In re Buckeye Activewear, LLC

589 B.R. 772

IN RE: BUCKEYE ACTIVEWEAR, LLC, Alleged Debtor.

Case No. 18-31582

United States Bankruptcy Court, N.D. Ohio, Western Division.

Signed August 31, 2018

Robert J. Honigford, Lima, OH, for Debtor.

MEMORANDUM OF DECISION AND ORDER RE: INVOLUNTARY PETITION

John P. Gustafson, United States Bankruptcy Judge

This case came before the court for hearing on June 26, 2018 pursuant to Alleged Debtor Buckeye Activewear, LLC's ("Alleged Debtor") Motion to Dismiss Case ("Motion"). [Doc. # 8]. Petitioning Creditor Radia Enterprises, Inc. ("Petitioning Creditor") filed a Response to Alleged Debtor's Motion [Doc. # 13], Alleged Debtor filed a Reply to Opposition to Motion to Dismiss [Doc. # 19], and Petitioning Creditor filed its own Reply to Creditor's Surreply on Motion for Dismissal. [Doc. # 21]. In its Motion, Alleged Debtor argues that, because there is no legal basis for Petitioning Creditor's filing of the involuntary petition, the involuntary petition should be dismissed with prejudice.

This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O) and venue is proper under 28 U.S.C. § 1409(a). The court has jurisdiction over core proceedings under 28 U.S.C. §§ 1334 and 157(a) and Local General Order 2012-7 of the United States District Court for the Northern District of Ohio.

Because the court finds that Petitioning Creditor cannot sustain its burden in terms of establishing that Alleged Debtor owes it an undisputed debt sufficient for the filing of an involuntary bankruptcy petition, the court will grant Alleged Debtor's Motion and dismiss this case with prejudice.

FACTUAL AND PROCEDURAL BACKGROUND

On May 17, 2018, Petitioning Creditor filed a Chapter 7 involuntary petition against Alleged Debtor, averring that Alleged Debtor was not paying its non-contingent, undisputed debts as they came due. [Doc. # 1]. The involuntary petition lists only one creditor, Radia Enterprises, Inc. (Petitioning Creditor), and a single claim in the amount of $85,372.77, described as "unpaid invoices for goods sold on credit." [Id. , p. 3]. Alleged Debtor filed both a Reply to the Involuntary Bankruptcy [Doc. # 7] and a Motion to Dismiss Case [Doc. # 8] on June 5, 2018, arguing that the involuntary petition is baseless and involves debts owed by third-party entities, not Alleged Debtor or its affiliates. The court set both the Reply and Motion for hearing to be held on June 26, 2018. [Doc. # 10].

With its Motion to Dismiss, Alleged Debtor filed the affidavit of Anthony S. Collins ("Mr. Collins"), the owner/operator of Alleged Debtor, in which Mr. Collins averred that while Alleged Debtor has previously done business with an entity affiliated with Petitioning Creditor, Alleged Debtor does not owe Petitioning Creditor any outstanding amounts. [Id. , pp. 3-4]. Mr. Collins' affidavit further states that Petitioning Creditor's involuntary suit appears to be an attempt at involving third parties in its dispute with Theodore R. Ralston ("Mr. Ralston"), a man Mr. Collins identified as unaffiliated with Alleged Debtor and Mr. Collins' related businesses. [Id. ].

In its Response to Motion for Dismissal [Doc. # 13], filed on June 21, 2018, Petitioning Creditor argues that there is no genuine dispute regarding the factual basis for its claim of a debt owed it by Alleged Debtor. In support, Petitioning Creditor submitted the affidavit of Rupendra Radia ("Mr. Radia"), the president of Petitioning Creditor, in which Mr. Radia states that Petitioning Creditor's business relationship with Alleged Debtor started when Petitioning Creditor hired Mr. Ralston as its business development director. [Doc. # 14, p. 2]. Mr. Radia's affidavit explains that Mr. Ralston connected Petitioning Creditor with Alleged Debtor and then placed orders with Petitioning Creditor on Alleged Debtor's behalf. [Id. ]. Mr. Radia's affidavit goes on to explain that the debt underlying Petitioning Creditor's involuntary filing stems from delivery of twelve orders of consumer goods that Petitioning Creditor avers Alleged Debtor is liable for. [Id. , pp. 3-8].

Petitioning Creditor also submitted copies of invoices, email chains, and shipping documents that purport to outline the transactional dispute underlying Petitioning Creditor's claim. [Doc. # 14-1 through 14-12]. Many of the submitted documents refer to Ted (Mr. Ralston), World Source Simple, LLC, and a delivery location at 2200 Allentown Road, Lima, Ohio.¹ [Id. ] Additionally, Petitioning Creditor submitted a sworn affidavit of Cathy Meilchen ("Ms. Meilchen"), Petitioning Creditor's accountant, alongside exhibits that appear to outline Ms. Meilchen's attempts at collecting monies from Alleged Debtor for the goods at issue. [Doc. # 15].

