Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 1 of 33 PageID #: 1718
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE EASTERN DISTRICT OF TEXAS
`SHERMAN DIVISION
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`
`
`Case No. 4:15-cv-275
`Consolidated Case No. 4:15-cv-46
` (Administratively Closed)
`
`USBC Case No. 14-42120
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`
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`
`
`
`
`§
`IN RE:
`§
`
`§
` FUNNEL SCIENCE INTERNET
`§
`MARKETING, LLC
`______________________________________ §
`
`§
`
`§
`RONALD PYKE, et al.,
`§
`
`§
` Appellants,
`§
`
`§
`v.
`§
`
`§
`FUNNEL SCIENCE INTERNET
`§
`MARKETING, LLC,
`§
`
`§
` Appellee
`§
`
`
`
`
`
` .
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`MEMORANDUM OPINION AND ORDER
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`
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`Now before the Court is the consolidated set of cross-appeals arising from an involuntary
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`Chapter 7 bankruptcy case filed against Funnel Science Internet Marketing, LLC (Appellee,
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`“Funnel Science” or “Alleged Debtor”) on the petition of Ronald Pyke, Virginia Rivers, Drop
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`Visionary Branding (“DVB”) and David Rice 1 (collectively, Appellants or “Petitioning
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`Creditors”) and the subsequent dismissal thereof by the United States Bankruptcy Court for the
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`Eastern District of Texas, Sherman Division. In the first case, filed as Funnel Science v. Pyke,
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`Rivers, DVB and Rice, 4:15cv46, Funnel Science was the titular Appellant and Pyke, et al., the
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`1 Mr. Rice is not named as a party. Although Funnel Science named him in its appeal under the
`original case number 4:15cv46, he was not named as a party in the Petitioning Creditors’ appeal
`under this case number 4:15cv275. On consolidation, the caption of this case number remained
`unchanged. Although Appellee Funnel Science states in its Brief that Mr. Rice should remain as
`a party, it is not necessary to identify him as such, given the Court’s determination herein.
`1
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`

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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 2 of 33 PageID #: 1719
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`Appellees. However, on April 23, 2015, Pyke, et al. (but without Rice), subsequently filed the
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`instant case, Pyke v. Funnel Science, 4:15cv275. The parties then filed a joint motion to
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`consolidate the two cases and a joint motion to extend the briefing schedule and page limits.
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`This Court granted both, closed the 4:15cv46 case and consolidated both appeals under
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`the instant Case No. 4:15cv275. Resultantly, the Pyke, et al., parties are the notional Appellants
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`in this case and Funnel Science the Appellee. In fact, as noted above, these are actually
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`cross-appeals and each side has filed an Opening Brief (“Brief”) and a Reply Brief (“Reply”).
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`Perhaps it would have been more appropriate to designate the parties as “Appellant” and
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`“Cross-Appellant.” However, the Court will continue to address the parties as they are
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`docketed. Appellee Funnel Science filed its Brief on June 25, 2015 (Doc. No. 16).2 Appellants
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`filed their Brief on July 23, 2015 (Doc. No. 17). Appellee filed its Reply on August 6, 2015
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`(Doc. No. 18). Appellants filed their Reply on August 21, 2015 (Doc. No. 19). Thus, briefing
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`is complete and the matter is ripe for decision.
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`
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`At issue are various orders and the Final Judgment entered by the Bankruptcy Court, the
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`Hon. Brenda T. Rhoades, Chief United States Bankruptcy Judge. Appellee appeals from the
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`Order Dismissing Involuntary Bankruptcy (USBC Doc. No. 21) and the Order Denying Motion
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`for Reconsideration (USBC Doc. No. 32), and cross-appeals from the Final Judgment (USBC
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`Doc. No. 33) and the Memorandum Opinion and Orders (USBC Doc. Nos. 47 and 57) on
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`Appellants’ two Motions for Reconsideration. Appellants appeal from the Final Judgment
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`(USBC Doc. No. 33) and both Memorandum Opinion and Orders (USBC Doc. Nos. 47 and 57).
