921 F.3d 1193

BENNETT, Circuit Judge, dissenting:
The Majority holds that, under Miles v. Okun (In re Miles) , 430 F.3d 1083 (9th Cir. 2005), a third party who appears for a debtor and successfully defends against an involuntary bankruptcy petition can never request that the debtor be awarded costs, a reasonable attorney's fee, or damages. The Majority finds that this is the case even when, as here, the debtor never appeared in the involuntary bankruptcy action, was prevented from appearing by its deadlocked governance, and the third party who appeared on behalf of the debtor successfully defended the involuntary bankruptcy. This rule, according to the Majority, is absolute, regardless of how closely related the third party is to the debtor, and even though the third party only seeks an award in favor of the debtor. Because Miles never went so far, and because I believe the Majority's rule is inconsistent with both the relevant statutory text and the policies underlying the Bankruptcy Act, I respectfully dissent.
Appellant Vibe Micro, Inc. owned 50% of the debtor 8Speed8's vested voting shares. Appellee SIG, LLC owned contingent shares in 8Speed8, which had not vested at the time of the involuntary bankruptcy petition. 8Speed8's board of directors reflected its collective ownership, with a director appointed from each of the owners, including SIG. Any action taken on behalf of the company required a two-thirds majority of the directors or the shareholders.
On December 13, 2013, SIG filed an involuntary bankruptcy petition against 8Speed8. According to Vibe Micro, both SIG and Luxor Entertainment, Inc.-the other 50% shareholder-intended to liquidate 8Speed8 contrary to Vibe Micro's position and inconsistent with its interests. Since "no one else could or would appear," Vibe Micro filed a motion to dismiss on behalf of 8Speed8, which the bankruptcy court granted. Vibe Micro also sought, on behalf of the debtor, 1) costs or a reasonable attorney's fee, pursuant to 11 U.S.C. § 303(i)(1) ; and 2) "damages proximately caused by" what it claimed was the bad faith filing of the petition, pursuant to 11 U.S.C. § 303(i)(2). The bankruptcy court granted Vibe Micro's motion to dismiss, but it (and later the district court) held that Vibe Micro did not have standing to seek either fees or damages that would be awarded to the debtor because Vibe Micro was not actually "the debtor."
Involuntary bankruptcy is a drastic course of action that carries significant consequences, and "[f]iling an involuntary petition should be a measure of last resort." Higgins v. Vortex Fishing Sys., Inc. , 379 F.3d 701, 707 (9th Cir. 2004). The fee-shifting and damages provisions of § 303(i) are intended to deter frivolous filings. See id. (regarding fee-shifting under § 303(i)(1) ); In re Fox Island Square P'ship , 106 B.R. 962, 968 (Bankr. N.D. Ill. 1989) (regarding damages under § 303(i)(2) ) ("This deterrent should be directed not merely to the petitioning creditor in the case at bar, but also should serve as an example for similar circumstances in future cases." (quoting In re Advance Press & Litho , 46 B.R. 700, 706 (Bankr. D. Colo. 1984) ). Appropriate deterrence serves not only to protect debtors from the very significant (and often irreparable) consequences that flow from an involuntary bankruptcy petition , but also to try to insulate the bankruptcy court from being unnecessarily and improperly used as a tool to resolve disputes. See Advance Press , 46 B.R. at 702 ("It is ... obvious that the use of the bankruptcy court as a routine collection device would quickly paralyze this court." (quoting In re SBA Factors of Miami , 13 B.R. 99, 101 (Bankr. S.D. Fla. 1981) ). For these reasons, "there must be available some remedy for the improper filing of an involuntary petition." In re Ed Jansen's Patio, Inc. , 183 B.R. 643, 644 (Bankr. M.D. Fla. 1995) (permitting the assignee for benefit of creditors to assert a claim for costs, fees, and damages on behalf of the debtor under § 303(i) ).
In keeping with the purpose and nature of § 303(i), parties with a close relationship to a debtor, who have actually defended against an involuntary bankruptcy petition, have been allowed to collect damages and fees. See, e.g. , Fox Island , 106 B.R. at 967 (holding that non-petitioning partners can collect damages for defending the partnership against an involuntary petition filed by other partners); see also Havens v. Leong P'ship , 586 B.R. 760 (Bankr. N.D. Cal. 2018) (holding that an alleged partner in a fictitious partnership had standing to seek damages), appeal docketed , No. 18-15679.
