In re Murphy, Case No. 9:17-bk-07843-FMD

In re: Gabriel C. Murphy, Alleged Debtor.

Case No. 9:17-bk-07843-FMD

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF FLORIDA FORT MYERS DIVISION

March 19, 2019

Chapter 7

ORDER DENYING MOTION TO DISMISS INVOLUNTARY BANKRUPTCY PETITION AND GRANTING ALLEGED DEBTOR'S REQUEST FOR ABSTENTION

Gabriel Murphy ("Murphy"), the alleged debtor in this involuntary Chapter 7 case, moves to dismiss the petition, for an award of attorney's fees and costs under 11 U.S.C. § 303(i)(1),¹ and an award of damages, including punitive damages, under § 303(i)(2) (the "Motion to Dismiss").² Alternatively, Murphy moves the Court to abstain under § 305(a).

For the reasons set forth below, the Court will deny the Motion to Dismiss but will grant Murphy's request that the Court abstain from this case.

I. PROCEDURAL HISTORY

On September 5, 2017, Digital Technology, LLC ("Digital Technology"), Investment Theory, LLC ("Investment Theory"), and Guaranty Solutions Recovery Fund I, LLC ("Guaranty Solutions") (together, "Petitioning Creditors") filed an involuntary Chapter 7 petition (the "Original Petition")³ against Murphy. Murphy promptly filed the Motion to Dismiss.

The Motion to Dismiss alleged improper service,⁴ that Digital Technology's claim is in bona fide dispute such that Digital Technology is not a qualified petitioning creditor, and that the Original Petition was filed in bad faith. During the course of the case, Murphy expanded upon the grounds for the Motion to Dismiss, including the Original Petition's failure to disclose that Investment Theory and Guaranty Solutions had acquired their claims by transfer and not for the purpose of filing the involuntary petition, and Murphy's contentions that Investment Theory is the alter ego of Digital Technology and Guaranty Solutions' claim is in bona fide dispute.⁵

On February 28, 2018, after months of discovery and related discovery disputes⁶—and just a month before the scheduled trial on the Motion to Dismiss—Petitioning Creditors filed an amended petition (the "Amended Petition").⁷ The Amended Petition recalculated Digital Technology's claim and, in compliance with Federal Rule of Bankruptcy Procedure 1003, disclosed that Investment Theory and Guaranty Solutions had obtained their claims by transfer and not for the purpose of filing the involuntary case.

Murphy moved to strike the Amended Petition (the "Motion to Strike").⁸ Petitioning Creditors filed a response to the Motion to Strike, and in the alternative, requested leave of Court to file the Amended Petition, nunc pro tunc to the date of the Amended Petition.⁹

By separate order, the Court has denied the Motion to Strike and granted Petitioning Creditors' request for leave to file the Amended Petition. Accordingly, the Court will consider the Motion to Dismiss as it applies to the Amended Petition.

On March 27, 2018, two days prior to the scheduled trial on the Motion to Dismiss, the Petitioning Creditors' attorney filed a joinder to theinvoluntary petition on behalf of William M. Scheer and Lawrence G. Scheer (the "Scheer Joinder").¹⁰ In the Scheer Joinder, the Scheers assert a claim in the amount of $51,440.00 plus accrued interest and attorney's fees ("the Scheer Claim"). Murphy contends that the Scheer Claim is no longer enforceable and that the Scheers do not qualify as petitioning creditors.¹¹

The Court conducted a five-day trial on the Motion to Dismiss in March and May 2018. Despite an extended break between the trial dates, the parties conducted no discovery on the validity of the Scheer Claim or the Scheer Joinder, and they presented no evidence on these issues at trial.¹²

On May 8, 2018, at the conclusion of Petitioning Creditors' case-in-chief, Murphy moved for directed verdict.¹³ In support of his ore tenus motion, Murphy argued two issues raised in the Motion to Dismiss. First, Murphy argued that Petitioning Creditors failed to establish that Guaranty Solutions and Investment Theory had not acquired their claims for the purpose of commencing the bankruptcy case as required under Federal Rule of Bankruptcy 1003(a).¹⁴ Second, Murphy argued that Petitioning Creditors failed to show that their claims are not subject to a bona fide dispute as to liability or amount as required by § 303(b).¹⁵ Murphy also requested the Court abstain from hearing this case.¹⁶

