Legacy Real Estate Investments, LLC et al v. Miller

Filing 17

OPINION AND ORDER by Chief Judge Gregory K Frizzell, dismissing/terminating case (terminates case) (hbo, Dpty Clk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA

IN RE:
JAMES RANDALL MILLER,
Debtor,
LEGACY REAL ESTATE INVESTMENTS,
LLC, et al.,
Appellant/Cross-Appellees,
v.
JAMES RANDALL MILLER,
Appellee/Cross-Appellant.

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Case No. 11-CV-130-GKF-FHM
(lead case)
Case No. 11-CV-460-GKF-FHM
(consolidated)
Case No. 11-CV-461-GKF-FHM
(consolidated)

OPINION AND ORDER
Before the court is the Report and Recommendation of United States Magistrate Judge
Frank H. McCarthy on the appeal from the United States Bankruptcy Court for the Northern
District of Oklahoma. [Dkt. #32]. Appellee/Cross-Appellant James Randall Miller (“Miller”)
has filed an objection [Dkt. #33] to the Report and Recommendation. Likewise, petitioning
creditors Legacy Real Estate Investments, LLC (“Legacy”), Summit Bank (“Summit”) and Louis
W. Bullock and Patricia W. Bullock d/b/a Bullock & Bullock (“Bullock”), collectively referred
to as “Petitioning Creditors”) have filed a partial objection to the Report and Recommendation
[Dkt. #34].

I. Background/Procedural Status
The Bankruptcy Court has issued decisions that are the subject of three appeals: Legacy
Real Estate Investments, L.L.C. et al. v. James Randall Miller, Case No. 11-CV-130-GKF-FHM;
James Randall Miller v. Legacy Real Estate Investments, LLC, Case No. 11-CV-460-GKF-FHM;
and Legacy Real Estate Investments, L.L.C., et al. v. James Randall Miller, 11-CV-461-GKFFHM.1 The involuntary bankruptcy petition filed against the debtor by four of his creditors was
dismissed based on the Bankruptcy Court’s finding that three of the four creditors did not qualify
to be petitioning creditors under 11 U.S.C. § 303(b)(1). Further, the Bankruptcy Court awarded
the debtor $259,773.27 in attorney fees and expenses against the Petitioning Creditors, jointly
and severally. The Bankruptcy Court found the petition was not filed in good faith, but denied
debtor’s request for compensatory damages because he failed to prove causation or the amount
of damages. The Bankruptcy Court also declined to award punitive damages, concluding the
attorney fee award sufficiently served the deterrent purpose of punitive damages.
The Petitioning Creditors sought reversal of:
1. the Bankruptcy Court’s conclusion that the claims of Legacy Real Estate Investments,
LLC and Summit Bank were the subject of a bona fide dispute as of the date of the
filing of the involuntary petition;
2. the dismissal of the involuntary case and remand of the case to the Bankruptcy Court
for further proceedings; or, at a minimum,
3. the Bankruptcy Court’s joint and several award of attorneys’ fees and expenses in
favor of Miller and against Bullock; and

1

The first appeal was filed on March 1, 2011, following the Bankruptcy Court’s order
dismissing the involuntary bankruptcy petition. The second and third appeals were filed on July
22, 2011, following the Bankruptcy Court’s order awarding $259,773.27 in attorney fees against
the Petitioning Creditors and denying Miller’s request for damages. On August 4, 2011, the
appeals were consolidated under the first-filed appeal, Case No. 11-CV-130. The records on the
appeals are located in Case No. 11-CV-130 at Dkt. #5 (“Dkt. #5”), in Case No. 11-CV-460 at
Dkt. #3 (“Dkt. #3”), and in Case No. 11-CV-141 at Dkt. #6 (“Dkt. #6”).
2

4. the Bankruptcy Court’s conclusion that the involuntary petition was filed in bad faith.
[Dkt. #25 at 64].
Miller appealed the Bankruptcy Court’s denial of his claims for actual and punitive
damages. He seeks an award of actual damages “of at least $675,000.00” and reversal and
remand of the punitive damages decision [Dkt. #24 at 10].
In his Report and Recommendation, Magistrate Judge McCarthy recommended that the
Bankruptcy Court’s decision be affirmed, except for the Bankruptcy Court’s finding that the
involuntary petition was not filed in good faith.
The Petitioning Creditors object to the Magistrate Judge’s recommendation to affirm the
Bankruptcy Court’s finding that the claims of Legacy and Summit were the subject of a bona
fide dispute. Further, they object to the recommendation to affirm the Bankruptcy Court’s ruling
holding Bullock jointly and severally liable for Miller’s attorney fees and expenses.
Miller objects to the Magistrate Judge’s recommendation to reverse the Bankruptcy
Court’s finding that the involuntary petition was filed in bad faith. He also objects to the
recommendation to affirm the Bankruptcy Court’s denial of his claim for actual and punitive
damages.
II. Standard of Review
Pursuant to Fed.R.Civ.P. 72(b)(3), the court is required to determine de novo any part of
the Magistrate Judge’s disposition that has been properly objected to. See also 28 U.S.C. §
636(b)(1).
On appeal of a bankruptcy decision, the district court is bound to accept the bankruptcy
court’s findings of fact unless they are clearly erroneous, but may examine its conclusions of law
de novo. Bartmann v. Maverick Tube, 853 F.2d 1540, 1543 (10th Cir. 1998). A factual finding

3

is clearly erroneous when the reviewing court, considering all of the evidence, is left with the
definite and firm conviction that a mistake has been committed. Id. (quoting Anderson v. City of
Bessemer City, 470 U.S. 564, 673 (1985)). Under the abuse of discretion standard, an appellate
court will not disturb a trial court’s decision absent “a definite and firm conviction that the lower
court made a clear error of judgment or exceeded the bounds of permissible choice in the
circumstances.” Thomas v. International Business Machines, 48 F.3d 478, 482 (10th Cir. 1995)
(quoting United States v. Ortiz, 804 F.2d 1161, 1164 n. 2 (10th Cir. 1986).
III. Analysis
A. Petitioning Creditors’ Objections
1. Whether the Claims of Legacy and/or Summit Qualified Were
the Subjects of Bona Fide Disputes
In order to file an involuntary petition in bankruptcy, a creditor must be “a holder of a
claim against [the alleged debtor] that is not contingent as to liability or the subject of a bona fide
dispute as to liability or amount.” 11 U.S.C. § 303(b)(1). The Petitioning Creditors appeal the
Bankruptcy Court’s determination that the claims of Legacy and Summit were subject to a bona
fide dispute.
The seminal case in this circuit regarding the meaning of the term “bona fide dispute” is
Bartmann. There, the court explained:
The term “bona fide dispute” is not defined in the Code and has been the subject of
much debate. We choose to adopt the standard propounded by the Seventh Circuit
as to what constitutes a bona fide dispute: the bankruptcy court must determine
whether there is an objective basis for either a factual or a legal dispute as to the
validity of the debt. The court need not determine the probable outcome of the
dispute, but merely whether one exists. Once the petitioning creditor establishes
a prima facie case that its claim is not subject to a bona fide dispute, the burden
shifts to the debtor to present evidence of a bona fide dispute. Under this objective
approach, the debtor’s subjective intent does not control whether a claim is considered
to be subject to a bona fide dispute.

