in the united states bankruptcy court for … · · 2015-11-01petitioning creditor’s response...

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IN THE UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

IN RE: §

§ CASE NO. 15-34872

STANISLAW R. BURZYNSKI §

§ (CHAPTER 7)

DEBTOR §

PETITIONING CREDITOR’S RESPONSE TO PUTATIVE DEBTOR’S RULE 12 (b) (6)

MOTION (DOCKET NO. 7) AND PETITIONING CREDITOR’S MOTION TO COMPEL

PUTATIVE DEBTOR TO COMPLY WITH BANKRUPTCY RULE 1003(b) FOR ALL

CREDITORS AND TO FILE AN ANSWER

PURSUANT TO LOCAL RULE 9013:

THIS MOTION SEEKS AN ORDER THAT MAY ADVERSELY AFFECT YOU.

IF YOU OPPOSE THE MOTION, YOU SHOULD IMMEDIATELY CONTACT

THE MOVING PARTY TO RESOLVE THE DISPUTE. IF YOU AND THE

MOVING PARTY CANNOT AGREE, YOU MUST FILE A RESPONSE AND

SEND A COPY TO THE MOVING PARTY. YOU MUST FILE AND SERVE

YOUR RESPONSE WITHIN 21 DAYS OF THE DATE THIS WAS SERVED ON

YOU. YOUR RESPONSE MUST STATE WHY THE MOTION SHOULD NOT

BE GRANTED. IF YOU DO NOT FILE A TIMELY RESPONSE, THE RELIEF

MAY BE GRANTED WITHOUT FURTHER NOTICE TO YOU. IF YOU

OPPOSE THE MOTION AND HAVE NOT REACHED AN AGREEMENT, YOU

MUST ATTEND THE HEARING. UNLESS THE PARTIES AGREE

OTHERWISE, THE COURT MAY CONSIDER EVIDENCE AT THE HEARING

AND MAY DECIDE THE MOTION AT HEARING.

REPRESENTED PARTIES SHOULD ACT THROUGH THEIR ATTORNEY.

TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE:

Petitioning creditor, Richard Jaffe, files this response to putative debtor’s Rule 7012 (b) motion and

petitioning creditor’s motion requiring the putative debtor to fully comply with Bankruptcy Rule 1003 (b), and

would respectfully show the Court as follows:

Case 15-34872 Document 9 Filed in TXSB on 11/01/15 of 47

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SUMMARY OF RESPONSE/MOTION

As a matter of statute and on-point Texas bankruptcy case law, neither of the two asserted bases of the

Rule 7012 (b) (6) motion are legal bases for dismissal under the rule. The factual assertion of a “bona fide

dispute” regarding petitioning creditor’s debt, as a matter of law, cannot be the basis of a Rule 7012(b) (6)

motion under the logic of the rule and bankruptcy practice which is different from civil rule 12 (b) (6) motion

practice, as explained by on-point Texas bankruptcy authority.

Movant counsel’s representation that there are 12 or more creditors and that petitioning creditor

knows it is a factual defense which cannot be asserted in a Rule 7012 (b) (6) motion. The only proper vehicle

for asserting a factual defense of 12 or more creditors is by averring such in an answer and providing the

required information about the creditors as set forth in Bankruptcy Rule 1003(b). Recently, a schedule of

“unpaid bills” has been served, but the list is incomplete in that it does not include former patients who

overpaid the putative debtor and have credit balances on their accounts. These former patients (or their estates)

are creditors and the failure to include these creditors renders the Rule 1003(b) filing incomplete and

inadequate. In addition to the former patients, insurance companies who have requested refunds of monies

allegedly erroneously paid on the clinic’s patients’ behalf are also creditors and should be listed on the

complete 1003(b) form. Petitioning Creditor is therefore requesting that the motion be denied and that the

putative debtor be ordered to file an answer addressing all of the allegation in the petition and fully complying

with Rule 1003 (b) listing all creditors.

FACTUAL BACKGROUND

As this is a motion to dismiss filed under Rule 7012(b), the facts set forth in the involuntary petition

form are taken as true and the issue in a Rule 7012(b) (6) motion is if the facts alleged state a claim


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for relief. Additional facts which may be required are set forth in the discussion of the purported

factual basis of putative debtor’s motion.

1. THE FACTUAL ALLEGATION OF A “BONA FIDE DISPUTE” IS NOT A VALID

BASIS OF A RULE 7012(b) (6) MOTION

Movant’s counsel asserts in this Rule 7012(b) motion that a bona fide dispute concerning the

debt requires dismissal of the petition under Rule 12(b) (6). However, a putative debtor’s counsel’s

assertion of a bona fide dispute is not a proper basis of a rule 701212(b) (6) motion. Unlike civil

practice, involuntary chapter 7 petitions are usually commenced by the use of a bankruptcy court-

approved form. Therefore, civil 12(b) (6) authority is not authoritative in a Rule 7012 (b) (6)

analysis logically and based on on-point Texas bankruptcy authority.

In in re Rambo Imaging, LLC, case no 07-11190-frm (WD Tex. 2007) (copy attached), one

petitioning creditor filed an involuntary chapter 7 petition using the court-approved form. The

putative debtor filed an unspecified rule 12(b) motion to dismiss, alleging, inter alia, that the debt

was subject to a bona fide dispute thereby justifying dismissal under Rule 12(b).

Because the motion was not filed under a specific subparagraph, the bankruptcy court engaged

in an exhaustive analysis of the various sub parts of Rule12 (b) and concluded the factual assertion

of a bona fide dispute could not be the basis for granting a Rule 12(b) motion. The court’s

reasoning was that a 7012 (b) (6) motion (the most likely sub part) challenges the legal sufficiency

of the petition’s allegations. However, when the approved involuntary petition form is used, the

allegations are sufficient as a matter of law and contesting the factual allegations in a form petition

renders dismissal under rule 12(b) (6) unavailable or inappropriate.

The putative debtor in this case is attempting to use the same counsel-asserted “bona fide

dispute” argument rejected by the bankruptcy court in Rambo Imaging LLC. We request that the


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Court follow the reasoning and result and conclude that counsel’s assertion of a bona fide dispute is

not a legal or legitimate basis for a Rule 7012(b) (6) motion.

Rambo Imaging LLC appears to be dispositive of the bona fide dispute basis in the Motion

to Dismiss. However, if the Court chooses not to follow Rambo Imaging, LLC and the logic of

limiting a rule 7012 (b) analysis to the sufficiency of the involuntary petition form, and decides to

pursue this issue despite there being no answer on file or issue being properly joined, Fifth Circuit

authority uses an objective standard for determining the existence of a bona fide dispute. See in re

Corrline International, LLC, 516 B.R. 106, 146 (S.D. Tex. 2014)(“the Fifth Circuit holds that under

the ‘objective standard’ test, ‘neither the debtor's subjective intent nor his subjective belief is

sufficient to meet [his] burden’ of proving a bona fide dispute exists. Id. (quoting in re Rimell, 946

F.2d at 1365”).

The court in in re Corrline International, LLC also stated:

“Further, it is well established that the previous recognition of a debt is evidence that no bona

fide dispute exists, and that self-serving testimony is insufficient to prove the existence of a

bona fide dispute. See Wishgard, LLC v. Se. Land Servs. LLC (in re Wishgard, LLC), no. 13–

20613–cmb, 2013 WL1774707, at *6 (Bankr. W.D. Pa. Apr. 25, 2013); in re Faberge rest.

of Florida, Inc., 222 B.R. 385, 389 (Bankr. S.D. Fla.1997). (emphasis added).

In Re Corrline, supra, 516 B.R. at 148.

A corollary or logical implication is that the existence of a bona fide dispute is determined at

the date of the petition, not after the fact. Again, although not necessary for the disposition of the

Rule 12 (b) (6), to the extent the Court requires addressing the counter facts alleged by counsel in this

Motion, petitioning creditor states that after the last bill was sent in July 2015, (for the amount which

is the basis of this petition), the putative debtor stated in writing the reason for nonpayment and it had

nothing to do with a dispute as to liability or the amount of the debt.


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With the same caveat as above, prior communications between the parties as far back as

August 2014 involving lesser amounts further demonstrate that the reason for non-payment of the

amounts due was not because of the existence of a bone fide dispute. Estoppel also comes into play

because a putative debtor cannot continue to accept the benefit of services month-after-month and

then after the filing of petition claim a bona fide dispute.

After issue is properly joined, and at the hearing of the merits, these written communications

(or redacted versions thereof) will be offered into evidence. These documents will show that counsel’s

assertion of a bona fide dispute is the same type of “manufactured… ‘disputes’” created after the

filing of the petition which the Corrline International LLC court rejected. Id. 1

2. PUTATIVE COUNSEL’S STATEMENT THAT THERE ARE 12 OR MORE

CREDITORS IS NOT A BASIS FOR DISMISSAL UNDER A RULE 12 (b)(6) MOTION

AND THE LIST OF UNPAID BILLS IS NOT IN COMPLIANCE WITH RULE 1003 (b)

The second asserted basis for the Rule 12(b) motion is putative debtor’s counsel’s assertion

that there are 12 or more creditors. However, this assertion by counsel is not assertable in a Rule

7012 (b) motion. Rather, it must be asserted in an answer in compliance with the Bankruptcy Rule

1003 (b).2 Therefore, the Rule 12 (b) (6) motion was defective on its face when filed.

1 The movant does cite several cases in its Legal Standard section. However, the cases cited in

paragraphs 1 and 2 are all civil cases explaining and applying Rule 12 (b) (6). As suggested above,

none of these cases have any relevance to a Bankruptcy Rule 7012 (b) (6) motion where a

bankruptcy court-approved form is used as the complaint, based on common sense and the holding

of In re Rambo Imagining, LLC. Paragraph 3 contains citations to some bankruptcy cases but has no

obvious application to a Rule 7012 (b) (6), motion which is limited to the four corners of the

bankruptcy petition form. Paragraph 4 cites a case for the general burden of proof requirements, but

the case also contains an extensive analysis of the statutory abstention doctrine, and its citation may

thus be an indirect attempt to raise the abstention/two-party dispute issue. To cover that possibility,

the issue will be briefly addressed separately, infra.

2 Bankruptcy Rule 1003 (b) provides that:


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Nine days after the motion was filed, Movant filed a notice of creditors and attached a list of

“unpaid bills” from the putative debtor. However, the putative debtor has one or more additional

creditors beyond the creditors listed in the unpaid bills list, namely as of the time of the filing of the

petition, there is one or more former patients who are creditors based on overpayments to the

putative debtor and his clinic. These individuals (or their surviving relatives) are creditors and

should be included in the 1003(b) list. In addition, there is one or more insurance carriers who have

paid for the clinic’s treatment of their insureds who have sought recovery of some or all amounts

previously paid. These carriers are also creditors of the putative debtor and should be listed on the

Rule 1003 (b) schedule.

A Rule 1003 (b) list of creditors must contain information about “all creditors.” See Rule 1003

(b) quoted footnote 2 above and In re Corrline, supra, 516 B.R. at 151. The failure to file a

complete list of creditors means that the filing is not in compliance with the rule. It has been held

that noncompliance with Rule 1003 (b) estops the debtor from including creditors in the numerosity

calculation. Id. In the event the putative provides a complete list of creditors, it is requested that the

list of patient creditors contain their phone numbers and email addresses since they are not

businesses, that contact information about the patient’s closest relative be included, since some of

the patient creditors may be deceased.

With the same above caveat that the Motion to Dismiss is defective, and that the list of unpaid

bills is not in compliance with Rule 1003 (b), which should mean that the Court need not go behind

“JOINDER OF PETITIONERS AFTER FILING. If the answer to an involuntary petition filed by

fewer than three creditors avers the existence of 12 or more creditors, the debtor shall file with the

answer a list of all creditors with their addresses, a brief statement

of the nature of their claims, and the amounts thereof. If it appears that there are 12 or more

creditors as provided in § 303(b) of the Code, the court shall afford a reasonable opportunity for

other creditors to join in the petition before a hearing is held thereon.” (emphasis added)


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the involuntary petition form or address the numerosity issue at this time, at the hearing on the

merits (or such other time as the Court determines), evidence will be offered showing that the

putative debtor and his representative provided misleading and incorrect information about his

financial situation, financial prognosis and only vague and self-serving information about the

number of creditors in an effort to justify lack of full payment of the increasing amounts due, in

order to induce petitioning creditor to continue providing services, thereby refuting movant’s

allegation of bad faith.

Finally, with the above caveat, even if the putative debtor fully complies with Rule 1003(b) and

proves that he has 12 or more qualified creditors, petitioning creditor expects to adduce evidence

satisfying the special circumstance exception to the three creditor rule based on “fraud, trick,

artifice or scam” as recognized in this district. See In re Corrline International, LLC., 516 B.R.

supra at 161 citing, In re Norriss Bros. 133 B.R. 599, 608-609 (N.D. Tex. 1991). See also, In re

Moss 249 B.R. 411, 424 (N.D. Tex. 2000) (also adopting the special or exigent circumstance

exception to the three creditor rule based on a finding that “all creditors will be benefitted by the

entry of an order for relief…” even in the absence of three petitioning creditors.

The factual basis of the special or exigent circumstance consist of, inter alia, substantial

payments by the putative debtor for personal living expenses in derogation of the rights of his

creditors (including hundreds of thousands of dollars in payments for real estate taxes, mortgage

and other payments on exempt and non-exempt property in this country and abroad, which property

has a combined appraised value of in excess of $14,000,000, despite admitting to unpaid trade

creditor bills of over 1.1 million dollars. There will likely also be evidence which raises substantial


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public interest issues which may be relevant to the special circumstance exception under current

special exception authority or a reasonable extension thereof.3

3. ABSTENTION

Although there is no answer raising the issue, and the word “abstention” is not mentioned in the

motion to dismiss, Movant does cite in re Xacar, 216 B.R.187 (S.D. Tex. 1997) (Motion to Dismiss

page 3 para. 4) which case has an extensive discussion of abstention under U.S.C. Section 305. If

this issue is raised in an answer, or if the Court choses to address this issue because of Movant’s

reference to in re Xacar, it should be pointed out that the factors set forth in 11 U.S.C. 304 (c) are

similar to the special or exigent circumstances exception to the three petitioning creditor rule.

As indicated above, there are one or more former patients who are owned refunds for reasons

which will be detailed at the hearing on the merits. Some of these former patients may have died

and if so, it would involve payment to the estate of the former patient. Unlike many of the trade

creditors listed in the incomplete Rule 1003(b) list of unpaid bills, these former patients (or their

estates) have no on-going relationship with the putative debtor, so short of employing collection

attorneys, they have no practical recourse for recovery of their credit balances. There are or may be

other complicating factors affecting these credit balances which will be presented at the hearing on

the merits.4

3 Although this district and the Northern District have expressly adopted the special or exigent

circumstances exception to the three petitioning creditor rule, one judge in the Western District has

rejected it and Norriss Bros. See In re Green, Case NO. 06-11761-FM (W.D. Tex. 2007)

4 The information in this section and some of the information in other sections of this

response/motion is admittedly vague. Some of the specific factual rebuttals are derived from

attorney-client communications which originally were or might have been covered by the attorney-

client privilege. However, because the movant has argued for dismissal based on a bona fide


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4. REQUEST FOR BOND

As part of the Rule 12(b) (6) motion, the Movant also seeks a bond under Bankruptcy Code

Section 303(e).5 However:

“the bankruptcy code does not mandate that a bond be posted, involuntary debtors are not

entitled to a bond as a matter of course, and such a bond is not routinely required of petitioners

on request of a debtor. See in re Contemporary Mission, Inc., no. 5-82-00915, 1983 Bankr.

Lexis 6916, at *6 (Bankr. D. Conn. Jan. 31, 1983); in re Reed, 11 B.R. 755, 757 (Bankr. S.D.

W. Va. 1981). The burden is on the alleged debtor to show the need for a bond by showing,

for example, that the petition was filed in bad faith or with an improper motive. Hutter Assocs.,

Inc. V. Women, Inc. (in re Hutter Assocs., Inc.), 138 B.R.512, 516 (W.D. Va. 1992).”

