Opinion
02-03322-JKC-7
June 5, 2002
ORDER DENYING MOTION TO DISMISS INVOLUNTARY PETITION AND ORDER FOR RELIEF
This matter comes before the Court on the Involuntary Petition filed by PCL/Calumet, a Joint Venture, Gradex, Inc., and Alt Witzig (the "Petitioning Creditors") against Entercitement, LLC ("Entercitement") and on the Motion to Dismiss filed by the Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit and Excel Legacy Corporation (the "Objecting Creditors"). The Court conducted a hearing on the Motion to Dismiss on April 30, 2002, at which time it raised the issue of whether the Objecting Creditors have standing to challenge the involuntary petition under 11 U.S.C. § 303. Pursuant to the Court's instructions at the hearing, the parties have submitted briefs on this issue. The Court now issues its Order, wherein it finds that the Objecting Creditors lack standing to challenge the involuntary petition under 11 U.S.C. § 303 and that, because Entercitement has not contested the petition, an Order for Relief must be and hereby is entered.
The Petitioning Creditors filed an involuntary petition against Entercitement on March 1, 2002. The record indicates that the appropriate summons and copy of the involuntary petition were properly served on Entercitement in a timely manner. Entercitement, however, has not answered or otherwise responded to the petition, and the time to do so has expired. Instead, the Petitioning Creditors filed a Motion to Dismiss in which they explicitly challenged the petition under § 303 and 305 of the United States Bankruptcy Code, 11 U.S.C. § 101, et seq. (the "Code"), and implicitly under Code § 707. At the hearing on the Motion on April 30, 2002, the Court raised, sua sponte, the issue of whether the Objecting Creditors have standing to argue that the involuntary petition in this case does not meet the requirements of § 303. The Court was then informed that on April 29, 2002, the Petitioning Creditors had filed a Motion for Order for Relief on the Involuntary Petition which, by implication, also challenges the Objecting Creditors' standing. At the heart of the standing issue is whether the Court, in the absence of any response to the involuntary petition from Entercitement, is charged with entering an order for relief, regardless whether any grounds may exists under either § 305 or 707 to dismiss the case.
The Objection Creditors indicated to the Court in their Motion to Dismiss that Entercitement lacks the funds needed to contest the involuntary petition.
The Court raised this issue sua sponte primarily because, as explained more fully in this Order, it has a duty under the Code and Federal Rules of Bankruptcy Procedure to enter an order for relief without delay if a debtor fails to contest an involuntary petition.
Section 303(d) of the Code provides in relevant part that "[t]he debtor, or a general partner in a partnership debtor that did not join in the petition, may file an answer to a petition under this section. Similarly, Federal Bankruptcy Rule 1011(a) provides:
(a) WHO MAY CONTEST PETITION. The debtor named in an involuntary petition or a party in interest to a petition commencing a case ancillary to a foreign proceeding may contest the petition. In the case of a petition against a partnership under Rule 1004(b), a nonpetitioning general partner, or a person who is alleged to be a general partner but denies the allegation, may contest a petition.
Bankruptcy Rule 1013 further provides in relevant part:
(a) CONTESTED PETITION. The court shall determine the issue of a contested petition at the earliest practicable time and forthwith enter an order for relief, dismiss the petition, or enter any other appropriate order.
(b) DEFAULT. If no pleading or other defense to a petition is filed within the time provided by Rule 1011, the court, on the next day, or as soon thereafter as practicable, shall enter an order for the relief requested in the petition.
See also 11 U.S.C. § 303(h) ("If the petition is not timely controverted, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed.").
These provisions, taken together, indicate that only the debtor, or a general partner of the debtor who did not join in the petition, may contest an involuntary petition on the grounds set forth in § 303, e.g., that the required number of creditors have not joined in the petition, that their claims do not, in the aggregate, total $11,625, that there is a bona fide dispute regarding one or more of the claims, that the claims are contingent, etc. In the absence of a responsive pleading, the Court must enter an order for relief under the appropriate Chapter of the Code without delay. The Court finds overwhelming support for this conclusion in relevant case law. See In re Jr. Food Mart of Ark., Inc. 234 B.R. 420 (Bankr.E.D.Ark. 1999) (Code and Rules "unambiguously"provide that only debtor can contest involuntary petition); accord Kukuda v. Westport Ins. Corp. (In re Michael Angelo Corry Inn, Inc.), 2002 WL 400780 (Bankr.W.D.Pa. 2002); In re Taylor Assocs., 191 B.R. 374 (Bankr. E.D. Tenn. 1996); In re Manson Billard, Inc., 82 B.R. 769 (Bankr.E.D.Pa. 1988).
