Hassell 2012 Joint Venture et al

Filing 13

ORDER GRANTING 11 MOTION to Strike 8 Appellant's Brief, 9 Appendix Materials from Appendix and to Strike References in Appellant's Brief to Evidence Outside the Record. With regard to RHHCs appeal, the Bankruptcy Courts m emorandum opinion and order granting summary judgment is AFFIRMED IN PART. The case is otherwise REMANDED to the Bankruptcy Court for additional findings of fact regarding whether the debts that were subject to litigation on the petition date were the subjects of bona fide disputes on that date. Case terminated on 7/24/2017(Signed by Judge Gray H Miller) Parties notified.(rkonieczny, 4)

United States District Court
Southern District of Texas

ENTERED
July 24, 2017

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
IN RE:
HASSELL 2012 JOINT VENTURE,
Debtor.

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§
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§
§

David J. Bradley, Clerk

CIVIL ACTION H-16-3220

MEMORANDUM OPINION AND ORDER
Pending before the court are (1) an appeal filed by appellant R. Hassell Holding Co., Inc.
(“RHHC”) (Dkt. 8 (appellant brief)); and (2) a motion to strike materials RHHC attached to its
appellant’s brief that were not part of the record on appeal filed by appellees James C. Hassell,
Hassell Construction Company, Inc., and Hassell Management Services, L.L.C. (collectively,
“HCCI”) (Dkt. 11). After considering the motion to strike and applicable law, the court is of the
opinion the motion (Dkt. 11) should be GRANTED. After considering the appellate briefs and
record evidence, the court is of the opinion that the Bankruptcy Court’s order granting summary
judgment should be AFFIRMED IN PART and otherwise REMANDED FOR ADDITIONAL
FINDINGS OF FACT.
I. BACKGROUND
On February 5, 2016, RHHC filed an involuntary petition under Chapter 7 of the Bankruptcy
Code against Hassell 2012 Joint Venture (the “Joint Venture” or the “Alleged Debtor”). Dkt. 5-2
at 322. On June 2, 2016, HCCI moved for summary judgment on the involuntary bankruptcy
petition, asserting that RHHC lacked evidence to support an essential element of the petition. See
Dkt. 10 ; see also Dkt. 2-2 at 385 (motion for summary judgment); Dkt. 2-2 at 835 (memorandum
opinion relating to order granting summary judgment); Dkt. 2-2 at 854 (order granting summary

judgment). On September 23, 2016, the Bankruptcy Court granted the motion for summary
judgment, holding that RHHC failed to present sufficient evidence that the Alleged Debtor was
failing to pay undisputed debts as they came due. Dkt. 10; see also Dkt. 2-2 at 835. RHHC moved
for reconsideration, and the Bankruptcy Court denied the motion. Dkt. 10; see also Dkt. 2-2 at 880
(motion to reconsider); Dkt. 2-2 at 911 (order denying motion to reconsider). RHHC timely filed
a notice of appeal. Dkt. 1. RHHC filed its appellant’s brief on January 26, 2017. Dkt. 8. HCCI
filed its appellee’s brief on February 24, 2017, and RHHC filed a reply on March 10, 2017. Dkts. 10,
12. The appeal in now ripe for consideration.
II. MOTION TO STRIKE
HCCI filed a motion to strike on February 24, 2017. Dkt. 11. In this motion, HCCI asserts
that the appendix filed with RHHC’s appellant brief contained a document that is not part of the
record on appeal. Id. (citing Dkt. 9). HCCI specifically takes issue with Appendix Item 6, which
is a request for abstract of judgment. See id.; see also Dkt. 9-6 (the contested document). RHHC
did not file a response to the motion to strike. Under Local Rule 7.4, “[f]ailure to respond will be
taken as a representation of no opposition.” S.D. Tex. L.R. 7.4. The court therefore deems the
motion to strike unopposed. HCCI’s motion to strike (Dkt. 11) is GRANTED. The court will not
consider Appendix Item 6 when considering RHHC’s appeal.
III. APPEAL
This is an involuntary bankruptcy case. Under 11 U.S.C. § 303(b), an “involuntary case
against a person is commenced by the filing with the bankruptcy court of a petition under chapter
7 or 11 of [the Bankruptcy Code], . . . [i]f such person is a partnership[,] . . . by fewer than all of the
general partners in such partnership; or . . . if relief has been ordered under [the Bankruptcy Code]
with respect to all of the general partners in such partnership, by a general partner in such
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partnership, the trustee of such a general partner, or a holder of a claim against such partnership.”
11 U.S.C. § 303(b). Under 11 U.S.C. § 303(h), a Bankruptcy Court may order relief in an
involuntary case only if “the debtor is generally not paying such debtor’s debts as such debts become
due unless such debts are the subject of a bona fide dispute as to liability or amount; or . . . within
120 days before the date of the filing of the petition, a custodian, other than a trustee, receiver, or
agent appointed or authorized to take charge of less than substantially all of the property of the
debtor for the purpose of enforcing a lien against such property, was appointed or took possession.”
11 U.S.C. § 303(h). The determination of whether a debtor is “generally not paying” its debts as they
become due is made as of the date the original petition is filed. In re Sims, 994 F.2d 210, 222 (5th
Cir. 1993). Courts consider various factors in determining whether a debtor is generally not paying
its debts, including (1) “the number and amount of the unpaid debts in relation to the size of the
debtor’s operation”; (2) “the age and number of unpaid debts”; (3) “the total amount of
indebtedness”; and (4) “the number of unpaid creditors.” In re Arriola Energy Corp., 74 B.R. 784,
790 (S.D. Tex. 1987) (Bue, J.). Another court sums up the factors as follows: “(1) the number of
unpaid claims; (2) the amount of such claims; (3) the materiality of the non-payments; and (4) the
debtor’s overall conduct in her financial affairs.” In re Moss, 249 B.R. 411, 422 (N.D. Tex. Bankr.
2000).
By the time HCCI moved for summary judgment, the Bankruptcy Court had held that the
Joint Venture was a general partnership and that RHHC was eligible to file an involuntary
bankruptcy petition under § 303(b)(3) of the Bankruptcy Code. Dkt. 8. The issue on summary
judgment was whether, under § 303(h)(1), the Joint Venture was “generally not paying such debtor’s
debts as such debts [became] due unless such debts are the subject of a bona fide dispute as to
liability or amount.” Id. (quoting § 303(h)(1)). The Bankruptcy Court determined that “the ratio of
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delinquent to current debts is not supportive of a pattern of the [Joint Venture] generally not paying
its debts as they become due. Furthermore, the totality of the circumstances reflects that the few
debts remaining as of the petition date reflect a pattern of payment of debts by the [Joint Venture].”
Dkt. 2-2 at 852. The Bankruptcy Court ultimately held that RHHC had “not demonstrated that the
[Joint Venture] was not paying its undisputed debts as they became due” and accordingly granted
summary judgment in HCCI’s favor. Id. at 852–54.
RHHC presents the following issues for appellate review: (1) whether the Bankruptcy Court
erred in finding that the summary judgment burden shifted to RHHC; (2) the Bankruptcy Court
incorrectly determined that RHHC had the burden to amend the bankruptcy schedules; (3) whether
the Bankruptcy Court erred in concluding that the amended schedules had any probative value in
light of the disclaimers contained within the amended schedules; (4) whether the Bankruptcy Court
erred in its conclusion that debts that were the subject of litigation and arbitration were subject to
a bona fide dispute; (5) whether the Bankruptcy Court’s findings of fact and conclusions of law
relating to current and delinquent debts remaining as of the petition date are clearly erroneous; (6)
whether the Bankruptcy Court’s finding that there was no evidence that the McCain debt was due
as of the petition date is incorrect; (7) whether the Bankruptcy Court should have taken into
consideration an outstanding claim by the U.S. Department of Labor; (8) whether the Bankruptcy
Court’s finding that the ratio of debts due as of the petition date to debts that were not due as of the
petition date was 47% to 53% is incorrect; (9) whether the Bankruptcy Court inappropriately allowed
HCCI to submit new evidence with their reply brief without giving RHHC an opportunity to examine
and respond to the new evidence; and (10) whether the Bankruptcy Court incorrectly failed to find
and conclude the RHHC satisfied its burden of showing there is a genuine issue of fact for trial. Dkt.
8 at 3–4.
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HCCI argues that the Bankruptcy Court properly granted its motion for summary judgment
for the following reasons: (1) HCCI satisfied its burden by identifying a portion of the record that
suggests RHHC could not satisfy its burden of proof; (2) the Bankruptcy Court correctly excluded
debts subject to a bona fide dispute and debts that were not outstanding as of the petition date; (3) the
Bankruptcy Court correctly concluded that there was insufficient evidence that the Joint Venture was
generally not paying its undisputed debts as they came due as of the petition date; and (4) the
Bankruptcy Court properly considered the summary judgment evidence attached to the reply, as
RHHC had ample to time to respond to the rebuttal evidence and did not do so. Dkt. 10.
The court will first set forth the legal standard for reviewing a Bankruptcy Court’s order, and
then it will analyze each of the alleged points of error.
A.