In re: James E. Lundeen, sr., involuntary chapter 7, alleged debtor.

Case no. 07-19422. United States Bankruptcy Court, N.D. Ohio, Eastern Division (copy

Attached. No on point Fifth Circuit authority found).

Presumably the request for a bond is based on the alleged bad faith arising out of the asserted

bona fide dispute about the debt and counsel’s assertion that there are 12 or more creditors. Because

the presumed asserted bases of the bond are also the arguably defectively asserted factual defenses

dispute, bad faith, and may have indirectly asserted the two-party dispute and/or abstention, and in

general because the claim which is the basis of this involuntary petition involves services rendered

by an attorney, the federal doctrine of implied waiver of the attorney-client privilege applies, as

does certain provisions of the Texas Disciplinary Rules of Professional Conduct permitting

disclosure of otherwise protected information based on a public interest analysis. This is why it was

suggested above that some of the information responsive to this motion may be submitted under

seal, to protect the putative debtor from a public filing of the specific facts responsive to Movant’s

factual contentions. (And for the same reason, there is no citation to a specific Texas rule allowing

disclosure of otherwise protected information). The purpose of this footnote is to provide Movant

and the Court notice of this waiver issue, to avoid undue harm to the putative debtor, as well as

explain the reason for the vagueness of some of the information in this Response/Motion. 5 Bankruptcy code § 303(e) states: "After notice and a hearing, and for cause, the court may require

the petitioners under this section to file a bond to indemnify the debtor for such amounts as the

court may later allow under subsection (i) of this section.


https://apps.fastcase.com/Research/Pages/Document.aspx?LTID=zU%2fd7B6r6AJDOoYB6pTy6i3g61csMLegwvHCPN0xsZsLRkR4utHx4HHIg%2f5Qa3kK7fGaYKMNmhfgDsF92CEFL%2b%2bFvzJx6Zr0FrbHun8gG5k7tsjsMy5bqL6VyisL50gwv7PP%2fHCBXaINUAWSVPun1WuD5RsmOEJrWvbv99FY184%3d&ECF=11+B.R.+755

https://apps.fastcase.com/Research/Pages/Document.aspx?LTID=zU%2fd7B6r6AJDOoYB6pTy6i3g61csMLegwvHCPN0xsZsLRkR4utHx4HHIg%2f5Qa3kK7fGaYKMNmhfgDsF92CEFL%2b%2bFvzJx6Zr0FrbHun8gG5k7tsjsMy5bqL6VyisL50gwv7PP%2fHCBXaINUAWSVPun1WuD5RsmOEJrWvbv99FY184%3d&ECF=138+B.R.+512

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to the petition, it may be premature for a bond hearing since issue has not been properly joined.

There should be one hearing where these common issues can be adjudicated.

But Movant has not fully complied with Bankruptcy Rule 1003(b). Therefore, the Court should

defer consideration of a bond until Movant fully complies with the applicable rule which is a

precondition of raising the numerosity defense. There is (not for publication) authority in another

circuit supporting this position. See in re: Apollo Health Street, Inc., debtor. Case no.: 11-22970

(nlw) United States Bankruptcy Court for the District of New Jersey dated: May 23, 2011 (copy

attached).

Some of the facts supporting the special circumstances exception to the 12 qualified creditor

rule may be applicable to the cause determination for a bond, but for the reasons set forth in

footnote 4, some of this information may be submitted under seal at the appropriate time.

Finally, it may be worth noting that the claim for legal services which is the basis of this petition

is for 10 times the amount of the requested bond. The communications between the parties involving

inducement and estoppel may also be relevant to the cause determination for a bond.

RELIEF REQUESTED

Petitioning creditor requests that the Rule 7012(b) (6) motion to dismiss be denied in all

respects, and that the putative debtor be ordered to provide the required creditor information (plus

last known phone numbers and email addresses) regarding all former patients who have a credit

balance on their accounts, the required information regarding any health insurance carriers who are

creditors, and that the request for a bond be denied, or that the hearing on the bond be continued and

held with the hearing on this involuntary petition. It is also requested that the putative debtor be

required to file an answer to the involuntary petition admitting or denying all of the elements


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alleged in the petition, including whether he is generally paying his debts as they become due.

Respectfully Submitted,

s/:Richard Jaffe

Richard Jaffe, Petitioning Creditor

TSB 10529500

770 L Street. Suite 950

Sacramento, Ca. 95616

713-626-3550

713-626-9420 (fax)

[email protected]

Certificate of Conference

I certify that on October 30, 2015, I conferred with counsel for the movant concerning the

motion to dismiss and our motion and based on these communications it was decided that the papers

should be submitted to the court for disposition.

s/:Richard Jaffe

Richard Jaffe, Esq.

Certificate of Service

The undersigned certifies that he served a true and correct copy of this response to the motion to

dismiss and motion to compel compliance with Rule 1003(b) by ECF notification, to the parties on the

ECF service list on this 1st day of November, 2015 and specifically to Joshua Wolfshohl Esq., Porter

Hedges, LLP, 1000 Main Street, 36th floor Houston Tx. 77002, and Diane Livingstone, Assistant US

Trustee, 515 Rusk, St. Suite 3516, Houston Tx, 77002 and also emailed a copy of these papers to

them.

s/: Richard Jaffe

Richard Jaffe, Esq.


IN THE UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

IN RE: §

§ CASE NO. 15-34872

STANISLAW R. BURZYNSKI §

§ (CHAPTER 7)

DEBTOR §

PROPOSED ORDER

CAME ON TO BE HEARD, putative debtor Stanislaw R. Burzynski’s Rule 12(b)

Motion to Dismiss the Involuntary Chapter 7 petition filed by petitioning creditor, Richard Jaffe,

and petitioning creditor’s motion to compel the putative debtor to provide a Bankruptcy Rule

1003(b) containing information for all creditors.

Upon consideration of all the papers presented in these Motions, and the argument of

counsel,

IT IS HEREBY ORDERED THAT the Motion to Dismiss is denied in all respects,

including the request for a bond. Putative debtor may renew his request for a bond and have a

hearing on same, if so desired, together with a hearing on the merits of the involuntary petition.

IT IS FURTHER ORDERED THAT Dr. Burzynski is ordered to file an answer and if he

avers 12 or more creditors, he shall provide the requisite Rule 1003(b) information about all

creditors including all former patients who have a credit balance and all health insurance carriers

who claim Dr. Burzynski is indebted to such carrier. Information concerning the former patients

shall include the phone number and email address of the former patient and the closest relative

contact information.


SO ORDERED:

________________________

David Jones, USBJ


In re Rambo Imaging, L.L.P., Case No. 07-11190-FRM (Bankr. W.D. Tex. 11/8/2007) (Bankr. W.D. Tex., 2007)

Page 1

IN RE: RAMBO IMAGING, L.L.P.,

Chapter 7, Alleged Debtor. Case No. 07-11190-FRM.

United States Bankruptcy Court, W.D.

Texas, Austin Division. November 8, 2007.

MEMORANDUM OPINION ON

DEBTOR'S MOTION TO DISMISS

INVOLUNTARY PETITION

CRAIG GARGOTTA, Bankruptcy Judge.

Strasburger & Price, LLP ("Petitioner")

filed an Involuntary Petition under Chapter 7

against the alleged Debtor, Rambo Imaging,

L.L.P. ("Debtor" or "Movant") on July 2, 2007.

On July 23, 2007, the Debtor filed a "Motion

to Dismiss Pursuant to Rule 12" (the "Motion"

or the "Motion to Dismiss"). On August 10,

2007, Petitioner filed a Response to the

Motion. After Movant's request for a

continuance was granted, the Motion to

Dismiss was heard by the Court on October 2,

2007.

Movant raises three grounds for the relief

it requests. Two of those, having to do with

sufficiency of service and of process of service,

had been cured as of the date of the hearing.

The third, which Movant identifies in the

Motion as arising under 11 U.S.C. § 303(b)(1),

challenges whether the claim of the sole

petitioner in this case is subject to a "bona fide

dispute." Movant alleges several bases for that

dispute, including that it was not a party to the

contract(s) with

Page 2

Petitioner (because less than the required

number of partners authorized the Petitioner's

retention by the Debtor), that Petitioner's

services were substandard and so,

presumably, not worth the amount charged,

and that the debt is subject to the defense that

it was incurred under duress.

Identification of the Authority for

Movant's Request for Relief

Critical at this juncture of these

involuntary proceedings, however, is the fact

that the Motion to Dismiss by its terms is

brought under Rule 12 of the Federal Rules of

Civil Procedure. It does not identify under

which subsection of that Rule the Motion is

brought. At the hearing Movant's counsel did

state that the Motion was brought under both

Rule 12(b), as a motion to dismiss (without

identifying which of the grounds listed in that

subsection applied), and under Rule 12(c), as a

motion for judgment on the pleadings.

Federal Rule of Bankruptcy Procedure

1011(b) expressly provides that FRCP 12

applies to involuntary petitions ("Defenses

and objections; when presented. Defenses and

objections to the petition shall be presented in

the manner prescribed by Rule 12 F.R.Civ.P.").

Rule 12, of course, allows not only several

types of dispositive motions to be filed, but

also provides for the filing of an answer. In

fact, after filing its Motion to Dismiss the

Debtor on September 6, 2007, also filed an

Original Answer and Counterclaim Subject to

Debtor's Motion to Dismiss Under Rule 12.

A reference in Rule 1011(c), however,

makes it abundantly clear that at least Rule

12(b) motions to dismiss may be brought with

respect to an involuntary petition. See

Fed.R.Bankr.P. 1011(c) ("Service of a motion

under Rule 12(b) F.R.Civ.P. shall extend the

time for filing and serving a responsive

pleading as permitted by Rule 12(a)

F.R.Civ.P."). Debtor's Motion to Dismiss is,

therefore, properly brought under Rule 12(b).

A motion to dismiss under Rule 12(b) can

be based on any of several grounds stated in

that Rule—dismissal for lack of subject matter

jurisdiction; for lack of personal jurisdiction;

for improper venue; for insufficiency of

process; for insufficiency of service of process;

for failure to state a claim



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upon which relief can be granted; and for

failure to join a necessary party.

Unfortunately, Movant failed to specify in the

Motion to Dismiss the specific grounds for

dismissal in this case, instead merely citing the

underlying statute—§ 303(b)(1). Because

Petitioner's response to the Motion to Dismiss

shows that it assumed that the requested

dismissal was based on Rule 12(b)(6), and

because Debtor's arguments generally center

on the sufficiency of Petitioner's pleading, it

seems fair to infer that Debtor contends, under

Rule 12(b)(6), that the Petition fails to state a

claim upon which relief can be granted. There

appears to be no dispute that Movant makes at

least that argument.

Debtor's counsel, however, also made

references to Petitioner's "standing" to file the

involuntary petition. Debtor's argument seems

to be that, if Petitioner could not prove each of

the requirements in § 303(b) for filing an

involuntary petition, it had no standing to file

it and this court therefore has no jurisdiction.

Such an argument would arise under Rule

12(b)(1), providing for dismissal for lack of

subject matter jurisdiction. Whether the

Court's subject matter jurisdiction is

challenged is important in this case, because

unlike when it considers a Rule 12(b)(6)

motion, the court in determining a motion to

dismiss under Rule 12(b)(1) is not limited to

the pleadings but may consider other evidence

outside the pleadings. E.g., Taylor v. Dam,

244 F.Supp.2d 747, 753 (S.D. Tex. 2003)

("Thus, unlike a motion to dismiss under Rule

12(b)(6), when examining a motion to dismiss

for lack of subject matter jurisdiction under

Rule 12(b)(1), the district court is entitled to

consider disputed facts as well as undisputed

facts in the record."), citing Clark v.

Tarrant County, 798 F.2d 736, 741 (5th Cir.

1986); see also Den Norske Stats

Oljeselskap As v. HeereMac V.O.F., 241

F.3d 420, 424 (5th Cir. 2001), cert. denied, 534

U.S. 1127 (2002) ("In ruling on a motion to

dismiss for lack of subject matter jurisdiction,

a court may evaluate (1) the complaint alone,

(2) the complaint supplemented by

undisputed facts evidenced in the record, or

(3) the complaint supplemented by

undisputed facts plus the court's resolution of

disputed facts."), quoting

Page 4

Barrera-Montenegro v. United States,

74 F.3d 657, 659 (5th Cir. 1996). Movant argues

that the Court can and should look beyond the

pleadings in deciding its Motion.

Movant's "standing" argument is based on

11 U.S.C. § 303(b). That Section provides, in

relevant part:

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 $13,475 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

$13,475 of such claims ....

Movant cites two cases in support of its

argument that § 303(b)'s requirements are

jurisdictional and require the Court to look

beyond the pleadings: In re Silverman, 230

B.R. 46 (Bankr. D. N.J. 1998) and In re

Iroquois Brands, Ltd., 1991 WL 639359

(Bankr. S.D. Tex.).



In In re Silverman the court had

granted an alleged debtor's motion to dismiss

an involuntary petition, stating that it had

found that the petitioner did "not have

standing under Code section 303(b)(1) to file

an involuntary petition if his claim is the

subject of a bona fide dispute." Id. at 48. There

was no analysis or issue as to the jurisdictional

nature, vel non, of § 303(b)(1), and no issue as

to whether extrinsic evidence should be

considered. Instead, the issues that the court

actually addressed in the opinion related to the

alleged debtor's request for punitive damages

under § 303(i).

The decision in Iroquois Brands cited

by Movant was vacated soon after it was

issued. See In re Iroquois Brands, Ltd.,

No. 91-01018, 1991 WL 639359, 1991 Bankr.

LEXIS 1915 (Bankr. S.D. Tex. March 7, 1991),

vacated by 1991 Bankr. LEXIS 2238 (Bankr.

S.D. Tex. May 24, 1991). Even if it were still

good law, the original decision in Iroquois

Brands would be of little relevance here.

Page 5

In that case, the bankruptcy court examined

whether the petitioners "had standing" to file

the involuntary petition, inasmuch as the

indenture agreement under which they held

their debentures did not authorize that sort of

action by individual debentureholders. It is

true that the court spoke in terms of

"jurisdiction." In re Iroquois Brands,

Ltd., No. 91-01018, 1991 WL 639359, at * 2,

1991 Bankr. LEXIS 1915 at * 5 (Bankr. S.D.

Tex. March 7, 1991) ("The issue of lack of

standing, one of the bases for Iroquois' Motion

to Dismiss, raises the defense of lack of subject

matter jurisdiction pursuant to F.R.Civ.P.

12(b)(1) as made applicable to this proceeding

by B.R. 1011."), vacated by 1991 Bankr. LEXIS

2238 (Bankr. S.D. Tex. May 24, 1991). It also

noted that standing cannot be inferred from

the pleadings. Id. As in Silverman, however,

the Iroquois Brands court provided no

analysis and does not appear to have actually

been presented with the issue of whether or

not § 303(b)'s requirements are jurisdictional

or whether or not extrinsic evidence should be

considered, but rather only with the ultimate

factual issue of whether or not the petitioning

creditors were authorized to file the case. See

id. 1991 WL 639359, at *3, 1991 Bankr. LEXIS

1915 at * 9 (dismissing the petition and noting

that it "need not address . . . whether the

petitioners have the requisite status as

creditors under 11 U.S.C. § 303").

These two cases suffer from the same

analytical flaw as others that speak in terms of

jurisdiction when considering standing to file

a bankruptcy petition. As the Fifth Circuit

Court of Appeals in In re Phillips, 844 F.2d

230, 236 n.2 (5th Cir. 1988), concluded, "the

courts holding that the issue is not

jurisdictional generally have engaged in an

analysis of the issue, while the courts holding

that it is a matter of jurisdiction have not."

