In re: Vincent Zenga ( 2017 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 17b002p.06
BANKRUPTCY APPELLATE PANEL
OF THE SIXTH CIRCUIT
_________________________
In re: VINCENT ZENGA; ROBIN ZENGA, ┐
Debtors. │
> Nos. 16-8022/8023
│
┘
Appeal from the United States Bankruptcy Court
for the Middle District of Tennessee at Nashville.
Nos. 16-01661, 16-01662, Keith M. Lundin, Judge.
Argued: November 9, 2016
Decided and Filed: January 17, 2017
Before: HUMPHREY, OPPERMAN, and PRESTON, Bankruptcy Appellate Panel Judges.
_________________
COUNSEL
ARGUED: Steven L. Lefkovitz, LEFKOVITZ & LEFKOVITZ, Nashville, Tennessee, for
Debtors. Gene L. Humphreys, BASS, BERRY & SIMS PLC, Nashville, Tennessee, for
Appellee. ON BRIEF: Steven L. Lefkovitz, LEFKOVITZ & LEFKOVITZ, Nashville,
Tennessee, for Debtors. Gene L. Humphreys, BASS, BERRY & SIMS PLC, Nashville,
Tennessee, for Appellee.
_________________
OPINION
_________________
GUY R. HUMPHREY, Bankruptcy Appellate Panel Judge. Creditor Ivan Qi (“Qi”) filed
involuntary petitions against husband and wife, Vincent and Robin Zenga (the “Zengas”).1 The
Zengas filed a motion to dismiss the involuntary petition in each of their respective cases,
arguing that 11 U.S.C. § 303(b)(1) required a minimum of three petitioning creditors to institute
1
Because they were involuntary petitions, separate cases have been maintained. However, to date all of the
filings in each case appear identical in substance. This opinion is being entered in each individual case.
1
Nos. 16-8022/8023 In re Zenga Page 2
an involuntary bankruptcy against them because they each had 12 or more creditors. At the
hearing on the motions, Qi argued that the Zengas were estopped from asserting that they had
more than 11 creditors because in response to a post-judgment interrogatory asking them to
identify their other creditors, they listed ten creditors. The bankruptcy court agreed with Qi,
denied the Zengas’ motions to dismiss the petitions, and entered orders for relief against them.
The Zengas obtained stays of the orders for relief pending disposition of these appeals. For the
reasons that follow, the Panel REVERSES the bankruptcy court’s decision and vacates the orders
for relief and REMANDS the cases for further proceedings consistent with this opinion.
ISSUES ON APPEAL
The Zengas raised the following issues on appeal:
1. Whether the bankruptcy court erred in granting orders for relief under
Chapter 7 of the Bankruptcy Code against the Zengas?
2. Whether the bankruptcy court applied the doctrine of judicial estoppel
or equitable estoppel in determining whether the number of petitioning creditors
was correct under the statute? And whether the bankruptcy court erred in
application of either of those doctrines?
3. Whether the requirement under 11 U.S.C. § 303(b) that when a person
has 12 or more creditors there must be three petitioning creditors to commence an
involuntary petition is jurisdictional in nature and, therefore, cannot be waived or
modified on equitable grounds?
4. Whether a court may preclude a debtor from introducing evidence as to
the 12 creditor threshold of 11 U.S.C. § 303(b) through an equitable doctrine,
such as equitable estoppel, following the Supreme Court’s decision in Law v.
Siegel, ___ U.S. ___, 134 S. Ct. 1188 (2014)?
JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this
appeal. The United States District Court for the Middle District of Tennessee has authorized
appeals to the Panel, and a final order of the bankruptcy court may be appealed as of right
pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, a final order “ends the litigation on
the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt
Corp. v. United States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497 (1989) (citation omitted). An
Nos. 16-8022/8023 In re Zenga Page 3
order for relief in an involuntary case is a final order. Mktg. & Creative Sols., Inc. v. Scripps
Howard Broadcasting Co. (In re Mktg. & Creative Sols., Inc.), 338 B.R. 300, 302 (B.A.P. 6th
Cir. 2006). As this Bankruptcy Appellate Panel has previously noted:
In granting the relief sought in an involuntary petition, the bankruptcy court must
consider the factual as well as legal issues. Findings of fact are reviewed under
the clearly erroneous standard. Fed. R. Bankr. P. 8013; Fed R. Civ. P. 52.
