In re: Skye Mineral Partners, LLC
MEMORANDUM OPINION Signed by Judge Colm F. Connolly on 11/16/2020. (nmf)
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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE SKYE MINERAL PARTNERS, LLC.:
Banla. No. 18-11430-LSS
Civ. No. 18-2008-CFC
SKYE MINERAL PARTNERS, LLC,
SKYE MINERAL INVESTORS, LLC,
and CLARITY COPPER, LLC,
November 16, 2020
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, UNITEDSTES DISTRICT JUDGE
This is an appeal from the Banlauptcy Court's dismissal of a petition for the
involuntary bankruptcy of Skye Mineral Partners, LLC ("Skye") filed by Appellant
PacNet Capital (U.S.) Limited. The dismissal occurred as a result of an Order
issued by the Bankruptcy Court on December 3, 2019. (B.D.I. 84) 1 The Order
granted in part Skye's Motion to Dismiss (B.D.I. 12), granted the Motion to
Dismiss Involuntary Chapter 7 Case filed by Skye Mineral Investors, LLC ("SMI")
and Clarity Copper, LLC ("Clarity Copper," and together with SMI and Skye, the
"Appellees") (B.D.I. 34), and denied as moot an emergency motion filed by
PacNet seeking appointment of an interim Chapter 7 trustee and an extension of
time for Skye to respond to the involuntary petition. The Bankruptcy Court set
forth the reasons for the Order in a bench ruling made on December 3, 2018
(B .D .I. 86, 12/3/18 Hr' g Tr. ("Bench Ruling")). For the reasons set forth herein, I
will affirm the Order.
The docket of the Chapter 7 case, captioned In re Skye Mineral Partners, LLC,
18-11430-LSS, is cited herein as "B.D.I. _." The appendix filed in support of
PacNet's opening brief (D.I. 8, 9) is cited herein as "A_," and the appendix filed
in support of the Appellees' answering brief (D.I. 11, 12) is cited herein as
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Skye is a holding company owned by SMI, Clarity Copper, PacNet, and
DXS Capital (U.S.) Limited. PacNet and DXS are part of an entity called the
Lippo Group. Skye formerly owned over 99 percent of the equity in CS Mining,
LLC, which operated a copper mine located in Utah. Noble Americas Corp. was a
secured lender to CS Mining.
The CS Mining Bankruptcy Case in Utah
In June 2016, some of CS Mining's creditors filed a petition for CS
Mining's involuntary Chapter 11 bankruptcy in the Bankruptcy Court for the
District of Utah. CS Mining ultimately consented to the involuntary filing and the
Court confirmed a plan for CS Mining's liquidation in April 2018. (DA675-682;
DA760-897). Pursuant to the plan, Skye's equity interest in CS Mining was
Two events occurred during the Utah bankruptcy that are relevant to this
appeal. First, pursuant to a settlement agreement that resolved an adversary
proceeding brought by CS Mining in the bankruptcy, CS Mining agreed to release
all claims that it held against Noble. (DA683-704). Second, in August 2017,
another Lippo Group entity, Tamra Mining Company, purchased substantially all
of CS Mining's assets, including CS Mining's litigation claims against the Lippo
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Group, through a court-ordered auction. In what the parties refer to as the Sale
Order, the Utah Bankruptcy Court overruled SMI's objections that Tamra's
purchase of the assets in question would deprive members of CS Mining and Skye
of their ability to bring a derivative action against members of the Lippo Group for
alleged fiduciary duty breaches and that the sale was unfair because Lippo Group
affiliates had put CS Mining into bankruptcy in order to acquire CS Mining's
assets at a significant discount. (A14).
