In re Seven Three Distilling Co.

IN RE: SEVEN THREE DISTILLING COMPANY, L.L.C., PUTATIVE DEBTOR.

CASE NO: 21-10219 SECTION A

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF LOUISIANA

July 6, 2021

CHAPTER 11

MEMORANDUM OPINION AND ORDER

Before the Court is the Seven Three Distilling Company, LLC's Motion and Incorporated Memorandum for Partial Summary Judgment, with attached declarations, exhibits, and a Statement of Uncontested Material Facts ("SUMF") (collectively, the "Seven Three MSJ"), [ECF Doc. 41], filed by Putative Debtor Seven Three Distilling Company, L.L.C. ("Seven Three") and the objection to the Seven Three MSJ, [ECF Doc. 51], filed by the Petitioning Creditors.¹ Also before the Court is the Motion and Incorporated Memorandum for Summary Judgment, with attached declarations, exhibits, and a Statement of Uncontested Material Facts (collectively, the "Petitioning Creditors MSJ"), [ECF Doc. 42], filed by the Petitioning Creditors, and the objection filed in response by Seven Three, [ECF Doc 53].

For the reasons discussed below, the Court (i) GRANTS IN PART and DENIES IN PART the Seven Three MSJ; and (ii) GRANTS IN PART and DENIES IN PART the Petitioning Creditors MSJ.

JURISDICTION AND VENUE

This Court has jurisdiction to grant the relief provided for herein pursuant to 28 U.S.C. § 1334. The matter presently before the Court constitutes a core proceeding that this Court mayhear and determine on a final basis under 28 U.S.C. § 157(b). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

BACKGROUND²

Seven Three is a Louisiana limited liability company formed in April 2015 to produce, market, and sell New Orleans-themed spirits from a distillery New Orleans, Louisiana. See Seven Three MSJ, SUMF ¶ 1; Petitioning Creditors MSJ, SUMF ¶ 1. In 2016 and 2017, Seven Three solicited individuals to invest in the company to finance its build-out, including the opening of a distillery. See Seven Three MSJ, SUMF ¶ 10; Petitioning Creditors MSJ, SUMF ¶ 2. To raise capital to fund its expansion, Seven Three issued convertible promissory notes (the "Convertible Notes") to thirteen friends and business associates of Seven Three's principals who each agreed to loan between $25,000 and $100,000 to the company. See Seven Three MSJ, SUMF ¶ 10; Petitioning Creditors MSJ, SUMF ¶¶ 2 & 4. Those individual investors included Patrick Dubendorfer,³ Robert Levis,⁴ Chad Hunt,⁵ and M. Theresa Turla.⁶ In exchange for each note holder's investment in the company, Seven Three agreed to repay the principal amount of the investment with 8% interest per annum (the "Payoff Amount") within 36 months of the issuancedate (the "Maturity Date"), unless the principal and interest is converted to an equity investment. See Petitioning Creditors MSJ, Exs. D, F, G & E. Per the terms of each Convertible Note,

[i]n the event that [Seven Three] issues and sells shares of its Equity Securities . . . to investors . . . on or before the Maturity Date, in an equity financing in one or more series of related closings after the date hereof, with total proceeds to [Seven Three] of at least $1,000,000 (a "Qualified Financing"), the Payoff Amount shall automatically convert without any further action by the Holder into the Equity Securities sold in the Qualified Financing. . . . If a Qualified Financing occurs after the Maturity Date, the Payor may elect at that time to either convert the Note as described above to the extent of the remaining balance of the Payoff Amount or to have the accrued balance of the Note paid in full out of the proceeds of the Qualified Financing.

Petitioning Creditors MSJ, Ex. D-2, ¶ 1; see also Petitioning Creditors MSJ Ex. F-1, ¶ 1 & Ex. G-1A, ¶ 1.

Since January 2016, Seven Three has leased the premises for the distillery from Petitioning Creditor 301 North Claiborne, LLC. See Seven Three MSJ, SUMF ¶ 2; Petitioning Creditors MSJ, SUMF ¶ 7.

On February 22, 2021, the five Petitioning Creditors filed an involuntary chapter 11 bankruptcy petition against Seven Three, alleging on Official Form 205 that "[t]he debtor is generally not paying its debts as they become due, unless they are in the subject of a bona fide dispute as to liability or amount." [ECF Doc. 1]. On March 15, 2021, Seven Three filed the Motion of Seven Three Distilling Company, LLC for (I) Dismissal of the Involuntary Petition for Failure To State a Claim for Relief; (II) or, Alternatively, Dismissal on Abstention Under § 305; and (III) Other Relief (the "Motion To Dismiss"), asserting that each claim held by the Petitioning Creditors is subject to a bona fide dispute and that the Petitioning Creditors filed the involuntary petition in bad faith. [ECF Doc. 6].⁷ The Motion to Dismiss is currently set for trial for July 9,2021. [ECF Doc. 77].⁸ To potentially obviate the need for a trial or at least reduce the issues for trial, Seven Three and the Petitioning Creditors filed the instant cross-motions for summary judgment on May 3, 2021.

