Yan v. Zhang

PEIDE YAN, Appellant/Cross-Appellee, v. ZHENGANG ZHANG, et al., Appellees/Cross-Appellants.

Case No.: PWG-17-742

Case No.: PWG-17-870

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND Southern Division

Filed: March 15, 2018

March 14, 2018

MEMORANDUM OPINION

Songsheng Chen, Chaohong Shi, Li Che, Zhengang Zhang, KZDJ, Inc. ("KZDJ"), and Paxi, LLC ("Paxi")¹ filed an involuntary bankruptcy proceeding against Peide Yan in the United States Bankruptcy Court for the District of Maryland on July 15, 2016. Invol. Pet., ECF No. 2-1; Order Entering Relief Under Chapter 7 on Invol. Pet. ("Order Entering Relief"), ECF No. 1-1. Because they filed their petition pursuant to 11 U.S.C. § 303² and there were fewer than twelvecreditors, one or more of the six Petitioning Creditors had to hold non-contingent, undisputed, unsecured/undersecured claims that totaled at least $15,775.³ See 11 U.S.C. § 303(b)(2).

Appellees concede that "Zhang, Che, and KZDJ did not hold eligible claims against Yan because each was an insider of Yan and their claims were still the subject of a litigation pending in the Circuit Court for Montgomery County, Maryland in Zhengang Zhang, et al. v. Peide Yan, et al, Case No. 405780." Appellees' Opp'n & Br. 2, ECF No. 13. And, the Bankruptcy Court entered an Order Determining that Paxi, LLC Does Not Qualify as a Petitioning Creditor ("Order Disqualifying Paxi"), ECF No. 13-10. The remaining creditors, Chen and Shi, jointly held a single claim against Yan (Hr'g Tr. 116:19-21 ("Chen and Shi, accounted to one, because their judgment was one judgment, not two creditors, but one."); Chen & Shi Jmt., ECF No. 13-4), which they alleged was for $339,208.77, see Invol. Pet. Yan acknowledged that Chen and Shi jointly held a judgment against him, but disputed the claimed amount, insisting that it was in the amount of $216,000. The Bankruptcy Court concluded that, because Yan did not dispute that heowed the amount of the judgment, Chen and Shi held a non-contingent, undisputed claim for purposes of 11 U.S.C. § 303(b). It granted the relief that the Petitioning Creditors requested in the involuntary petition under Chapter 7 of the Bankruptcy Code. Order Entering Relief.

Both sides filed notices of appeal. ECF No. 1 in PWG-17-742; ECF No. 1 in PWG-17-870. I consolidated the appeals and directed the parties to brief their appeals as cross-appeals, ECF No. 5, which they have done, ECF Nos. 13, 14, 15, 16. Appellant Yan contends that the Bankruptcy Court erred in issuing the Order Entering Relief Under Chapter 7 on Involuntary Petition, ECF No. 1-1, because, in his view, Appellees "failed to meet their prima facie burden of establishing that any of the[m] . . . was the holder of a claim against Yan that was not contingent as to liability or the subject of a bona fide dispute as to liability or amount." Yan Br. 4-5. Appellees challenge the Bankruptcy Court's Order Disqualifying Paxi, ECF No. 13-10, and Order Denying Motions for Reconsideration (of the Order Disqualifying Paxi) ("Order Denying Recons."), ECF No. 13-13. Appellees' Opp'n & Br. 22. They raise the following issues:

1. Did the bankruptcy court err in determining that Paxi, LLC ("Paxi") was not a qualified petitioning creditor?

2. Did the alleged debtor, Peide Yan ("Yan"), waive the defense of Paxi's lack of standing by failing to assert Paxi's lack of capacity within 21 days of service of the Involuntary Summons in either Yan's Answer, Supplemental Answer, or a motion to dismiss the involuntary petition?

3. Was Yan estopped from contesting Paxi's eligibility as a petitioning creditor by virtue of having admitted in his list of creditors and amended list of creditors that Paxi held a valid claim against Yan?

4. Did Paxi have standing to be a petitioning creditor under applicable federal law even if Paxi lacked such standing under state law?

5. Even if Paxi lacked standing to be a petitioning creditor as of the petition date, did the subsequent reinstatement of Paxi's charter also reinstate Paxi's eligibility as a petitioning creditor?

Id. at 24-25.

Having reviewed the parties' briefs and the record, I find oral argument unnecessary. See Fed. R. Bankr. P. 8012; Loc. R. 105.6. There is a single issue, the answer to which makes all other issues that the parties raise moot: Whether Paxi had authority, despite the forfeiture of its rights to do business in Maryland and use its name, to take action to place Yan into involuntary bankruptcy in order to protect the undisputed obligation owed to it. Because it did have this authority, such that it was a qualified petitioning creditor, the Petitioning Creditors met the statutory requirements of § 303(b)(2) based on Paxi's claim, regardless of whether Chen and Shi's claim was disputed. Yan's challenge to the Order Entering Relief, based on his belief that Chen and Shi's claim did not qualify, consequently becomes moot. Also moot are the issues Appellees raised regarding waiver and estoppel, because Yan could not have succeeded on a challenge to Paxi's ability to bring the petition. The question of the effects of Paxi's later reinstatement on its previous eligibility also becomes moot, as Paxi was eligible in the first place. Accordingly, the Bankruptcy Court's Order Disqualifying Paxi is reversed, which renders its Order Denying Motions for Reconsideration moot, and the Bankruptcy Court's Order Entering Relief Under Chapter 7 on Involuntary Petition is affirmed.