At the June 26th hearing, Alleged Debtor's counsel and Petitioning Creditor's counsel appeared by phone. Upon being questioned by the court, Alleged Debtor's counsel admitted that it has fewer than twelve creditors. The parties also argued in support of their respective positions and the court allowed the parties to submit additional briefing and evidence regarding Alleged Debtor's Motion to Dismiss. The court also set a trial for determining whether Alleged Debtor pays its debts as they come due that was to be held on September 13, 2018.² [Doc. # 18].

On June 29, 2018, Alleged Debtor filed its Reply to Opposition to Motion to Dismiss [Doc. # 19], arguing that the evidence before the court demonstrates that Petitioning Creditor's claim remains subject to genuine issues of fact, requiring dismissal of the involuntary petition. In support, Alleged Debtor submitted exhibits that outline a Texas state court lawsuit in which Petitioning Creditor appears to be suing third party entities for the same $85,372.77 underlying its involuntary petition brought against Alleged Debtor. [Doc. # 19, pp. 14-45]. Alleged Debtor also submitted a second, more extensive affidavit from Mr. Collins and an affidavit from Mr. Ralston, both of which reference the Texas state court action and maintain that Mr. Ralston is not affiliated with Alleged Debtor. [Id. , pp. 7, 10]. Both affidavits also identify 2200 Allentown Road, Lima, Ohio as the address of a multi-tenant warehouse owned by another of Mr. Collins' companies, 2200 Allentown Road LLC, a warehouse that is currently occupied by a number of tenants, including Mr. Ralston and his business, World Source Simple, LLC. [Id. , pp. 6, 10].

In its Reply to Creditor's Surreply on Motion for Dismissal [Doc. # 21], filed on July 24, 2018, Petitioning Creditor argues that it has presented sufficient evidence demonstrating that its claim against Alleged Debtor is not subject to a bona fide dispute. Petitioning Creditor explains that Ohio agency and acceptance/delivery law necessarily holds Alleged Debtor liable for the goods allegedly ordered on its behalf by Mr. Ralston. [Id. , pp. 4-7]. Petitioning Creditor further argues that Alleged Debtor's course of conduct and prior dealings with Petitioning Creditor establish a connection, under the Ohio law of apparent/ostensible authority, supporting Alleged Debtor's liability for the $85,372.77 owing from orders placed by Mr. Ralston. [Id. , pp. 6-7].

LAW AND ANALYSIS

Section 303 of the Bankruptcy Code allows for the filing of an involuntary petition by holders of debt claims that are "not contingent as to liability or the subject of a bona fide dispute as to liability or amount.³ " 11 U.S.C. § 303(b) ; see , In re Soderberg and Schafer CPAS, LLC , 441 B.R. 262, 263 (Bankr. N.D. Ohio 2010). The burden of establishing the non-contingent and undisputed nature of a § 303(b) qualifying claim rests on the petitioning creditor. Soderberg , 441 B.R. at 263 (citing Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd. ), 486 F.3d 940, 944 (6th Cir. 2007) ).

At issue in this case is whether Alleged Debtor owes Petitioning Creditor a debt that is not subject to a bona fide dispute. While the Bankruptcy Code does not define the term "bona fide dispute," the Sixth Circuit Court of Appeals has set forth the following objective standard for determining, for purposes of involuntary bankruptcy eligibility, whether a bona fide dispute exists: "If there is either a genuine issue of material fact that bears upon the debtor's liability, or a meritorious contention as to the application of law to undisputed facts, then the petition must be dismissed.⁴ " DSC, Ltd. , 486 F.3d at 945 (quoting Booher Enter. v. Eastown Auto Co. (In re Eastown ), 215 B.R. 960, 965 (6th Cir. BAP 1998) ); see also , Soderberg , 441 B.R. at 263-64 ; In re Lough , 57 B.R. 993, 997 (Bankr. E.D. Mich. 1986) ; In re Freedom Filler, LLC , 2013 WL 3379365 at *1, 2013 Bankr. LEXIS 2760 at *2 (Bankr. N.D. Ohio July 8, 2013). "[I]n determining whether a claim is subject to a bona fide dispute, the bankruptcy court must not resolve any genuine issues of fact or law, it must only determine whether such issues exist.⁵ " Soderberg , 441 B.R. at 264 (citing DSC, Ltd. , 486 F.3d at 945 ).

In Soderberg , the bankruptcy court looked to a decision from the Fifth Circuit Court of Appeals and adopted the following burden-shifting framework:

[T]he petitioning creditor must establish a prima facie case that no bona fide dispute exists. Once this is done, the burden shifts to the debtor to present evidence demonstrating that a bona fide dispute does exist. Because the standard is objective, neither the debtor's subjective intent nor his subjective belief is sufficient to meet this burden. The court's objective is to ascertain whether a dispute that is bona fide exists; the court is not to actually resolve the dispute. This does not mean that the bankruptcy court is totally prohibited from addressing the legal merits of the alleged dispute; indeed, the bankruptcy court may be required to conduct a limited analysis of the legal issues in order to ascertain whether an objective legal basis for the dispute exists.

Soderberg , 441 B.R. at 264 (quoting Subway Equip. Leasing Corp. v. Sims (In re Sims ), 994...