Involuntary Bankruptcy Is Dead—RIP (In re TV Azteca)

By: Donald L Swanson

What creditor would ever want to be an involuntary bankruptcy petitioner under these statements of facts and law:

• Facts:  “Here, there is no dispute that the holders of the Notes are owed the entire principal amount plus unpaid interest. . . . But, there is a dispute as to whether the holders of the Notes are entitled a redemption premium”; and
• Law: A creditor is ineligible to be an involuntary petitioner if any portion of the creditor’s claim is the subject of a bona fide dispute as to amount or liability?

Such statements are from In re Azteca, S.A.B. de C.V., et al., Case No. 23-10385, SDNY Bankruptcy Court (opinion dated 11/20/2023).

Contrary Law

Here’s the contrary rule of law that existed for decades after enactment of the Bankruptcy Code—and which I read a bajillion times in years gone by:  

• “To eliminate a creditor as an eligible petitioning creditor, the bona fide dispute must go to the entire claim”; and
• “A bona fide dispute as to a portion of the petitioning creditor’s claim does not disqualify that creditor from filing an involuntary case.”

From Collier on Bankruptcy, Vol 2, ¶ 303.03[2][b][iii], at 303-24 & -25 (15^th Ed.).

A Huge Change

That change (from Collier to In re Azteca) in the law of involuntary bankruptcy is huge. 

Who would ever want to incur the involuntary petitioner risk, when a dispute over even a slight portion of the creditor’s claim destroys involuntary petitioner eligibility? 

• That risk is much too high!

A BAPCPA Result

According to the In re TV Azteca opinion, this change in the law of involuntary bankruptcy arises from Congress’s 2005 BAPCPA amendments to 11 U.C.S § 303.

Granted, BAPCPA (the “Bankruptcy Abuse Prevention and Consumer Protection Act”) is the worst anti-bankruptcy piece of legislation of our time.  That’s because it sees bankruptcy as a bad thing in all circumstances, finds abuse at every level of bankruptcy, is designed to make bankruptcy unworkable for those who need it most, and seeks to dramatically diminish the number of bankruptcy filings.   

The BAPCPA text for involuntary petitioner eligibility[fn. 1] makes changes to § 303(b)(1) and § 303(h), so that those sections now read like this (the BAPCPA additions are underlined and in italics):

• (b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title—(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount . . . ; and
• (h) . . . after trial, the court shall order relief against the debtor in an involuntary case . . . only if—(1) . . . , unless such debts are the subject of a bona fide dispute as to liability or amount.  

A Surprise

It’s actually surprising that BAPCPA increases the risk for petitioning creditors, because involuntary bankruptcies are commonly filed when creditors believe that fraud and abuse is actually occurring—e.g., when assets are being transferred to insiders or otherwise dissipated.

But . . . no . . . BAPCPA sees the very act of filing bankruptcy as what is fraudulent and what it wants to forestall. To illustrate:

• one BAPCPA provision on involuntary bankruptcies (its Sec. 332, now contained in 11 U.S.C. § 303(k)) is designed to prevent the filing of involuntary cases against individual consumers; and
• BAPCPA specifies that such provision, “may be cited as the ‘Fraudulent Involuntary Bankruptcy Improvement Act of 2005’” (emphasis added).

Conclusion

I don’t know whether the plain language of BAPCPA’s amendments to § 303 require the no-portion-can-be-in-dispute result of In re Azteca and similar opinions.  But that result:

• is terrible policy, because it effectively eliminates an important bankruptcy tool that creditors could otherwise use to protect themselves from debtor fraud and abuse; and
• is a truly unfortunate result for our system of bankruptcy.

————–

Footnote 1.  Sec. 1234 of BAPCPA titled, “INVOLUNTARY CASES,” says: 

(a) AMENDMENTS.—Section 303 of title 11, United States Code, is amended—(1) in subsection (b)(1), by—(A) inserting ‘‘as to liability or amount’’ after ‘‘bona fide dispute’’; and (B) striking ‘‘if such claims’’ and inserting ‘‘if such noncontingent, undisputed claims’’; and (2) in subsection (h)(1), by inserting ‘‘as to liability or amount’’ before the semicolon at the end.

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