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`2 The Court will refer to docket entries in the Bankruptcy action as “USBC Doc. No. XX” and to
`docket entries in the instant case as “Doc. No. XX.”
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`2
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`

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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 3 of 33 PageID #: 1720
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`The parties have briefed specific issues: six by Appellee and two by Appellants.
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`Appellate jurisdiction over these cross-appeals is proper in this Court pursuant to 28
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`U.S.C. § 158(a).
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`
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`After reviewing the parties’ briefs, the record in this case, and the applicable law, the
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`Court AFFIRMS the orders of the Chief Bankruptcy Judge.
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`I.
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`
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`BACKGROUND
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`The following factual background is compiled from the Orders of the Bankruptcy Court
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`and the filings of the parties.
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`
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`Appellants filed a petition for involuntary Chapter 7 bankruptcy against Appellee on
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`October 5, 2014. Appellants – referred to as Petitioning Creditors in the Bankruptcy Court and
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`in the parties’ own appellate briefs – characterize themselves as “creditors” of Appellee who
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`“believed and continue to believe in the legitimacy of their respective claims against Alleged
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`Debtor [Appellee].” Appellants’ Brief at 8. The claims are for compensation allegedly owed.
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`On the other hand, Appellee characterizes Appellants as “disgruntled former employees or
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`independent contractors who had previously worked for Funnel Science, and collectively they
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`allege debts totaling a mere $24,731.72.” Appellee’s Brief at 6 (footnote omitted). Appellee
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`recites the background of each individual Appellant and the alleged circumstances leading to his
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`or her discharge or termination, and the relatively small sums that each then demanded from
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`Appellee. See generally id. at 7-13. Appellee contends it disputed the amounts demanded, in
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`full or in part, over a period of time until Appellants filed the petition for involuntary bankruptcy;
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`Appellants argue that no bona fide disputes existed.
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`
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`On October 27, 2014, Appellee filed its Motion to Dismiss Chapter 7 Case in the
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`3
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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 4 of 33 PageID #: 1721
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`Bankruptcy Court (USBC Doc. No. 4).3 A hearing was set, but then continued on Appellee’s
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`motion, prompting Appellants to move for the appointment of a trustee. Appellants had also
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`served a subpoena duces tecum, which Appellee had moved to quash. The Bankruptcy Court set
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`the hearing on all three motions on November 10, 2014, and after a partial hearing, continued it
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`to November 14, 2014. At the November 14, 2014, hearing, the Chief Bankruptcy Judge orally
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`granted Appellee’s Motion to Dismiss and issued an Order Dismissing Involuntary Bankruptcy
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`on November 17, 2014 (USBC Doc. No. 21) (and terminated the remaining motions).
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`
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`On November 26, 2014, Appellee filed a Motion to Partially Reconsider Order
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`Dismissing Bankruptcy Case, pursuant to Fed. R. Civ. P. 59 or, alternatively 60(b)(6),4 arguing
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`that the Bankruptcy Court should have found that Appellants/Petitioning Creditors had filed the
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`petition for involuntary bankruptcy in bad faith. The Bankruptcy Court set a hearing on
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`December 16, 2014. On December 1, 2014, Appellee also filed an Application for Judgment
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`Awarding Fees and Costs Under Section 303(i)(1), seeking $29,127.50 in attorneys’ fees and
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`$200.33 in expenses incurred while pursuing its Motion to Dismiss and otherwise defending
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`against Appellants’ petition. The Bankruptcy Court set a hearing on January 6, 2015.
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`
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`At the December 16, 2014, hearing, the Chief Bankruptcy Judge orally denied the Motion
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`for Partial Reconsideration and issued an Order Denying Motion for Reconsideration on January
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`6, 2015. At the January 6, 2015, hearing, the Chief Bankruptcy Judge granted fees on the
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`Motion for Judgment Awarding Fees and Costs, but reduced the amount of attorneys’ fees
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`allowed. On January 8, 2015, the Bankruptcy Court issued a Final Judgment disposing of all
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`3 For the purposes of this Background, the Court will only cite to the Bankruptcy record if there
`is a reason to do so or the record cited is significant.
