Involuntary Bankruptcy – Nice Summary of the Basics

This is a skit prepared by Peter Lively, Hale Antico and others for presentation to the Inn of the Court on November 18, 2014.  It was a rousing success.  It explains very nicely how this very scary area of bankruptcy law works.  Why is it scary?  Attorneys fees and sanctions are almost mandatory if the petitioning creditors are wrong and the case is dismissed.

There are also specialist in the area, with a bankruptcy lawyer you can be distressed, he will take care of the administrative issues, filling any paperwork and protect your property as much as possible. If you are looking for good rates, you definitely need to check as you already worried about the bankruptcy case you probably feel there is nothing t do, or that the lawyers fees are to much for you.

James T. King Bankruptcy Inn of Court

 November 18, 2014

Involuntary Bankruptcy Petition Trial

Presented by Teams 2 & 6


Moderator – the Honorable Judge Scott Clarkson

Trial Judge (the Honorable Evan Handid): Lou Esbin

Alleged Debtor’s Attorney (Ivan Ventura):

Alleged Debtor (Dan Debtor): Hale Antico

Petitioning Creditor’s Attorney (Chad Cowell): Cliff Bordeaux

Petitioning Creditor 1 (Charlie P. Lender):

Petitioning Creditor 2 (Tough Guy Collections, Inc.):

Petitioning Creditor 3 (Gary Pessimist):

Petitioning Creditor 4 (Veronica B. Injured):

Petitioning Creditor 5 (Francis Speculative):

Non-Petitioning Creditor 1 (Edgar Employee):

Non-Petitioning Creditor 2 (Imelda Insider):

Non-Petitioning Creditor 3 (Ava C. Recipient):


Act 1


 Provide overview of the historical and current procedure and the relevant Bankruptcy Code Sections & Bankruptcy Rules, using Lou Esbin’s introduction to the handout materials and the following outline:

I.       303(b)(1) – Three Petitioning Creditors 12 or more creditors:

– Not contingent as to liability

– Not subject to bona fide dispute as to liability or amount

– Totaling more than $12,300 above liens on property of the debtor

II.      303(b)(2) – One petitioning creditor necessary, provided that debtor has fewer than 12 such holders [referencing qualifications of 303(b)(1)], where each creditor holding a claim is:

– Not employee of debtor

– Not insider of debtor

– Not voidable under 544, 545, 547, 548, 549,724(a)

– Totaling (aggregate of three creditors) more than $12,300.

III.     303(h)(1) – Debtor not generally paying liquidated and noncontingent debts as they come due.

IV.     Rule 1003 – Petitioner creditor didn’t acquire the claim for the purpose of commencing the involuntary


Act 2

The first 2 scenes take place simultaneously but in different locations in the court building just prior to the trial.


Scene 1.

In the lobby of the court building waiting impatiently for the security guards to check in a long line of people.

Alleged Debtor’s counsel (Ivan Ventura) is trying to explain to his nervous client (Dan Debtor) how an insolvency petition trial works and what his strategy is for helping his client prevail

Ivan:   OK Dan, get your picture ID out and take off your jacket, belt and shoes so we can get through the metal detector faster when it is finally our turn.  It seems as if someone forgot their ID again…

Dan:  Wow, I thought the airport security was tough.  What if we miss the hearing?  I’m stressed out.

Ivan:   Dan, take a few deep breaths and try to relax, I think I have a handle on this matter.  I played golf with your judge Evan Handid recently at the cdcbaa golf tournament and I suspect he will be even handed in his ruling.  I don’t think he will rule on this matter without us just because  we are a few minutes late.

Dan:   I can’t believe that I’m being forced into bankruptcy, I don’t have that many creditors and I was only late on some of my payments to Charlie.  I’m so nervous lately I can’t seem to think straight.  What are my chances of prevailing today?

Ivan:  Well Dan, I think you have about a 50/50 chance but don’t hold me it, the judge needs to make several decisions before ruling.

Dan:  You said there are now 18 creditors, right?

Ivan:   Yes Dan, there are 5 “Petitioning Creditors” and 13 “non-Petitioning Creditors”.  I think three (3) of the non-Petitioning Creditors will also appear in court today; they didn’t join in the actual petition to force you into bankruptcy, but their existence does affect the test pursuant to which the judge must make his decisions today.

Dan:  You previously mentioned that one (1) petitioning creditor could be enough, but sometimes it takes three (3) Petitioning Creditors.   What happens when there are 5 Petitioning Creditors?  It seems like I’m doomed.