The Chancery Court Action and Related Bankruptcy Litigation
On January 24, 2018, SMI and Clarity Copper filed a Verified Complaint in
the Delaware Court of Chancery, bringing certain claims directly, and others
derivatively on behalf of Skye, against PacNet, DXS, other members of the Lippo
Group, and Noble. (A202-253). The Verified Complaint essentially repeats the
allegations underlying SMI's objections that the Utah Bankruptcy Court had
overruled when it approved Tamra's purchase of CS Mining's assets-i.e., that the
defendants engaged in fraud and breached various fiduciary and contractual duties
by divesting SMI and Clarity Copper of the value of their equity positions in Skye,
acquiring CS Mining's assets at a windfall discount, and divesting Skye of its
equity interest in CS Mining. Id. SMI and Clarity Copper alleged that through
these actions, the Chancery Court defendants breached multiple provisions of
Skye's operating agreement (Counts 1, 2, 6, and 14); breached the Noble loan
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agreement (Count 9); violated fiduciary duties of loyalty, care, and candor (Counts
1 and 2); tortiously interfered with the Noble loan agreement (Count 7); breached
the implied covenant of good faith and fair dealing (Counts 8 and 1O); engaged in a
civil conspiracy (Count 5); and perpetrated multiple frauds (Counts 11 and 13). Id.
On February 16, 2018, PacNet removed the Chancery Court action to the
Bankruptcy Court for the District of Delaware. PacNet argued in support of
removal that the Chancery Court action was related to the CS Mining bankruptcy
case and it asked the Banlauptcy Court to transfer the removed action to the Utah
Banlauptcy Court. (DA1058-2026; DA2027-2041). Contemporaneously with the
removal, Tamra filed in the Utah banlauptcy case a motion asking that court (1) to
enforce the Sale Order and (2) to enjoin SMI and Clarity Copper from continuing
to prosecute their claims in the Chancery Court action. (A257-835; DA972-1057).
Tamra argued in support of its motion that the Chancery Court action involved
claims that CS Mining had possessed and had either sold to Tamra or had released
pursuant to its settlement agreement with Noble.
On June 4, 2018, the Utah Bankruptcy Court denied Tamra's motion.
(DA2215-2233). The Court held that it lacked jurisdiction to make a determination
regarding the nature of the claims in the Chancery Court action for four reasons.
Id. First, no "arising under" jurisdiction existed to evaluate the Chancery Court
action claims because enforcing a sale order was not a cause of action arising
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under the Bankruptcy Code. Id. Second, no "arising in" jurisdiction existed
because "the crux of the matter is essentially a dispute over property between two
non-debtor third parties-not an interpretation of what the [sale] order says."
(DA2230). As the Court explained: "These types of disputes could and are
routinely resolved in other, non-bankruptcy courts." Id. Third, no "related to"
jurisdiction existed because CS Mining was not a party to the Chancery Court
action, and the parties "agree[d] that the resolution of the [Chancery Court] Action
will have no effect on the Debtor or its bankruptcy estate." (DA2231). And
fourth, the "retention of jurisdiction" clause in the order that approved Tamra's
purchase of assets could not create jurisdiction where none otherwise existed.
On June 18, 2018, after receiving a copy of the Utah Opinion, the
Bankruptcy Court below remanded the Chancery Court action back to the
Chancery Court and denied the motion to transfer the action to the Utah
Bankruptcy Court. (DA2119-2122). The Bankruptcy Court granted this relief
because "it has been determined that bankruptcy jurisdiction does not exist over
the dispute in this action." (DA2121).
The Instant Petition and Second Removal of The Chancery
The day after the Bankruptcy Court remanded the Chancery Court action,
PacNet filed this involuntary bankruptcy proceeding. (DA2123-2127). Although
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PacNet is an equityholder of Skye, PacNet alleges in its petition that it is acting as
the holder of an "unsecured claim based on [a] loan guaranty agreement" in the
amount of approximately $5 million. Id. Three days later, PacNet and DXS again
removed the Chancery Court action to the Bankruptcy Court below. (DA135-292;
DA293-448; DA449-452). In support of removal, PacNet and DXS argued that the
Chancery Court action "is a core proceeding pursuant to 28 U.S.C. § 157(b)
because the claims in the Delaware Chancery Action are alleged to belong to
[Skye], a debtor in a chapter 7 proceeding pending before this Court, and
adjudication of the claims in the Delaware Chancery Action requires a resolution
of the issue of whether the claims are in fact property of [Skye's] estate, or whether
they are purchased claims belonging to Tamra." (DA140-41; DA298-99).
The Motions to Dismiss and Bench Ruling
SMI and Clarity Copper moved under Bankruptcy Code§ 707(a) and
alternatively under Bankruptcy Code§ 305(a) to dismiss the involuntary petition.