Similarly, the Southern District of New York found that a 50% shareholder had standing to contest an involuntary bankruptcy petition: "[T]he debtor in the instant case is unable to answer the petition because its only two shareholders are on either side of the case, with neither having authority to act for the corporation." In re Westerleigh Dev. Corp. , 141 B.R. 38, 40 (Bankr. S.D.N.Y. 1992) ; see also In re Synergistic Techs., Inc. , No. 07-31733-SGJ-7, 2007 WL 2264700, at *5 (Bankr. N.D. Tex. Aug. 6, 2007) ("[W]hen there is a corporate governance deadlock that prevents a corporate debtor from taking a position with regard to an involuntary bankruptcy petition, the court should allow shareholders to assert positions [including requests for damages under § 303(i) ] on behalf of the alleged debtor."). Decisions allowing third parties that successfully defend against involuntary bankruptcy petitions to seek fees and damages that would be awarded to the debtor are in accord with the actual language of § 303(i)(1) which permits a judgment for fees or costs "against the petitioners and in favor of the debtor," and are certainly not inconsistent with § 303(i)(2), which permits an award of damages against a petitioner that files a petition in bad faith. See Ed Jansen's Patio , 183 B.R. at 644.
Here, Vibe Micro owned 50% of the debtor's stock and stepped into the debtor's shoes to defend against the involuntary bankruptcy proceeding, and the party that filed the involuntary bankruptcy petition was itself a shareholder and on the board of directors. SIG admitted that 8Speed8 was essentially non-functional because of the shareholders' disputes: "[T]here was a breakdown. There was a lack of communication. There was a shareholder meeting called that was-that not all the shareholders wanted to attend." Any action on behalf of 8Speed8 required a two-thirds majority, either of the board (which included SIG) or of the shareholders (which were split 50-50). There is no indication that a vote of any kind ever took place. Under these circumstances, it is likely that Vibe Micro was the only party willing or able to defend 8Speed8 against involuntary bankruptcy, as it has asserted. The bankruptcy court should have at least determined whether Vibe Micro was correct in its assertion that, but for its actions, the debtor's interests would have gone wholly unrepresented and undefended. If Vibe Micro was truly the only party willing and able to act for 8Speed8, it should have been allowed to seek fees and damages under § 303(i).
The cases cited by the Majority do not support its rule. In re Mike Hammer Productions, Inc. , which the Majority cites for the proposition that "Congress intended only the debtor to have standing to seek damages," Maj. Op. at 1195, stands only for the commonsense proposition that if a party lacks standing to contest an involuntary bankruptcy petition-as creditors do in most circumstances-then it also lacks standing to collect costs, fees, or damages under § 303(i). Franklin v. Four Media Co. (In re Mike HammerProds., Inc.) , 294 B.R. 752, 754-55 (9th Cir. B.A.P. 2003). The case says nothing about third parties who step into a debtor's shoes. In fact, the court in Hammer appears to recognize that third parties have standing to seek damages when they represent the debtor. 294 B.R. at 755 (noting that in Ed Jansen's Patio , 183 B.R. at 644, the "assignee for benefit of creditors" was eligible to recover damages as a "representative of the debtor's estate"; observing that the third party with standing in Fox Island , 106 B.R. at 968, had "represented the Partnership"; and citing approvingly to an American Law Reports analysis of § 303(i)(1)(B) entitled "Standing of parties other than alleged debtor to seek award of attorney's fees").
The Majority primarily relies on Miles to support its holding that a third party can never collect damages, contending that "Appellant's appearance in this case was just as voluntary as the third parties in Miles ." Maj. Op. at 1196. But Miles involved true third parties-relatives of the debtors-who filed a separate suit in state court and who never appeared in the underlying bankruptcy cases. 430 F.3d at 1086. Vibe Micro is not such an independent third party-it was acting as a 50% shareholder during a corporate governance breakdown. Vibe Micro has always asserted that no other entity was willing to defend 8Speed8, and Vibe Micro claimed fees and damages, not after the fact and not for itself, as in Miles , but in the bankruptcy proceeding and for the debtor, as part of its motion to dismiss filed on the debtor's behalf.