Ivan:   You are not necessarily doomed to be an involuntary Chapter 7 debtor Dan, fortunately not everyone who claims that you owe them money necessarily qualifies as a “creditor” generally and some Petitioning Creditors will not necessarily qualify as Petitioning Creditors under the language of the statute.

Dan:  OK, you lost me.  How can a creditor not be a creditor?

Ivan:  Well, when there are fewer than 12 entities claiming that you owe them money, the court doesn’t count them as “creditors” if they are your employees, or your insiders (relatives and general partners, for example) or transferees of avoidable claims (things that a Chapter 7 trustee could recover during the case, if it goes forward – such as fraudulent transfers).   Whenever there are so few “creditors” only one Petitioning Creditor with a claim of at least $12,300 is required to prevail against you.

Dan:  OK, I’m starting to get it.  But we have 5 Petitioning Creditors, so what can we do?

Ivan:  I’m going to ask the court to exclude some of the Petitioning Creditors because the Bankruptcy Code requires that when there are 12 or more entities claiming that you owe them money, each of the Petitioning Creditors must hold  claims that (1) are not contingent as to liability, (2) not the subject of a bona fide dispute as to liability or amount, and (3) also that the aggregate claims of the qualifying Petitioning Creditors must be more than $12,300 above the value of property that secures those claims.

Dan:    OK, I think I understand.  You are going to knock out some of the Petitioning Creditors because they hold contingent or secured claims and then there will not be enough Petitioning Creditors in relation to the total entities that claim I owe them money.  What happens to the Petitioning Creditors that are knocked out?  Do they count as claim holders in the total creditor pool?

Ivan:  No, Section 303(b)(2) states that if there are fewer than 12 such holders, excluding [additional categories of creditors], then you can have only one (1) Petitioning Creditor.  The “such holders” language seems to refer back to 303(b)(1).  I think the “such holders” language means that a creditor who counts toward the 303(b)(2) total creditor list must first be an allowed creditor under 303(b)(1).  So I think if you are counted out of 303(b)(1), then you are automatically excluded under 303(b)(2) too.

Dan:  OK, this seems complicated to me.  This is why I’m paying you to represent me.

Ivan:   You have the essence of how it works.  If there are more than 12 entities holding qualified claims against you and there are fewer than three (3) qualified Petitioning Creditors, then you probably win.  The Petitioning Creditors that are knocked out as contingent. Etc., are also knocked out from the total creditor pool, but I don’t have time to explain the rest right now.  Please empty your pockets into the gray plastic tray and step through the metal detector.  When you get through to the other side hurry up and get dressed again, we don’t want to upset the judge by being too late.


Scene 2.

In the elevator on the way up to the courtroom.

Petitioning creditor’s counsel (Chad Cowell) with his client (Charlie).  Charlie is concerned that some of the non-petitioning creditor claims may not be qualifying creditors and Chad is explaining how they might be able to prevail at trial even if several of the non-Petitioning Creditors are deemed unqualified.

Charlie:  Wow, this court building is nice!  It is certainly different than the probate court where we appeared last week.

Chad:  Charlie, I’m not very confident about the other Petitioning Creditors, so this could come down to only you.

Charlie:  Why, what is wrong with the other Petitioning Creditors?

Chad:  There is a chance the court could find some of the Petitioning Creditors’ claims don’t qualify them as Petitioning Creditors so we could end up with only one Petitioning Creditor (you) and 12 or more qualified holders of claims.  If that happens, there is a chance that Dan Debtor will slip through the net this time.

Charlie:  If the court finds that a Petitioning Creditor’s claim doesn’t qualify that entity as a Petitioning Creditor, does that entity’s claim still count in the total creditor pool?

Chad:  No, once a creditor is knocked out under the 303(b)(1) test, it is also excluded under the 303(b)(2) test.  There are additional tests under 303(b)(2) that don’t appear in 303(b)(1).

Charlie:  Isn’t there anything that we can do to reduce the total creditor pool for 303(b)(2), if I end up being the only qualified Petitioning Creditor?

Chad:  Yes, I’ve spoken to a few of the other holders of claims against Dan Debtor and I have a back-up plan in the event that Ivan Ventura disqualifies more than two (2) of the other Petitioning Creditors.

Charlie:  OK, I hope your plan is a quick one because this whole proceeding is costing me a lot of money.  What is the nutshell version of your plan?