Creditors have long been prevented from contesting an involuntary petition. The Bankruptcy Act of 1898, pursuant to its 1938 amendments, prohibited creditors from contesting an involuntary petition in order to prevent creditors from protecting a preference or retaining some other unfair advantage. See Taylor, 191 B.R. at 378 (citing the Chandler Act of June 22, 1938, ch. 575, §§ 18(b), 59(f), 52 State. 840, 852, 859 (codified at 11 U.S.C. § 41(b), 95(f)), repealed by Act of Nov. 6, 1978, Pub.L. No. 95-598, tit. IV. § 401, 92 Stat. 2549, 2683. The current versions of the Code and Bankruptcy Rules have maintained this prohibition. As noted in both Taylor and Manson Billard, the Advisory Committee's comments to Bankruptcy Rule 1011 provide that "`[t]he rule preserves the features of the former Act and Rule 112 and the Code permitting no response by creditors to an involuntary petition or petition against a partnership under rule 1004(b).'" Taylor, 191 B.R. at 379; Manson Billard, 82 B.R. at 771-72. Finally, Collier on Bankruptcy also recognizes that creditors lack standing to contest an involuntary petition under § 303 of the Code:
Rule 1011 contains no provision authorizing creditors to contest an involuntary petition . . . . This recognizes that bankruptcy is a collective proceeding intended to benefit creditors. As such, it would not be in the interest of creditors generally to permit objections by particular creditors who might stand to lose more in a collective proceeding.
8 Collier on Bankruptcy ¶ 303.20[5] (15th ed. 1995).
In its brief on the standing issue, the Objecting Creditors concede that they do not have standing under § 303 to contest the involuntary petition. Instead, they argue that the Court must determine whether the involuntary petition meets the requirements of § 303, regardless of whether it is contested, pursuant to its powers under 11 U.S.C. § 105. This argument directly contradicts the import of Bankruptcy Rule 1013(b), which contemplates the entry of an order for relief upon the involuntary debtor's default. Even assuming that the Court could use its § 105 powers under to dismiss an involuntary petition pursuant to § 303 on its own motion, it would do so only if the petition in question were patently deficient. The petition here, however, appears on its face to meet the requirements of § 303.
The Objecting Creditors are not wholly without relief in this case. Under the Code, any interested party may move to dismiss a petition for the reasons set forth in §§ 305, 707, and/or 1112. See also Jr. Food Mart, 234 B.R. at 421. Here, the Objecting Creditors have argued in their Motion to Dismiss that the involuntary petition should be dismissed for bad faith, see 11 U.S.C. § 707(a), or because "the interests of creditors and the debtor would be better served by" dismissal, see 11 U.S.C. § 305(a). As indicated at the hearing on the Motion to Dismiss, the Court will consider these issues upon the Objecting Creditor's filing of a motion for summary judgment under Bankruptcy Rule 7056 on or before May 31, 2002.
Along with their Motion to Dismiss, the Objecting Creditors submitted extrinsic evidence in support of their arguments. The Petitioning Creditors, in turn, moved to exclude this evidence on the grounds that extrinsic evidence cannot be considered by the Court in ruling upon a motion to dismiss. Given that the presentation and consideration of extrinsic evidence generally converts a motion to dismiss to one for summary judgment, see Bankruptcy Rule 7012 (incorporating Fed.R.Civ.P 12(b)(6)), the Court has ordered the Objecting Creditors to resubmit whatever arguments they have may under §§ 707 and 305 by way of a summary judgment motion.
Based on the foregoing, the Court must conclude that the Objecting Creditors lack standing to contest the involuntary petition filed against Entercitement under the grounds provided by § 303. Thus, in the absence of any responsive pleading filed by Entercitement, the Court orders that relief under Chapter 7 of the Code be granted against Entercitement. The Debtor is ordered to comply timely with the requirements of Bankruptcy Rule 1007 by filing all required schedules and statements. As indicated above, the Objecting Creditors are given until May 31, 2002, to present any arguments they may have for dismissal of this case by way of a summary judgment motion.