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Section 303(b)(1) of the Bankruptcy Code provides in relevant part that “[a]n involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title – (1) by three or more entities, each of which is * * * a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount * * * if such noncontingent, undisputed claims aggregate at least $15,775 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims.”  A dispute now exists among the courts as to whether a creditor with a claim only partially disputed as to the amount, can be a petitioning creditor under Section 303.

The majority of courts that have addressed or commented on the issue have concluded that any dispute as to amount (whether implicating the statutory threshold or not) renders a creditor ineligible.  See, e.g., In re Regional Anesthesia Associates, PC, 360 B.R. 466, 470 (Bankr. W.D.Pa. 2007) (finding that any dispute regarding the amount that arises from the same transaction and is directly related to the underlying claim renders the claim subject to a bona fide dispute); In re Bimini Island Air, 370 B.R. 408 (Bankr. S.D.Fla. 2007) (opining that “bona fide dispute” is characterized in a new way making “a dispute as to the amount of the debt claimed apparently sufficient to render a petitioning creditor ineligible.”); In re Vicor Techs, Inc., 2013 WL 1397460, at *5 (Bankr. S.D.Fla. April 5, 2013) (stating it is “generally accepted” that a dispute as to any portion of a claim is a bona fide dispute, “even if some dollar amount would be left undisputed.)  Fustolo v. 50 Thomas Patton Drive, LLC, 816 F.3d 1 (1st Cir. 2016) came to the same conclusion.  Declining to read a materiality requirement into Section 303, the court stated:

As discussed above, the bona fide dispute provision strikes a balance between the Bankruptcy Code’s dual purposes of ensuring the orderly disposition of creditors’ claims and protecting debtors from coercive tactics.  Limiting petitioning creditors to only those claims that are of undisputed value is in line with those aims.  Accordingly, and in the absence of persuasive contrary authority or illuminating legislative history, we follow the straightforward reading of section 303, which places no qualifiers on the requirement that any asserted claim be free of “bona fide dispute as to … amount.”

Id. at 10.

The court in In re QDOS, Inc., 591 B.R. 843 (Bankr. C.D.Cal. 2018) also reached this conclusion.  The court explained:

If a claim is disputed as to liability, then the entire amount of the claim is disputed. If a claim is disputed as to “amount,” this implies that less than the entire amount is disputed.  If the rule were otherwise – that is, if the entire amount had to be disputed to make the claim disputed as to amount – then the word “amount” in the statute would be redundant because it would mean the same thing as “liability.”  In construing a statute, a federal court is obliged to give effect, if possible, to every word Congress used.

Id. at 848.  Citing to a statement from Senator Max Baucus found in the Congressional Record with respect to 1984 amendments to the Bankruptcy Code in 1978, the court stated that the legislative history showed that from the inception, Congress intended that a bona fide dispute as to either liability or the amount of a claim would be sufficient to disqualify the creditor holding such claim from qualifying as a petitioning creditor in an involuntary case.

However, QDOS noted that on an even more basic level, the proposition “a partially disputed claim is a disputed claim” “is not only true, it is necessarily true.”  Id. at 849-50.  The court stated that it would be contradictory to deny that a partially disputed claim is nonetheless a disputed claim. It stated that “[t]he word ‘dispute’ includes within it various degrees, just like the term ‘bald.’  If a creditor sent a debtor an invoice for $1,000, and the debtor wrote back that he owed only $600, it is properly said that the invoice is in dispute.”  The court found that it would be palpably false to state under these circumstances that the invoice is not in dispute. Id. at 850.

In order for a bona fide dispute to exist, the alleged debtor must do more than just disagree with the amount of the claim.  Rather, the court must determine whether there is “an objective basis for either a factual or legal dispute as to the validity of the debt.”  Id. at 850.  In QDOS, the claim was based upon a promissory note with a principal amount of $250,000 and carrying a “loan fee” of $25,000.  The loan’s term is six months, so the effective per annum interest rate is 20 percent.  The court noted that California’s Constitution prohibits commercial loans with rates in excess of 10 percent.  Clearly under these facts, a legitimate dispute existed over how much money was owed, and the creditor was not a qualified petitioning creditor.

Other courts have concluded that a claim that is partially disputed as to amount is not a claim that is “the subject of a bona fide dispute as to liability or amount within the meaning of §303(b)(1).  See 2 Collier on Bankruptcy ¶303.11[2] and cases cited therein.  These courts state that that the disputed amount must also implicate the statutory threshold to be considered a relevant bona fide dispute.  See, e.g., In re DemirCo Holdings, Inc., 2006 WL 1663237, at *3 (Bankr. C.D.Ill. June 9, 2006) (“For a bona fide dispute to be relevant, it must at last have the potential to reduce the total of petitioners’ claims to an amount below the statutory threshold.”).

 

Matthew T. Gensburg
mgensburg@gcklegal.com