584 B.R. 115
Bankr. N.D. Tex.2018Background
- Petitioning creditor Joshua N. Terry obtained a JAMS arbitration award (confirmed by state court) against Acis Capital Management, L.P. (Acis LP) and Acis Capital Management GP, L.L.C. (Acis GP/LLC) for roughly $7.95 million and filed involuntary Chapter 7 petitions against both on January 30, 2018.
- Acis LP was the CLO portfolio manager that subcontracted virtually all operations and employees to Highland Capital Management under shared‑services and sub‑advisory agreements; Highland is the dominant counterparty/insider and primary creditor.
- After the arbitration award, multiple transactions occurred that shifted management rights, fee streams, and ALF (the risk‑retention vehicle) interests away from Acis LP to Cayman affiliates (including Highland CLO entities and Neutra, Ltd.), and Acis LP assigned a large receivable to a Cayman entity.
- The Alleged Debtors filed lists claiming 18–20 creditors; Terry contended (and the court found) that, after excluding insiders, vendors actually owed to Highland, and claims in bona fide dispute, Acis had at most 11 qualified creditors on the petition date.
- The court found (1) the petitioning‑creditor numerosity requirement under 11 U.S.C. § 303(b) was satisfied for a single creditor filing, (2) Acis was generally not paying its debts as they became due under § 303(h), (3) Terry did not file in bad faith, and (4) abstention under § 305 was not warranted; the court ordered relief and directed appointment of a chapter 7 trustee.
Issues
| Issue | Plaintiff's Argument (Terry) | Defendant's Argument (Acis/Highland) | Held |
|---|---|---|---|
| Whether a sole petitioning creditor could file under 11 U.S.C. § 303(b) (numerosity) | Fewer than 12 qualified creditors existed on petition date; many listed creditors were insiders, law‑firm vendors billed to Highland, or claims in bona fide dispute | There were 12+ creditors on the amended lists, so three petitioners required | Court: Found at most 11 qualified creditors after exclusions; single‑creditor filing permissible — § 303(b) satisfied |
| Whether alleged debtors were "generally not paying" debts as they became due (11 U.S.C. § 303(h)) | Majority of Acis's (few) creditors had unpaid invoices >90 days; large confirmed judgment unpaid; transactions were stripping value | Alleged Debtors argued normal payment practices and cash‑flow timing from quarterly CLO receipts; contested allocations | Court: Petitioning creditor proved by preponderance that debts generally were not being paid; § 303(h) satisfied |
| Whether the involuntary petitions must be dismissed for bad faith notwithstanding statutory compliance | Terry acted to preserve estate value and stop asset stripping; filings were appropriate | Alleged Debtors argued Terry filed as litigation tactic to gain advantage in state court; bad faith should defeat petitions | Court: No bad faith found; filings were justified to prevent dismantling and to protect creditors |
| Whether the court should abstain under 11 U.S.C. § 305(a) | Bankruptcy is necessary to preserve assets, pursue avoidance actions, and ensure equitable distribution; state forum inadequate to reach Cayman affiliates | Alleged Debtors urged dismissal/abstention because state court litigation exists and bankruptcy would be inefficient and harmful to equity | Court: Abstention denied — bankruptcy forum is more efficient, federal tools necessary, and dismissal would risk continued value transfers to Highland affiliates |
Key Cases Cited
- In re Forever Green Athletic Fields, Inc., 804 F.3d 328 (3d Cir. 2015) (discussing potential dismissal of involuntary petitions on bad‑faith grounds even when statutory requirements are met)
- In re Moss, 249 B.R. 411 (Bankr. N.D. Tex. 2000) (factors for determining when an alleged debtor is not generally paying debts and recognition that asset transfers to avoid creditors support involuntary relief)
- In re Smith, 415 B.R. 222 (Bankr. N.D. Tex. 2009) (analysis of § 303(h) factors and § 305 abstention considerations)
- In re Norriss Bros. Lumber Co., 133 B.R. 599 (Bankr. N.D. Tex. 1991) (authority on special circumstances and involuntary petition practice)
- In re Trans‑High Corp., 3 B.R. 1 (Bankr. S.D.N.Y. 1980) (examples of evaluating payment terms and whether debts are being paid as they become due)