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In re Reid

decided: July 21, 1988.

IN RE: ZADOCK REID, DEBTOR-APPELLANT. ARTHUR T. SUSMAN AND MARVIN TEMPLE, PETITIONERS-APPELLANTS,
v.
DALE R. SCHMID, D.D.S., RALPH F. SCHMID, KATHERINE G. DENGLER, AND MICHAEL OVERFIELD, PETITIONING CREDITORS-APPELLEES



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 84 B 8768--Frank J. McGarr, Judge.

Cummings and Flaum, Circuit Judges, and Grant, Senior District Judge.*fn*

Author: Flaum

FLAUM, Circuit Judge.

Dale Schmid, D.D.S., Ralph Schmid, Katherine G. Dengler, and Michael Overfield (the "creditors") filed an involuntary petition in bankruptcy against Zaddock & Co. ("Zaddock") under § 303(b)(1) of the Bankruptcy Code of 1978. 11 U.S.C. § 303(b)(1). Shortly thereafter the creditors filed another involuntary petition against Zaddock's president and principal shareholder Zadock Reid ("Reid"). The district court appointed an interim trustee to manage both Zaddock's estate and Reid's personal estate. Reid appealed the appointment of the interim trustee. We determined that at least on the basis of the evidence relied on by the district court, the creditors' claims against Reid were the subject of a bona fide dispute and therefore could not serve as the basis for an involuntary petition in bankruptcy. In re Reid, 773 F.2d 945 (7th Cir. 1985). Reid and his former attorneys, Arthur T. Susman and Marvin Temple (collectively "appellants"),*fn1 now seek to recover $63,570 in attorneys' fees and expenses incurred in rectifying what the appellants characterize as the wrongful appointment of an interim trustee. The district court denied their fee petition. We affirm.

I.

On June 29, 1984 the creditors filed an involuntary petition in bankruptcy against Zaddock. On July 2, 1984 an interim trustee, Nathan Yorke, was appointed to manage the Zaddock business. Pursuant to his responsibilities as interim trustee, Yorke conducted a hearing at which Reid was examined. Reid invoked his fifth amendment right against self-incrimination and refused to answer any questions other than his name and legal residence.

On July 13, 1984 the creditors filed an involuntary petition against Reid individually. Four days later, the creditors filed an emergency application under 11 U.S.C. § 303(g) to have an interim trustee appointed to take possession of Reid's personal assets in order to prevent loss to his estate. Pursuant to § 303(g), the district court conducted a hearing and concluded that Reid controlled Zaddock and was improperly commingling Zaddock's assets with his own personal assets. As a result, the court appointed Yorke as interim trustee to manage Reid's personal estate and ordered the creditors to post a $10,000 bond to protect Reid against damages, including damages which might be recoverable under 11 U.S.C. § 303(i). Bankr. R. 2001(b).

Reid appealed, arguing that the appointment of the interim trustee was unlawful because the creditors' claims against him were subject to a bona fide dispute and therefore could not serve as the basis for an involuntary petition in bankruptcy. We reversed the district court in a divided opinion, each judge writing separately. In re Reid, 773 F.2d 945 (7th Cir. 1985).

Two judges found that the creditors failed to satisfy their burden under § 303(b)(1) which provides that an involuntary case in bankruptcy may be commenced by three or more creditors, "each of whom is . . . a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute." 11 U.S.C. § 303(b)(1). Reid's alleged liability to the creditors was premised on the theory that the "corporate veil" should be "pierced"--that Reid should be held personally liable for Zaddock's obligations to the creditors because he commingled Zaddock's assets with his own and transferred them to foreign jurisdictions. These two judges determined that the evidence relied on by the district court was insufficient to conclude that Reid was commingling assets and therefore was also insufficient to support the conclusion that the creditors' claims against Reid were not the subject of a bona fide dispute. The lead opinion specifically stated that the creditors therefore lacked standing to file an involuntary petition against Reid and reversed "the district court's grant of the creditors' involuntary petition for the appointment of an interim trustee." Reid, 773 F.2d at 948. The case was remanded to the district court "for further proceedings consistent with [the] opinion." Id.

In his concurring opinion, Judge Cudahy stated:

I agree that the petitioning creditors have not established the absence of a bona fide dispute with respect to their claims against Zadock Reid. I would therefore expressly authorize the district court on remand to conduct further evidentiary proceedings to determine whether the dispute as to Reid's liability is bona fide.

Id. Judge Wood, Jr. dissented, reasoning that the evidence relied on by the district court was sufficient to support its conclusion.

On December 4, 1985, the appellants filed a joint petition for damages, fees, and costs related to the appointment of the interim trustee. The petition was captioned "Joint Petition of Alleged Debtor and His Attorneys Arthur T. Susman and Marvin W. Temple For Damages, Fees and Costs." The district court ruled that the motion was premature. The court interpreted our decision as requiring further consideration of the question of Reid's personal liability for Zaddock's obligations to the creditors. In re Reid, No. 84 B 8768, mem. op. at 3 (N.D. Ill. Jan. 14, 1986). The court therefore denied the petition without prejudice pending further proceedings. These further proceedings, however, were hampered by Reid's repeated failure to attend. Apparently not comforted by the success of his first appeal, it now appears that Reid is outside the country and the possibility of his return is uncertain at best.

On August 29, 1986 the appellants filed a "Joint Petition of Alleged Debtor's Attorneys, Arthur T. Susman and Marvin W. Temple, for Fees and Costs." Although the petition's caption did not specifically refer to Reid, the first sentence stated that "this petition for fees and costs is submitted by the Debtor and the attorneys for Zadock Reid. . . ." The petition was substantially similar to the petition filed on December 4, 1985 except that it omitted the debtor's prior request for damages caused by the wrongful filing of the involuntary petition. The district court denied the fee petition. The appellants now renew their ...


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