(A944-967). Skye joined in that motion and also moved to dismiss the involuntary
petition under Bankruptcy Code§ 303. (B.D.I. 34; A968-994). PacNet filed its
objection (A1088-1120) ("Objection"), and SMI, Clarity Copper, and Skye filed a
consolidated reply brief in support of their motions (Al 121-60). The motions to
dismiss were based on multiple grounds, including that: the involuntary petition
was filed in bad faith; PacNet cannot show that Skye is not paying its debts as they
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come due; PacNet assigned its right to the proceeds of the guarantee claim to the
CS Mining estate and, therefore, is not eligible to file the case; PacNet's claim is
subject to a bonafide dispute; PacNet is not eligible to file the involuntary case
because it is an insider holding a contingency claim; and the involuntary filing was
a litigation tactic and the case should be dismissed.
The Bankruptcy Court conducted an evidentiary hearing on the motions on
September 17, 2018. The parties jointly submitted a binder of thirty-seven
exhibits. (9/17/18 Hr'g Tr. 4:19-8:12; Al 164-68). At the outset, after argument
from both sides on the unavailability of a PacNet representative for deposition
prior to the hearing, and since the parties were prepared to proceed without
witnesses, the Bankruptcy Court ruled that it would proceed with the hearing
without witnesses. (Id. 4:19-12:8; Al 164-72). The record reflects that there was
no objection to this ruling.
During the hearing, PacNet made a series of admissions through its counsel
regarding its intent in filing the involuntary petition and other facts regarding the
two-party nature of the dispute at issue. Following the hearing, the Bankruptcy
Court took the matter under advisement.
On December 3, 2018, the Bankruptcy Court issued its Bench Ruling. The
Banlauptcy Court found that PacNet had failed to show that Skye is not generally
paying its debts as they come due. (Bench Ruling 8:24-9:3; A1318-19). In the
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Court's words: "There is no evidence that PacNet took any steps to collect on [a]
debt prior to filing the involuntary petition." (Id. 17: 14-16; Al 327). The Court
further explained that although the guaranty that PacNet seeks to enforce is
unconditional, "that does not mean that payment is due upon request"; rather, prior
to demand, the guarantee "is simply an obligation that might have to be paid." (Id.
8: 14-18; Al318). With respect to PacNet's purpose for the involuntary filing, the
Bankruptcy Court found that PacNet filed the involuntary petition in bad faith, as a
litigation tactic in connection with the Chancery Court action, to substitute a
Chapter 7 trustee for the Chancery Court plaintiffs as part of a two-party dispute.
(Id. 15:20-16:3; 19:24-20:6; A1325-26; A1329-30). The Court cited PacNet's
failure to make any effort to collect on its guaranty debt prior to forcing Skye into
Chapter 7 as evidence that PacNet filed the involuntary petition with an improper
purpose. (Id. 17:8-16; A1327).
On December 17, 2018, PacNet filed a timely notice of appeal. D.I. 1. The
appeal is fully briefed. D.I. 7, 10, 13. The Court did not hold oral argument
because the facts and legal arguments are adequately presented in the briefs and
record, and the decisional process would not be significantly aided by oral
JURISDICTION AND STANDARD OF REVIEW
I have jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a)(3). This
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Court has summarized the standards of review that govern its consideration of an
appeal from bankruptcy court as follows:
A District Court sits as an appellate tribunal when
presented with an appeal from a final order of a United
States Bankruptcy Court. This Court's standard of
review is to review factual findings for clear error, and
exercise plenary review over legal determinations. We
review basic and inferred facts under the clearly
erroneous standard. We exercise plenary review over
legal issues. In reviewing ultimate facts, which are a
mixture of fact and legal precept, we must break down
the question of law and fact and apply the appropriate
standard to each component.
Cal. Air Res. Bd. v. La Paloma Generating Co., No. 1:17-CV-1698, 2018 WL
3637963, at *2 (D. Del. July 31, 2018) (quotations and brackets omitted)
(co 11 ecting precedent).
The "decision to dismiss a petition for lack of good faith rests within the
sound discretion of the bankruptcy court." In re Tamecki, 229 F.3d 205, 207 (3d
Cir. 2000); accord In re Metrogate, LLC, 2016 WL 3150177, at *8 (Bankr. D. Del.