The Court denied the motion for directed verdict.¹⁷ But the Court held that Petitioning Creditors had met their initial burden to show that the claims of Guaranty Solutions and Investment Theory were not acquired for the purpose of commencing the bankruptcy case.¹⁸ And the Court analyzed the claims of each Petitioning Creditor under § 303(b). As to Guaranty Solutions, the Court found that while Murphy might dispute the calculation of interest on Guaranty Solutions' claim, Murphy did not dispute his liability for the claim itself; therefore, Petitioning Creditors met their burden to establish that the claim was not in bona fide dispute as to liability or amount.¹⁹ On Investment Theory's claim, the Court ruled that Petitioning Creditors put forward sufficient evidence to establish the lack of a bona fide dispute.²⁰ And on Digital Technology's claim, the Court determined that Petitioning Creditors met their threshold burden of proof through testimony and evidence to establish the undisputed portion of that claim.²¹

Because the Court found that Petitioning Creditors had met their initial burdens, the burden then shifted to Murphy to show that any of Petitioning Creditors' claims were acquired for the purpose of filing the involuntary petition or were in bona fide dispute. The Court did not rule on Murphy's request for abstention.

In July 2018, the parties submitted closing briefs,²² proposed findings of fact and conclusions of law, and objections to each other's proposed findings and conclusions.²³ On December 12, 2018, the Court was provided with the trial transcripts for the May 2018 trial dates.²⁴

II. PETITIONING CREDITORS' CLAIMS

Under § 303(b)(1), an involuntary case may be commenced by three or more entities each of which holds a claim that is not contingent as to liability or subject to a bona fide dispute as to liability or amount if the claims aggregate at least $15,775.00 more than the value of any lien on the debtor's property securing the claims.

If an alleged debtor asserts that a petitioning creditor's claim is in bona fide dispute, the bankruptcy court need not resolve the merits of the dispute, but simply determines whether one exists.²⁵ Here, the facts relating to Murphy's claim of a bona fide dispute are so convoluted and intertwined that a thorough analysis is necessary for the Court to determine whether Petitioning Creditors' claims are in bona fide dispute. The following summarizes the evidence presented at trial on Petitioning Creditors' claims.

A. Digital Technology

Digital Technology is owned by Connolly Investment Group, LLC ("CIG") (80%) and Nathan Thomas (20%).²⁶ CIG is owned by Michael Connolly ("Connolly").²⁷

Digital Technology's claim arises from its sale of a website with the World Wide Web address²⁸ of "video2mp3.net" (the "Website"). The Website featured a software application that converts videos to digital "MP3" recordings.²⁹

Search engines, such as Google, directed visitors to the Website. Search engine "ranking" was a critical factor in directing visitors to the Website. For example, if a person conducted a search on Google for the terms "convert video to MP3," the order in which the Website appeared in the search results affected whether the person visited the Website or another website identified in the search results. In other words, the higher the search engine "ranking," the more persons (visitors) viewed the Website.

The Website's primary purpose was to generate income from advertisements. Advertisement facilitators, including Contech, LLC, d/b/a Sonobi ("Sonobi"), sold and placed advertisements on the Website.³⁰ Each time an advertisement was displayed to a visitor on the Website, a small fee was charged to the advertiser. Sonobi and the other advertisement facilitators collected the fees from the advertisers and remitted them, less their own charges for the placing the advertisements, to Digital Technology as the owner of the Website. The greater the internet traffic on the Website—i.e., the more visitors—the greater the advertising revenue. In addition, by "subscribing" to the Website for a monthly fee, visitors could use the Website's software without having to watch the advertisements. These subscription fees were deposited into a PayPal account that was linked to Michael Connolly's Social Security number.³¹

In 2012, Digital Technology earned approximately $200,000.00 per month, or roughly $2.4 million for the year, from the Website.³²Approximately 25% of the Website's revenues were generated by advertisements placed by Sonobi.³³ Connolly, the 80% owner (through CIG) of Digital Technology, also owns an interest in Sonobi; at the time of trial, Connolly owned approximately one-third of Sonobi's membership interests.³⁴

The Purchase and Sale of the Website

Murphy had previously owned two Internet companies and had invested in commercial real estate. In early 2012, he decided to reenter the Internet industry and was introduced to Connolly and Digital Technology.

In February 2012, Connolly sent Murphy a term sheet, outlining the general terms of the sale of the Website.³⁵ Shortly thereafter, Murphy and Connolly decided to move forward with the transaction.

Over the next few months, Murphy arranged for the formation of two corporate entities to acquire the Website: Crowd Shout Holdings, Ltd. ("CSHoldings"), domiciled in the Republic of Malta,³⁶ and Crowd Shout, Ltd., ("Crowd Shout") domiciled in the Isle of Man.³⁷ CS Holdings is the 100% owner of Crowd Shout.³⁸ The ownership of CS Holdings was structured to implement the terms of the acquisition, with Murphy, through another entity he owned, GCM Holdings, Ltd. ("GCM") owning 32.5%,...