5th Circuit Bankruptcy Summary: In re Green Hills Development Co., L.L.C., No. 12-60784 (5th Cir. Feb. 3, 2014)

Green Hills Development executed a promissory note to Credit Union Liquidity Services (CULS) for $14.5 million, secured by certain real estate.  Green Hills Development later fell behind on the note and failed to pay the balance at maturity.  Green Hills Development sued CULS in Texas state court for various causes of action, generally seeking to enjoin CULC from collecting on the note.  CULS filed counterclaims and also filed a motion for summary judgment.  The state court entered an order partially granting and partially denying CULS’s motion for summary judgment.  As that case was proceeding, CULS filed a petition for involuntary bankruptcy against Green Hills.  Green Hills Development sought to dismiss the bankruptcy case, arguing, among other things, that CULS’s claim against Green Hills was subject to bona fide dispute.  The bankruptcy court entered an order dismissing the petition on the grounds that CULS had failed to offer sufficient evidence that Green Hills Development was generally not paying its debts as they came due and that, therefore, relief under section 303(h)(1) was not proper.  The court also held in the alternative that relief under section 303(h)(1) was improper because Green Hill’s debt to CULS was subject to a bona fide dispute.  The bankruptcy court reached this conclusion despite holding that the claim was not subject to a bona fide dispute for standing purposes under section 303(b).

On appeal, the Fifth Circuit first analyzed section 303(b), which was amended in 2005 by BAPCPA.  Section 303(b) states that an involuntary petition may be brought only by the “holder of a claim . . . that is not . . . the subject of a bona fide dispute as to liability or amount.”  The 2005 legislation added the phrase “as to liability or amount.”  Prior to 2005, court including the Fifth Circuit interpreted section 303(b) to deny standing to a creditor only when there was a dispute as to liability.  The Fifth Circuit now holds that a bona fide dispute as to amount is sufficient standing alone to deny standing to a creditor.  Therefore, the Fifth Circuit affirmed the dismissal, but on different grounds than the bankruptcy court (i.e., on the 303(b) basis rather than the 303(h)(1) basis).

CULS, Credit Union Liquidity Services, insolvency-insights, section 303(b), section 303(h)(1)