842 F.

2d 47
56 USLW 2570, 18 Collier Bankr.Cas.2d 838,
17 Bankr.Ct.Dec. 599,
Bankr. L. Rep. P 72,241

PARADISE HOTEL CORPORATION d/b/a Pineapple Beach

Resort, Appellant
v.
BANK OF NOVA SCOTIA.
No. 87-3318.

United States Court of Appeals,

Third Circuit.
Argued Dec. 10, 1987.
Decided March 15, 1988.

Jewel Cooper, Cooper & Diase, St. Thomas, U.S.V.I., Elisabeth R. Sauer
(argued), Campbell, Morgan, Gibson & Kramer, Kansas City, Mo., for
appellant.
William L. Blum, Lloyd De Vos (argued), Andrew W. Heymann, De Vos
& Co., Charlotte Amalie, St. Thomas U.S.V.I., for appellee.
Before GIBBONS, Chief Judge, STAPLETON, and MANSMANN,
Circuit Judges.
OPINION OF THE COURT
STAPLETON, Circuit Judge:

This appeal requires us to determine whether a fully secured creditor may

participate in the filing of an involuntary bankruptcy petition. We must also
decide whether the debtor in this case is foreclosed by its response to the
involuntary petition from now asserting claims based on alleged wrongdoing on
the part of the secured creditor in the filing of that petition. Finally, we address
the issue of whether the complaint states claims upon which relief can be
granted.

The district court held that the Bank of Nova Scotia (Bank), although fully
secured, could participate as a petitioning creditor in a Chapter 7 proceeding
involving Paradise Hotel Corporation (Paradise). It also concluded that
Paradise was now barred from asserting that the Bank acted tortiously in
causing the involuntary petition to be filed. We agree that the Bank was a
proper petitioning creditor. Because we disagree with the court's latter
conclusion, however, we will reverse.

I.
3

Paradise operated a resort hotel in St. Thomas, United States Virgin Islands.
The resort venture was financed largely by two loans provided by the Bank that
were secured by a mortgage on the hotel's real estate. On January 20, 1984, the
Bank terminated negotiations with Paradise concerning repayment schedules
for the loans and joined two other Paradise creditors in filing an involuntary
petition under Chapter 7 of the Bankruptcy Code, 11 U.S.C. Sec. 701 et seq.
(1982 & Supp.1986). According to Paradise, this filing immediately created a
crisis in relations between Paradise and its other creditors, resulted in
conditions under which Paradise could not meet the demands of its creditors on
a current basis, and left Paradise with no alternative but to file a voluntary
petition under Chapter 11, 11 U.S.C. Sec. 1101 et seq. (1982 & Supp.1986) on
January 26, 1984.

On February 13, 1984, Paradise requested that the bankruptcy court stay the
involuntary bankruptcy proceeding initiated by the Bank. Paradise insisted that
the Bank had caused the involuntary petition to be filed wrongfully because the
Bank, as a fully secured creditor, was not entitled to be a petitioner under Sec.
303 and because Paradise was paying its debts as they became due as of the
date of the filing of the involuntary petition. Paradise's "Memorandum in
Support of Debtor's Motion to Stay Involuntary Petition" made clear that
Paradise's primary motivation in seeking the stay was to preserve potential
claims arising out of the filing of the petition so that it might pursue these
claims after determining how much damage had been occasioned by the filing:

5
Debtor
requests relief of stay rather than dismissal in the present case.... From the
following arguments, it may be noted that the filing of the involuntary petition may
have been patently improper and, as such, may have given rise to unwarranted
damage to debtor which only voluntary relief will allow debtor an opportunity to
determine. If in fact debtor has suffered from the wrongful filing of this involuntary
petition, debtor would request leave to bring an adversary proceeding in which
affirmative relief against the petitioners may be obtained.

App. at 12-13. The Memorandum then set forth Paradise's reasons for
contending that the filing had been wrongful. The stay was granted by the
bankruptcy court.1

With the stay of the Chapter 7 proceeding in place, the Chapter 11 proceeding
went forward over the next two years. During that time, neither party asked the
bankruptcy court to lift the stay, or to dismiss or convert the Chapter 7 action.
Paradise ultimately sold its properties and paid each of its creditors in full.

