Opinion ID: 510088
Heading Depth: 1
Heading Rank: 3

Heading: Status of American Express as a Petitioning Creditor

Text: 21 A. Potential Disqualification of American Express Because Its Debt was Subject to a Bona Fide Dispute under Sec. 303(b)(1) 22 For creditors to successfully petition for involuntary bankruptcy, the bankruptcy court must determine that the creditors have standing and that the debtor generally has not been paying his debts as they become due. In re Johnston Hawks, Ltd., 49 B.R. 823, 828 (Bankr.D.Hawaii 1985). Pursuant to 11 U.S.C. Sec. 303(b)(1) 3 , a petitioning creditor does not have standing when its debt is subject to a bona fide dispute. See In re Nordbrock, 772 F.2d 397, 399 (8th Cir.1985) (stating that the policy underlying the bona fide dispute exception is to prevent creditors from using the bankruptcy courts as means of collecting disputed claims). The term bona fide dispute is not defined in the Code and has been the subject of much debate. 4 We choose to adopt the standard propounded by the Seventh Circuit as to what constitutes a bona fide dispute: the bankruptcy court must determine whether there is an objective basis for either a factual or a legal dispute as to the validity of debt. In re Busick, 831 F.2d 745, 750 (7th Cir.1987). The court need not determine the probable outcome of the dispute, but merely whether one exists. Id. Once the petitioning creditor establishes a prima facie case that its claim is not subject to a bona fide dispute, the burden shifts to the debtor to present evidence of a bona fide dispute. In re Garland Coal & Mining Co., 67 B.R. 514, 521 (Bankr.W.D.Ark.1986); see In re Taylor, 75 B.R. 682, 684 (N.D.Ill.1987) (stating that to compel dismissal of an involuntary petition, the debtor must present proof of a bona fide dispute once the burden shifts because [o]therwise, any debtor could defeat an involuntary petition ... by merely asserting that a bona fide dispute exists). Under this objective approach, the debtor's subjective intent does not control whether a claim is considered to be subject to a bona fide dispute. In re Tikijian, 76 B.R. 304, 314 (Bankr.S.D.N.Y.1987). 23 Debtor maintains that both the bankruptcy court and the district court erred as a matter of law because payment of a debt after the petition is filed, but before the involuntary bankruptcy hearing, does not alter a creditor's status as a petitioning creditor. Post-petition payment of a debt does not affect whether the debt is subject to a bona fide dispute. Cf. E.L. Bunch Hullet, Inc. v. Universal C.I.T. Credit Corp., 259 F.2d 685, 688-89 (10th Cir.1958); In re Garland Coal & Mining Co., 67 B.R. at 519. A bankruptcy court determines the number of petitioning creditors filing an involuntary bankruptcy petition on the date that the petition is filed. In re Garland Coal & Mining Co., 67 B.R. at 519. Prior to the filing date, debtor had not paid his debt to American Express. Thus, the bankruptcy court erred as a matter of law in finding that the debt to American Express could not be subject to a bona fide dispute because the debtor had paid the debt after the petition was filed. We reverse on this issue. On remand, the court should determine whether the American Express claim was subject to a bona fide dispute. 24 B. The Statute of Limitations Defense as a Means of Disqualifying American Express as a Petitioning Creditor 25 Debtor also contends that American Express cannot be a petitioning creditor because collection of its debt is barred by the statute of limitations, citing In re Putman, 193 F. 464 (N.D.Cal.1911), and In re All Media Properties, Inc., 5 B.R. 126 (Bankr.S.D.Tex.1980), aff'd, 646 F.2d 193 (5th Cir.1981). Neither case supports debtor's proposition. First, in In re Putman, the court discussed the position that if the claims of any one of the three creditors are not provable, ... the petition is defective. In re Putman, 193 F. at 467. Debtor relies on the same position. It is well-established under the present Code, however, that although a claim might not be provable, it still may be sufficient to confer standing on a petitioning creditor. 2 L. King, Collier on Bankruptcy p 303.08 (15th ed. 1988); see also In re Johnston Hawks Ltd., 49 B.R. at 829; In re All Media Properties, Inc., 5 B.R. at 134. 26 Second, the court in In re All Media Properties, Inc. recognized that a petitioning creditor may, under certain circumstances, have standing even when the underlying debt is found to be unprovable because it is time-barred. In re All Media Properties, Inc., 5 B.R. at 140. The court stated that the existence of a colorable defense would not disqualify a petitioning creditor. 27 The Court has decided that where the issues concerning defenses to a claim of a petitioning creditor are not clear and require adjudication of either substantial factual or legal questions, the creditor should be recognized as qualified to join in the bringing of an involuntary bankruptcy petition. On the other hand, if it is clear that the claim is barred and the alleged debtor raises that defense, then that creditor should not be allowed to participate in the involuntary petition. 28 Id. at 134. Thus, for a statute of limitations defense to bar a creditor's participation in an involuntary petition, it must be clear that the creditor's claim would be barred, without the resolution of substantial factual or legal questions. Because the debtor simply did not make a clear showing that the debt was time-barred, 5 the limitations defense does not preclude American Express from being a petitioning creditor. 29