Standard of Review
In reviewing a decision of the Bankruptcy Court, this court functions as an appellate court,

applying the standards of review generally applied in federal appeals courts. Webb v. Reserve Life
Ins. Co. (In re Webb), 954 F.2d 1102, 1103–04 (5th Cir. 1992); see also Coston v. Bank of Mavren
(In re Coston), 991 F.2d 257, 261 n.3 (5th Cir. 1993) (en banc) (citing Griffith v. Oles (In re Hipp,
Inc.), 895 F.2d 1503, 1517 (5th Cir. 1990)). This court generally reviews orders granting summary
judgment de novo, “guided by the same standard as the Bankruptcy Court: Federal Rule of Civil
Procedure 56.” In re Camey, 258 F.3d 415, 418 (5th Cir. 2001) (citing Stults v. Conoco. Inc., 76
F.3d 651, 654 (5th Cir. 1996)); see also In re Oparaji, 698 F. 3d 231, 235 (5th Cir. 2012). However,
the court reviews findings of fact made by the Bankruptcy Court under the clearly erroneous
standard. In re Crowell, 138 F.3d 1031, 1033 (5th Cir. 1998); In re Beaubouef, 966 F.2d 174, 177
(5th Cir. 1992).

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B.

Analysis
The court will analyze each of the issues raised by RHHC in seriatim.
1.

Meeting the Initial Burden

The court reviews the first issue presented by RHHC’s de novo because it concerns a
question of law.
RHHC argues that Bankruptcy Court improperly applied Celotex Corp. v. Catrett, 477 U.S.
317, 323 (1986), because it found that the burden shifted to RHHC to come forward with an issue
of material fact even though HCCI’s motion only contended that RHHC had no evidence to prove
its case. Dkt. 8. RHHC contends that, under Celotex, the movant must identify portions of the
record that demonstrate the absence of a material fact and cannot merely state that the non-movant
has no evidence to support its case. Id.
HCCI argues that their motion correctly identified the portion of the record demonstrating
the absence of a genuine issue of material fact that the Joint Venture was not paying its debts as they
became due. Dkt. 10 (citing Dkt. 2-2 at 385–93 (motion for summary judgment)). The motion
contains the following heading: “No Evidence of Not Paying Debts As they Come Due.” Dkt. 2-2
at 391. The motion then notes that the Bankruptcy Court cannot order relief in an involuntary
bankruptcy case unless the debtor is generally not paying debts as they are due, and the financial
documents and job cost reports produced by RHHC provided “no evidence that there are any unpaid
debts” of the Joint Venture. Dkt. 2-2 at 392.
RHHC argues, in reply, that “[s]ome reference to documents that were produced has to state
a specific reason why [HCCI] believed that the voluminous documents ultimately presented no
genuine issue of material fact whether the Debtor was paying its debts as they became due.” Dkt. 12.

