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Forever Green Ath. Fields, Inc. v. Dawson

United States District Court, E.D. Pennsylvania

August 13, 2014

FOREVER GREEN ATHLETIC FIELDS, INC., Putative Debtor/Appellee
v.
CHARLES DAWSON, KELLY DAWSON and COHEN SEGLIAS PALLAS GREENHALL & FURMAN, Petitioning Creditors/Appellants

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For FOREVER GREEN ATHLETIC FIELDS, INC., Debtor-in-Possess: ARIS J. KARALIS, ROBERT W. SEITZER, LEAD ATTORNEYS, MASCHMEYER KARALIS, P.C., PHILADELPHIA, PA.

For CHARLES C. DAWSON, KELLI DAWSON, COHEN, SEGLIAS, PALLAS, GREENHALL & FURMAN, PC, Creditors: LESLIE J. RASE, LEAD ATTORNEY, STERN & EISENBERG PC, WARRINGTON, PA; STEVEN K. EISENBERG, LEAD ATTORNEY, STERN AND EISENBERG LLP, JENKINTOWN, PA.

For ROBERT H. HOLBER, CHAPTER 7 TRUSTEE, Trustee: ROBERT H. HOLBER, LEAD ATTORNEY, MEDIA, PA.

For FREDERIC J. BAKER, UNITED STATES TRUSTEE, Trustee: FREDERIC J. BAKER, LEAD ATTORNEY, OFFICE OF THE U.S. TRUSTEE, PHILADELPHIA, PA.

OPINION

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MEMORANDUM

Dalzell, J.

Before us is an appeal from a Bankruptcy Court decision dismissing an involuntary petition based solely on that Court's finding that a petitioning creditor impermissibly used the involuntary petition as a litigation tactic and thus acted in bad faith.

We have jurisdiction to consider this appeal pursuant to 28 U.S.C. § 158(a)(1), which provides that the district courts shall have jurisdiction to hear appeals from final judgments, orders and decrees of the Bankruptcy Courts. We draw our recital of the facts from the Bankruptcy Court's decision and the record before that Court and find Judge Coleman's decision to be thorough and well-reasoned. We will therefore affirm.

I. Factual Background

On April 20, 2012, Charles Dawson, his wife Kelli L. Dawson, and the law firm Cohen, Seglias, Pallas, Greenhall & Furman, PC (collectively, the " Petitioning

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Creditors" ) filed an involuntary petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq., against Forever Green Athletic Fields, Inc. (" Forever Green" or the " Putative Debtor" ). In re Forever Green Athletic Fields, Inc., 500 B.R. 413, 416 (Bankr. E.D.Pa. 2013). Forever Green's principal business was marketing artificial turf for athletic fields. Id. at 419. The Dawsons have a $306,006.24 Consent Judgment against Forever Green dated April 5, 2011 as a result of litigation in Louisiana. Record on Appeal (" ROA" ) # 13 (FGAF MTD, Ex. 1). Cohen, Seglias has a $206,126.00 judgment against Forever Green entered by the Court of Common Pleas of Philadelphia County, about which the Bankruptcy Court stated " [n]o additional information has been provided." Forever Green, 500 B.R. at 420.

On November 1, 2013, after a two-day hearing and the parties' post-hearing briefing, Judge Magdeline D. Coleman of the United States Bankruptcy Court for the Eastern District of Pennsylvania found by a preponderance of the evidence that Charles Dawson filed the involuntary petition " in furtherance of an improper bankruptcy purpose." Id. at 430 (citing In re K.P. Enterprise, 135 B.R. 174, 179 (Bankr. D.Me. 1992)). She held that the record showed the litigation to be the " latest tactic employed by Mr. Dawson to frustrate Forever Green's attempts to litigate its claims against him and the entities he owns," id. at 430-31. The Court held that " [a]fter due deliberation and for sufficient cause[,] . . . Mr. Dawson was not motivated by a proper bankruptcy purpose," id. at 416, and granted the Putative Debtor's motion to dismiss on the grounds that the involuntary petition was a bad-faith filing and an abuse of the bankruptcy court system. Id. at 415, 430. This appeal ensued.

A. The Parties

Forever Green is a Pennsylvania corporation whose sole officer and director is Keith Day. Id. at 419. Although Day testified in the Bankruptcy Court hearing that Forever Green was still operating and that he was trying to restart the business, Hearing Transcript (" Tr." ) 1/15/13 at 59:23 and 60:2, the parties stipulated that Forever Green had suspended active business operations in 2010 and was not paying its debts as they came due at the time of the involuntary filing. Joint Stip. at ¶ ¶ 25, 26. The parties do not dispute that the Petitioning Creditors hold bona fide claims. Forever Green, 500 B.R. at 418.