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Id. at 1543-44 (quotations and citations omitted). The Bankruptcy Appellate Panel of the Tenth
Circuit has held that “[t]he mere existence of pending litigation is insufficient to establish the
existence of a bona fide dispute,” but “the pendency of litigation suggests that a bona fide
dispute exists.” In re Red Rock Rig 101, Ltd., 397 B.R. 545, 2008 WL 2052732, *1 (10th Cir.
BAP (Okla.)) (unpublished opinion) (citations omitted).
The Bankruptcy Court found that Bullock met the requirement of having an undisputed
claim, but that the remaining petitioning creditors—Legacy, Summit and Harley—did not. [Dkt.
#5-3 at 626-668]. Harley did not appeal this finding. Since there must be at least three
qualifying creditors, the Bankruptcy Court’s dismissal of the involuntary petition must be
affirmed if the claims of either Legacy or Summit are the subject of a bona fide dispute as to
liability or amount. See 11 U.S.C. § 303(b)(1).2
a. Legacy
The Bankruptcy Court found there was a bona fide dispute about Legacy’s claim against
Miller based on a release of liability in a Foreclosure Agreement between the two parties.
Legacy loaned money to Mill Creek Lodge Estates, LLC, Mill Creek Water Sales and
Distribution, LLC, and Mill Creek Management Co., LLC (collectively, “Mill Creek”), which
were secured by real estate in Colorado and Tulsa, Oklahoma. [Dkt. #5-1 at 50]. Miller, the
manager and principal of the Mill Creek entities, personally guaranteed the loans. [Id.]. The
loans fell into default in 2007. On June 19, 2009, the parties entered into a Foreclosure
Agreement in which Miller and Mill Creek acknowledged a debt to Legacy of $2,882,574,31 and
confessed judgment in the amount of the debt. [Dkt. #5-1 at 50-57]. Mill Creek and Miller also

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The statute requires that an involuntary case be commenced by “three or more entities, each of
which is…a holder of a claim against such person that is not contingent as to liability or the
subject of a bona fide dispute as to liability or amount…” 11U.S.C. § 303(b)(1).
5

consented to foreclosure of the Legacy liens on the Colorado property and agreed they would not
contest or interfere with the foreclosure proceedings. [Id.]. In exchange, as long as Miller was
not in default of his promises, Legacy would release Mill Creek and Miller of their liability as
borrower and guarantor, respectively. [Id.].
Legacy filed a foreclosure action against Mill Creek, Miller and other interest holders in
San Juan County, Colorado, District Court on July 20, 2009. In its Complaint, Legacy asserted
claims for foreclosure of deeds of trust on the Colorado real property, water rights to the property
and personal property held by defendants (including Miller) in San Juan County. [Dkt. #5-2 at
148-158]. Legacy also sought reformation of the deeds of trust on the Colorado properties and a
money judgment for breach of promissory notes against Mill Creek. [Id.]. Legacy did not seek a
money judgment against Miller. [Id.].3
Mill Creek and Miller contested the action. The Colorado court granted Legacy summary
judgment on October 29, 2009 [Dkt. #5-2 at 268-270], and entered Judgment of Foreclosure En
Masse on November 24, 2009. [Dkt. #5-2 at 271-287]. In its summary judgment order, the court
found there was no genuine issue for trial regarding the Mill Creek defendants’ default under the
loan agreements and their admission to indebtedness in the amount of $2,882,574.31 under the
Foreclosure Agreement. [Dkt. #5-2 at 269].4 Further, it found there was no genuine dispute of
material fact that defendants agreed to a non-contested foreclosure pursuant to the Foreclosure

3

The Bankruptcy Court, in its Findings of Fact, stated that Legacy sought money judgment
against MCLE, MCWSD and Miller in the amount of $2,882,574.31. [Dkt. #5-3 at 631]. A
review of the Complaint in the Colorado Foreclosure confirms this statement was incorrect
with respect to Miller.
4

Additionally the Judgment and Decree of Foreclosure En Masse granted “judgment in rem with
respect to the real property … in favor of Plaintiff [Legacy] and against Defendants [MCLE and
MCWSD] in the amount of $2,882,574.31.” [Dkt. #5-2 at 313]. The Judgment did not impose a
money judgment against Miller. [Dkt. #5-2 at 310].
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Agreement and that Legacy was entitled to foreclose on the real and personal property and water
rights of defendants as secured by the loan agreements. [Id.]. The Colorado court also found
Miller’s claims of duress and inappropriate financial pressure to enter into the Foreclosure
Agreement were not genuine issues of material facts. [Id.].
The Colorado court found that Legacy was entitled to its attorney’s fees and costs of
collection and foreclosure, “except as to the parties to the ‘Foreclosure Agreement,’ because
attorneys fees and costs were waived as to them.” [Id.].
Legacy moved for an amendment and clarification of the Colorado court’s findings
regarding attorney fees. [Dkt. #5-3 at 78-84]. It argued that the loan documents gave it the right
to collect attorney fees in the event of default; the Foreclosure Agreement did not provide that
the amount of indebtedness confessed included attorney fees and costs; and the Foreclosure
Agreement provided that in an action to enforce the Foreclosure Agreement, the prevailing party
was to be awarded its costs and expenses, including reasonable attorney fees. [Id. at 81].
Legacy stated that it “necessarily filed its Motion for Summary Judgment seeking to enforce the
Foreclosure Agreement due to Defendants’ noncompliance thereunder” and “[a]s a result,
Plaintiff is entitled to collect its attorneys’ fees and costs.” [Id. at 81-82]. Legacy contended it
was also entitled to recover attorneys’ fees under the loan documents. [Id.].
The Colorado court denied Legacy’s motion for fees. [Dkt. #5-3 at 85-86]. The court
acknowledged Legacy was the prevailing party in the action and the loan agreements contained
provisions which entitled them to attorneys’ fees and costs incurred for collection under the
defaulted loans, but that the provisions of the Foreclosure Agreement—specifically, Paragraphs
4, 10(d) and 13(b)—precluded recovery of attorneys’ fees. [Id.].

