Dispute Evolution: A bona fide dispute regarding claim amount may disqualify creditor from maintaining an involuntary case.

by Patterson Belknap Webb & Tyler LLP

Section 303(b)(1) of the Bankruptcy Code generally requires three petitioning creditors to join an involuntary petition, each of which must hold claims against the debtor that are not contingent as to liability and are not the subject of a bona fide dispute as to liability or amount.[1]  The Bankruptcy Code does not define the term “bona fide dispute,” which has generated myriad disputes over its interpretation.  Most Circuit Courts of Appeals have settled on an “objective” test for determining whether a bona fide dispute exists.[2]  This approach requires “the bankruptcy court to determine whether there is an objective basis for either a factual or a legal dispute as to the validity of the debt.”[3]  Under the objective test, a “debtor’s subjective intent or belief [regarding a claim] is irrelevant, and the mere or conclusory denial of a claim’s validity or amount is not sufficient to create a bona fide dispute.”[4]  However, “the statute does not require the court to determine the outcome of any dispute, only its presence or absence. Only a limited analysis of the claims at issue is necessary.”[5]

The amendments to the Bankruptcy Code that became effective in 2005, however, injected new uncertainty into the analysis.  Prior to 2005, the claim of a petitioning creditor could not be “contingent as to liability or the subject of a bona fide dispute.”  The 2005 amendments added the words “or amount” to Section 303(b)(1).  So, while it was always the case that disputes as to the entire amount of the claim were enough to disqualify a creditor from being an involuntary petitioner, the amendments raised a new question:  whether a petitioning creditor is disqualified if a bona fide dispute exists regarding even a portion of the amount of its claim. 

Some lower courts have declined to read the amendment to effect what they view as a sweeping change in the law, refusing to hold that a dispute as to the precise amount of a creditor’s claim could render that creditor ineligible to join an involuntary petition.[6]  But many others, including two Circuit Courts of Appeals, have held that the plain language of the amended statute compels the conclusion that a creditor whose claim is the subject of any bona fide dispute as to amount cannot be a petitioning creditor.[7]

Another court has recently joined the latter group.  In Mont. Dep't of Revenue v. Blixseth, Nevada District Judge District Judge Jennifer A. Dorsey affirmed the bankruptcy court’s decision that a state taxing authority whose claim is the subject of a bona fide dispute as to amount was not qualified to be a petitioning creditor under 11 U.S.C. § 303(b) even where there is no dispute as to the alleged debtor’s liability.[8]

The State of Montana Department of Revenue, California Franchise Tax Board, and Idaho State Tax Commission filed an involuntary bankruptcy petition against Timothy Blixseth on April 5, 2011.[9]  Blixseth moved to dismiss the case on the grounds that, inter alia, the claims of the petitioning creditors were subject to a bona fide dispute as to amount.  The Bankruptcy Court agreed and dismissed the petition.[10]

On appeal, Montana noted that “some bankruptcy courts have found that, even after the [2005] amendment, ‘the better reasoned authority suggests that a petitioning creditor is not disqualified even if a bona fide dispute exists regarding a portion of its claim,’” and therefore urged the District Court to hold that “the 2005 amendments simply clarified the prevailing interpretation that a dispute over amount is bona fide only if it lowers the claims below the statutory threshold.”[11]  Judge Dorsey disagreed.  First, she determined that the statute is not ambiguous and its plain meaning is clear:

The statute places no qualifier or limit on “bona fide dispute as to . . . amount.” The text does not indicate that a bona fide dispute as to amount is relevant or material only if it lowers the claims below the statutory threshold. The statute's plain language suggests that any bona fide dispute as to the entire amount of a claim disqualifies it from being used as the basis for an involuntary bankruptcy petition. . . . I prefer the plain meaning of this statute, and I do not find that it is ambiguous.[12]

Next, Judge Dorsey rejected Montana’s invitation to “disregard the statute's plain meaning because it leads to absurd results.”[13]

Considering the dual purposes of the bankruptcy code and the balance that it strives to attain, [i.e., . . .]  ensuring the orderly disposition of creditors' claims and protecting debtors from coercive tactics [ . . . ], I cannot conclude that Congress's decision to exclude claims that are objectively disputed as to amount leads to results so absurd that I would be required to treat the text as if it were ambiguous. The result could be considered harsh in the most extreme cases, but it is enough that Congress intended that the language it enacted would be applied as I have applied it. The remedy for any dissatisfaction with the results in particular cases lies with Congress and not with this court. Congress may amend the statute; I may not.[14]

Accordingly, Judge Dorsey concluded that “§ 303(b), as amended under the BAPCPA in 2005, unambiguously disqualifies a creditor whose claim is the subject of any bona fide dispute as to amount. This plain-meaning application does not effect patently absurd results but, rather, is in line with the congressional intent to balance the bankruptcy code's dual purposes. I therefore affirm the bankruptcy court's decision interpreting § 303(b) to mean that any bona fide dispute over the amount of a claim disqualifies a petitioning creditor.  Thus, I also affirm its conclusion that California and Montana were not qualified petitioning creditors under 11 U.S.C. § 303(b) because their claims were the subjects of bona fide disputes as to amount and, in Montana's case, validity.”[15]

