When is a Claim Subject to a Bona Fide Dispute? Bankruptcy Court Examines the Requirements For An Involuntary Petition

Contributed by Katherine Doorley
The Bankruptcy Blog has previously examined issues surrounding involuntary petitions, including whether the holder of an unstayed state court judgment could be a petitioning creditor, and when a dispute becomes bona fide.  A recent decision by the Bankruptcy Court for the Southern District of Florida, In re Vicor Technologies, Inc. No. 12-39329-EPK (Bankr. S.D. Fla. Apr. 5, 2013) contains a detailed discussion of the statutory requirements for involuntary petitions.
On December 7, 2012 thirteen creditors of Vicor Technologies, Inc. filed an involuntary petition.  Vicor moved for dismissal.  The petitioning creditors subsequently filed a motion for summary judgment.  Vicor was directed to file an answer to the involuntary petition, which it did, asserting affirmative defenses that required an evidentiary hearing.  Prior to a hearing on the motion to dismiss, the court ruled on the motion for summary judgment.  Pursuant to an agreement between the parties, the court limited its summary judgment analysis under section 303(b) of the Bankruptcy Code to five of the petitioning creditors.
Section 303 of the Bankruptcy Code provides that an involuntary petition requires three or more creditors “each of which is either a holder of a claim against [the alleged debtor] that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount . . .” 11 U.S.C. § 303(b).  Section 303 further requires a finding that the alleged debtor be generally not paying its debts as they become due. 11 U.S.C. § 303(h).
The petitioning creditors argued that the claims of each creditor satisfied the requirements of section 303(b), and Vicor was generally not paying its debts as they became due, therefore, according to the petitioning creditors, relief was warranted under of the Bankruptcy Code.  Vicor disputed the allegation.
The bankruptcy court first addressed whether or not Vicor was generally paying its debts.  Courts apply a flexible “totality of the circumstances” test to determine whether a debtor is “generally not paying” its debts, which focuses “on the number of unpaid claims, the amount of the claims, the materiality of nonpayment and the overall conduct of the debtor’s financial affairs.”  In re Huggins, 380 B.R. 75, 83 (Bankr. M.D. Fla. 2007).  Vicor presented no evidence it was generally paying its debts as they became due.  In fact, Vicor’s accounts payable ledger indicated that a number of claims, including those of the petitioning creditors, remained unpaid for extended periods of time, and Vicor’s publicly reported financial information indicated that Vicor was in a “tail spin.”  The bankruptcy court found that Vicor had not been “generally paying its debts” as they came due.  
The bankruptcy court next discussed whether at least three of the petitioning creditors held claims that satisfied the requirements of section 303(b).  Because the Bankruptcy Code does not define “bona fide dispute” a majority of courts apply a standard which requires a court to “determine whether there is an objective basis for either a factual or a legal dispute as to the validity of debt.”  In re Busick, 831 F.2d 745, 750 (7th Cir. 1987).  As part of its discussion, the bankruptcy court examined the history of section 303.  Prior to the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), a dispute as to the amount of any portion of a claim did not necessarily imply that the entire claim was subject to a bona fide dispute.  The bankruptcy court noted that BAPCPA amended section 303(b)(1) such that a dispute as to any portion of a claim meant that there was a bona fide dispute as to the entire claim, and therefore would not satisfy section 303(b)(1).  The analysis must still be conducted on a claim by claim basis, however. “When a creditor holds multiple claims, and some but not all of such claims are subject to bona fide dispute, this does not disqualify the creditor entirely.  A claim of such creditor not subject to bona fide dispute may still be counted . . . .”
The bankruptcy court next considered the claims of the petitioning creditors.  Because Vicor did not contest the claim held by one of the petitioning creditors, the petitioning creditors only needed to establish the sufficiency of the claims of two remaining petitioning creditors.  The remaining petitioning creditors each asserted multiple claims against Vicor for, among other things, unpaid compensation, unpaid reimbursable expenses, and unpaid loans.  Because the petitioning creditors presented a prima facie case that their claims were not subject to bona fide dispute, the burden shifted to Vicor to provide evidence of a bona fide dispute. Vicor submitted the affidavit of James E. Skinner, the interim CEO, which alleged certain vague wrongdoings on the part of the petitioning creditors, and Skinner’s beliefs about the validity of the debts.  The bankruptcy court found that the affidavit did not establish a bona fide dispute. 
As the bankruptcy court discussed, a bona fide dispute as to a particular claim can consist of a dispute as to the either the existence or the amount of the liability, but the fact that a debtor holds a potential counterclaim does not create a bona fide dispute.  Further, each of the petitioning creditors held multiple claims.  The court found that Vicor had presented no specific evidence to dispute the claims of the petitioning creditors and found “[i]t is not sufficient . . . for purposes of supporting the allegation that a claim is subject to bona fide dispute under § 303(b), to simply state that you do not agree.”  Further, the bankruptcy court held that even if Vicor’s “vague, generalized” objections to the claims raised a bona fide dispute as to some of the petitioning creditors’ claims, each creditor held at least one undisputed claim.  The court granted the petitioning creditors’ motion for summary judgment and entered an order for relief.
The Vicor decision does not make any new law, but serves as a useful reminder that the requirements for petitioning creditors under section 303 of the Bankruptcy Code are not hard to establish and even if one claim of a creditor is disputed, the requirements may be satisfied by any undisputed claim.