594 B.R. 516
Bankr. D.P.R.2018Background
- Multiple petitioning creditors (including four syndicated lenders and several judgment creditors) filed involuntary Chapter 11 petitions against Betteroads Asphalt, LLC and Betterecycling Corporation on June 9, 2017, alleging debts totaling ~ $96–98 million and that the debtors were not generally paying their debts as they became due.
- Petitioners included judgment creditors (St. James, Sargeant Marine/Trading, Facsimil, Champion, Control Force) whose claims rested on final state-court or confirmed-arbitration judgments; lenders asserted large loan claims (many listed as secured or disputed above lien value).
- Debtors moved to dismiss under Rule 12(b)(6) arguing (a) many petitioners’ claims are subject to bona fide dispute; (b) petitions were filed in bad faith (carve-out/settlement deals and lender misconduct); (c) court should abstain under 11 U.S.C. § 305(a)(1); and (d) fees/damages under § 303(i).
- Petitioning creditors and lenders opposed dismissal, arguing § 303(b) and § 303(h) thresholds were met (≥3 qualified petitioners, noncontingent undisputed claims aggregating > statutory threshold, and debtors generally not paying debts) and that "bad faith" is not a statutory defense to a properly filed involuntary petition.
- The court (Bankr. D.P.R.) found the § 303(b) numerosity/standing requirements satisfied based on at least three judgment-based petitioners in each case and concluded debtors were generally not paying debts as of the petition date; it denied dismissal in part but held (contrary to some petitioners) that bad faith can be an independent ground to dismiss an involuntary petition and scheduled an evidentiary hearing on bad faith; it also rejected dismissal under § 305(a)(1).
Issues
| Issue | Plaintiff's Argument (Petitioners/Lenders) | Defendant's Argument (Debtors) | Held |
|---|---|---|---|
| 1) Do the petitions satisfy § 303(b) and § 303(h) (numerosity, noncontingent/undisputed claims, debtor generally not paying)? | §303 thresholds met: at least 3 petitioners hold final judgments or undisputed claims; many unpaid claims/aging reports/proofs of claim show debtors generally not paying. | Many lender claims are subject to bona fide dispute; some petitioners are coordinated with lenders and thus should be consolidated or disqualified. | Court: §303(b) and §303(h) satisfied—three petitioners with final judgments existed for each debtor and evidence (aging reports, proofs of claim, collection suits, tax claims) supports ‘‘generally not paying.’’ |
| 2) Is creditor "bad faith" an independent ground to dismiss an involuntary petition under §303 (or via §105 equity)? | Bad faith is not an independent statutory defense; §303 lacks a good-faith requirement and mentions "bad faith" only in §303(i) (damages) — courts should not create extra-textual defenses post Law v. Siegel. | Court should police abuse of bankruptcy (good-faith/clean-hands) — bad faith can defeat jurisdictional/equitable relief and is a basis to dismiss involuntary petitions (echoing Third Circuit). | Court: Bad faith is an independent cause for dismissal under §303; equitable/good-faith principles apply and an evidentiary hearing on bad faith was ordered. |
| 3) Should the court abstain under §305(a)(1) and dismiss or suspend these involuntary cases? | N/A (debtors seek abstention). | Dismissal under §305 is appropriate because state courts can adjudicate disputes and abstention better serves creditors and debtor. | Court: Debtors failed to show that dismissal/suspension would better serve both debtors and creditors; §305(a)(1) dismissal denied. |
| 4) Should petitioning creditors who executed carve-out/settlement agreements with lenders be treated as a single party or otherwise disqualified? | Petitioners/lenders: each judgment creditor holds independent claims; carve-outs do not negate separate-entity status or §303 standing. | Debtors: carve-out/settlement arrangements show petitioners were coordinated/paid, should be aggregated or deemed acting in bad faith. | Court: The agreements do not collapse petitioners into a single claimant for §303(b); numerosity stands. The carve-outs may be relevant to bad-faith analysis to be addressed at hearing. |
Key Cases Cited
- Law v. Siegel, 571 U.S. 415 (2014) (limits bankruptcy courts' equitable powers where they would contravene specific Bankruptcy Code provisions)
- In re Forever Green Athletic Fields, Inc., 804 F.3d 328 (3d Cir. 2015) (holds bad faith can be a basis to dismiss involuntary petitions and for damages)
- In re Edgar A. Reyes Colón, 558 B.R. 563 (Bankr. D.P.R. 2016) (refused to use equity to bypass explicit §303 statutory requirements; discussed Law v. Siegel limits)
- In re Little Creek Dev. Co., 779 F.2d 1068 (5th Cir. 1986) (good-faith requirement as equitable protection—courts deny equitable relief to those with unclean hands)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard for Rule 12(b)(6))
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (further clarifies the Twombly plausibility standard)