Chad:  It shouldn’t take too long to persuade Judge Evan Handid that a few of the non-Petitioning Creditors are holding claims that don’t qualify under Bankruptcy Code Section 303(b)(2).  To be included in the total number of claim holders they can’t be employees, insiders or transferees of avoidable transfers.

Charlie:  OK, so we win if you can knock out a few creditors from counting in the total number of creditors under 303(b)(2), that’s great.

Chad:  That isn’t the end of the analysis for Judge Evan Handid.  Your claim does satisfy the 303(b)(2) test for being at least $12,300, so you can be the lone Petitioning Creditors as long as there are fewer than 12 qualifying holders of claims against Dan Debtor.   However, the court must also find that Dan Debtor was not paying his payments to you or his other obligation on time.  You and I know that he was late with some of his payments, so I’m reasonably confident that you may have a 50/50 chance at winning, but don’t hold me to that – we attorneys don’t like to give probabilities of winning to our clients.

Charlie:  OK, I think I get it.  Here we are, wow look at all the fancy marble!


Scene 3.   In the Courtroom

The trial begins.

Judge:  Next on the calendar is the case of alleged debtor, Dan Debtor.   Petitioning Creditors, please state your appearances.  Others that allegedly hold claims against this debtor please stay seated, we may call you eventually.

Ivan:  Good morning your honor Ivan Ventura, appearing for the debtor, Dan Debtor.  I mean the alleged debtor.

Chad:  Good morning your honor Chad Cowell, Petitioning Creditor Charlie’s counsel.

Tough Guy Collections, Inc:  I’m Mr. Tough Guy appearing for TGCI (Petitioning Creditor 2), judge.  I didn’t know I needed an attorney.

Gary Pessimist: Good morning I’m Gary Pessimist (Petitioning Creditor 3) your honor, I couldn’t afford counsel.

Veronica B. Injured:  Good morning, I’m Veronica Injured (Petitioning Creditor 4) I didn’t want to hire counsel because my PI attorney told me what to do.

Francis Speculative:  I’m Francis, (Petitioning Creditor 5), good morning your honor, I took some law school classes online once so I know how all this legal stuff works.

Court:  Thank you all for being here today.         Mr Ventura, your client has five (5) Petitioning Creditors.  How many other entities claim that he owes them money?

Ivan:   To the best of my knowledge there are 18 total alleged holders of claims your honor, including the five (5) Petitioning Creditors.

Court:  Mr. Cowell, do you agree that 18 total alleged claim holders is the accurate number?

Chad:  Yes, your honor that sounds about right.  However, I respectfully do not agree that they are all necessarily qualified holders of claims under the applicable section of the Bankruptcy Code.

Court:  Well, that’s essentially what this trial is about.  …  Mr. Ventura, do you dispute the eligibility of any of the Petitioning Creditors?

Ivan:  Yes, your honor.  I am prepared to show that the majority of the Petitioning Creditors are not qualified under the Code and that this court should not issue an order for relief for that reason alone.

Court:   Very well, I’ve reviewed the Petition filed by Mr. Cowell for Charlie and I don’t have any questions regarding Charlie’s claim.  Thank you Mr. Cowell for preparing thorough pleadings.  I’d like to hear first from Mr. Tough Guy (Petitioning Creditor 2), first.  Please come to the podium and explain the nature of your claim against the alleged debtor.

Tough Guy:  Yes, your honor.  Dan Debtor ran up a $4,000 hospital bill with Mercy Hospital, and failed to pay.  TGCI purchased the claim form Mercy Hospital because TGCI is in the business of collecting bad debt.

Court:   I’ve reviewed your petition and I don’t see a copy of an assignment attached to your petition Mr. Tough Guy.  You only filed a coversheet indicating that TGCI collects bad debt.

Tough Guy:   TGIC purchased a bunch of accounts from Mercy Hospital only a few weeks after the petition was filed in this case.  I thought this was a good investment because there was already one Petitioning Creditor in this case and when I called his attorney, Mr. Cowell, he told me that a potentially valuable parcel of real property was likely to be recovered by the bankruptcy estate.

Court:  Mr. Ventura, have you seen the TGCI petition?

Ivan:  Yes, your honor.  It is deficient in many ways most importantly Bankruptcy Rule 1003 requires that a Petitioning Creditor annex to the petition a statement that the claim was not acquired for the purpose of commencing the case.  I move that this Petitioning Creditor be disqualified.