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The court disagrees with RHHC. In Celotex, the U.S. Supreme Court noted that the “party
seeking summary judgment always bears the initial responsibility of informing the district court of
the basis for its motion, and identifying those portions of the ‘pleadings, depositions, answers to
interrogatories, and admissions on file, together with affidavits, if any,’ which it believes
demonstrate the absence of a genuine issue of material fact.” 477 U.S. at 323. However, it
determined that there was “no express or implied requirement in Rule 56 that the moving party
support its motion with affidavits or other similar materials negating the opponent’s claim.” Id.
Here, HCCI pointed to the evidence offered and stated that it did not present an issue of material fact
that the Joint Venture was not paying its debts. See Dkt. 2-2 at 392. It was then up to the nonmovant at that point to demonstrate that there was an issue of material fact. The court, after
conducting a de novo review, finds that Bankruptcy Court did not err in determining that the burden
shifted to RHHC. The objection presented in RHHC’s first issue is OVERRULED. The Bankruptcy
Court’s finding on this issue is AFFIRMED.
2.

Burden to Amend the Bankruptcy Schedules

The court reviews the second issue presented by RHHC de novo because it concerns a
question of law.
The Bankruptcy Court stated:
Despite the extensive discovery that has taken place, and the amount
of time RHHC has had to review the documents, RHHC has not
amended the schedules and statement of financial affairs to identify
any debts. If the discovery resulted in evidence that there were debts
owed by the Partnership, RHHC had an affirmative duty to amend its
schedule and statement of financial affairs to reflect them.
....
Dkt. 2-2 at 841.

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RHHC contends that this finding was in error because it did not have a burden to amend the
Bankruptcy Schedules. Dkt. 8. RHHC notes that it is a general partner of the Joint Venture, and it
argues that only the debtor (the Joint Venture) has an obligation to file and amend the schedules and
statements, citing Bankruptcy Rule 1007(a)(2). Dkt. 8.
HCCI, citing Bankruptcy Rule 1007(g), asserts that general partners have a duty to prepare
and file schedules of assets and liabilities and, as such, have a corresponding duty to amend those
schedules if they are incorrect. Dkt. 10. HCCI additionally contends that, regardless, RHHC waived
this argument for purposes of appeal because it did not raise this argument in the Bankruptcy Court
until it filed its motion to reconsider. Id. (citing Lamle v. Mattel, Inc., 394 F.3d 1355, 1359 n.1 (Fed.
Cir. 2005)).
In reply, RHHC asserts that HCCI’ argument “completely mistate[s] what is required of a
petitioner in an involuntary bankruptcy case prior to the entry of an order for relief.” Dkt. 12.
RHHC contends that Rule 1007(g) only applies after the order for relief. Id. RHHC points out that
it was never ordered to file schedules on behalf of the Joint Venture. Id. RHHC does not address
the waiver argument. See id.
Under Bankruptcy Rule 1007(a)(2), in an involuntary bankruptcy case, “the debtor shall file,
within seven days after entry of the order for relief, a list containing the name and address of each
entity included or to be included on Schedules D, E/F, G, and H as prescribed by the Official
Forms.” Fed. R. Bankr. P. 1007(a)(2). Bankruptcy Rule 1007(b)(1) requires “the debtor, unless the
court orders otherwise” to file various “schedules, statements, and other documents . . . .” Fed. R.
Bankr. P. 1007 (b)(1) (emphasis added). Under Bankruptcy Rule 1007(c), in an involuntary case,
“the schedules, statements, and other documents required by subdivision (b)(1) shall be filed by the
debtor within 14 days after the entry of the order for relief.” Fed. R. Bankr. P. 1007(c) (emphasis
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added). Under Bankruptcy Rule 1007(g), the “general partners of a debtor partnership shall prepare
and file the schedules of the assets and liabilities, schedule of current income and expenditures,
schedule of executory contracts and unexpired leases, and statement of financial affairs of the
partnership.” Fed. R. Bankr. P. 1007(g). Thus, RHHC, as a general partner of the Joint Venture (the
Alleged Debtor), had a duty to “prepare and file the schedules” under Rule 1007(g), but the
schedules required by Rule 1007(b)(1) were not due until fourteen days after the entry of the order
for relief.
However, notwithstanding the absence of an order for relief, RHHC filed schedules and
amended schedules. At the very least, counsel for the filing party had a duty as an officer of the
court to file amended schedules if discovery revealed that the schedules on file were incorrect.
RHHC’s argument that is had no such obligation is nonsensical.1
Moreover, the Bankruptcy Court’s finding that RHHC had a duty to amend the schedule was
made in the context of its finding that HCCI had satisfied its burden and the burden thus shifted to
RHHC to come forward with evidence. The Bankruptcy Court found that because the amended
schedules on file did not show debts owed by the Joint Venture and RHHC had not amended these
schedules to provide evidence of unpaid debts, HCCI met the burden of establishing that “the record
presented to the Court is sufficient under Celotex to require the party with the burden of proof to
present evidence in support of that burden.” Dkt. 2-2 at 841. Thus, even if RHHC did not have a
burden to amend the schedules and failed to do so, it still had the opportunity to present evidence
for trial with its response to the motion for summary judgment.

1

Furthermore, RHHC indicated in its notice of filing of amended schedules that it would
amend the amended schedules and SOFAs “once the books and records of the Debtor can be
accessed.” Dkt. 2-2 at 69.
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The court, after conducting a de novo review, finds no error in the Bankruptcy Court’s
statement that RHHC has an obligation to amend the schedules. The objection in RHHC’s second
issue presented is OVERRULED. The Bankruptcy Court’s order is AFFIRMED with regard to this
issue.
3.