During the two-day Bankruptcy Court hearing, Day testified that Forever Green's current assets exceeded $6,000,000 -- ($5,000,000 of which represented Forever Green's claim against Charles Dawson and other current and past co-owners of ProGreen Sports Surfaces, LLC, also a marketer of synthetic turf (collectively, the " ProGreen parties" )). Tr. 1/15/13 at 14:1, 14:7-15:23. See also Forever Green, 500 B.R. at 419. Forever Green's other assets include a malpractice claim against its lawyer, Stephen Babcock, in connection with litigation in Louisiana against Charles Dawson and his wife, which Day valued at $1,000,000 and Babcock offered to settle for $100,000. Tr. 1/15/13 at 52:10-12. See id. There was little evidence presented of other Forever Green business activity. See id. (noting Forever Green's operating account showed no activity during 2012). Its bank account balance barely exceed thirty dollars during the course of the previous year. ROA # 43.

On the other side of the balance sheet, Day testified that Forever Green's liabilities totalled approximately $2,300,000. Tr. 1/15/13 at 52:20-23. The largest creditor is M & T Bank (as successor to Wilmington Trust of Pennsylvania) to whom Forever

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Green currently owes about $1,300,000 arising from a business line of credit. Id. The record indicates that Wilmington Trust secured its claim with a lien on all Forever Green assets inclusive of its claims against the ProGreen parties and Babcock. Forever Green, 500 B.R. at 419. The parties agreed, prior to the filing of the involuntary petition, that Wilmington Trust's claim is senior to the Dawsons' claims, as evinced by a UCC financing statement.[1] See Joint Stip., ROA # 18. See also Tr. 2/11/13 at 35:12-22.

Charles Dawson was a former Forever Green salesman turned competitor. Tr. 1/15/13 at 10:6. In 2006, he became a member of ProGreen Sports Surfaces, LLC, which had two other members. See Forever Green, 500 B.R at 420; see also Dawson Depo., 1/5/12 at 88:11-89:4. At the time the Petitioning Creditors filed the involuntary petition, he had become a 50% member. Tr. 1/15/13 at 8:1, 9:6 and 13:22-23. See also Dawson Depo., 1/5/12 at 93:8-18. The record before the Bankruptcy Court did not explain the interplay between Dawson's role at ProGreen and Forever Green's claims against that entity. But Judge Coleman nonetheless pointedly observed that " it is clear that Mr. Dawson, as an owner of one of the entities sued by Forever Green, has fairly sizeable financial interest in the outcome of these claims." Forever Green, 500 B.R at 420.

B. The Prior Litigation

The bankruptcy appeal before us turns on whether the Petitioning Creditors filed the involuntary petition in bad faith to frustrate Forever Green's litigation against the Dawsons and others. Id. at 416. But context is all: the present litigation is the latest chapter in a decade-long Dickensian saga between the parties. Tr. 1/15/13 at 8:1 and 9:6.

As Judge Coleman observed, the involuntary petition may be traced to June 9, 2005, when Forever Green filed suit in the Bucks County Court of Common Pleas against the ProGreen parties and others. Forever Green, 500 B.R at 420-21. Seeking damages in excess of $5,000,000 arising from the alleged diversion of corporate assets and opportunities, Forever Green alleged in that lawsuit that Charles Dawson " played a central role in the purported scheme and used his position as a sales representative of Forever Green to divert corporate assets from Forever Green to ProGreen." Id. at 421. See also Tr. 1/15/13 14:7-16:9. In July of 2005 the action was removed to this Court. See Forever Green Athletic Fields, Inc. v. ProGreen Surfaces, Inc. et al., Civil No. 05-3519.

At about the same time, the Dawsons filed suit against Forever Green in Louisiana, seeking unpaid commissions they alleged Forever Green owed Charles Dawson and unpaid wages it allegedly owed to his wife. Forever Green, 500 B.R at 421. On March 2, 2011, a Consent Judgment was entered by the 19th Judicial District Court, Parish of East Baton Rouge, Louisiana in the case captioned Charles C. Dawson and Kelli L. Dawson v. Forever Green Athletic Fields, Inc., David Ripka and Keith Day, Civil No. 547,844, Sec. 26, resolving the main claims between the parties.[2] Under the Consent Judgment, judgment

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was entered against Forever Green and for Charles Dawson and Kelli Dawson for $306,006.24, including interest and costs. Forever Green, 500 B.R at 421.