Section 303(b) determines whether a

creditor is "eligible" to file the petition. See

Official Form 5 for an Involuntary Petition

(referring to § 303(b) requirements as

determining whether the petitioner is

"eligible" to file the involuntary petition). In

the Fifth Circuit, however, it is clear that

"eligibility does not raise an issue of subject

matter jurisdiction." Id. In Phillips, the

Court of

Page 6

Appeals addressed a debtor's eligibility under

11 U.S.C. § 109 to file a voluntary petition, but

its analysis applies as well to the filing of an

involuntary petition:

[S]ubject matter jurisdiction of the

bankruptcy court comes from 28 U.S.C. § 1471

and 28 U.S.C. § 157, which provide that the

bankruptcy courts shall have exclusive

jurisdiction of all cases arising under Title 11.

On the other hand, issues pertaining to

whether a debtor meets the requirements of §

109(g)(2) only "determine whether or not the

court must dismiss the case. They are factual



or legal questions which the court must

determine. They are the issues raised by the

pleadings. They are defenses not jurisdictional

requirements."

Id., quoting In re Johnson, 13 B.R. 342,

346 (Bankr. D. Minn.1981). Similarly, in

Abramson v. Boedeker, 379 F.2d 741, 746

(5th Cir. 1967), in examining an involuntary

petition under the Bankruptcy Act, the Court

held "that allegations in the wording of the

statute, although vulnerable to objection by

the debtor-alleged-bankrupt . . ., are not

`jurisdictionally' defective.").

Based on the foregoing, this Court finds

that the requirements of § 303(b) are not

jurisdictional, and that it does have

jurisdiction over this case. See also In re

Bowshier, 313 B.R. 232, 239 (Bankr. S.D.

Ohio 2004) ("The court concludes that section

303 requirements for the filing of an

involuntary petition are nonjurisdictional in

nature."). It therefore treats the Motion, to the

extent brought under Rule 12(b), solely as a

motion to dismiss under Rule 12(b)(6) for

failure to state a claim for relief.

Finally, Movant's counsel at the hearing

also made reference to the Motion to Dismiss

as a motion for judgment on the pleadings

under Rule 12(c). Because the analysis under

Rule 12(b)(6) presents more complex issues

than that under Rule 12(c), the Court will first

address the latter.

Judgment on the Pleadings

Federal Rule of Civil Procedure Rule 12(c)

provides, in relevant part, that "[a]fter the

pleadings are closed but within such time as

not to delay the trial, any party may move for

judgment on the pleadings." In this case, the

pleadings are not yet closed, inasmuch as the

Petitioner's time to reply to the Debtor's

counterclaim is tolled by the Petitioner's own

Rule 12(b)(6) motion to

Page 7

dismiss that counterclaim. See docket entry #

21, Strasburger & Price's Motion to Dismiss

Debtor's Counterclaim; Rule 12(a)(4) ("Unless

a different time is fixed by court order, the

service of a motion permitted under this rule

alters these periods of time as follows . . . if the

court denies the motion or postpones its

disposition until the trial on the merits, the

responsive pleading shall be served within 10

days after notice of the court's action . . ..").

For that reason, the Court finds that the

Motion to Dismiss, to the extent brought

under Rule 12(c), should be denied as

premature. See Nortel Networks Ltd. v.

Kyocera Wireless Corp., 2002 WL

31114077, *1 n.1 (N.D. Tex.) (holding that

motion for judgment on the pleadings was

timely since a reply to the defendant's

counterclaim had been filed the day before the

motion, and noting that "Rule 7(a) provides

that the pleadings are closed upon the filing of

a complaint and answer, unless a

counterclaim, cross-claim, or third-party

claim is interposed, in which event the filing of

a reply, cross-claim answer, or third-party

answer normally will mark the close of the

pleadings."), quoting Wright, C.A. & Miller,

A.R., Federal Practice and Procedure §

1367, at pp. 5012-13 (1990) (footnotes

omitted).

Thus, the Court proceeds to determine the

Motion solely under Rule 12(b)(6).

Dismissal for Failure to State a Claim:

Whether the Petition Is Deficient on Its

Face

In general, consideration of matters

beyond the complaint is improper in context of

motion to dismiss under Rule 12(b)(6).

Spivey v. Robertson, 197 F.3d 772, 774 (5th

Cir. 1999) ("This court will not look beyond the

face of the pleadings to determine whether

relief should be granted based on the alleged

facts ...."), cert. denied, 530 U.S. 1229 (2000).

Movant's counsel, in argument at the hearing,

expressly acknowledged that Petitioner would



expect that the Court was limited to

considering only the pleadings in deciding the

Motion, as it would ordinarily be in deciding a

motion to dismiss for failure to state a claim

upon which relief can be granted. Consistent

with this Rule

Page 8

12(b)(6) standard, Movant's threshold

argument is that the Petition on its face is so

deficient as to require dismissal.

Movant also asserts, however, that the

burden of proof at a hearing on a Rule 12(b)(6)

motion to dismiss an involuntary petition is

that applicable to a "reverse summary

judgment," which Movant claims is that the

Petitioner must prove that there is absolutely

no question regarding the validity and amount

of Petitioner's claim, and/or that there is "no

more than a scintilla of evidence" and "no

dispute as to the law" that supports

Petitioner's claim.

The Court rejects this argument. It does

agree, however, and the Petitioner in this case

concedes, that the latter bears the burden of

proof on the Debtor's Motion to Dismiss.

However, the Court agrees with Petitioner

that, for purposes of a Rule 12(b)(6) motion to

dismiss—even when applied to an involuntary

petition—the "complaint" is construed in the

light most favorable to the "plaintiff," and all

facts alleged by it are accepted as true.

Woodard v. Andrus, 419 F.3d 348, 351 (5th

Cir. 2005) ("The complaint must be liberally

construed, with all reasonable inferences

drawn in the light most favorable to the

plaintiff."); accord, Causey v. Sewell

Cadillac-Chevrolet, Inc., 394 F.3d 285,

288 (5th Cir. 2004); Rascon v. Austin

I.S.D., 2006 WL 2045733, *2 (W.D. Tex.).

The "reverse summary judgment" standard

urged by the Movant is contrary to these well-

established presumptions.

It does appear, however, that the courts'

general approach to reviewing the sufficiency

of a complaint under Rule 12(b)(6) has

recently been "reinterpreted." The standard

had been well-established, as described by the

Fifth Circuit Court of Appeals:

Motions to dismiss for failure to state a

claim are appropriate when a defendant

attacks the complaint because it fails to state a

legally cognizable claim. Fed. R. Civ. P.

12(b)(6). The test for determining the

sufficiency of a complaint under Rule 12(b)(6)

was set out by the United States Supreme

Court as follows: "[A] complaint should not be

dismissed for failure to state a claim unless it

appears beyond doubt that the plaintiff can

prove no set of facts in support of his claim

which would entitle him to relief." Conley v.

Gibson, 355 U.S. 41, 45-46 (1957). See also

Grisham v. United States, 103 F.3d 24, 25-

26 (5th Cir. 1997).

Page 9

Subsumed within the rigorous standard of

the Conley test is the requirement that the

plaintiff's complaint be stated with enough

clarity to enable a court or an opposing party

to determine whether a claim is sufficiently

alleged. Elliott v. Foufas, 867 F.2d 877, 880

(5th Cir. 1989). Further, "[t]he plaintiff's

complaint is to be construed in a light most

favorable to the plaintiff, and the allegations

contained therein are to be taken as true."

Oppenheimer v. Prudential Sec. Inc., 94

F.3d 189, 194 (5th Cir. 1996). This is consistent

with the well-established policy that the

plaintiff be given every opportunity to state a

claim. Hitt [v. City of Pasadena], 561 F.2d

[606,] 608 [(5th Cir. 1977)]. In other words, a

motion to dismiss an action for failure to state

a claim "admits the facts alleged in the

complaint, but challenges plaintiff's rights to

relief based upon those facts." Tel-Phonic

Servs., Inc. v. TBS Int'l, Inc., 975 F.2d

1134, 1137 (5th Cir. 1992). Finally, when

considering a Rule 12(b)(6) motion to dismiss

for failure to state a claim, the district court

must examine the complaint to determine

whether the allegations provide relief on any



possible theory. Cinel v. Connick, 15 F.3d

1338, 1341 (5th Cir. 1994).

Ramming v. United States, 281 F.3d

158, 161-62 (5th Cir. 2001), cert. denied sub

nom, Cloud v. U.S., 536 U.S. 960 (2002); see

also In re Calloway, 70 B.R. 175, 179

(Bankr. N.D. Ind. 1986) ("As is generally true,

motions to dismiss involuntary petitions

pursuant to Bankruptcy Rule 1011(b) and

Fed.R.Civ.P. 12(b) are disfavored and should

not be granted unless it appears certain that

the petitioners would not be entitled to an

order for relief under any facts they could

prove in support of their allegations. The

petition is to be construed in a light most

favorable to the petitioners, whose allegations

are taken as true.").

It is this "rigorous standard of the Conley

test" that appears to have been modified by the

Supreme Court recently, in Bell Atlantic

Corp. v. Twombly, ____ U.S. ____, 127

S.Ct. 1955 (2007). In Bell Atlantic, the Court

expressly rejected the "no set of facts"

language in Conley and substituted instead a

"plausibility" standard: a complaint must state

sufficient facts that plausibly suggest (rather

than being merely consistent with) the

plaintiff's entitlement to relief. Specifically, the

Court criticized those decisions that have

interpreted the "no set of facts" language in

Conley literally and in isolation as creating a

standard under which "any statement

revealing the theory of the claim will suffice

unless its factual impossibility may be shown

from the face of the pleadings ..." Id. at ____,

127 S.Ct. at 1968.

Page 10

While rejecting the particular language

used by the Conley Court as it had been

subsequently interpreted and applied by some

courts, the Bell Atlantic Court nevertheless

insisted that Conley had merely been

misunderstood and that it was not establishing

a new, more stringent standard. Instead, the

Court stated that its "analysis comports with

this Court's statements in the years since

Conley." Indeed, much of the analysis in Bell

Atlantic does not differ significantly from

how courts have applied Rule 12(b)(6) in the

past:

Federal Rule of Civil Procedure 8(a)(2)

requires only "a short and plain statement of

the claim showing that the pleader is entitled

to relief," in order to "give the defendant fair

notice of what the . . . claim is and the grounds

upon which it rests," Conley v. Gibson, 355

U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).

While a complaint attacked by a Rule 12(b)(6)

motion to dismiss does not need detailed

factual allegations, . . . a plaintiff's obligation

to provide the "grounds" of his "entitle[ment]

to relief" requires more than labels and

conclusions, and a formulaic recitation of the

elements of a cause of action will not do . . ..

Factual allegations must be enough to raise a

right to relief above the speculative level, see 5

C. Wright & A. Miller, Federal Practice and

Procedure § 1216, pp. 235-236 (3d ed. 2004)

. . . ("[T]he pleading must contain something

more ... than ... a statement of facts that merely

creates a suspicion [of] a legally cognizable

right of action"), . . . on the assumption that all

the allegations in the complaint are true (even

if doubtful in fact) .....

Id. at ____, 127 S.Ct. at 1964-65

(citations and footnote omitted). Further,

although the Bell Atlantic Court was

examining an action brought under the

Sherman Act, it noted that "for most types of

cases, the Federal Rules eliminated the

cumbersome requirement that a claimant `set

out in detail the facts upon which he bases his

claim,'" Id. at ____, 127 S.Ct. at 1965,

quoting, with emphasis added, Conley v.

Gibson, 355 U.S. 41, 47 (1957).

It is well-established that, "Rule 8 of the

Federal Rules of Civil Procedure, 28 U.S.C.A.,

provides that a pleading shall set forth a short,

plain statement of the claim showing that the

pleader is entitled to relief." Black v. First

Nat. Bank of Mobile, Ala., 255 F.2d 373,



375 (5th Cir. 1958) (also noting that "[a]bsent

from this rule is the old requirement of

common law and code pleading that the

pleader set forth 'facts' constituting a cause of

action") (internal quotations omitted), citing

John Walker & Sons v. Tampa Cigar

Co., 197 F.2d 72, 73 (5th Cir. 1952). Rule 8(a),

of course,

Page 11

prescribes the general rules of pleading for

claims for relief and is incorporated and made

applicable to an involuntary proceeding under

Fed.R.Bankr.P. 1018. See also In re Alta

Title Co., 55 B.R. 133, 141-42 (Bankr. Utah

1985) ("While it is conceivable that an

involuntary petition might be so clearly

defective on its face as to warrant dismissal,

generally it should be treated with the same

liberality as a civil complaint.") (footnotes

omitted); In re Longhorn 1979-II Drilling

Program, 32 B.R. 923, 926 (Bankr. Okla.

1983) ("An involuntary petition for

bankruptcy is considered with all the liberality

of the usual civil complaint."), citing

Abramson v. Boedeker, 379 F.2d 741 (5th

Cir.), cert. denied, 389 U.S. 1006 (1967) (same,

with respect to the Bankruptcy Act's

provisions on involuntary filings).

In Bell Atlantic, however, the Court

noted that:

Rule 8(a)(2) still requires a "showing,"

rather than a blanket assertion, of entitlement

to relief. Without some factual allegation in the

complaint, it is hard to see how a claimant

could satisfy the requirement of providing not

only "fair notice" of the nature of the claim, but

also `grounds' on which the claim rests. See 5

Wright & Miller § 1202, at 94, 95 (Rule 8(a)

"contemplate[s] the statement of

circumstances, occurrences, and events in

support of the claim presented" and does not

authorize a pleader's "bare averment that he

wants relief and is entitled to it").

Id. at ____, 127 S.Ct. at 1965 n.3.

With this background in mind, then, the

Court examines the Petitioner's pleading in

this case for its sufficiency. Specifically, Debtor

alleges that the Petitioner's use of Official

Form 5 for an Involuntary Petition, without

further detail or support, is insufficient in this

case (and perhaps in all cases, given the

language of the Form) to state a prima facie

case for relief under the Involuntary Petition.

The Form, as completed by Petitioner by

the checking of applicable boxes, states only

that:

[x] Petitioner(s) are eligible to file this

petition pursuant to 11 USC § 303(b).

[x] The debtor is a person against whom

an order for relief may be entered under title

11 of the United States Code.

[x] The debtor is generally not paying such

debtor's debts as they become due, unless such

debts are the subject of a bona fide dispute as

to liability or amount ....

Page 12

On the second page of the Form, where it is

asked to list information about all the

petitioning creditors, Petitioner has listed only

itself, has inserted "Fees for professional

services rendered" under the heading of

"Nature of Claim," and has listed $218,613.21

under the heading "Amount of Claim."

Movant specifically contends that the

Petition as so "drafted" does not allege facts

showing that Petitioner's claim is not

contingent or subject to a bona fide dispute as

to liability or amount.

It is true, in general, for purposes of a Rule

12(b)(6) motion, that "[a]lthough complaint is

to be liberally construed, it is still necessary

that complaint contain more than bare

assertions of legal conclusions." Emery v.

U.S., 920 F. Supp. 788 (W.D. Mich. 1996).

Official Form 5 does contain only conclusions



as to the "not contingent" and "not subject to a

bona fide dispute" allegations of § 303(b)(1).

The factual allegations necessary to support an

involuntary petition, however, are relatively

few and relatively simple (in concept at least, if

not in proof). The Petition in this case shows

that Petitioner asserts a claim, shows the

amount of the claim and the nature of the

claim and, through reference to § 303(b),

incorporates allegations that address that

section's requirements that the claim not be

contingent nor the subject of a bona fide

dispute.

Addressing facts similar to those in this

case, the District Court in In re McDougald,

17 F.R.D. 2 (W.D. Ark. 1955), also considered

an involuntary petition (albeit one brought

under the Bankruptcy Act) that contained only

allegations of the amount and nature of the

claims of the petitioners. The McDougald

Court affirmed the bankruptcy referee's

decision to deny the motion to dismiss,

specifically holding that "in the absence of

affidavits or evidence to the contrary, the well

pleaded allegations of the creditors' petition,

for purposes of a motion to dismiss, must be

accepted as true." Id. at 5. This Court agrees.