“A finding of fact is clearly erroneous ‘when although there is evidence to support
it, the reviewing court on the entire evidence is left with the definite and firm
conviction that a mistake has been committed.’” United States v. Mathews (In re
Mathews), 209 B.R. 218, 219 (6th Cir. BAP 1997) (quoting Anderson v. City of
Bessemer City, 470 U.S. 564, 573, 105 S. Ct. 1504, 1511, 84 L. Ed. 2d 518
(1985)); see United States v. United States Gypsum Co., 333 U.S. 364, 68 S. Ct.
525, 92 L. Ed. 746 (1948). Conclusions of law are reviewed de novo. Corzin v.
Fordu (In re Fordu), 209 B.R. 854, 857 (6th Cir. BAP 1997); Belfance v. Bushey
(In re Bushey), 210 B.R. 95, 98 (6th Cir. BAP 1997). Furthermore, a bankruptcy
court’s interpretation of the Bankruptcy Code is reviewed de novo. In re
Troutman Enters., 253 B.R. at 10. De novo review means that the issue is
decided as if it had not been heard before. Mapother & Mapother, P.S.C. v.
Cooper (In re Downs), 103 F.3d 472 (6th Cir.1996). No deference is given to the
trial court’s conclusions of law. In re Eastown Auto Co., 215 B.R. 960 (citing
Razavi v. Comm’r, 74 F.3d 125 (6th Cir.1996)).
Id.
The standard of review regarding the application of estoppel has been called into question
recently by the Sixth Circuit Court of Appeals.
In Lewis v. Weyerhaeuser, 141 Fed. App’x. 420, 423–24 (6th Cir. 2005), we
questioned the continuing viability of our de novo standard for judicial estoppel,
noting the Supreme Court’s characterization of the doctrine as an equitable
remedy “invoked by the court at its discretion,” New Hampshire v. Maine,
532 U.S. 742, 750, 121 S. Ct. 1808, 149 L. Ed. 2d 968 (2001) (citation omitted),
and recognizing that the “majority of federal courts” review for abuse of
discretion.
Kimberlin v. Dollar Gen. Corp., 520 F. App’x 312, 313 n.1 (6th Cir. 2013). Other circuits have
held that the standard of review for equitable estoppel is abuse of discretion. See Radio Sys.
Corp. v. Lalor, 709 F.3d 1124, 1130 (Fed. Cir. 2013); Bah. Sales Assoc., LLC v. Byers, 701 F.3d
1335, 1340 (11th Cir. 2012). The Sixth Circuit B.A.P. has previously held that “[e]quitable
estoppel involves mixed questions of law and fact.” Rossi v. Westenhoefer (In re Rossi), No. 11-
Nos. 16-8022/8023 In re Zenga Page 4
8048, 2012 WL 913732, at *2 (B.A.P. 6th Cir. Mar. 20, 2012) (citing Noonan v. Sec’y of Health
& Human Servs. (In re Ludlow Hosp. Soc’y, Inc.), 124 F.3d 22, 25 n.6 (1st Cir. 1997)).
However, the result of each of the Zenga appeals is the same whether the bankruptcy court’s
application of estoppel is reviewed de novo, as a mixed question of law and fact, or for an abuse
of discretion because, by definition, it is an abuse of discretion to apply an erroneous legal
standard. The bankruptcy court’s use of estoppel was erroneous because Qi failed to establish
the elements of either judicial or equitable estoppel.
FACTS
Qi obtained judgment against the Zengas for $2,500,000 in state court and filed separate
involuntary chapter 7 bankruptcy petitions against each of them. The Zengas filed motions to
dismiss the involuntary petitions, asserting that because they have 12 or more creditors, the
involuntary petitions required at least three petitioning creditors. The Zengas also assert that the
cases should be dismissed because the cases are not in the best interest of creditors.
