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Vibe Micro, Inc. v. SIG Capital, LLC

United States District Court, D. Nevada

May 22, 2017

VIBE MICRO, INC., Plaintiff,
SIG CAPITAL, LLC., Defendant.



         I. Introduction

         This case was taken on appeal from the Bankruptcy Court on 10/1/14. A status conference was held on 12/12/14. Before the Court are Appellant Vibe Micro's Opening Brief [ECF No. 17], Appellee SIG Capital's Answering Brief [ECF No. 19], and Appellant Vibe Micro's Reply Brief [ECF No. 24].

         II. Background

         This case is an appeal from a final order of the United States Bankruptcy Court for the District of Nevada, issued on September 18, 2014. [ECF No. 1]. The issue on appeal is whether the bankruptcy court erred in holding, as a matter of law, that Vibe Micro, Inc., a shareholder of the involuntary debtor, 8Speed8, Inc., did not have standing to seek statutory remedies under 11 U.S.C. 303(i), and against SIG Capital, Inc., Petitioner, for costs, attorneys' fees, and damages, on behalf of the debtor, 8Speed8, Inc.

         The Court relies on and reiterates the findings of fact of the bankruptcy court, which are reviewed for clear error. In re Summers, 332 F.3d 1250, 1252 (9th Cir. 2003). On December 13, 2013, Appellee SIG Capital, Inc., a Nevada corporation, filed an involuntary petition for relief under Chapter 7 of the U.S. Bankruptcy Code, against the Debtor, 8Speed8, Inc. SIG and Vibe Micro are both shareholders of 8Speed8. SIG was also a creditor of 8Speed8, lending money to fund 8Speed8's development of payment services kiosk systems. A shareholder dispute arose between SIG and Vibe Micro, and Vibe Micro initiated arbitration proceedings against SIG. Subsequent to the initiation of arbitration proceedings, in December 2013, SIG filed an involuntary bankruptcy petition against 8Speed8. 8Speed8 never appeared in the bankruptcy action. Vibe Micro appeared, and asserted that it was representing the interest of 8Speed8, and stated in its pleadings that the debtor was not represented in the proceedings. [ECF No. 18, p 93, Transcript of Bankruptcy Hearing].

         In January 2014, Vibe Micro moved to dismiss the bankruptcy. Vibe Micro also sought to obtain fees and costs, actual damages, and punitive damages pursuant to 11 U.S.C. 303(i). SIG opposed the motion, and the parties agreed that further discovery was necessary before the Court could decide the merits of dismissal on the grounds asserted by Vibe Micro. However, in June 2014, SIG decided that dismissal was appropriate, and filed its own motion to dismiss.

         The Bankruptcy Court held a hearing on both motions to dismiss in August 2014. At this hearing, the Court deemed it appropriate to dismiss the case since both parties had moved to dismiss. It then allowed SIG and Vibe Micro to present oral arguments on the issue of Vibe Micro's entitlement to receive fees under 11 U.S.C. 303(i).

         The Bankruptcy Court issued a verbal ruling on the motions on September 15, 2014. It held that under a Ninth Circuit holding, In re Miles, 430 F.3d 1083 (9th Cir. 2005), only the debtor has standing to seek damages under Section 303(i). It entered an order dismissing the bankruptcy case and denying Vibe Micro any attorneys' fees and costs, and damages, on September 18, 2014.

         III. Legal Standard

         On appeal to the District Court, the Bankruptcy Court's conclusions of law are reviewed de novo, and its factual findings are reviewed for clear error. In re Summers, 332 F.3d 1250, 1252 (9th Cir. 2003). Interpretation of statutes, and standing issues, are issues of law, which are reviewed by the appellate court de novo. In re Mike Hammer Prod., Inc., 294 B.R. 752, 753 (9th Cir. B.A.P. 2003).

         IV. Discussion

         The statute at issue in this case is 11 U.SC. § 303(i). Section 303(i), which provides for costs and fees in the resolution of bankruptcy proceedings, states: “If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment - (1) against the petitioners and in favor of the debtor for - (A) costs; or (B) a reasonable attorney's fee; or (2) against any petitioner that filed the petition in bad faith, for - (A) any damages proximately caused by such filing; or (B) punitive damages. The Ninth Circuit analyzed the language of this statute in In re Miles, which, on its face, “is ambiguous as to whether damages…can be awarded only in favor of the debtor or in favor of other parties.” 430 F.3d 1083 (9th Cir. 2005). Looking at legislative history, determining that “reading 303(i)(2) to allow third parties to seek damages could invite abuse of the system”, and determining that “reading 303(i) to limit standing to the debtor is consistent with the admittedly rather sparse authority addressing this issue, ” the Ninth Circuit held that appellants in that case, a putative debtor's wife and children, did not have standing to recover damages under the statute. In re Miles, 430 F.3d 1083 (9th Cir. 2005).

         Vibe Micro argues that for purposes of fees and costs, it functioned as the Debtor in the bankruptcy action, and thus had standing to seek an award on 8Speed8's behalf. Vibe Micro argues that it was a fifty percent vested shareholder trying to protect the Debtor, 8Speed8. SIG disputes the contention that Vibe Micro was a fifty percent vested shareholder, and rather, states that Vibe Micro, SIG, and Luxor, each were thirty percent shareholders in 8Speed8. The bankruptcy court did not make a factual determination as to Vibe Micro's ownership interest in 8Speed8, and the Court does not deem this determination material to whether, under In re Miles, a shareholder, rather than the Debtor itself, may recover under Section 303(i). Vibe Micro raises facts regarding SIG's purposes in bringing the involuntary bankruptcy petition, and alleges that SIG was bringing it in bad faith, to subvert and/or evade the arbitration proceedings that Vibe Micro had initiated amongst the shareholders, and to liquidate 8Speed8. The bankruptcy court did not make a determination as to whether the petition was ...

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