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s part of theBankruptcy AbusePrevention and ConsumerProtection Act of 2005, Congressmade certain modifications to§ 303 of the Bankruptcy Code, 11U.S.C. 303. Section 303 sets forth therequirements that petitioners must satisfy inorder to commence involuntary bankruptcyproceedings and for the subject entity to beadjudged a debtor for purposes of suchproceedings. This article considers the extent,if any, to which the modifications to § 303change existing law, as applied by the courts.Under the prior version, § 303(b)(1)provided in pertinent part that an involuntarycase is commenced by the filing of a petition bythree or more entities, each of which is aholder of an unsecured claim against suchperson “that is not contingent as to liability orthe subject of a bona fide dispute,” if theamount of such claims aggregate the statutoryminimum, which is currently $12,300. (If theputative debtor has fewer than 12 creditors,excluding employees or insiders of the putativedebtor, one person mayfile.) The new lawchanged § 303(b)(1) by adding “as to liabilityor amount” after “bona fide dispute.”The prior version of § 303(h)(1) providedthat, if an alleged debtor contests the filing of the involuntary petition under § 303(b)(1), thecourt, after trial, shall order relief against thedebtor only if itis generally not paying its debtsas theybecome due “unless such debts are thesubject of a bona fide dispute.” Similar to§ 303(b)(1), the new law changes§ 303(h)(1) by adding “as to liability oramount” after “bona fide dispute.”
Retroactive application willnot violate Constitution
As an initial matter, the new law providesthat these amendments shall take effect uponenactment and shall apply with respect to casescommenced “before, on and after such date.” Inother words, the amendments are supposed tobe applied retroactively. Retroactivityinstinctively raises questions of fairness;however, the U.S. Supreme Court has held thatapplication of an intervening statute thatconfers or ousts jurisdiction or changesprocedural rules in suits arising before itsenactment does not raise constitutionalconcerns. Because § 303 is considered ajurisdictional statute, coupled with the generalprinciples that bankruptcy relief is a privilegeand not a constitutional right, it is clear thatthe retroactive application of theseamendments, even if they alter existing law,will not violate the Constitution. See
In reBDC 56 LLC
, 330 F.3d 111 (2d Cir. 2003).Courts have distilled three substantiverequirements for an involuntary petition to bevalid under § 303: There must beat least threepetitioning creditors (only one ifthe debtorhas fewer than 12 creditors); each petitioningcreditor must holdunsecured claims againstthe debtor not subject to bona fide dispute andtotaling at least $12,300; and the debtor isgenerally not paying debts as they come due.
Inre Focus Media Inc.
, 378 F.3d 916 (9th Cir.2004);
In re Amanat
, 321 B.R. 30 (Bankr.S.D.N.Y. 2005).While the requirement to have at leastthree petitioning creditors is straightforwardenough, creditors are often reluctant to join inthe filing of such a petition because, if theinvoluntary petition is dismissed, they could befacing severe consequences under § 303(i).Further, there is the risk that a debtor couldsuccessfully showthat related entities should bedeemed to be one and the same creditor. Also,creditors pushing for an involuntary filingshould be mindful of the prohibition in Rule1003 of the Federal Rules of BankruptcyProcedure of assigning claims for the purpose of commencing an involuntary case. See, e.g.,
Focus Media
, supra.The term “bona fide dispute” is not definedin the Bankruptcy Code. While courts havearticulated different standards, theyhavesettled on onein recent years requiring thatthere be “an objective basis for either a factualor a legal dispute as to the validity of the debt.”In other words, a bona fide dispute exists onlywhen “there are substantial factual or legalquestions that bear upon the debtor’s liability.”
In re Byrd,
357 F.3d 433 (4th Cir. 2004). Underthis standard, the petitioning creditors bear theburden of a prima facie showing that no bona
WWW.NLJ.COM
THE WEEKLY NEWSPAPER FOR THE
LEGAL PROFESSION
MONDAY, JULY 18, 2005
BANKRUPTCY LAW
Involuntary Proceedings
By Craig Rankin and Christopher Alliotts
Craig Rankin
is a partner at Los Angeles-basedbankruptcy boutique Levene, Neale, Bender,Rankin &Brill.
Christopher Alliotts
is of counsel to the Menlo Park, Calif., office of Los Angeles-based SulmeyerKupetz.
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