The bankruptcy court held a hearing on the motions to dismiss at which Qi argued that
the Zengas were estopped from presenting evidence that they had more than 11 creditors due to
their responses to post-judgment sworn interrogatories which were previously served in the state
court proceedings. The bankruptcy court agreed with Qi, denied the motions to dismiss, and
entered orders for relief against them. The Zengas filed separate appeals.
DISCUSSION
Bankruptcy Code § 303 provides for the filing of involuntary bankruptcy petitions,
stating in part:
(b) An involuntary case against a person is commenced by the filing with the
bankruptcy court of a petition under chapter 7 or 11 of this title --
(1) by three or more entities …
(2) if there are fewer than 12 such holders …, by one or more of such holders
that hold in the aggregate at least $ 15,775 of such claims;….
11 U.S.C. § 303(b).
Nos. 16-8022/8023 In re Zenga Page 5
In this case, the involuntary petitions were filed by Qi alone after he relied on the answers
to the post-judgment interrogatory responses provided by the Zengas which described ten
creditors in addition to Qi—one creditor under the 12 creditor threshold requiring three or more
petitioning creditors. In addition to the original responses to the interrogatories, prior to filing
the bankruptcy petitions, Qi also requested the Zengas to supplement their responses. The
Zengas failed to do so. Based upon these facts, the bankruptcy court determined that the Zengas
were estopped from establishing in the bankruptcy court that they had more than 11 creditors.
The Zengas contest that determination, asserting that: the numerical threshold of § 303(b)(1) is
jurisdictional in nature and, therefore, cannot be overridden through use of an equitable doctrine;
the Supreme Court’s decision in Law v. Siegel, ___ U.S. ___, 134 S. Ct. 1188, 1194–95 (2014),
precludes the use of equitable doctrines such as estoppel in the bankruptcy courts; the bankruptcy
cases should be dismissed because they are not in the best interest of their creditors; and the
bankruptcy court erroneously applied the doctrines of judicial and equitable estoppel.
I. The Number of Petitioning Creditors is Not Jurisdictional
The Zengas argue that the number of petitioning creditors required to file an involuntary
petition is jurisdictional and, therefore, equitable doctrines such as estoppel may not be utilized
to supplant the statutory requirement of three petitioning creditors. Courts that have examined
this issue following the Supreme Court’s decision in Arbaugh v. Y & H Corp., 546 U.S. 500, 126
S. Ct. 1235 (2006), have determined that the threshold is not jurisdictional. The Panel agrees
with the post-Arbaugh decisions which hold that the threshold requirement is not jurisdictional.
In Arbaugh the Supreme Court addressed the issue of whether the 15-employee threshold
for imposition of Title VII employment protections and liability was jurisdictional. The Court
framed the issue as whether the 15-employee threshold was a “determinant of subject-matter
jurisdiction,” as opposed to merely being an element of Arbaugh’s claim. Id. at 513–14.
In finding that it was not jurisdictional, the Court noted that Congress provided for the “basic
statutory grants of federal-court subject-matter jurisdiction” under 28 U.S.C. §§ 1331 and 1332.
Id. at 513. The Court also noted that while Congress could have expressly made the 15-
employee threshold jurisdictional as it did with the amount-in-controversy limit of diversity-of-
citizenship jurisdiction under § 1332, it did not. The Court then laid out a bright-line test for
Nos. 16-8022/8023 In re Zenga Page 6
determining if a numerosity requirement in a statute is jurisdictional: “when Congress does not
rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as
nonjurisdictional in character.” Id. at 516. On that basis, the Court held that the 15-employee
threshold for imposing liability under Title VII was not jurisdictional and could be waived if not
raised at the appropriate juncture of the case. Id.
Following Arbaugh, those courts which have addressed whether the numerosity threshold
of § 303(b)(1) is jurisdictional have all uniformly concluded that it is not. Thus in Adams v.
