Section 303(span)(1) is modified to make clear that unsecured claims against the debtor must be determined by taking into account liens securing property held by third parties.

Section 303(span)(3) adopts a provision contained in the Senate amendment indicating that an involuntary petition may be commenced against a partnership by fewer than all of the general partners in such partnership. Such action may be taken by fewer than all of the general partners notwithstanding a contrary agreement between the partners or State or local law.

Section 303(h)(1) in the House amendment is a compromise of standards found in H.R. 8200 as passed by the House and the Senate amendment pertaining to the standards that must be met in order to obtain an order for relief in an involuntary case under title 11. The language specifies that the court will order such relief only if the debtor is generally not paying debtor’s debts as they become due.

Section 303(h)(2) reflects a compromise pertaining to section 543 of title 11 relating to turnover of property by a custodian. It provides an alternative test to support an order for relief in an involuntary case. If a custodian, other than a trustee, receiver, or agent appointed or authorized to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property, was appointed or took possession within 120 days before the date of the filing of the petition, then the court may order relief in the involuntary case. The test under section 303(h)(2) differs from section 3a(5) of the Bankruptcy Act [section 21(a)(5) of former title 11], which requires an involuntary case to be commenced before the earlier of time such custodian was appointed or took possession. The test in section 303(h)(2) authorizes an order for relief to be entered in an involuntary case from the later date on which the custodian was appointed or took possession.

Section 303 governs the commencement of involuntary cases under title 11. An involuntary case may be commenced only under chapter 7, Liquidation, or chapter 11, Reorganization. Involuntary cases are not permitted for municipalities, because to do so may constitute an invasion of State sovereignty contrary to the 10th amendment, and would constitute bad policy, by permitting the fate of a municipality, governed by officials elected by the people of the municipality, to be determined by a small number of creditors of the municipality. Involuntary chapter 13 cases are not permitted either. To do so would constitute bad policy, because chapter 13 only works when there is a willing debtor that wants to repay his creditors. Short of involuntary servitude, it is difficult to keep a debtor working for his creditors when he does not want to pay them back. See chapter 3, supra.

The exceptions contained in current law that prohibit involuntary cases against farmers, ranchers and eleemosynary institutions are continued. Farmers and ranchers are excepted because of the cyclical nature of their business. One drought year or one year of low prices, as a result of which a farmer is temporarily unable to pay his creditors, should not subject him to involuntary bankruptcy. Eleemosynary institutions, such as churches, schools, and charitable organizations and foundations, likewise are exempt from involuntary bankruptcy.

The provisions for involuntary chapter 11 cases is a slight change from present law, based on the proposed consolidation of the reorganization chapters. Currently, involuntary cases are permitted under chapters X and XII [chapters 10 and 12 of former title 11] but not under chapter XI [chapter 11 of former title 11]. The consolidation requires a single rule for all kinds of reorganization proceedings. Because the assets of an insolvent debtor belong equitably to his creditors, the bill permits involuntary cases in order that creditors may realize on their assets through reorganization as well as through liquidation.

Subsection (span) of the section specifies who may file an involuntary petition. As under current law, if the debtor has more than 12 creditors, three creditors must join in the involuntary petition. The dollar amount limitation is changed from current law to $5,000. The new amount applies both to liquidation and reorganization cases in order that there not be an artificial difference between the two chapters that would provide an incentive for one or the other. Subsection (span)(1) makes explicit the right of an indenture trustee to be one of the three petitioning creditors on behalf of the creditors the trustee represents under the indenture. If all of the general partners in a partnership are in bankruptcy, then the trustee of a single general partner may file an involuntary petition against the partnership. Finally, a foreign representative may file an involuntary case concerning the debtor in the foreign proceeding, in order to administer assets in this country. This subsection is not intended to overrule Bankruptcy Rule 104(d), which places certain restrictions on the transfer of claims for the purpose of commencing an involuntary case. That Rule will be continued under section 405(d) of this bill.

Subsection (c) permits creditors other than the original petitioning creditors to join in the petition with the same effect as if the joining creditor had been one of the original petitioning creditors. Thus, if the claim of one of the original petitioning creditors is disallowed, the case will not be dismissed for want of three creditors or want of $5,000 in petitioning claims if the joining creditor suffices to fulfill the statutory requirements.

