Unsecured Creditors Beware: The Bona Fide Dispute Requirement of Bankruptcy Code Section 303(b)(1) is Still Evolving

When traditional out-of-court debt-collection efforts fail, the Bankruptcy Code provides unsecured creditors with a potentially powerful, albeit infrequently used, tool to try to obtain payment from a financially distressed counterparty: commencing an involuntary bankruptcy proceeding. At least in theory, by forcing a putative debtor into an involuntary bankruptcy proceeding, creditors are able to apply additional pressure in an effort to secure more immediate payment of an outstanding debt.

The Bankruptcy Code’s requirements for commencing an involuntary proceeding are included in Section 303(b)(1). This section provides that an involuntary petition may be filed if a debtor has 12 or more creditors, with at least 3 creditors holding unsecured claims that in the aggregate total at least $18,600, which debts are not contingent as to liability or, as addressed in the TV Azteca case, the subject of a bona fide dispute as to liability or amount. Additionally, if a debtor contests an involuntary petition, Section 303(h)(1) of the Bankruptcy Code requires the petitioning creditors to prove that the debtor is generally not paying its debts that are not otherwise subject to a bona fide dispute as to liability or amount as they become due.