581 B.R. 882
D. Nev.2017Background
- Montana, California, and Idaho filed an involuntary bankruptcy petition against Timothy Blixseth on April 5, 2011; California and Idaho withdrew support nunc pro tunc after settling with Blixseth and ceased participation.
- The Yellowstone Club Liquidating Trust (Yellowstone) later joined the petition; Blixseth moved to dismiss arguing the petition lacked the required number of "qualified" creditors under 11 U.S.C. § 303(b).
- The bankruptcy court allowed expedited discovery, held a two‑day evidentiary hearing, converted the dismissal motion to partial summary judgment, and dismissed the involuntary case.
- The bankruptcy court found Blixseth had produced evidence of at least 12 creditors as of the petition date, but the petitioning creditors failed to show those creditors were disqualified; it held petitioning creditors whose claims are subject to any bona fide dispute as to amount are disqualified under § 303(b).
- The district court reviewed the record, affirmed that three qualified creditors were required (because Blixseth had 12+ creditors), held Montana’s and California’s claims were subject to bona fide disputes as to amount (disqualifying them), and affirmed the dismissal.
Issues
| Issue | Plaintiff's Argument (Montana) | Defendant's Argument (Blixseth) | Held |
|---|---|---|---|
| Number of qualified creditors required under § 303(b) | Burden shifts: debtor must first allege 12+ creditors, then petitioning creditors must show fewer than 12 qualified creditors | Blixseth argued petition required three qualified creditors only if debtor had 12+ qualified creditors; he produced evidence of 12+ creditors so three were required | Court: shifting burden is proper; Blixseth met initial burden to show 12+ creditors; three qualified creditors were therefore required |
| Proper allocation/application of burden of proof on creditor qualification | Bankruptcy court mistakenly placed burden entirely on petitioning creditors | Blixseth produced documentary and testimonial evidence of 12+ creditors; petitioning creditors had burden to prove disqualification (e.g., avoidable transfers) | Court: bankruptcy court correctly applied shifting burden and did not clearly err in finding Blixseth met his initial burden |
| Meaning of § 303(b)’s phrase "bona fide dispute as to liability or amount" after BAPCPA (2005) | The 2005 amendment should be read as clarification; a dispute as to a portion of amount should not disqualify a creditor if an undisputed portion meets threshold | Any bona fide dispute as to amount disqualifies the creditor; plain statutory text contains no materiality qualifier | Court: § 303(b) unambiguously disqualifies creditors whose claims are the subject of any bona fide dispute as to amount; declined to read in a materiality requirement |
| Qualification of Montana’s and California’s claims | Their assessments were valid and not disqualifying | Blixseth raised objective legal and factual disputes about Montana’s ability to create a separate liability (Audit Issue 4) and factual disputes about California’s amount (refund/loss carryback) | Court: Montana’s and California’s claims were subject to bona fide disputes as to validity/amount and thus disqualified; dismissal affirmed |
Key Cases Cited
- In re Rothery, 143 F.3d 546 (9th Cir. 1998) (party opposing summary judgment may not rest on bare allegations; burden on petitioning creditor to meet § 303 elements)
- In re Vortex Fishing Sys., 277 F.3d 1057 (9th Cir. 2002) (objective test for bona fide dispute regarding liability or amount)
- In re Focus Media, 378 F.3d 916 (9th Cir. 2004) (pre‑BAPCPA guidance that undisputed portion of a claim can suffice under § 303(b))
- In the Matter of Green Hills Dev. Co., LLC, 741 F.3d 651 (5th Cir. 2014) (interpreting BAPCPA to disqualify a creditor if there is a bona fide dispute as to amount)
- Fustolo v. 50 Thomas Patton Drive, LLC, 816 F.3d 1 (1st Cir. 2016) (declining to read a materiality requirement into § 303(b); any bona fide dispute as to amount disqualifies)
- Lamie v. United States Trustee, 540 U.S. 526 (2004) (statutory interpretation: courts should begin with the statute’s plain meaning and not resort to legislative history absent ambiguity)