Moreover, the allegations that the claim is

not contingent and is not the subject of a bona

fide dispute are obviously both negative

statements, such that the factual allegations

necessary to support them would consist not of

reciting facts, but rather of reciting the

absence of facts indicating a

Page 13

contingency or a bona fide dispute. Such a

showing requires no more, really, than an

allegation that the claim is not contingent nor

the subject of a bona fide dispute. That

allegation may reasonably be inferred by the

absence of facts that show there is some

contingency or bona fide dispute. Id. At the

least, by expressly alleging on the Official

Form that it is eligible to be a petitioning

creditor under § 303(b)(1), the Petitioner has

incorporated that section's language to an

extent that it should be considered to have

made the allegation that its claim is not

contingent nor subject to a bona fide dispute.

Simply put, there is not much more the

Petitioner could have said, and to require it to

file a separate pleading with the words "the

claim is not contingent nor the subject of a

bona fide dispute" is to elevate form over

substance in order to dispose of the matter on

a procedural basis. There is a strong policy in

favor of deciding litigation on the merits. See

Madison v. Purdy, 410 F.2d 99 (5th Cir.

1969) (a motion to dismiss on the basis of

pleadings alone should rarely be granted);

Hitt v. City of Pasadena, 561 F.2d 606,

608 (5th Cir. 1977) (noting, in the context of a

Rule 12(b)(6) motion, "the well-established

policy that the plaintiff be given every

opportunity to state a claim"); see also

Conley v. Gibson, 355 U.S. 41, 48 (1957)

("The Federal Rules reject the approach that

pleading is a game of skill in which one misstep

by counsel may be decisive to the outcome and

accept the principle that the purpose of

pleading is to facilitate a proper decision on

the merits.").1

Page 14

Moreover, Petitioner's use of Official

Form 5 differs qualitatively from a litigant's

use of one of the forms found in the Appendix

to the Federal Rules of Civil Procedure.2 The

latter are expressly illustrative only, and

"plainly demonstrate" that "all the Federal

Rules of Civil Procedure require is ̀ a short and

plain statement of the claim' that will give the

defendant fair notice of what the plaintiff's

claim is and the grounds upon which it rests."

Conley v. Gibson, 355 U.S. 41, 47-48 (1957)

(footnote omitted); see also Employers'

Mut. Liability Ins. Co. of Wis. v. Blue

Line Transfer Co., 2 F.R.D. 121, 123 (W.D.

Mo. 1941) (the forms for complaints

prescribed by the United States Supreme

Court in adopting the Federal Rules of Civil

Procedure "do not dispense with the necessity,

as occasion may require, for a statement of



certain details or particulars which would

enable the defendant more readily to prepare

and file a responsive pleading") (emphasis

added).

In contrast, the Official Forms

promulgated in conjunction with the Federal

Rules of Bankruptcy Procedure are, if not

entirely and absolutely mandatory, certainly

"expected" to be used by practitioners. Federal

Rule of Bankruptcy Procedure 9009 provides

that "[t]he Official Forms prescribed by the

Judicial Conference of the United States shall

be observed and used with alterations as may

be appropriate." The instructions that

accompany the Official Forms, however, note

that "alteration will be appropriate in only rare

circumstances." Introduction and General

Instructions to Official and Procedural

Bankruptcy Forms (also noting that, although

the rule of substantial compliance applies,

"[t]he Official Forms, accordingly, are

obligatory in character"); see also Resnick, A.,

Collier on Bankruptcy, ¶ 1002.02[1], p.

1002-3 (15th ed. 2007) ("The petition

Page 15

commencing a case must conform to the

appropriate Official Bankruptcy Form

promulgated by the Judicial Conference of the

United States.").

The relatively few courts that have

addressed practitioners' changes to the Official

Forms do not encourage that practice,

emphasizing the need for uniformity and

noting the many constituencies involved in

reviewing and extracting information from the

Forms. For example, in In re Mitchell, 255

B.R. 345, 363 (Bankr. D. Mass. 2000), where

the court found that the debtors' affairs were

not so complex that they warranted altering

the Official Forms, it inferred from their

failure to use those Forms that they intended

to confuse rather than enlighten parties in

interest about their economic circumstances.

In In re Orrison, 343 B.R. 906, 909 (Bankr.

N.D .Ind. 2006), the court examined an

altered form of the voluntary petition, and

warned against "[a]lterations that `confuse[ ]

and confound[ ] a streamlined administrative

process,' . . . or which frustrate "a quick and

easy comprehension of the information

presented,'" noting generally that "[a]lthough

Rule 9009 allows alterations to the official

forms, that does not give parties a free pass to

make whatever changes they want whenever

they want to do so."

Admittedly, these cases involved

alterations of the Official Forms that omitted

and/or rearranged and/or obscured the

information prescribed by the Official Forms,

unlike the instant case involving the

supplementation of that information. They

nevertheless illustrate the courts' general

approach to the use of the Official Forms—at a

minimum, their use is strongly preferred, and

their legal sufficiency is generally assumed—

an assumption shared by not only the courts

and the clerks but also by the parties. As the

court in In re Mack, 132 B.R. 484, 484-85

(Bankr. M.D. Fla. 1991) noted:

Although F.R.B.P. 9009 permits flexibility

in the arrangement of the contents and allows

combinations of forms to permit economies in

their use, the petition, schedules, and

statements filed by a debtor must nevertheless

substantially comply with and conform to the

official forms. Advisory Committee Note to

F.R.B.P. 9009. The forms of petition,

schedules, and statements filed by the debtors

in these cases fail

Page 16

this test of substantial compliance as to both

their form and their content. They are

therefore legally insufficient and

unacceptable.

In addition, a review of the history of the

Federal Rule of Bankruptcy Procedure

governing petitions and involuntary filings

supports the conclusion that the use of the

Official Form in this case should be found



sufficient to overcome the Rule 12(b)(6)

challenge. The 1983 version of Rule 1003

governed the filing of an involuntary petition,

and required substantial compliance with the

then applicable Official Form for an

Involuntary Petition:

Rule 1003. Involuntary Petition;

Case Ancillary to Foreign Proceeding.

(a) Commencement. A petition

commencing an involuntary case shall be filed

with the bankruptcy court and shall conform

substantially to Official Form 11.

The Advisory Committee Notes to the

1983 version of Rule 1003 further provided

that

Official Form No. 11 (Involuntary Case:

Creditors' Petition), is prescribed for use by

petitioning creditors to have a debtor's assets

liquidated under chapter 7 of the Code or the

business reorganized under chapter 11. It

contains the required allegations as specified

in § 303(b) of the Code. Official Form 12 is

prescribed for use by fewer than all the general

partners to obtain relief for the partnership as

governed by § 303(b)(3) of the Code and Rule

1004(b).

Advisory Committee Notes (1983) to

Fed.R.Bankr.P. 1003 (emphasis added). The

allegations in now abrogated Official Form 11

that addressed the eligibility requirements set

forth in § 303(b) are the same as those in the

current Involuntary Petition Official Form 5.

Although the Advisory Committee Notes to the

current Form now also acknowledge that

"[p]etitioners may wish to supplement the

allegations set forth in the form with a further

statement of facts," the Form used by

Petitioner in this case seems to have been

intended, at least by its drafters, to be

generally legally sufficient to allege a

petitioner's eligibility as part of its cause of

action for involuntary relief.

Further, when an allegation in the

involuntary petition was perceived to need

additional factual support, the drafters of the

Rules did expressly require that

supplementation. Current Rule 1003, which

now addresses the filing of involuntary

petitions by transferees of claims, requires that

the Official Involuntary Petition Form be

supplemented to allege facts regarding the

transfer to

Page 17

support the allegation that the petitioner is

"qualified." Fed.R.Bankr.P. 1003(a) ("A

transferor or transferee of a claim shall annex

to the original and each copy of the petition a

copy of all documents evidencing the transfer,

whether transferred unconditionally, for

security, or otherwise, and a signed statement

that the claim was not transferred for the

purpose of commencing the case and setting

forth the consideration for and terms of the

transfer."). This requirement to supplement

contrasts with the absence of any express

requirement of, or even reference to,

supplementation of the Official Form with

regards to the allegation of a petitioner's

general eligibility under § 303(b), further

supporting the conclusion that the Official

Form's allegations as to those requirements

are sufficient at this stage of the proceedings.

Moreover, nothing in Bell Atlantic

alters the general rule that, in considering a

pleading challenged under Rule 12(b)(6),

"[t]he plaintiff's complaint is to be construed

in a light most favorable to the plaintiff, and

the allegations contained therein are to be

taken as true." Oppenheimer v.

Prudential Sec. Inc., 94 F.3d 189, 194 (5th

Cir. 1996). This Court finds that, considering

all of the foregoing and when viewed in the

light most favorable to a petitioner, a properly

completed Official Form 5, Involuntary

Petition, will generally satisfy the notice

requirements under Rules 7008, 1011, and

1018. As the Advisory Committee Notes to the

Official Form state, "[a]dditional information



concerning any allegation can be requested by

the debtor as part of the discovery process."

The Court agrees with Movant and the

Advisory Committee Notes to the Form that, in

some instances and for some allegations, the

better practice may be, and the petitioner "may

wish," to attach to the Official Form a pleading

with more specific facts. The Court holds,

however, that on its face the Petition in this

case is not so deficient as to fail to give notice

to Movant of Petitioner's claim to relief and

that, therefore, the Petition should not be

dismissed as facially insufficient.

Page 18

Dismissal for Failure to State a Claim:

Whether the Petition Is Deficient in

Light of Evidence Outside its "Four

Corners"

Movant also contends that, because of the

nature of an involuntary petition as compared

to a complaint in "ordinary" litigation, the

hearing on a Rule 12(b)(6) motion to dismiss

an involuntary petition—whether considered

as such or converted to a motion for summary

judgment—is necessarily an evidentiary

hearing.3 It argues that, when the evidence

presented at the hearing is considered, the

Debtor has failed to sustain its burden of proof

on the Motion to Dismiss.

As discussed above, Movant points to two

cases in particular as supporting its argument

that a Rule 12(b)(6) motion on an involuntary

petition requires an evidentiary hearing: In re

Silverman, 230 B.R. 46 (Bankr. D. N.J.

1998) and In re Iroquois Brands, Ltd.,

No. 91-01018, 1991 WL 639359, 1991 Bankr.

LEXIS 1915 (Bankr. S.D. Tex. March 7, 1991),

vacated by 1991 Bankr. LEXIS 2238 (Bankr.

S.D. Tex. May 24, 1991). While those courts did

consider extrinsic evidence on the Rule 12(b)

motions, there is no indication there was any

dispute over that procedure nor any allegation

of lack of notice or surprise. Rather, it appears

that both sides presented evidence without

raising the question of its appropriateness at

that stage of the proceedings.

Page 19

Even if the Court were to consider

evidence beyond the pleadings, however, it

would nevertheless still find that the Motion to

Dismiss should be denied. First, while Movant

pleaded and argued at the hearing that there

was a dispute regarding the Petitioner's claim,

the Court admitted no exhibits and Movant

offered no testimony in support of that

argument. It did, however, point to a number

of pleadings, orders, and documents filed in a

previous voluntary bankruptcy case filed by

the Debtor, Case No. 07-10041, and requested

the Court, in the Motion to Dismiss and at the

hearing, to take judicial notice of those. Even

under the liberal approach applicable to

decisions on Rule 12(b)(6) motions, the court

considers facts of which it takes judicial notice.

Gersten v. Rundle, 833 F.Supp. 906 (S.D.

Fla. 1993), aff'd, 56 F.3d 1389 (11th Cir. 1995),

cert. denied, 516 U.S. 1118 (1996) (for purposes

of Rule 12(b)(6), the court does not accept as

true facts alleged in a petition that are

internally inconsistent, or run counter to facts

of which court can take judicial notice, or when

they are merely conclusory allegations or

unwarranted deductions of fact).

In particular, Movant referred the Court

to docket entries # 66, 76, 90, 95 in the earlier

case, as well as the exhibits to those

documents, as supportive of its argument that

the Debtor was not a party to any retention

agreement with the Petitioner, and that

therefore is not liable for the attorneys fees

that Petitioner claims are owed it for

representing the Debtor (and others). The

pleadings and documents Movant asks the

Court to take notice of, however, show at best

only that the Debtor needed the authority of a

certain percentage of its partners to retain

counsel. The only "evidence" that such

authority was not obtained by Petitioner is

Movant's bare, unsupported allegation in its



Motion to Dismiss and its counsel's statement

at the hearing.4 In short, the court finds that,

Page 20

considering these documents, Movant has

failed to sustain its burden of producing some

evidence of a bona fide dispute, or at least

pointing out to the court that there is an

absence of evidence to support Petitioner's

allegation that its claim is not subject to a bona

fide dispute.

Movant has also pointed, however, to

docket entry # 27 in case no. 07-10041, which

is its Objection to Petitioner's claim filed in

that case. In that Objection, the Debtor

appears to admit that it retained Petitioner but

claims that the charges were excessive in light

of the agreement between the parties and the

quality of the work performed, and that the

Petitioner breached its duty of care in

representing Movant and so caused it damages

in excess of the amount of Petitioner's claim.

All of these allegations are, of course, highly

fact-intensive inquiries.

In response to Movant's argument

regarding its Objection to the claim,

Petitioner's counsel, who in addition to being

an officer of the court is, according to the face

of the Petition, a partner and authorized

representative of the Petitioner, stated at the

hearing that a portion of the claim has not

been disputed at all, and that such amount

exceeds the amount necessary under §

303(b)(1) to qualify Petitioner as an eligible

petitioning creditor. That statement was not

rebutted by any evidence presented by the

Movant. The court finds that, considered at

this stage of the proceedings in the light most

favorable to the Petitioner (the applicable Rule

12(b)(6) standard), that Petitioner's

representative's in-court statement is some

evidence that the claim is not subject to a bona

fide dispute.5

More important, however, is the fact that

Petitioner's proof of claim in the earlier case

has a presumption of prima facie validity.

Fed.R.Bankr.P. 3001(f) ("A proof of claim

executed and filed

Page 21

in accordance with these rules shall constitute

prima facie evidence of the validity and

amount of the claim."). That presumption is

overcome only if sufficient evidence is

presented by the objecting party. In re

Missionary Baptist Foundation of

America, Inc., 712 F.2d 206, 212 (5th Cir.

1983) ("A claim filed pursuant to § 501 enjoys

prima facie validity which may be overcome by

the trustee's presentation of evidence.")

(emphasis added); see also, In re O'Connor,

153 F.3d 258, 260 (5th Cir. 1998) ("If the

Trustee objects, it is his burden to present

enough evidence to overcome the prima facie

effect of the claim."); accord, In re Fidelity

Holding Co., Ltd., 837 F.2d 696, 698 (5th

Cir. 1988) ("The objecting party must then

produce evidence rebutting the claimant or

else the claimant will prevail."). The mere

filing of an objection to the claim, without

supporting evidence, is not enough. In re

Sims, 994 F.2d 210, 222 (5th Cir. 1993), cert.

denied sub nom, Sims v. Subway

Equipment Leasing Corp., 510 U.S. 1049

(1994) (holding that the alleged debtor's "mere

filing of such counterclaims against the

[petitioning] creditors is insufficient to

demonstrate the existence of a bona fide

dispute" let alone any bad faith of the

petitioners); accord, In re Medical Group,

Inc., 2005 WL 4677807, *2 (Bankr. E.D. La.

2005) ("Generally, the existence of pending

litigation between the debtor and creditor does

not make the claim subject per se to bona fide

dispute."). In this case, the Debtor's Objection

to the Petitioner's proof of claim was never

tried or ruled on before that bankruptcy case

was dismissed. Under these circumstances,

the Court finds that Movant's Objection in the

prior case to Petitioner's claim does not rebut,

for purposes of a Rule 12(b)(6) motion, the

latter's allegation that its claim is not subject

to any bona fide dispute.



