A Creditor with a Partially Disputed Claim Risks Disqualification from an Involuntary Petition

Trade and other unsecured creditors may consider joining an involuntary bankruptcy petition as a means to obtain payment of their claims. However, they should carefully weigh their decision and consider section 303(b)(1) of the Bankruptcy Code, which conditions a creditor’s eligibility to join an involuntary petition on its claim not being subject to a bona fide dispute as to liability or amount. 

A recent decision by the United States District Court for the District of Nevada, in State of Montana Department of Revenue v. Blixseth (the “Blixseth Court”), has fleshed out the meaning of a bona fide dispute as to the amount of a petitioning creditor’s claim and serves as a stark warning to creditors contemplating joining an involuntary bankruptcy petition. The Blixseth Court upheld the dismissal of an involuntary petition based on the disqualification of two petitioning creditors whose claims were found to be subject to a bona fide dispute as to amount because they were partially disputed. Bottom line, this decision raises the bar for creditors filing an involuntary bankruptcy petition. Creditors should make sure their claims are wholly undisputed or risk dismissal of the petition that can expose them to sanctions.