Huffman v. Armenia, Case Nos. A06A2105; A06A2106; A07A0616, 2007 Ga. App. LEXIS 325 (Ga. App. March 20, 2007).
In a prior post, I discussed a case that held that a debtor entity may file a Bankruptcy petition even when a Receiver has been appointed by the state court. While I do not know that there is much dispute over the fact that federal Bankruptcy law pre-empts state law, and therefore, the appointment of receivers, but what happens when the officers or directors of the entity attempt to file a Bankruptcy petition without the appropriate authorization of the Board? The Georgia Court of Appeals provides and answer. Footnote 3 identifies the issue –
Huffman also argues that the trial court erred in finding him in contempt because the corporation (HELP) was entitled to file for bankruptcy and the court lacked the authority to prevent HELP from doing so. Huffman’s argument misses the point. The issue is not whether the court improperly tried to prevent the corporation (or the receiver on its behalf) from filing for bankruptcy. Instead, the issue is whether Huffman violated the TRO by acting unilaterally in filing the unauthorized, pro se petition on behalf of the corporation.
The background facts are as follows:
Appellees … are minority shareholders of Home & Equity Loan Products, Inc. ("HELP"). Appellant David Huffman is the chairman and president of HELP and a member of the corporation’s board of directors. On December 20, 2005, the appellees filed a verified complaint, directly and derivatively on behalf of the corporation, against HELP’s board of directors for, inter alia, breach of fiduciary duty, gross negligence, fraud, civil RICO, and misappropriation of corporate opportunities. The same day, the appellees filed an emergency motion for a temporary restraining order and for the appointment of a receiver to assume control of HELP and another business, Dream Avenue Mortgage Corporation ("Dream Avenue"), which is owned by Huffman.
On January 6, 2006, the trial court conducted a hearing on the appellees’ motions. Huffman appeared pro se at the hearing. During the hearing, the court made a verbal ruling appointing a receiver for HELP and Dream Avenue, requiring the HELP directors to cooperate with the receiver, and prohibiting the directors from transferring any corporate assets, doing anything that would deplete the assets, or interfering with the business of HELP and Dream Avenue. On January 19, 2006, the court issued a written order appointing the receiver and restraining Huffman and the other HELP directors from "misappropriating, converting, transferring, or otherwise using or depleting" the assets of HELP (hereinafter, the "TRO").
Notwithstanding the entry of the TRO and appointment of a Receiver, Huffman filed a pro se Chapter 7 Bankruptcy Petition on behalf of HELP. The Petition did not inclide a Board authorization or schedules.
2Although Huffman’s appellate briefs repeatedly claim that HELP’s board of directors unanimously voted to authorize the filing of the bankruptcy petition and signed a resolution to that effect before the petition was filed, there is no evidence in the record to support of these statements and, in fact, the evidence contradicts these statements.
Appellees then filed a Motion for Contempt in Superior Court –
On January 26, 2006, the trial court conducted a motion hearing, during which it found that Huffman filed the bankruptcy petition in a "deliberate attempt to destroy" the appellees’ lawsuit and, as a result, was in willful contempt of the TRO. The court told Huffman that he could purge himself of the contempt by immediately filing a motion to dismiss the bankruptcy petition.
On January 31, 2006, Huffman filed a Motion to Dismiss the Bankruptcy petition. Additionally, a Motion to Dismiss was filed in the Bankruptcy Court by the Receiver, and joined by Appellees.
On February 14, 2006, the bankruptcy court held a hearing on the motions to dismiss. At that hearing, Huffman’s attorneys, Neil Wilkinson and Paul Wright, withdrew Huffman’s pro se motion to dismiss the bankruptcy petition and argued in opposition to the appellees’ motion to dismiss the bankruptcy petition. When the bankruptcy court noted that the petition could not be properly filed unless there was a board of directors resolution authorizing it, Wilkinson specifically assured the court that HELP’s board of directors had approved a resolution authorizing Huffman to file the bankruptcy petition, telling the court that he had "seen it." The bankruptcy court warned Wilkinson that "if you don’t have that board resolution, you’re sunk," so "if the board resolution exists, you’d better produce it."
Apparently, at the February 14, 2006 hearing, no Board authorization existed –
Two days later, Wilkinson contacted an attorney representing another HELP board member, Ronald Baker. Wilkinson told the attorney that the bankruptcy court had directed Baker to sign a resolution authorizing the bankruptcy petition in order to "cure this defect" in the bankruptcy filing. After consulting with Baker, the attorney signed the resolution on behalf of Baker on February 16, 2006. Wilkinson filed the resolution with the bankruptcy court on February 21, 2006. On March 2, 2006, however, the bankruptcy court dismissed the petition, finding that "the undisputed evidence shows that the Chapter 7 Petition was filed without the appropriate Board authorization" and that Huffman had failed to cure the defects in the petition.