The requirement that a petitioning creditor must hold a claim that is entirely undisputed as to its amount may limit the pool of such creditors available to commence involuntary bankruptcy cases.  Some courts and commentators have suggested that petitioning creditors can avoid this dilemma by limiting their stated claims on an involuntary petition to only those that are undisputed as to liability and amount.[16]  But,  as a leading bankruptcy treatise cautions, “[u]ncertainty as to whether taking such a position would later mean that the creditor could not later successfully argue that its full proof of claim was allowable might constitute a restraining influence on this tactic.”[17]  This presents a dilemma.  A petitioning creditor that asserts the entire amount of its claim against a debtor on an involuntary petition risks dismissal if any portion of that claim is subject to a bona fide dispute as to amount.  But, if the creditor asserts only the undisputed portion of its claim, its ability to assert the disputed amount later appears uncertain.

[1] The statute also expressly provides that an indenture trustee representing such a holder qualifies as a “creditor” for this purpose.  11 U.S.C. § 303(b)(1).  However, if the debtor has less than 12 creditors, any one creditor that meets all of the statutory requirements may commence an involuntary bankruptcy case.  11 U.S.C. § 303(b)(2). 

[2] See generally In re Byrd, 357 F.3d 433, 437 (4th Cir. 2004); In re BDC 56 LLC, 330 F.3d 111, 117-18 (2d Cir. 2003); Matter of Sims, 994 F.2d 210, 220-21 (5th Cir. 1993); In re Rimell, 946 F.2d 1363, 1365 (8th Cir. 1991); B.D.W. Assocs., Inc. v. Busy Beaver Bldg. Ctrs., Inc., 865 F.2d 65, 66-67 (3d Cir. 1989); Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1543-44 (10th Cir. 1988); In re Eastown Auto Co., 215 B.R. 960, 965 (B.A.P. 6th Cir. 1998).  The subjective test – which inquires as to whether the claims were made in good faith – has been largely discarded.  In re: Vortex Fishing Sys., 277 F.3d 1057, 1064 (9th Cir. 2002) (citing In re Busick, 831 F.2d 745, 750 (7th Cir. 1987)).

[3] Vortex, 277 F.3d at 1064.

[4] In re Tamarack Resort, LLC, 2010 Bankr. LEXIS 845, at *8-9 (Bankr. D. Idaho Mar. 17, 2010). 

[5] Id. (citing Busick, 831 F.2d at 749). 

[6] See, e.g., In re Demirco Holdings, Inc., 2006 Bankr. LEXIS 1131, at *9-10 (Bankr. C.D. Ill. June 9, 2006) (“With the dearth of committee comments and legislative history available to interpret BAPCPA, this Court cannot presume that Congress added the phrase ‘as to liability and [sic] amount’ with the intent that the claims of involuntary petitioners must now be fully liquidated either by agreement or judgment so that no dispute exists as to any portion of such claims. Without clear legislative intent, this Court cannot presume such a change in the law and declines to do so.”).

[7] In the Matter of Green Hills Dev. Co., LLC, 741 F.3d 651, 658 (5th Cir. 2014). See also Excavation, Etc., LLC, 2009 Bankr. LEXIS 1905, at *4-5 (Bankr. D. Or. June 24, 2009) (holding that BAPCPA amendments of 2005 overruled prior Ninth Circuit precedent, because, were those cases to remain in effect, they would render superfluous the “and amount” language that was added in 2005).  See also In re DSC, Ltd., 486 F.3d 940, 947 (6th Cir. 2007) (Congress made clear that it intended to disqualify creditors when any legitimate basis, whether factual or legal, existed for a debtor not to pay claim). 

[8] 2017 U.S. Dist. LEXIS 206513 (D. Nev. Dec. 15, 2017).

[9] Id. at *4.  California and Idaho settled their claims post-petition, but another creditor joined the petition after it was filed.

[10] Id. at *3.

[11] Id. at *30-31. 

[12] Id. at *32-33. 

[13] Id. at *33. 

[14] Id. at *35 (internal citations and quotations omitted).

[15] Id. at *38. 

[16] See, e.g., In re Hentges, 351 B.R. 758 (Bankr. N.D. Okla. 2006) (petitioning creditor was disqualified because a portion of its asserted claim was subject to bona fide dispute, but noting that the court “might have reached a different conclusion” had creditor asserted claim for undisputed amount only). 

[17] Collier on Bankruptcy ¶303.11 [2] (16th ed. rev. 2013).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Patterson Belknap Webb & Tyler LLP | Attorney Advertising

Written by:

Patterson Belknap Webb & Tyler LLP

Patterson Belknap Webb & Tyler LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.