opinion leaves the door open a crack for a bankruptcy court to award fees and costs to a shareholder or partner found to be acting on behalf of the debtor.
The opinion is Vibe Micro Inc. v. SIG Capital LLC, 14-1618 (D. Nev. May 22, 2017).