`4 As made applicable by Fed. R. Bankr. P. Rules 9023 and 9024.
`4
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`

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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 5 of 33 PageID #: 1722
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`claims in Appellee Funnel Science’s favor and apportioning the award of fees among three of the
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`Appellants: $1,200.00 from Ginny Rivers; $5,000.00 from Ronald A. Pyke; and $13,800.00 from
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`Jessica Juderman-Van Brunt d/b/a Drop Visionary Branding, for a total award of $20,000.00.
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`
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`Appellants filed a Motion for Reconsideration Regarding Final Judgment Awarding Fees
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`and Expenses to Alleged Debtor (USBC Doc. No. 36, the “First Motion for Reconsideration”),
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`citing Fed. R. Civ. P. 59 and 60, raising for the first time their argument that Appellee was not
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`authorized to do business in the State of Texas. Pursuant to Tex. Bus. Org. Code § 9.051(b),
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`Appellants argued, Appellee should not have been granted the “affirmative relief” of attorneys’
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`fees awarded for defending against the petition for involuntary bankruptcy. On March 4, 2015,
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`the Chief Bankruptcy Judge issued a Memorandum Opinion and Orders (USBC Doc. No. 47)
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`denying Appellants’ First Motion for Reconsideration.
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`
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`Appellants then filed a Comment Regarding the Court’s Memorandum Opinion and
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`Orders on March 10, 2015. The “comment” purported to “clarify a couple of matters in case
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`they may affect the Court’s ruling in its Order on Reconsideration.” See USBC Doc. No. 53 at
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`2. They asserted that they could not have discovered Appellee’s lack of authorization to conduct
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`business in the State of Texas any earlier due to the “blatant perjury” of Appellee’s owner. See
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`USBC Doc. No. 53 at 3. In support, Appellants quoted two lines of deposition testimony that
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`had been selectively lifted from a longer examination. See id. at 2. The following day, March
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`11, 2015, Appellants filed their Second Motion for Reconsideration (USBC Doc. No. 54), which
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`was substantively a copy of the “Comment” made into the form of a motion, including the claim
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`of “blatant perjury.” On April 9, 2015, the Chief Bankruptcy Judge issued a Memorandum
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`Opinion and Orders (USBC Doc. No. 57) on Appellants’ “Comment” and the Second Motion for
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`5
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`

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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 6 of 33 PageID #: 1723
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`Reconsideration, denying the motion as well as Appellee’s request for sanctions against
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`Appellants’ counsel.
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`The instant cross-appeals ensued. Appellee raises six issues:
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`Whether the Bankruptcy Court erred in finding that Appellants did not file
`the petition for involuntary bankruptcy in bad faith.
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`Whether the Bankruptcy Court erred by not requiring Appellants to post a
`bond indemnifying Appellee pursuant to section 303(e) of the Bankruptcy
`Code.
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`Whether the Bankruptcy Court erred in failing to award Appellee the full
`amount of attorneys’ fees and expenses it requested for defending against
`the
`involuntary petition, pursuant
`to section 303(i)(1) of
`the
`Bankruptcy Code.
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`1:
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`2:
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`3.
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`4.
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`5.
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`6.
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`Appellee’s Brief (Doc. No. 16) at 2-4. Appellant raises two issues in addition to addressing
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`Whether the Bankruptcy Court erred in apportioning the awarded
`attorneys’ fees among three of the Appellants individually instead of
`holding all of the Petitioning Creditors jointly and severally liable for the
`full amount of the award.
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`Whether the Bankruptcy Court erred in failing to award Appellee
`sanctions or its fees and expenses incurred in defending against the
`Appellants’ First Motion for Reconsideration.
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`Whether the Bankruptcy Court erred in failing to award Appellee
`sanctions or its fees and expenses incurred in defending against the
`Appellants’ Second Motion for Reconsideration.
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`each of Appellee’s six issues:
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`1.
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`
`
`
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`2.