7

Paragraph 4 of the Foreclosure Agreement, “Confession of Judgment,” provided that the
borrower was to confess judgment in the total indebtedness amount ($2,882,574.32) and take
actions to support the lender’s position in legal proceedings, not to present any defense or
objections to the legal proceedings, and to sign all consents or other documents requested by the
lender’s counsel in connection with the legal proceedings. [Dkt. #5-1 at 51]. The paragraph
concluded:
So long as Borrower and Guarantor are not in default hereunder, Lender agrees not
to seek any deficiency judgment against either Borrower or Guarantor.
[Id.]. Paragraph 10 (“Miscellaneous”) subsection (d) provided in pertinent part:
If any action, suit or other proceeding is brought to enforce, or for the breach of,
this Agreement, the prevailing party shall be awarded its costs and expenses
(including reasonable attorneys’ fees and costs).
[Id. at 54, ¶10(d)]. Paragraph 13 (“Mutual Releases”), subsection (b) provided:
…so long as Borrower and Guarantor shall have performed all of their obligations
hereunder, Lender…shall be deemed to have fully and completely released Borrower
and Guarantor from any and all liabilities, damages, causes of action and all claims
of any nature whatsoever that Lender has against either Borrower or Guarantor arising
out of any transaction occurring prior to the execution hereof.
[Id. at 55, ¶13(b)].
In its ruling denying Legacy’s Motion for Amendment, the Colorado court held Legacy
was not entitled to recover attorneys’ fees and costs under the Foreclosure Agreement because
“Legacy did not allege or prove a breach of contract of the ‘Foreclosure Agreement’ by
Defendants Miller as to any of the preconditions under the agreement that would entitled Legacy
to a judgment for costs and attorney fees against “defendants Miller.” [Dkt. #5-3 at 86].
The Bankruptcy Court found that Legacy’s viability as a creditor hinged on the
Foreclosure Agreement. [Dkt. #5-3 at 653]. Legacy argued that whether the release of Miller
contained in the Foreclosure Agreement was enforceable was not at issue in the Legacy
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foreclosure, because Legacy did not plead breach of the Foreclosure Agreement and did not seek
to enforce it. [Id.]. However, the Bankruptcy Court concluded otherwise, noting that Legacy’s
counsel had told the Colorado court the Foreclosure Agreement was “the most critical element”
to resolution of the Legacy Foreclosure. The Bankruptcy Court observed that the Colorado
court, both in its summary judgment ruling and in its order denying Legacy’s motion to
reconsider, rejected Legacy’s claim for attorney fees based on the release contained in the
Foreclosure Agreement. [Id.].
The Bankruptcy Court assumed for purposes of its decision that after application of the
proceeds of the sale of its collateral, Legacy had a remaining balance due in excess of $1.6
million. The Bankruptcy Court also commented:
There can be no doubt that the Foreclosure Agreement contains a release of Miller.
There is also little question that Miller’s release was conditional. Put simply, in
order to reap the benefits of the Foreclosure Agreement (including the release of
liability), Miller was required to cooperate with Legacy in the Legacy Foreclosure.
The record before the Court suggests that he did not.
[Dkt. #5-3 at 653]. It stated, “The question is whether there exists a bona fide dispute regarding
Miller’s liability for any such amount.” [Id. at 654-655]. The court concluded “[t]he finding of
the Colorado District Court that the release of Miller precluded an award of attorney’s fees
against Miller in the Colorado Foreclosure creates a bona fide dispute regarding any liability
Miller may owe to Legacy,” thus defeating Legacy’s status as a petitioning creditor in the
bankruptcy case. [Id. at 654] (emphasis added).
Legacy argued—and the Bankruptcy Court agreed—that it was not required to seek a
judgment against Miller—the guarantor—as part of its foreclosure action in Colorado. [Dkt. #53 at 654] (citing U.S. v. Newton Livestock Auction Market, Inc., 336 F.2d 673, 677 (10th Cir.
1964) and Joe Heaston Tractor & Implement Co. v. Sec. Accept. Corp., 243 F.2d 196, 199 (10th

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Cir. 1957). However, the Bankruptcy Court ruled that, as a result of the Colorado court’s
decision, “an issue regarding the effectiveness of the release of Miller is present, and [] the issue
creates a bona fide dispute regarding the validity of the Legacy claim against Miller.” [Id.].
Legacy contends its claim against Miller could only be challenged on the basis that the
Colorado court’s denial of its attorney fee request precluded it from asserting Miller was liable
on the guaranty. It asserts, though, that “[t]he doctrine of issue preclusion always requires that
the issue in question have actually been litigated and decided in a prior proceeding, and here, that
indisputably did not happen.” [Dkt. #34 at 9].5 In the Legacy Foreclosure, it did not assert a
claim against Miller on his guaranty agreement; therefore, Legacy contends it is not now
precluded from asserting such a claim.6 Further, it argues there is no genuine dispute that Miller
breached the Foreclosure Agreement. Thus, it concludes, the Colorado court’s denial of its
request for attorney fees did not create a bona fide dispute regarding Miller’s liability.
The court concurs. The explicitly-stated basis for the Colorado court’s denial of
Legacy’s attorney fee request was that Legacy failed to plead and prove Mill Creek and Miller
breached the Foreclosure Agreement. While this decision was dispositive of the attorney fee

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Application of the doctrine of claim preclusion or res judicata requires (1) a final judgment on
the merits in an earlier action; (2) identity of parties or privies in the two suits; and (3) identity of
the cause of action. Wilkes v. Wyoming Dept. of Employment Div. of Labor Standards, 314 F.3d
501, 504 (10th Cir. 2003).

6

Legacy contends that the doctrine of claim preclusion does not apply in this action, because an
action against a guarantor on a note is separate from the remedy of foreclosure and sale. See
Alien, Inc. v. Futterman, 924 P.2d 1063, 1067 (Colo. App. 1995) (“a guaranty is a separate and
distinct contract from the underlying obligation being guaranteed”); accord Bartmann, 853 F.2d
at 1545 (under Oklahoma law, “[g]uaranties are construed most strongly against the guarantor”);
see also Nat’l City Bnak v. The Plechaty Cos., et al., 661 N.E.2d 227, 230 (Ohio App. 1995);
Emerson v. LaSalle Nat’l Bank, 352 N.E.2d 45, 48-50 (Ill. App. 1976) (“The action against
guarantors of a note is separate from the remedy by foreclosure and sale. [citation omitted]. The
entry of a deficiency decree against a principle is not res adjudicata of the guarantor’s liability.”).
10

