A motion to dismiss an involuntary petition only gives the debtor a temporary reprieve from filing a list of creditors. Without awaiting a discovery request by the involuntary petitioners, the debtor must immediately file a list of creditors if the dismissal motion is denied, according to the Ninth Circuit Bankruptcy Appellate Panel.
The Failed ‘Involuntary’
Four creditors filed an involuntary petition against a corporate debtor. Conceding that it was not paying its debts, the debtor filed a motion to dismiss under Rule 12(b)(6) by alleging that two of the creditors were not qualified petitioners.
The bankruptcy judge decided there were disputed issues of fact requiring a trial. Believing that involuntary petitions must be ruled upon quickly, the bankruptcy court held a trial without requiring the debtor to file a list of all creditors or permitting the creditors to take discovery.
After trial, the bankruptcy court ruled that two of the petitioning creditors were disqualified. One was an equity investor who had no claim, and the other held a disputed claim. The bankruptcy court therefore denied the involuntary petition.
The petitioning creditors appealed, winning a reversal and remand in a November 7 opinion by Bankruptcy Judge Laura S. Taylor.
Judge Taylor interpreted Ninth Circuit authority to say that “all claimholders” are entitled to consider joining as involuntary petitioners against a debtor in “financial distress even if there initially are too few petitioning creditors.” Liberty Tool & Mfg. v. Vortex Fishing Systems Inc. (In re Vortex Fishing Systems Inc.), 277 F.3d 1057 (9th Cir. 2002). She also extensively quoted Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., for holding that the Bankruptcy Code and Rules permit the joinder of additional petitioners when there is a defect in the number of petitioning creditors. In re Kidwell, 158 B.R. 203 (Bankr. E.D. Cal. 1993).
In meticulous detail, Judge Taylor explained why the Code and Rules entitle petitioning creditors to discovery and a list of creditors if the involuntary debtor’s motion to dismiss is denied.
Responsive Answer or Motion
Yes, Judge Taylor said, a debtor may respond to an involuntary petition, not by filing an answer but by filing a motion to dismiss under Bankruptcy Rule 1011, which incorporates F.R.C.P. 12. The filing of a motion to dismiss extends the debtor’s time for filing an answer to the involuntary petition. Bankruptcy Rule 1011(c) and F.R.C.P. 12(a).
If the involuntary debtor’s motion to dismiss is denied, F.R.C.P. 12(a)(4)(A) requires the debtor to answer the petition within 14 days. “And,” Judge Taylor said, if the debtor claims to have more than 12 creditors, Bankruptcy Rule 1003(b) requires the debtor to file a list of creditors along with the answer. If there are more than 12 creditors, Rule 1003(b) goes on to provide that the “court shall afford a reasonable opportunity for other creditors to join in the petition before a hearing is held thereon.”
Therefore, Judge Taylor said, a motion to dismiss “delays, but does not invariably negate, the requirement of answer and creditor list.”
But there is more. Although the court must dispose of an involuntary petition quickly, the petitioning creditors are entitled to discovery because Bankruptcy Rule 1018 incorporates F.R.C.P. 26. In addition, additional creditors are entitled to join as petitioners because Rule 1018 also incorporates F.R.C.P. 24.
Judge Taylor summarized the rules as making “clear that resolution of a contested involuntary petition should proceed with discovery and disclosure typical in an adversary proceeding, but Rule 1013(a) mandates that the process move quickly.”
In sum, Judge Taylor reversed and remanded because the involuntary debtor should have been required to file an answer and list of creditors when the bankruptcy court denied the debtor’s motion to dismiss. She cited the First Circuit Bankruptcy Appellate Panel for reaching the same result in an unpublished decision. Banco Popular de Puerto Rico v. Colon (In re Colon), BAP No. PR 07-053, 2008 WL 8664760, at *7 (B.A.P. 1st Cir. 2008).
A motion to dismiss an involuntary petition only gives the debtor a temporary reprieve from filing a list of creditors. Without awaiting a discovery request by the involuntary petitioners, the debtor must immediately file a list of creditors if the dismissal motion is denied, according to the Ninth Circuit Bankruptcy Appellate Panel.
The Failed ‘Involuntary’
Four creditors filed an involuntary petition against a corporate debtor. Conceding that it was not paying its debts, the debtor filed a motion to dismiss under Rule 12(b)(6) by alleging that two of the creditors were not qualified petitioners.
The bankruptcy judge decided there were disputed issues of fact requiring a trial. Believing that involuntary petitions must be ruled upon quickly, the bankruptcy court held a trial without requiring the debtor to file a list of all creditors or permitting the creditors to take discovery.
After trial, the bankruptcy court ruled that two of the petitioning creditors were disqualified. One was an equity investor who had no claim, and the other held a disputed claim. The bankruptcy court therefore denied the involuntary petition.
The petitioning creditors appealed, winning a reversal and remand in a November 7 opinion by Bankruptcy Judge Laura S. Taylor.