In re Alta Title Co.

Decision Date04 November 1985
Docket NumberBankruptcy No. 84C-01113.
Citation55 BR 133
PartiesIn re ALTA TITLE COMPANY, a Utah Corporation, Debtor.
CourtU.S. Bankruptcy Court — District of Utah

Duane H. Gillman, Boulden & Gillman, Salt Lake City, Utah, trustee.

David W. Overholt, Gustin, Adams, Kasting & Liapis, Salt Lake City, Utah, for Moore Financial of Utah.

Donald J. Winder, Winder & Haslam, Salt Lake City, Utah, for D. Frank Wilkins.


GLEN E. CLARK, Bankruptcy Judge.

This proceeding requires the Court to decide whether the commencement date of an involuntary petition occurs when the original petition is filed by an insufficient number of petitioning creditors, or when the petition is amended to include the requisite number of creditors. Resolution of this issue turns on two questions. First, is the requirement of three or more petitioning creditors a jurisdictional requirement? Second, do amendments to an involuntary petition relate back to the date of the original petition?


On April 23, 1984, Moore Financial of Utah ("Moore Financial"), a creditor of Alta Title Company ("Alta Title") with a claim in excess of $100,000.00, filed an involuntary Chapter 7 petition against Alta Title. The petition averred that "petitioner believes that Debtor has fewer than twelve holders of non-contingent claims." On May 14, Alta Title moved to dismiss the involuntary petition and quash the summons on the basis that it had more than twelve creditors. The motion was supported by the affidavit of James V. Crestani, president of Alta Title, which stated that Alta Title had approximately 150 creditors on the date the petition was filed.

Prior to the June 27, 1984 hearing on the involuntary petition and the motion to dismiss and quash, two additional creditors, Bench Mark Systems, Inc. and Gary Free & Associates, each filed an involuntary petition against Alta Title. At the hearing, the Court found that Moore Financial had not acted in bad faith when it filed the initial involuntary petition, and allowed the creditor 10 days within which to amend its petition and join at least two creditors.

On July 9, 1984, an amended involuntary petition was filed by Moore Financial, Capital Land Management Corporation dba Gary Free & Associates, Bench Mark Systems, Inc., and Rocky Mountain Petroleum Club. This petition was not controverted, and on July 18 the Court entered an order for relief. Duane H. Gillman was appointed trustee on July 19, 1984.

On August 23, 1984, D. Frank Wilkins, the superseded trustee for Alta Title under a nonjudicial "trust assignment" for the benefit of creditors, filed a motion to amend the order for relief, or, in the alternative, to determine the commencement date of this involuntary case. The Court allowed Wilkins to intervene and be heard as a respondent to the involuntary petition.1 Wilkins requested a determination by the Court that the involuntary case was commenced on July 9, 1984, the date of filing the amended petition, not April 23, 1984, the date Moore Financial filed its initial petition. On October 9, 1984, a hearing was held to consider the motion. Arguments were presented and the parties were directed to submit memoranda. The matter has been under advisement until now.

The Three Petitioning Creditor Requirement

A case under Title 11 is commenced by filing a petition under Section 301, 302, 303, or 304 of the Bankruptcy Code. Once commenced, the district court has original and exclusive jurisdiction over the bankruptcy case. 28 U.S.C. § 1334(a). Section 303(b)(1) of the Bankruptcy Code provides that an involuntary case may be commenced by three or more entities2 that hold claims3 against the debtor which are not contingent as to liability and aggregate at least $5,000.00 more than the value of any lien securing their claims. If the debtor has fewer than twelve such creditors, excluding any employee or insider4 of the debtor and any transferee of a voidable transfer, Section 303(b)(2) provides that the petition may be filed by a single creditor.

An involuntary petition must end either in the entry of an order for relief against the debtor or dismissal of the creditors' petition. 11 U.S.C. § 303(h), (i), and (j); Bankruptcy Rule 1013(a). See In re St. Lawrence Condensed Milk Corporation, 9 F.2d 896, 899 (2d Cir.1925). If the petition is not timely controverted, the debtor waives its defenses and the court must order relief against the debtor. 11 U.S.C. § 303(h); Bankruptcy Rule 1013(b). See In re Mason, 709 F.2d 1313, 1318, 11 B.C.D. 226 (9th Cir.1983); E.L. "Bunch" Hullet, Inc. v. Universal C.I.T. Credit Corp., 259 F.2d 685, 689 (10th Cir.1958). Cf. Sheehan & Egan v. North Eastern Shoe Co., 47 F.2d 487, 489 (1st Cir.1931). But if the debtor files an answer controverting the petition, certain factual and legal determinations must be made by the court in order for it to retain jurisdiction over the case. These determinations include whether the debtor is a farmer or charitable corporation, whether sufficient creditors with sufficient claims have joined in the petition, and whether the debtor meets the eligibility requirements of 11 U.S.C. § 109(b) and (d). If the court finds that any of the required determinations are adverse to the petitioning creditor(s), the case must be dismissed and damages, including attorneys' fees, awarded to the debtor. 11 U.S.C. § 303(i); In re Johnson, 13 B.R. 342, 346, 7 B.C.D. 1331, 4 C.B.C.2d 1482 (Bkrtcy.D.Minn.1981). See In re Godroy Wholesale Co., Inc., 37 B.R. 496, 10 C.B.C.2d 249 (Bkrtcy.D.Mass.1984).

