[00:00:00] Speaker 03: Inray, Carol D. King, Myron Moskovitz appearing for appellant and Herb Fox appearing for appellee. [00:00:09] Speaker 01: Okay, Mr. Moskovitz, you want to reserve some time for rebuttal in this case? [00:00:13] Speaker 02: Yeah, I'll reserve five minutes if I need it. [00:00:16] Speaker 02: This one is much shorter than the one involving Mr. King. [00:00:22] Speaker 02: Please go ahead. [00:00:23] Speaker 02: Ms. [00:00:24] Speaker 02: King is involved because she's also [00:00:29] Speaker 02: libel on this large judgment that Wolverine has, and it was decided that it'd be much easier to bring them both into a voluntary bankruptcy and deal with the whole thing together. [00:00:45] Speaker 02: These accusations I've made against Mr. King do not apply to Carole King. [00:00:53] Speaker 02: We're not making any claim that she's trying to manipulate anything. [00:00:57] Speaker 02: But the issue involving her is very simple. [00:01:04] Speaker 02: She has many fewer creditors, and her answer listed 13 creditors, which is one over the required amount to trigger Wolverine's duty to have at least three petitioning creditors. [00:01:21] Speaker 02: But three of those [00:01:23] Speaker 02: creditors that Ms. [00:01:25] Speaker 02: King listed out of the 13 were secured. [00:01:31] Speaker 02: And we claim they should be disqualified. [00:01:33] Speaker 02: That brings her total down to nine and removes the requirement that Wolverine bring in three creditors. [00:01:44] Speaker 02: The argument is pretty simple. [00:01:46] Speaker 02: The statute itself is not clear on this. [00:01:51] Speaker 02: The legislative history is not clear on this. [00:01:54] Speaker 02: But as a policy matter, it really makes no sense to include secured creditors in the required 12 because you can't really bring them in [00:02:13] Speaker 02: into the required three either on Wolverine's side because these people have no incentive to participate in an involuntary bankruptcy. [00:02:24] Speaker 01: Well, doesn't your clients, doesn't Wolverine's participation kind of disprove that? [00:02:29] Speaker 01: I mean, Wolverine, you told us in the prior case, sought recourse to bankruptcy because its state court remedies weren't working. [00:02:38] Speaker 01: Aren't there situations when a secured creditor would have a legitimate reason to seek relief from the bankruptcy court? [00:02:47] Speaker 02: That's a good point. [00:02:48] Speaker 02: The problem, it's a very practical problem, is at the present time Wolverine's lien has been deemed inferior to Acro's. [00:03:01] Speaker 02: Acro is one of the companies that Mr. King's son [00:03:07] Speaker 02: John controls a different John, and Acro has done everything they can to prevent Wolverine from collecting. [00:03:17] Speaker 03: But I think the broader question is, if you're saying as a policy matter, we should be excluding secure creditors because they really are somewhat indifferent to a bankruptcy, I don't think you can say that. [00:03:28] Speaker 03: I mean, there are situations where collateral might be in peril. [00:03:31] Speaker 03: There are situations where the debtor is acting out of trust. [00:03:34] Speaker 03: There's all kinds of reasons why a secure creditor could care deeply whether somebody is in a bankruptcy. [00:03:38] Speaker 02: Well, let him show that. [00:03:39] Speaker 02: I mean, if that's the particular situation. [00:03:42] Speaker 03: No, I'm not talking about a particular. [00:03:43] Speaker 03: I'm talking about a policy argument. [00:03:44] Speaker 03: We're talking about a policy argument. [00:03:45] Speaker 03: You have to think a little more broadly. [00:03:47] Speaker 03: It's not so much what's happening in this case, which you're basically saying this can never pertain. [00:03:52] Speaker 03: And I don't see how you can get there. [00:03:55] Speaker 02: Well, that's a good point. [00:03:57] Speaker 02: Maybe we shouldn't be saying never, but at least in this case. [00:04:01] Speaker 03: Can I ask you a more fundamental question with respect to the language of 303? [00:04:05] Speaker 03: What is the meaning