May 26, 2016); In re Shipman, 2012 WL 4498001, at *4 (Bankr. D. Del. Sept. 28,
A district court will "not 'disturb an exercise of discretion [by the
Bankruptcy Court] unless there is a definite and firm conviction that the
[Bankruptcy] court ... committed a clear error of judgment in the conclusion it
reached upon a weighing of the relevant factors."' In re Nutraquest, Inc., 434 F.3d
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639, 645 (3d Cir. 2006) (quoting In re Orthopedic Bone Screw Prods. Liab. Litig.,
246 F .3d 315, 320 (3d Cir. 2001 )). An abuse of discretion "must rest on a clearly
erroneous finding of fact, an errant conclusion of law or an improper application of
law to fact." In re Diet Drugs, 778 F. App'x 111, 115 (3d Cir. 2019)). A court
abuses its discretion where its decision was "arbitrary, fanciful or clearly
unreasonable." Democratic National Committee v. Republican National
Committee, 673 F.3d 192,201 (3d Cir. 2012) (quoting Moyer v. United Dominion
Industries, Inc., 473 F.3d 532,542 (3d Cir. 2007)); Zacharias v. Foreman, 2015
WL 849048, at* 1 (D. Del. Feb. 23, 2015). The test for an abuse of discretion is
"not what this court would have done under the same circumstances; that is not
enough. The court must feel that only one order could have been entered on the
facts." Diet Drugs, 778 F. App'x at 115.
PacNet makes three arguments on appeal. I address them seriatim.
Burden of Proof
PacNet first faults the Bankruptcy Court for "failing to conclude that [Skye],
the alleged debtor in this case, bore the burden of proof in demonstrating that the
involuntary petition was not filed in good faith." D.I. 7 at 13. This contention,
however, rests on a distortion of what the Bankruptcy Court actually said.
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The Bench Ruling and Order are unusual in that they resolve dual motions to
dismiss (i) under § 303 by Skye, and (ii) under§ 707(a) or§ 305(a) by Skye, SMI,
and Clarity Copper. In the proceedings below, the parties disputed how the burden
of proof should be imposed. Skye and the other movants for dismissal took the
position that it was PacNet's burden to show that the involuntary filing was made
in good faith. PacNet took the position that the moving parties bore the burden of
establishing that PacNet had filed the petition in bad faith. The parties maintain
these respective positions on appeal.
Binding legal authority lends support to both sides' positions. In In re
Forever Green Athletic Fields, Inc., 804 F.3d 328, 335 (3d Cir. 2015), the Third
Circuit held that when a motion to dismiss an involuntary petition is filed pursuant
to § 303 "in terms of allocating burdens of proof, [petitioning] creditors are
presumed to have acted in good faith," and "[t]o dismiss the petition, the [alleged]
debtor must show by a preponderance of the evidence that the [petitioning]
creditors acted in bad faith." Id. at 335 (citing In re Bayshore Wire Prods. Corp.,
209 F.3d 100, 105 (2d Cir. 2000)). On the other hand, in In re Tamecki, 229 F.3d
205, 207 (3d Cir. 2000), the Third Circuit held that that when a motion to dismiss
filed pursuant to§ 707(a) "calls into question a petitioner's good faith, the burden
shifts to the petitioner to prove his good faith." See also id. ("Section 707(a)
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allows a bankruptcy court to dismiss a petition for cause if the petitioner fails to
demonstrate his good faith in filing.").
As the Bankruptcy Court noted, neither In re Forever Green Athletic Fields,
In re Tamecki, nor any other case cited by the parties addresses how to allocate the
burden of proof when a court is confronted simultaneously with motions to dismiss
under§ 303 and§ 707. (Bench Ruling 9:21-10:17). The Bankruptcy Court
determined, however, that it "did not need to reconcile the burden of proof [issue]
here because PacNet's motivation or purpose in filing the involuntary petition is
not disputed. The record is clear on why PacNet filed this case." (Al320). The
Court then discussed in detail the record and what it showed about PacNet's
purpose in filing the petition and the Court explained how that record warranted a
finding of bad faith on PacNet's part. (A1321-A1330). Although the Court did
not use the words "I find by a preponderance of the evidence that PacNet acted in
bad faith," it is clear from its ruling that that is precisely what it did. The Court
chose not to "reconcile" In re Forever Green Athletic Fields with In re Tamecki or
the evidentiary standards of§ 303 with§ 707 because it did not have to do so in
this case. Applying either standard resulted in the same conclusion-PacNet acted
in bad faith. Thus, necessarily implicit in the Bankruptcy Court's ruling is a
finding that Skye and the movants established by a preponderance of the evidence
that PacNet acted in bad faith. Indeed, PacNet admits as much in its opening brief.
