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District Court Rules Creditor Must Have Fully Undisputed Claim To Petition For Involuntary Bankruptcy

A District Court judge in Nevada has ruled that a creditor must have a fully undisputed claim in order to be a “qualified creditor” that can petition for involuntary bankruptcy. A ruling from the Ninth Circuit Court of Appeals had established a precedent that allowed a creditor to remain a qualified credit for an involuntary bankruptcy if only a portion of the claim was undisputed and certain other conditions were satisfied.

A copy of the ruling in State of Montana v. Timothy Blixseth can be accessed here.

The decision delves into the nuances and inner workings of the bankruptcy code, but the ruling is important because, according to one legal opinion, “involuntary bankruptcies are a powerful tool” for creditors and this ruling may give creditors pause before filing for an involuntary bankruptcy if there is a chance that the claim might be subject to a bona fide dispute.

The defendant argued against the involuntary case because he was disputing the amount owed, which the bankruptcy court agreed with and dismissed the case. One of the plaintiffs, the state of Montana, which claimed the defendant owed more than $220,000 in unpaid taxes, appealed the decision, arguing that the defendant was only disputing a portion of the claim. The Ninth Circuit Court of Appeals had previously ruled that disputing a portion of the claim was not a bona fide dispute, but that ruling was based on an older version of the bankruptcy code.

The district court ruled that updated language in the statute overrules the Ninth Circuit ruling. The ruling is expected to narrow the field of qualified co-petitioners for involuntary bankruptcy filings.

 

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