Court:  Mr. Tough Guy, Mr. Ventura is absolutely correct.  I’m sorry but you didn’t follow the rules and your petition can’t be amended to correct all of the deficiencies.   You are not eligible to be a Petitioning Creditor because it is clear to me from your statements here today that you purchased the claim for the improper purpose of commencing this case against Dan Debtor which violates Bankruptcy Rule 1003.

Ivan:  Thank you your honor, I’ll make sure to follow the rules next time I try to collect bad debt in a bankruptcy case.

Court:  Next I’d like to hear from Mr. Pessimist.  Mr. Pessimist, please come forward and explain the nature of your claim.

Gary Pessimist:  Hi again your honor.  Last year, Dan took out a line of credit from Chase Bank and I agreed to guaranteed it because he had marginal credit but he is a friend of a friend.  He recently told me that one of his other creditors had filed an involuntary petition.  I felt like the future wasn’t looking good, so I decided to file a petition as well.

Court:  Finally. Something that appears straightforward!

Gary:  I’m glad you feel that way, your honor.  I wanted to act prudently because you never know what bad things might happen.

Court: And when did you receive a notice from Chase Bank that the alleged debtor had default in his payments?

Gary Pessimist:  Well, Dan hasn’t defaulted on his payments to Chase Bank yet, but you know how these things go… he will probably do so soon.   I know Dan already has a spotty payment history, that’s why he needed my guarantee in the first place.  ‘Better safe than sorry, as my mom always said.’

Court: (deep sigh) Mr. Pessimist, your claim is contingent as to liability, you don’t owe Chase Bank unless and until the alleged debtor defaults on payments to Chase Bank.  Therefore, you are not a qualified Petitioning Creditor.  Please sit down so that Mrs. Speculative can address the court next.

Ivan:   Thank you again your honor.

Court:  Mrs. Speculative, please state for the record the nature of your claim against the alleged debtor.

Francis Speculative:   Thank you your honor.  Dan Debtor defrauded me out of my inheritance when he acted as Trustee for my mother’s trust.  I have damages of exactly $1,209,059.23.  You see, my mother had extensive patents, intellectual property, royalties, and some real estate in very run-down areas.  Dan sold them in probate for far less than could have been obtained.

Court:  OK slow down a minute.  You’ve stated a very precise dollar amount, does that figure come from a final judgment entered against the alleged debtor?

Francis:  No your honor, we agree that the amount is certain however, my attorney just filed the complaint last month and the trail is next year, I’m sure you are well aware of how long complex probate litigation takes in state court these day with all the cut backs.  By the way, I heard in the news that the Ana Nicole Smith case was in and out of bankruptcy a few times.  That is such an interesting….

Ivan:  (interrupting Francis)  Excuse me your honor, my client asserts that he did nothing wrong and, when he has his other day in court for the state court trial next year, he will be fully vindicated!

Court:  Mrs. Speculative, I’m sorry for your loss, but you haven’t proven your case against the alleged debtor so your claim is still uncertain as to liability.  Therefore, you are not a qualified Petitioning Creditor under Bankruptcy Code Section 303(b)(1) and you don’t count in the total subject creditor pool under 303(b)(2) either.

Ivan:  Thank you once again your honor!

Court:  Next I’d like to hear from Ms. Injured.

Veronica B. Injured:  Me, your honor?

Court:   Yes, please maneuver your wheelchair forward to the side of the podium and state the nature of your claim for the record.

Veronica B. Injured:  Shortly before the petition date, Dan Debtor crashed his truck into my parked vehicle.  I was sitting in my vehicle at the time of the accident and I suffered severe injuries, I had to consult with a truck accident injury lawyer to see if I was eligible for a compensation.

Court:  I can see that from your multiple casts and your rigid neck brace, I hope you feel better soon.   Mr. Ventura, does your client dispute liability in this matter?

Ivan:  No your honor, he acknowledges he is at fault.  However, he certainly regrets that he was texting and driving and especially that he didn’t realize the road unexpectedly terminated in a parking lot.

Court:  Ms. Injured, have you settled with Dan Debtor’s insurance company and with Dan Debtor yet?

Veronica B. Injured:  No your honor, I have ongoing medical expenses.  I have been demanding payment from Dan Debtor but I haven’t received anything from him or his insurance company yet.  Clearly I’m a qualified petitioning creditor, right?

