922 F.3d 13
1st Cir.2019Background
- Edgar Reyes-Colon, a plastic surgeon, faced an involuntary bankruptcy petition filed by Banco Popular and joined by Popular Auto in November 2006 for unpaid debts.
- Under 11 U.S.C. § 303(b), fewer than three petitioning creditors cannot force an involuntary bankruptcy if the debtor had 12 or more eligible creditors when the petition was filed.
- The bankruptcy court initially found Reyes-Colon had 15 eligible creditors and dismissed the petition for failure to secure a third petitioner; the BAP remanded for failure to give all creditors notice; later proceedings revisited the creditor count and other issues.
- After evidentiary hearings, the bankruptcy court again dismissed the petition, concluding it lacked equitable power to override § 303(b) despite finding fraudulent conduct by Reyes-Colon; the district court reversed, finding fewer than 12 eligible creditors and ordering relief.
- The First Circuit reviewed whether Reyes-Colon waived arguments on creditor numerosity, whether the petitioners bore the burden of proof, whether the petitioners met that burden, and whether equitable/special-circumstances relief could override the statutory numerosity requirement.
Issues
| Issue | Plaintiff's Argument (Reyes-Colon) | Defendant's Argument (Banks) | Held |
|---|---|---|---|
| Whether Reyes-Colon had 12 or more eligible creditors at filing | He had 12+ creditors; bankruptcy court correctly counted 15 | Petitioners argued debtor had fewer than 12 so only two petitioners suffice | Court affirmed reliance on bankruptcy court finding that record supported at least 12 eligible creditors; case resolved on bankruptcy-court reasoning |
| Which party bears burden to prove creditor numerosity | Burden on petitioning creditors once debtor files Rule 1003(b) list | Banks claimed debtor assumed burden by moving for summary judgment or amending list | Held burden rested on petitioning creditors after debtor filed compliant (and amended) Rule 1003(b) list; Rule 56 does not shift substantive burden of proof |
| Whether petitioners introduced sufficient evidence to disqualify listed creditors | Reyes-Colon: petitioners failed to dispute several listed creditors | Banks: they offered evidence as to some creditors (e.g., Miami-Dade, Westernbank, Bank of America, Citibank) | Court held petitioners failed to adequately challenge multiple creditors; even if some were ineligible, enough remained to meet the debtor-claimed 12+ threshold |
| Whether equitable or "special circumstances" allow bypassing §303(b) numerosity | Debtor: statutory requirement cannot be overridden by equity; Siegel bars contravening explicit Code provisions | Banks: special circumstances (debtor fraud) warrant equitable relief to allow petition to proceed with two petitioners | Held Siegel precludes using equity to override §303(b); bankruptcy court correctly refused to waive the three-petitioner rule despite debtor misconduct |
Key Cases Cited
- Law v. Siegel, 571 U.S. 415 (2014) (bankruptcy courts may not contravene explicit statutory provisions when exercising equitable powers)
- In re DeMore, 844 F.3d 292 (1st Cir. 2016) (appellate review in First Circuit assesses bankruptcy-court decision directly)
- In re Old Cold LLC, 879 F.3d 376 (1st Cir. 2018) (intermediate appellate rulings serve as helpful but nonbinding guidance on direct review)
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) (bankruptcy courts have inherent powers to sanction abusive litigation practices)
- Celotex Corp. v. Catrett, 477 U.S. 317 (1986) (summary judgment procedures and burdens of production)
- In re Oak Knoll Assocs., L.P., 835 F.3d 24 (1st Cir. 2016) (limits on using §105(a) or equitable powers as a roving writ to override Code provisions)