Subsection (d) permits the debtor to file an answer to an involuntary petition. The subsection also permits a general partner in a partnership debtor to answer an involuntary petition against the partnership if he did not join in the petition. Thus, a partnership petition by less than all of the general partners is treated as an involuntary, not a voluntary, petition.

The court may, under subsection (e), require the petitioners to file a bond to indemnify the debtor for such amounts as the court may later allow under subsection (i). Subsection (i) provides for costs, attorneys fees, and damages in certain circumstances. The bonding requirement will discourage frivolous petitions as well as spiteful petitions based on a desire to embarrass the debtor (who may be a competitor of a petitioning creditor) or to put the debtor out of business without good cause. An involuntary petition may put a debtor out of business even if it is without foundation and is later dismissed.

Subsection (f) is both a clarification and a change from existing law. It permits the debtor to continue to operate any business of the debtor and to dispose of property as if the case had not been commenced. The court is permitted, however, to control the debtor’s powers under this subsection by appropriate orders, such as where there is a fear that the debtor may attempt to abscond with assets, dispose of them at less than their fair value, or dismantle his business, all to the detriment of the debtor’s creditors.

The court may also, under subsection (g), appoint an interim trustee to take possession of the debtor’s property and to operate any business of the debtor, pending trial on the involuntary petition. The court may make such an order only on the request of a party in interest, and after notice to the debtor and a hearing. There must be a showing that a trustee is necessary to preserve the property of the estate or to prevent loss to the estate. The debtor may regain possession by posting a sufficient bond.

Subsection (h) provides the standard for an order for relief on an involuntary petition. If the petition is not timely controverted (the Rules of Bankruptcy Procedure will fix time limits), the court orders relief after a trial, only if the debtor is generally unable to pay its debts as they mature, or if the debtor has failed to pay a major portion of his debts as they become due, or if a custodian was appointed during the 90-day period preceding the filing of the petition. The first two tests are variations of the equity insolvency test. They represent the most significant departure from present law concerning the grounds for involuntary bankruptcy, which requires an act of bankruptcy. Proof of the commission of an act of bankruptcy has frequently required a showing that the debtor was insolvent on a “balance-sheet” test when the act was committed. This bill abolishes the concept of acts of bankruptcy.

The equity insolvency test has been in equity jurisprudence for hundreds of years, and though it is new in the bankruptcy context (except in chapter X [chapter 10 of former title 11]), the bankruptcy courts should have no difficulty in applying it. The third test, appointment of a custodian within ninety days before the petition, is provided for simplicity. It is not a partial re-enactment of acts of bankruptcy. If a custodian of all or substantially all of the property of the debtor has been appointed, this paragraph creates an irrebuttable presumption that the debtor is unable to pay its debts as they mature. Moreover, once a proceeding to liquidate assets has been commenced, the debtor’s creditors have an absolute right to have the liquidation (or reorganization) proceed in the bankruptcy court and under the bankruptcy laws with all of the appropriate creditor and debtor protections that those laws provide. Ninety days gives creditors ample time in which to seek bankruptcy liquidation after the appointment of a custodian. If they wait beyond the ninety day period, they are not precluded from filing an involuntary petition. They are simply required to prove equity insolvency rather than the more easily provable custodian test.

Subsection (i) permits the court to award costs, reasonable attorney’s fees, or damages if an involuntary petition is dismissed other than by consent of all petitioning creditors and the debtor. The damages that the court may award are those that may be caused by the taking of possession of the debtor’s property under subsection (g) or section 1104 of the bankruptcy code. In addition, if a petitioning creditor filed the petition in bad faith, the court may award the debtor any damages proximately caused by the filing of the petition. These damages may include such items as loss of business during and after the pendency of the case, and so on. “Or” is not exclusive in this paragraph. The court may grant any or all of the damages provided for under the provision. Dismissal in the best interests of credits under section 305(a)(1) would not give rise to a damages claim.

Under subsection (j), the court may dismiss the petition by consent only after giving notice to all creditors. The purpose of the subsection is to prevent collusive settlements among the debtor and the petitioning creditors while other creditors, that wish to see relief ordered with respect to the debtor but that did not participate in the case, are left without sufficient protection.