Seven Three asserts it is entitled to partial judgment as a matter of law because there is no genuine dispute that the Petitioning Creditors cannot meet their burden at trial to show that each holder's claim is not subject to a bona fide dispute as to validity or amount or that Seven Three is generally not paying its debts as they become due, excepting such debts subject to such a bona fide dispute. The Petitioning Creditors, conversely, assert they are entitled to partial judgment as a matter of law, as no genuine dispute exists regarding their ability to satisfy their burden to show the requisite number of holders of claims that are not subject to bona fide dispute as to validity or amount and that Seven Three is generally not paying its noncontingent, undisputed debts as they become due.

DISCUSSION

A. Summary Judgment Standard

Rule 56 of the Federal Rules of Civil Procedure is applicable to this proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure. Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322(1986); see also FED. R. BANKR. P. 7056. Indeed, "[s]ummary judgment is warranted where, after adequate time for discovery and upon motion, a party fails to make a showing sufficient to establish the existence of an element essential to its case and upon which it carries the burden of proof at trial." In re Betteroads Asphalt, LLC, 594 B.R. 516, 541 (Bankr. D.P.R. 2018) (citing Celotex Corp., 477 U.S. at 322). A party seeking summary judgment must demonstrate: (i) an absence of evidence to support the non-moving party's claims or (ii) an absence of a genuine dispute of material fact. See Sossamon v. Lone Star State of Tex., 560 F.3d 316, 326 (5th Cir. 2009); Warfield v. Byron, 436 F.3d 551, 557 (5th Cir. 2006). A genuine dispute of material fact is one that could affect the outcome of the action or allow a reasonable fact finder to find in favor of the non-moving party. See Royal v. CCC & R Tres Arboles, L.L.C., 736 F.3d 396, 400 (5th Cir. 2013) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).

A court views the facts and evidence in the light most favorable to the non-moving party. See City & Cnty. of S. F., Cal. v. Sheehan, 575 U.S. 600, 603 (2015). Nevertheless, the Court is not obligated to search the record for the non-moving party's evidence. See Malacara v. Garber, 353 F.3d 393, 405 (5th Cir. 2003). A party asserting that a fact cannot be or is genuinely disputed must support the assertion by citing to particular parts of materials in the record, showing that the materials cited do not establish the absence or presence of a genuine dispute, or showing that an adverse party cannot produce admissible evidence to support the fact. See FED. R. CIV. P. 56(c)(1). The Court need consider only the cited materials, but it may consider other materials in the record. See FED. R. CIV. P. 56(c)(3). The Court may not make credibility determinations or weigh the evidence in the course of its summary judgment analysis. See Turner v. Baylor Richardson Med. Ctr., 476 F.3d 337, 343 (5th Cir. 2007).

When, as here, both parties move for summary judgment, a court must rule on each party's motion on an individual and separate basis. See White Buffalo Ventures, LLC v. Univ. of Tex. at Austin, 420 F.3d 366, 370 (5th Cir. 2005). "If there is no genuine issue of material fact and one or the other party is entitled to prevail as a matter of law, a court will render judgment." Standard Ins. Co. v. Corgill, No. 3:13-CV-00997, 2013 WL 12101080, at *2 (N.D. Tex. July 23, 2013) (citation omitted).

B. Statutory Requirements of an Involuntary Petition

To avoid the misuse of involuntary bankruptcy as a tool for coercion, Congress limited the circumstances under which creditors may force a debtor into such a proceeding. See Credit Unioin Liquidity Servs., L.L.C. v. Green Hills Dev. Co., L.L.C. (In re Green Hills Dev. Co., L.L.C.), 741 F.3d 651, 655 (5th Cir. 2014) (citing 30 CONG. REC. S7618 (daily ed. June 19, 1984)). Section 303(b) of the Bankruptcy Code, in pertinent part, provides that an involuntary petition must be filed by three or more entities, "each of which is . . . a holder of a claim against [the putative debtor] that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount." 11 U.S.C. § 303(b)(1) (emphasis added).⁹ Such "noncontingent, undisputed claims" must aggregate at least $16,750 more than the value of liens on the putative debtor's property. Id. Although a holder may have multiple claims that may "aggregate," a creditor cannot bifurcate its claims and count as more than one "entity" holding such a claim. See Subway Equip. Leasing Corp. v. Sims (In re Sims), 994 F.2d 210, 217 (5th Cir. 1993). "[T]he policy considerations for therules...