Disclaimers in Amended Schedules

The court reviews the third issue presented by RHHC under a clearly erroneous standard
because this issue relates to the Bankruptcy Court’s factual findings.
RHHC contends that the Bankruptcy Court committed a fundamental error in relying on the
amended schedules when shifting the burden to RHHC because the amended schedules contain a
specific disclaimer that they were unreliable. Dkt. 8 at 18. The disclaimer RHHC included when
if filed the amended schedules reads as follows:
[RHHC] has filed the attached Amended Schedules and SOFAs in
good faith, providing the information available. However, [RHHC]
cannot warrant or represent that these Amended Schedules and
SOFAs are accurate and reliable as they have been filed without the
benefit of reviewing the books and records of the Debtor. Thus the
information provided should not be relied upon for accuracy, and the
Amended Schedules and SOFAs are subject to amendment once the
books and records of the Debtor can be accessed.
Dkt. 2-2 at 69 (notice of filing amended schedules and SOFAs).
RHHC supports its argument that the Bankruptcy Court’s reliance on this admittedly
unreliable evidence to shift the burden was clearly erroneous with Justice White’s statement in his
Celotex concurrence that “[i]t is not enough to move for summary judgment without supporting the
motion in any way or with a conclusory assertion that the plaintiff has no evidence to prove his
case.” 477 U.S. at 328 (White, J., concurring). The argument appears to be that because the record

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contained a disclaimer, it was as if HCCI, in pointing to the schedules, was merely relying on a
conclusory assertion that there was no evidence.
The court prefers to rely on the U.S. Supreme Court’s discussion of the movant’s burden in
the Celotex majority opinion:
[A] party seeking summary judgment always bears the initial
responsibility of informing the district court of the basis for its
motion, and identifying those portions of the ‘pleadings, depositions,
answers to interrogatories, and admissions on file, together with the
affidavits, if any,’ which it believes demonstrate the absence of a
genuine issue of material fact.
Id. at 323. The Court specifically stated that it found “no express or implied requirement in Rule 56
that the moving party support its motion with affidavits or other similar materials negating the
opponent’s claim.” Id. (emphasis in original). The Court summed up by noting, “[o]ne of the
principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported
claims or defenses, and we think it should be interpreted in a way that allows it to accomplish this
purpose.” Id. at 323–24.
Here, when HCCI moved for summary judgment, it pointed to portions of the record on file
with the court and noted that the amended schedules were insufficient evidence that the Joint
Venture was generally not paying its debts at the time the petition was filed. The fact that RHHC
admitted when filing the amended schedules that they were unreliable does not change the fact that
the record did not contain sufficient evidence to support an essential element of RHHC’s claim. It
was appropriate to shift the burden to the party bearing the burden at trial when there was no
evidence in the record of an essential element and HCCI specifically identified the portion of the
record that did not support RHHC’s claim—the allegedly unreliable schedules. The Bankruptcy

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Court appropriately considered the record before it and determined that the next step was for RHHC
to come forth with evidence that there indeed was a triable issue.
The court finds no error in the Bankruptcy Court’s reliance on the absence of proof in the
amended schedules to shift the burden to RHHC to prove there was an issue of material fact. The
objection contained in RHHC’s third issue presented in OVERRULED. The Bankruptcy Court’s
order is AFFIRMED with regard to this issue.
4.

Debts Subject to Litigation at the Time Petition Filed

The court reviews the portion of the fourth issue presented that relates to debts subject to
litigation de novo because the alleged error is an issue of law.
The Bankruptcy Court found that two of the debts presented by RHHC in its response were
subject to bona fide dispute because the debts were subject to pending lawsuits that were “‘answered
and disputed.’” Dkt. 8 at 25 (quoting the Bankruptcy Court’s order). RHHC argues that caselaw
does not support this conclusion and that the “mere existence of pending litigation or the filing of
an answer is insufficient to establish the existence of a bona fide dispute.” Id. (citing various nonbinding authority).2
The main case relied upon by RHHC is In re Vortex Fishing Systems, Inc., 277 F.3d 1057
(9th Cir. 2001). In Vortex Fishing, the Ninth Circuit held first that a Bankruptcy Court’s
determination whether a debt is subject to a bona fide dispute is “essentially a factual inquiry” and
thus subject to review under the clearly erroneous standard. 277 F.3d at 1064 (agreeing with the
Fifth Circuit and the Eighth Circuit with regard to the appropriate standard of review) (citing In re

