In an involuntary petition, creditors who received voidable transfers may not be counted in deciding whether the alleged debtor has 12 or more creditors. On an issue where lower courts are split, District Judge Robert R. Summerhays of Lafayette, La., ruled that a creditor who received a preference is still counted if the debtor can show that the creditor has a statutory defense to the preference.
Judge Summerhays had been a bankruptcy judge since 2006. He was elevated to the district court bench in September 2018.
One creditor filed an involuntary chapter 7 petition against an individual debtor. In response, the debtor filed schedules showing about 25 creditors. If the debtor indeed had 25 creditors, the court would have dismissed the petition because Section 303(b) requires three petitioning creditors if the debtor has 12 or more creditors.
The involuntary petitioner submitted that at least 15 of the scheduled creditors had received preferences and therefore should not be counted under Section 303(b)(2). That section excludes a creditor who is a “transferee of a transfer that is voidable under section . . . 547 . . . .”
The debtor responded by arguing that the transferees all had ordinary course defenses to a preference under Section 547(c)(2). The bankruptcy court sided with the involuntary petitioner and ruled that the petitioner was only required to make a prima facie case showing that a creditor had received a preference. The ordinary course defense would not be considered.
The bankruptcy judge entered an order for relief, and the debtor appealed. Judge Summerhays vacated and remanded in an opinion on January 22.
The involuntary petitioner relied on a 1981 case from Long Island, N.Y., where the bankruptcy court held that a creditor could be excluded from the count if the creditor had received a preference, without considering defenses.
There, the bankruptcy judge reasoned that a creditor with a potential preference would hope to avoid bankruptcy and therefore should be excluded from the count, based on a presumption about congressional intent.
Judge Summerhays was more persuaded by the statutory language, his own logic, and a 1983 bankruptcy court decision from Oklahoma.
By disregarding the defenses, Judge Summerhays said that the New York decision “ignores the text of section 303(b)(2) and section 547(b).” In particular, Section 547(b) says that a transfer is avoidable “[e]xcept as provided in subsections (c) and (i) of this section.”
“In other words,” Judge Summerhays said, “a preferential transfer is not avoidable . . . and, hence, not subject to exclusion under section 303(b)(2), if one of the Section 547(c) defenses applies to the transfer.”
Consequently, Judge Summerhays held that “Section 546(c) defenses must be considered in determining whether to exclude a creditor under section 303(b)(2).” He added that “suppositions and presumptions about policy and congressional intent cannot supplant the express language of the statute.”
Judge Summerhays vacated and remanded, with instructions to apply the ordinary course defense in counting whether the debtor had 12 or more creditors.
In an involuntary petition, creditors who received voidable transfers may not be counted in deciding whether the alleged debtor has 12 or more creditors. On an issue where lower courts are split, District Judge Robert R. Summerhays of Lafayette, La., ruled that a creditor who received a preference is still counted if the debtor can show that the creditor has a statutory defense to the preference.
Judge Summerhays had been a bankruptcy judge since 2006. He was elevated to the district court bench in September 2018.
One creditor filed an involuntary chapter 7 petition against an individual debtor. In response, the debtor filed schedules showing about 25 creditors. If the debtor indeed had 25 creditors, the court would have dismissed the petition because Section 303(b) requires three petitioning creditors if the debtor has 12 or more creditors.
The involuntary petitioner submitted that at least 15 of the scheduled creditors had received preferences and therefore should not be counted under Section 303(b)(2). That section excludes a creditor who is a “transferee of a transfer that is voidable under section . . . 547 . . . .”
The debtor responded by arguing that the transferees all had ordinary course defenses to a preference under Section 547(c)(2). The bankruptcy court sided with the involuntary petitioner and ruled that the petitioner was only required to make a prima facie case showing that a creditor had received a preference. The ordinary course defense would not be considered.
The bankruptcy judge entered an order for relief, and the debtor appealed. Judge Summerhays vacated and remanded in an opinion on January 22.