of the word aggregate if it isn't that some creditors potentially may not be unsecured, but some might be? [00:04:15] Speaker 03: And as long as the total number comes up to the 18,600, that qualifies. [00:04:23] Speaker 02: I don't know. [00:04:24] Speaker 02: I mean, this question. [00:04:26] Speaker 02: is not directly addressed by the legislation. [00:04:31] Speaker 02: You know, the main problem I think is not only that a fully secured creditor [00:04:40] Speaker 02: has no incentive to join the involuntary petition. [00:04:45] Speaker 02: It's got a very strong disincentive because if there's no involuntary bankruptcy, then the secure creditor doesn't need anyone's permission to execute on his lane. [00:05:00] Speaker 02: But once you get in a bankruptcy court, you got to get permission and permission takes time. [00:05:05] Speaker 02: and you may not get it, and meanwhile you got an asset that you want to execute on, fully secured creditors want to stay away from this thing. [00:05:16] Speaker 02: You're almost never going to get them to sign up. [00:05:19] Speaker 02: But, you know, once again, let me go back that this was decided on summary judgment, and they had the burden of showing that [00:05:29] Speaker 02: As the court pointed out, maybe these three secure creditors were not fully secured. [00:05:35] Speaker 02: Maybe they had junior liens. [00:05:37] Speaker 02: Maybe they did have an incentive to join. [00:05:39] Speaker 02: There was no evidence of that, nothing. [00:05:42] Speaker 03: Well, the statute talks about aggregate debt. [00:05:44] Speaker 03: It doesn't talk about incentives one way or the other. [00:05:47] Speaker 03: So what's the answer on aggregate debt? [00:05:51] Speaker 02: Let me check that out. [00:05:52] Speaker 02: Well, I hope that there's an argument. [00:05:54] Speaker 02: Okay, I appreciate it. [00:05:55] Speaker 03: I'll get back to you on that. [00:05:59] Speaker 02: I'll reserve the rest of my time. [00:06:00] Speaker 02: OK. [00:06:01] Speaker 02: OK. [00:06:01] Speaker 02: Real good. [00:06:04] Speaker 01: Let's see. [00:06:04] Speaker 01: Mr. Fox. [00:06:16] Speaker 00: Good morning, Your Honors. [00:06:16] Speaker 00: May it please the Court, Herb Fox, on behalf of Appellee Carol King. [00:06:26] Speaker 00: We see this [00:06:28] Speaker 00: question in the appeal from the order of dismissal as to Ms. [00:06:34] Speaker 00: King to be simply a question of straightforward statutory construction. [00:06:40] Speaker 00: The old act expressly excluded [00:06:46] Speaker 00: Secured creditors from being counted the current act Congress deleted that that exclusion and And and that's sort of the end of the story. [00:07:00] Speaker 00: It's no longer the rule [00:07:01] Speaker 03: I mean, it's a practical matter. [00:07:03] Speaker 03: If you only have one creditor, they would have to be under-secured at least, right? [00:07:07] Speaker 03: But that's not what we're talking about here. [00:07:08] Speaker 00: That's right. [00:07:08] Speaker 03: Yeah. [00:07:09] Speaker 00: And as to the policy, it's not for me or Mr. Moskovitz or, respectfully, this court. [00:07:18] Speaker 00: Congress has ruled and chimed in, weighed in on the policy, and decided that secured creditors can appear as petitioners and also be counted. [00:07:30] Speaker 00: which is really the issue here. [00:07:32] Speaker 00: I will add that just for the record purposes, we actually came in with, I believe, 44 creditors for Ms. [00:07:45] Speaker 00: King, and the judge, the court, excluded all but 13 of them. [00:07:52] Speaker 00: So this wasn't a willy-nilly decision. [00:07:54] Speaker 00: I think the court, Judge Clifford, went through the record and chopped off [00:08:00] Speaker 00: the creditors he thought were improperly joined, but still left us with these 13. [00:08:07] Speaker 03: Can I raise something? [00:08:08] Speaker 03: Mr. Moskowitz has reserved a lot of time, so he may get to this when he comes back to his portion. [00:08:13] Speaker 00: The argument about Section 102-2, an acclaim against a person, do you want to give us your thoughts about