649 B.R. 365
Bankr. D. Mass.2023Background
- PCC Rokita filed an involuntary Chapter 7 petition against HH Technology Corp. (HHT) on Feb. 11, 2022; Shanghai Morimatsu joined May 23, 2022. The Assignee for the Benefit of Creditors (Assignee) and HHT moved to dismiss, arguing HHT had more than 11 eligible creditors so three petitioning creditors were required.
- HHT executed an Assignment for the Benefit of Creditors on Dec. 31, 2021 and transferred assets to the Assignee, who prepared and amended creditor lists as additional invoices were discovered.
- The Assignee and HHT produced evidence that HHT continued operations and obligations through December 2021; creditors were tracked manually and some invoices surfaced late in discovery.
- Petitioning creditors challenged the inclusion of several creditors, asserting (inter alia) bona fide disputes, preferential/voidable transfers, or that small/recurring claims should be excluded.
- After expedited discovery and a two‑day evidentiary hearing, the court found 15 eligible creditors under 11 U.S.C. § 303(b)(2), concluded three petitioning creditors were required, and granted the motion to dismiss the involuntary petition.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a single creditor could commence the involuntary petition when the alleged debtor had ≥12 eligible creditors | PCC Rokita: HHT had fewer than 12 eligible creditors so one creditor could file | Assignee/HHT: HHT had more than 11 eligible creditors, so three petitioners were required | Court: HHT had 15 eligible creditors; single‑creditor petition improper and petition dismissed |
| Whether creditors identified after HHT’s initial list may be counted | Petitioning creditors: late additions should be excluded | Assignee/HHT: amended lists reflect credible, post‑review discoveries and give notice | Court: Allowed subsequently identified creditors; late identification explained by testimony and records |
| Whether small or recurring claims (e.g., utilities, credit cards) are excluded from the eligible‑creditor count | Petitioning creditors: small/recurring debts should not be counted toward the 12‑creditor threshold | Assignee/HHT: Code excludes specific classes (insiders, employees, transferees), not creditors based on amount or frequency | Court: Small or recurring claims count; statute does not exclude them and policy disfavors narrowing creditor inclusion |
| Whether creditors who received postpetition transfers (or alleged avoidable preferences) are ineligible under § 303(b)(2) | Petitioning creditors: certain creditors (e.g., landlords, lessors, LSPs) received avoidable transfers and thus are ineligible | Assignee/HHT: many alleged transfers are either void as stay violations (not voidable) or subject to defenses (ordinary course, new value); HHT retained liability after the Assignment | Court: Transfers made in violation of automatic stay are void (not voidable under § 549); many challenged transfers would be defensible (ordinary course/new value); creditors remained eligible |
Key Cases Cited
- In re Reyes‑Colon, 922 F.3d 13 (1st Cir. 2019) (shifts burden to petitioning creditors once alleged debtor lists ≥12 creditors)
- O’Neill v. Nestle Libbys P.R., Inc., 729 F.2d 35 (1st Cir. 1984) (policy and scope of ordinary‑course defense)
- In re Soares, 107 F.3d 969 (1st Cir. 1997) (transfers in violation of the automatic stay are void ab initio)
- 40235 Washington St. Corp. v. Lusardi, 329 F.3d 1076 (9th Cir. 2003) (distinguishing void and voidable transfers under stay and § 549)
- Hinkle v. Midland Credit Mgmt., Inc., 827 F.3d 1295 (11th Cir. 2016) (account charge‑offs do not extinguish creditor’s legal right to collect)
- In re Rassi, 701 F.2d 627 (7th Cir. 1983) (creditors with small claims count toward involuntary petition eligibility)
- In re Okamoto, 491 F.2d 496 (9th Cir. 1974) (under predecessor law, small/recurring claims are included in creditor counts)