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`Whether the Bankruptcy Court erred in finding that Appellee had standing
`to obtain affirmative relief in the Bankruptcy Court despite the fact that
`Appellee was not authorized to do business in the State of Texas at the
`time of the filing of, the hearing on, and the order with respect to
`Appellee’s application for fees.
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`Whether the Bankruptcy Court erred by refusing to grant Appellant’s
`two Motions for Reconsideration.
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`
`6
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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 7 of 33 PageID #: 1724
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`Appellant’s Brief (Doc. No. 17) at 2. The Court will address the arguments in turn.
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`II.
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`STANDARD OF BANKRUPTCY APPELLATE REVIEW
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`
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`This Court reviews the Bankruptcy Judge’s findings of fact for clear error. In re IFS
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`Financial Corp., 803 F.3d 195, 203 (5th Cir. 2015); Robertson v. Dennis (In re Dennis), 330
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`F.3d 696, 701 (5th Cir. 2003). A finding of fact is clearly erroneous only if “on the entire
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`evidence, the court is left with the definite and firm conviction that a mistake has been
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`committed.” In re Dennis, 330 F.3d at 701 (quoting Hibernia Nat’l Bank v. Perez (In re Perez),
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`954 F.2d 1026, 1027 (5th Cir. 1992). The Court conducts a de novo review of the Bankruptcy
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`Judge’s conclusions of law. Id. Mixed questions of law and fact are reviewed de novo. In re
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`Foster Mortgage Corp., 68 F.3d 914, 917 (5th Cir. 1995).
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`III. DISCUSSION AND ANALYSIS
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`As Appellee’s Brief was first filed, the Court will first examine the issues it raises.
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`A.
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`1.
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`Appellee’s Issues
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`Appellants’ Alleged Bad Faith
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`The Bankruptcy Court explicitly found that Appellants’ claims as purported creditors of
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`Appellee Funnel Science were all subject to bona fide disputes. See Order Dismissing
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`Involuntary Bankruptcy (USBC Doc. No. 21) at 1. Accordingly, under 11 U.S.C. § 303(b)(1),
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`Appellants’ petition for involuntary bankruptcy had to be dismissed. The Bankruptcy Court also
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`found that Appellants nonetheless did not act in bad faith when they filed the petition. See
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`Order Dismissing Involuntary Bankruptcy at 2.
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`7
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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 8 of 33 PageID #: 1725
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`
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`The import of this finding is that Appellee was precluded from obtaining actual or
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`punitive damages. 11 U.S.C. § 303(i)(2) (requiring a finding of bad faith when dismissing an
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`involuntary bankruptcy in order to award actual or punitive damages).
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`
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`Appellee contends that the Bankruptcy Court erred on two sub-parts: (1) based on the
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`alleged evidence of Appellants’ intent and (2) because the Bankruptcy Court applied an incorrect
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`standard of law to the facts of the case. Appellee’s Brief at 25. The Court reviews the
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`Bankruptcy Court’s determination of bad faith for clear error as a finding of fact. In re Elliott,
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`506 F. App’x 291, 292 (5th Cir. 2013) (“We review the bankruptcy court’s factual findings,
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`including its finding of bad faith, for clear error . . . .”); In re Jacobsen, 609 F.3d 647, 652 (5th
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`Cir. 2010). Proper analysis requires that the Court examine the second point first.
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`a.
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`Applicable Standard Of Law
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`Appellee claims that the Bankruptcy Court relied on an incorrect legal standard when it
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`cited In re Seko Investments, Inc., 156 F.3d 1005 (9th Cir. 2003). Appellee’s Brief at 34. The
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`Bankruptcy Court cited In re Seko as part of its discussion on the issue of whether counterclaims
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`unrelated to the transactions involved in the involuntary bankruptcy could be bona fide disputes,
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`and whether Appellants and their counsel had been confused on that point. Appellee contends
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`that an intervening change to the Bankruptcy Code in 2005 and decisional authority meant that
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`the Bankruptcy Court applied an incorrect standard of law by citing to In re Seko.