request, the order did not operate to create a bona fide dispute regarding Miller’s liability on the
underlying debt. Legacy’s claim in the Bankruptcy Court was for amounts owed on Miller’s
personal guaranty and did not include any amount for attorney fees incurred in the Colorado
Foreclosure. The Colorado court never reached the substantive issue of whether Miller breached
the Foreclosure Agreement. Indeed, it refused to consider the issue because it had not been
raised by Legacy in its pleadings. The court did not purport to decide the merits of Legacy’s
argument that Miller had breached the Foreclosure Agreement.
The court finds the Colorado court’s ruling on attorney fees did not give rise to an
objective basis for either a factual or legal dispute as to the validity of Miller’s debt. See
Bartmann, 853 F.2d at 1544. Therefore, the court concludes the Bankruptcy Court erred in
finding Legacy’s claim was subject to a bona fide dispute.
b. Summit
The Petitioning Creditors contend the Bankruptcy Court erred in finding Summit’s claim
was subject to a bona fide dispute.
Miller’s loan relationship with Summit began in September 2006. [Dkt. #5-3 at 635]. As
of March 15, 2007, Miller and one of his companies, East Village Property Company, LLC
(“EVPC”) were indebted to Summit under a Renewal Note in the maximum principal amount of
$850,000, with a maturity date of March 15, 2009 (the “Renewal Note”). [Id. at 635-36]. The
Renewal Note was secured by mortgages on real estate in Oklahoma and by a deed of trust
(“DOT”) on a lot in Colorado (the “Colorado Lot”). [Id.].
In April 2007, Miller advised Summit that MCLE wanted to sell the Colorado Lot to
Troy Hudspeth (“Hudspeth”). [Id.]. MCLE planned to finance the sale for a period of one year.
Summit agreed to release the Colorado DOT in exchange for receiving collateral rights in the

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MCLE loan to Hudspeth to secure payment of Miller and EVPC’s obligations to Summit. [Id.].
The sale to Hudspeth occurred in late May and early June 2007. [Id.]. Hudspeth executed a
promissory note in favor of MCLE (the “Hudspeth Note”), and granted a lien on the Colorado
Lot to MCLE under a deed of trust (the “Hudspeth DOT”). [Id. at 636-37]. MCLE then assigned
the Hudspeth Note and the Hudspeth DOT to Summit as collateral for the amounts owed to
Summit by Miller and EVPC (the “MCLE Assignment”). [Id. at 637]. As part of the transaction,
Miller and EVPC executed and delivered a Second Renewal Note to Summit in the amount of
$770,000.00 (the “Second Renewal Note”). [Id.].
Within months, Hudspeth defaulted on the Hudspeth Note. On December 13, 2007,
Summit executed a document entitled “Colorado Statutory Power of Attorney for Property” (the
“POA”), in which Summit authorized MCLE to commence foreclosure proceedings with respect
to the Hudspeth DOT on behalf of Summit. [Id.; Dkt. #5-3 at 96-98]. Under the POA, MCLE
was obligated “[t]o use due care to act for [Summit’s] benefit. [Id. at 96].
MCLE commenced a foreclosure action against Hudspeth in the Colorado District Court
on December 28, 2007 (the “Hudspeth Foreclosure”). [Dkt. #5-3 at 637]. A judgment
foreclosing the Hudspeth DOT was entered on June 12, 2009. [Id.]. A sale of the Colorado Lot
by the Sheriff of San Juan County, Colorado (the “Sheriff”) was scheduled to take place on July
30, 2009. [Id.].
On or about June 19, 2009, MCLE entered into a real estate contract with Bush
Mountain, LLC (“Bush Mountain”), under which Bush Mountain agreed to purchase the
Colorado Lot for $500,000 (the “Bush Mountain PSA”). [Id. at 638]. The sale was to close on
July 31, 2009, one day after the scheduled Sheriff’s sale. [Id.]. All proceeds of the Bush
Mountain PSA were to be paid to Summit. [Id.]. Summit expected to receive a minimum of

12

$450,000 in proceeds from the sale. [Id.]. Upon condition that it receive the proceeds from the
Bush Mountain PSA, Summit agreed to extend the maturity date of the Second Renewal Note
until July 31, 2010. [Id.].
The foreclosure sale took place as scheduled on July 30, 2009. [Id.]. MCLE submitted a
written bid to purchase the Colorado Lot at the Sheriff’s sale in the amount of $889,053.73, the
full amount Hudspeth owed MCLE under the Judgment.7 [Id.]. MCLE was the sole bidder at the
sale. [Id.]. MCLE prepared and sent a Sheriff’s Certificate of Purchase on the Colorado Lot to
the Sheriff that was acknowledged on August 13, 2009, before a notary public and returned to
MCLE without recording (the “Sheriff’s Certificate”). [Id.]. The Sheriff’s Certificate reflected
that MCLE was the purchaser at the sheriff’s sale and would be entitled to a deed for the
property at the end of the redemption period unless redemption was made. [Id.].
The sale of the Colorado Lot under the terms of the Bush Mountain PSA fell through on
August 6, 2009, ostensibly because of the failure of MCLE to deliver an acceptable title
insurance commitment. [Id. at 638-39]. After the sale fell through, Miller continued to
communicate with Mark Poole, the President and Chief Lending Officer of Summit (“Poole”),
regarding loan extension and repayment options. [Id. at 639]. As part of the negotiations, Summit

7

The Bankruptcy Court found that “Summit was aware of the amount of the bid and did not
object.” [Dkt. #5-3 at 638]. Summit contends there is no support in the record that it was aware
of the bid amount before MCLE sent it to the Sheriff. [Dkt. #25 at 25]. Poole testified that prior
to the sale, Summit believed MCLE would submit a bid of $500,000, and Summit did not
authorize a full credit bid. [Dkt. #5-3 at 445 (Tr., 238:13-25), 451 (Tr., 244:15-21), and 459 (Tr.
251:20-24)]. Miller argues, however, the Summit later ratified the full credit bid by its conduct
after the sale.
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requested that Miller provide Summit with additional real estate collateral. [Id.]. This did not
happen. [Id.].8
On August 24, 2009, the Sheriff’s Sale was confirmed. [Dkt. #5-3 at 117].
On September 1, 2009, Summit filed a “Motion to Clarify Journal Entry of Judgment,
Certificate of Purchase, Report and Return of Sale, and Order Approving Sheriff’s Sale” (the
“Motion to Clarify”), seeking:
1. A determination that Summit was the holder of the Hudspeth Note and the Hudspeth
DOT;
2. A finding that, with respect to the Hudspeth Foreclosure, MCLE acted solely as
Summit’s agent;
3. A finding that Summit is the actual holder of the Sheriff’s Certificate;
4. An order directing the Sheriff to execute, deliver, and record a deed to the Colorado
Lot listing Summit as the grantee; and
5. Such other and further relief as may be just and proper.
[Id. at 639]. Summit did not object to the amount bid by MCLE for the Colorado Lot in the
Motion to Clarify. [Id.].

