Creditors contemplating the bold step of commencing an involuntary bankruptcy case against a putative debtor may wish to consider a recent decision of the Bankruptcy Court for the District of Minnesota Court, In re American Resource & Energy, LLC, where the court dismissed an involuntary chapter 7 petition by summary judgment motion after determining that (a) each of the three petitioning creditors failed to qualify under section 303(b)(1) of the Bankruptcy Code to file a bankruptcy petition as a “bona fide dispute” existed with respect to each of their putative claims when they filed the petition that commenced the case and (b) with the disqualification of those parties as petitioners, the joinder of a fourth creditor to the petition post-filing did not satisfy the debt threshold of section 303(b)(2) to allow that party to maintain the petition even if the putative debtor had fewer than twelve creditors in all. For want of a qualified petitioning creditor holding claims in a sufficient amount against the putative debtor, the petition, and the case as a whole, was dismissed.
The case against American Resources & Energy, LLC (“ARE”) was commenced on January 24, 2014, by the filing of an involuntary petition for relief under chapter 7 of the Bankruptcy Code. Three named parties asserted the status of petitioning creditors in connection with the petition. In its answer to the petition, ARE asserted, among other things, that: (i) one or all of the petitioners were ineligible to join in the involuntary petition against ARE, (ii) none of the claims referenced in the involuntary petition had become due, and (iii) as a result of some or all of the claims reference in the involuntary petition being subject to a bona fide dispute, the petitioners did not meet the requirements of section 303(b)(1). Some months after the commencement of the case, petitioners’ counsel filed an amended petition that purported to join a fourth party as a petitioning creditor.
The court went through a detailed examination of the events leading up to the commencement of the chapter 7 case, including a discussion of ARE’s complicated and convoluted corporate structure. ARE’s business was the design and sale of wind turbine towers, foundations, and raising systems. Prior to the commencement of the case, a struggle arose for dominance over the entire ARE-related enterprise. The disputes among the various parties in ARE’s ownership structure centered on the capitalization, ownership and control of ARE and its affiliated entities. The parties even disputed which among them was rightfully the majority shareholder of ARE.
The turmoil eventually led to the commencement of at least two actions against ARE in state court, which remained pending when the bankruptcy was commenced. Two of the petitioners were ARE’s opponents in the lawsuits, with each having commenced a separate action against ARE on different theories of liability. The first of the lawsuits had been fully briefed, with counterclaims asserted by ARE, but a judgment had yet to be rendered, while the second had been removed to state district court following a judgment against ARE and the other defendant in a lower court. The lawsuits constituted the sole bases for the claims asserted by two of the petitioners in the involuntary petition. With respect to the third petitioner, which asserted a claim on a business loan, no litigation was pending at the time of the filing of the petition; however, a controversy existed over the identity of the third petitioner (the name of the entity identified on the petition differed materially from the entity identified with the transfer) as well as to the nature of the asserted claim (i.e., whether the funds constituted a loan, an equity contribution or whether a transfer occurred at all).
The court identified the threshold issue before it: whether the petitioners’ claims “were not contingent as to liability or the subject of a bona fide dispute as to liability or amount, as 11 U.S.C. § 303(b)(1) requires of petitioning creditors in an involuntary case.” In a footnote, the court characterized this issue as “a dispute over the separate existence of a dispute.” The court directed the parties to put the threshold issue before the court early and, given the posture of ARE’s existing controversies with all three petitioners and the “extrinsic, preexisting, formulized articulation of factual and legal positions” set forth in pleadings filed in the prepetition lawsuits, the court determined that a motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure was the appropriate vehicle for this determination.
Section 303 governs the procedures for the commencement of an involuntary bankruptcy case under the Bankruptcy Code. Pursuant to section 303(b)(1), an involuntary case may be commenced by three or more entities, each of which holds a claim that is neither contingent nor “the subject of a bona fide dispute as to liability or amount,” and such noncontingent, undisputed claims aggregate to at least $15,325 more than the value of any liens on the property securing such claims. If there are fewer than twelve such holders, an involuntary case may be commenced by one or more of such parties that hold claims of at least $15,325 in the aggregate pursuant to section 303(b)(2). According to the court, the constraints of section 303(b) exist to require “a certain level of solidity in a creditor’s claim, something akin to a coherent well-based case for a right to payment enforceable under non-bankruptcy law, before the creditor may seek the powerful, collective remedy of bankruptcy against its debtor.” If there is, however a contest over a putative debtor’s liability that is “worthy of a fight under generally-applicable law,” the putative debtor may not be forced into bankruptcy at the instance of the claimholder.