Standard of Review

This Court has jurisdiction over appeals from the bankruptcy court. 28 U.S.C. § 158. It is well established that this Court "reviews a bankruptcy court's findings of fact for clear error and conclusions of law de novo." Rosen v. Kore Holdings, Inc. (In re Rood), 448 B.R. 149, 157 (D. Md. 2011); see In re Official Comm. of Unsecured for Dornier Aviation (N. Am.), Inc., 453 F.3d 225, 231 (4th Cir. 2006). Also, this Court reviews the bankruptcy court's application of law to fact for abuse of discretion. Coggins & Harman, P.A. v. Rosen (In re Rood), No. DKC-12-1623, 2013 WL 55650, at *2 (D. Md. Jan. 2, 2013).

Discussion

The crux of this case is the Bankruptcy Court's Order Disqualifying Paxi as a petitioning creditor, in which it reasoned that "the forfeiture of Paxi, LLC's right to do business and the right to the use of its name rendered it ineligible to be a petitioning creditor with respect to the Involuntary Petition filed on July 15, 2016, against Peide Yan." Order Disqualifying Paxi 1.

Applicability of Federal Law

Appellees and Paxi, in separate motions, sought reconsideration of the Order Disqualifying Paxi, arguing as they do here that, pursuant to Bankruptcy Rule 7017, federal law—not state statute or case law—governs capacity to sue in federal court generally and federal bankruptcy court in particular. Appellees' Opp'n & Br. 35; see Order Denying Recons. 11-12. It is true that, for adversary proceedings, Bankruptcy Rule 7017 incorporates Federal Rule 17, which in turn provides that an LLC that lacks the capacity to sue under "the law of the state where the court is located" nonetheless "may sue . . . in its common name to enforce a substantive right existing under the United States Constitution or laws." Fed. R. Civ. P. 17(b)(3)(A); see Fed. R. Bankr. P. 7017. But, as the Bankruptcy Court said, and as Yan correctly asserts, Federal Rule 17 does not apply to involuntary cases, because Bankruptcy Rule 1018 does not incorporate Rule 7017. See Fed. R. Bankr. P. 1018 (identifying specific bankruptcy rules that apply to involuntary cases, which, notably, do not include Rule 7017); Fed. R. Civ. P. 81(a)(1) ("[The Federal Rules] apply to bankruptcy proceedings to the extent provided by the Federal Rules of Bankruptcy Procedure."); Order Denying Recons. 6, 11-12; Yan Reply & Opp'n 25.

Certainly, "[i]f directed by the bankruptcy court, Rule 17 of the Federal Rules of Civil Procedure can be applied to contested matters [including] proceedings related to contestedinvoluntary petitions . . . ." In re Murray, 199 B.R. 165, 171 (Bankr. M.D. Tenn. 1996) (citing Fed. R. Bankr. P. 1018 and 9014)); see Fed. R. Bankr. P. 1018 ("The court may direct that other rules [governing adversary proceedings, such as Rule 7017] shall also apply."); Fed. R. Bankr. P. 9014 (stating that Bankruptcy Rule 7017 applies to "contested matter[s] not otherwise governed by the[] [Bankruptcy Rules]"). And, by operation of Bankruptcy Rule 9029(b), some courts have applied Federal Rule 17 "to determine capacity to file a bankruptcy petition." In re Murray, 199 B.R. at 171-72; see Fed. R. Bankr. P. 9029(b) ("Procedure When There is No Controlling Law. A judge may regulate practice in any manner consistent with federal law, these rules, Official Forms, and local rules of the district."). Yet, in this case, the Bankruptcy Court expressly declined to apply Bankruptcy Rule 7017 or Federal Rule 17. Order Denying Recons. 11-12.

State Law

The Bankruptcy Court relied on Sections 4A-911 and 4A-920 of the Corporations and Associations Article of the Maryland Code to disqualify Paxi. Section 4A-911 provides that, when a Maryland limited liability company ("LLC"), such as Paxi, "has not paid a tax due before October 1 of the year after the tax became due," as Paxi failed to do, "its right to do business in Maryland and the right to the use of its name will be forfeited unless all taxes, interest, and penalties due by it are paid." Md. Code Ann., Corps. & Ass'ns § 4A-911(a)(1)-(2). The forfeiture is subject to § 4A-920, which provides:

The forfeiture of the right to do business in Maryland and the right to the use of the name of the limited liability company under this title does not impair the validity of a contract or act of the limited liability company entered into or done either before or after the forfeiture, or prevent the limited liability company from defending any action, suit, or proceeding in a court of this State.

Corps. & Ass'ns § 4A-920.

Construing this language, the Court of Special Appeals...