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Poole testified he was concerned that the Hudspeth foreclosure had wiped out Summit’s
lien interest and that Mill Creek would potentially get the lot back in ownership without Summit
having a collateral interest in the lot. During an August 14, 2009, meeting with Miller, Poole
presented Miller with a deed of trust intended to restore Summit’s collateral position. [Dkt. #5-3
at 404-405 (Tr. 197:16-198:16)]. Poole testified Miller took the deed of trust with him to have
his attorney review, but did not indicate to Poole that he believed the bid Mill Creek had
submitted at the sheriff’s sale completely wiped out his debt to Summit Bank. [Id. at 406 (Tr.
199:1-11]. On August 24, 2009, Miller sent Poole an email about a Mayes County farm Summit
and Miller talked about being used as collateral for an extension on the loan. [Id. at 408-409 (Tr.
201:24-202:21)]. In the email, Miller was taking the position he did not need a loan to pay
accrued interest on the Summit loan. [Id. at 409 (Tr. 202:12-20)]. Summit argues Miller’s
continued acknowledgment of his personal obligations to Summit after the Sheriff’s Sale belies
his claim that the Sheriff’s Sale extinguished his personal debt to Summit and precludes any
notion of an agreement that he would be released from the obligation to Summit.
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Also on or about September 1, 2009, Miller prepared and executed a document entitled
“Assignment of Sheriff’s Certificate of Purchase Issued in Sale No. 08-CV-01” (the “First
Assignment”). Under the terms of the First Assignment, MCLE purported to assign all of its
interest in the Sheriff’s Certificate to Summit. Additionally, the First Assignment stated:
This Assignment is made for the purpose of extinguishing any and all collateral
interest in or against the Property in exchange for the full and final release by
Assignee [Summit] of the certain Promissory Note dated March 15, 2007 by and
between Assignee and Mill Creek Lodge Estates, LLC together with the release
of any and all other liens and indebtedness to which the Property is or may be
subject.
Poole objected to the release language in the First Assignment and demanded that it be removed.
[Id. at 640]. Miller then prepared and executed another “Assignment of Sheriff’s Certificate of
Purchase Issued in Sale No. 08-CV-01” (the “Second Assignment”), dated September 4, 2009.
[Id.]. The Second Assignment contained the following language:
This Assignment is made for the purpose of extinguishing any and all collateral
interest and security interest in or against the Property in exchange for the full
and final release by Assignee [Summit] of the following all filed of record with
the San Juan County Clerk and Recorder: that certain Promissory Note dated
March 15, 2007 by and between Assignee and East Village Property Company, LLC/J.
Randall Miller; that certain Modification of Mortgage dated March 15, 2007 by and
between Assignee and East Village Property Company, LLC; that certain Guaranty
Dated March 15, 2007 by and between Assignee and Mill Creek Lodge Estates, LLC;
Deed of Trust dated June 1, 2007 and Recorded June 5, 2007 at Reception Number
145733; Assignment of Deed of Trust and Promissory Note dated May 25, 2007,
Recorded June 5, 2007 at Reception Number 145735; Power of Attorney dated
December 13, 2007, Recorded December 26, 2007 at Reception Number 146205;
and together with the release of any and all other liens and indebtedness to which the
Property is or may be subject.
[Id. at 640-41].
The Second Assignment was filed of record on September 4, 2009.9 [Id. at 641].
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Poole testified there was never any agreement at any time with respect to a credit-bid or that the
full credit-bid extinguished Miller’s debt obligation to Summit Bank. [Dkt. #5-3 at 414 (TR.
207:7-12)]. He testified that Summit just wanted to be repaid on its loan, and there was no
agreement to take the property to extinguish the debt. [Dkt. #5-3 at 417 (Tr. 210:4-24]
15

On September 9, 2009, the Sheriff executed a deed to the Colorado Lot listing Summit as the
grantee (the “Summit Deed”). The Summit Deed was filed of record on September 10, 2009.
[Id.].
On October 15, 2009, Summit made formal demand upon Miller for payment of all
amounts Summit claimed due and owing. [Id.]. Miller refused to make any payments. [Id.]. On
November 26, 2009, Summit sued the Millers, MCLE and other related legal entities in Tulsa
County District Court (the “Summit State Court Action”). [Id.]. In that lawsuit, Summit asserted
claims for foreclosure of Summit’s mortgage liens on two Tulsa properties; a claim against
Miller and MCLE for fraud and breach of fiduciary duty in connection with the Hudspeth
Foreclosure, specifically with respect to the execution and filing of the Second Assignment; an
equitable claim for a determination that the filing of the second Assignment did not release
Miller from any liability that Miller owed to Summit and that Summit was authorized to sell the
Colorado Lot without fear that its actions could be considered a full satisfaction of the debt owed
by Miller and EVPC to Summit. [Id.]. In his answer, Miller alleged all debt owed to Summit had
been paid in full as a result of the sale of the Colorado Lot. [Id.]. He sought dismissal with
prejudice of Summit’s claims and an award of attorney fees. [Id.]. The Summit State Court
Action remained pending at the time the involuntary petition was filed. [Id. at 641-42].
Poole testified that, as of May 11, 2010, Miller owed Summit $888,164.85, with interest
on the debt accruing at a rate of $333.33 per day. [Id. at 642]. As of the date the involuntary
petition was filed, none of the real estate collateral claimed by Summit had been liquidated.
[Id.]. There was no meaningful evidence in the record as to the value of these properties. [Id.].
The Bankruptcy Court held there was “no doubt” Summit loaned Miller or his related
entities the sum of $800,000, and that Miller was either directly obligated on or personally
16

guaranteed the loans. [Dkt. #5-3 at 655]. Further, the court stated, “Clearly, Miller attempted to
extinguish all liability to Summit by preparing and recording the Second Assignment.” [Id.].
However, the court concluded significant questions remained regarding the effects of the
Hudspeth Foreclosure and the Summit deed. [Id.]. These questions, the court found, precluded a
finding that Summit’s claim was not the subject of a bona fide dispute. [Id.]. Additionally, the
Bankruptcy Court found Summit had not provided evidence establishing it was the holder of an
unsecured claim; therefore, it had not satisfied the requirement of 11 U.S.C. § 303(b)(1)
requiring claims that “aggregate at least $14,425 more than the value of any lien on property of
the debtor securing such claims[.]” [Id. at 656].
In his Report and Recommendation, the Magistrate Judge agreed with Summit that under
§ 303(b)(1), even a fully secured creditor is eligible to be a petitioning creditor as long as the
aggregated debts of the other unsecured creditors reach the statutory requirement. [Dkt. #32 at
12, n. 7]. Nevertheless, he opined that the issue need not be resolved, because Summit was
ineligible to be a petitioning creditor on the basis of the dispute concerning Miller’s liability.
[Id.].
The Petitioning Creditors object to the Magistrate Judge’s finding that Summit was
ineligible to be a petitioning creditor. They contend that “[u]nder the circumstances of this case,
Summit’s receipt of the deed does not give rise to [a] bona fide dispute regarding Miller’s loan
obligation.” [Dkt. #34 at 15].
Based on its review of the record, the court concludes the Bankruptcy Court did not err in
finding Summit had failed to establish its claim was not the subject of a bona fide dispute.
Summit cites In re CLE Corp., 59 B.R. 579, 584 (Bankr. N.D. Ga. 1986) for the proposition that
the assertion of creative defenses by a debtor is not sufficient to establish a bona fide dispute. In