2

RHHC additionally contends that in one of the disputes, the party alleging that the Joint
Venture owed it money obtained a judgment in its favor after the Memorandum Opinion was filed.
Id. The court, however, cannot consider this judgment as it is outside of the Record considered by
the Bankruptcy Court. See Part II, supra.
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Sims, 994 F.2d 210, 221 (5th Cir. 1993), and In re Rimell, 946 F.2d 1363, 1365 (8th Cir. 1991)). The
court then noted that it must “‘determine whether there is an objective basis for either a factual or
a legal dispute as to the validity of the debt.’” Id. (quoting In re Busick, 831 F.2d 745, 750
(7th Cir. 1987)). As to whether one of the debts at issue was subject to a bona fide dispute, the court
noted that the “mere existence of pending litigation or the filing of an answer is insufficient to
establish the existence of a bona fide dispute,” and the “‘existence of a counterclaim against a
creditor does not automatically render the creditor’s claim the subject of a “bona fide dispute.”’”
Id. at 1066 (quoting In re Seiko Inv., Inc., 156 F.3d 1005, 1007 (9th Cir. 1998)). It found, however,
that the “existence of affirmative defenses may suggest that a bona fide dispute exists.” Id. at 1067.
The court then considered the substance of the litigation over the alleged debt and determined that
the Bankruptcy Court did not clearly err in finding that the debt at issue was subject to a bona fide
dispute. Id.
The Fifth Circuit, like the Ninth Circuit, uses clearly erroneous review and the objective test
discussed by the Ninth Circuit in In re Vortex Fishing Systems. In re Sims, 994 F.2d at 221. “Under
that objective standard, the bankruptcy court must ‘determine whether there is an objective basis for
either a factual or legal dispute as to the validity of the debt.’” Id. (quoting In re Rimell, 946 F.2d
1363, 1365 (8th Cir. 1991)). Under this test,
[t]he petitioning creditor must establish a prima facie case that no
bona fide dispute exists. Once this is done, the burden shifts to the
debtor to present evidence demonstrating that a bona fide dispute
does exist. . . . Because the standard is objective, neither the debtor’s
subjective intent nor his subjective belief is sufficient to meet this
burden. . . . The court’s objective is to ascertain whether a dispute that
is bona fide exists; the court is not to actually resolve the dispute.
In re Rimmell, 946 F.2d at 1365; see also In re Sims, 994 F.2d at 221 (quoting the standard from In
re Rimmell). While the Fifth Circuit has noted that bankruptcy courts “routinely consider the
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existence and character of pending but unresolved litigation as evidence of a bona fide dispute,” it
also has indicated that the mere existence of pending litigation is not dispositive. In re Green Hills
Dev. Co., 741 F.3d 651, 659 (5th Cir. 2014) (noting that the bankruptcy court had conducted a
“thorough, independent review of the evidence” from the litigation related to the alleged debt).
Here, the Bankruptcy Court noted that the lawsuits were answered and disputed by Hassell
Construction Company, Inc. See Dkt. 2-2 at 848. However, the Bankruptcy Court cited to HCCI’s
reply to its motion for summary judgment to support this finding, and the reply contains only a
conclusory statement asserting that the lawsuits were answered and disputed. See Dkt. 2-2 at 848
(memorandum opinion quoting ECF No. 122 at 6, which is the reply); Dkt. 2-2 at 780–81 (reply)
(“The very fact that these are lawsuits, answered and disputed by HCCI, make the claims for
payment asserted therein contested, and therefore they do not qualify to be included or counted as
debts of the alleged debtor which are not being paid.”). There does not appear to be an answer or
any documents in the record relating to these lawsuits other than the petitions and a motion for
summary judgment filed by the plaintiff, Texan Floor Services, Ltd. See Dkt. 2-2 at 593 (original
petition in Applied Finish Systems v. Hassell Construction Company, Inc., et al.); Dkt. 2-2 at 601
(original petition in Texas Floor Service, Ltd. v. R. Hassell Builders, Inc.); Dkt. 2-2 at 611 (Texan
Floor’s motion for summary judgment). Thus, the court is unable to make an independent review
using the objective test to determine if there appeared to be a bona fide dispute as to the Joint
Venture owing the debt or if instead it was just not paying the debt and got sued. The court, of
course, cannot rely solely on HCCI’s conclusory allegation that the debt was disputed, as it does not
meet the Rule 56 standard.

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Therefore, the court REMANDS this case to the Bankruptcy Court so that it may make a
determination under the objective standard set forth in In re Sims as to whether the debts that were
subject to litigation were, indeed, the subject of a bona fide dispute.
5.

Debts Subject to Arbitration at the Time of the Petition

The court reviews the portion of the fourth issue presented that relates to debts subject to
arbitration de novo because the alleged error is an issue of law.
The Bankruptcy Court additionally found that the debt the Joint Venture allegedly owed to
RHHC was subject to a bona fide dispute because it was subject to arbitration before the American
Arbitration Association. Dkt. 2-2 at 849. RHHC contends that this conclusion, like the conclusion
regarding the debts that were subject to litigation, is not supported by caselaw. Dkt. 8. HCCI argues
that RHHC misconstrues the Bankruptcy Court’s holding, pointing out that the Bankruptcy Court
discussed the “‘alleged bad faith conduct of HCCI, alleged disloyal conduct in breach of the
partnership agreement, alleged misappropriation and misapplication of partnership revenues’” when
determining that “these debts are subject to a bona fide dispute as to liability or amount.” Dkt. 10
at 30 (quoting the Bankruptcy Court’s order on the motion for summary judgment).
The court has reviewed the record and concludes that the Bankruptcy Court’s finding that the
debt that was subject to arbitration was subject to a bona fide dispute is not clearly erroneous. The
Bankruptcy Court considered more than the fact that the arbitration was pending and instead looked
at the substance of the arbitration as evidence by documents attached to HCCI’s reply to RHHC’s
response to HCCI’s motion for summary judgment. See Dkt. 2-2 at 849. The court finds that the
evidence the Bankruptcy Court considered was sufficient to satisfy the In re Sims objective standard.
The objection contained in RHHC’s fourth issue presented relating to debts subject to arbitration is
OVERRULED. The Bankruptcy Court’s finding on this issue is AFFIRMED.
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6.