Miles primarily dealt with the meaning of § 303(i)(2), which allows for "damages against any petitioner" proximately caused by the bad faith filing of an involuntary petition. Miles found that the language in § 303(i)(1) -that fees and costs could only be awarded "in favor of the debtor"-should be read into § 303(i)(2). 430 F.3d at 1093-94. Consequently, § 303(i)(2) did not allow relatives of the debtors to recover damages they personally suffered, even if proximately caused by the bad faith filing of an involuntary petition against their family members. Id. at 1094. Miles says nothing about a non-debtor who obtains a dismissal for the debtor and requests that damages be awarded to the debtor under § 303(i)(2). Moreover, reading the words "in favor of the debtor" into § 303(i)(2), as Miles does, would seem to support, rather than defeat, the claim made here by Vibe Micro. And, Miles certainly should not be read to bar a non-debtor who successfully obtains dismissal of a petition from obtaining "judgment ... in favor of the debtor for ... A) costs; or B) a reasonable attorney's fee" pursuant to § 303(i)(1). Such a rule is inconsistent with the purposes underlying § 303(i) and takes Miles beyond both its facts and its holding.
Of course, Vibe Micro should not automatically get its fees and damages. I would remand this case for factual findings that were never made. The bankruptcy court would need to, inter alia , 1) determine whether any party other than Vibe Micro could have appeared on 8Speed8's behalf, see Fox Island, 106 B.R. at 967 (making a factual finding that a non-petitioning partner represented the partnership); 2) decide whether the filing was in bad faith; and 3) calculate the appropriate damages and fees-if any-in light of the totality of the circumstances, Higgins , 379 F.3d at 707. I cannot agree with the Majority's determination that Vibe Micro lacks standing to seek fees and damages that would be awarded to the debtor, regardless of the debtor's ability to defend itself in the bankruptcy action, and notwithstanding that Vibe Micro actually obtained a dismissal on behalf of the debtor. Accordingly, I respectfully dissent.
I don't believe Appellant's position on this is unclear-it sought fees and damages to be awarded to the debtor . My dissent goes to this circumstance only-a third party asking that fees and damages be awarded to the debtor in a case where the debtor has not appeared, and the third party appeared on behalf of the debtor.
"An allegation of bankruptcy is a charge that ought not to be made lightly. It usually chills the alleged debtor's credit and his sources of supply. It can scare away his customers. It leaves a permanent scar, even if promptly dismissed." In re SBA Factors of Miami , 13 B.R. 99, 101 (Bankr. S.D. Fla. 1981) ; see also 2 Collier on Bankruptcy ¶ 303.37 (16th ed. 2018) ("Since the Code was enacted in 1978, some people have used section 303 as a means of harassment; this was an effective technique in the sense that even if the wrongful cases were dismissed (after effort to be sure), they resulted in serious consequences for the victim of the wrongful filing.").
In fact, the cases in which non-debtors successfully claimed damages each involved a debtor who did not appear and a third party closely aligned with the debtor. Compare, e.g. , Ed Jansen's Patio , 183 B.R. at 644 (assignee for benefit of non-petitioning creditors) and Inre Synergistic Techs., Inc. , No. 07-31733-SGJ-7, 2007 WL 2264700, at *6 (Bankr. N.D. Tex. Aug. 6, 2007) (33% shareholder and board member), with Franklin v. Four Media Co. (In re Mike Hammer Prods., Inc.) , 294 B.R. 752 (9th Cir. B.A.P. 2003) (holding creditors, who had no other affiliation to the debtor, did not have standing to seek costs or damages under § 303(i) ).
The Majority cites Westerleigh for the proposition that a bankruptcy court can dismiss a petition sua sponte if it is filed by a shareholder to gain leverage against another shareholder. Maj. Op. at 1195-96. But the bankruptcy court in Westerleigh did not act sua sponte. Rather, the court found that the non-petitioning 50% shareholder had standing to contest the involuntary bankruptcy petition and granted that shareholder's motion to dismiss. 141 B.R. at 41.
There was no suggestion that the non-petitioning creditors in Hammer were acting on behalf of the debtor-they were, in fact, simultaneously suing the debtor in state court. See 294 B.R. at 753.
We do not here face the question of whether Miles bars a third party closely related to the debtor from collecting fees or damages for itself when it acts on behalf of a non-appearing debtor in successfully defending against an involuntary bankruptcy proceeding (though I note the policies underlying the statute would counsel in favor of allowing such awards). As noted, we are here faced only with the question of whether a third party closely related to the debtor can obtain fees or damages for the debtor in a case where the debtor did not appear, and the third party obtained a dismissal of the involuntary petition on the debtor's behalf.

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