On a question where the circuits are split, the First Circuit Bankruptcy Appellate Panel decided that a creditor has no unfettered right to intervene as an involuntary petitioner. Perhaps contrary to a First Circuit decision under the former Bankruptcy Act, the panel ruled that a bankruptcy court may establish a deadline for creditors to intervene as involuntary petitioners.

A creditor obtained a judgment abroad for more than $1 million against a corporation that operated in Massachusetts. After the creditor domesticated the foreign judgment in the U.S., the debtor effected an assignment for the benefit of creditors, or ABC.

After the ABC began, the judgment creditor filed an involuntary chapter 7 petition alone in Boston. Not long after, the second creditor joined as an involuntary petitioner.

The debtor filed a motion to dismiss the involuntary petition and alleged that it had more than 11 creditors. Bankruptcy Judge Janet E. Bostwick set a deadline for other creditors to join as involuntary petitioners.

When there were only two petitioners on board eight weeks after the deadline, a third creditor surfaced and filed a motion to intervene as an involuntary petitioner. As it happened, the third creditor had previously assented to the ABC. The third creditor contended that it had cause to jump ship and join the involuntary petition, claiming that there were preferences to creditors who should not be counted in deciding whether there were fewer than 12 creditors.

Bankruptcy Judge Bostwick adhered to her deadline and did not permit the third creditor to intervene as an involuntary petitioner. She held a trial and dismissed the involuntary petition on finding that the debtor had 15 creditors.

The three creditors appealed to the BAP and lost in an opinion on June 17 by Bankruptcy Judge Peter G. Cary.

The Statute and the Rule

Judge Cary characterized the third creditor as contending that “it had a statutory right under § 303(c) to join the involuntary petition” which was “unfettered” and deprived the bankruptcy court of “any discretion whatsoever to set the [joinder] deadline.”

Judge Carey said that the argument for unfettered joinder “fails on plain error review,” referring to Section 303(c) and Bankruptcy Rule 1003. The subsection says, “After the filing of a petition under this section but before the case is dismissed or relief is ordered, a creditor holding an unsecured claim that is not contingent . . . may join in the petition with the same effect as if such joining creditor were a petitioning creditor under subsection (b) of this section.”

In relevant part, Rule 1003(b) says, “If it appears that there are 12 or more creditors as provided in § 303(b) of the Code, the court shall afford a reasonable opportunity for other creditors to join in the petition before a hearing is held thereon.” [Emphasis added.]

The Circuit Split

Turning to caselaw, Judge Cary said that the circuits are “divided on the question of whether the right to join an involuntary petition under § 303(c) is unrestricted.” He cited the First Circuit for having said, “without explication” before adoption of the Bankruptcy Code, “‘Intervention is a matter of right unless the bankruptcy court finds the petition was made in bad faith for the purpose of improperly invoking its jurisdiction.’ In re Crown Sportswear Inc., 575 F.2d 991, 993 (1st Cir. 1978).”

“More recently,” Judge Cary said, the Third Circuit and “several other courts” have “likewise stated that § 303(c) ‘provides for joinder of creditors as a matter of right.’ In re Forever Green Athletic Fields Inc., 804 F.3d 328, 337 (3d Cir. 2015).”

On the other side of the fence, Judge Cary cited the Sixth Circuit for holding in Riverview Trenton R.R. Co. v. DSC Ltd. (In re DSC Ltd.), 486 F.3d 940, 948 (6th Cir. 2007), “that bankruptcy courts may set a deadline for creditors to join an involuntary petition, notwithstanding the provisions of § 303(c).”

Adopting the position of the Sixth Circuit, Judge Cary said that enforcing a deadline is consistent with the “inherent authority” of courts to “manage their dockets and courtrooms.”

With regard to the third creditor’s joinder motion, Judge Cary said “that intervention motions have a timeliness requirement” that is “embedded in the plain language of Rule 24(a).” He noted how the third creditor had “not opted to intervene” until eight weeks after the deadline. He said that the bankruptcy court took other facts into consideration, such as the third creditor’s original consent to the ABC.

Judge Cary affirmed the bankruptcy court’s orders, which, he said, were “buttressed” by Bankruptcy Rule 1013(a). It says that the “court shall determine the issues of a contested petition at the earliest practicable time and forthwith enter an order for relief, dismiss the petition, or enter any other appropriate order.” [Emphasis in original.]