Findings Regarding Current and Delinquent Debts Remaining

The court reviews the fifth issue presented by RHHC under a clearly erroneous standard
because this issue relates to the Bankruptcy Court’s factual findings.
The Bankruptcy Court considered the following debts as “unpaid and not subject to a bona
fide dispute” as of the date of the petition: (1) Traffic Systems Construction, Inc. (McCain),
$49,070.77; (2) Joslin Construction, $3,131.34; (3) Kone, Inc., $44,650.00; (4) Railroad Commission
of Texas, $1,000.00; and (5) One Way Striping & Signs LLC, $1,400.00. Dkt. 2-2 at 850. The
Bankruptcy Court ultimately concluded, however, that RHHC had not produced sufficient evidence
that the debts to Traffic Systems Construction, Inc. (McCain) and to Joslin Construction were due
as of the February 5, 2015 petition date. Id. at 851. The court noted that the invoices resulted from
work completed in November and December 2014. Id. The court found that the evidence in the
record relating to the other three debts indicated that they were old enough to justify an inference that
they were due as of the petition date. Id.
RHHC argues that the Bankruptcy Court erred in its determination that the debt to Traffic
Systems Construction, Inc. (McCain) was not due on the petition date. Dkt. 8 at 21–23. To support
this argument, RHHC points to an exhibit it attached to its response to HCCI’s motion for summary
judgment. Dkt. 8 at 22. This exhibit is dated February 13, 2015, and it states that McCain, Inc., has
a “claim” for labor and materials provided to Traffic Systems Construction Inc. in November 2014.
Dkt. 2-2 at 642–43. According to this document, the amount of the claim is $49,070.77. Id. RHHC
had argued in its motion to strike the evidence HCCI submitted with its reply to RHHC’s response
to HCCI’s motion for summary judgment that this exhibit “‘clearly proves that a debt of $49,070.77
was due as of February 13, 2015, for work performed in November 2014.’” Dkt. 10 at 22 (quoting
the motion to strike). February 13, 2015, however, is eight days after the petition date of February
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5, 2015. Thus, the exhibit does not “clearly prove” that the a debt owed by the Alleged Debtor was
due on February 5, 2015 (the petition date).
RHHC additionally supports its argument by pointing to a spreadsheet provided to the
Bankruptcy Court by Phillip Hassell that sets forth the status of various debts outlined in RHHC’s
response to HCCI’s motion for summary judgment.3 Dkt. 8 at 23 (citing Dkt. 2-2 at 797 (a
spreadsheet attached to Phillip Hassell’s declaration)). In the declaration, Hassell states that the
spreadsheet was prepared at his direction from the records of Hassell Construction Company, Inc.
Dkt. 2-2 at 794. The spreadsheet indicates that a debt to Traffic Systems (McCain) for $447,669.49
was paid by check on January 6, 2015. Dkt. 2-2 at 797. The spot in which one would fill in the date
on which the check cleared is empty. See id. RHHC argues that this is an admission that the debt
to Traffic Systems (McCain) was due and owing as of the petition date. Dkt. 8 at 23.
What is curious is that the debt to Traffic Systems (McCain) that is noted in RHHC’s exhibits
is a debt for $49,070.77, not $447,669.49. See Dkt. 2-2 at 642. The spreadsheet that was attached
to Phillip Hassell’s declaration (provided with HCCI’s reply) refers to RHHC’s exhibit R-7, but it
shows that a check was written to cover a debt for $447,669.47, not a debt for $49,070.77. Dkt. 2-2
at 797. Regardless, even if it is the same debt or part of the debt for the same job, the fact that the
spreadsheet does not have a date on which the check cleared is hardly sufficient evidence to create
an issue of material fact that the Joint Venture was not paying a debt that was due the date of the
petition. The only evidence in the record establishes that the debt for $49,070.77 was for work
completed in November 2014 and that it was due at least by February 13, 2015. See Dkt. 2-2 at 642
(Feb. 13, 2015 claim by Traffic Systems (McCain)). There is no evidence in the record it was due

3

Phillip J. Hassell is the president of Hassell Construction Company, Inc. (one of the
appellees). Dkt. 2-2 at 794.
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on the date of the petition, February 5, 2015. Even if the payment noted on the spreadsheet relates
to this debt, the fact that a check was written prior to the petition date also does not necessarily mean
the debt was due. The court finds no clear error in the Bankruptcy Court’s finding that the debt was
not old enough to be considered as evidence that the Joint Venture was generally not paying its debts
as of the petition date. The objection contained in RHHC’s fifth issue presented is OVERRULED.
The Bankruptcy Court’s finding on this issue is AFFIRMED.
7.

Alleged Inconsistency in Bankruptcy Court’s Opinion

The court reviews the sixth issue presented by RHHC under a clearly erroneous standard
because this issue relates to the Bankruptcy Court’s factual findings.
RHHC argues that there is an inconsistency in the Bankruptcy Court’s findings regarding
which debts were due and undisputed as of the petition date. See Dkt. 8 at 25. It points out that on
page 11 of the memorandum opinion, the Bankruptcy Court noted that three debts were undisputed
and outstanding as of the petition date, and then on the table on page 17 of the order, the Bankruptcy
Court did not include two of these debts as being due as of the petition date. Id. RHHC argues that
these “two findings are hopelessly inconsistent and render as confusing the penultimate finding of
the ratio of undisputed debts that were due as of the Petition Date as compared to the undisputed
debts that had not yet come due as of the Petition Date.” Id. at 26.
On page 11 of the order, the Bankruptcy Court found, after considering evidence relating to
debts that remained unpaid as of the petition date, that three debts were “undisputed and outstanding
as of the petition date”: (1) Traffic Systems Construction Inc. ($49,070.77), (2) Joslin Construction
($3,131.34), and (3) Kone, Inc. ($44,650.00). Dkt. 2-2 at 845. Then, on page 16 of the order, the
Bankruptcy Court again notes that these and two other debts were “unpaid and not subject to a bona
fide dispute as of the petition date.” See id. at 850. It noted that it “must now determine whether
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RHHC has produced sufficient evidence to allow a factfinder to reasonably conclude that these debts
were due as of the petition date.” Id. (emphasis added). The Bankruptcy Court noted that an invoice
that was unpaid as of the petition date is insufficient, standing alone, to allow the factfinder to
conclude that the invoice was due. Id. The court concluded that debts to Traffic Systems
Construction and Joslin Construction, which were incurred in November 2014 and December 2014,
respectively, “were not old as of the petition date”—February 5, 2015. Id. at 851. It found that the
age of the debts to Kone, Inc. and the two other debts it considered as due (which were due on
October 7, 2014, June 11, 2014, and November 2013, respectively) was sufficient to allow it to draw
an inference that the debts were due as of the petition date.4 Id. The Bankruptcy Court provided a
table that set forth the debts that were due and not due as of the petition date. Id. It is this chart that
RHHC contends is inconsistent with the court’s finding on page 11 that the debts to Kone, Inc.,
Traffic Systems (McCain), and Joslin were undisputed and outstanding. However, the Bankruptcy
Court was clear that there is a distinction between outstanding and due. The court finds no
inconsistency and no clear error. The objection contained in RHHC’s sixth issue presented is
OVERRULED. The Bankruptcy Court’s findings with respect to this issue are AFFIRMED.
8.

