Involuntary Petitions Under BAPCPA

Prior to enactment of BAPCPA, a creditor did not qualify to commence an involuntary petition unless such creditor was the 'holder of a claim against [the alleged debtor] that [was] not contingent as to liability or the subject of a bona fide dispute.' 11 U.S.C. ' 303(b) (1) (2004). Likewise, such requirements apply for purposes of determining whether the debtor has fewer than twelve creditors pursuant to ' 303(b)(2) and whether the alleged debtor was generally paying its debts as they came due pursuant to ' 303(h). Courts have widely accepted an objective test to determine whether a dispute is bona fide, and, under such standard, a creditor's claim must not be subject to dispute over a material fact or the application of law to the facts ' a standard similar to that necessary to obtain summary judgment. See e.g., Metz v. Dilley (In re Dilley), 339 B.R. 1, 6 (1^st Cir. B.A.P. 2006).

In applying the above objective standards, pre-BAPCPA courts debated the circumstances which would lead to a determination that a claim was the subject of a bona fide dispute, and specifically whether a counter claim or a dispute over the amount of a debt was sufficient to disqualify a creditor under ' 303. Some courts held that a counterclaim or a dispute regarding the amount of a creditor's claim was sufficient to disqualify a creditor, while other courts maintained that so long as a creditor could establish an undisputed portion of its claim sufficient to exceed the dollar threshold of ' 303(b) (as of the date of this article, the unsecured claims of petitioning creditors were required to aggregate at least $12,300) then such creditor held a claim that was not the subject of a bona fide dispute. See 2-303 Collier On Bankruptcy-15th Edition Rev. P 303.03; and Involuntary Bankruptcy and the Bona Fides of a Bona Fide Dispute, 65 Ind. L.J. 315 (1990). See also In re Focus Media, Inc., 378 F.3d 916, 926 (9th Cir. 2004)('a dispute as to the amount of the claim gives rise to a bona fide dispute only when: 1) it does not arise from a wholly separate transaction; and 2) netting out the claims of the debtors could take the petitioning creditors below the amount threshold of ' 303') (internal quotation marks omitted); Key Mech. Inc. v. BDC 56 LLC (In re BDC 56 LLC), 330 F.3d 111, 120 (2d Cir. 2003) (bona fide dispute exists 'where a claim for offset arises out of the same transaction and is directly related to the creditor's underlying claim, and, if valid, could serve as a complete defense to that claim').

The limited changes to the text of ' 303 which were enacted by the BAPCPA provide that a creditor does not qualify for purposes of ' 303(b) or ' 303(h) unless such creditor is the 'holder of a claim against [the alleged debtor] that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount.' 11 U.S.C. ' 303(b) (2006)(emphasis added). The initial rumblings regarding this change posited that the addition of 'as to ' amount' to ' 303 would resolve the pre-BAPCPA split of authority regarding the effects of a dispute regarding the amount of a creditor's claim.

Does revised ' 303 provide that a dispute regarding the amount of a creditor's claim disqualify such creditor for purposes of ' 303(b) and (h)? Perhaps due to the virtually nonexistent legislative history regarding BAPCPA's changes to ' 303, the limited number of reported cases which have addressed this issue provide no further clarity. See In re Henteges, 351 B.R. 758 (Bankr. N.D. Okla. 2006)(bank was not qualified as petitioning creditor where $9000 of $39,000 debt was disputed); In re Euro American Lodging Corp., 2007 Bankr. LEXIS 15 (Bankr. S.D.N.Y. 2007)(Any dispute regarding the amount that arises from the same transaction and is directly related to the underlying claim should render the claim subject to a bona fide dispute). But see In re Demirco Holdings, Inc., 2006 Bankr. LEXIS 1131 (Bankr. C.D. Ill. 2006)(dispute as to amount is only relevant if the petitioning creditors claims would fall below the statutory minimum amount); In re ELRS Loss Mitigation, LLC, 325 B.R. 604 (Bankr. N.D. Okla. 2005).

The DemriCo court noted that the 'amendment appears to clarify the prior legislative intent. With the dearth of committee comments and legislative history available to interpret BAPCPA, this Court cannot presume that Congress added the phrase 'as to liability and amount' with the intent that the claims of involuntary petitioners must now be fully liquidated either by agreement or judgment so that no dispute exists as to any portion of such claims. Without clear legislative intent, this Court cannot presume such a change in the law and declines to do so.' Demirco Holdings, at 9.

Until the establishment of controlling precedent to the contrary, it appears that the addition of 'as to'amount' to the provisions of ' 303 has provided no resolution to the long standing question of what constitutes a bona fide dispute for purposes of ' 303.

Next month, we discuss Means testing, Credit counseling and debtor education: Can an individual render oneself ineligible to be an involuntary debtor?

Lisa M. Schiller is a partner and Craig A. Pugatch is an associate in the Fort Lauderdale, FL, law firm of Rice Pugatch Robinson & Schiller, P.A. The firm is a business insolvency practice focusing on workouts bankruptcy and all bankruptcy-related litigation. The authors may be reached at [email protected] and [email protected].

As bankruptcy practitioners awaited the enactment and effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ('BAPCPA'), the multitude of speaking panels, journals, and cocktail conversations offering their speculative commentary on the anticipated effects of the amendments to Title 11 paid increased attention to the proposed amendments' effects on the remedies afforded to creditors under ' 303 of the Bankruptcy Code ' namely the involuntary bankruptcy petition. While the changes to the text of ' 303 are minimal, the substantial changes to a debtor's eligibility requirements along with additional remedies afforded to creditors and trustees with respect to a debtor's exempt property provoked numerous questions with regard to involuntary bankruptcy petitions under the BAPCPA, and particularly in the context of individual debtors.