Zarnel (In re Zarnel), 619 F.3d 156, 166–67 (2d Cir. 2010), the Second Circuit noted that the
other subdivisions of § 303 implicitly permit the bankruptcy court’s exercising of jurisdiction
over the case even if the creditor threshold has not been met; § 303 does not contain an explicit
reference to the creditor threshold being jurisdictional; the statute does not instruct the
bankruptcy court to sua sponte raise the issue; and the bankruptcy courts are governed by a
separate jurisdictional statute, 28 U.S.C. § 1334. Similarly, the 7th, 9th, 10th and 11th Circuits
have all expressed that the numerosity threshold of § 303(b)(1) is not jurisdictional. Mitchell v.
Weinman (In re Mitchell), 554 F. App’x 756, 760 (10th Cir. 2014); Trusted Net Media Holdings,
LLC v. The Morrison Agency, Inc. (In re Trusted Net Media Holdings, LLC), 550 F.3d 1035,
1046 (11th Cir. 2008); Rubin v. Belo Broad. Corp. (In re Rubin), 769 F.2d 611, 614 n.3 (9th Cir.
1985); Kelly v. Herrell, 602 F. App’x 642, 646–47 (7th Cir. 2015) (issue addressed in dicta).
While the Sixth Circuit Court of Appeals has not determined whether the creditor
threshold of § 303(b)(1) is jurisdictional, it has addressed a similar question in the context of the
Consolidated Omnibus Reconciliation Act, or COBRA, 29 U.S.C.S. § 1161(b). In Thomas v.
Miller, the Sixth Circuit held: “[i]n the wake of the Supreme Court’s decision in Arbaugh,” that
“the doctrine of equitable estoppel can, in appropriate cases, bar an employer, concededly not
meeting COBRA’s numerical application threshold, from defending an action under that statute
on that basis.” 489 F.3d 293, 297 (6th Cir. 2007). It seems likely that the same principles would
be applicable to § 303. In fact, Thomas contains language that can be read as indicating that its
holding is applicable in other contexts. “[W]e hold that, in appropriate cases, courts may exercise
their equitable powers to estop defendants from arguing that they fall below a statute’s numerical
threshold.” Id. at 302.
Nos. 16-8022/8023 In re Zenga Page 7
Accordingly, following the Supreme Court’s decision in Arbaugh, the Sixth Circuit’s
decision in Thomas v. Miller, and the post-Arbaugh circuit decisions holding that the threshold is
not jurisdictional, the Panel finds that the creditor threshold requirement of § 303(b)(1) is not
jurisdictional.
II. The Motions to Dismiss Under 11 U.S.C. § 707 are not Properly Before this
Panel
On appeal the Zengas also argue that the involuntary cases should be dismissed because
they are not in the best interest of creditors. However, they did not raise that issue in their
motions to dismiss the involuntary petitions and the bankruptcy court did not address it.
Appellate courts do not generally consider issues on appeal which were not raised in the trial
court. Hayward v. Cleveland Clinic Found., 759 F.3d 601, 614–15 (6th Cir. 2014); Burley v.
Gagacki, 834 F.3d 606, 613 n.2 (6th Cir. 2016). After the orders for relief were entered, creditor
William T. Zenga filed motions to dismiss the cases under § 707 of the Code, and the parties
agreed to a continuance of those motions while this appeal is pending. Thus, creditor Zenga’s
motion to dismiss is not the subject of a final order and, therefore, this court does not have
jurisdiction over that matter.2
III. Law v. Siegel is Not Applicable
The Zengas argued in their reply brief that the Court’s decision in Law v. Siegel
precluded the bankruptcy court’s use of equitable estoppel to avoid the application of the three or
more petitioning creditor requirement of § 303(b)(1). Law v. Siegel, ___ U.S. ___, 134 S. Ct.
1188 (2014). In Law v. Siegel, the Court held that a bankruptcy trustee could not use § 105(a) of
the Code to surcharge a debtor’s exemptions for costs that the trustee incurred in avoiding a lien
2
It also seems doubtful that a non-petitioning creditor has standing to oppose an involuntary petition.