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`
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`As an initial matter, the Court observes that counsel for Appellee stated to the Chief
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`Bankruptcy Judge during the December 16, 2014, hearing on its Motion to Partially Reconsider
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`Order Dismissing Bankruptcy Case that,
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`8
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`

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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 9 of 33 PageID #: 1726
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`We’re not arguing that Your Honor used an incorrect standard in deciding
`whether or not there was a bona fide dispute. What we are arguing here is that
`after Your Honor found that there was a bona fide dispute, Your Honor took it a
`step further and cited to this legal confusion on the issue of offsetting
`counterclaims versus recoupment. And that because of the legal conclusion - -
`confusion, Your Honor found the petitioning creditors did not act in bad faith,
`because they had a reasonable belief that maybe if the debtor’s claims, or the
`alleged debtor’s claims were counterclaims, then it wouldn’t subject to them to a
`bona fide dispute based on this pre-2005 law.
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`See FS000570-FS000571.5 Notwithstanding this statement, counsel now argues that the Chief
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`Bankruptcy Judge did use an incorrect legal standard. The only difference is that Appellee here
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`conflates the determination of a bona fide dispute with the separate determination of whether the
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`involuntary bankruptcy petition was filed in bad faith.
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`
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`Nonetheless, Appellee admits that the Bankruptcy Court correctly determined that the
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`bankruptcy was subject to bona fide disputes as to Appellants’ claims. Appellee’s Brief at
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`24-25. In doing so, Appellee cited the objective standard in Matter of Sims, 994 F.2d 210, 221
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`(5th Cir. 1993) (citing In re Lough, 57 B.R. 993 (Bankr. E.D. Mich. 1986)). In fact, the
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`Bankruptcy Court also explicitly relied on Sims:
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`Now, turning to the bad faith issue. It appears to the Court that there seems to be
`some legal confusion about the distinction between transactionally related
`defenses and claims, which I think in the 5th Circuit we call recoupment, if you
`will, versus counterclaims on unrelated claims that could give rise to two
`independent claims that may be entitled to offset, but does not necessarily negate
`the underlying claim. And I think that is the issue that is being addressed in part
`by the Seko, S-e-k-o, Investments case and the 5th Circuit in the Sims case. And
`the existence of this legal confusion and legal arguments are just that. I don’t
`think that in this case that the petitions were filed in bad faith and the Court so
`finds.
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`See FS000559-FS000560. Appellee ignores this point entirely and insists that because the
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`Bankruptcy Court cited In re Seko Investment, Inc., 156 F.3d 1000 (9th Cir. 1998) as a factor in
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`9
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`

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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 10 of 33 PageID #: 1727
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`determining that Appellants had not acted in bad faith, it must have relied on an incorrect
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`standard of law. That is because in Credit Union Liquidity Servs., LLC v. Green Hills Dev. Co.,
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`741 F.3d 651, 657-58 (5th Cir. 2014), the Fifth Circuit found that the 2005 amendments to the
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`Bankruptcy Code invalidated the Ninth Circuit’s holding that “when the debtor’s counterclaim
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`arises from a separate contract, it does not ‘put in doubt’ the creditor’s claims for the purposes of
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`§ 303(b).”
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`
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`Appellee previously raised this argument in its Motion for Partial Reconsideration to the
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`Bankruptcy Court. During the hearing on that motion, the Chief Bankruptcy Judge stated:
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`So the Court did recognize the change in 2005 in making the conclusion that the
`claims here were subject of a bona fide dispute. Okay?
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`Then the next question is, whether that - - the creditors here acted in bad faith.
`And the Court’s point there, and the Court’s point now is that the changes to the
`law that you are talking about and the 5th Circuit’s ruling about what that law
`means was in 2014. And it is apparent to the Court and I guess I’m going to have
`to be blunt, because I tried not to be at the last hearing, that counsel for the
`debtors, or counsel for the creditors was confused then and is still confused about
`what that means and what the 5th Circuit meant, or what the 2005 change meant,
`because the 2005 change does not go into those issues. It just has, I think three
`more words that were added. But the 5th Circuit’s ruling on what it means and
`its rejection of Secco6 occurred in 2014. And it is clear to the Court that counsel
`for the creditors was confused and is still confused about what it means. Okay?