Oct. 17, 2005 came and went without the collapse of the bankruptcy world as we knew it, and, as with much of the commotion regarding implementation of BAPCPA, many of the questions raised with respect to involuntary petitions remain unsettled and have resulted in a split of authority amongst courts addressing such issues. In the wake of BAPCPA's implementation, the expanded remedies available to recover from a debtor's property for the benefit of the estate make involuntary petitions an increasingly attractive tool in creditors' arsenal. Additionally, BAPCPA's anticipated adversity on creditors' ability to prosecute involuntary petitions appears to have been mere conjecture, and, absent controlling precedent to the contrary, even the express changes to the text of ' 303 appear to have been much ado about nothing.

The 'Changes' to ' 303

Prior to enactment of BAPCPA, a creditor did not qualify to commence an involuntary petition unless such creditor was the 'holder of a claim against [the alleged debtor] that [was] not contingent as to liability or the subject of a bona fide dispute.' 11 U.S.C. ' 303(b) (1) (2004). Likewise, such requirements apply for purposes of determining whether the debtor has fewer than twelve creditors pursuant to ' 303(b)(2) and whether the alleged debtor was generally paying its debts as they came due pursuant to ' 303(h). Courts have widely accepted an objective test to determine whether a dispute is bona fide, and, under such standard, a creditor's claim must not be subject to dispute over a material fact or the application of law to the facts ' a standard similar to that necessary to obtain summary judgment. See e.g., Metz v. Dilley (In re Dilley), 339 B.R. 1, 6 (1^st Cir. B.A.P. 2006).

In applying the above objective standards, pre-BAPCPA courts debated the circumstances which would lead to a determination that a claim was the subject of a bona fide dispute, and specifically whether a counter claim or a dispute over the amount of a debt was sufficient to disqualify a creditor under ' 303. Some courts held that a counterclaim or a dispute regarding the amount of a creditor's claim was sufficient to disqualify a creditor, while other courts maintained that so long as a creditor could establish an undisputed portion of its claim sufficient to exceed the dollar threshold of ' 303(b) (as of the date of this article, the unsecured claims of petitioning creditors were required to aggregate at least $12,300) then such creditor held a claim that was not the subject of a bona fide dispute. See 2-303 Collier On Bankruptcy-15th Edition Rev. P 303.03; and Involuntary Bankruptcy and the Bona Fides of a Bona Fide Dispute, 65 Ind. L.J. 315 (1990). See also In re Focus Media, Inc., 378 F.3d 916, 926 (9th Cir. 2004)('a dispute as to the amount of the claim gives rise to a bona fide dispute only when: 1) it does not arise from a wholly separate transaction; and 2) netting out the claims of the debtors could take the petitioning creditors below the amount threshold of ' 303') (internal quotation marks omitted); Key Mech. Inc. v. BDC 56 LLC (In re BDC 56 LLC), 330 F.3d 111, 120 (2d Cir. 2003) (bona fide dispute exists 'where a claim for offset arises out of the same transaction and is directly related to the creditor's underlying claim, and, if valid, could serve as a complete defense to that claim').

The limited changes to the text of ' 303 which were enacted by the BAPCPA provide that a creditor does not qualify for purposes of ' 303(b) or ' 303(h) unless such creditor is the 'holder of a claim against [the alleged debtor] that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount.' 11 U.S.C. ' 303(b) (2006)(emphasis added). The initial rumblings regarding this change posited that the addition of 'as to ' amount' to ' 303 would resolve the pre-BAPCPA split of authority regarding the effects of a dispute regarding the amount of a creditor's claim.

Does revised ' 303 provide that a dispute regarding the amount of a creditor's claim disqualify such creditor for purposes of ' 303(b) and (h)? Perhaps due to the virtually nonexistent legislative history regarding BAPCPA's changes to ' 303, the limited number of reported cases which have addressed this issue provide no further clarity. See In re Henteges, 351 B.R. 758 (Bankr. N.D. Okla. 2006)(bank was not qualified as petitioning creditor where $9000 of $39,000 debt was disputed); In re Euro American Lodging Corp., 2007 Bankr. LEXIS 15 (Bankr. S.D.N.Y. 2007)(Any dispute regarding the amount that arises from the same transaction and is directly related to the underlying claim should render the claim subject to a bona fide dispute). But see In re Demirco Holdings, Inc., 2006 Bankr. LEXIS 1131 (Bankr. C.D. Ill. 2006)(dispute as to amount is only relevant if the petitioning creditors claims would fall below the statutory minimum amount); In re ELRS Loss Mitigation, LLC, 325 B.R. 604 (Bankr. N.D. Okla. 2005).

The DemriCo court noted that the 'amendment appears to clarify the prior legislative intent. With the dearth of committee comments and legislative history available to interpret BAPCPA, this Court cannot presume that Congress added the phrase 'as to liability and amount' with the intent that the claims of involuntary petitioners must now be fully liquidated either by agreement or judgment so that no dispute exists as to any portion of such claims. Without clear legislative intent, this Court cannot presume such a change in the law and declines to do so.' Demirco Holdings, at 9.

Until the establishment of controlling precedent to the contrary, it appears that the addition of 'as to'amount' to the provisions of ' 303 has provided no resolution to the long standing question of what constitutes a bona fide dispute for purposes of ' 303.

Next month, we discuss Means testing, Credit counseling and debtor education: Can an individual render oneself ineligible to be an involuntary debtor?

Lisa M. Schiller is a partner and Craig A. Pugatch is an associate in the Fort Lauderdale, FL, law firm of Rice Pugatch Robinson & Schiller, P.A. The firm is a business insolvency practice focusing on workouts bankruptcy and all bankruptcy-related litigation. The authors may be reached at [email protected] and [email protected].