Shortly after completion of the Chapter 11 proceeding, Paradise brought this

suit in the district court. In its complaint, Paradise elaborated on the allegations
of its "Memorandum in Support of Debtor's Motion to Stay Involuntary
Petition." Paradise alleged that the Bank "maliciously and without reasonable
grounds instigated and participated ... in the filing" of what it knew was an
improper involuntary petition. App. at 22. Paradise again insisted, as it had in
the earlier Memorandum, that the impropriety lay both in the fact that the
Bank, as a fully secured creditor, was not an appropriate petitioning creditor
and in the fact that Paradise had generally been paying its debts as they arose.
By wrongfully filing such a petition, Paradise maintained, the Bank had
engaged in (1) malicious prosecution, (2) abuse of process, (3) racketeering, (4)
false representation, (5) intentional interference with business relationships, and
(6) breach of trust. Paradise alleged that it had suffered damages and incurred
legal expenses totalling more than $10,000 as a result of the Bank's actions, and
that an award in excess of $1,000,000 in punitive damages would be
appropriate.

In response to the complaint, the Bank filed a motion to dismiss for failure to
state a claim. Treating the motion as a request for summary judgment, the
district court concluded that the Bank was entitled to participate in the Chapter
7 filing, despite its fully secured status, and that Paradise's Chapter 11 petition
constituted an admission that it was generally unable to pay its debts as they
became due. The district court also held that the failure of Paradise "to contest
the validity of the involuntary petition [constituted] waiver of its right to object
to any defect in the filing of [the] petition." App. at 118.

10

Our review of the district court's determinations is plenary. We review the

grant of summary judgment as though considering the controversy in the first
instance. Goodman v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir.1976),
cert. denied 429 U.S. 1038, 97 S.Ct. 732, 50 L.Ed.2d 748 (1977).

II.

11

The district court concluded initially that the Bank, although concededly a fully
secured creditor, could properly join an involuntary bankruptcy petition. While
there is a dearth of authority on the point, we agree with the district court's
conclusion.2

12

Section 303(b)(1) provides in relevant part:

13 An involuntary case against a person is commenced by the filing with the

(b)
bankruptcy court of a petition under Chapter 7 ... of this title-14 by three or more entities, each of which is ... a holder of a claim against such
(1)
person that is not contingent as to liability or the subject of a bona fide dispute, ... if
such claims aggregate at least $5000 more than the value of any lien on property of
the debtor securing such claims held by the holders of such claims.
15

Read literally, this section requires only that a petitioner be an entity which
holds a non-contingent, undisputed claim against the debtor. Its description of
the qualification of a petitioner is, therefore, broad enough to include a fully
secured holder of a non-contingent, undisputed claim. Moreover, the last clause
of the section makes it clear that at least some creditors holding security may
be included in the group of three petitioners so long as the unsecured portion of
the petitioners' claims totals in the aggregate at least $5,000. Since that clause
does not distinguish between fully secured and undersecured creditors, Sec.
303(b)(1) on its face purports to authorize the filing of an involuntary petition
where, as here, a fully secured creditor is joined by two unsecured creditors
whose claims exceed $5,000 in the aggregate.

16

We acknowledge that there is some appeal to Paradise's argument that a

creditor whose claim is not in jeopardy should play no role in initiating an
involuntary bankruptcy. Nevertheless, we conclude that we should apply the
statute as written without engrafting upon it an implied exception. First, we
have been unable to find any support for such an exception in the legislative
history. Second, the fact that the text of the statute is broad enough to include
secured creditors appears unlikely to have been the product of oversight.
Section 303 is a revision of Sec. 59, 11 U.S.C. Sec. 95 (1976) (superceded), of
the Bankruptcy Act of 1898. Section 59 required only one petitioner when the
debtor had less than twelve creditors and expressly provided that "fully secured
creditors" not be counted in the tally of creditors. See Sec. 59(e)(4). Section 303
retains the distinction between situations in which there are less than twelve
creditors and those in which there are twelve or more, but deletes the reference
to "fully secured creditors." In this context, we are confident that the drafters of
Sec. 303 consciously focused on the issue now before us when they penned the

broad language specifying those who may petition.

17

Finally, we note that under any reading of Sec. 303(b)(1), a secured creditor
that is unsecured by only a small amount can clearly help precipitate a
bankruptcy. This is significant for two reasons. Any reading that required the
bankruptcy court to distinguish between fully secured and slightly unsecured
creditors would add complexity to the administration of Sec. 303(b)(1) without
accomplishing any substantial objective and, as a practical matter, our reading
of that section does not deprive a debtor of any substantial protection he would
otherwise have. Accordingly, we will affirm the district court's determination
that the Bank's fully secured status did not preclude it from joining the
involuntary petition.