Court:  I’m afraid not Ms. Injured.  Despite that liability is not in dispute for your claim, the amount of your claim remains uncertain.  Therefore, you are not eligible to be a Petitioning Creditor under 303(b)(1).   Please take a seat, I mean please maneuver your wheelchair away from the podium carefully.

Ivan:  Thank you very much again your honor.  Your honor, given that there are now fewer than three Petitioning Creditors and there are a total of 14 claim holders, so I move that the court immediately rule in favor of the allege debtor and dismiss the petition.

Court:  You are correct Mr. Ventura that without three (3) or more qualified Petitioning Creditors and there are 12 or more holders of qualified claims against the alleged debtor Bankruptcy Code Section 303(b)(1) does not authorize me to issue and order for relief.

Chad:  Excuse me your honor!

Court: Yes, Mr. Cowell?  Do you have something to add before I dismiss your client’s petition?  Your client is now the only remaining Petitioning Creditor.

Chad:  If the court will allow me a few minutes, I would like the court to call the three non-Petitioning Creditors to the stand so that they may state the nature of their claims because I believe that they may not be qualified holders of claims pursuant to Bankruptcy Code Section 303(b)(2).  As your honor is well aware, should the court determine that there are fewer than 12 holders of qualified claims against the alleged debtor, the court is authorized to issue an order for relief today, despite that my client is the only Petitioner Creditor.

Court: Ok, now this trial is getting very interesting.  We will now hear from the non-Petitioning Creditors who are in the courtroom today.  For the sake of efficiency, all three please come to the podium together and explain the nature of your claims against the debtor.

Edgar Employee:  Hello again your honor.  I’m Edgar Employee, I work for Dan Debtor and he owes me $3000 in back wages.  I have copies of signed time slips and IOUs.

Imelda Insider:  Hi your honor, I’m Dan’s sister and I loaned Dan $2000.  He has been borrowing money from me since we were little kids.

Ava C. Recipient:  Howdy Judge.  I am the assignee of Andy Preference’s claim.  About 30 days before the petition date, Dan Debtor paid Andy Preference $25,000 toward the $100,000 balance that Dan has owed him for years.

Court:  Thank you all for coming today, please take your seats now.  Mr. Cowell, please proceed with your argument.

Chad:  Your honor, two (2) of the three (3) claim holders must be excluded form the total number of creditors under 303(b)(2) because Edgar is an employee and Imelda is an insider of the alleged debtor.  The third (3rd) must be excluded because she is a transferee of an avoidable transfer; Ava C. Recipient is holding a claim that will be an avoidable preference under Section 547.

Court:  Well, Mr. Ventura.  It now appears that there are only 11 qualified holders of claims.  Is there anything else that you would like to add before I issue an order for relief today?

Ivan: Yes, your honor.  Bankruptcy Code Section 303(h)(1) provides that the court should only issue the order for relief after trial if the alleged debtor is not generally paying his debtor as they come due.  Despite that my client doesn’t have a valid challenge as to Charlie being a qualified Petitioning Creditors regarding any of the 303(b) factors, my client has been paying his obligations to other substantially creditors on time and he has been paying Charlie pretty much on time, so the court shouldn’t issue an order for relief.

Court: Mr. Cowell, has your client received all of the alleged Debtor’s payments?

Chad:  No your honor, many payments have been late and the one due before the petition date didn’t arrive at all.  I requested copies of the payments from Mr. Ventura and he produced several cancelled checks with dates well past the due dates for those payments.

Court: How many of the payments were late?

Chad: More than 50% since the payments began your honor.

Court:  Mr. Ventura.  Do you agree that Mr. Cowell’s assertion regarding the timing of the payments are reasonably accurate or do we need to spend more time sifting through each and every cancelled check today?

Ivan:   Well your honor, I hate to admit that Mr. Cowell had stated correctly that more than 50% of the payments have been made past the due date.

Court:  I find that the facts show payments are not being generally as they come due pursuant to 303(h)(1).  Mr. Cowell has proven to me that Charlie’s claim of $20,000 is not contingent as to liability or amount and that he isn’t a transferee of an avoidable transfer.  Moreover, Charlie is not an employee or insider of Dan Debtor and didn’t acquire his claim for the purpose of commencing this case.  Therefore, Charlie is a qualified Petitioning Creditor.  There are fewer than 12 qualified holders of claims against the alleged debtor, so I’m going to issue the order for relief under 303(b)(2).  The court is in recess while I take a short break before the next matter.



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