In a recent decision, the Bankruptcy Appellate Panel for the Ninth Circuit addressed a significant issue concerning involuntary bankruptcy petitions under Chapter 7 of the Bankruptcy Code. The case, Wolverine Endeavors VIII, LLC v. Carole D. King1, delved into whether fully secured, nonrecourse creditors should be counted when determining the number of creditors an alleged debtor has under 11 U.S.C. § 303(b).
Background of the Case
Wolverine Endeavors VIII, LLC filed an involuntary Chapter 7 bankruptcy petition against Carole D. King, asserting a claim exceeding $7 million based on a judgment from 2011, renewed in 2021. Initially, Wolverine was the sole petitioning creditor. Subsequently, additional creditors attempted to join the petition, but only one was deemed eligible alongside Wolverine.
Ms. King moved to dismiss the petition, arguing that she had 12 or more “countable creditors”, which under § 303(b) would require at least three “petitioning creditors” to initiate an involuntary bankruptcy.2 The bankruptcy court agreed, considered fully secured creditors in the tally, and dismissed the petition due to the lack of sufficient petitioning creditors.
The Legal Issue
The crux of the appeal was whether fully secured, nonrecourse creditors should be included in the count of an involuntary debtor’s creditors under § 303(b).
Court’s Analysis
- Plain Language of § 303(b): The court emphasized the importance of adhering to the statute’s plain language. Section 303(b) specifies the requirements for creditors initiating an involuntary petition but does not explicitly exclude fully secured creditors from being counted. The statute meticulously outlines exclusions—such as contingent claims, employees, insiders, and certain transferees—but makes no mention of exempting fully secured or nonrecourse creditors.
- Legislative History: Historically, the former Bankruptcy Act of 1898 explicitly excluded fully secured creditors from being counted. However, when Congress enacted the current Bankruptcy Code, it omitted this exclusion. The court interpreted this omission as intentional, suggesting that Congress did not intend to exclude fully secured creditors from the creditor count in involuntary petitions.
- Policy Considerations: Wolverine argued that fully secured creditors lack an incentive to initiate bankruptcy proceedings since they can satisfy their claims through collateral. The court, however, noted that secured creditors might have valid reasons to prefer bankruptcy proceedings, such as benefiting from an orderly liquidation process or avoiding the complexities of foreclosure. The court also acknowledged that excluding fully secured creditors could undermine the protections afforded to alleged debtors by reducing the number of creditors required to file an involuntary petition. The inclusion serves to prevent potential abuse of the bankruptcy system by ensuring that a sufficient number of creditors support the initiation of involuntary proceedings.
Conclusion
The Bankruptcy Appellate Panel affirmed the bankruptcy court’s decision, holding that fully secured, nonrecourse creditors are to be counted when determining the number of an alleged debtor’s creditors under § 303(b). This interpretation aligns with the majority of courts and is supported by the statute’s plain language, legislative intent, and underlying policy considerations.
Implications
This decision reinforces the importance of a careful and comprehensive creditor count in involuntary bankruptcy petitions. Creditors and debtors alike must be aware that fully secured creditors are counted under 303(b).
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Disclaimer: The above is for informational purposes only and does not constitute legal advice.
- No. CC-24-1008-LFS, 2024 Bankr. LEXIS 2623 (B.A.P. 9th Cir. Oct. 29, 2024). ↩︎
- The court, “to distinguish entities that are petitioning creditors from entities that are being counted to satisfy the numerosity requirement of § 303(b), moving forward, [] refer[ed] to the former as ‘petitioning creditors’ and the latter as ‘countable creditors.'” ↩︎