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Its second argument on appeal is that "the Bankruptcy Court erred as a matter of
law by concluding that [Skye] carried its burden of demonstrating that PacNet
acted in bad faith by filing the involuntary petition." D.I. 7 at 19. I find therefore
that the Bankruptcy Court did not erroneously fail to conclude that Skye bore the
burden of proof in this matter.
Whether PacNet Filed the Petition in Bad Faith
As just noted, PacNet's second argument is that the Bankruptcy Court erred
in concluding that Skye established by a preponderance of the evidence that
PacNet acted in bad faith when it filed the involuntary petition. I cannot say,
however, that the Bankruptcy Court's conclusion that PacNet acted in bad faith
constituted a clear error of judgment or was arbitrary, fanciful, or clearly
unreasonable. On the contrary, the Bankruptcy Court offered a detailed and
thoughtful explanation about how PacNet's own admissions and the statements of
its counsel warranted a finding that PacNet had filed the involuntary petition not to
further a legitimate bankruptcy purpose or collect a debt that Skye had refused or
even been demanded to pay, but instead to gain a tactical advantage in a two-party
dispute between majority and minority equity holders that was properly before the
Court of Chancery. (Bench Ruling 19:21-20:6). 2
PacNet raises the issue of whether its counsel's statements, in written legal
pleadings and at oral argument, were admissible evidence of PacNet' s intent. D.I.
7 at 20-27. According to PacNet they were not, and the Bankruptcy Court had
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"zero evidence" before it regarding the relevant factors in assessing PacNet's
purpose in filing the involuntary petition. "A trial judge's decision as to whether a
lawyer's statement is a judicial admission is reviewed on appeal for abuse of
discretion." Robert E. Larsen, Navigating the Federal Trial§ 12:23 (2018).
The totality of the circumstances test includes a review of both subjective
motivations and the objective reasonableness of a petitioner's actions before filing
an involuntary petition. In re Luxeyard Inc., 556 B.R. 627, 641-42 (Bankr. D. Del.
2016). In determining that the "the record is clear on why PacNet filed this case,"
the Bankruptcy Court did not rely solely on statements made in oral arguments in
assessing PacNet's subjective intent. As the Bankruptcy Court notes, "PacNet tells
us in its opposition, which was echoed during argument, this opposition as
incorporated into its response to interrogatory which was Exhibit 19 and, in
particular its response to Interrogatory 1." (Bench Ruling at 10:25-11 :4 (emphasis
added)). "PacNet filed this case in order to have an independent Chapter 7 Trustee
appointed to evaluate and adjudicate any claims the alleged debtor owns against
any party." (Id. at 11 :5-8). PacNet does not explain why the Bankruptcy Court's
consideration of PacNet's statements in briefs and discovery responses constituted
an abuse of discretion.
More importantly, courts in this district recognize that, because an attorney
is a party's "authorized legal agent," his or her statements are party admissions.
See, e.g., United States v. Cook, 2018 WL 6499872, at *8 (D. Del. Dec. 11, 2008).
The Court has noted "ample authority" for the proposition "that an attorney's
statement may bind the party whom the attorney represents." In re Joy Global,
Inc., 346 B.R. 659, 665 n.13 (D. Del. 2006). This is consistent with the general
rule across jurisdictions that an attorney's statement "is treated as a judicial
admission when the statement (1) is made during a judicial proceeding; (2) deals
with a fact; and (3) is deliberate, clear, and unambiguous. When these three
elements are met, the statement is viewed as conclusive on the factual issue, and
binds the party both at trial and on appeal." Larsen, supra,§ 12:23 (2018)
(collecting the extensive precedent from the Circuit Courts of Appeal). "Such
binding statements can be made almost anytime during the litigation," including
"briefs" and during "oral arguments." Larsen, supra, § 12:23. Accordingly, an
attorney's statements in court in support of his client's legal "positions" may
constitute a party admission.