Moreover, this standard only makes sense

at this stage of the proceedings. On a Rule

12(b)(6) motion, "[t]he issue is not whether a

plaintiff will ultimately prevail but whether the

claimant is entitled to offer evidence to

support the claims." Jackson v.

Birmingham Bd. of Educ., 544 U.S. 167,

184 (2005), quoting Scheuer v. Rhodes,

416 U.S. 232 (1974). A petitioner's burden

should not be as high on a pre-trial motion to

dismiss as it would be at the trial on the

involuntary petition. All

Page 22

it must show at trial is "a prima facie case that

no bona fide dispute exists. Once this is done,

the burden shifts to the debtor to present

evidence demonstrating that a bona fide

dispute does exist. . . . The court's objective [at

trial on the merits] is to ascertain whether a

dispute that is bona fide exists; the court is not

to actually resolve the dispute." Sims, 994

F.2d at 221, quoting In re Rimell, 946 F.2d

1363, 1365 (8th Cir. 1991). Certainly, to merely

withstand a Rule 12(b)(6) motion, a petitioner

should not be required to prove by a

preponderance of the evidence that its claim is

valid, when the only "evidence" that it is not

are the allegations and arguments of the

alleged debtor contained in pleadings never

ruled on.

Accordingly, the Court finds that even

considering the evidence presented by

Movant, the Petition is sufficient to state a

claim for relief within the meaning of Rule

12(b)(6).

Summary and Conclusion

Finally, the Court notes that the purposes

of Rule 12(b) are not necessarily served by

dismissal of a contested involuntary petition

prior to a trial on the merits. One of the

purposes of Rule 12(b)(6) motions is to

quickly, inexpensively, and efficiently dispose

of litigation that on its face is clearly meritless.

Bell Atlantic, ___ U.S. at ___, 127 S.Ct. at

1966 ("when the allegations in a complaint,

however true, could not raise a claim of

entitlement to relief, `"this basic deficiency

should . . . be exposed at the point of minimum

expenditure of time and money by the parties

and the court"'"), quoting 5 Wright & Miller

§ 1216, at 233-234, in turn quoting Daves v.

Hawaiian Dredging Co., 114 F.Supp. 643,

645 (D. Hawai'i 1953)); Neitzke v.

Williams, 490 U.S. 319, 326-27 (1989) (the

procedure of Rule 12(b)(6) "streamlines

litigation by dispensing with needless

discovery and factfinding"). In this case,

however, the Rule 12(b)(6) procedures, rather

than enabling a swifter disposition of the

litigation, at best duplicate the already

streamlined procedures applicable to

involuntary petitions in bankruptcy, which

themselves expressly call for prompt

adjudication. See Fed.R.Bankr.P. 1013 ("The

court shall determine the issues of a contested

petition at the earliest

Page 23

practicable time and forthwith enter an order

for relief, dismiss the petition, or enter any

other appropriate order."); see also

Fed.R.Bankr.P. 1011(d), (e) (prohibiting

counterclaims by alleged debtors and limiting

pleadings that may be filed prior to

adjudication of the petition in an involuntary

proceeding). Therefore, while the use of Rule

12 is allowed in the context of an involuntary

petition, its benefits in this context appear to

be limited, and the Court finds that the better

approach (and one consistent with the policy

of disposing of litigation on the merits) for

issues such as those raised by the Motion to

Dismiss here, is a prompt trial on the merits.

Based on all of the foregoing, the Court

holds that the Motion to Dismiss should be

denied. An order consistent with these

findings and conclusions shall be entered.

---------------

Notes:



1. Accord, Maty v. Grasselli Chemical

Co., 303 U.S. 197, 200 (1938) ("Pleadings are

intended to serve as a means of arriving at fair

and just settlements of controversies between

litigants. They should not raise barriers which

prevent the achievement of that end."); Sun

Bank v. Pelican Homestead & Sav.

Ass'n, 874 F.2d 274, 276 (5th Cir. 1989) ("The

Federal Rules of Civil Procedure are designed

for the just, speedy, and inexpensive

disposition of cases on their merits, not for the

termination of litigation by procedural

maneuver.") (footnotes omitted); Lindsey v.

Prive Corp., 161 F.3d 886 (5th Cir. 1998)

(noting, in the context of a motion for default

judgment, that there is "a strong policy in favor

of decisions on the merits"), citing 10 Wright,

C.A. et al., Federal Practice & Procedure §

2681, at 402 (2d ed. 1983); Phillips v.

Illinois Cent. Gulf R.R., 874 F.2d 984, 990

(5th Cir. 1989) (noting, in the context of a

motion to dismiss or transfer venue, "the

policy of deciding disputes on the merits" and

"the jurisprudential policy `of removing

whatever obstacles may impede an expedient

and orderly adjudication of cases and

controversies on their merits.'"), quoting

Goldlawr, Inc. v. Heiman, 369 U.S. 463,

466-67 (1962).

2. There are a few other areas of the law

besides bankruptcy, however, in which a

litigant's use of an official form for a complaint

under the Federal Rules of Civil Procedure also

need not be supplemented by specific facts.

See e.g., McZeal v. Sprint Nextel Corp.,

2007 WL 2683705, *2 (Fed. Cir. 2007)

(applying standards used by the Fifth Circuit

in addressing Rule 12(b)(6) motions and

noting that "a plaintiff in a patent

infringement suit is not required to specifically

include each element of the claims of the

asserted patent" but may limit itself to Official

Form 16 for its complaint).

3. As pointed out by Movant, Rule 12

authorizes the court to convert a Rule 12(b)(6)

motion to dismiss to a motion for summary

judgment if matters outside the pleadings are

considered. Fed.R.Civ.P. 12(b) ("If, on a

motion asserting the defense numbered (6) to

dismiss for failure of the pleading to state a

claim upon which relief can be granted,

matters outside the pleading are presented to

and not excluded by the court, the motion shall

be treated as one for summary judgment and

disposed of as provided in Rule 56, and all

parties shall be given reasonable opportunity

to present all material made pertinent to such

a motion by Rule 56.").

That Rule also provides, however, that the

court should not so convert a motion absent

notice and compliance with the procedural

safeguards afforded summary judgment

practice under, in this case, Fed.R.Bankr.P.

7056. Accord, Capital Films Corp. v.

Charles Fries Productions, Inc., 628

F.2d 387, 391 fn.1 (5th Cir. 1980) ("It is a well

established rule in this circuit that a motion to

dismiss, under Rule 12(b), when treated as a

motion for summary judgment, must also

abide by the procedural safeguards of Rule

56."); see also Hickey v. Arkla Industries,

Inc., 615 F.2d 239, 240 (5th Cir. 1980)

("parties are entitled to 10 days notice that a

12(b)(6) motion is being treated as a Rule 56

motion for summary judgment."). Because

those procedures were not followed in this

case, the Court will not convert the Rule

12(b)(6) motion to a motion for summary

judgment.

4. The Debtor did file, after the hearing, a

pleading styled "Advisory on Petitioner's

(Mis)representations, Reply Brief Supporting

Debtor's Motion to Dismiss & Request for

Relief under § 303(i)." Attached to that

pleading are copies of a number of documents

that relate to Movant's arguments regarding

whether the Debtor properly authorized the

Petitioner's retention and therefore should be

required to pay for its services. Those attached

documents are not authenticated, however,

and no foundation for their admissibility has

otherwise been presented. For that reason,

and because the hearing was concluded and

the Court had not granted leave to offer



additional evidence, it has considered the

Movant's post-hearing pleading only as

additional briefing and has not considered

either the factual statements in the Advisory

that are not supported by the record, nor the

attached documents, as evidence.

5. Nothing in this decision, however, should be

construed as indicating such proof would be

sufficient at a trial on the merits of the

Petition, however.

---------------


In re Green, Case No. 06-11761-FM (Bankr. W.D. Tex. 4/9/2007) (Bankr. W.D. Tex., 2007)

Page 1

IN RE: HENRY ALAN GREEN

ALLEGED INVOLUNTARY CHAPTER 7,

DEBTOR

TERESA M. GREEN ALLEGED

INVOLUNTARY CHAPTER 7, DEBTOR Case No. 06-11761-FM. Case No. 06-11762-FM.

United States Bankruptcy Court, W.D.

Texas, Austin Division. April 9, 2007.

MEMORANDUM OPINION

FRANK MONROE, Bankruptcy Judge.

The Court held an initial hearing upon the

Involuntary Petition filed by Josephine Maita

initiating the above two cases and the Alleged

Debtors' Motions to Dismiss the same on

February 7, 2007 at 1:30 p.m. The initial

hearing was limited to several discreet issues

as set forth hereinafter. This is a matter which

arises under Title 11 and in a case under Title

11. It is, therefore, a core proceeding under 28

U.S.C. §157(b)(2). This Court has the

jurisdiction to enter a final order under 28

U.S.C.

Page 2

§1334(a) and (b), 28 U.S.C. §157(a) and (b)(1),

28 U.S.C. §151, and the Standing Order of

Reference of the United States District Court

for the Western District of Texas referring all

bankruptcy matters to the Bankruptcy Court.

Josephine Maita ("Maita") is the aunt of

the Alleged Debtor Teresa M. Green. Teresa M.

Green and Henry Alan Green are married.

Maita holds a judgment against both Henry

and Teresa Green in the face amount of

$555,188.98, which judgment was issued by

the Superior Court of California for the County

of Alameda on April 18, 2006. Maita registered

the California judgment in Texas in Cause No.

D-1-GN-06-001621 in the 126th District Court

of Travis County, Texas via Notice of Filing

Foreign Judgment Pursuant to the Uniform

Enforcement of Foreign Judgments Act. This

judgment is recorded in Vol. 06131, Page 1317

in the 126th District Court of Travis County,

Texas. Maita then filed an Abstract of

Judgment in the Official Public Records of

Travis County, Texas at Doc. No. 2006136046

on July 12, 2006.

This case is not the first brush with

bankruptcy that the Greens have had. They

initiated a voluntary Chapter 7 petition on

January 11, 2005 under Case No. 05-10196.

Maita was a creditor of the Greens at that time

although her claim had not been reduced to

judgment. Maita objected to the entry of a

discharge in that prior case. After trial, this

Court denied the Greens a discharge of their

indebtednesses finding violations of 11 U.S.C.

§727(a)(2)(A)

Page 3

and 11 U.S.C. §727(a)(4)(A).

The Greens had sold their home in

California in June 2004 with net cash

proceeds in excess of $1.1 million [only

$75,000.00 of which was non-exempt under

the laws of the State of California] liquidated

their Fidelity Investment account netting

$300,000.00 plus, and, along with an

additional $60,000.00, purchased for cash a

residence in Austin, Texas for approximately

$1.44 million. This Court found that the

Greens had invested virtually all of their non-

exempt property [almost three times the

amount to pay Maita her claim] in an exempt

homestead in Texas with the actual intent to

defraud Maita and the Greens' other creditors.

Additionally, the Debtors had failed to disclose

certain financial transactions which had

occurred in April 2004 as required by the

Schedules and Statements of Affairs.

The instant Involuntary Petitions were

filed by Maita primarily due to the change of

the federal exemption laws occasioned by the

passage of the Bankruptcy Abuse Prevention

and Consumer Protection Act of 2005. The



relevant provision, 11 U.S.C. §522, was

amended so that if a debtor elects to exempt

property under state law and such debtor has

acquired during the 1215-day period preceding

the filing of the petition real property that the

debtor uses as a residence or a homestead,

then to the extent the value of the equity in

such property exceeds $125,000.00, it is not

entitled to be exempted. See 11 U.S.C.

§522(p)(1)(B) and (D).

Page 4

Accordingly, if Maita is successful in having an

order for relief entered in these two cases, the

Alleged Debtors' state law homestead

exemption on their house, now worth 1.7

million, will be limited to $125,000.00 thereby

freeing up more than enough funds to pay

Maita and all other creditors in full; still

leaving a significant excess for the benefit of

the Debtors.

ISSUES

1. If there are fewer than 12 holders of

such claims against either of the Greens, is

Maita precluded from being a petitioning

creditor because she is an insider? The

language of 11 U.S.C. §303(b)(2) says that if

there are fewer than 12 "such holders",

excluding an insider, then the involuntary case

can be commenced by one or more of "such

holders". The question is whether the language

excluding an insider from being counted as a

claim holder also excludes an insider from

being a petitioner.

2. Since Maita has an abstract of

judgment on file in Travis County, is she a

creditor "secured" by the homestead and,

therefore, ineligible to be a petitioning

creditor?

3. Is there an exception to the statutory

requirements set out in §303(b)(2) of the

Bankruptcy Code if the Greens each have more

than eleven creditors?

4. Which of the 19 alleged creditors

claimed by both of the Greens actually

qualifies as such under 11 U.S.C. §303(b)?

Stated another way, do either of the Greens

have twelve or more holders of

Page 5

such qualified claims?

Sub-Issue: Are non-recourse creditors to

be counted — i.e. what is the proper

interpretation of "holder of a claim against

such person" as used in 11 U.S.C. §303(b)(1)?

The rules of construction set out in 11 U.S.C.

§102(2) states that a "claim against the debtor"

includes a claim against property of the debtor

(non-recourse secured claims); however, 11

U.S.C. §303(b)(1) states that those creditors

whose claims are to be counted for involuntary

purposes are those which hold a "claim against

such person". Does that difference in language

mean that non-recourse creditors are excluded

from the count as well as community claims of

a spouse who has not actually incurred the

debt?

Conclusions of Law

1. If there are fewer than 12 holders of

such claims against either of the Greens, is

Maita precluded from being a petitioning

creditor because she is an insider?

It is undisputed in this case that Maita is

related to Teresa Green and therefore is an

insider as defined by 11 U.S.C. §101(31)(A)(i) of

the Bankruptcy Code. The Greens urge that 11

U.S.C. §303(b)(2) which excludes "any

employee or insider" of the debtor from being

included as one of the "holders of such claims"

for counting purposes also prevents Maita

from being a petitioning creditor under

§303(b)(2).

Page 6



Section 303(b)(1) and (2) of the

Bankruptcy Code sets forth the qualifications

of a petitioning creditor.

(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 bonafide dispute as to liability

or amount, or an indenture trustee

representing such a holder, if such

noncontingent, undisputed claims aggregate

at least $12,300 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 twelve such

holders, excluding any employee or insider of

such person and any transferee of a transfer

that is voidable. . . by one or more of such

holders that hold in the aggregate at least

$12,300 of such claims;"

11 U.S.C. §303(b)(1) and (2)(West 2007).

Courts have struggled with the issue of

whether, in cases involving 12 or less creditors,

an insider has standing to file an involuntary

petition. Some courts support the Greens'

position that an insider lacks standing to file

an involuntary in cases with fewer than 12

creditors. See In re Gills Creek Parkway

Assoc. L.P., 194 B.R. 59, 62 (Bankr. D.S.C

1995)(asserting in dicta that claims of

employees, insiders and transferees of debtor

are excluded from consideration in

determination of single creditor's eligibility to

file in involuntary petition); In re Runaway II,

Inc., 168 B.R. 193, 198 (Bankr. W.D. Mo.

1994)(dismissing case filed by insider where

there were less than 12 creditors); In re Kenval

Mktg. Corp., 38 B.R. 241, 244 (Bankr. E.D.

Pa.)("Creditors

Page 7

attempting to file under ... §303(b)(2) . . . are

precluded from successfully filing if they hold

voidable preferences."), reconsideration

denied, 40 B.R. 445 (Bankr. E.D. Pa. 1984); In

re Kreidler Import Corp., 4 B.R. 256, 259

(Bankr. D.Md. 1980)(rejecting "the

construction advanced... that preferred

creditors are not counted but are eligible to

join involuntary petition").