Section 303(d) states: “[t]he debtor, or a general partner in a partnership debtor that did not join in the petition, may
file an answer to a petition under this section.” Further, Federal Rule of Bankruptcy Procedure 1011(a) provides
that “[t]he debtor named in an involuntary petition may contest the petition. In the case of a petition against a
partnership under Rule 1004, a nonpetitioning general partner, or a person who is alleged to be a general partner but
denies the allegation, may contest the petition.” Fed. R. Bankr. P. 1011(a). Conspicuously missing from the persons
stated in the Bankruptcy Code and Rules as to whom may file an answer to an involuntary petition are non-
petitioning creditors. Courts have held that such creditors do not have such standing. See In re QDN, LLC, 363 F.
App’x. 873 (3d Cir. 2010); Broadview Sav. Bank v. Royal Gate Assocs. Ltd. (In re Royal Gate Assocs., Ltd.),
81 B.R. 165 (Bankr. M.D. Ga. 1988); In re Zoomaire, Inc., 47 B.R. 628 (Bankr. S.D. Ohio 1985); and Dunlop Tire
and Rubber Corp. v. Earl’s Tire Serv., Inc. (In re Earl’s Tire Serv., Inc.), 6 B.R. 1019 (D. Del. 1980) (superseded by
rule on other grounds).
Nos. 16-8022/8023 In re Zenga Page 8
on the debtor’s residential property which the debtor fraudulently imposed upon the property
when the Bankruptcy Code exemption provisions and other provisions of the Code do not
expressly authorize such a surcharge. In so holding, the Court stated:
It is hornbook law that § 105(a) “does not allow the bankruptcy court to override
explicit mandates of other sections of the Bankruptcy Code.” Section 105(a)
confers authority to “carry out” the provisions of the Code, but it is quite
impossible to do that by taking action that the Code prohibits. That is simply an
application of the axiom that a statute’s general permission to take actions of a
certain type must yield to a specific prohibition found elsewhere. . . . We have
long held that “whatever equitable powers remain in the bankruptcy courts must
and can only be exercised within the confines of” the Bankruptcy Code. [citations
omitted].
Law v. Siegel, 134 S. Ct. 1188, 1194–95 (2014). In Redmond v. Jenkins (In re Alternate Fuels,
Inc.), 789 F.3d 1139, 1149 (10th Cir. 2015), the Tenth Circuit Court of Appeals succinctly
summarized Law v. Siegel’s holding: “Law held simply that a court may not employ § 105(a) to
override other explicit mandates in the Bankruptcy Code. Here, no explicit mandate of the
Bankruptcy Code prohibits recharacterization [of putative debt to equity] under § 105(a).”
The Zengas cite In re Colon, No. 06-04675 (ESL), 2016 WL 4597279, at *4-5 (Bankr.
D.P.R. Sept. 2, 2016), in which a bankruptcy court recently determined that it could not use
principles of equity to overcome the 12 creditor threshold requirement. The bankruptcy court
initially determined that there were “special circumstances” in the nature of “fraud, artifice, or
scam” relating to fraudulent transfers made by the debtor which justified allowing an involuntary
petition to proceed with two petitioning creditors, although the debtor had more than
12 creditors. Id. at *2. In reversing its prior decision, the court held that: “[a]fter Law v. Siegel,
the equitable powers of the bankruptcy courts, to the extent they existed, have been diminished
or restricted whenever exercising such equitable powers contravenes specific statutory
provisions.” Id. at *3. In this case, the bankruptcy court used equitable estoppel to prevent the
Zengas from introducing evidence that they had more than 11 creditors.
In the present case, the Panel has already determined that the numerosity requirement
found in § 303 is not jurisdictional. While § 303(b) requires three petitioning creditors when
there are 12 known creditors, this requirement is not an absolute bar to the administration of a
case filed with less petitioning creditors. See, e.g., Adams v. Zarnel (Zarnel), 619 F.3d 156
Nos. 16-8022/8023 In re Zenga Page 9
(2d Cir. 2010). Absent the Supreme Court’s or Sixth Circuit Court of Appeals’ determination
that Law v. Siegel prevails under these circumstances and not Arbaugh v. Y & H Corp. and
Thomas v. Miller and their progeny, this Panel does not believe that Siegel can be extended to
prevent use of equitable doctrines to overcome a numerical threshold requirement of a statute
when that statutory provision is not jurisdictional. Therefore, the Panel will consider whether
estoppel was properly applied under the facts of this case.
