Hall, William L. v. Enodis Corporation ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 01-3057
IN RE: WILLIAM L. HALL,
Debtor-Appellee.
APPEAL OF: ENODIS CORPORATION
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Appeal from the United States District Court
for the Northern District of Indiana, Hammond Division.
No. 01 C 20—Allen Sharp, Judge.
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ARGUED JANUARY 14, 2002—DECIDED SEPTEMBER 18, 2002
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Before POSNER, RIPPLE, and DIANE P. WOOD, Circuit
Judges.
DIANE P. WOOD, Circuit Judge. Only four months after
filing for relief under Chapter 11 of the Bankruptcy Code,
William L. Hall filed a motion to dismiss his petition. One
of his creditors, Enodis Corporation (to which we will refer
by its former name, Welbilt) believed that Hall had abused
the bankruptcy process and accordingly asked the bank-
ruptcy court to take the extra steps of making the dismiss-
al one with prejudice and awarding monetary sanctions
against Hall. The bankruptcy court promptly granted the
motion to dismiss, but it reserved the right to modify the
dismissal in accordance with Welbilt’s motion if the facts
warranted such an action. After an evidentiary hearing, the
2 No. 01-3057
bankruptcy court denied Welbilt’s requests; the district
court affirmed. Finding no abuse of discretion, we in turn
affirm the decision of the district court.
I
Consolidated Industries Corporation (Consolidated), a
manufacturer and retailer of residential furnaces in
Lafayette, Indiana, was once a subsidiary of Welbilt. Among
the furnaces it designed and manufactured were two
similar horizontal furnaces. In 1994, it became involved in
costly and lengthy class action litigation over horizontal
furnaces manufactured between 1982 and 1989. See Salah
v. Consolidated Indus., Inc., CV 738376 (hereinafter the
Salah action). By May 1995, Consolidated’s furnace design
was also under investigation by the Consumer Product
Safety Commission.
Many people might not want to purchase a company
embroiled in so much controversy, but Hall was not one of
them. In 1998, after several years of negotiation, Hall
purchased Consolidated from Welbilt, becoming its sole
shareholder. As a part of this purchase, Consolidated took
out a loan from FINOVA Capital Corporation (FINOVA), a
commercial lender, for $7.5 million, and Hall personally
guaranteed the debt. Under the terms of the sale, Consoli-
dated assumed the ultimate risk of loss on all tort litigation,
although Welbilt continued its existing insurance coverage.
Approximately four months after the purchase, on May
28, 1998, Consolidated filed a Chapter 11 petition. Consoli-
dated claimed that it could not afford the time and litiga-
tion expense of the Salah action. Furthermore, Consoli-
dated was also involved in a number of other lawsuits,
including one that it had filed against some 24 insurance
companies concerning coverage for the defective furnaces,
and one against Welbilt and associated parties claiming
that Welbilt was responsible for Consolidated’s debts and
No. 01-3057 3
that various frauds and breaches of fiduciary duty had
occurred. Hall also had an individual action against the
Welbilt parties. At the time of the bankruptcy filing, Consoli-
dated’s largest outstanding debt was the remaining $4.5
million due on the FINOVA note.
Before the Consolidated bankruptcy proceeding was com-
pleted, Hall filed a personal Chapter 11 petition in which he
claimed that his outstanding debt was approximately $5.1
million. That number reflected Hall’s direct debts as well as
his exposure through his guarantee of Consolidated’s debt.
The petition automatically stayed all litigation against Hall
(much of which had to do with Consolidated) and prevented
any attempts to commence collection of debts from Hall. 11
U.S.C. § 362. The bankruptcy court scheduled a mediation
designed to resolve all of the claims against Hall, but it was
unsuccessful because Hall could not persuade the insurance
companies to contribute to a comprehensive settlement
(that also would have resolved Consolidated’s bankruptcy).
FINOVA then stated that it would not renew the Consoli-
dated loan agreements, which naturally affected Consoli-
dated’s ability to secure additional loans. Without the co-
operation of FINOVA and the insurance companies, Hall
realized there could be no “global” reorganization of his
personal assets. At that point, he filed the motion to dismiss
the Chapter 11 action that led to the present dispute.