Runaway sheds the most light on this

view. Runaway noted:

The phrase, "such holders" is used twice in

§303(b)(2). The first use of "such holders"

refers back to §303(b)(1) where a holder is "a

holder of a claim against such person that is

not contingent as to liability or the subject of a

bonafide dispute". However, the first use of

"such holders" is immediately followed by

language excluding employees, insiders and

creditors holding avoidable transfers. These

exclusions modify the phrase "such holders" as

it is used in subsection (b)(2). The second use

of "such holders" refers to the first use of the

phrase in subsection (b)(2) and its exclusions.

The second use of the phrases "such holders"

directly modifies the "one or more" creditor

language. Thus, to file a petition under (b)(2),

a creditor must hold a claim that is not

contingent, subject to a bonafide dispute, nor

be the claims of an employee, insider or

transferee of an avoidable transfer.

Runaway 168 B.R. at 196

A number of courts, however, have

interpreted §303(b)(2) to allow an insider,

employee or transferee to file an involuntary

petition. See Sipple v. Atwood (In re Atwood),

124 B.R. 402, 405 n.2 (S.D. Ga.

1991)("Petitioning creditors. . . qualify [to file

an involuntary petition] even if their claim is

voidable."); In re Little Bldgs. Inc., 49 B.R.

889, 890-91 (Bankr. N.D. Ohio 1985)(denying

debtor's motion to dismiss involuntary

petition filed

Page 8



by insiders); In re Kitchen Assocs. Inc., 33 B.R.

214, 215 (Bankr. W.D. La. 1983)("Under the

plain meaning of 11 U.S.C. §303(b)(1) and (2),

employees of the debtor may be petitioning

creditors for involuntary bankruptcy of the

debtor."); In re Hopkins, 177 B.R. 1 (Bankr. D.

Me. 1995)(Former spouses and their children

may be petitioning creditors because their

entitlement to alimony and child support,

respectively, makes them entities holding

claims).

The Little Bldgs. court found contra to

Runaway that:

Under these provisions, a single

unsecured creditor may file an involuntary

petition against an alleged debtor if his claim

is not subject to a bonafide dispute and is for

at least $5,000 and if the alleged debtor has

fewer than twelve creditors. Although the

number of the alleged debtor's creditors may

or may not be disputed in this case, it is

important to note that §303(b)provides that in

calculating the number of an alleged debtor's

creditors, the claims of insiders and the claims

of transferees whose transfers are subject to

avoidance are not included. If after deducting

the claims of insiders and avoidance

transferees, an alleged debtor has fewer than

twelve creditors, a single creditor is eligible to

file an involuntary petition, irrespective of

whether or not that creditor is, or at one time

was, an insider. . .[T]he language of the section

states, with mathematic-like certainty, that the

claims of insiders are excluded only from

consideration in determining the number of an

alleged debtor's creditors. Insiders are still

eligible to initiate involuntary proceedings

against the entity they are or were associated

with.

Little Bldgs., 49 B.R. at 890-891.

Collier's also supports the Little Bldgs.

rationale that "[a]lthough insiders are not

counted as holders of claims for purposes of

establishing the numerosity requirement in

Section 303(b), these individuals can be

petitioning creditors if they satisfy the other

requirements." Collier on Bankruptcy

Page 9

¶303.03[2](c)(iv), at page 303-36(15th ed.

rev.). Collier takes the same position with

respect to creditors who have received

voidable transfers. Id. at ¶303.03[2](c)(v),

page 303-36-37.

And, quite frankly, there is another way to

read the statute rather than how the court in

Runaway chose to read it. The first "such

holders" in §303(b)(2) can refer back to

§303(b)(1) "holder of a claim" and the second

"such holders" in §303(b)(2) can just as easily

be read to refer back to "holder of a claim" in

§303(b)(1) as well.

The better reasoned reading of the statute

is that it does not exclude employees, insiders,

etc. from being petitioning creditors under

§303(b)(2). This is especially true when one

looks at the legislative reasoning as to why

these type creditors were excluded from

counting purposes in the first place. See In re

Skye Mktg. Corp., 11 B.R. 891, 897 (Bankr.

E.D.N.Y 1981). The Skye court points out:

The detailed rules governing the counting

of creditors have their origin in policy

considerations which, to an extent, are

conflicting. One such policy is based upon the

fear that involuntary bankruptcy proceedings

might be used by one or two recalcitrant

creditors as a means of harassing an honest

debtor. Populist Members of Congress, in

debating the bill which was later adopted as

the Bankruptcy Act of 1898, decried the

involuntary bankruptcy provisions as an

"engine of oppression" and "intended to bind

hand and foot the debtors of this country and

place them in the vise-like grip of the greedy

cormorants of the country." 31 Cong. Rec.

1803, 1851 (remarks of Congressmen Henry

and Sparkman), quoted in In re Gibralter

Amusements, Ltd., 291 F.2d 22, 27 (2d Cir.

1961)(Friendly, J., dissenting). In order to



allay these fears, the requirement of three

petitioners was adopted as a general rule, and

single creditor petitions were permitted

Page 10

only in cases in which there were fewer than

twelve creditors. Another fear was the

possibility that the threat of an involuntary

proceeding would be used to compel the

debtor to make preferential payments to one

or two litigious creditors. A competing

consideration was the avoidance of collusion

between the insolvent debtor and friendly

creditors through which an involuntary

petition might be defeated. To be sure, a

creditor who is being paid lacks an incentive to

join an involuntary proceeding because of the

risk that a portion of his claim would be sought

as a preference by the trustee while the balance

of his claim would be discharged in

bankruptcy. Insiders who have become

creditors of their businesses are deterred by

similar considerations from joining in an

involuntary petition. Indeed, in considering

the statutory predecessor of subsection (b)(2)1

it was said that (t)he detailed ground rules for

"counting creditors," laid down by s 59, sub e,

indicate that the principal Congressional fear

of abuse was not that a debtor would be too

easily petitioned into bankruptcy rather that

through connivance with friendly creditors

that insolvent debtor[s] might be able unfairly

to hamstring one or two large creditors. . .Id.

at 25 (citation omitted). Thus, the compromise

was to require three petitioners to join when

the eligible claimants number more than

twelve, a single petitioner when they do not,

and exclude from the class of claimants who

may be counted those who lack an incentive to

join an involuntary petition.

Congress continued to adhere to this

compromise in adopting the Bankruptcy

Reform Act of 1978. Those who would be

deterred from joining the effort to petition a

debtor into bankruptcy by their status as

preferred creditors are not to be counted

according to the dictates of section 303(b)(2)

of the Code.

Skye, 11 B.R. at 897-898.

Given this potential lack of incentive to

join or file an

Page 11

involuntary petition, one can postulate that

Congress could not have possibly intended

that the parties excluded for counting

purposes under (b)(2) should also lack

standing to file an involuntary petition. It is

because they may lack incentive to join in that

these parties were excluded from the count.

Congress sought to avoid possible collusion

between the insolvent debtor and friendly

creditors through which an involuntary might

be defeated by artificially increasing the total

number of creditors so at least three would be

required to file a petition. Here, Maita,

although an insider, is not in collusion with the

Debtors. She, in fact, seeks redress from the

fraud the Debtors have perpetrated upon her.

Maita may be a petitioning creditor under 11

U.S.C. §303(b)(2).

2. Since Maita has an abstract of judgment

on file in Travis County, is she a "secured"

creditor and, therefore, ineligible to be a

petitioning creditor?

To moot this question, Maita has waived

her judicial lien by written waivers filed with

the Court on February 27, 2007 in both Henry

and Teresa Greens' bankruptcy cases.

Attached to both waivers is a copy of the

Release of Abstract of Judgment executed by

Maita on February 22, 2007 and subsequently

filed of record in Travis County, Texas on

February 27, 2007 in the Official Public

Records.

Page 12

A secured creditor may waive security for

all or a portion of its claim, to meet the



aggregate unsecured debt requirement of

§303(b). In re All Media Properties, Inc., 5

B.R. 126, 141 (Bankr. S.D. Tex. 1980), affirmed

and bankruptcy court opinion noted with

approval at 646 F.2d 193 (5th Cir. 1981); In re

American Gypsum Co., 31 B.R. 187, 189

(Bankr. D.N.M. 1983); CC Britain Equities,

L.L.C. v. Allen-Main Associates Limited

Partnership (In re Allen-Main Associates

Limited Partnership), 223 B.R. 59 at 61 (2nd

Cir. BAP 1998).

Even without the waiver, the alleged

"secured" status of Maita's claim is a specious

argument.

The Greens asserted at trial that the

involuntary petitions should be dismissed

because, according to the Greens, the two

petitioning creditors do not hold unsecured

claims aggregating at least $12,300.00 as

required under 11 U.S.C. §303(b)(1). In taking

this position, the Greens have asserted that

Maita is a fully secured creditor in this

proceeding because she filed an abstract of her

judgment against the Greens in the Official

Public Records of Travis County, Texas

(Debtors' Exhibit 46) which the Greens argue

attaches to their homestead. Determination of

secured creditor's claim for purposes of an

involuntary petition is governed by state law.2

See In re Harman, 243 B.R. 671 (Bankr.

Page 13

N.D. Tex., 1999)

The filing of an abstract of judgment

under Texas law does not create a valid and

enforceable lien against a judgment debtor's

homestead. Hoffman v. Love, 494 S.W. 2d 591,

593-94 (Tex. Civ. App.-Dallas 1973), writ ref'd

n.r.e. per curiam at 499 S.W.2d 295 (Tex.

1973)(ruling that a purchaser of the property

had standing to challenge the validity of the

lien and that "a judgment, though duly

abstracted, never fixes a lien on the homestead

so long as it remains homestead"); Harms v.

Ehlers, 179 S.W. 2d 582, 583 (Tex. Civ. App.-

Austin 1944), writ ref'd, (ruling that because

the property in question had been the

homestead of the deceased judgment debtor

without interruption until the time of his

death, "no abstract of judgment lien could or

did attach thereto during his life" and the

property passed to his probate estate, free of

any lien.)

To support their contention that Maita is

fully secured, the Greens cite Davis v. Davis

(In re Davis), 170 F.3d 475 (5th Cir. 1999).

Here, the Fifth Circuit did not hold that the

filing of an abstract of judgment creates a valid

lien on a Texas homestead. The 5th Circuit's

holding was that the exemption provisions of

the Bankruptcy Code, as they existed at the

time of that decision, did not preempt state

exemption laws, so as to create a lien or other

Page 14

substantive collection right. In other words,

once the property is exempted from property

of the estate, the parties are relegated to their

rights and remedies under applicable

nonbankruptcy law. The Court stated in its

holding:

For all these reasons, we conclude that

§522(c)(1) does not "create liability" of exempt

property for specified debts following

bankruptcy. Instead, the section permits

creditors holding such claims to proceed

against the property after bankruptcy based on

the rights and remedies they would have had

under state law if bankruptcy had never been

filed.

Id. at 481.

Even if a lien is considered perfected

against the homestead, it is not enforceable

unless it secures payment for those certain

type debts enumerated in Tex. Const. Art. XVI,

§50. See Exocet, Inc. v. Cordes, 815 S.W.2d

350, 352 (Tex. App.-Austin 1991, no

writ)(Debtor's homestead is not exempt from

the perfected lien; rather, the homestead is



exempt from any seizure attempting to enforce

the perfected lien). Maita's judicial lien cannot

be enforced against the homestead. Maita,

therefore, cannot foreclose on the Greens'

homestead. Her lien would then, even if it

attaches, have no value, and she should be

considered totally unsecured.

Maita, even without waiver of her judicial

lien, can be a petitioning creditor because for

§303 purposes her abstract of judgment did

not create a lien which is enforceable against

the Greens' homestead.

Page 15

3. Is there an exception to the statutory

requirements set out in §303(b)(2) of the

Bankruptcy Code if the Greens each have more

than eleven creditors?

At trial Maita asserted that, if the Greens

had more than eleven creditors each, there

should be an exception to the statutory

requirements set out in Bankruptcy Code

§303(b) due to exigent circumstances relying

on In re Moss, 249 B.R. 411 (Bankr. N.D. Tex.

2000). See also In re Norriss Bros. Lumber

Co., Inc., 133 B.R. 599 (Bankr. N.D. Tex. 1991).

This is a judicially created exception when the

debtor has engaged in "fraud, trick, artifice or

scam" and where the debtor has made

fraudulent conveyances or preferential

transfers or engaged in other misconduct vis-

a-vis his or her creditors. Moss, 249 B.R. at

424.

Maita urges this Court to apply this

exception if the Greens prove the existence of

more than eleven creditors each. This Court

did find that the Debtors transferred property

having a value in excess of $1,000,000 within

one-year prior to their voluntary bankruptcy

filing with intent to hinder, delay or defraud

their creditors (Adversary Proceeding No. 05-

1085). In that same proceeding, this Court

found that there were numerous material

omissions and misstatements in the Greens'

bankruptcy Schedules and Statement of

Financial Affairs.

In addition, the record from this trial

indicates that the Greens are living an

extravagant lifestyle, while certain

Page 16

creditors of theirs remain unpaid. They

continue to live in a paid-for house that is now

worth $1.7 million and have the resources to

take luxury vacations.

The Court condones neither the Debtors'

past fraudulent behavior nor their current

behavior. However, this Court must abide by

the statutory construction of §303(b). The

statute is clear on its face and contains no

fraud exception. As such, the Court must rely

on its review of the Greens' claims to

determine whether an order for relief with

respect to this involuntary proceeding can be

entered.

4. Which of the 19 alleged creditors

claimed by both of the Greens actually

qualifies as such under 11 U.S.C. §303(b)?

Stated another way, do either of the Greens

have twelve or more holders of such qualified

claims?

Sub-Issues: What is the proper

interpretation of "holder of a claim against

such person" as used in 11 U.S.C. §303(b)(1)?

The rules of construction set out in 11 U.S.C.

§102(2) state that a "claim against the debtor"

includes a "claim against property of the

debtor" [which would include non-recourse

secured claims]; however, 11 U.S.C. §303(b)(1)

states that those creditors whose claims are to

be counted for involuntary purposes are those

which hold a "claim against such person".

Does that difference in language mean that

non-recourse creditors are excluded from the

count? And, does that mean that a claim

against one spouse in a

Page 17



community property state should not be

counted as a claim against the other spouse for

the purposes of §303(b)?

Bankruptcy Code §303(b) provides that

an involuntary case may be commenced by

three or more entities or if there are fewer than

twelve creditors, by one entity. To be counted

each creditor must be a holder of a "claim

against such person that is not contingent as to

liability or the subject of a bonafide dispute as

to liability or amount". 11 U.S.C.

§303(b)(1)(emphasis added) (West 2007). The

language "claim against the debtor" is defined

in §102 to include non-recourse claims against

the property of the debtor. 11 U.S.C.

§102(2)(West 2007). "Claim against such

person" in §303(b)(1) is, however, not defined.

"Community claim" is defined in §101(7)

as a "claim that arose before the

commencement of the case concerning the

debtor for which property of the kind specified

in section 541(a)(2) of this title is liable,

whether or not there is any such property at

the time of the commencement of the case". 11

U.S.C. §101(7)(West 2007). State substantive

community property laws generally allow

entities holding claims against one spouse

incurred during marriage to reach the

community property of both spouses. TEX.

FAM. CODE ANN. §3.202 (Vernon 2007). CA.

FAM. CODE ANN. §910 (West 2007). This is

true in both Texas and California. However, it

does not mean that the spouse is personally

liable for claims made against the other

spouse. Latimer v. City National Bank of

Colorado City, 715 S.W.

Page 18

2d 825 (Tex. App.-Eastland 1986, no

writ)(Wife of promissory note maker, whose

signature did not appear on any of the notes,

was not personally liable on them.); See CA.

FAM. CODE ANN. §914 (Statute defines the

specific instances when a spouse is personally

liable for debts incurred by the other spouse;

personal liability does not attach to all debts

incurred by a spouse during the marriage). The

only instances when personal liability is

imposed is when: (1) the individual's spouse

acts as an agent for the individual (and the

Family Code makes clear that one spouse does

not act as an agent for the other spouse solely

because of the marriage relationship); or (2)

the spouse incurs a debt "for necessaries".

