The pleading requirements laid down by the Supreme Court in Iqbal and Twombly do not apply to the filing of an involuntary bankruptcy petition under Section 303. The petitioning creditor need only check the appropriate boxes on Official Form 105, according to Bankruptcy Judge Eduardo Rodriguez of Houston.
Or, perhaps Judge Rodriguez was saying that Official Form 105 complies with Iqbal and Twombly.
Although an alleged debtor is entitled to respond to an involuntary petition by filing a motion to dismiss or a motion for summary judgment, Judge Rodriguez said in his September 28 opinion that the “better approach” is to have “a prompt trial on the merits.”
The Motion to Dismiss
The facts were rather complicated but boil down to this: An individual issued a personal guarantee for $1 million corporate debt. The creditor sued in state court when the debt matured and was not paid. The state court denied cross motions for summary judgment.
The creditor then filed an involuntary chapter 7 petition under Section 303. The debtor conceded that he had fewer than 12 creditors and that he was generally not paying his debts.
Before answering the involuntary petition, the debtor filed a motion to dismiss and a motion for summary judgment.
In the motion to dismiss under Federal Rule 12(b)(1), the alleged debtor argued that the bankruptcy court lacked subject matter jurisdiction because the petitioning creditor held a disputed claim and was thus disqualified under Section 303(b). Rule 12(b) is made applicable by Bankruptcy Rule 1011.
Judge Rodriguez rejected the theory, saying that compliance with the Section 303 standards for a petitioning creditor are not jurisdictional but go to the merits.
The debtor also moved to dismiss under Rule 12(b)(6), contending that the terse Official Form 105 does not comply with the pleading standards set down by Federal Rule 8 and the Supreme Court’s dictates in Iqbal and Twombly. The debtor argued that the creditor was required to allege additional evidence showing that the claim was liquidated and without bona fide dispute.
Judge Rodriguez pointed out that the creditor was obliged by Bankruptcy Rule 9009(a) to use the check-the-box Official Form 105. The rule also says that the forms “shall be used without alternation,” aside from exceptions not applicable.
Judge Rodriguez recited how the involuntary petitioner had checked the three proper boxes, alleging that it was an eligible involuntary petitioner, that the debtor was subject to an involuntary petition and that the debtor was generally not paying its debts. The creditor also filled in another box on page three of the involuntary petition by listing the precise amount of the claim of some $1.7 million and saying it was based on a matured loan.
In sum, Judge Rodriguez denied the Rule 12(b)(6) motion because the creditor had checked the boxes and alleged it was the holder of a claim for more than $16,750. In other words, a petitioning creditor is not required to anticipate affirmative defense or proffer evidence to show that affirmative defenses do not hold water.
Summary Judgment
Attaching evidence, the debtor filed a motion for summary judgment under Federal Rule 56(a). The evidence was pleadings showing that the state court had denied cross motions for summary judgment. To the debtor’s way of thinking, denial of summary judgment in state court meant that the claim was disputed, making the creditor ineligible to file an involuntary petition.
On the motion for summary judgment, Judge Rodriguez said that the debtor carried his initial burden of showing the absence of disputed facts indicating that the debt was contingent as to liability.
Thus, the burden shifted to the creditor to show there were disputed facts about the contingent nature of the claim.
Judge Rodriguez examined the security agreement and found no condition precedent to the debtor’s liability on the guarantee once there was a default. Under Texas law, he said that the guaranty of payment was unconditional and not contingent as to liability.
Consequently, there were disputed issues of fact requiring a trial as to the contingent nature of the claim.
Turning to bona fide dispute, Judge Rodriguez said that the standard in the Fifth Circuit is objective. Likewise in that regard, the debtor pointed to the denial of summary judgment motions in state court. Again, reference to the state court shifted the burden to the petitioning creditor.
Pending litigation, Judge Rodriguez said, “strongly suggests” but does not “necessarily establish” a bona fide dispute. He cited out-of-circuit bankruptcy court authority for the idea that denial of summary judgment does not even tentatively decide anything about the merits of a claim. Rather, “denial is simply a pretrial order stating that the case should go to trial and not a decision that a bona fide dispute exists.”
Judge Rodriguez also noted that the debtor had not raised any affirmative defenses or counterclaims in state court. Although not dispositive, he said that the lack of defenses and counterclaims “undermines” the notion of a bona fide dispute. He also noted that the debtor had not proffered any evidence undercutting the amount of the claim.
Judge Rodriguez denied the debtor’s motion for summary judgment, finding disputed issues of fact.
Although the debtor was entitled to move under Rules 12 and 56, Judge Rodriguez said that the “better approach . . . is a prompt trial on the merits.” He entered a scheduling order requiring the debtor to answer the involuntary petition and calling for a trial on the remaining issues: Is the claim contingent, and is there a bona fide dispute about the liability or amount of the claim?
Observations
The alleged debtor’s arguments under Iqbal and Twombly might not be altogether specious. Aside from the amount of the petitioners’ claims, Official Form 105 only recites legal conclusions and does not require the involuntary petitioner to allege facts underpinning the conclusions.
Like Judge Rodriguez said, the best practice is to hold trial quickly, where the petitioning creditor is tasked with introducing evidence to justify the required legal conclusions.
Still, the official form is not statute, but its promulgation does imply compliance with applicable law regarding the sufficiency of pleadings. The official form does require making the allegations called for in Section 303. But are the conclusory allegations sufficient after Iqbal and Twombly?
The pleading requirements laid down by the Supreme Court in Iqbal and Twombly do not apply to the filing of an involuntary bankruptcy petition under Section 303. The petitioning creditor need only check the appropriate boxes on Official Form 105, according to Bankruptcy Judge Eduardo Rodriguez of Houston.
Or, perhaps Judge Rodriguez was saying that Official Form 105 complies with Iqbal and Twombly.
Although an alleged debtor is entitled to respond to an involuntary petition by filing a motion to dismiss or a motion for summary judgment, Judge Rodriguez said in his September 28 opinion that the “better approach” is to have “a prompt trial on the merits.”
The Motion to Dismiss
The facts were rather complicated but boil down to this: An individual issued a personal guarantee for $1 million corporate debt. The creditor sued in state court when the debt matured and was not paid. The state court denied cross motions for summary judgment.
The creditor then filed an involuntary chapter 7 petition under Section 303. The debtor conceded that he had fewer than 12 creditors and that he was generally not paying his debts.
Before answering the involuntary petition, the debtor filed a motion to dismiss and a motion for summary judgment.