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303 Involuntary Cases

In re CPME LLC (April 10, 2014)
Issues: Petitioning Creditors filed an involuntary Chapter 11 petition against alleged Debtor (CPME), which was contested. Alleged Debtor is a general contractor in the El Paso area actively engaged in the construction industry. Issues addressed by the Court included (1) whether a sufficient number of Petitioning Creditors were eligible and had standing under §303(b)(1) of the Bankruptcy Code; and (2) whether the Alleged Debtor was generally paying its debts as they became due under §303(h)(1) of the Bankruptcy Code. Holdings: The Court dismissed the Involuntary Petition against the Alleged Debtor. The Court’s ruling is set forth in a written transcript. The Court concluded that five of the six Petitioning Creditors were not eligible under §303(b)(1) of the Bankruptcy Code—as the evidence demonstrated that their claims were in bona fide dispute as to amount and some were in bona fide dispute as to liability and amount. The Court declined to adopt, based on the facts of the case, a “special circumstances” exception which eliminates the statutory requirement of a sufficient number of eligible petitioning creditors. The Court also concluded that, after applying a factor based test, the Alleged Debtor was generally paying its debts as they became due under §303(h)(1) of the Bankruptcy Code, other than debts that were in bona fide dispute. The Alleged Debtor was paying its debts as they became due to its two largest creditors—the IRS under an Installment Agreement and its bank loan. Although there were some creditors that the Alleged Debtor was not paying, the Court found that such debts were in bona fide dispute. As the Alleged Debtor was a general contractor in the construction industry, it was typical for this type of general contractor to be in disputes with some subcontractors over the quality of their work and entitlement to payment.

 

In re JC General Contractors Inc. (June 11, 2014)
Issues: Petitioning Creditors filed an involuntary Chapter 7 petition against Alleged Debtor (JC General Contractors), which was contested. Alleged Debtor is a contractor, who had only one open contract and had otherwise shut down operations. Issues addressed by the Court included (1) whether a sufficient number of Petitioning Creditors were eligible and had standing under §303(b)(1) of the Bankruptcy Code as unsecured creditors; (2) whether the Alleged Debtor was generally paying its debts as they became due under §303(h)(1) of the Bankruptcy Code; and (3) whether the Involuntary Petition was filed in bad faith. Holdings: The Court granted the Involuntary Petition against the Alleged Debtor and entered an Order for Relief. The Court’s ruling is set forth in a written transcript. The Court concluded that the three Petitioning Creditors were eligible under §303(b)(1) of the Bankruptcy Code—as   two of the Petitioning Creditors held judgments and the other Petitioning Creditor’s claim was not in bona fide dispute.  Although two of the Petitioning Creditors held abstract of judgment liens, the Petitioning Creditors were unsecured given the value of the debtor’s real property (undeveloped vacant property) and the multiple senior liens against the real property. The Court also concluded that, after applying a factor based test, the Alleged Debtor was not generally paying its debts as they became due under §303(h)(1) of the Bankruptcy Code. The Alleged Debtor had several outstanding judgments against it, over $500,000 in tax liens for multiple years which it had not paid, constantly had checks dishonored for insufficient funds, and many of its accounts payable were over 90 days past due. The Court also concluded that the filing of the Involuntary Petition was not motivated by ill will, malice or harassment, and thus was not filed in bad faith.

 

In re Clean Fuel Technologies II, LLC (February 4, 2016)
Issue: Petitioning Creditors filed an involuntary Chapter 7 petition against the Alleged Debtor, which was previously dismissed by the Court after a contested hearing. The Alleged Debtor then filed a Counterclaim under Section 303(i) of the Bankruptcy Code seeking recovery of its attorney’s fees and costs against the unsuccessful Petitioning Creditors. The Court addressed the legal standard under Section 303(i) for an award of attorney’s fees and costs in favor of an alleged debtor when an involuntary petition is dismissed. Holding: In summary, the Court determined that dismissal of a contested involuntary petition creates a rebuttable presumption that attorney’s fees and costs will be awarded to an alleged debtor under Section 303(i) of the Bankruptcy Code. The presumption may be rebutted by petitioning creditors based on the totality of the circumstances, which includes consideration of the following factors: (1) the merits of the involuntary petition; (2) the role of any improper conduct on the part of the alleged debtor; (3) the reasonableness of the actions taken by the petitioning creditors; (4) the motivation and objectives behind the filing of the involuntary petition; and (5) other material factors and considerations. Based on the particular (and somewhat peculiar) facts in this case, the Court concluded that, based on the totality of the circumstances, the Petitioning Creditors successfully rebutted the presumption that attorney’s fees and costs would be awarded to the Alleged Debtor. As a result, the Court denied the Counterclaim filed by the Alleged Debtor against the Petitioning Creditors. The Court’s ruling is set forth in a Memorandum Opinion. (Westlaw: 2016 WL 447675, Lexis: 2016 Bankr. Lexis 379)