Welbilt responded by filing a cross motion to dismiss with
prejudice along with a request for costs and attorneys’ fees.
It argued that Hall had filed his bankruptcy petition in bad
faith. According to Welbilt, the record showed that Hall’s
personal liabilities were actually zero at the time of his
filing, and so there was no basis for claiming protection
under the bankruptcy laws. Furthermore, Welbilt claimed,
the fraud action that Hall had filed against Welbilt prior to
the bankruptcy was meritless. Welbilt also argued that Hall
had filed the bankruptcy petition for the impermissible
purpose of slowing down the resolution of the fraud case.
4 No. 01-3057
Finally, Welbilt argued that Hall had engaged in other
sanctionable conduct. For instance, it alleged that Hall
provided FINOVA with a false affidavit to induce it to lend
him the $7.5 million; Hall committed perjury in the Consoli-
dated bankruptcy proceeding by lying about a prior bank-
ruptcy in 1990; and Hall committed perjury by filing a
complaint in his own bankruptcy proceeding, in which he
claimed that Welbilt violated the automatic stay and a
bankruptcy court order. Welbilt maintained that this con-
duct, individually and cumulatively, amounted to an abuse
of the bankruptcy process and rendered appropriate both
monetary sanctions and a dismissal with prejudice.
II
No one is claiming that Hall’s personal bankruptcy peti-
tion should not have been dismissed. The only question is
whether there should have been punitive elements to that
dismissal, by making it with prejudice and ordering sanc-
tions. We review the bankruptcy court’s finding that Hall
did not act in bad faith for clear error, Covey v. Commercial
Nat’l Bank of Peoria, 960 F.2d 657, 662 (7th Cir. 1992), and
its dismissal of the bankruptcy petition for an abuse of
discretion, In re Leavitt, 171 F.3d 1219, 1223 (9th Cir.
1999). Normally, a dismissal of a bankruptcy petition has
no long-term consequences for the debtor’s ability to re-file.
Umbenhauer v. Wong, 969 F.2d 25, 30 (3d Cir. 1992). There
is an exception, however, if the court “for cause” orders that
the dismissal of the case is with prejudice. See 11 U.S.C.
§ 349(a). In that instance, the order may either bar the later
dischargeability of debts that would have been discharge-
able in the dismissed proceeding, or it may preclude the
debtor from filing a subsequent petition related to those
debts. Id. Dismissals with prejudice are therefore generally
reserved for extreme situations, such as when a debtor
conceals information from the court, violates injunctions,
No. 01-3057 5
files unauthorized petitions, or acts in bad faith. Id.; In re
Tomlin, 105 F.3d 933, 937 (4th Cir. 1997) (filing six bank-
ruptcy petitions in seven years); In re Martin-Trigona, 35
B.R. 596, 601 (Bankr. S.D.N.Y. 1983).
Welbilt argues that Hall is exactly the kind of debtor that
a dismissal with prejudice was designed for. According to
Welbilt, Hall used the bankruptcy process to manipulate
the course of the other lawsuits with which he and Consoli-
dated were enmeshed, and that his bad faith was patent.
Hall’s sole motive for filing the Chapter 11 petition, in
Welbilt’s view, was to “slow down” meritless litigation in
which he was a plaintiff. But there are some immediate
problems with Welbilt’s position. Much of that litigation
involved Consolidated or Hall as a plaintiff, and the
automatic stay of 11 U.S.C. § 362 does not apply to suits by
the debtor. See Maritime Elec. Co. v. United Jersey Bank,
959 F.2d 1194, 1204 (3d Cir. 1991); Martin-Trigona v.
Champion Fed. Sav. & Loan & Ass’n, 892 F.2d 575, 577
(7th Cir. 1989). On the other hand, “[a]ll proceedings in a
single case are not lumped together for purposes of auto-
matic stay analysis.” Maritime Elec. Co., 959 F.2d at 1204.
