First Application of New Involuntary Provision

A Maine bankruptcy court has become the first to issue a published decision applying the amended version of 11 U.S.C. 303 governing involuntary bankruptcies. In re Dilley, ___ B.R. ___, 2005 WL 2241975 (Bankr. D. Maine 2005). The pre-amendment version of the involuntary bankruptcy statute disqualified a creditor from filing if its claim was subject to a "bona fide dispute as to liability." BAPCPA amends this to provide that the creditor is disqualified if the claim is subject to a bona fide dispute as to liability "or amount." Unlike most provisions of BAPCPA, the amendments to 303 took effect immediately upon the Act's passage, and apply both to pending and newly filed cases.

It is hard to imagine a factual scenario more horrendous than that described in Dilley. The alleged debtor had been indicted for killing his estranged wife and his mother -- in front of their two minor children. The debtor admitted to the shooting at the scene, but later pled not guilty. The administrator for the late wife's estate, and the conservator for the two children, filed an involuntary petition against the debtor based on their claims for wrongful death, intentional infliction of emotional distress and support.

The Dilley court noted the absence of any useful legislative history on the amendment to 303, and determined that the "clarification" to include disputes as to amount "does not appear to be a departure from the broad scope attributed to 'bona fide dispute' before the amendment took effect." (In fact, several circuits have held that a dispute as to amount, but not liability, would not disqualify a creditor unless the dispute could bring the amount of the claim below the dollar threshold for filing an involuntary).

Applying the new language disjunctively, the court determined that a creditor is disqualified if its claim is subject to dispute as to either liability or amount. It found the wrongful death and emotional distress claims subject to dispute as to liability, notwithstanding the debtor's admission at the crime scene (which it concluded would be admissible as evidence), because the debtor's not guilty plea "establishes a contest to be resolved in the criminal court." (This conclusion seems to improperly equate a mere unsworn denial -- the not guilty plea -- with an evidentiary dispute, and also to improperly tie the debtor's criminal exposure -- which is subject to different legal standards -- with his liability on the civil claim).

Applying the amended language of 303, it also found the support claims to be subject to dispute not as to liability, but as to amount, because the support obligation was dependent on the debtor's current income and his present incarceration strongly suggested an inability to pay. As a result, the court dismissed the involuntary bankruptcy.