Dispute over Part of a Claim Disqualifies an Involuntary Petitioner

When liability is conceded but the debtor disputes a portion of a creditor’s claim, the creditor is ineligible to file an involuntary petition, according to Bankruptcy Judge Lisa G. Beckerman of Manhattan.

In her November 20 opinion, Judge Beckerman also said that when other creditors hold the same claim, a creditor cannot cure its disability as an involuntary petitioner by disclaiming the portion of the claim that is in dispute.

The debtor, a television company in Mexico, issued $400 million in unsecured notes in 2017. When the debtor failed to pay interest for more than a year, several noteholders made a demand on the indenture trustee, who served the debtor with a notice of acceleration, causing all of the principal, interest and other amounts to become due under the indenture and the notes.

The indenture contained a clause stating that any dispute must be brought to a state or federal court in Manhattan.

The indenture trustee sued in federal district court in New York seeking judgment for principal, interest and other sums due, including $16 million as a redemption premium. In district court, the debtor disputed liability for the redemption premium, contending that the premium was not due because there had been no voluntary redemption.

Despite the forum-selection clause, the debtor filed suit in Mexico, where a court in Mexico entered an injunction purporting to halt collection of the notes based on detriment to the business caused by the pandemic.

Several holders owed tens of millions of dollars in notes filed an involuntary chapter 11 petition in bankruptcy court in Manhattan. Notably, the involuntary petitioners were represented by the same law firm that was representing the indenture trustee in the suit in federal district court.

Apparently anticipating an objection to their eligibility to be involuntary petitioners, the involuntary petitioners only claimed the debts for principal and interest to underpin their rights to file an involuntary petition. In the bankruptcy petition, the involuntary petitioners did not claim the disputed $16 million redemption premium.

The debtor filed a motion to dismiss the involuntary petition, alleging that the liability to the noteholders was subject to bona fide dispute as to amount.

Disputed Liability as to Amount

The noteholders’ ability to stand as involuntary petitioners was governed by Section 303(b)(1), which requires that each petitioner must be “a holder of a claim . . . that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount . . . .” The debtor conceded liability for principal and interest but contended that the dispute regarding the redemption premium made the noteholders ineligible.

Based on the forum-selection clause, Judge Beckerman did not permit the debtor to rely on the lawsuit in Mexico to show a dispute as to liability. She disregarded the “position taken by the Alleged Debtors in the Mexican courts since the parties have contractually agreed that any dispute arising under the Notes and the Indenture may be heard only by a state or federal court located in Manhattan.”

On the other hand, Judge Beckerman said that the “issue as to whether a redemption premium is due and owing is clearly in dispute in the District Court Action.”

The question remained: Did the dispute as to a portion of the claim make the noteholders ineligible to be involuntary petitioners?

Although the Second Circuit has not staked out a position, Judge Beckerman quoted former Vermont Bankruptcy Judge Colleen A. Brown, who said that the First, Fifth and Eleventh Circuits “have concluded that ‘a creditor whose claim is the subject of a bona fide dispute as to liability or amount lacks standing to be a petitioning creditor under § 303(b)(1), even if a portion of their claim amount is undisputed[.]’” In re Koffee Kup Bakery, Inc., 21-10168, 2022 WL 141516, at *7 (Bankr. D. Vt. Jan. 14, 2022).

Judge Beckerman went on to say that “the vast majority of decisions by courts within the Second Circuit have followed this approach.” Of perhaps greatest significance, she referred to the 2005 amendments, which added “as to liability or amount” after “bona fide dispute” in Section 303(b)(1).

Judge Beckerman declined to follow a line of cases that disregard a dispute to amount when a creditor holds claims arising from several separate transactions and some of the claims are not disputed. She cited Bankruptcy Judge Martin Glenn of New York, who did not disqualify an involuntary petitioner who had claims from two invoices, but only one was disputed. In re Manolo Blahnik USA, Ltd., 619 B.R. 81, 98 (Bankr. S.D.N.Y. 2020).

In the case at hand, Judge Beckerman said that the involuntary petition and the suit in federal district court arose from the same notes and indentures, and that the indenture trustee was seeking recovery of the redemption premium in district court on behalf of all holders. She noted that the involuntary petitioners “were part of the holders of the Notes who directed the Indenture Trustee to send the Acceleration Notice . . . which included the demand for the payment of a premium.”

“In addition,” Judge Beckerman said, “counsel for the Petitioning Creditors in these Chapter 11 cases is acting as counsel for the Indenture Trustee in the District Court Action.” If there were an order for relief, she expected that the indenture trustee would file a claim on behalf of all holders seeking the disputed redemption premium.

Judge Beckerman granted the motion to dismiss the involuntary petition, saying that the petitioners “cannot blithely ignore the District Court Action.”