In re Cates

• Decision Date: 08 May 1986
• Docket Number: Bankruptcy No. 85-00455-B1-5.
• Citation: 62 BR 179
• Parties: In re Tom CATES d/b/a Oil Patch Service and Rental, Alleged Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Texas

62 B.R. 179 (1986)

In re Tom CATES d/b/a Oil Patch Service and Rental, Alleged Debtor.

Bankruptcy No. 85-00455-B1-5.

United States Bankruptcy Court, S.D. Texas, Brownsville Division.

May 8, 1986.

Richard D. Schell, Wiley, Hale & Fleurinet, Harlingen, Tex., for Petitioning Creditor.

Robert B. McLeaish, McAllen, Tex., Robert C. Maley, Jr., Sheinfeld, Maley, & Kay, Houston, Tex., for Alleged Debtor.

MEMORANDUM AND ORDER

MANUEL D. LEAL, Bankruptcy Judge.

In this contested involuntary petition, the major issues are whether the claim of the sole petitioning creditor is subject to bona fide dispute, whether there are twelve or more creditors of the alleged debtor and whether the debtor was generally paying his debts as they became due. Because the petitioning creditor has not established the absence of a bona fide dispute with respect to its claim, we DENY and DISMISS the involuntary petition.

FACTS

Budd Leasing Corp. (Budd) filed an involuntary petition against Tom Cates d/b/a Oil Patch Service and Rental (Cates) on January 23, 1985. Cates entered into a lease agreement with Western Lease Banc, lessor, on July 31, 1980 for a four year term. On the same date Cates signed an affidavit which was a disclaimer of liability in favor of the lessor Western Bank. Cates was to make monthly payments of $2,372.96 for the following equipment:

Three chemical mixing tanks MT7912 Five mud cleaners, complete; MC7911 Four pumping units, complete

400 feet 6" pipe

20 6" Victaulic ells (90°)

Cates received delivery of the equipment on July 31, 1980; the lease term commenced August 1, 1980. On August 4, 1980, Western Banc assigned all rights in the lease to Patagonia Leasing, Inc. subject to the Cates lease and a conditional option agreement between lessor and lesee. Patagonia assigned its interests to Budd on March 31, 1981.

Cates testified that the equipment was defective and has not been used since February, 1981. He further testified that he notified both Patagonia Leasing and Budd to pick up the equipment. This fact was not contested by Budd's witness. Cates made a minimum of twenty-four payments to Budd. When he defaulted the parties entered into a new payment schedule. When this was unsuccessful, Budd referred the matter to its attorneys.

Budd filed a state court action in Harris County, Texas against Cates for the money owed. Venue was transferred to Hidalgo County. Rather than pursue its state court collection suit, Budd commenced the instant involuntary petition while keeping its state court action pending. The reasons given for the simultaneous bankruptcy filing were that Budd was afraid that Cates would leave the country and dissipate his assets before adjudication of the state court suit. Budd felt that by bringing a bankruptcy action all of Cates' assets could be preserved under the control of a Federal Court. Cates allegedly was in default under the lease in the amount of $47,000 as of the date of the filing of the involuntary petition.

LEGAL DISCUSSION

The Court has jurisdiction of the instant case under 28 U.S.C. § 157(b)(2)(A)(1984). Congress expressly entitled chapter 3 of title 11 "case administration." Since the substantive statutory law on involuntary petitions is codified in § 303 of this chapter, the instant action is a core proceeding for it "concerns the administration of the estate." 28 U.S.C. § 157(b)(2)(A). No objection has been raised as to the jurisdiction of this Court to enter a final judgment in this matter.

As a general policy we will scrutinize the creditor's filing carefully because "the filing of an involuntary petition is an extreme remedy with serious consequences to the alleged debtor, such as loss of credit standing, inability to transfer assets and carry on business affairs, and public embarrassment." In re Reid, 773 F.2d 945, 946 (7th Cir.1985).

To this end, the Bankruptcy Amendments Act added the additional requirement that a petitioning creditor cannot prevail unless it shows that its claims are not subject to bona fide dispute. In re Rubin, 769 F.2d 611, 615 (9th Cir.1985). § 303(b)(1) now states

(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title —

(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute, or an indenture trustee representing such holder, if such a claims aggregate at least $5,000 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;

(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $5000 of such claims.

The proponent of this amendment stated:

Under my amendment, the original filing of an involuntary petition could not be based on debts that are the subject of a good-faith dispute between the debtor and his or her creditors. In the same vein, the granting of an order of relief could not be premised solely on the failure of a debtor to pay debts that were legitimately contested as to liability or amount.

I believe this amendment, although a simple one, is necessary to protect the rights of debtors and to prevent misuse of the bankruptcy system as a tool of coercion. I also believe it corrects a judicial misinterpretation of existing law and congressional intent as to the proper basis for granting involuntary relief.

130 Cong.Rec. S7618. (June 19, 1984) (Comments of Senator Baucus).

Cates contends that Budd's claim is subject to bona fide dispute. Several courts have...