III.
18

As an additional ground for its entry of summary judgment for the Bank, the
district court stated that Paradise "admitted its bankrupt condition when it filed
a verified complaint which asserted entitlement to relief under [Chapter 11]."
App. at 118. As a result, the court concluded that Paradise was in no position to
contend that it had been paying its debts as they came due as of the time of the
Chapter 7 petition.

19

Because the filing of a voluntary petition constitutes an adjudication of

bankruptcy effective on the filing date,3 such a filing may preclude a debtor
from contending thereafter that it was generally paying its debts at the time of
the petition. Paradise, however, does not claim to have been paying its debts on
January 26, when it invoked Chapter 11. Paradise's complaint focuses on
January 20, 1984, the date of the Bank's involuntary petition.4 The complaint
alleges that until January 20 Paradise had been paying its debts and that the
involuntary petition destroyed its ability to do so in less than a week. Contrary
to the view of the district court, the non-existence of insolvency on January
20th and its existence on January 26th are not logically inconsistent
propositions. The filing of an involuntary petition frequently creates a situation
in which potential sources of additional credit disappear and existing debts are
accelerated.5 Accordingly, we conclude that the district court was mistaken in
assuming that an adjudication of bankruptcy on January 26 necessarily meant
that Paradise had ceased paying its debts as they came due on January 20.6

20

At oral argument before us, counsel for the Bank took a different tack for the
first time. Counsel argued that, even if Paradise's Chapter 11 petition did not
foreclose its claims, the record contains sufficient evidence for a factual
determination that Paradise was not paying its debts on January 20, 1984. We

decline to consider this contention. The Bank neither pursued this argument in
the district court, nor raised it in its brief on appeal. Moreover, the record does
not contain appreciable evidence as to claims by creditors other than the Bank.
We are not prepared to conclude from the limited information before us that
this is one of those infrequent occasions when evidence as to a single debt
demonstrates conclusively that the debtor was not generally paying its debts as
they came due.7 Given the fact that the Bank did not press this argument in
support of its motion for summary judgment, we cannot fault Paradise for
failing to further develop the record in this area.
IV.
21

The third ground for the district court's decision was that Paradise had waived
its bad faith claims against the Bank by failing to contest the Chapter 7 petition.
The Bank advances both this waiver argument and two closely related
contentions: (1) that the Chapter 7 proceeding should be given res judicata
effect, and (2) that the remedy provided by Sec. 303(i)(2) of the Code against
petitioners who have filed in bad faith is an exclusive one. We find all three
arguments unpersuasive.

22

First, we note that waiver, in the strict sense, is the intentional relinquishment
of a known right. See, e.g., Evcco Leasing Corp. v. Ace Trucking Co., 828 F.2d
188, 195 (3d Cir.1987). Nothing that Paradise did or did not do in response to
the Chapter 7 petition could constitute a waiver of this kind given the fact that
its Memorandum expressly evidenced an intent to pursue its bad faith claims.

23

Moreover, it is simply not true that Paradise failed to raise in opposition to the
Chapter 7 petition the defects that it now identifies in that petition. An
involuntary petition is an application for an order of relief declaring the debtor
to be a bankrupt. When the petition is filed, the debtor must be served with a
summons requiring within 20 days of its service a response as to why an order
for relief should not be entered. Rule 1010. In this instance, Paradise filed an
apparently timely response specifying the defects it perceived in the petition
and asking that the proceeding be stayed.8 As the Advisory Committee's Note
to Rule 1013 recognizes, one of the alternatives open to the court after the filing
of a response is to exercise its inherent authority to stay the proceeding. The
court exercised that option in the Chapter 7 proceeding in this case and no one
has since sought to have the stay lifted. As a result, Paradise has not been called
upon to take any further position with respect to the petition and the petition
has never been acted upon by the court.

24

Thus, this is not a case like those relied upon by the Bank in which the debtor

has been called upon to take a position with respect to the merits of an
involuntary petition, has failed to oppose it or has opposed it on less than all of
the available grounds, and has suffered an adverse adjudication of the petition.
See, e.g., In re Mason, 709 F.2d 1313 (9th Cir.1983); In re Earl's Tire Service, 6
B.R. 1019 (D.Del.1980). In those cases, the debtor, like any other party to civil
litigation, is barred by the adverse adjudication from asserting that the petition
is defective. Here, there was no adjudication adverse to Paradise. We have
nothing but a proceeding that was stayed prior to the time when the bankruptcy
court would have required Paradise to go forward with an attack on the petition
or suffer a declaration of bankruptcy. Accordingly, there was no basis for the
district court's conclusion that Paradise waived its claims.
25

The absence of an adverse adjudication, of course, is also fatal to the Bank's

contention that the Chapter 7 proceeding should be given res judicata effect.