The cases cited by PacNet suggesting a different result are inapposite. See
D.I. 7 at 20-21. In each of these three cases, the issue was whether a lawyer's
representation regarding an underlying, unadmitted, out-of-court alleged piece of
evidence - e.g., the statements of an IRS official, the testimony that a client would
give, the content of a written report was itself "evidence." In each case, the court
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In the context of an involuntary petition, the standard for evaluating a
petitioning creditor's bad faith is the "totality of the circumstances," Forever
Green, 804 F.3d at 335, which is "a fact intensive review." In re Diamondhead
Casino Corp., 540 B.R. 499, 507 (Bankr. D. Del. 2015); see also In re
Diamondhead Casino Corp., 2016 WL 3284674, at *16 (Bankr. D. Del. June 7,
2016); In re Metrogate, LLC, Case No. 15-12593 (KJC), 2016 WL 3150177, at
* 12 (Bankr. D. Del. May 26, 2016). The record here justifies the Bankruptcy
Court's finding of bad faith based on the totality of the circumstances. PacNet
filed the involuntary petition to move the litigation out of the Chancery Court in
order to substitute a Chapter 7 trustee for the plaintiffs in the Chancery Court
action. (See Bench Ruling 11:15-20 (A1321); 15:20-16:3 (Al325-26); 16:5-6
(A1326); 16:11-14, 22-23 (Al326); 19:24-20:6 (A1329-30)). PacNet filed the
involuntary petition a day after an adverse judgment forcing it to litigate the
Chancery Court action in state court. Its filing was a direct response to the
Bankruptcy Court's remand of the Chancery Court action. Skye experienced no
other changes - financial, operational, or otherwise - that can explain the
concluded that such a representation was not evidence. Those holdings have
nothing to do with the facts here, where the issue is whether the statements of a
party's counsel are evidence of the party's subjective intent regarding the very
subject matter of counsel's role - namely to manage litigation.
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involuntary petition's "suspicious" and "telling" timing. Forever Green, 804 F.3d
at 336; Metrogate, 2016 WL 3150177, at *17.
PacNet admitted that the Utah Bankruptcy Court's "failure to reach the
ultimate issue of whether CS Mining (or [Skye]) was the owner of the claims being
asserted by the Majority Owners" prompted PacNet to file the Involuntary
Petition." (Objection at 3 (third bullet point); Al 094). PacNet thus admits that it
filed the involuntary petition to redress the fact that the Utah Bankruptcy Court
would not resolve whether the Skye's claims lack merit.
As a minority interest holder in the Skye, PacNet "could [have] br[ought] a
derivative action on behalf of [Skye] against Clarity Copper, Skye Mineral
Investors and their principals in the Court of Chancery" to pursue any meritorious
claims that do exist. (Bench Ruling 11:25-12:5; A1321-22)). In stating in its
Objection that it "should not have to prejudice its legal position vis-a-vis CS
Mining and [Skye]" by filing a derivative claim," (Objection at 22 n.16; Al 113),
PacNet acknowledged that the hypothetical claims it refers to (and elsewhere
denies) can be pursued derivatively. PacNet thus admitted to the Bankruptcy Court
that it agreed that it would be possible for PacNet to file a derivative action on
behalf of Skye as a matter of corporate law. (9/17/18 Hr'g Tr. 67: 19-68:2; 68:1621; A1227-28). PacNet further admitted to the Bankruptcy Court that, prior to
filing the involuntary petition, PacNet had tried to get a receiver appointed, that
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PacNet could consider the alternative or option of trying again to have a receiver
appointed in Chancery Court, and that PacNet could have tried to get a receiver
appointed in state court again. (Id. 77:10-20 (Al237); 132:5-13 (A1292)).
