An involuntary debtor won little sympathy from the bankruptcy court or the appellate panel when his claim to have a dozen or more creditors contradicted a prior declaration in another court.
A creditor won a $2.5 million judgment. In supplemental proceedings after judgment, the debtor answered interrogatories by claiming to have only 10 creditors. When the creditor alone filed an involuntary chapter 7 petition, the debtor changed his tune, claimed to have more than a dozen creditors, and moved to dismiss for the lack of three petitioning creditors required by Section 303(b)(1).
The bankruptcy judge nonetheless entered an order for relief, invoking equitable estoppel to bar the debtor from claiming there were more than 11 creditors.
On appeal, the Bankruptcy Appellate Panel for the Sixth Circuit handed a victory to the debtor by setting aside the order for relief. The Jan. 17 opinion by Bankruptcy Judge Guy R. Humphrey insinuates that the victory may be fleeting because he gave the creditor a second bite at the apple.
The parties could not agree whether to apply equitable or judicial estoppel. The debtor argued that having three petitioning creditors is jurisdictional, precluding the appellate court from even deciding which estoppel theory to apply.
Judge Humphrey looked to the Supreme Court’s 2006 Arbaugh opinion for guidance. There, the high court ruled that having 15 employees was not jurisdictional for a labor discrimination case. By the same token, he said that the three creditor threshold is not jurisdictional, citing the five courts of appeals to reach the same conclusion.
Turning to estoppel, Judge Humphrey said it was not a judicial estoppel case because no court made a decision based on the debtor’s assertion of having fewer than a dozen creditors.
Regarding equitable estoppel, he said there were three elements to prove: (1) a misrepresentation; (2) reasonable reliance, and (3) detriment to the party asserting estoppel. Judge Humphrey said only the third issue was disputed.
In the record and at oral argument, the petitioning creditor could not show detriment other than the loss of time. Consequently, Judge Humphrey reversed the bankruptcy for making an error of law by invoking equitable estoppel to order relief.
In a portion of the opinion that may be dicta, Judge Humphrey adopted a ruling by the Second Circuit for the proposition that the three creditor requirement is not absolute when the equities counsel otherwise. He went on to say that the principle from the Supreme Court’s Law v. Siegel decision does not bar the use of equity to dispense with the three creditor requirement because it is not jurisdictional.
The debtor did not emerge victorious because the judge cited a string of cases where courts refused to invoke equitable estoppel when the debtor, who previously claimed to have fewer than a dozen creditor, later claimed to have more.
As a result, Judge Humphrey remanded the case, instructing the bankruptcy court to give the creditor more time to join additional petitioning creditors.