17

CLE Corp., however, the debtor’s president testified that none of the so-called disputes were
developed until after he had met with counsel subsequent to the filing of the Petition. Id. The
court concluded, “From both the timing and substance of Debtor’s alleged disputes, it is apparent
that the Debtor’s disputes are not in good faith and have been raised solely for the purpose of
opposing the Petition.” Id. at 584-585.
Here, the dispute over the Summit loan arose well before the bankruptcy petition was
ever filed, at the time of the Hudspeth Foreclosure. While Summit has presented evidence
supporting its position that Miller engaged in a series of wrongful acts aimed at extinguishing
Summit’s collateral interest in the Colorado Lot, the fact remains that Miller contests liability
and has since the issuance of the deed to Summit following the full credit bid. The Bankruptcy
Court correctly concluded that a bona fide dispute as to whether and to what extent the debt
remained. It was not required, under Bartmann, to determine the probable outcome of the
dispute. Thus, the Bankruptcy Court did not err in finding Summit did not qualify as a
petitioning creditor under § 303(b)(1).
2. Attorney Fees
The Bankruptcy Court entered a judgment holding the petitioning creditors jointly and
severally liable for attorney fees and expenses in the amount of $259,773.27 under 11 U.S.C. §
303(i). [Dkt. #6-1 at 127]. The Petitioning Creditors contend the Bankruptcy Court erred in
holding Bullock jointly and severally liable for Miller’s attorney fees and expenses “without any
individualized consideration of the totality of the circumstances (including the merits of the
Bullock Claim).” [Dkt. #25 at 46].
The decision about whether to award attorney fees “is committed to the discretion of the
trial court.” In re Hentges, 351 B.R. 758, 770 (Bankr. N.D. Okla. 2006) (citing Susman v.

18

Schmid (in re Reid), 854 F.2d 156, 159 (7th Cir. 1988). See also Southern Cal. Sunbelt Dev. Inc.,
608 F.3d 456, 464 (9th Cir. 2010); In re Kidwell, 158 B.R. 203, 216 (Bankr. E.D. Cal. 1993).
The fact that a petitioner has a meritorious claim does not preclude an award of attorney fees
under § 303(i). Kidwell, 158 B.R. at 216]. In Hentges, the court, in determining whether to
award fees, noted that “most courts employ a ‘totality of the circumstances’ test.” 351 B.R. at
770. Relevant circumstances include (1) the merits of the involuntary petition; (2) the role of
any improper conduct on the part of the alleged debtor; (3) the reasonableness of the actions
taken by petitioning creditors; (4) the motivation and objectives behind filing the petition; and
(5) other material factors the court deems relevant. Id.
Section 303(i) unambiguously authorizes the trial court to exercise individualized
discretion in the award of attorney fees. See In re Maple-Whitworth, 556 F.3d 742, 745 (9th Cir.
2009). The trial court may consider factors such as relative culpability among the petitioners, the
motives or objectives of individual petitioners in joining in the involuntary petition, the
reasonableness of the respective conduct of the debtors and petitioners and other individualized
petitioners, the motives or objectives of individual petitioners in joining in the involuntary
petition, the reasonableness of the respective conduct of the debtors and petitioners, and other
individualized factors. Id. at 46. “[A] bankruptcy court has discretion to hold all or some
petitioners jointly or severally liable for costs and fees, to apportion liability according to
petitioners’ relative responsibility, or to deny an award against some or all petitioners, depending
on the totality of the circumstances.” Id.
The Bankruptcy Court acknowledged in both its Opinion and Supplemental
Memorandum Opinion that “[w]hen considering whether to award costs and fees, courts examine
the totality of the circumstances.” [Dkt. #5-3 at 661; Dkt. #6-1 at 103]. In its Memorandum

19

Opinion, the court discussed the basis for its decision to award fees against the petitioning
creditors, stating, “All petitioning creditors, regardless of the viability of their claims against the
debtor, are subject to this statute and may be held to pay fees, costs, and damages.” (citing
Kidwell, 158 B.R. at 216 (Bankr. E.D. Cal. 1993). [Dkt. #5-3 at 661]. The court stated that three
of the four petitioning creditors (Legacy, Summit and Bullock) had been involved in business
relationships with Miller that had foundered, and all three have been involved in “protracted
negotiations and litigation with Miller.” [Id., at 662].
The court also discussed each individual petitioning creditors’ testimony about their
motivations for joining the involuntary petition. [Id. at 647-649]. Specifically regarding
Bullock, the court noted, “Louis Bullock stated his belief that the filing of a bankruptcy petition
would be the most efficient way to collect on the moneys owed to Bullock by Miller.” [Id. at
648-649]. It also observed that Bullock was engaged in state court litigation with Miller to
collect the debt owed. [Id. at 662].
Petitioning Creditors contend the Magistrate Judge’s recommendation that the
Bankruptcy Court’s bad faith finding be reversed is irreconcilable with his recommendation that
the attorney fee award be confirmed. This court disagrees. Although few courts have assessed
fees and costs absent a finding of bad faith, it is apparent on the face of the statute that such a
finding is not required. In re Fox Island Square Partnership, 106 B.R. 962, 967 (Bankr. N.D. Ill.
1989); In re Advance Press & Litho, Inc., 46 B.R. 700, 702 (Bankr. D. Colo. 1984). As the court
in Advance Press stated, “it is evident from the alternative provisions of § 303(i)(1) and (2) that
Congress sensed there would be situations where the burdens imposed upon debtors, even in
good-faith circumstances, should require the losing creditors to pay for the burden they created.”
45 B.R. at 702.

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Nevertheless, this court’s reversal, in Section III.B.1 below, of the Bankruptcy Court’s
finding that the Petitioning Creditors acted in bad faith, impacts the viability of the Bankruptcy
Court’s award of attorney fees jointly and severally against Bullock. “The presence or absence
of bad faith will inform the exercise of the district court’s discretion under § 303(i).” In re Reid,
854 F.2d at 160. Thus, the attorney fee decision must be reversed and remanded for
individualized consideration—as set out in Hentges—of the joint and several award against
Bullock in the absence of bad faith.
B. Miller
Miller has objected to the Magistrate Judge’s recommendation to reverse the Bankruptcy
Court’s finding that the involuntary petition was filed in bad faith. [Dkt. #33]. Additionally, he
objects to the Magistrate Judge’s recommendation to affirm the Bankruptcy Court’s refusal to
award actual and punitive damages to Miller. [Id.].
1. Bad Faith
Section 303(i)(2) permits an award of damages against any petitioner who filed an
involuntary bankruptcy petition in bad faith. The Bankruptcy Court found the Petitioning
Creditors filed the involuntary bankruptcy petition in bad faith but held the debtor failed to
establish actual damages or a basis for punitive damages.
The Magistrate Judge recommended reversal of the bad faith finding, concluding (1) the
Bankruptcy Court failed to address the question of which party has the burden of proof on the
bad faith issue; (2) the Bankruptcy Court failed to analyze the facts of this case in relation to
factors identified in other courts’ tests for determining whether a petition was filed in bad faith;
(3) although case authority holds there is a presumption of good faith in favor of petitioners and
that debtor has the burden of proving bad faith, the Bankruptcy Court appeared to place the