While the Louisiana litigation was running its course, the District Court proceeding in Pennsylvania had been suspended in favor of binding arbitration. Id. Under the April 1, 2008 Binding Arbitration Agreement (" Arbitration agreement" ) between the parties to the District Court litigation -- Forever Green, Day and another individual on the one hand and Charles Dawson and the other ProGreen parties on the other -- the parties agreed to resolve all their disputes except for those pending in Louisiana. ROA # 13, Ex. 7 at 1. The parties agreed to appoint Howard D. Venzie, Jr., Esq. of the law firm Venzie, Phillips & Warshawer, P.C., as arbitrator. Id. at 2. Judge Coleman noted that the Arbitration agreement also provided:

Cooperation. The parties hereto agree to cooperate and assist in the implementation of this Agreement, and hereby agree to execute any and all documents necessary to effectuate their Agreement hereunder.

Forever Green, 500 B.R at 422 (citing Arbitration agreement ¶ 16).

On March 30, 2011, less than one month after the entry of the Consent Judgment, the ProGreen parties submitted a motion to terminate arbitration with Mr. Venzie. ROA # 13, Ex. 9. The ProGreen parties contended that their motion should be granted because Forever Green was insolvent -- neither it nor Day and his colleague " have the ability or desire to pay" the arbitration fees, and the Forever Green parties had repeatedly failed to provide current financial information and other disclosures. Id. at 2, 9. The motion to terminate listed $498,292.00 in federal and state tax liens against Forever Green in addition to Wilmington Trust's $1,350,000 claim.[3] Id. at 10, 12. It also listed judgments recorded against Forever Green, including the $206,126.00 judgment of Cohen, Seglias recorded on December 29, 2010 and the Dawsons' $306,006.24 Consent Judgment. Id. at 11. The motion made clear that any judgment creditors -- including the Dawsons -- might serve a writ of execution on the arbitrator as garnishee, thereby preventing the arbitrator from paying any of Forever Green's debts or disposing of its property. Id. at 15.

Over the next few weeks, the Dawsons took steps to do just that. On April 26, 2011, they recorded their Louisiana judgment,

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by then $326,610.07 with interest, in the Court of Common Pleas of Philadelphia County.[4] ROA # 13, Ex. 2 at 2. At the same time, their counsel advised the arbitrator that they would be seeking to garnish " any [Forever Green] funds in [his] or [his] firm's possession," at that time consisting only of a $5,081.82 advance deposit on the arbitrator's fees. ROA # 13, Ex. 11 at 1. The arbitrator informed the parties the following day that the Dawsons' demand placed him " in a position of being adverse to the parties . . . and to . . . the Dawsons who are related to the subject matter of this arbitration and have an interest in the outcome." Id. Concluding that the demand " create[d] ethical implications regarding impartiality" and put payment for his services at risk, the arbitrator suspended the proceedings indefinitely. Id. at 1-2. The next day, " knowing that their action would cause the suspension of the arbitration," Forever Green, 500 B.R. at 423, the Dawsons obtained a writ of execution against the arbitrator and his law firm. Id.

Charles Dawson explained his strategy during his deposition.

[Plaintiffs' attorney:] At this point, after obtaining the judgment, what was your intention as to what to do with it?

[Dawson:] Get paid.

[Plaintiffs' attorney:] And how did you propose to get paid?

[Dawson:] Find any available asset that Forever Green may have and try to use the lien to seize it.

. . .[Plaintiffs' attorney:] Okay. And this is generally what you wanted [your attorney] to do, is to make the arbitration stop?

[Dawson:] Of course.

[Plaintiffs' attorney:] Okay. And the reason was?

[Dawson:] I don't believe it has any merit and I'm sick of paying attorneys. I am for compromise and no one else is. That's why.

. . .

[Plaintiffs' attorney:] Okay. Were you aware that one of the reasons set forth or that would be used to try to terminate this proceeding was the fact that the Dawson judgment now being transferred to Pennsylvania would be used to levy on any monies to be paid to the arbitrator?

[Dawson:] I'm going to use that judgment to levy any monies I can find anywhere, whether it be the arbitrator or anyone else. So, yeah, if we can get the lien paid, that's my number one objective. If I can get it paid, I'm very happy.

Dawson Depo., 1/5/12 at 181:3-10, 186:17-24, 187:15-188:1

The Forever Green parties responded by filing a complaint in the Court of Common Pleas of Philadelphia County against the Dawsons and others seeking a declaratory judgment and other equitable relief. Forever Green, 500 B.R. at 423.

While that Philadelphia action was pending, in November of 2011 the Dawsons' Louisiana counsel wrote to a Forever Green attorney proposing a global settlement under which Charles Dawson would offer testimony helpful to Forever Green

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in its prosecution of its Louisiana malpractice claim if the Consent Judgment were paid off. Id.; see also ROA # 13, Ex. 14. In addition, the Dawsons would grant Forever Green a full discharge of their claim if it obtained a release of personal guaranties by two other ProGreen parties from Wilmington Trust. Id. The Dawsons' counsel wrote that the arbitration was in an " indefinite state of suspension" and " [u]nless and until the Dawsons' Judgment for about $300,000.00 is paid off in full, that indefinite state of suspension will continue." ROA # 13, Ex. 14 at 1. The settlement attempt failed. Forever Green, 500 B.R. at 423.