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`And given that counsel is confused, I’m pretty certain the creditors were,
`themselves, confused. And it is the Court’s ruling that the creditors did not act in
`bad faith. And I have no evidence that the creditors acted in bad faith. All I
`have is the evidence that they filed a case and that the parties had a dispute about
`some matters. That’s the only evidence. And the Court is finding as a matter of
`fact based on the evidence before the Court that the creditors did not act in bad
`faith.
`
`
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`5 Referring to Funnel Science’s Bates-labeled hearing transcript attached to its Appellee’s Brief.
`6 As reported in the hearing transcript, referring to In re Seko.
`10
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`

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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 11 of 33 PageID #: 1728
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` See FS000577-FS000578. The Chief Bankruptcy Judge thus made clear that she was not
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`relying on In re Seko for any purpose other than making a finding of fact: that Appellants’
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`counsel was confused by the effect of the 2005 change as explained by the Fifth Circuit in its
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`2014 Green Hills decision, before filing the petition for involuntary bankruptcy that same year.
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`Appellee’s contention that the Bankruptcy Court applied the In re Seko standard is misplaced.
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`
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`Appellee nonetheless argues that under various tests used in different Bankruptcy Courts
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`outside the Fifth Circuit, Appellants acted in bad faith because they were aware that a bona fide
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`dispute existed at the time that they filed their petition. See Appellee Brief at 26-27 (citing, inter
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`alia, In re Better Care, Ltd., 97 B.R. 405, 411 (Bankr. N.D. Ill. 1989), In re Tichy Elec. Co., Inc.,
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`332 B.R. 364, 373 (Bankr. N.D. Iowa 2005), and In re Cannon Express Corp., 208 B.R. 450
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`(Bankr. W.D. Ark. 2002)). This argument relates to Appellee’s first point.
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`b.
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`Evidence Of Appellants’ Intent
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`Appellee offers selected emails and excerpts of testimony during the hearing on its
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`Motion to Dismiss in an attempt to establish bad faith on the parts of Ronald Pyke, Virginia
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`Rivers, Jessica Juderman-Van Brunt (named herein under her d/b/a of DVB) and David Rice.
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`The fundamental argument is that Appellants acted in bad faith because they knew of the
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`existence of bona fide disputes over their claims of compensation owed when they petitioned for
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`the involuntary bankruptcy.
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`
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`In that light, Appellee contends Mr. Pyke was aware of a bona fide dispute over his claim
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`for money owed him as Funnel Science’s Fractional CFO based on emails he had received
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`stating that its owner, Alex Fender, “disagrees with this amount” and thought Mr. Pyke’s “work
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`is a scam and I will be glad to let the cat out of the bag.” Appellee’s Brief at 28 (citing record).
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`11
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`

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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 12 of 33 PageID #: 1729
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`The remainder of Appellee’s argument concerns whether Mr. Pyke had negotiated additional
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`compensation and an agreement to justify the payment demanded. Id. at 29.
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`
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`Next, Appellee contends that Ms. Van Brunt’s testimony indicates she was aware of a
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`dispute over her claim for $16,196.75, and that Mr. Fender believed that she was overcharging
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`and being paid too much. Appellee Brief at 29 (citing record). Appellee alleges Ms. Van
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`Brunt’s objective was to use the bankruptcy to obtain the payment she claimed. Id. at 30.
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`
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`Appellee next asserts that Ms. Rivers knew that Appellee had issues with her
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`performance and that she knew her services had been terminated for that performance. Id. at
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`30-31 (citing record). Further, that she initially filed an overstated claim with the original
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`petition for involuntary bankruptcy, which she abruptly amended in the midst of the hearings on
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`Appellee’s Motion to Dismiss the bankruptcy. Id. at 31.