26

The Bank further insists that Paradise forfeited its claims by deciding not to
proceed under Sec. 303(i)(2) of the Code. That section provides as follows:

27 If the court dismisses a petition under [Chapter 7] other than on consent of all
(i)
petitioners and the debtor, and if the debtor does not waive the right to judgment
under this subsection, the court may grant judgment-***
28
***
29
30

(2) against any petitioner that filed the petition in bad faith, for--

(A) any damages proximately caused by such filing; or

31
(B) punitive damages.
32
33

We agree that this section was intended to permit a bankruptcy court to

adjudicate claims in a Chapter 7 proceeding like those of Paradise. It does not
require that all such claims be so adjudicated, however, and we know of no
case which so holds. Moreover, we believe it would be inconsistent with the
overall scheme of the Code to find that Sec. 303(i)(2) is an exclusive remedy
for such claims.

34

Under Sec. 706 of the Code a debtor, with exceptions not here relevant, is
entitled as of right to convert a Chapter 7 proceeding to a Chapter 11
proceeding at any time. Frequently, it is in the debtor's best interest to convert

without delay and commence its reorganization as promptly as possible. If we

were to accept the Bank's arguments regarding the exclusivity of Sec. 303(i)(2),
we would place a debtor in this situation on the horns of a dilemma by
requiring it to choose between two unattractive alternatives. One alternative
would be to pay the price of indefinitely postponing the conversion in order to
litigate the legal sufficiency of the petition, the bad faith of the petition, and the
amount of its damages in the Chapter 7 case. The other alternative would be to
convert immediately in order to secure the Chapter 11 advantages the debtor
was intended to have but thereby release its claims against the petitioner who
allegedly petitioned in bad faith. We think Congress did not intend that a debtor
should have to pay this kind of penalty for exercising its statutory right to
convert promptly. Accordingly, we decline to hold that Sec. 303(i)(2) is an
exclusive remedy in a situation of this kind.
35

For these reasons, we cannot agree that Paradise's response to the Chapter 7
petition forecloses its claims in this action.9 V.

36

Because we conclude that Paradise remains free to contend that it was generally
paying its debts as they became due as of January 20, 1986, that the Bank had
no reason to believe otherwise, and that the Bank maliciously represented to the
contrary in its Chapter 7 petition, we must remand for further proceedings. We
consider it appropriate, however, to narrow the field of battle before doing so.

37

With respect to Paradise's claims for malicious prosecution, abuse of process,

false representation and intentional interference with business relationships, we
are unable to say that "it appears beyond doubt that [Paradise] can prove no set
of facts in support [of its claims] which would entitle [it] to relief." Conley v.
Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). It seems
apparent from the present record, however, that Paradise can have no
meritorious RICO or breach of trust claims.

38

To make out a civil RICO claim under 18 U.S.C. Sec. 1962(c) and (d) (1982 &
1986 Supp.), a complaint must allege "(1) the conducting of, (2) an enterprise,
(3) through a pattern, (4) of racketeering activity." Marshall-Silver Construction
Co., Inc. v. Mendel, 835 F.2d 63, 65 (3d Cir.1987), citing Sedima, S.P.R.L. v.
Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275, 3285-86, 87 L.Ed.2d 346
(1985). Paradise contends that the Bank itself was "the enterprise" and that the
Bank's behavior immediately before and in connection with the involuntary
bankruptcy petition constituted a pattern of racketeering activity. App. at 25. A
single entity cannot be both defendant and the enterprise for purposes of Sec.
1962(c), however. B.F. Hirsch v. Enright Refining Co., Inc., 751 F.2d 628, 634
(3d Cir.1984). Moreover, Paradise's allegation that during the ninety days

preceding bankruptcy Paradise and the Bank engaged in negotiations with

respect to the Bank's loan, and that the Bank filed its petition, without notice, in
disavowal of these negotiations, simply does not describe a pattern of
racketeering activity by the Bank of the sort contemplated by Sec. 1962. That a
"pattern of racketeering activity" requires more is evident from our recent
decision in Marshall-Silver Construction Co., Inc. v. Mendel, 835 F.2d 63 (3d
Cir.1987). We there held, on very similar facts, that proof of only a single
injury, a single victim, and a single short-lived scheme did not suffice to satisfy
the pattern requirement.
39

