McMillan v. Schmidt, Jr. (In the Matter of McMillan)

Summarized by Aaron Kaufman , Gray Reed LLP
10 years 7 months ago

Citation:

Case No. 14-10458 (5th Cir. July 23, 2015) (not precedential)

Tag(s):

Ruling:

AFFIRMED (in a 2-1 decision) the dismissal of a contested matter following the bankruptcy court's denial of a motion under section 303(i) for costs and fees, concluding that a contested matter is not the proper vehicle to obtain a money judgment from parties not properly before the bankruptcy court. The majority held that due process requires an adversary proceeding with service of the complaint and summonses under Bankruptcy Rule 7004(a)(1). The majority also agreed that the two creditors were not "petitioning creditors" under 303(b) or (c), because they did not sign the original petition or join the petition after the initial filing. Judge Dennis, dissenting, argued that an adversary proceeding should not be required to exercise jurisdiction over two parties who essentially sought the benefits of the bankruptcy forum but declined to sign an actual bankruptcy petitions (comparing such acts to willful violations of the automatic stay, which bankruptcy courts routinely sanction under section 362(k) of the Bankruptcy Code, without requiring adversary proceedings).

Procedural context:

After the bankruptcy court dismissed an involuntary petition, the alleged debtor filed a motion for costs under section 303(i) of the Bankruptcy Code. The bankruptcy court denied that motion, and the alleged debtor appealed. Before the district court ruled on the merits, it dismissed the appeal for lack of jurisdiction.

Facts:

Aigner (the petitioning creditor) obtained a default judgment McMillan (the alleged debtor). Unrelated to that debt, McMillan was in the midst of a business dispute with the former CEO and CFO (Schmidt and Wafford) of a company McMillan owned. As part of this dispute (and still unrelated to Aigner's default judgment), Schmidt and Wafford approached Aigner and obtained an assignment of Aigner's rights under his default judgment so that they could control an involuntary bankruptcy petition against McMillan. With that agreement in place, Aigner filed an involuntary petition as the sole petitioning creditor. Neither Schmidt nor Wafford signed their own joining petition, but they did rely on their pre-petition assignment to have standing before the bankruptcy court. The bankruptcy court dismissed the involuntary petition, concluding that Aigner's assignment violated Rule 1003(a) and, thus, prohibited him from filing an involuntary petition. Further, because neither Schmidt nor Wafford signed an involuntary petition, the bankruptcy court held that they were not "petitioning creditors." This appeal arises from McMillan's subsequent motion for costs under section 303(i), which allows the successful alleged debtor to recover costs and fees from unsuccessful petitioning creditors. In this case, because the bankruptcy court held that Schmidt and Wafford were not technically "petitioning creditors," the court held that it could not enter an award of fees and costs against them under section 303(i).

Judge(s):

Per Curiam (Dennis, Prado and Higginson), Dennis dissenting.

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