21

burden of proof on the Petitioners to prove an absence of bad faith by proving good faith; (4) the
Bankruptcy Court failed to make factual findings about the reasonableness of petitioners’
position that their claims were not subject to a bona fide dispute; and (5) the Bankruptcy Court
erred in finding the Petitioning Creditors’ desire to collect debts supported a bad faith finding.
Case authority holds—and Miller concedes—that there is a presumption of good faith in
favor of petitioners and the debtor has the burden of proving bad faith. See In re John Richards
Homes, 439 F.3d 248, 254 (6th Cir. 2006); In re Bayshore, 209 F.3d 100, 105 (2nd Cir. 2000);
Hentges, 351 F.R. at 770; In re Reveley, 148 B.R. 398, 406 (Bankr. S.D.N.Y. 1992); In re
Apache Trading Group, 229 B.R. 891, 892-92 (Bankr. S.D. Fla. 1999); [Dkt. #33 at 5]. The
Bankruptcy Court did not specifically address the burden of proof issue. The Petitioning
Creditors assert the court’s comment that the creditors’ claim of acting in good faith “rings
hollow,” [Dkt. #5-3 at 664] demonstrates it considered the creditors bore the burden of proving
good faith. This court does not necessarily agree with the creditors, but concludes the
Bankruptcy Court’s failure to articulate the applicable burden of proof raises the question of
whether it applied the correct burden of proof.
The Bankruptcy Code does not define “bad faith.” The Tenth Circuit has found that in
order to grant sanctions under the bad faith exception, there must be clear evidence that a party’s
claims were frivolous and that they were pursued in bad faith. FDIC v. Schuchmann, 319 F.3d
1247, 1252 (10th Cir. 2003). The court instructed:
The mere fact that a party did not prevail in the district court does not necessarily
imply that its conduct was improper. Further, bad faith requires more than a
mere showing of a weak or legally inadequate case, and the exception is not
invoked by findings of negligence, frivolity or improvidence. In addition to
making an explicit finding of improper motive, the trial court must also inform
the court upon which factual basis [it] arrived at the conclusion of bad faith.

22

Id. (quotations and citations omitted). Similarly, courts have found bad faith when the filing of
the petition “was motivated by ill will, malice, or a desire to embarrass or harass the alleged
debtor.” Hentges, 351 B.R. at 772 (citing Bayshore, 209 F.3d at 105, In re Camelot, Inc., 25
B.R. 861, 864 (Bankr. E.D. Tenn. 1982) and General Trading Inc. v. Yale Materials Handling
Corp., 119 F.3d 1485, 1501 (11th Cir. 1997).
[Dkt. #5-3 at 661].
Although the Tenth Circuit has not done so,10 other courts have developed various tests to
determine whether bad faith is present. See Bayshore, 209 F.3d at 105. Those tests include:
1. The “improper use” test, which “finds bad faith when a petitioning creditor uses
involuntary bankruptcy procedures in an attempt to obtain a disproportionate
advantage for itself, rather than to protect against other creditors obtaining
disproportionate advantages, particularly when the petitioner could have advanced its
own interests in a different forum.” Id. (citations omitted);
2. The “improper purpose” test, “where bad faith exists if the filing of the petition was
motivated by ill will, malice, or a desire to embarrass or harass the alleged debtor.”
Id. (citations omitted).
3. The “objective test” for bad faith “based on what a reasonable person would have
believed.” Id. (citations omitted); and
4.

A bad faith inquiry modeled on the standards set forth in Bankruptcy Rule 9011,
which requires analysis of both the objective reasonableness of the petitioning
creditors’ filing of an involuntary petition and their subjective intent.

Id.; Hentges, 351 B.R. at 775-76.
The Bankruptcy Court held that the primary reason the Petitioning Creditors filed the
involuntary petition was to remove Miller as a real party-in-interest in the pre-existing litigation
and replace him with a bankruptcy trustee in the hopes of concluding that litigation as quickly as

10

The parties cite no case wherein the Tenth Circuit has adopted a test, nor has this court
discovered one.
23

possible. [664-65]. The court found “[t]hese are not proper purposes for the filing of an
involuntary bankruptcy case.” [Id. at 665].
The court disagrees with this conclusion, both as a matter of law and as applied to the
facts of this case. In Hentges, the Bankruptcy Court in this District examined at length the
question of whether the collection of claims in bankruptcy court rather than an alternative forum
constituted “bad faith,” and found it did not. The court stated:
While it is true that these creditors had the option of continuing to proceed in
Tulsa County District Court to attempt to collect on the judgments and guarantees,
that fact, in and of itself, does not support an inference of bad faith. Creditors are
justified in filing an involuntary bankruptcy against a debtor where exclusive
bankruptcy powers and remedies may be usefully invoked to recover transferred
assets, to “insur[e] an orderly ranking of creditors’ claims” and “to protect against
other creditors obtaining a disproportionate share of debtor’s assets.” Creditors may
also use the bankruptcy process to install a trustee to prevent future transfers or
wasting or dissipation of assets or to investigate and to challenge the legitimacy of
entities that may be operating as alter egos of a debtor.
351 B.R. at 772 (citing In re Better Care, Ltd., 97 B.R. 405, 411 (Bankr. N.D. Ill. 1989).
Further, the court in Hentges pointed out that if the involuntary petition would have been
successful, a Chapter 7 trustee would have had a duty to vigorously pursue the debtor’s lawsuit
for the benefit of the estate if the suit had merit; thus, the court could not conclude the
substitution of the Chapter 7 trustee for the debtor as the plaintiff in the lawsuit would have
given the petitioning creditor “any unfair or disproportionate advantage” over the debtor’s other
creditors. Id. (quotation and citation omitted).
The court cannot conclude—applying any of the four tests outlined in Bayshore and
Hentges—that the Petitioning Creditors acted in bad faith. Under the “improper use” test, there
is no evidence the creditors attempted to obtain a disproportionate advantage over other
creditors; thus, no “improper use” can be found. Applying the “improper purpose” test, the court
notes that while litigation between the Petitioning Creditors and the debtor was contentious, there
24