Thus, while the bankruptcy filing did not automatically stay
Hall’s own actions, nor did Hall’s personal filing have
any effect on Consolidated’s suits, Welbilt’s counterclaim
against Hall (which it was admittedly aggressively pur-
suing) and the Salah action were automatically stayed. A
greater problem with Welbilt’s position here is that the
bankruptcy court believed Hall’s explanation for his course
of action. Hall repeatedly testified that he filed the bank-
ruptcy petition in an attempt to achieve a “global settle-
ment.” That is a common motive for debtors, not one that
immediately raises concerns about bad faith.
Hall was attempting to gather before one court parties
that represented both his and Consolidated’s liabilities (as
to which he definitely had a personal stake stemming from
his guarantee) as well as their potential assets, permitting
6 No. 01-3057
a discussion among parties whose claims were interrelated.
The starkest example of the entanglement between Hall
and Consolidated’s financial success was that Consoli-
dated’s largest liability, the remaining $4.5 million debt to
FINOVA, was personally guaranteed by Hall. While it is
true that a debtor does not have to file bankruptcy to
negotiate with creditors, as Hall explained at argument, the
global settlement was merely the method he was trying to
use to achieve a critical purpose—settling the FINOVA
debt. Undoubtedly Hall hoped that one of his potential
assets at the settlement table, Consolidated’s claim against
the insurance companies, or even the claims against Wel-
bilt, could help in resolving that debt.
We do not find this strategy so far out-of-bounds that the
bankruptcy court was required as a matter of law to label
it as bad faith. To the contrary, Chapter 11 is normally used
to restructure or achieve a financial settlement with credi-
tors and potential creditors. Although Welbilt may have
been frustrated by this tactic, particularly considering that
the global settlement failed, there is no evidence that Hall
used the settlement to frustrate creditors or even that it
failed because of Hall; both parties maintain that the set-
tlement failed when the insurance companies refused to
contribute any funding for the settlement. Cf. In re Martin-
Trigona, 35 B.R. 596, 602 (dismissed with prejudice after,
among other things, the debtor refused to cooperate in
meeting with creditors). Once it became clear that there
would be no settlement, Hall immediately dismissed his
Chapter 11 proceeding, further supporting his contention
that the purpose for filing the petition was to reach a
settlement rather than prolong meritless litigation. On this
record, we do not believe the district court clearly erred in
finding Hall did not act in bad faith.
Welbilt also claims that Hall’s action was meritless be-
cause he was not a true debtor, and instead was a million-
aire with potential assets of $7 million, largely based on
No. 01-3057 7
Hall’s fraud claim against Welbilt, and liabilities of only
$5.1 million. In fact, Welbilt insists that Hall was not
actually insolvent, relying on Covey v. Commercial Nat’l
Bank of Peoria, 960 F.2d at 660. In Covey, this court posed
the following question for courts when defining insolvency
in the bankruptcy code: “What would a buyer be willing to
pay for the debtor’s entire package of assets and liabilities?”
Because Hall paid over $7 million for Consolidated approxi-
mately four months prior to filing Consolidated’s Chapter
11 petition, Welbilt maintains that neither Consolidated
nor Hall by definition may be insolvent. Welbilt is over-
reading Covey. Covey does not stand for the proposition that
as a matter of law companies that command a positive sum
on the market are always and forever solvent. Four months
after Hall purchased it, Hall caused it to file its own
Chapter 11 proceedings, indicating either that Hall had
sorely misjudged the company when he bought it, or that
Consolidated had suffered a terrible four months. Nothing
in Covey holds that Consolidated, or Hall for that matter,
could not have had a negative net worth in those circum-
stances.
Furthermore, contrary to Welbilt’s assertion that Hall
was really rolling in money when he filed his personal
bankruptcy petition, the record can support the opposite
conclusion. At the time Hall filed, he faced $4.5 million in
contingent liabilities, the payment of which depended on
Consolidated’s successful resolution of its own Chapter 11
case. Hall’s personal worth was intimately tied up with
Consolidated’s fortunes, and both looked grim.
