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Ninth Circuit: Fully Secured, Nonrecourse Creditors Qualify As ‘Countable’ Creditors
Addressing a matter of first impression, the bankruptcy appellate panel for the U.S. Court of Appeals for the Ninth Circuit (BAP) recently held that fully secured, nonrecourse creditors qualify as “countable” creditors for purposes of determining the viability of an involuntary bankruptcy petition under Section 303(b) of the U.S. Bankruptcy Code. See, I, 664 B.R. 162 (9th Cir. BAP 2024). In so doing, the King decision highlights a potential pitfall for creditors who contemplate the filing of an involuntary bankruptcy petition against a putative debtor.
Background
In August 2022, Wolverine Endeavors VIII, LLC filed an involuntary Chapter 7 petition against Carole D. King. Wolverine was the sole petitioning creditor, and asserted a claim in excess of $7 million against King on account of a previously obtained judgment. King, in turn, moved to dismiss the involuntary on the basis that she had at least 12 countable creditors as determined under section 303(b) of the code, and, as a consequence, at least three petitioning creditors were necessary in order for the petition to be viable.
After King filed her dismissal motion, three entities (Insurance Company of the West, Fence Factory, Inc. and East West Bank) filed joinders to the involuntary petition pursuant to Section 303(c) of the code, which allows a creditor meeting certain qualifications to “join in the involuntary petition with the same effect as if such joining creditor were a petitioning creditor.” King contested the qualifications of certain of these entities to join in the petition.
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