By: Donald L Swanson
The statute for filing an involuntary bankruptcy (§ 303(b)) sets a high bar for petitioner eligibility. Specifically, a creditor cannot qualify as a petitioner under § 303(b), if any portion of that creditor’s claim is subject to a bona fide dispute.
- Here is the operative § 303(b) language: ”An involuntary case . . . is commenced by . . . a holder of a claim . . . that is not . . . the subject of a bona fide dispute as to liability or amount.”
In a new opinion, three involuntary Petitioners are found to have involuntary eligibility, despite Debtor’s defenses and counterclaims against Petitioners in pending lawsuits . . . but barely—by the skin of their teeth.
- The opinion is In re ArtiusID, Inc., Case No. 23-11007 in the Western Texas Bankruptcy Court (decided July 23, 2024).
Issues & Arguments
Three Petitioners try to put Debtor into an involuntary bankruptcy, because Debtor has not paid Petitioners for services they each provided.
Debtor moves to dismiss the involuntary petition, because Petitioners’ claims are subject to bona fide dispute: Debtor is already presenting defenses and counterclaims against each of the Petitioners in pending lawsuits. Therefore, Debtor argues, Petitioners are not eligible to force Debtor into bankruptcy.
Petitioners argue they are eligible, for each of the following three reasons:
- Debtor concedes that several of each Petitioners’ invoices are not contested, and these undisputed invoices represent separate “claims” that independently establish each of the Petitioners’ eligibility;
- even if their invoices are all deemed to constitute a single “claim,” a significant portion—above the required statutory threshold—of each Petitioner’s claim is uncontested, so they are eligible; and
- in any case, no portion of any Petitioner’s claim is subject to a dispute that is bona fide, because, (i) invoices were approved by Debtor for payment well in advance of the bankruptcy filing, and (ii) there is no objective basis to dispute them.
Ruling
In a status hearing, the Court declares its intent to follow the interpretation of § 303(b) reflected in the plain language of the statute—as well as in the bulk of the case law (including cases in the Court’s district)—that if any portion of a claim is in bona fide dispute, then that claim cannot be used to establish eligibility of a creditor to file an involuntary petition.
Accordingly, the Court disagrees with the Petitioners’ positions on the first two points but agrees with them on the third.
On the first point, while Petitioners are correct that the analysis of eligibility to force an alleged debtor into bankruptcy should proceed on a claim-by-claim basis, the statutory text is clear that creditors who hold at least one uncontested “claim” can be eligible, even if a creditor holds other claims that are contested. Yet:
- Petitioners fail to show that their various invoices amount to more than one “claim”:
- to the contrary, all of the invoices relate to the same basic contractual relationship and set of services; and
- thus, each Petitioner has only one claim related to its unpaid invoices.
On the second point, an uncontested portion of a claim is not enough to “save” eligibility if another portion of that same claim is contested:
- some courts and commentators believe this result is incorrect or absurd and have read a “materiality” requirement into the Bankruptcy Code—but this Court disagrees with those authorities; and
- the statute is unambiguous, and the result is not absurd:
- the weight of precedent favors this result as well; and
- this Court will follow it.
On the third point, however, Debtor fails to show that any portion of the Petitioners’ claims is, in fact, subject to a bona fide dispute:
- while litigation over the Petitioners’ claims is pending, with Debtor’s defenses and counterclaims against Petitioners, the evidence for Debtor’s position is thin and insubstantial;
- despite ample opportunity to demonstrate an objective basis for a dispute, Debtor fails do so; and
- because there is no bona fide dispute, the motion to dismiss must be denied.
So, the Court allows the involuntary bankruptcy to proceed.
Background
Debtor is a software company.
Petitioners do some work for Debtor and are not paid. Petitioners submit invoices, at least some of which are approved for payment, and these approved invoices are the source of Petitioners’ claims against Debtor.
Petitioners have pending lawsuits against Debtor in two New York state courts, none of which is far advanced. Debtor answers each complaint, denies liability, raises various affirmative defenses, and brings counterclaims for breach of contract (citing poor performance) and breach of confidentiality provisions; but
- the record provides few details about the alleged breaches by Petitioners or the harms to Debtor therefrom.
Petitioners say they filed this involuntary bankruptcy because Debtor changed its name to ArtiusID from Q5id, Inc., and moved its location. Petitioners are concerned that Debtor:
- is trying to disappear to escape its debts;
- provides identity theft-prevention services and holds significant personal information of its customers; and
- has breached its obligations to customers and rendered their sensitive information unavailable to them.
Conclusion
The In re ArtiusID, Inc., opinion is both lengthy . . . and instructive.
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