that? [00:08:27] Speaker 00: claims against property, claimants, that the parties who have claims against the property cannot join, I think undercuts the whole concept of allowing secured creditors to participate in an involuntary. [00:08:43] Speaker 01: Does it follow that from secured creditors participating that non-recourse secured creditors should also be allowed to participate? [00:08:52] Speaker 00: I don't know that the 303B doesn't really make a distinction between recourse and non-recourse. [00:09:02] Speaker 03: Yeah, no, I agree. [00:09:03] Speaker 03: The implication is if you read 102 to the claims against the debtor include claims against property of the debtor, there's sort of this reverse implication there by using person instead of debtor in 303. [00:09:12] Speaker 03: So that's where I think we're inquiring whether you have a... How do you think we should think of the word person under that circumstance? [00:09:20] Speaker 00: Right. [00:09:21] Speaker 00: I know the issue came up during trial. [00:09:26] Speaker 00: It was bandied about as a possible appellate issue for us, and we abandoned that. [00:09:33] Speaker 00: And I'll also leave it up to your good graces. [00:09:36] Speaker 00: I think, again, we're going to need to look at congressional intent, if it's at all clear what Congress intended in terms of recourse versus non-recourse. [00:09:48] Speaker 00: This also intersects with, or could intersect with California community property law. [00:10:00] Speaker 00: There are many situations in which both debtors, both spouses I should say, are going to be held personally liable for debts against their jointly held their community property. [00:10:15] Speaker 00: And you rear off in that direction, and it's a nightmare. [00:10:20] Speaker 03: I'll throw another idea out there, and maybe nobody thinks this is interesting. [00:10:23] Speaker 03: But to the extent that the phrase is such person, one could argue that such person means it's referring back to a prior use of the word person in the same section. [00:10:33] Speaker 03: And if you do that, you see that the distinction really, the meaning of the distinction in the first instance is we're not talking about governmental entities. [00:10:40] Speaker 03: We're talking about individuals, because they're simply not eligible for involuntary. [00:10:44] Speaker 03: So we're talking about individuals, and we're talking about corporations, and we're talking about partnerships, and so on. [00:10:49] Speaker 03: I mean, that's one way you could think about why a person matters in that context, if it's such a person. [00:10:56] Speaker 03: And I don't know. [00:10:57] Speaker 03: I mean, if that's of no interest to anybody, then we'll decide if it's of interest to us. [00:11:02] Speaker 03: And we'll go from there. [00:11:04] Speaker 00: I think you might end up having to dig deeper into the nature of the debt. [00:11:10] Speaker 00: I mean, you know, if these are debts, I mean, this particular debt, you know, is a secure debt against personal property, against a home, I should say, real property. [00:11:26] Speaker 00: But, you know, the reality is that real property, you know, belongs to the person. [00:11:31] Speaker 00: And to just say you have no protection because it's only property does a disservice to their actual lives. [00:11:47] Speaker 03: Yeah, I mean, one of the problems we have, and everybody knows it, is involuntaries are relatively few. [00:11:53] Speaker 03: The case law is relatively sparse. [00:11:56] Speaker 03: Congress has written sections, and we're all trying to figure out what the heck they meant by them. [00:12:01] Speaker 03: And both of these appeals present really fun questions along those lines, because Congress might have said more they didn't. [00:12:07] Speaker 03: So there we are. [00:12:08] Speaker 00: Unless the Court has any further questions. [00:12:13] Speaker 03: Thank you very much. [00:12:14] Speaker 01: Thank you. [00:12:15] Speaker 01: All right. [00:12:16] Speaker 01: Back to you, Mr. Moskovitz. [00:12:18] Speaker 01: Nine minutes and 15 seconds. [00:12:19] Speaker 01: Please go