PCC Rokita S.A. v. HH Tech. Corp. (In re HH Tech. Corp.)

659 B.R. 788

HH TECHNOLOGY CORP., Alleged Debtor.

PCC Rokita S.A., Shanghai Morimatsu Chemical Equipment Co., Ltd., and DFT Properties, LLC, Appellants, v. HH Technology Corp. and Craig R. Jalbert, as Chapter 7 Trustee and Assignee for the Benefit of Creditors of HH Technology Corp., Appellees.

BAP NO. MB 23-012

Bankruptcy Case No. 22-10156-JEB

United States Bankruptcy Appellate Panel of the First Circuit

June 17, 2024

Appeal from the United States Bankruptcy Court, for the District of Massachusetts (Hon. Janet E. Bostwick, U.S. Bankruptcy Judge)

Ilyas J. Rona, Esq., on brief for Appellants.

D. Ethan Jeffery, Esq., Christopher M. Condon, Esq., and Francis C. Morrissey, Esq., on joint brief for Appellees.

Before Godoy, Harwood, and Cary, United States Bankruptcy Appellate Panel Judges.

Cary, United States Bankruptcy Appellate Panel Judge.

This appeal presents challenges by three creditors of HH Technology Corp. ("HHT") to the dismissal of the involuntary bankruptcy petition filed against HHT (the "Dismissal Order") and several interlocutory orders that merged into that order. The challenges center on numerosity—the number of creditors of the alleged debtor, which in turn dictates the number of petitioning creditors required to commence the involuntary proceeding below.¹ According to petitioning creditors, PCC Rokita S.A. ("Rokita") and Shanghai Morimatsu Chemical Equipment Co., Ltd. ("Morimatsu"), and would-be petitioning creditor, DFT Properties, LLC ("DFT") (together, the "Appellants"), the bankruptcy court erred by preventing the joinder of DFT, thus leaving too few creditors to commence an involuntary bankruptcy under § 303(b)(1).² They argue, alternatively, that the bankruptcy court erred by including too many creditors in the count, rendering impossible the commencement of an involuntary bankruptcy by fewer than three creditors under § 303(b)(2).

For the reasons described below, we AFFIRM the Dismissal Order. We also AFFIRM the two interlocutory orders properly preserved for appeal—the order setting the deadline for creditors to join the involuntary petition (the "Joinder Deadline Order") and the order denying DFT's joinder motion (the "Order Denying Joinder Motion").

BACKGROUND

I. Pre-Filing Events

Rokita, a Polish chemical manufacturer, obtained a foreign default judgment in 2010 against HHT, an engineering company with offices in Massachusetts and Texas, for $1,016,500 in compensatory damages and approximately $12 million in lost profits and other damages. Rokita then commenced a civil action in the U.S. District Court for the District of Massachusetts against HHT to enforce the default judgment. In December 2021, the district court partially granted Rokita's motion for judgment on the pleadings, in the approximate amount of $1,016,500. That same month, HHT ceased operations and elected to use an assignment for the benefit of creditors to wind up its business affairs. As part of that process, on December 31, 2021, HHT executed a document entitled "Trust Agreement and Assignment for the Benefit of Creditors," which transferred and assigned its assets to Craig R. Jalbert (the "Assignee") for him to liquidate and distribute to HHT creditors. The Assignee accepted the assignment that day and subsequently notified HHT's creditors of the assignment.

II. Post-Filing Events

Rokita, one of the creditors that received notice, did not assent to the assignment. On February 11, 2022, it commenced an involuntary chapter 7 bankruptcy petition against HHT under § 303(b)(2) as the sole petitioning creditor.

A. The Motion to Dismiss

The Assignee responded by filing a motion to dismiss the involuntary petition (the "Motion to Dismiss"), which HHT joined the same day. The Assignee and HHT (sometimes the "Appellees") alleged that HHT had more than 11 creditors and therefore, under § 303(b)(1), the commencement of the involuntary bankruptcy against HHT was ineffectual because at least three petitioning creditors were required. They also asserted that the Assignee complied with Bankruptcy Rule 1003(b) by providing to Rokita a list of HHT's creditors. The Motion to Dismiss also set forth an answer to the involuntary petition, which asserted affirmative defenses, including that there were more than 11 creditors with claims against HHT and the involuntary petition was, therefore, not joined by the requisite number of creditors under § 303(b)(1). In support of the Motion to Dismiss, the Appellees submitted the Assignee's affidavit, which included a list identifying at least 12 unsecured creditors of HHT (the "creditor list").

