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.

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