ahead. [00:12:21] Speaker 02: Okay. [00:12:21] Speaker 02: I don't think I'll need that much. [00:12:23] Speaker 02: So I agree. [00:12:25] Speaker 02: Our original position as to a blanket rule about secured creditors, I think that doesn't work for the reasons the Court pointed out. [00:12:36] Speaker 02: But I want to [00:12:38] Speaker 02: Go back to this list that the debtor is required to provide in order to trigger the three that the petitioner has to come up with. [00:12:52] Speaker 02: What's that list for? [00:12:54] Speaker 02: Well, one of the purposes of the list, I submit, is to enable the petitioner to try to get other people to join them, right? [00:13:06] Speaker 02: Now, as counsel in the prior case pointed out, you know, it wasn't easy to get someone like Fence Factory with a small debt. [00:13:17] Speaker 02: But fully secured creditors are not going to join that petition. [00:13:24] Speaker 02: That part of the list is useless to them. [00:13:26] Speaker 02: If the Bank of America has the first deed of trust on the King's home, they're not coming in. [00:13:33] Speaker 02: There's no reason to it. [00:13:35] Speaker 02: Involuntary bankruptcy can only hurt them. [00:13:38] Speaker 02: It's not going to help them. [00:13:40] Speaker 02: So it seems to me, going back to this notion that this was the King's motion for summary judgment, they had the burden of showing that these three secured creditors were in a position somewhat like Wolverine [00:13:57] Speaker 02: where, yes, they had a lien, but the lien was of dubious value. [00:14:04] Speaker 02: And there would be an incentive for a creditor like that to join with Wolverine and the insurance company of the West. [00:14:13] Speaker 02: But if those secured creditors were fully secured first liens on adequately valued property, they ain't coming in. [00:14:24] Speaker 02: So to me, that's the guts of the case. [00:14:29] Speaker 02: The language of the statute is unclear. [00:14:31] Speaker 02: As you pointed out, this is a rarely used statute. [00:14:35] Speaker 02: Congress had little reason to deal with these questions directly. [00:14:39] Speaker 02: But as a practical matter, this leaves the petitioner for an involuntary bankruptcy in a very difficult position, particularly when not Mrs. King, but Mr. King, [00:14:54] Speaker 02: had his son buy up these other big debts of creditors who definitely would have come in, but they obviously wouldn't because they were trying to protect the kings. [00:15:06] Speaker 02: They weren't trying to really collect their debts. [00:15:09] Speaker 02: There's no record of any of those three judgments having been paid even a nickel. [00:15:18] Speaker 02: They're not there to be paid. [00:15:20] Speaker 02: They're there as a screen. [00:15:21] Speaker 02: to protect the kings. [00:15:23] Speaker 02: So this is another way that they're using to try to frustrate Wolverine's very legitimate evidence to collect this judgment. [00:15:34] Speaker 02: So I think the rule the court should adopt is the burden is on the debtor to show that the list of creditors in their 12 plus are real possibilities of joining the petition. [00:15:50] Speaker 02: Now, you know, I don't fault them for listing Fence Factory, which, and another PG&E and things like that, which are unlikely that you're going, that's the nature of the problem. [00:16:04] Speaker 02: But with the secured creditors thing, no, provide more information about exactly what their situation is. [00:16:12] Speaker 02: Because if they had said on their list to creditors that, [00:16:18] Speaker 02: one or more of their secured creditors was like Wolverine with a lien that's of dubious value, you can be sure that Wolverine would have approached them and wouldn't be here. [00:16:32] Speaker 02: That's all I have, unless there's any questions. [00:16:34] Speaker 02: Any questions? [00:16:36] Speaker 01: Okay. [00:16:36] Speaker 01: Thank you very much. [00:16:37] Speaker 01: Thanks to both sides for your good arguments. [00:16:39] Speaker 01: The matter is submitted. [00:16:41] Speaker 01: Thank you. [00:16:41] Speaker 01: Thank you very much.