The record further supports the Bankruptcy Court's conclusion that the
reason that PacNet was not pursuing other remedies is that doing so would be
disadvantageous to it (wearing its equity and defendant hats) in the Chancery Court
action. (Bench Ruling 12:5-11 (A1322); 15:23-16:4 (A1325-26); 18:25-19:4
(A1328-29)). "With its equity hat on it also has the right to bring a derivative
action on behalf of the alleged debtor. To date it has not chosen to do so because it
values its defenses in the Chancery Court action greater than any recovery on its
guarantee." (Id. 18:25-19:4; A1328-29). PacNet admitted in its Objection that it
did not want to "prejudice its legal position vis-a-vis CS Mining and [Skye]" by
filing a derivative claim. (Objection ,r 45 n.16; Al 113). At oral argument,
PacNet's counsel confirmed that PacNet could, but did not want to, file a
derivative action as a matter of corporate law because in doing so PacNet would
prejudice its defenses in the Chancery Court action. (9/17/18 Hr'g Tr. 65:6-10
(A1225); 67:19-68:2 (A1227-28); 68:16-21 (A1228)).
PacNet also contended in its Objection that appointing a Chapter 7 trustee
was "a more efficient remedy" than proceeding derivatively in the Chancery Court
(Objection ,r 45 n.16; Al 113), underscoring that PacNet simply preferred the
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Bankruptcy Court over the Chancery Court. PacNet admitted to the Bankruptcy
Court that, prior to filing the involuntary petition, PacNet had tried to get a receiver
appointed, and that PacNet could consider the alternative or option of trying again
to have a receiver appointed in Chancery Court, but that PacNet had declined to
pursue that strategy prior to the involuntary petition because it assumed that SMI
and Clarity Copper would object, the Chancery Court would have to decide the
issue, no receiver would have been appointed, and therefore it would have all been
a waste of time. (9/17/18 Hr'g Tr. 77:10-20 (A1237), 132:5-13 (A1292)). These
admissions support the Bankruptcy Court's bad faith determination. Creditors who
file bankruptcy petitions "to gain an advantage in pending litigation" - such as by
avoiding the destruction of defenses it wants to advance in parallel cases - "act in
bad faith." Forever Green, 804 F.3d at 335.
PacNet's admissions also supported the Bankruptcy Court's conclusion that
PacNet's primary purpose in filing the involuntary petition was not the collection
of debt, including where PacNet's view is that the Skye's current legal claims are
not viable and thus have no value. (Bench Ruling 11:8-10, 21-25 (A1321); 15:2016:3 (A1325-26); 19:24-20:6 (A1329-30)). The record supports this conclusion.
First, PacNet believes "that all claims in the Chancery Court action are
double derivative claims and were sold to Tamra in the CS Mining bankruptcy."
(Id. 11 :21-25; Al321). As the Bankruptcy Court observed, PacNet "wants me to
Case 1:18-cv-02008-CFC Document 19 Filed 11/16/20 Page 20 of 24 PageID #: 3957
either assume or make an assessment that the claims brought in the Chancery Court
action on behalf of the alleged debtor are non-meritorious. I am not in a position to
do that." (Id. 18:3-6; A1328). In its removal notice, PacNet states that bankruptcy
jurisdiction exists for this Court to make "a determination as to whether those
claims are property of [the Skye's] bankruptcy," which PacNet asserts "once
belonged to CS Mining and now belong to Tamra." (DA-00136-37; DA-0029495). In its motion for an interim trustee, PacNet states that Skye supposedly has
"an interest in properly analyzing [the Chancery Action] claims ... and having the
Court determine whether they are property of [Skye's] estate." (A1003). PacNet
thus argues that the Bankruptcy Court has jurisdiction over the Chancery Court
action to determine that the claims are not property of the estate. This is the
opposite of the typical Chapter 7 case, which is filed to prevent asset dissipation
and to maximize estate recoveries. PacNet admitted to the Bankruptcy Court that
PacNet's view is that Skye's real litigation-related assets are its potential claims
against Richards and Walker, 3 which claims Skye had failed to pursue because it
has conflicted management that has repeatedly shown an inability to act in Skye's
best interest. (9/17/18 Hr'g Tr. 91: 16-92: 17; A1251-52).
David J. Richards controls SMI and is SMI' s appointee to the Skye's board.
Clinton Walker controls Clarity Copper and is Clarity Copper's appointee to the
Skye's board. D.I. 7 at 4.
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PacNet further admitted to the Bankruptcy Court its view that Skye does not
have valuable claims in the Chancery Court action because any of the alleged
misconduct harmed CS Mining, such that CS Mining would own the claims, and
that PacNet had purchased those claims in the CS Mining bankruptcy. (Id.
