By: Donald L Swanson
The opinion is PCC Rokita, S.A. v. HH Technology Corp. (In re HH Technology Corp.), Case No. 24-9002 (1st Cir.; decided July 24, 2025).
The opinion begins like this (emphasis added):
- “Debtors initiate most bankruptcy cases. But sometimes, creditors are the initiators. Creditors initiate a bankruptcy case by filing a so-called involuntary petition.”
- “A single creditor may file an involuntary petition if the debtor against whom the petition is filed has fewer than twelve qualified creditors.”
- “If, however, the debtor has twelve or more qualified creditors, at least three creditors must file or subsequently join the petition.
One of the issues addressed in the HH Technology Corp. opinion is this:
- What are the qualifications for a creditor to be included in or excluded from the 12-creditors limit for an involuntary petition under § 303?
Facts
In December 2021, the U.S. District Court for Massachusetts recognizes Plaintiff’s million-dollar foreign judgment against Debtor. Shortly thereafter, Debtor enters into an assignment for benefit of creditors to wind itself down under Massachusetts law.
Debtor’s assignee (the “ABC Assignee”) accepts the assignment and begins the wind down process.
Two months later, Plaintiff files an involuntary bankruptcy petition against Debtor in the Massachusetts Bankruptcy Court—as the sole petitioner. Plaintiff gives this explanation:
- Debtor made a number of large payments shortly before the petition’s filing, some of which are avoidable as preferences;
- ABC Assignee does not intend to recover those payments;
- one of Debtor’s principals has formed a new company that appears to continue Debtor’s business; and
- a bankruptcy is needed to protect creditor interests.
ABC Assignee moves to dismiss the involuntary petition and provides a list of 15 creditors with claims against Debtor.
Plaintiff disputes the qualifications of those 15 creditors under § 303(b),[fn. 1] which describes a qualified creditor as:
- being neither an employee nor an insider of the debtor; and
- holding a claim against debtor that is, (1) “not contingent as to liability or the subject of a bona fide dispute as to liability or amount”; and (2) not avoidable under Chapter 5 or § 724(a) of the Bankruptcy Code.
ABC Assignee’s Argument
Plaintiff’s involuntary petition against Debtor must be dismissed, the ABC Assignee argues, because:
- Debtor has 15 creditors and only one petitioning creditor; and
- three petitioning creditors are required to put a debtor with 12 or more qualified creditors into an involuntarily bankruptcy.
Bankruptcy Court Proceedings
The Bankruptcy Court schedules an evidentiary hearing on ABC Assignee’s motion to dismiss and authorizes discovery in the interim on creditor qualifications under § 303(b)(2).
During discovery, several more creditors are found—bringing the number of putatively qualified creditors to “approximately twenty.” One of those creditors joins the involuntary petition—doubling the number of petitioning creditors (from 1 to 2).
After discovery, ABC Assignee claims that Debtor has 15 qualified creditors.
In response, the two Petitioning Creditors contend that 12 of those 15 are unqualified for various reasons.
In a memorandum opinion, after the evidentiary hearing, Bankruptcy Court finds that the two Petitioning Creditors have failed to prove that any of the 12 challenged creditors are unqualified.
The Bankruptcy Court then dismisses the involuntary petition on numerosity grounds—because:
- Debtor has 12 or more qualified creditors; but
- there are only two petitioning creditors—one short of the required three.
The Petitioning Creditors timely appeal to the Bankruptcy Appellate Panel, which affirms, and the appeal moves on to the First Circuit Court of Appeals.
First Circuit’s Analysis
A creditor’s receipt of a pre-petition transfer from the debtor, that is avoidable under the Bankruptcy Code, disqualifies such creditor from being counted as one of the 12 creditors under § 303(b)(2). That’s because § 303(b)(2) allows for a single petitioning creditor only when:
- “there are fewer than 12 such holders, excluding . . . any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a)” (emphasis added).
The two Petitioning Creditors seek to disqualify various creditors, from being counted in the 12-creditors limit of § 303(b)(2), for receiving prepetition transfers avoidable as preferences under § 547.
Section 547(b) specifies the conditions under which preferential transfers may be avoided, and § 547(c) sets forth various defenses to avoidability:
- if a § 547(c) defense applies, the transfer is not avoidable and the creditor can be counted in the 12-creditors limit of § 303(b)(2).
–Burden of Proof
So, the question becomes: who has the burden of proof on § 547(b) avoidability and on § 547(c) defenses.
One case cited in the First Circuit’s opinion disqualified a creditor from inclusion in the 12-creditors limit, based solely on a prima facie showing of avoidability under § 547.
The Bankruptcy Court had refused to exclude any of the challenged creditors from the 12-creditors count by concluding:
- the two Petitioning Creditors had the burden of proving that the § 547(c) defenses did not apply; and
- those two creditors failed in meeting that burden.
–Three Arguments Rejected
The Petitioning Creditors challenge the Bankruptcy Court’s ruling, arguing the following three points—all of which the First Circuit rejects as erroneous.
The first point is that only a prima facie showing of avoidability is required to disqualify a creditor from inclusion in the 12-creditors limit of § 303(b)(2)—and potential defenses are irrelevant. Such point is erroneous because, if a § 547(c) defense applies, the challenged transfer is not avoidable under § 547.
The second point is that the Bankruptcy Court should not have considered § 547(c) defenses, at all, because ABC Assignee failed to assert any such defenses in its answer to the involuntary petition. Such point is erroneous because:
- § 547(c) provides a defense to avoidability, not a defense to an involuntary petition;
- ABC Assignee’s defense to the involuntary petition was creditor numerosity, which ABC Assignee timely asserted;
- § 547(c) defenses become pertinent only after the Petitioning Creditors challenge the qualification of certain creditors because of their alleged receipt of avoidable preferences; and
- once the Petitioning Creditors raised the § 547 challenge, ABC Assignee promptly raised the § 547(c) defenses.
The third point is that the Bankruptcy Court should not have required Petitioning Creditors to disprove the applicability of § 547(c) defenses to an otherwise avoidable transfer in order to disqualify a creditor. Such point is erroneous because Petitioning Creditors preserved their § 547 challenges for at most 5 of the 20 creditors so that the placement of the burden of proof made no difference—because the 12-creditors minimum is met, regardless, and any possible burden allocation error was harmless.
Conclusion
Good to know!
———————–
Footnote 1. 11 U.S.C. § 303(b)(1)&(2) provides: “(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, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $10,000 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims; (2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545,547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $10,000 of such claims.”
** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.
MEDIATBANKRY 
Leave a comment