Outstanding Claim by the U.S. Department of Labor

The court reviews the seventh issue presented by RHHC de novo because it concerns a
question of law.
The Bankruptcy Court set forth all of the alleged debts in a table on page 5 of its order.
Dkt. 2-2 at 838–39. In this table, it listed a debt to the U.S. Department of Labor for $420,300.00
as outstanding as of February 6, 2015, and it stated that it was unknown whether the debt was

4

There was no invoice in the record from Kone, Inc., but there were emails indicating that
the debt was outstanding in September and October of 2014. See Dkt. 2-2 at 850–51.
19

disputed by HCCI. Id. at 839. The Bankruptcy Court did not, however, include this debt in its table
of debts that were due and undisputed as of the petition date. Id. at 851. RHHC contends that this
fact “proves the point that, under Celotex, there was a genuine issue for trial that was established by
[RHHC’s] evidence submitted in support of its [summary judgment] Response.” Dkt. 8 at 24.
HCCI points out that RHHC failed to cite any evidence supporting its contention that the debt
to the U.S. Department of Labor was outstanding as of the petition date. Dkt. 10 at 32. In the
memorandum opinion, the Bankruptcy Court noted that the “alleged debt to the United States Dept.
of Labor was first asserted post-petition.” Dkt. 2-2 at 845 n.5. The court thus held that it would not
consider the debt in its § 303(h)(1) analysis. Id.
The court has reviewed, de novo, the briefing and the documents submitted by RHHC to
support this debt, and it appears that the U.S. Department of Labor issued various citations to Hassell
Construction Company pertaining to Hassell 2012 Joint Venture Contracts for acts occurring on
February 6 and February 7, 2015. See Dkt. 2-2 at 508 (Royce Hassell declaration); Dkt. 2-2 at
524–48 (citations and invoices). The citations were not issued until July 2015. Dkt. 2-2 at 524,
529–48. Thus, they are not evidence that the Alleged Debtor was generally not paying its debts as
of the petition date—February 5, 2015. The objection contained in RHHC’s seventh issue presented
is OVERRULED. The Bankruptcy Court’s finding that the debt to the U.S. Department of Labor
should not be considered in its analysis is AFFIRMED.
9.

Acme Architectural Hardware

The court reviews the issue presented relating the Acme Architectural Hardware de novo
because it concerns a question of law.
Like the alleged debt to the U.S. Department of Labor, RHHC contend that the Bankruptcy
Court listed a debt for $13,433.55 to Acme Architectural Hardware (“Acme”) on its table on page
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5 of the order but did not consider it in its table of debts that were due and undisputed as of the
petition date. Dkt. 8 at 24–25. In the chart on page 5 of the Bankruptcy Court’s memorandum
opinion, the Bankruptcy Court listed a debt to Acme as being outstanding on February 6, 2015 (the
day after the petition) and being paid (allegedly) on this same date. Dkt. 2-2 at 839.
The court has conducted a de novo review of the arguments and evidence. The evidence
attached to RHHC’s response to the motion for summary judgment includes an email from a person
at Acme to Hassell Construction on February 6, 2016—one day after the petition. Dkt. 2-2 at 651
(exhibit R-9 to the Royce Hassell declaration). The email states that an order Acme needed “to get
payment on” was attached. Dkt. 2-2 at 651. The email states that Hassell Construction was
supposed to provide a credit card for payment. Id. Then, an email string that appears to be internal
amongst the Hassell group of companies indicates that they had not seen the invoice before. Id. at
650. There is no evidence in the record that the Joint Venture had an invoice that was due on the
date of the petition—the day before this email. Thus, it was proper for the Bankruptcy Court to
determine that this debt should not be included in the debts that were demonstrative of the Joint
Venture generally not paying its debts as of the petition date. RHHC’s objection to the Bankruptcy
Court’s findings regarding the Acme debt is OVERRULED. The Bankruptcy Court’s determination
on this issue is AFFIRMED.
10.

Incorrect Ratio of Debts

The court reviews the eighth issue presented by RHHC under a clearly erroneous standard
because it relates to the Bankruptcy Court’s findings of fact.
The Bankruptcy Court found that the “record at this stage reflects that $47,050.00 [in debt]
was undisputed and due as of the petition date,” which represents “approximately 47% of all
outstanding and undisputed debts of the Partnership as of the petition date.” Dkt. 2-2 at 852. The
21

court held that the “ratio of delinquent to current debts is not supportive of a pattern of the
Partnership generally not paying its debts as they become due.” Id. It further found that “the totality
of the circumstances reflects that the few debts remaining as of the petition date reflect a pattern of
payment of debts by the partnership [and] . . . failure to pay two relatively small obligations is a far
cry from a general failure to pay debts as they come due.” Id.
RHHC argues that the Bankruptcy Court erred in finding that the ratio of debts due as of the
petition date versus debts that were not due as of the petition date was 47 percent to 53 percent.
Dkt. 8 at 4. RHHC does not take issue with the Bankruptcy Court’s math; rather, it asserts that the
ratio is incorrect because the Bankruptcy Court’s determinations about which debts were due on the
petition date were incorrect, thus throwing off the ratio. Id. at 21–26. HCCI argues that RHHC
failed to carry its burden and that affirming the Bankruptcy Court is therefore proper. Dkt. 10 at 36.
The court makes no determination regarding this issue. If the Bankruptcy Court determines
on remand that the debts that were subject to pending litigation were indeed subject to bona fide
dispute, then there is no error. If, however, the Bankruptcy Court determines that the debts were not
subject to a bona fide dispute, then the Bankruptcy Court is instructed to recalculate these
percentages and determine if the new calculations impact its conclusion.
11.

