The Ninth Circuit Bankruptcy Appellate Panel has held that a debtor opposing an involuntary Chapter 11 petition under FRCP 12(b)(6), asserting that not enough creditors joined the involuntary petition, must file an answer and schedules if the matter is set for trial so other creditors have an opportunity to join the petition.  In re QDOS, Inc., 591 B.R. 843 (2019)

Three individuals and a family trust filed a petition seeking to place the debtor, QDOS, Inc., into an involuntary Chapter 11 bankruptcy proceeding.  If a debtor has more than 12 creditors, then at least three holders of claims that are “not contingent as to liability or the subject of a bona fide dispute as to liability or amount” and holding not less than a cumulative total of $15,755[1] must be petitioners.  11 U.S.C. § 303(b).  The petitioning creditors must also establish that a debtor is in economic distress.  QDOS filed a motion under Fed. R. Bankr. P. 12(b)(6) seeking to dismiss the involuntary petition on the basis that the numerosity requirement was not met.  It did not deny that it was in economic distress.

The bankruptcy court determined that a trial was required, and did not require QDOS to file an answer to the involuntary petition and a list of creditors.  FRBP 1003(b) provides in part that “[i]f the answer to an involuntary petition filed by fewer than three creditors avers the existence of 12 or more creditors, the debtor shall file with the answer a list of all creditors with their addresses…”  QDOS filed a Rule 12(b)(6) motion alleging that less than three creditors were petitioners, and did not file the required list of creditors.

The bankruptcy court held a trial, and found that one of the petitioners was an investor, not a creditor, and the other petitioner failed to appear.  The bankruptcy court agreed with QDOS that the numerosity requirement had not been met and dismissed the involuntary petition.

The petitioning creditors appealed on basis that all creditors had the right to consider whether to join in the involuntary petition, and that the bankruptcy court’s actions had impermissibly limited that right.  The creditors relied on FRBP 1003(b) and the bankruptcy court’s failure to require Rule 26 disclosures and permit discovery.  40-50 creditors had not had a reasonable opportunity to join the petition.

The BAP reversed.  Joinder can remedy a deficiency in the number of petitioning creditors and all creditors have the right to consider joining as petitioners where the involuntary debtor is in economic distress.  FRCP 24(a)(1), 11 U.S.C. § 303(c), and FRBP 1018.  Even though Section 1003(b) requires filing a list of creditors with an answer, and filing a Rule 12(b)(6) rather than an answer initially is allowed, when a defense alleging insufficient numerosity is alleged by motion and the matter is set for trial, a debtor must file and answer with an attached list of creditors.


[1] The amount is subject to periodic adjustment.