The 2005 BAPCPA amendments overruled prior Ninth Circuit opinions holding that the undisputed portion of a disputed claim makes the holder eligible to be an involuntary petitioner, according to District Judge Jennifer A. Dorsey of Las Vegas.
In her Dec. 15 opinion, Judge Dorsey reads Section 303(b)(1) to mean that a creditor cannot qualify to be an involuntary petitioner if any portion of the creditor’s claim is in bona fide dispute.
The issue arose from the involuntary chapter 7 petition originally filed in 2011 against Timothy Blixseth, the former owner of the bankrupt Yellowstone Mountain Club LLC. The bankruptcy judge initially dismissed the petition, holding that venue should have been in Montana, not Las Vegas. In a 2/1 opinion, the Ninth Circuit Bankruptcy Appellate Panel reversed the venue decision and remanded for further proceedings.
In July 2013, Bankruptcy Judge Bruce A. Markell dismissed the involuntary petition, this time holding that two of the four petitioners were ineligible because parts of their claims were disputed. He read the 2005 amendments to Section 303(b)(1) to mean that an entire claim must be undisputed to justify filing an involuntary petition.
Laying out the history of Section 303(b)(1) and its amendments, Judge Dorsey agreed with Judge Markell, who is now the Professor of Bankruptcy Law and Practice at Northwestern Univ. Pritzker School of Law.
As originally adopted in the Bankruptcy Reform Act of 1978, Section 303(b)(1) said that an involuntary petitioner must have a claim “that is not contingent as to liability.” In 1984, Congress modified the section by adding “or the subject on a bona fide dispute,” making a petitioner ineligible if the petitioner’s claim was “contingent as to liability or the subject of a bona fide dispute.”
In the 2005 amendments to Section 303(b)(1), Congress inserted “as to liability or amount” and made other changes so it now provides that a creditor can be an involuntary petition if the creditor holds a claim “that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount. . . .”
Before BAPCPA, the Ninth Circuit had held in a series of opinions that the undisputed portion of a claim makes the creditor an eligible petitioner, if the undisputed portion is above the threshold amount.
The 2005 amendments, Judge Dorsey said, “sparked a disagreement among the courts about whether the amendment displaced judicial gloss that narrowed the meaning of bona fide dispute as it pertains to the amount of a claim.”
According to Judge Dorsey, the First and Fifth Circuits along with “[m]any bankruptcy courts” said that the 2005 amendments overruled prior decisions holding that a creditor is disqualified only if the undisputed portion of its claim is less than the statutory minimum. Even after the 2005 amendment, Judge Dorsey said that “some bankruptcy courts” cling the notion that a creditor is not disqualified if a portion of its claim is disputed.
Saying she was “skeptical” about the idea that the amendment did not change prior law, Judge Dorsey saw the statutory language as “clear.” As it now reads, Section 303(b)(1) “places no qualifier or limit on ‘bona fide dispute as to . . . amount.’ The text does not indicate that a bona fide dispute as to amount is relevant or material only if it lowers the claims below the statutory threshold.”
Judge Dorsey therefore held that the “statute’s plain language suggests that any bona fide dispute to the entire amount of a claim disqualifies it from being used as the basis for an involuntary bankruptcy petition.”
Judge Dorsey rejected the notion that her plain language interpretation would lead to “absurd results,” citing the example of a $1 dispute in a $100,000 claim making the petitioner ineligible. She said that the “self-evident” purpose of Congress was “to prevent creditors from using involuntary bankruptcy to coerce a debtor to satisfy a judgment even when substantial questions may remain concerning the liability of the debtor.”
The opinion is State of Montana Department of Revenue v. Blixseth, 13-1324 (D. Nev. Dec. 15, 2017).