New Evidence with Reply

The court reviews the ninth issue presented by RHHC de novo because it concerns a question
of law.
RHHC contends that the Bankruptcy Court inappropriately considered new evidence that the
HCCI submitted in its reply to RHHC’s response to HCCI’s motion for summary judgment. Dkt. 8
at 26–27. RHHC argues that it is procedurally inappropriate to submit evidence for the first time in
a reply brief. Id. at 27 (citing Tovar v. United States, No. CIV. A 3:98-CV-1682, 2000 WL 425170,
22

at *4 n.8 (N.D. Tex. Apr. 18, 2000) (Fitzwater, J.), aff’d, 244 F.3d 135 (5th Cir. 2000)). It also
contends that if a court permits a party to submit evidence in a reply, the non-moving party should
be given an opportunity to respond to the evidence. Id.
HCCI notes that its reply brief, to which it attached rebuttal evidence, was filed on August
24, 2016, and the Bankruptcy Court did not issue its order until approximately thirty days later.
Dkt. 10 at 37. RHHC, however, did not file a response to the rebuttal evidence or even seek leave
to file a response. Id. Instead, it filed a motion to strike. Id. HCCI asserts that the Bankruptcy
Court correctly considered the rebuttal reply brief evidence, subject to RHHC’s objections in its
motion to strike. Id.
In its memorandum opinion, the Bankruptcy Court noted that RHHC objected to HCCI’s
introduction of evidence with its reply. Dkt. 2-2 at 842. It agreed that a reply is “‘not the appropriate
vehicle for presenting new arguments or legal theories,’” but found that the materials submitted were
“directly responsive and related to the evidence and arguments raised by RHHC in its response.”
Id. (quoting AAR, Inc. v. Nunuz, 408 F. App’x 828, 830 (5th Cir. 2011)). Specifically, in RHHC’s
response, it identified several alleged debts of the Joint Venture. Dkt. 2-2 at 476. HCCI attached
evidence to its reply to controvert these allegations. Dkt. 775. The Bankruptcy Court specifically
stated that it would consider the evidence and also would consider the objections to the admissibility
of the evidence contained in RHHC’s motion to strike. Dkt. 2-2 at 843.
The court agrees with the Bankruptcy Court that it was within the court’s discretion to
consider the evidence that was submitted in reply because it was directly responsive to new evidence
submitted by RHHC in its response. See Lynch v. Union Pacific RR Co., No. 3:13-CV-2701-L, 2015
WL 6807716, at *1 (N.D. Tex. Nov. 6, 2015) (Lindsay, J.) (“Because Defendant’s reply and related
evidence are responsive to arguments raised and evidence relied on by Plaintiff in his summary
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judgment response, this is not a situation in which a new issue was raised for the first time in a reply
that would require the court to give him an opportunity to respond to Defendant’s reply.”). The court
additionally notes that RHHC could have moved to file a sur-reply to address these issues, and it had
adequate time to do so. See, e.g., Makhlouf v. Tailored Brands, Inc., No. H-16-0838, 2017 WL
1092311, at *5 (S.D. Tex. Mar. 23, 2017) (Harmon, J.) (“While the [Rules] . . . do not expressly
permit the filing of a sur-reply by a non-movant to a movant’s rebuttal brief, ‘[a] sur-reply is
appropriate by the non-movant . . . when the movant raises new legal theories or attempts to present
new evidence at the reply stage.’” (quoting Murray v. TXU Corp., No. Civ. A 3:03CV0888P, 2005
WL 1313412, at *4 (N.D. Tex. May 27, 2005))). Moreover, it is clear that the Bankruptcy Court
considered the arguments contained in the motion to strike, which actually respond to the evidence
in the reply.5 See, e.g., Dkt. 2-2 at 810 (motion to strike) (“Of the nine new exhibits, Exhibits A-D
and Exhibits 1, 3,4 and 5 attached to the Phillip Hassell Declaration are completely irrelevant. The
only marginally relevant exhibit is Exhibit 2 to the Phillip Hassell Declaration.”). This objection is
OVERRULED, and the portion of the Bankruptcy Court’s memorandum opinion relying on the
evidence attached to the reply is AFFIRMED.

5

In the motion to strike, RHHC contends that it would need to depose the “unidentified
person who prepared [Exhibit 2] to the Phillip Hassell Declaration” in order to respond to it. Dkt. 22 at 810. The court notes, however, that RHHC actually relies on Exhibit 2 to the Phillip Hassell
Declaration to support its argument that the debt to Traffic Systems (McCain) was due on the date
of the petition. RHHC has thus effectively waived any objection to the exhibit by relying on it to
support its arguments. Since this is the only exhibit RHHC felt was relevant, any arguments now
presented that RHHC should have been given more of an opportunity to rebut the evidence is
completely disingenuous. Additionally, RHHC provided significant argument regarding why it
believed the other exhibits were irrelevant in the motion to strike, and the Bankruptcy Court
expressly states that it considered these arguments.
24

12.

Failure to Conclude RHHC Produced a Genuine Issue of Material Fact

The court reviews the tenth issue presented by RHHC de novo because it concerns a mixed
question of law and fact.
RHHC’s final point of error is a general contention that the Bankruptcy Court erred in failing
to find that there was a genuine issue of material fact for trial. Dkt. 8 at 29. RHHC states that
“[s]pecific facts were addressed in the declaration of Royce Hassell and the 22 exhibits attached to
[RHHC’s] SJ Response that clearly establish that there existed a genuine issue for trial.” Id. The
court makes no determination on this issue at this time. If the Bankruptcy Court determines on
remand that the debts that were subject to pending litigation were indeed subject to bona fide dispute,
then there is no error. If, however, the Bankruptcy Court determines that those debts were not
subject to a bona fide dispute, then the Bankruptcy Court is instructed to determine if the new
calculations of the debt ratio indicate there is a genuine issue of material fact for trial.

25

V. CONCLUSION
HCCI’s motion to strike (Dkt. 11) is GRANTED.
With regard to RHHC’s appeal, the Bankruptcy Court’s memorandum opinion and order
granting summary judgment is AFFIRMED IN PART. The case is otherwise REMANDED to the
Bankruptcy Court for additional findings of fact regarding whether the debts that were subject to
litigation on the petition date were the subjects of bona fide disputes on that date. If the Bankruptcy
Court finds that they were, it may dismiss this case in its entirety. If, however, the Bankruptcy Court
finds that either or both of the debts were not subject to a bona fide dispute on the date of the
petition, then it is instructed to reconsider its overall calculation to determine if summary judgment
is appropriate when one includes that debt or those debts in the undisputed and due part of the
overall analysis.
Signed at Houston, Texas on July 24, 2017.

___________________________________
Gray H. Miller
United States District Judge

26