IV. Qi has Conceded that Judicial Estoppel is not Applicable and the Bankruptcy
Court Erred in Applying Equitable Estoppel
Due to the bankruptcy court reference to both judicial estoppel and equitable estoppel in
its oral decision, the parties do not agree and the record is not clear as to which type of estoppel
the bankruptcy court applied.3 The Zengas assert that the bankruptcy court incorrectly applied
the doctrine of judicial estoppel while Qi asserts that the bankruptcy court correctly applied
equitable estoppel.
Qi admits that judicial estoppel is not applicable given that no court previously made a
decision in reliance on the Zengas’ prior false oaths. “[J]udicial estoppel bars a party from
(1) asserting a position that is contrary to one that the party has asserted under oath in a prior
proceeding, where (2) the prior court adopted the contrary position either as a preliminary matter
or as part of a final disposition.” White, 617 F.3d at 476 (citing Browning v. Levy, 283 F.3d 761,
775 (6th Cir. 2002)). See also Henry v. Abbott Labs., 651 F. App’x 494, 503 (6th Cir. 2016);
Haddad v. Randall S. Miller Assocs., PC, 587 F. App’x 959, 965 (6th Cir. 2014). Qi is correct
that the elements of judicial estoppel are not met. Since Qi has conceded that judicial estoppel is
not applicable and was not applied by the bankruptcy court,4 the Panel need only determine if the
3
On pages 6 and 7 of the transcript of the hearing the bankruptcy court referred to judicial estoppel; on
pages 8 and 25 of the transcript of the hearing the court referred to equitable estoppel; on pages 7 and 24 counsel for
Qi referred to equitable estoppel; throughout the 6 pages of the transcript devoted to the court’s oral decision, the
court refers to the responses to the post-judgment interrogatories being “under oath” or “sworn” at least 7 times.
(Tr. of Proceedings, May 31, 2016, ECF No. 10). The first element of judicial estoppel is usually described as
“asserting a position that is contrary to one that the party has asserted under oath in a prior proceeding.” White v.
Wyndham Vacation Ownership, Inc., 617 F.3d 472, 476 (6th Cir. 2010).
4
(Appellee’s Br. at 3–4, ECF No. 20).
Nos. 16-8022/8023 In re Zenga Page 10
bankruptcy court correctly applied equitable estoppel to prevent the Zengas from establishing
that they had more than 11 creditors.
The bankruptcy court held that “this is a textbook case where equitable estoppel prohibits
the Zengas from now claiming that there are more than the 10 creditors . . . The elements of
equitable estoppel are all here and there is no equitable balance to them that would inspire me to
overlook the fact that the answers were given under oath.” (Tr. at 25:16–26:2).
To establish equitable estoppel, a party must prove “(1) misrepresentation by the party
against whom estoppel is asserted; (2) reasonable reliance on the misrepresentation by the party
asserting estoppel; and (3) detriment to the party asserting estoppel.” Mich. Express, Inc. v.
United States, 374 F.3d 424, 427 (6th Cir. 2004) (citing LaBonte v. United States, 233 F.3d 1049,
1053 (7th Cir. 2000)). See also Dobrowski v. Jay Dee Contractors, Inc., 571 F.3d 551, 557 (6th
Cir. 2009).
There appears to be no dispute that the first two elements of equitable estoppel were met.
The Zengas made factual misrepresentations that they only had 10 creditors in addition to Qi.
The Zengas’ counsel stated during the hearing: “[a]dmittedly the interrogatory answers that were
given were deficient.” (Tr. at 4:21–4:22). Regarding the second element, Qi asserted that he
reasonably relied upon the misrepresentation. “There’s nothing else my client could have done
to ascertain the number of creditors here, other than what they did.” (Tr. at 8:3–8:4). The
Zengas have not challenged the reliance element. In fact, the Zengas’ briefs conceded that Qi
“reasonably relied on inaccurate interrogatory answers in basing its decision to commence an
involuntary bankruptcy proceeding.” (Appellants’ Br. at 6, ECF No. 19).