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`
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`Finally, Appellee claims that Mr. Rice had been terminated for committing time card
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`fraud and then accessed Funnel Science computers and deleted emails between him and the
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`company’s clients and deleted the clients’ Bing accounts. Id. at 31 (citing record).7
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` All of this, Appellee argues, indicates bad faith on Appellants’ part under either the
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`“improper use” test (citing In re Tichy, 332 B.R. at 373 and In re Better Care, Ltd., 97 B.R. at
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`411) or the “improper purpose” test (id.); and that filing an involuntary petition in order to collect
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`a debt is an improper use of the bankruptcy process (citing Cannon Express Corp., 280 B.R. at
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`455).
`
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`7 Appellee also claims that Appellants contacted its customers, attempted to interfere with its
`business operations, sent “onerous subpoenas” and filed a “baseless motion” seeking
`appointment of a trustee after Appellee requested a continuance for a hearing. Id. at 32 (citing
`record). None of these points has any bearing on Appellee’s underlying claim that Appellants
`acted in bad faith because they were aware of bona fide disputes when they filed the petition.
`12
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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 13 of 33 PageID #: 1730
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`However, Appellee badly misses the point. The Bankruptcy Court did not absolve or
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`excuse any bad faith on the part of Appellants. Instead, the Chief Bankruptcy Judge found as a
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`matter of fact that Appellants’ counsel (and, hence, Appellants) were confused as to the effect of
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`Green Hills and the 2005 Bankruptcy Code amendments discussed above. In other words, they
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`were confused whether the disputes over Appellants’ claims constituted “bona fide disputes”
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`within the meaning of § 303(b), which would render Appellants ineligible to file the petition.
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`
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`It is undisputed that Appellants consulted counsel before filing the petition. Mr. Pyke
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`testified that after he heard that there were others beside himself who “were not getting paid by
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`Funnel Science,” he and Ms. Van Brunt conferred with counsel as to the monies Appellee
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`allegedly owed them and that, as a result of that consultation they decided to file the petition for
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`involuntary bankruptcy. FS000299. Appellee admits that Ms. Rivers consulted with counsel
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`before filing the petition for involuntary bankruptcy. Appellee’s Brief at 31. Furthermore,
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`Counsel for the Appellants stated in colloquy with the Bankruptcy Court that “[w]e sent this
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`involuntary petition around” and that Ms. Rivers had signed it because she had provided
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`information to Mr. Pyke that Mr. Pyke provided to counsel. FS000548.
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`In other words, consistent with the Bankruptcy Court’s findings of fact, Appellants
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`obtained the advice of counsel before filing their petition. The Bankruptcy Court further found
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`as a matter of fact that Appellant’s counsel was obviously confused about the standard governing
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`whether those alleged debts, and Appellee’s responses to them, constituted bona fide disputes.
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`Responding to this finding, Appellee accuses counsel for Appellants of committing
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`“malpractice” and that Appellants therefore should only “have recourse against their counsel for
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`malpractice.” Appellee’s Brief at 38. The Court disagrees.
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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 14 of 33 PageID #: 1731
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`The Court is left with the “definite and firm conviction that a mistake has” not been
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`committed, and thus there was no clear error, in the Bankruptcy Court’s finding of no bad faith.
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`In re Dennis, 330 F.3d at 701. Appellee’s first contention is without merit.
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`2.
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`Bond
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`Appellee next contends that the Bankruptcy Court abused its discretion when it did not
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`grant Appellee’s request for a bond on the involuntary bankruptcy, pursuant to § 303(e). See
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`Appellee Brief at 39; see also USBC Doc. No. 21 (awarding attorneys’ fees without imposing a
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`bond). This Court reviews such claim of error for abuse of discretion. In re Hutter Assocs.,
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`Inc., 138 B.R. 512, 516 (Bankr. W.D.Va. 1992). “A district court abuses its discretion if it: (1)
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`relies on clearly erroneous factual findings; (2) relies on erroneous conclusions of law; or (3)
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`misapplies the law to the facts.” Allen v. C&H Distributors, L.L.C., - - - F.3d - - - -, 2015 WL
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`9461591, at *2 (5th Cir. Dec. 23, 2015).