Additional contempt proceedings were held in Cobb Superior Court-
On March 7, 2006, the trial court conducted another hearing to determine whether to hold Huffman, Wright, and Wilkinson in contempt of the TRO for failing to withdraw the unauthorized bankruptcy petition and for opposing the appellees’ motion to dismiss the petition. In an order issued the next day, the court found that these acts were part of a deliberate effort to defeat the receivership, the TRO, and the appellees’ lawsuit, and that Huffman’s contumacious acts had cost the receiver and his attorney an "inordinate amount of time and expense." Consequently, the court found Huffman in continued contempt and ordered him to pay $17,899 in fees to the receiver and the receiver’s attorney (hereinafter, Contempt Order II).
In a subsequent hearing, the court considered the appellees’ motion for a citation of contempt and an award of attorney fees against Wilkinson. Following a hearing, the trial court found that, at the time Wilkinson filed the motion to withdraw Huffman’s pro se motion to dismiss the bankruptcy petition, Wilkinson knew about the TRO. The court then found that Wilkinson deliberately violated the order and that his actions constituted contempt. The court also found that the bankruptcy action was interposed for delay, lacked any justification, and was based upon grounds that were frivolous, groundless, vexatious, and totally without merit. The court ordered Wilkinson to pay $32,000 in attorney fees to the appellees, and ruled that Wilkinson could purge himself of his contempt by paying the fees (hereinafter, "Contempt Order III").
Appeals of the three contempt orders followed. The Court first held that the contemt orders were civil and not criminal contempt. On appeal from a finding of civil contempt, "if there is any evidence from which the trial court could have concluded that its order had been violated, we are without power to disturb the judgment absent an abuse of discretion."
The Court reversed the first contempt order (the filing of the Bankruptcy Petition) because the act in question took place before the written TRO was entered (although subsequent to the oral TRO).
The second contempt order was affirmed.
As noted above, the undisputed evidence in the record shows that Huffman filed the pro se bankruptcy petition on behalf of the corporation, that Huffman is not a lawyer, that neither the receiver nor the corporation’s board authorized the petition before it was filed, and that Huffman had failed to attach the required schedules to the petition. Moreover, at the time of the February 14 bankruptcy hearing, Huffman knew that he had lacked the capacity and authority to file the petition on behalf of HELP. Even so, Huffman and his attorneys continued to fervently oppose efforts to dismiss the petition, going so far as to misrepresent to the bankruptcy court that the HELP board had passed a resolution authorizing the bankruptcy petition before Huffman had filed it. … In the briefs filed in this Court on behalf of Huffman, attorneys Wilkinson and Wright repeatedly and falsely stated that the HELP board of directors had unanimously authorized Huffman’s filing of the bankruptcy petition before Huffman filed the petition on January 13, 2006.7
7 The briefs contain, inter alia, the following false statements and blatant misrepresentations: "[O]n January 12, 2006 the [HELP] Board unanimously exercised its business judgment to direct the filing of a Chapter 7 petition." * "The [bankruptcy] petition was properly authorized, . . . because the Board acted unanimously to approve the Petition." * "The [HELP board’s bankruptcy] resolution should have been attached to the Petition when filed, but was not." * "[T]he trial court was asked to appoint a receiver over the assets of [HELP.] . . . [Then,] the board of directors of [HELP] unanimously voted to cause the corporation to file a Chapter 7 Bankruptcy Petition[.] . . . [T]he corporation then filed the Bankruptcy Petition[.]" * The bankruptcy petition was filed with the "unanimous consent of [the] directors." * "The alleged contempt consists of lawful and proper corporate actions taken in the Bankruptcy Court, with the unanimous approval of the board of directors of the corporate debtor, Home Equity Loan Products, Inc."
The evidence of record contradicts such statements. Moreover, during a July 2006 contempt hearing in the court below, Wilkinson admitted that he had never seen a board resolution authorizing the bankruptcy petition that had been signed before the petition was filed and that there was no evidence that the board had authorized the petition.
Wilkinson and Wright also falsely stated in the appellate briefs that the corporation "successfully opposed the receiver’s motion to dismiss the Bankruptcy Petition and cured the non-fatal defects" in the petition. In fact, the record clearly shows that bankruptcy court dismissed the petition after finding that the petition was unauthorized and that Huffman and his attorneys had failed to cure the defects. Wilkinson admitted this during the July 2006 contempt hearing.
The third Contempt Order was also affirmed.
Wilkinson appeals from Contempt Order III, contending the trial court erred in finding him in contempt for assisting Huffman in the bankruptcy case because "any order seeking to prevent Huffman from utilizing federal bankruptcy proceedings was invalid." Wilkinson argues that "a state court receivership cannot operate to deny a corporate debtor access to this nation’s federal Bankruptcy Courts." As discussed in Division 3, supra, Huffman, a non-lawyer, had no right to file a pro se, unauthorized bankruptcy petition on behalf of HELP. Therefore, to the extent that the TRO prevented him from doing so, it was, at most, superfluous. Moreover, the TRO did not prevent any authorized person or entity from pursuing bankruptcy protection on behalf of HELP, nor did it prevent Huffman from filing personal bankruptcy. Accordingly, this enumeration lacks merit.