TEX. FAM. CODE ANN. §3.201(a)(Vernon

2007). California has a similar liability

scheme. CAL FAM. CODE §914. Even though

Greens' counsel alludes in his closing

argument that some of the Greens' debts were

"for necessaries", there was no evidence

presented as to which debts, if any, constituted

such, and there were no assertions or evidence

regarding either of the Greens acting as an

agent for the other. Even so, giving the debtors

the benefit of liberal interpretation, the Court

has presumed one debt [Clinical Pathology] as

a "necessary" since it was a medical bill

concerning their child.

This means that a creditor with a personal

liability claim against the "incurring spouse"

cannot be counted as a holder of a claim

against a "non-incurring spouse" even though

it will have a "community claim" in the non-

incurring spouse's estate if an order

Page 19

for relief is entered. Collier on Bankruptcy,

§303.03[2][c][viii] at 303-37-38. 15th Ed. See

also, In re Karber, 25 B.R. 9, 13 (Bankr. N.D.

Tex. 1982)(citing Collier's). Stated another

way, even though a creditor of the non-

incurring spouse may have a community claim

against that spouses' interest in the parties'

community property, that is not sufficient. It is

clear that for a creditor to be "counted" under

§303(b)(1) it must hold a claim against the

"person", i.e. the alleged debtor must be

personally liable for the creditor's claim in

order for that creditor to be "counted". If a

claim against property was to be included,

Congress clearly could have said so. It did not.

And, the primary reason why claims against

property were most likely not included is that



holders of those claims have a remedy outside

of bankruptcy [foreclosure against their

collateral] whereas holders of unsecured

claims against the person do not. Therefore,

non-recourse secured creditors may not be

counted. And, unsecured creditors whose sole

remedy is to look to community property for

satisfaction of their debt [or to the personal

liability of the incurring spouse] may not be

counted as holders of "claims against the

person" of the non-incurring spouse under

§303(b). This Court reviews the claims to be

counted on this basis with due deference to

who has the burden of proof.

The Greens bear the initial burden of

proving that each has 12 or more creditors. In

re Rothery, 143 F.3d 546, 549(9th Cir.

Page 20

1998). Bankruptcy Rule 1003(b) instructs that

a debtor, who professes to have more than 12

creditors, must file an answer, including a list

of all creditors with their names and

addresses, a brief statement of the nature of

the claims and the amounts thereof. Once the

debtor files his list of creditors in compliance

with Bankruptcy Rule 1003(b), the petitioner

has the burden of showing that the debtor has

less than 12 bonafide creditors. In re Braten,

99 B.R. 579, 582 (Bankr. S.D.N.Y. 1989); see

also In re James Plaza Joint Venture, 67 B.R.

445, 448 (Bankr. S.D. Tex. 1986). Compliance

with Bankrutpcy Rule 1003(b) is a condition

precedent to the burden shifting to the

petitioning creditor. The Court will review the

creditors taking into consideration this

burden.

Creditor by Creditor Anaylsis

1) Charles Nettles, Mr. Nettles was the

Greens' former bankruptcy attorney in their

prior Chapter 7 proceeding and the related

discharge litigation who the Greens "stiffed" to

the tune of $ 6,100. (Debtors' Exhibit 1). Mr.

Nettles invoice is addressed to both Mr. and

Mrs. Green; he clearly represented both; and

he is a valid creditor of both.

2) General Electric Capital Corp. Henry

Green signed a personal guaranty of a secured

obligation of Maita Brothers, Inc. in 1998.

(Debtors' Exhibit 2). Mrs. Green did not

execute the guaranty and is not personally

liable on such. Mr. Green explained

Page 21

that Maita Brothers, Inc. entered into a

General Assignment for the Benefit of

Creditors in August, 2004 (Debtors' Exhibit

25) and that he has no idea what the Assignee

received from the sale of GECC's collateral.

Mr. Green did testify that he called and

obtained a balance due from GECC as of the

date of the trial of $37,560.00. Maita has the

burden of proving GECC is not a valid creditor.

Mr. Green's unobjected-to hearsay testimony

carries the day. GECC is to be counted as a

creditor of Mr. Green.

3) Zion Credit Corp. (Debtors' Exhibit 5).

This creditor is similar to that of General

Electric Capital Corp. Mr. Green testified that

he has had no communication from Zion since

the time of the Assignment for Benefit of

Creditors. But, he has called and obtained a

balance from Zion in the amount of $32,500 as

of the date of the trial. No documentation was

produced to verify how much is owed or how it

was calculated, and no accounting was

submitted with respect to the liquidation of

Zion's collateral. However, giving Mr. Green

the benefit of the doubt on his unobjected-to

hearsay testimony, the claim will be counted as

one of his creditors. It will not be counted as

one of Mrs. Green's.

4) Randy Bridges (Debtors' Exhibit 3).

This is a business debt of Henry Green only. It

arises out of a guaranty by Mr. Green and

others of a 2003 Promissory Note executed by

third parties, related to the business of Maita

Brothers, Inc. Mrs. Green has no personal

liability.



Page 22

5) Volkswagen Credit (Debtors' Exhibit 4).

This is an automobile lease signed only by

Teresa Green. The lease is currently not in

default and testimony indicated that the

Greens intend to continue paying on the lease

until paid in full. Maita contends that this

claim should not be counted as a lessor does

not have a "claim" under bankruptcy law

unless the lease is rejected under 11 U.S.C.

§365. This is not, however, the relevant

inquiry. The lease is a current claim against

"the person", Mrs. Green. There is personal

liability if it is not paid. It will be counted

against Mrs. Green only.

6) US Bank (Debtors' Exhibit 16). This is

also an automobile lease. The billing

statements reflect both Mr. and Mrs. Green as

lessees. This is a claim against both Mr. and

Mrs. Green.

7) Fidel Del Torro, DDS (Debtors' Exhibit

11). This party is providing ongoing

orthodontic care for one of the Green's

children. It is unclear whether this is actually a

"debt". The only evidence produced is an

unexecuted contract showing Mr. Green as the

"Responsible Individual". Mr. Green testified

that the agreed price for the total services is

$4,600 and that he made a down payment of

$1,086.00 with $3,394 to be paid in 18

monthly installments of $183.00. Dr. Del

Torro has future services to perform. However,

this is a personal services contract. There is no

liability unless and until services are rendered

by Del Torro. There is no contractual

obligation on either of the Greens if they

Page 23

choose to stop using Del Torro's services and

go to someone else. This is not a claim within

the meaning of §303(b) (1) as the payments

were current on the petition date.

8) Clinical Pathology (Debtors' Exhibit 6).

The only evidence of this debt is a billing dated

November 8, 2004 which is prior to the

Greens' first bankruptcy case. The Greens also

listed this debt in their schedules in the first

bankruptcy case. Henry Green acknowledged

that he has paid several other invoices to

Clinical Pathology since this invoice, and he is

paying for all current services provided by this

party. This, however, appears to be still owing

even though the Greens' discharge was denied

in their prior case. Maita presented no

evidence to the contrary. The bill is in the

name of the Green's child, Jordan. Neither Mr.

nor Mrs. Green's name appears on the bill. The

Court, will, in an abundance of caution,

consider the same as the responsibility of, and

a personal claim against, both Mr. and Mrs.

Green.

9. Graebel Van Lines (Debtors' Exhibit 7).

This is the balance owed Graebel for moving

services when the Greens moved from

California to Texas in 2004. The invoice is

directed to Henry Green only and will be

considered only a debt of Mr. Green.

10. Encore Bank (Debtors' Exhibit 12).

This is a home equity line of credit against the

Greens' property at 4201 Hidden Canyon

Cove. This line of credit is for $220,000 but is

only partially drawn against ($24,000 as of the

petition date). This is a non-recourse

Page 24

obligation. TEX. CONST. ART. XVI, §50(a) (6)

(C). As such, it is not a "claim against such

person" within the meaning of §303 and will

not be counted against either Mr. or Mrs.

Green.

11. Bank of America Visa (Debtors' Exhibit

13). This is a credit card in both Mr. and Mrs.

Greens' names. However, Mr. Green's

testimony was clear that this card is paid off

each month. He testified that his credit cards

are simply being used as a convenient way to

pay for ordinary routine expenses, and that he

usually does not carry a balance on them. They

are routinely paid in full each month. Debtors'



Exhibit 13, page 17 indicates there was a

balance on the account of $663.03 as of the

petition date. Even though it was billed pre-

petition it was not due until November 14,

2006. And, it was in fact, paid in full on

November 8, 2006 in accord with the Greens'

normal practice. Regardless, and even though

a good argument could be made for this being

treated in the same manner as routine

recurring monthly bills such as utilities and

the like [and not counting it], in an abundance

of caution this will be counted as a creditor of

both Mr. and Mrs. Green.

12. CitiAdvantage World Master Card

(Debtors' Exhibit 14). This is a credit card

account allegedly used by both Mr. and Mrs.

Green but Plaintiff's Exhibit P-10 indicates it is

billed only to Mr. Green. Again, however, it is

the Debtors' practice to pay off their credit

card balances in full each month. Debtors'

Exhibit 14

Page 25

indicates there was no billed and unpaid

balance on the account as of the petition date.

Page 14 of the Exhibit indicates the balance of

the account then due was paid in full on

October 27, 2006. Page 16 shows the account

was not billed again until November 7, 2006

after the involuntary petitions were filed. This

is, therefore, a post-petition debt of Mr. Green.

As such, it cannot be counted as a pre-petition

creditor.

13. Citi Advantage Card (Debtors' Exhibit

19). This is another credit card, but the account

is billed in the name of Joan Green, Henry

Green's mother. Mr. Green testified that he

and his wife each have a card on this account

and that they are permitted users. He also

testified that his credit report showed him

responsible for this debt. However, he did not

produce the credit report. And, most, if not all

of the charges incurred appear to be his

mother's charges. The Greens produced no

other evidence reflecting that they were liable

on this account other than copies of their

credit cards for the account merely reflecting

that they may be authorized users (Debtors'

Exhibit 22). This account cannot be included

for counting purposes.

14. Eanes Independent School District

(Debtors' Exhibit 9). Page 1 of Debtors' Exhibit

9 is a proof of claim filed in the Greens' prior

bankruptcy. It is for ad valorem taxes for a

prior year on the homestead at 4201 Hidden

Canyon Cove. Mr. Green testified that this bill

had been paid pre-petition and that it is

Page 26

his practice to pay his property taxes annually.

Page 2 of the Exhibit is a copy of the 2006 bill.

Even though the taxes are not due and payable

until January 31, 2007, personal liability

attaches as of January 1, 2006. Therefore, this

qualifies as a pre-petition claim against the

person of both Mr. and Mrs. Green. In re

Midland Indus. Service Corp., 35 F.3d 164,

166 (5th Cir. 1994).

15. Akawie & La Pietra (Debtors' Exhibit

8). This is a bill from a California law firm

addressed to Henry Green (billed "care of"

Stanley Green in San Jose, CA), for legal

services rendered relating to the business of

Maita Brothers, Inc. The testimony elicited

from Mr. and Mrs. Green regarding this claim

is that the law firm represented both the

Greens in connection with Maita's judicial

collection of the note. The law firm negotiated

a Confession of Judgment (Debtors' Exhibit

24) that Mr. and Mrs. Green executed. As such,

this should be considered a liability of both Mr.

and Mrs. Green.

16. Drs. Des Rosier and Werneke

(Debtors' Exhibit 15). This is a medical bill for

services provided to Teresa Green. This is

solely Teresa Green's debt.

17. Kent Kuhlmann. Henry Green testified

that when he was in California in the summer

or fall of 2006, that he borrowed $ 600 from

his friend, Mr. Kuhlmann, to purchase



birthday gifts for his wife and two of his

children. He also testified he had not repaid

this loan as of the petition date. There is no

written

Page 27

documentation of this claim except for the

affidavit of Mr. Kuhlmann. Maita objected to

the use of this affidavit as hearsay, and the

Court sustained the objection. Further, saying

a debt is a debt does not necessarily make it so

without some documentation. Maita has

rebutted the presumption that this is a valid

creditor. The burden shifted to the Debtors to

prove the legitimacy of the debt. The Greens

have not met their burden on this one. This

claim cannot be counted. The testimony of Mr.

Green is not believable especially since he had

access to three credit cards, two of which were

routinely paid off on a monthly basis at the

time of the alleged loan.

18. Donna Brown (Debtors' Exhibit 20).

This is a debt of $24.50 owed by Mr. Green to

an attorney for work performed prior to the

Greens' first bankruptcy. It is clear from the

Exhibit that Ms. Brown had a retainer

substantially exceeding this amount and that

when she returned the unearned portion of the

retainer, she did not deduct the $24.50

because it was "pre-bankruptcy" debt. Mrs.

Green's name does not appear anywhere on

this account and should not be counted for

purposes of her petition. Further, it is a de

minimus claim that should not be counted

against Mr. Green. Denham v. Shellman Grain

Elevator, Inc., 444 F.2d 1376 (5th Cir. 1971).

19. Citifinancial Retail Services (Debtors'

Exhibit 18). This is a consumer account of Mr.

Green, which reflects a balance of

Page 28

$2,649.94 as of May 7, 2006, nearly six

months before the petition date. Two monthly

statements provided in Exhibit 18 indicate that

no payments are due on the account and no

interest accrues until April, 2007. There is no

documentary evidence in the record showing

the balance owing on the petition date

although the Court presumes it to be the same

as existed May 7,2006. Mrs. Green's name

does not appear on this account nor was there

any evidence that she is personally liable. It is

a claim to be counted against Mr. Green only.

The total claims for each are as follows:

Total Claims of Henry Green

1. Charles Nettles

2. General Electric Capital Corp.

3. Zion Credit Corp.

4. Randy Bridges

5. U.S. Bank

6. Clinical Pathology

7. Graebel Van Lines

8. Bank of America Visa


10. Akawie & La Pietra

11. Citifinancial Retail Services

Total Claims of Teresa Green

1. Charles Nettles

2. Volkswagon Credit

3. U.S. Bank

4. Clinical Pathology

5. Bank of America Visa


7. Akawie & La Pietra



8. Drs. Des Rosier and Werneke

Each of the Greens' has less than twelve

claims. As such,

Page 29

Maita has met the filing requirements

pursuant to §303(b) of the Bankruptcy Code

and the involuntary petitions can be

commenced against both Mr. and Mrs. Green

by Maita as the sole petitioning creditor of

each involuntary petition.

The Court, however, did not try the issue

of whether the alleged Debtors were generally

paying their debts as they become due as

required by §303 (h) of the Bankruptcy Code.

It is necessary for this issue to be tried before

the Court can enter the full relief requested.

---------------

Notes:

1. Section 59(e) of the Bankruptcy Act, 11

U.S.C. s95(e) provided as follows: In

computing the number of creditors of a

bankrupt for the purpose of determining how

many creditors must join in the petition, there

shall not be counted (1) such creditors as were

employed by the bankrupt at the time of the

filing of the petition; (2) creditors who are

relatives of the bankrupt or, if the bankrupt is

a corporation, creditors who are stockholders

or members, officers or members of the board

of directors or trustees or of other similar

controlling bodies of such bankrupt

corporation; (3) creditors who have

participated, directly or indirectly, in the act of

bankruptcy charged in the petition; (4)secured

creditors whose claims are fully secured; and

(5) creditors who have received preferences,

liens, or transfers void or voidable under this

Act.

2. Other than his exempt homestead, Harman,

[the debtor], had no real property upon which

the abstracted judgment could attach a

judgment lien. Harman at 674 (Although

debtor owned the homestead as of the

involuntary petition date and petitioning

creditors had abstracted their judgments, the

court made no further mention of the exempt

homestead and yet determined that the

petitioning creditors were unsecured).

---------------


In re Lundeen, Case No. 07-19422 (Bankr. N.D. Ohio 2/20/2008) (Bankr. N.D. Ohio, 2008)

Page 1

In re: JAMES E. LUNDEEN, SR., Involuntary Chapter 7, Alleged Debtor.