However, the bankruptcy court made no factual finding that Qi suffered a detriment due
to his reliance on the Zengas’ statements regarding the number of creditors. The detriment
suffered by a party seeking to employ the doctrine of equitable estoppel must be “actual and
substantial.” Deschamps v. Bridgestone Ams., Inc. Salaried Emps. Ret. Plan, 840 F.3d 267, 276
(6th Cir. 2016); Smiljanich v. Gen. Motors Corp, 302 F. App’x 443, 450 (6th Cir. 2008).
See also Trustees of Michigan Laborers’ Health Care Fund v. Gibbons, 209 F.3d 587, 591 (6th
Cir. 2000) (party must have suffered “substantial detriment”). Examples of detriment justifying
Nos. 16-8022/8023 In re Zenga Page 11
the invocation of equitable estoppel have included the “loss of opportunity to improve one’s
position” or loss of evidence. Smiljanich, 302 F. App’x. at 450.
At oral argument the Panel inquired what detriment Qi had suffered in reliance upon the
Zengas’ misrepresentations. Qi’s attorney was unable to articulate any specific detriment, other
than the loss of time. The court did not employ 11 U.S.C. § 303(c) and Federal Rule of
Bankruptcy Procedure 1003(b) to address any reliance which Qi placed on the answers to the
post-judgment interrogatories. Section 303(c) provides that:
After the filing of a petition under this section but before the case is dismissed
or relief is ordered, a creditor holding an unsecured claim that is not
contingent . . . may join in the petition with the same effect as if such joining
creditor were a petitioning creditor under subsection (b) of this section.
11 U.S.C. § 303(c). Rule 1003(b) implements that section, providing:
If the answer to an involuntary petition filed by fewer than three creditors avers
the existence of 12 or more creditors, the debtor shall file with the answer a list of
all creditors with their addresses, a brief statement of the nature of their claims,
and the amounts thereof. If it appears that there are 12 or more creditors as
provided in § 303(b) of the Code, the court shall afford a reasonable opportunity
for other creditors to join in the petition before a hearing is held thereon.
Fed. R. Bankr. P. 1003. Faced with similar circumstances, other courts have granted petitioning
creditors such as Qi leave to seek the joinder of additional petitioning creditors. See In re Lee,
247 B.R. 311, 314 (Bankr. M.D. Fla. 2000) (court refused to apply doctrine of judicial estoppel
as to the number of creditors based on debtor’s prior testimony and gave the petitioning creditors
20 days to obtain an additional petitioning creditor); In re Nazarian, 5 B.R. 279, 281 (Bankr. D.
Md. 1980) (when only 2 qualifying creditors filed the petition, court refused to dismiss the case
and granted the petitioning creditors 30 days to seek the joinder of a third petitioning creditor).
See also In re J. V. Knitting Servs., Inc., 4 B.R. 597 (Bankr. S.D. Fla. 1980) (court did not need
to examine validity of original petitioning creditor’s claim once three additional qualifying
creditors joined the involuntary petition). Thus, if the bankruptcy court took evidence and found
that the Zengas had more than 11 creditors, the court could have granted Qi leave to join
additional petitioning creditors.
Nos. 16-8022/8023 In re Zenga Page 12
Accordingly, based upon the bankruptcy court’s failure to find actual and substantial
detriment to Qi and Qi’s inability to point to any detriment other than loss of time, the Panel
finds that the bankruptcy court erred as a matter of law in applying equitable estoppel to bar the
Zengas from introducing evidence of the existence of more than 11 creditors.5
CONCLUSION
For the reasons stated, the bankruptcy court’s Orders for Relief are VACATED and the
cases are REMANDED for further proceedings consistent with this opinion.
5
Law v. Siegel further supports the conclusion that the use of equitable estoppel to preclude the Zengas
from introducing evidence of the existence of more than 11 creditors was erroneous when § 303(c) and Bankruptcy
Rule 1003(b) were available to minimize the detriment to Qi.