In re QDOS, Inc.

Citation: 591 B.R. 843Docket: Case No.: 8:18-bk-11997-MW

Court: United States Bankruptcy Court, C.D. California; October 31, 2018; Us Bankruptcy; United States Bankruptcy Court

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The Court is addressing a corporate debtor's motion to dismiss an involuntary chapter 11 petition filed by alleged creditors, initially three but later four, against QDOS, Inc. The Court has subject matter jurisdiction under 28 U.S.C. 1334 and General Order 13-05, and this is classified as a core proceeding under 28 U.S.C. 157(b)(2)(A). The Original Petitioning Creditors filed the involuntary petition on May 31, 2018. QDOS responded with a motion to dismiss on June 22, 2018, arguing that the Original Petitioning Creditors did not meet the qualifications under 11 U.S.C. 303(b)(1) and that the petition was filed in bad faith. A tentative ruling suggested the dismissal based on Mr. Terrigno's lack of qualification as a petitioning creditor.

On August 6, 2018, Jim Maddox joined the involuntary petition, prompting a rescheduling of the hearing to August 10, 2018, as an evidentiary hearing requiring personal attendance of the Petitioning Creditors. Counsel for the Petitioning Creditors expressed concerns about their unavailability, leading to another continuance to September 10, 2018, with a requirement for all Petitioning Creditors to appear for cross-examination. Supplemental filings were submitted by Mr. Terrigno and Mr. Maddox, both indicating their non-attendance at the September hearing. Ultimately, due to scheduling issues, the evidentiary hearing was further continued to October 17, 2018.

Each Petitioning Creditor was mandated to attend a hearing for cross-examination by QDOS's counsel regarding their declarations asserting qualification as petitioning creditors under bankruptcy law. The Court had previously indicated that failure to appear would result in the striking of their declarations. Mr. Maddox failed to appear for the third time despite the Court's orders. In an attempt to circumvent the consequences of his non-appearance, he filed Proof of Claim 7-1 on September 26, 2018, ambiguously stating he was owed "not less than $220,000.00" without specifying the exact amount and waiving any claim for interest. QDOS contended that Mr. Maddox's loan was usurious, placing his claim in bona fide dispute. The Court determined that QDOS's due process rights were violated due to the inability to cross-examine Mr. Maddox, which prejudiced their case.

Under 11 U.S.C. § 303(b)(1), an involuntary bankruptcy petition must be filed by three or more entities with non-contingent, undisputed claims totaling at least $15,775 more than any secured liens. Section 303(b)(2) applies if there are fewer than 12 holders of such claims. QDOS's CEO testified that they had 40 to 50 creditors with undisputed claims, making § 303(b)(2) inapplicable. The burden of proof lies initially with the Petitioning Creditors to fulfill the statutory requirements, which then shifts to the alleged debtor if met.

Regarding Mr. Terrigno's status as a qualified petitioning creditor, he received subscription documents for both stock and a loan to QDOS. He executed the stock subscription for a $60,000 investment but claimed he believed it was a loan. The Court found this testimony uncredible, concluding that Mr. Terrigno was aware he was purchasing stock, not a promissory note.

Mr. Gillam's email to Mr. Terrigno on February 27, 2018, stating that Mr. Terrigno was owed $60,000, was made hastily without verifying Mr. Terrigno's status as a creditor or shareholder. The Court found Mr. Gillam's testimony credible, noting the short 54-minute response time between emails. Consequently, Mr. Terrigno is determined not to be a qualified petitioning creditor under 11 U.S.C. § 303(b)(1) because he holds QDOS common stock, not a valid claim.

In contrast, Mr. Maddox is confirmed as a creditor; however, there is a dispute regarding whether his claim is undisputed or subject to a bona fide dispute as to liability or amount. QDOS asserts that Mr. Maddox's loan is usurious, thus making the interest charges uncollectible under California law. The Petitioning Creditors counter that even if the loan is usurious, the principal remains undisputed. The text of 11 U.S.C. § 303(b)(1) indicates that a claim partially disputed as to amount still qualifies as a claim not subject to a bona fide dispute. The interpretation of "disputed" suggests that a liability dispute encompasses the entire claim, while an amount dispute pertains to only a portion. Legislative history supports that a bona fide dispute regarding either liability or amount disqualifies a creditor from being a petitioning creditor, as highlighted by Senator Baucus's remarks on the 1984 amendments to the Bankruptcy Code.

Creditors may exploit the Bankruptcy Code against debtors with genuine disputes regarding their liability, pressuring them to pay rather than face the stigma of bankruptcy. An amendment is proposed to prevent involuntary petitions from being filed based on debts that are actively contested by the debtor. Likewise, relief orders should not be granted solely due to a debtor's failure to pay disputed debts. This amendment aims to safeguard debtors' rights and curb the misuse of bankruptcy as a coercive tool. Legislative history since the 1984 amendments suggests that any legitimate dispute over liability or amount disqualifies a creditor from being a petitioning creditor. However, some courts have erroneously allowed creditors with partially disputed claims to qualify. The recent BAPCPA amendments clarify that disputes concerning either liability or amount are sufficient grounds for disqualification. Despite this, certain courts continue to disregard the phrase "or amount," failing to recognize that the existence of any dispute—whether over liability or amount—implies a bona fide dispute. The concept of a "disputed claim" encompasses varying degrees of disagreement, and denying a partially disputed claim as being in dispute is illogical. The resolution of legal questions in this context illustrates the necessity of adhering to the principle that a partially disputed claim is inherently a disputed claim.

The Court concludes that a dispute regarding a portion of a claim can constitute a bona fide dispute concerning liability or amount, aligning with prior court decisions. The existence of a bona fide dispute regarding the Maddox claim necessitates more than mere disagreement about the claim's amount; there must be an objective basis for a factual or legal dispute over the debt's validity. The Maddox claim, grounded in a $250,000 promissory note with a $25,000 loan fee and an effective interest rate of 20%, raises concerns under California's usury laws, which cap commercial loan rates at 10%. The Petitioning Creditors argue that the loan fee is not interest and cite exceptions to usury laws, but they fail to substantiate these claims adequately. The Court finds that the Petitioning Creditors have not demonstrated what makes the loan fee reasonable or what exceptions apply, thereby establishing a legitimate dispute over the owed amount. Consequently, the Court rules that a bona fide dispute exists regarding the Maddox claim, meaning Mr. Maddox does not qualify as a petitioning creditor. Additionally, the Court decides that Mr. Maddox's Proof of Claim will not be considered due to his noncompliance with court orders to appear and his violation of QDOS's due process rights, particularly since his Proof of Claim ambiguously states an amount "not less than $220,000."

Mr. Maddox is disqualified as a petitioning creditor due to his noncompliance with multiple court orders requiring his appearance at an evidentiary hearing and his avoidance of cross-examination regarding his claims. Without probative evidence supporting his claim, and with all his declarations stricken, the remaining petitioning creditors—Mr. Wiese and Mr. Hayden—are insufficient in number to satisfy the three-creditor requirement under 11 U.S.C. § 303(b)(1). Consequently, the Court dismisses the involuntary petition against QDOS with prejudice. A hearing is scheduled for January 28, 2019, to consider whether to grant QDOS judgment for reasonable attorneys' fees and costs against Messrs. Wiese, Hayden, Terrigno, and Maddox. Briefs are due on specified dates leading up to the hearing. The excerpt also touches on the interpretation of "bona fide dispute" in relation to claims under § 303(b), clarifying that both liability and amount disputes can qualify as bona fide disputes, with the Ninth Circuit's interpretation pending.