On March 6, 2012, the court in the Philadelphia action issued a scheduling order in anticipation of a final order that would declare whether the payments made to the arbitrator inclusive of the advance deposit were immune from garnishment and free of all claims by the Dawsons. Id. at 424. The scheduling order required (1) a joint stipulation of facts by March 30, 2012; (2) the Forever Green parties' memorandum of law in support for their request for declaratory relief by April 18, 2012; and (3) by May 3, 2012, the defendants' memorandum of law in opposition to plaintiffs' request for declaratory relief. Id.

On March 30, 2012, the parties filed the joint stipulation and on April 18, 2012, the plaintiffs filed their memorandum. Id. But the defendants failed to file their response. Instead, on April 20, 2012, the Petitioning Creditors filed the involuntary petition against Forever Green and simultaneously filed a suggestion of bankruptcy in the Philadelphia action. Id. The Court of Common Pleas responded by placing the action in deferred status.[5] Id. On May 14, 2012, the Dawsons removed the Philadelphia action to the Bankruptcy Court for the Eastern District of Pennsylvania. Id.; see also ROA # 9 at 1.

II. Procedural Background

A. Procedural History

The procedural history in the Bankruptcy Court is no less tangled than the prior litigation. On April 23, 2012, the Petitioning Creditors filed an amended petition, and on June 1, 2012 the court filed an Order of Relief granting relief under Chapter 7 of the Bankruptcy Code by judgment of default. Forever Green, 500 B.R. at 416-17. On June 21, 2012, Forever Green filed a motion to vacate the Order of Relief, arguing that the Court lacked jurisdiction to enter the Order because the Petitioning Creditors had never properly served the summons and complaint: the Petitioning Creditors' proof of service failed to identify an officer, a managing or general agent, or any other agent authorized to receive service of process pursuant to Rule 4(h).[6] Id. at 417. The Bankruptcy Court held that personal jurisdiction

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over Forever Green had not been established and on September 7, 2012 Judge Coleman vacated the Order of Relief and ordered the Petitioning Creditors to effect service of the involuntary petition in accordance with the procedures set forth in Fed. R. Bankr. P. 1010. Id.

On October 9, 2012, the Petitioning Creditors filed a certificate of service certifying the petition had been mailed to Day. Id. On October 26, 2012, Forever Green filed its motion to dismiss, contending that service of process was again insufficient [7] and that the petition should be dismissed because it was filed in bad faith. Id. On January 15 and February 11, 2013, the Bankruptcy Court held evidentiary hearings on the motion to dismiss, at which Forever Green's officer and director, Day, was the only witness. Id. at 418. Day testified that Forever Green had not been depleting its assets. Tr. 1/15/13 at 53:19-20. He further stated that he had been personally funding the litigation and had paid down trade claims and tax from his own funds. Id. at 55:9-56:24. Day also testified that he decided to pay off with his own funds " [t]hose [debts] that [he] had financial personal guarantees on." Tr. 2/11/13 at 22:1-5. Asked whether he had paid the Dawsons anything, Day answered, " There are other creditors ahead of them," among them Wilmington Trust, holder of a filed lien. Day explained that Wilmington Trust is " a secured creditor ahead of all unsecured creditors." Id. at 35:12, 20-21.

At the close of the hearings the parties briefed Judge Coleman as to whether the Court should " dismiss the [i]nvoluntary [p]etition as being filed in bad faith because Mr. Dawson invoked [the] Court's jurisdiction for an improper purpose." Forever Green, 500 B.R. at 418. The Petitioning Creditors continued to argue that Mr. Dawson's status as a judgment creditor " inoculates him from any imputation of bad faith." Id. at 424.

B. The Decision Below

On November 1, 2013, Judge Coleman issued her decision dismissing the involuntary petition, finding that " [t]he record before this Court demonstrates that Mr. Dawson effectuated the filing of the [i]nvoluntary [p]etition in furtherance of his pre-existing scheme to frustrate the prosecution of a pending arbitration proceeding as well as to force Forever Green to pay Mr. Dawson's claim ahead of Forever Green's other creditors." Id. at 416. In her decision, Judge Coleman found that the fact that Dawson is a bona fide creditor " does not establish that he invoked [the Bankruptcy] Court's jurisdiction for a proper bankruptcy purpose." Id. at 424. Rather, ...


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