In re: Qdos, Inc., 607 B.R. 338

Background

In May 2018 three creditors (Hayden, Terrigno, and the Wiese Family Trust) filed an involuntary Chapter 11 petition against QDOS, claiming loans. Maddox later sought to join.
QDOS moved to dismiss under Civil Rule 12(b)(6), arguing Terrigno was an investor (not a creditor) and asserting it had 12+ creditors so three petitioning creditors were required. QDOS did not file a Rule 1003(b) creditor list.
The bankruptcy court found triable issues, set a trial, but declined to require QDOS to answer or to produce the Rule 1003(b) creditor list; it also limited discovery and the time for joinder.
At trial Terrigno was deemed an equity holder (not a qualifying petitioner); Maddox did not appear and the court concluded Maddox failed to prove he was a qualifying petitioning creditor. The court found QDOS had >12 creditors and dismissed the petition.
The petitioning creditors appealed. The BAP reversed and remanded, holding the bankruptcy court erred by proceeding to trial and dismissing without requiring QDOS to answer, provide the Rule 1003(b) creditor list or allow adequate discovery/notice so other creditors could meaningfully join. The BAP affirmed the nonappearance-based exclusion of Maddox.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether dismissal for insufficient qualifying petitioners was proper without requiring debtor to answer and file Rule 1003(b) creditor list	Petitioners: Court must require QDOS to answer, produce creditor list, and allow joinder/discovery before dismissing for numerosity	QDOS: Its 12+-creditor assertion could be resolved on its motion to dismiss; Rule 1003(b) applies to answers not motions	Reversed: Once trial was required, debtor had to answer within Rule 12 timelines and, if asserting 12+ creditors, file Rule 1003(b) list; dismissal without that and without reasonable joinder opportunity was error
Whether the bankruptcy court denied due process by restricting discovery and not facilitating joinder	Petitioners: They were entitled to Rule 26/1018 disclosures and reasonable opportunity to solicit joinders; court’s limits prevented that	QDOS: Prompt resolution favored limited discovery; petition was publicly docketed	Reversed: Court must balance expedition with Rule 1018/26 discovery; here creditors lacked reasonable opportunity to join, so dismissal was premature
Whether Maddox qualified as a petitioning creditor despite failing to appear at trial	Petitioners: Maddox’s proof of claim showed a qualifying loan claim (any disputed interest could be waived)	QDOS: Maddox’s claim was subject to bona fide dispute (usury) and he failed to appear for cross-examination	Affirmed as to nonappearance: Court did not err excluding Maddox for failing to appear and thus failing to carry burden to prove an undisputed claim
Whether Terrigno was a qualifying creditor	Petitioners: (not disputed on appeal) claimed loan	QDOS: Terrigno was an investor/equity holder, not a creditor	Affirmed below (petitioners did not contest on appeal): Terrigno is not a qualifying petitioning creditor

Key Cases Cited

Owens-Corning Fiberglass Corp. v. Ctr. Wholesale, 759 F.2d 1440 (9th Cir. 1985) (due process review of involuntary-petition procedures)
Liberty Tool & Mfg. v. Vortex Fishing Sys., Inc., 277 F.3d 1057 (9th Cir.) (creditor-list notice/joinder requirement; reasonable opportunity to join)
In re Kidwell, 158 B.R. 203 (Bankr. E.D. Cal. 1993) (joinder is a statutory right; debtor must not deprive eligible creditors of ability to join)
Cunningham v. Rothery (In re Rothery), 143 F.3d 546 (9th Cir. 1998) (petitioning creditors bear burden to prove requirements under §303)
Johnson v. Riverside Healthcare Sys., 534 F.3d 1116 (9th Cir. 2008) (12(b)(6) standard for pleading plausibility)
Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standards; disregard legal conclusions)
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)