is no evidence the Petitioning Creditors were motivated by ill will or malice; rather, they all were
attempting to collect a debt. Under the “objective test” approach, Legacy and Bullock clearly
acted reasonably in believing they had claims that were not subject to a bona fide dispute. Even
Summit—given Miller’s conduct with respect to the Colorado property—could be said to have
reasonably believed the claim was not subject to a legitimate dispute. Finally, under the
modified Bankruptcy Rule 9011 analysis, all through Petitioning Creditors acted with objective
reasonableness and their subjective intent—to collect debts owed to them—was permissible.
The Bankruptcy Court cited two cases in support of its conclusion that it was improper
for petitioning creditors to file an involuntary petition to displace the debtor for purposes of
collection litigation: In re Nordbrock, 772 F.2d 397, 399 (8th Cir. 1985) (“This case reflects
efforts by a single creditor to use the Bankruptcy Court as a forum for the trial and collection of
an isolated disputed claim, a practice condemned by prior decisions”); and In re SBA Factors of
Miami, Inc., 13 B.R. 99 (Bankr. D. Fla. 1981) (finding involuntary [petition] to be filed in bad
faith where it was intended by creditors “as a substitute for customary collection procedures.”
Both cases, however, are distinguishable from this fact situation.
Nordbrock did not involve the question of whether a petition had been filed in bad faith.
Rather, the appellate court affirmed the trial court’s dismissal of an involuntary petition filed by
a single creditor because the § 303(h)(1) criteria that the debtor was generally not paying debts as
they became due had not been satisfied. There, the creditor sought to recover a debt of
approximately $3 million on a personal guarantee. The alleged debt was the only obligation of
the debtor. 722 F.2d at 398-99. The court dismissed the petition, finding the creditor failed to
establish the debtor was not generally paying his debts when they came due, as required by §

25

303(h)(1). Id. at 399. The court also found that under § 303(a), the petition had to have been
filed by three or more creditors. Id.
In SBA Factors, the court found petitioners acted in bad faith in filing or joining the filing
of an involuntary petition. In so ruling, the court concluded the petitioners completely failed to
carry their burden under § 303(h)(1) to show the debtor was not paying his debts as they became
due. The court conducted a fact intensive review of each creditor’s conduct and motives. It
found the original petitioning creditor, Classic Printers, Inc., alleged the debtor owed it $29,000,
but had failed to invoice the debtor for any part of the sum. The creditors who had joined as
petitioning creditors—Venture Group, Inc., and Philip Dennis, claimed there was a default by a
third party on an account receivable sold by the debtor to Venture Group. However, they
presented no evidence the debtor had guaranteed any debt owed Venture Group, and under
Florida’s statute of frauds, the obligation was required to be in writing or alternatively, partial
performance must have occurred. The debtor had produced all invoices it had received for six
months before the petition was filed, together with cancelled checks reflecting payment of each
invoice. Id. at 100.
In contrast to Nordbrock, this was not a single creditor case. Four creditors—each with
claims they believed were not subject to a bona fide dispute—joined in filing the involuntary
bankruptcy petition. And while the Bankruptcy Court in this case found three of the four claims
were subject to a bona fide dispute, the claims—in contrast to those asserted in SBA Factors—
could not be characterized as frivolous.
The court agrees with the Magistrate Judge’s opinion that the desire to collect a debt is
not—in itself—sufficient to support a finding of bad faith, because a desire to collect a debt
underlies all creditors’ participation in an involuntary bankruptcy.

26

Here, the Bankruptcy Court observed that Legacy, Summit and Bullock had been
involved in protracted litigation with Miller and “[a] reasonable person could easily conclude
that the state court litigation between these parties will continue unabated for years.” [Dkt. #5-3
at 662]. However, the court failed to make specific factual findings about the reasonableness of
each of the Petitioning Creditors’ position that their claims were not subject to a bona fide
dispute. Further, the court did not discuss whether each creditor had a reasonable belief that
Miller was not paying his debts as they came due, or the extent to which each party relied on
advice of counsel in filing the petition.
The court concurs with the Magistrate Judge’s conclusion that the Bankruptcy Court did
not adequately support its finding of bad faith by engaging in a fact intensive discussion of the
creditors’ motivation and state of mind at the time the involuntary bankruptcy petition was filed.
Lacking “clear evidence” that Petitioning Creditors’ claims “were frivolous and that they were
pursued in bad faith,” as set forth in Schuchmann, this court finds the bad faith decision must be
reversed. 319 F.3d at 1252.
2. Denial of Damages to Miller
Miller sought $812,791.29 in compensatory damages and punitive damages between $1.6
million and $4 million. [Dkt. #6-1 at 102]. The Bankruptcy Court declined to award actual
damages to Miller, finding he failed to prove damages with a degree of certainty and further
failed to prove the alleged damages were proximately caused by the filing of the involuntary
petition. [Dkt. #6-1 at 123]. The Bankruptcy Court also declined to award punitive damages,
finding the award of attorney fees served as an adequate deterrent to misuse of the involuntary
bankruptcy process in the future. [Id. at 126].

27

Miller appealed the Bankruptcy Court’s finding that his claims for lost future profits were
unsubstantiated and the denial of his claim for punitive damages.
The burden is on the party seeking damages to provide evidence of the amount of
damages. Jennings v. Rivers, 394 F.3d 850, 853 (10th Cir. 2005). Miller claimed damages for
future loss of income totaling $675,000 ($135,000 per year) over a five-year period. The sole
support for this claim was Paragraph 24 of Miller’s Affidavit, in which Miller estimated his
future lost profits. [Dkt. #6-1 at 31]. The Bankruptcy Court concluded “an award of actual
damages for lost profits would be an exercise in pure speculation, as would a finding that any
such damages were caused by the filing of the involuntary petition. [Dkt. #6-1 at 121]. The court
concurs with the Bankruptcy Court’s conclusion that Miller failed to prove the damages with a
degree of certainty and failed to prove the damages were proximately caused by the filing.
The Bankruptcy Court declined to award punitive damages, finding the assessment of
attorney fees against the Crediting Petitioner was an adequate deterrent. [Dkt. #6-1 at 125-26].
An award of punitive damages is a matter left to the discretion of the bankruptcy court. In re
K.P. Enter., 46 B.R. 700, 701 (Bankr. D. Colo. 1984); In re K.P. Enter., 135 B.R. 174, 183
(Bankr. D. Me. 1992). The court finds the Bankruptcy Court did not abuse its discretion in
denying Miller’s request for punitive damages.
IV. Conclusion
The Report and Recommendation of Magistrate Judge McCarthy [Dkt. #32] is accepted
in part and rejected in part. The Bankruptcy Court’s finding that Legacy Real Estate
Investments, LLC’s claim against the debtor was subject to a bona fide dispute is reversed.
Additionally, the Bankruptcy Court’s finding that the Petitioning Creditors acted in bad faith in
filing their involuntary bankruptcy petition is reversed. Further, the Bankruptcy Court’s joint

28

and several award of attorney fees against Louis Bullock is reversed and remanded to the
Bankruptcy Court for further consideration consistent with this order. In all other respects, the
decision of the Bankruptcy Court is affirmed.
ENTERED this 26th day of March, 2012.

29