The Bankruptcy Code does not define “bona fide dispute,” leaving the meaning of the term to judicial determination. According to the court, the relevant factors for that determination include the posture of the parties; the nature and gravity of their contentions with each other, factual and legal; and the non-bankruptcy law that governs their disputes.
Vehicle for Determination
As both sides had professed a desire for broad discovery, the court first addressed why it believed it could dispose of the threshold issue by summary judgment rather than holding a full evidentiary hearing. This determination began with an examination of the Eighth Circuit’s decision in In re Rimell, 946 F.2d 1363 (8th Cir. 1991), where the Court of Appeals previously observed that “the determination as to whether a dispute is bona fide will often depend…upon an assessment of witnesses’ credibilities and other factual considerations….”
Based in large part on the Rimell court’s use of the word “often” as opposed to “always,” theARE court found that Rimell did not categorically require the taking of evidence on an assertion of bona fide dispute. The court explained that Rimell’s articulation “puts primacy on the legal viability of petitioning creditors’ claims and putative debtors’ defenses against them, under the facts advanced in support of them.” The court reasoned that where such claims were already in suit under a plausibly-pled statement of facts, Rimell did not require the analysis on bona fide dispute to go to an actual resolution of the pleaded issues on their merits. The court went on to state that a determination under section 303(b)(1) need go only to “the existence of a dispute from the putative debtor as to its liability on the claim or the claim’s amount, and then whether the debtor has an objective basis in asserted fact or law for its disputation. As to the factual dimension of resistance, this is satisfied when facts are pled or framed plausibly to support a defense. When it comes to the objective character of legal positions, it is satisfied where they are pled colorably against the petitioning creditor.”
The court established a two-step analysis for resolving an involuntary petition on summary judgment. First, a court must determine if there is a genuine dispute of material fact (i.e., a triable issue as to a fact necessary to satisfy an essential element of the claim or defense in question). Second, if there is no genuine dispute of material fact, the court must determine if the governing law dictates judgment for the movant on the uncontroverted facts.
As ARE denied it had any liability on the claims of all three petitioners, it was obvious to the court that disputes existed with respect to the petitioning claims. From there, the court moved to an examination of whether ARE’s resistance to the claims was “bona fide.” The court found that this issue could also easily be decided based on the record at bar.
The court, which was clearly concerned about the potential for abuse with involuntary petitions, held that the claims of all three petitioners lacked “the solidity, the prima facie sheen of enforceability and consequent recovery, that § 303(b)(1) requires to qualify as a petitioning creditor in involuntary bankruptcy.” With respect to the first petitioner’s claim, the court examined the answer and other submissions filed in connection with its lawsuit and determined that ARE’s fact allegations, set forth in plausible fashion, colorably supported a defense and, therefore, the claim was clearly subject to bona fide dispute. The court found that the second petitioner’s claim was subject to bona fide dispute as its removal to district court entitled the defendants to a trial de novo and, therefore, the claim remained unresolved by any judicial determination. With respect to the third petitioner, the court found that the serious questions as to the identity of the real party in interest to the alleged transaction as well as to the nature of the questioned funds infusion constituted bona fide dispute.
Finally, the court found that the addition of the fourth petitioner that purported to join the petition post-filing could not save the petition. Even if ARE had less than twelve creditors holding noncontingent, undisputed claims, the debt held by the joining creditor, which totaled only $12,605, did not meet the current debt threshold under section 303(b)(2) and, therefore, the case had to be dismissed.
The threat of an involuntary bankruptcy is a useful, albeit extreme, remedy available to creditors that can be used to exert pressure on a putative debtor and foster a consensual resolution. Creditors considering such an action, however, should take a careful look at the underlying claims that will be used as a basis for the involuntary petition to be sure the claims are reasonably solid and not in dispute, as petitioning creditors may not have the benefit of a full evidentiary hearing in bankruptcy to defend the quality and validity of their petitioning claims.