This case also differs from Covey in that the liabilities as
well as the assets are contingent and both must be dis-
counted accordingly. In re Xonics Photochemical, Inc., 841
F.2d 198, 200 (7th Cir. 1988). We are not saying that legal
claims are not assets, see In re Polis, 217 F.3d 899, 903 (7th
Cir. 2000), only that they are contingent assets whose value
must be assessed in light of the probability that they will
8 No. 01-3057
be realized. Even if the Welbilt actions were pending, there
would still only be a possibility that Hall would have
emerged victorious in the lawsuit and received a $7 million
award. Indeed, Welbilt maintained throughout its brief that
the fraud actions Consolidated and Hall commenced against
it were entirely without merit. Presumably this means that
Welbilt places the value of the plaintiffs’ “assets” in the
lawsuit near zero.
Suppose, however, that Welbilt believed that Hall had
even a 10 percent probability of success. In that case, we
would discount the $7 million by 90 percent. The value of
the contingent asset would then be $700,000—the total
claim times the probability that it could occur. If Hall’s
assets could be as little as $700,000 or even zero, then it is
possible (indeed, likely) that his potential liabilities would
ultimately outweigh his assets. Moreover, as we already
noted, the $7 million purchase price reflected only the
market value of Consolidated at the time of Hall’s purchase,
not what it was worth later on, when Hall filed his bank-
ruptcy petition. In today’s world, it should go without
saying that the value of a company can fluctuate in a short
period of time—sometimes dramatically. Although we
would have to discount Hall’s potential liabilities as well,
they might carry a smaller discount rate given that Hall
had personally guaranteed a debt that was dischargeable
for Consolidated because of Consolidated’s bankruptcy. Of
course the likelihood that Hall would not ultimately be
responsible for the $4.5 million debt would increase if
Consolidated reorganized and survived its financial woes.
Welbilt has one more important arrow in its quiver,
however. Hall, it argued, committed perjury in one of the
Welbilt cases. Specifically, Hall testified falsely in a depo-
sition in Consolidated v. Welbilt, about whether he had
previously filed for bankruptcy in 1990. Hall even lied about
the earlier bankruptcy to FINOVA when he first secured
the loan to purchase Consolidated. Such behavior, it as-
No. 01-3057 9
serts, is reprehensible (as well as illegal) and cries out for
severe sanctions. Neither the bankruptcy court nor the
district court disagreed with the general thought that
perjury is highly undesirable behavior. But the question is
whether those courts abused their discretion when they
refused to give the particular remedies that Welbilt was
seeking here. Although they certainly might have come to
the opposite conclusion, we cannot find an abuse of discre-
tion in the decision not to grant Welbilt’s motions here.
Although a district court may dismiss a bankruptcy petition
with prejudice because of a debtor’s perjury, see 11 U.S.C.
§ 727(a)(4)(A), dismissal with prejudice is not invariably
required. To warrant dismissal with prejudice, the false
oath must be material. In re Senese, 245 B.R. 565, 574
(Bankr. N.D. Ill. 2000). Hall’s false statements to FINOVA,
or even in the Welbilt deposition, did not relate to his
disclosure regarding the amount or location of his assets or
liabilities in this bankruptcy. See In re Charfoos, 979 F.2d
390, 392 (6th Cir. 1992). Moreover, his prior bankruptcy
had no bearing on his ability to file the present bankruptcy
petition. Under § 727(a)(8) of the Bankruptcy Code, Hall
had to wait at least six years between the petition dates. He
waited even longer than that: his current bankruptcy peti-
tion was filed after almost eight years.
On this record, we cannot find that the district court
abused its discretion when it refused to dismiss the petition
with prejudice. The district court reasonably could have
concluded that Hall’s conduct, while hardly admirable, was
not the sort of egregious conduct that warranted dismissal
with prejudice.
III
In light of our finding that the district court did not abuse
its discretion in failing to dismiss with prejudice, we also
find that it did not abuse its discretion in refusing to award
10 No. 01-3057
monetary sanctions covering Welbilt’s attorneys’ fees and
costs. Although a district court is authorized to sanction a
party by requiring her to pay costs and attorneys’ fees, In re
Volpert, 110 F.3d 494, 499-500 (7th Cir. 1997), it is not
required to award them if it determines the party did not
abuse the bankruptcy process. That is what the court
decided here. It was therefore entitled to refuse Welbilt’s
demand for monetary sanctions.
We AFFIRM the decision of the district court.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-97-C-006—9-18-02