In connection with its breach of trust claim, Paradise contends that the Bank, by
seeking involuntary bankruptcy, breached a fiduciary duty stemming from the
relationship that had developed between the parties during the pre-bankruptcy
negotiations with respect to the loan. Creditor-debtor relationships such as that
between the Bank and Paradise rarely are found to give rise to a fiduciary duty.
See, e.g., Aaron Ferer & Sons, Ltd. v. Chase Manhattan Bank, 731 F.2d 112,
122 (2d Cir.1984) (interpreting New York law). It ordinarily "would be
anomalous to require a lender to act as a fiduciary for interests on the opposite
side of the negotiating table." Weinberger v. Kendrick, 698 F.2d 61 (2d
Cir.1982), cert. denied, 464 U.S. 818, 104 S.Ct. 77, 78 L.Ed.2d 89 (1983).
Paradise's complaint alleges nothing that could give rise to a fiduciary duty on
the part of the Bank here. This claim, as well as the RICO claim, should,
therefore, be dismissed on remand.

VI.
40

For the foregoing reasons, we will reverse the judgment of the district court and
remand for further proceedings consistent with this opinion.

The record in this case does not include a copy of the stay order. It does,
however, contain a judicial admission by the Bank before the district court that
such an order exists. App. at 36

In re Crabtree, 32 B.R. 837 (Bankr.E.D.Tenn.1983) appears to be the only

reported case in which a court was required to address this issue. It held that a
fully secured creditor could be a Sec. 303(b)(1) petitioner. 32 B.R. at 839.
Treatise writers have taken the same view. 2 Collier on Bankruptcy p 303.08
(15th ed. 1986); G. Treister, J. Trost, L. Forman, K. Klee, and R. Levin,
Fundamentals of Bankruptcy Law Sec. 3.02(c)(1) (1986); See also 2 D.
Cowans, Bankruptcy Law and Practice Sec. 14.5 (1987)

Section 301 states that "commencement of a voluntary case ... constitutes an

order for relief." As with Sec. 18(f) of the 1898 Act, a debtor is thereby deemed
to have been bankrupt from the time it filed the voluntary petition. See House
Report No. 95-595, 95th Cong. 1st Sess. 321 (1977); Senate Report No. 95989, 95th Cong. 2d Sess. 31 (1978), U.S.Code Cong. & Admin.News 1978, p.
5787 (suggesting that use of the phrase "order for relief" rather than
"adjudication" merely reflects a desire to adopt less pejorative language)

Pursuant to Sec. 303(h), the order of relief, or adjudication of bankruptcy, in a

Chapter 7 case occurs only after the petition is not timely controverted or
withstands the debtor's objections. Thus, no adjudication took place on January
20, 1984

Paradise contends, for example, that the involuntary petition caused the
Internal Revenue Service to abandon its agreement to permit Paradise to pay its
tax liability in installments

Our conclusion here mandates rejection of an analogous argument made by the

Bank. The Bank insists that Paradise's Chapter 11 petition effected a conversion
of the Chapter 7 proceedings, thus giving rise to an "order of relief" that
precluded Paradise's claim generally to have been paying its debts on January
20. Once again, the Bank ignores the fact that the date attributed to the "order
for relief" would be January 26, six days after the relevant date

Several courts have concluded that proof that a debtor failed to service a single
debt may suffice to demonstrate that the debtor is not paying its debts as they
come due, See e.g., In re Hill, 5 B.R. 79, 83 (Bankr.D.Minn.1980); Matter of
B.D. Intern. Discount Corp., 15 B.R. 755, 762-63 (Bankr.S.D.N.Y.1981); but
such a conclusion generally is deemed appropriate only under truly
extraordinary circumstances. See Matter of 7H Land & Cattle, 6 B.R. 29
(Bankr.D.Nev.1980); In re Sol Arker, 6 B.R. 632, 636 (Bankr.E.D.N.Y.1980);
See also 2 Collier, Collier on Bankruptcy p 303.12 (15th ed. 1986)

The Bankruptcy Court treated Paradise's response as timely and nothing in the
record suggests that it was not filed within 20 days of the service of the
summons. Contrary to the contention of the Bank there is no requirement that
the response be filed within 20 days of the filing of the petition

At oral argument, the Bank suggested for the first time that Paradise was
foreclosed from litigating its claims because it failed to raise them in its
Chapter 11 proceeding. The record in this proceeding does not reveal what role,
if any, these claims played in the Chapter 11 proceeding and we are not in a
position to express an opinion with respect to this issue. We have consistently
held that a matter should first be raised before the district court in part because

of the need to develop an adequate record. In this instance, that rationale

demonstrates clearly the necessity for the rule