Rokita countered in its objection to the Motion to Dismiss that at least four of the 12 unsecured creditors identified by the Assignee and HHT on the creditor list might be excludable under § 303(b)(2) and, therefore, one petitioning creditor was sufficient to commence the involuntary petition.

B. The Joinder Deadline Order

On April 21, 2022, during a status conference on the Motion to Dismiss, the bankruptcy court issued the Joinder Deadline Order, setting May 23, 2022 as the deadline for creditors to join the involuntary petition. The order warned that the court would not consider any joinder motions filed after that date "absent a showing of good cause." The transcript of the status conference reflects that Rokita did not object to the Joinder Deadline or express any concern regarding the bankruptcy court's authority to set the deadline.

Morimatsu timely joined the involuntary petition, thereby raising the number of petitioning creditors to two. Three days before the expiration of the joinder deadline, Rokita sought to extend it by an additional 30 days, asserting that, to the extent any creditors of HHT wished to join the involuntary petition pursuant to § 303(c) and Bankruptcy Rule 1003(b), they should be given a reasonable opportunity to do so. The court denied the extension request and scheduled an evidentiary hearing on the Motion to Dismiss for July 27, 2022.

C. The Additional Creditors and their Joinder Deadline

On July 15, 2022, Rokita and Morimatsu filed a motion seeking to preclude the introduction of evidence relating to four creditors whose existence was belatedly disclosed on July 5, 2022 (the "additional creditors").³ The court ultimately denied that request, reasoning that Rokita and Morimatsu had an opportunity to conduct discovery regarding the additional creditors. The court directed the Appellees, by July 21, 2022, to file an amended creditor list to include the additional creditors and it set August 22, 2022, as the deadline for the additional creditors to join the involuntary petition. None of the additional creditors filed a joinder motion by the August 22, 2022 deadline.

D. The Order Denying DFT's Joinder Motion

Although it had previously consented to the assignment, DFT filed a motion seeking to join the involuntary petition (the "Joinder Motion") on July 16, 2022—nearly eight weeks after the expiration of the initial, May 23, 2022 joinder deadline. DFT asserted a "statutory right" under § 303(c) to join the involuntary petition before the case was dismissed or relief was ordered. Arguing there was "good cause" to allow its late request to join because it had discovered additional information after the May 23, 2022 joinder deadline, DFT represented that: (1) one week after the assignment, one of HHT's principals formed a Texas entity, which appeared to be operating the same business as HHT with the same employees at a nearby location; (2) there were newly-disclosed foreign creditors of HHT; (3) other creditors of HHT had received over $1.2 million in payments during the 90-day period preceding the assignment; (4) the assignment by HHT to the Assignee was "invalid" because the Assignee failed to obtain the necessary creditor assent required by Massachusetts state law; and (5) one of HHT's insurance policies was recently canceled. Based upon this information, DFT alleged that a bankruptcy trustee was necessary to conduct an independent investigation and bankruptcy court supervision was needed to gather HHT's assets and equitably and transparently administer claims.

In his affidavit filed in support of the Joinder Motion, Jeffery W. Wells, DFT's counsel, averred that, when he "received notice of the [involuntary] bankruptcy proceeding and of the creditor joinder deadline, [DFT] believed that its interests would be adequately served by the state law assignment" and elected not to join the involuntary petition. It was not until July 12, 2022, that Mr. Wells contacted counsel for Rokita and Morimatsu, on behalf of DFT, seeking to join the involuntary petition.

On July 18, 2022, the bankruptcy court entered the Order Denying Joinder Motion, ruling that DFT failed "to show good cause to belatedly join the petition." In denying DFT's joinder request, the court reasoned that DFT was represented by counsel, knew the deadline to join was May 23, 2022, and "could have sought additional information before the May 23, 2022[ ] deadline, or sought an extension at that time" but instead, "made a deliberate decision not to join the petition prior to the deadline."

E. The Dismissal Order

The bankruptcy court conducted a two-day evidentiary hearing on the Motion to Dismiss on July 27, 2022 and August 31, 2022.

In post-trial briefing, the Assignee and HHT asserted that at trial they had identified at least 15 creditors holding qualified claims against HHT. Rokita and Morimatsu countered in their post-trial brief that "numerous genuine issues of material fact" precluded counting 10 of the purported creditors for purposes of determining creditor numerosity. Citing In re Blaine Richards & Co., 10 B.R. 424, 428 (Bankr. E.D.N.Y. 1981), they argued that a prima facie showing of a preferential transfer was enough to exclude a creditor under § 303(b)(2), and defenses to avoidance under § 547 need not be considered. Alternatively, they maintained that the burden of proving affirmative defenses to preference claims...