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Paradise Hotel Corp. v. Bank of Nova Scotia

filed: March 15, 1988.

PARADISE HOTEL CORPORATION D/B/A PINEAPPLE BEACH RESORT, APPELLANT
v.
BANK OF NOVA SCOTIA



On Appeal from the United States District Court for the Virgin Islands (St. Thomas), D.C. Civil No. 86-014.

Gibbons, Chief Judge, Stapleton, and Mansmann, Circuit Judges.

Author: Stapleton

Opinion OF THE COURT

STAPLETON, Circuit Judge:

This appeal requires us to determine whether a fully secured creditor may participate in the filing of an involuntary bankruptcy petition. We must also decide whether the debtor in this case is foreclosed by its response to the involuntary petition from now asserting claims based on alleged wrongdoing on the part of the secured creditor in the filing of that petition. Finally, we address the issue of whether the complaint states claims upon which relief can be granted.

The district court held that the Bank of Nova Scotia (Bank), although fully secured, could participate as a petitioning creditor in a Chapter 7 proceeding involving Paradise Hotel Corporation (Paradise). It also concluded that Paradise was now barred from asserting that the Bank acted tortiously in causing the involuntary petition to be filed. We agree that the Bank was a proper petitioning creditor. Because we disagree with the court's latter conclusion, however, we will reverse.

I.

Paradise operated a resort hotel in St. Thomas, United States Virgin Islands. The resort venture was financed largely by two loans provided by the Bank that were secured by a mortgage on the hotel's real estate. On January 20, 1984, the Bank terminated negotiations with Paradise concerning repayment schedules for the loans and joined two other Paradise creditors in filing an involuntary petition under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq. (1982 & Supp. 1986). According to Paradise, this filing immediately created a crisis in relations between Paradise and its other creditors, resulted in conditions under which Paradise could not meet the demands of its creditors on a current basis, and left Paradise with no alternative but to file a voluntary petition under Chapter 11, 11 U.S.C. § 1101 et seq. (1982 & Supp. 1986) on January 26, 1984.

On February 13, 1984, Paradise requested that the bankruptcy court stay the involuntary bankruptcy proceeding initiated by the Bank. Paradise insisted that the Bank had caused the involuntary petition to be filed wrongfully because the Bank, as a fully secured creditor, was not entitled to be a petitioner under § 303 and because Paradise was paying its debts as they became due as of the date of the filing of the involuntary petition. Paradise's "Memorandum in Support of Debtor's Motion to Stay Involuntary Petition" made clear that Paradise's primary motivation in seeking the stay was to preserve potential claims arising out of the filing of the petition so that it might pursue these claims after determining how much damage had been occasioned by the filing:

Debtor requests relief of stay rather than dismissal in the present case. From the following arguments, it may be noted that the filing of the involuntary petition may have been patently improper and, as such, may have given rise to unwarranted damage to debtor which only voluntary relief will allow debtor an opportunity to determine. If in fact debtor has suffered from the wrongful filing of this involuntary petition, debtor would request leave to bring an adversary proceeding in which affirmative relief against the petitioners may be obtained.

App. at 12-13. The Memorandum then set forth Paradise's reasons for contending that the filing had been wrongful. The stay was granted by the bankruptcy court.*fn1

With the stay of the Chapter 7 proceeding in place, the Chapter 11 proceeding went forward over the next two years. During that time, neither party asked the bankruptcy court to lift the stay, or to dismiss or convert the Chapter 7 action. Paradise ultimately sold its properties and paid each of its creditors in full.

Shortly after completion of the Chapter 11 proceeding, Paradise brought this suit in the district court. In its complaint, Paradise elaborated on the allegations of its "Memorandum in Support of Debtor's Motion to Stay Involuntary Petition." Paradise alleged that the Bank "maliciously and without reasonable grounds instigated and participated . in the filing" of what it knew was an improper involuntary petition. App. at 22. Paradise again insisted, as it had in the earlier Memorandum, that the impropriety lay both in the fact that the Bank, as a fully secured creditor, was not an appropriate petitioning creditor and in the fact that Paradise had generally been paying its debts as they arose. By wrongfully filing such a petition, Paradise maintained, the Bank had engaged in (1) malicious prosecution, (2) abuse of process, (3) racketeering, (4) false representation, (5) intentional interference with business relationships, and (6) breach of trust. Paradise alleged that it had suffered damages and incurred legal expenses totalling more than $10,000 as a result of the Bank's actions, and that an award in excess of $1,000,000 in punitive damages would be appropriate.

In response to the complaint, the Bank filed a motion to dismiss for failure to state a claim. Treating the motion as a request for summary judgment, the district court concluded that the Bank was entitled to participate in the Chapter 7 filing, despite its fully secured status, and that Paradise's Chapter 11 petition constituted an admission that it was generally unable to pay its debts as they became due. The district court also held that the failure of Paradise "to contest the validity of ...


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