Case No. 07-19422.United States Bankruptcy Court, N.D.

Ohio, Eastern Division.February 20, 2008.

MEMORANDUM OF OPINION RE: MOTION TO POST BOND

MORGENSTERN-CLARREN, Bankruptcy Judge.

Header ends here.

The alleged debtor filed a motion for an order requiring the petitioning creditors to post a bond under 11 U.S.C. § 303(e).1 The petitioning creditors responded.2 The court heard oral argument on the motion on February 19, 2008.3 For the reasons stated below, the motion is denied.4

JURISDICTION

Jurisdiction exists under 28 U.S.C. § 1334 and General Order No. 84 entered by the United States District Court for the Northern District of Ohio. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O).

Page 2

FACTS AND DISCUSSION

Bankruptcy code § 303(e) states: "After notice and a hearing, and for cause, the court may require the petitioners under this section to file a bond to indemnify the debtor for such amounts as the court may later allow under subsection (i) of this section." 11 U.S.C. § 303(e). Subsection (i) of § 303 allows the court to award an involuntary debtor costs, attorneys fees, and damages against a petitioning creditor in certain circumstances, such as when a creditor filed the petition in bad faith. 11 U.S.C. § 303(i). The legislative report accompanying § 303(e) states that,

"[t]he bonding requirement will discourage frivolous petitions as well as spiteful petitions based on a desire to embarrass the debtor (who may be a competitor of a petitioning creditor) or to put the debtor out of business without good cause." 11 U.S.C. § 303 note (1978); see also 2 COLLIER ON BANKRUPTCY ¶ 303.11 (Alan N. Resnick & Henry J. Sommer eds., 15th rev. ed. 2008) (citing legislative history).

The bankruptcy code does not mandate that a bond be posted, involuntary debtors are not entitled to a bond as a matter of course, and such a bond is not routinely required of petitioners on request of a debtor. See In re Contemporary Mission, Inc., No. 5-82-00915, 1983 Bankr. LEXIS 6916, at *6 (Bankr. D. Conn. Jan. 31, 1983); In re Reed, 11 B.R. 755, 757 (Bankr. S.D. W. Va. 1981). The burden is on the alleged debtor to show the need for a bond by showing, for example, that the petition was filed in bad faith or with an improper motive. Hutter Assocs., Inc. v. Women, Inc. (In re Hutter Assocs., Inc.), 138 B.R. 512, 516 (W.D. Va. 1992).

In this case, the alleged debtor requests that the petitioning creditors post a bond because he filed a motion to dismiss the involuntary petition. At oral argument, counsel for the alleged debtor further stated that he believes the petition was filed in bad faith. Counsel also stated that the alleged debtor has been personally harmed by the filing of the petition as two of his credit

Page 3

cards were canceled, one with a statement that it was because of the bankruptcy.

As to the first issue, the alleged debtor did file a motion to dismiss the involuntary petition with damages under § 303(i),5 but the mere fact that such a motion was filed does warrant the issuance of a bond. See id.; In re Contemporary Mission, Inc., 1983 Bankr. LEXIS 6916, at *6 (noting that


In re Lundeen, Case No. 07-19422 (Bankr. N.D. Ohio 2/20/2008) (Bankr. N.D. Ohio, 2008)

requiring creditors to post a bond simply because the debtor filed a motion to dismiss would make the "for cause" provision of § 303(e) meaningless).

As to the second issue, the alleged debtor did not produce any evidence or make any arguments as to why he believes the petition was filed in bad faith. While animosity does exist between the parties, the petitioner in an involuntary bankruptcy is presumed to be acting in good faith, and the alleged debtor did not show that these creditors filed this petition for any other reason than to collect on debts which they believe to be valid. See In re Hutter Assocs., Inc., 138 B.R. at 516.

Finally, issues regarding the alleged debtor's damages relate to his motion to dismiss and do not show cause as to why a bond is needed should the alleged debtor prevail on that motion. The cancellation of a credit card by a third party does not show bad faith or improper motive.

CONCLUSION

For the reasons stated, the alleged debtor's motion to post bond is denied. A separate order will be entered to memorialize this decision.

Page 4

ORDER

For the reasons stated in the memorandum of opinion entered this same date, the alleged debtor's motion to post bond is denied. (Docket 7).

IT IS SO ORDERED.

---------------

Notes:

1. Docket 7.

2. Docket 11. The petitioning creditors include Parshotam Gupta, Floyd Heller, Jerold Ladin, Estelle Lukasek, Darshan Mahajan, and Mahendra Patel.

3. Docket 9.

4. In the court's view, the value of this opinion is solely to decide the bond issue in this case and not as an addition to the general jurisprudence. For that reason, the opinion is not intended for commercial publication.

5. Docket 6.

---------------


In re Apollo Health Street, Inc. (Bankr.N.J., 2011)

IN RE: Apollo Health Street, Inc.,

Debtor.

CASE NO.: 11-22970 (NLW)

UNITED STATES BANKRUPTCY

COURT FOR THE DISTRICT OF NEW

JERSEY

Dated: May 23, 2011

NOT FOR PUBLICATION

OPINION

Before: HON. NOVALYN L.

WINFIELD

APPEARANCES:

Warren J. Martin, Jr., Esq.

Robert M. Schechter, Esq.

Porzio, Bromberg & Newman, PC

Attorneys for Petitioning Creditors

Dennis O'Grady, Esq.

Mark E. Hall, Esq.

Riker, Danzig, Scherer, Hyland & Perretti

LLP Headquarters Plaza

One Speedwell Avenue

Morristown, NJ 07962 Co-Counsel for

Alleged Debtor

Deryck A. Palmer, Esq.

Andrew M. Troop, Esq.

Israel Dahan, Esq.

Cadwalader, Wickersham & Taft, LLP

Co-Counsel for Alleged Debtor

Page 2

Procedural History

This matter was brought before the court

by Apollo Health Street, Inc. ("Apollo, Inc.")

on a motion to direct the Petitioning Creditors

to post a bond pursuant to 11 U.S.C. § 303(e)

to secure a possible recovery of fees, costs, and

other damages under 11 U.S.C. § 303(i). The

Petitioning Creditors opposed Apollo, Inc.'s

motion, arguing that the court's dismissal of

the involuntary petition obviates the need,

purpose and statutory authority to require

them to post a bond. As set forth below, the

court determines that Apollo, Inc.'s request for

a bond is appropriately made,

notwithstanding dismissal of the involuntary

petition, and that a hearing is required to set

the amount of the bond, if sufficient cause for

a bond is shown.

The court has jurisdiction to consider the

matter before it pursuant to 28 U.S.C. § 1334

and the Standing Order of Reference issued by

the United States District Court for the District

of New Jersey on July 23, 1984. The matter is

a core proceeding under to 28 U.S.C. §

157(b)(2)(A).

Statement of Facts

The involuntary Chapter 7 petition was

filed against Apollo, Inc. on April 26, 2011 by

Bloomfield Center Alliance, Inc., Michael C.

Nudo, Ariel J. Morales, William J. Colgan,

Med-Link Computer Science, LLC, 2 Broad

Street Assocs., 71 Washington Street Assoc.,

LLC, Senorita's Mexican Restaurant, LLC,

Merrel Mount, Prominent Ticket Service and

Goldkhin Wholesale Enterprises, Inc.

("Petitioning Creditors"). One week later, on

May 2, 2011 Apollo, Inc. filed its motion to (i)

dismiss the petition, (ii) impose sanctions and

(iii) direct petitioning creditors to post a bond.

The motion to dismiss was accompanied by an

application to shorten

Page 3

time for hearing, and on May 2, 2011 the court

entered an order which shortened the hearing

date to May 10, 2011.

Counsel for Apollo, Inc. and the

Petitioning Creditors agreed to proceed first

with the testimony and documentary evidence

on the issue of whether Apollo, Inc. was

generally paying its debts as they came due. At

the conclusion of testimony, counsel for



Apollo, Inc. moved pursuant to Fed. R. Civ. P.

52(c) for judgment. On May 16, 2011, the Court

delivered its oral opinion dismissing the

involuntary petition and concluding that

Apollo, Inc. was generally paying its

obligations as they came due.1 On the same

date, the court heard argument on whether to

direct the Petitioning Creditors to post a bond

pursuant to § 303(e) to secure a possible

recovery of fees, costs, and other damages

from the Petitioning Creditors under § 303(i).

An hour and a half before the hearing, the

Petitioning Creditors filed a brief and then

argued in court that Apollo, Inc.'s request to

post a bond should be denied as a matter of law

because, according to the Petitioning

Creditors, no reported cases that in any way

mention or address § 303(e) hold that a bond

should be posted in a dismissed case. The

court reserved ruling on the Petitioning

Creditors' oral motion to allow the parties an

opportunity to file supplemental briefs on

whether a request for bond should be denied

as a matter of law under § 303(e) once an

involuntary petition has been dismissed.

Page 4

Discussion

"Section 303(e) permits the court in its

discretion, after notice and a hearing, to order

the posting of a bond where cause has been

shown." In re Contemporary Mission, Inc.,

1983 Bankr. LEXIS 6916, at *6 (Bankr. D.

Conn. Jan. 31, 1983). Specifically, the relevant

subsections in § 303 provide:

(e) After notice and a hearing,

and for cause, the court may

require the petitioners under

this section to file a bond to

indemnify the debtor for such

amounts as the court may later

allow under subsection (i) of this

section.

(i) If the court dismisses a

petition under this section other

than on consent of all petitioners

and the debtor, and if the debtor

does not waive the right to

judgment under this subsection,

the court may grant judgment—

(1) against the petitioners and in

favor of the debtor for--

(A) costs; or

(B) a reasonable

attorney's fee; or

(2) against any petitioner that

filed the petition in bad faith,

for--

(A) any damages

proximately

caused by such

filing; or

(B) punitive

damages.

Section 303(e) was enacted to:

... discourage frivolous petitions

as well as the more dangerous

spiteful petitions, based on a

desire to embarrass the debtor

(who may be a competitor of a

petitioning creditor) or to put

the debtor out of business

without good cause (an

involuntary petition may put a

debtor out of business even if it

is without foundation and is later

dismissed).

H.Rep. No. 95-595, 95th Cong., 1st Sess. at 323

(1977); see U.S. Code Cong. & Admin.News

1978, p. 6279; see also In re Ransome Grp.

Investors I., LP, 423 B.R. 556, 558 (Bankr.

M.D. Fla. 2009). "A bond can have a sobering

effect in a case that is off to a shaky start and

that is fraught with controversy about the bona

fides of the petitioners." In re Kidwell, 158

B.R. 203, 218 (Bankr. E.D. Cal. 1993).

Page 5



However, the courts have recognized that

"[p]etitioning creditors in involuntary cases

should not be routinely required to post a bond

upon the alleged debtor's request. because the

Bankruptcy Code does not impose a

mandatory bond requirement." In re Ransome

Grp. Investors I, LP, 423 B.R. at 558 (citing In

re Reed, 11 B.R. 755, 757 (Bankr. S.D. W. Va.

1981)). Instead, "the Court 'may' require the

petitioning creditors to post a bond, and that

such a requirement should only be imposed

upon the Court's finding of 'cause.'" Id.

The statute does not specify or require a

particular time frame for posting a bond.

Rather, it imposes three prerequisites for the

court's exercise of its discretion: (a) notice, (b)

a hearing and (c) cause. Significantly, § 303(e)

also plainly states that the purpose of a bond is

to indemnify the debtor from an allowance of

fees, costs and damages that the court may

award under § 303(i). While the Petitioning

Creditors recite a lengthy list of cases that they

claim support their contention that a bond

cannot be imposed after dismissal of an

involuntary petition and prior to consideration

of an award under § 303(i), the cases in fact

simply establish that on the facts and posture

of the case, the courts did not impose a bond.

See In re Mod-U-Lanes, Inc., 51 B.R. 660, 663

(Bankr. M.D. Fla. 1985) (dismissing

involuntary petition without addressing

whether the petitioning creditors should post

a bond because the debtor asked to either (i)

dismiss the case or (ii) post a bond under §

303(e)); see also In re Green Hills Dev. Co.,

LLC, 445 B.R. 647, 666-67 (Bankr. S.D. Miss.

2011) (dismissing involuntary petition without

addressing the debtor's request for a bond).

The Petitioning Creditors point to no case

standing for the proposition that posting of a

bond under § 303(e) cannot be required after

dismissal of an involuntary petition.

What constitutes "[t]he showing [of

cause] which the debtor must make [for

posting a

Page 6

bond under § 303(e)] is not clear from the

statute." In re Contemporary Mission, Inc.,

1983 Bankr. LEXIS 6916, at *6. The legislative

history recited above suggests a congressional

intent that courts require a bond to insure that

petitioning creditors do not employ an

involuntary petition for an improper purpose.

But, this cannot be the sole purpose of § 303(e)

because the statutory language provides that

the bond is to indemnify the debtor if the court

makes an award under § 303(i). Plainly then, a

fundamental purpose of § 303(e) is to insure

that if an award is made under § 303(i) the

debtor had a ready means of recovery for its

losses.

Some courts have held that because there

is presumption of good faith in favor of the

petitioning creditors, "the putative debtor

must establish a prima facie case of bad faith

before petitioning creditors may be required to

post a bond." In re Secured Equip. Trust of E.

Air Lines, 1992 WL 295943, at *6 (S.D.N.Y.

Oct. 08, 1992); see also In re Hutter Assocs.,

Inc., 138 B.R. 512, 516 (W.D. Va. 1992). Other

courts have imposed a bond even without an

indication of bad faith when additional

evidentiary hearings were required prior to a

determination of whether or not the

involuntary petition should be dismissed. See

In re Cinnamon Lake Corp., 48 B.R. 70, 74

(Bankr. M.D. Fla. 1985). Significantly, in

either case a hearing has been held to

determine whether cause for a bond exists.

This court does not find any support in the

legislative history, statutory language or case

authority for the Petitioning Creditors'

contention that the court is precluded, as a

matter of law, from imposing a bond under §

303(e) once the involuntary petition has been

dismissed. As Apollo, Inc. points out, the

literal language of the statute provides that the

court can require a bond, after notice, a

hearing and upon showing of cause to

indemnify the debtor for amounts that may

later be allowed under § 303(i). Granted, none

of the reported cases under § 303(e)



Page 7

addressed the issuance of a bond post-

dismissal. However, this only indicates that

such cases came before the courts under

different facts and procedural posture.

In the matter at hand Apollo, Inc. moved

not only to dismiss the involuntary case but

also to require the Petitioning Creditors to post

a bond. The parties mutually agreed to proceed

first with evidence on the issue of whether

Apollo, Inc. was generally not paying its debts

as they came due. Given that Apollo, Inc. is an

operating company with many customers,

employees and trade vendors, the courts

believes that it was wise to determine whether

the criteria for an involuntary petition were

met. This approach had the benefit of limiting

any injury to Apollo, Inc. occasioned by the

involuntary petition and thereby limiting

damages which can be claimed. Further, it may

be a reason to limit the size of a bond, but it

cannot be a basis to dispense with a hearing to

establish whether a bond should be imposed.

Apollo, Inc. has not yet had an

opportunity to demonstrate that cause exists

to post a bond. While significant evidence has

been provided on the issue of whether Apollo,

Inc. was paying its obligations as they came

due, there has been no evidentiary hearing

regarding the basis for a bond. During the May

16, 2011 hearing Apollo, Inc. was ready to go

forward to establish cause for purposes of

posting a bond. Only the Petitioning Creditors'

contention that this matter should be decided

as a matter of law prevented the hearing.

Page 8

Conclusion

A hearing is needed pursuant to 11 U.S.C.

§303(e) in order to determine whether cause

exists to require the Petitioning Creditors to

post a bond to secure a possible recovery of

fees, costs, and other damages under 11 U.S.C.

§303(i).

NOVALYN L. WINFIELD

United States Bankruptcy Judge

--------

Notes:

1. Following its oral opinion, this court

issued a written opinion on May 18, 2011.

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