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`Appellants contend in opposition that Appellee did not serve notice of a motion for a
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`bond and no hearing was conducted. Both parties agree that the basic requirements for a bond
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`under § 303(e) are (1) notice; (2) a hearing; and (3) cause. Appellee Brief at 39 (citing In re
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`Apollo Health Street, Inc., 2011 WL 2118230, at *2 (Bankr. D.N.J. May 23, 2011)); Appellants’
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`Brief at 34. See also 11 U.S.C. § 303(e) (“After notice and a hearing, and for cause, the court
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`may require the petitioners under this section to file a bond to indemnify the debtor for such
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`amounts as the court may later allow under subsection (i) of this section.”).
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`Appellants’ opposition is baseless. When Appellee filed its Motion to Dismiss the
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`involuntary bankruptcy before the Bankruptcy Court, it included a dedicated section entitled
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`“Request for Bond from Petitioners.” See USBC Doc. No. 4 at 14. It explicitly cited §§ 303(e)
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`14
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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 15 of 33 PageID #: 1732
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`and (i), the latter of which is discussed further below. It requested the Bankruptcy Court to
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`conduct a hearing on the request and sought an order requiring Appellants to post a $100,000
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`bond “for Funnel Science’s reasonable protection.” USBC Doc. No. 4 at 14. There is no
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`question that the Motion to Dismiss was served on opposing counsel and therefore notice was
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`given. See id. at 15 (Certificate of Service via CM/ECF). All counsel appeared at the hearing
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`on the motion, during which arguments as to a bond were addressed to the Bankruptcy Court.
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`See FS000253; FS000308 (inquiring as to Appellants’ ability to pay a $20,000 judgment with the
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`Bankruptcy Court sustaining an objection for speculation); FS000536 (counsel raising the issue
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`of a bond and stating that Funnel Science had “incurred significant damages” in relation to it);
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`FS000549 (counsel for Appellants acknowledging that “the Court certainly is authorized to
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`impose a bond” and that Appellee requested a bond in the amount of $100,000); FS000552.
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`Thus, the notice and hearing requirements were met.
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`Turning to § 303(i) as the basis for Appellee’s recovery, the statute states:
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`(i) If the court dismisses a petition under this section other than on consent of all
`petitioners and the debtor, and if the debtor does not waive the right to judgment
`under this subsection, the court may grant judgment--
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`(1) against the petitioners and in favor of the debtor for--
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`(A) costs; or
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`(B) a reasonable attorney’s fee; or
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`(2) against any petitioner that filed the petition in bad faith, for--
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`(A) any damages proximately caused by such filing; or
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`(B) punitive damages.
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`15
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`Case 4:15-cv-00275-MHS Document 20 Filed 03/21/16 Page 16 of 33 PageID #: 1733
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`This Court has already upheld the Bankruptcy Court’s finding that Appellants did not file
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`the petition for involuntary bankruptcy in bad faith. Accordingly, § 303(i)(2) does not apply.
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`The Bankruptcy Court awarded attorneys’ fees under § 303(i)(1), which could apply to
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`Appellee’s request for a bond under § 303(e).
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`However, after discussing notice and a hearing, Appellee’s entire argument on appeal is a
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`brief paragraph focused on “cause”:
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`“Cause” to impose a bond on the Petitioning Creditors existed in this case and the
`evidence needed by the Bankruptcy Court to find such cause was attached as
`exhibits to Funnel Science’s Motion to Dismiss. As discussed above, the
`evidence is overwhelming that the Petitioning Creditors filed the involuntary
`petition in bad faith and for the improper purpose of harassing Funnel Science,
`causing it to incur fees and damages, and disrupting its business by abusing the
`bankruptcy process as an improper litigation and collection tactic. Their counsel
`also filed successive, meritless motions for reconsideration in violation of 28
`U.S.C. § 1927 and Fed. R. Bankr. P. 9011. All of this resulted in substantial
`damage to Funnel Science, for