Once the debtor puts in issue the number of creditors, it must file with its answer a list of all creditors with their addresses, a brief statement of the nature of their claims, and the amounts thereof. Bankruptcy Rule 1003(d).5 After the debtor files its answer asserting that it has twelve or more creditors and listing all its creditors, the petitioning creditor may solicit other creditors to join in the petition and the debtor may solicit the creditors not to unite in the petition. See In re Brown, 111 F. 979, 980 (E.D.Mo.1901); Advisory Committee Note to former Bankruptcy Rule 104(e).

Section 303(c) permits creditors other than the original creditor(s) to join in the petition with the same effect as if the joining creditor had been one of the original petitioning creditors.6 If a petitioning creditor is disqualified, another may be allowed to join the petition and the case will not be dismissed for want of three creditors. H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 322 (1977), 1978 U.S.Code Cong. & Admin.News, pp. 5787, 6287; S.Rep. No. 95-989, 95th Cong., 2d Sess. 33 (1978), 1978 U.S.Code Cong. & Admin.News, p. 5819. This joinder must occur before the case is dismissed or relief is ordered. The procedure for joinder of other creditors is set forth in Bankruptcy Rule 1003(d). Section 303(c) and Rule 1003(d) contemplate that one-person petitions might be mistaken as to the number of creditors, and provide a means for curing the defect. See In re Crown Sportswear, Inc., 575 F.2d 991, 993 (1st Cir.1978).

Great stress is laid upon the use of the word "commenced" in Section 303(b)(1). Wilkins argues that since an involuntary case must be commenced by three or more creditors when the debtor has twelve or more creditors, jurisdiction does not attach until joinder occurs. Therefore, so the argument goes, the commencement date of this involuntary case cannot be earlier than the date upon which two or more qualified creditors joined in the petition of Moore Financial.

The court's jurisdiction over an involuntary case is statutory and not dependent upon the accuracy and precision of the averments made in the petition. See In re Claudon, 73 F.2d 876, 878 (7th Cir.1934); 2 COLLIER ON BANKRUPTCY ¶ 18.05, at 22 (14th ed. 1976). The filing of a petition sufficient on its face clearly gives the bankruptcy court jurisdiction over an involuntary case. Canute Steamship Co. v. Pittsburgh Coal Co., 263 U.S. 244, 248, 44 S.Ct. 67, 68, 68 L.Ed. 287, (1923). While some courts have labeled the three petitioning creditor requirement "jurisdictional,"7 this requirement is not jurisdictional in the sense of subject matter jurisdiction, but is a substantive matter which must be proved or waived if put in issue.8 In contrast, parties cannot confer subject matter jurisdiction upon the bankruptcy court by agreement, waiver, or consent.9

The Good Faith Rule

The relative ease with which creditors can force a financially distressed debtor into bankruptcy makes involuntary bankruptcy a dangerous weapon in the hands of a single creditor. Although the liberal joinder provisions of Bankruptcy Rule 1003(d) enable a single petitioning creditor to cure a defective petition, "the three creditor requirement is not a meaningless formality that a creditor may ignore until after filing the petition." Basin Electric Power Cooperative v. Midwest Processing Company, 769 F.2d 483, 486 (8th Cir.1985).

If an involuntary petition is proper and complete, the motives of the petitioning creditor(s) are irrelevant. See In re Automatic Typewriter & Service Co., 271 F. 1, 4 (2d Cir.1921); In re Pickering Lumber Co., 1 F.Supp. 82, 83 (W.D.Mo.1932). Nonetheless, courts have consistently held that an essential prerequisite for allowing joinder of additional creditors to cure a defective petition is that the original petition was filed in good faith, and not as a fraudulent attempt to confer jurisdiction upon the court with a view of being later supported by intervention of other creditors.10

Myron M. Navison Shoe Co. v. Lane Shoe Co., 36 F.2d 454 (1st Cir.1929), is the leading and most often cited case for the "good faith" rule in single petitioning creditor cases. In that case, a single creditor, Lane Shoe Company, filed an involuntary petition alleging that all of the creditors of the Navison Shoe Company, Inc. were less than twelve in number. In its answer the alleged...

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