129:20-130:1; A1289-90). As it admitted to the Bankruptcy Court, PacNet's view
is that Skye's claims in the Chancery Court action lack value not just because of
who Skye has named as defendants, but also because of the nature of the legal
theory, explaining PacNet's view that if the sole basis for seeking recovery from
Richards and Walker were the same theory alleged in the Chancery Court action,
then no viable claims exist. (Id. 133:19-23; A1293).
Skye is a non-operating company with no business to liquidate: PacNet did
not identify any dissipation of assets or other legitimate concern that could justify
an involuntary Chapter 7 liquidation. Although PacNet asserts that it filed the
involuntary petition for the benefit of appointment of a Chapter 7 trustee, the
Bankruptcy Court asserted that the "forum of the Chancery Court action is wholly
irrelevant to collection of PacNet's debt." (Bench Ruling 16:23-17:3; Al326-27).
"PacNet should be neutral as to the source of payment for its debt. If the Chancery
Court action is successful it will serve as a source of recovery for the $5 million
dollars and PacNet may be able to set-off the $5 million dollar claim against any
judgment against it." (Id. 17:23-18:3; Al327-28).
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Indeed, PacNet agreed with the Bankruptcy Court's view that PacNet should
be neutral as to the source of payment for its debt. (9/17/18 Hr'g Tr. 91 :5-7;
A1251). PacNet further admitted to the Bankruptcy Court that one of its bases for
filing the involuntary petition was that, with respect to the prospect of any recovery
for Skye in the Chancery Court, PacNet did not know how those proceeds would
be paid out in that litigation, referring to whether a receiver would then be
appointed, whether notice and an opportunity to file claims would be afford to
creditors, or whether many creditors would make claims. (Id. 83 :8-86: 1; A1243A1246).
As the Bankruptcy Court noted in its ruling, "PacNet also wants me to
assume that if plaintiffs are successful in the Chancery Court action Clarity Copper
and Skye Mineral Investors will abscond with the funds or use the funds to pay
other creditors. I have no evidentiary basis on which to draw such a conclusion."
(Bench Ruling 18:7-11; A1328).
These findings support a conclusion that the involuntary petition did not
serve the purpose of "preserving an ongoing concern or maximizing the value of
the debtor's estate," or any other "valid bankruptcy purpose." In re Integrated
Telecom Express, Inc., 384 F.3d 108, 119-20 (3d Cir. 2004). Like the holding
company in In re 15375 Mem 'l Corp. v. Bepco, L.P., 589 F.3d 605 (3d Cir. 2009),
PacNet's "sudden decision to file for bankruptcy despite [the purported debtor]
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having been dormant and without employees or offices for several years" is an act
that "cannot escape the conclusion that the filings were a litigation tactic." Id. at
Whether Skye was Not Paying Its Debts as They Came Due
Finally, PacNet argues that the Bankruptcy Court erred in concluding that
PacNet had failed to demonstrate that Skye was not paying its debts as they came
due. The Bankruptcy Court found that "[t]here is no evidence that PacNet took
any steps to collect on [its] debt prior to filing the involuntary petition," and no
evidence that Skye engaged in any improper conduct. (Id. 17:14-16; A1327). The
record supports this conclusion. Indeed, PacNet admitted that it had not even
requested payment from Skye on that claim. (See DA2143, RFA No. 5).
A petitioning creditor must both satisfy the statutory requirements of§ 303
and act with a valid bankruptcy purpose, or else the bankruptcy court will dismiss
the petition. Forever Green, 804 F.3d at 334. The Bankruptcy Court's findings
and the undisputed evidence established that PacNet did not possess a valid
bankruptcy purpose in filing the involuntary petition. The record also supports that
the Bankruptcy Court's conclusion that "the involuntary petition was filed as a
litigation tactic to impact the Court of Chancery action in a two-party dispute
between majority and minority equity holders and the alleged debtor." (Bench
Case 1:18-cv-02008-CFC Document 19 Filed 11/16/20 Page 24 of 24 PageID #: 3961
Ruling 19:24-20:3; A1329-30). For the reasons discussed above, the Bankruptcy
Court did not abuse its discretion in dismissing the involuntary petition.
Accordingly, I will affirm the Bankruptcy Court's Order granting in part the
motions to dismiss the involuntary petition.
The Court will issue an Order consistent with this Memorandum Opinion.
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