Subsection (k) governs involuntary cases against foreign banks that are not engaged in business in the United States but that have assets located here. The subsection prevents a foreign bank from being placed into bankruptcy in this country unless a foreign proceeding against the bank is pending. The special protection afforded by this section is needed to prevent creditors from effectively closing down a foreign bank by the commencement of an involuntary bankruptcy case in this country unless that bank is involved in a proceeding under foreign law. An involuntary case commenced under this subsection gives the foreign representative an alternative to commencing a case ancillary to a foreign proceeding under section 304.

2010—Subsecs. (k), (l). Puspan. L. 111–327 redesignated subsec. (l) as (k).

2005—Subsec. (span)(1). Puspan. L. 109–8, § 1234(a)(1), inserted “as to liability or amount” after “bona fide dispute” and substituted “if such noncontingent, undisputed claims” for “if such claims”.

Subsec. (h)(1). Puspan. L. 109–8, § 1234(a)(2), inserted “as to liability or amount” before semicolon.

Subsec. (k). Puspan. L. 109–8, § 802(d)(2), struck out subsec. (k) which read as follows: “Notwithstanding subsection (a) of this section, an involuntary case may be commenced against a foreign bank that is not engaged in such business in the United States only under chapter 7 of this title and only if a foreign proceeding concerning such bank is pending.”

Subsec. (l). Puspan. L. 109–8, § 332(span), added subsec. (l).

1994—Subsec. (span). Puspan. L. 103–394 substituted “$10,000” for “$5,000” in pars. (1) and (2).

1986—Subsec. (a). Puspan. L. 99–554, § 254, inserted reference to family farmer.

Subsec. (span). Puspan. L. 99–554, § 283(span)(1), substituted “subject of” for “subject on”.

Subsec. (g). Puspan. L. 99–554, § 204(1), substituted “may order the United States trustee to appoint” for “may appoint”.

Subsec. (h)(1). Puspan. L. 99–554, § 283(span)(2), substituted “are the” for “that are the”.

Subsec. (i)(1). Puspan. L. 99–554, § 204(2), inserted “or” at end of subpar. (A) and struck out subpar. (C) which read as follows: “any damages proximately caused by the taking of possession of the debtor’s property by a trustee appointed under subsection (g) of this section or section 1104 of this title; or”.

1984—Subsec. (span). Puspan. L. 98–353, § 426(a), inserted “against a person” after “involuntary case”.

Subsec. (span)(1). Puspan. L. 98–353, § 426(span)(1), inserted “or the subject on a bona fide dispute,”.

Subsec. (h)(1). Puspan. L. 98–353, § 426(span)(2), inserted “unless such debts that are the subject of a bona fide dispute”.

Subsec. (j)(2). Puspan. L. 98–353, § 427, substituted “debtor” for “debtors”.

Puspan. L. 109–8, title XII, § 1234(span), Apr. 20, 2005, 119 Stat. 204, provided that:

Amendment by sections 332(span) and 802(d)(2) of Puspan. L. 109–8 effective 180 days after Apr. 20, 2005, and not applicable with respect to cases commenced under this title before such effective date, except as otherwise provided, see section 1501 of Puspan. L. 109–8, set out as a note under section 101 of this title.

Amendment by Puspan. L. 103–394 effective Oct. 22, 1994, and not applicable with respect to cases commenced under this title before Oct. 22, 1994, see section 702 of Puspan. L. 103–394, set out as a note under section 101 of this title.

Effective date and applicability of amendment by section 204 of Puspan. L. 99–554 dependent upon the judicial district involved, see section 302(d), (e) of Puspan. L. 99–554, set out as a note under section 581 of Title 28, Judiciary and Judicial Procedure.

Amendment by section 254 of Puspan. L. 99–554 effective 30 days after Oct. 27, 1986, but not applicable to cases commenced under this title before that date, see section 302(a), (c)(1) of Puspan. L. 99–554.

Amendment by section 283 of Puspan. L. 99–554 effective 30 days after Oct. 27, 1986, see section 302(a) of Puspan. L. 99–554.

Amendment by sections 426(a) and 427 of Puspan. L. 98–353 effective with respect to cases filed 90 days after July 10, 1984, and amendment by section 426(span) of Puspan. L. 98–353 effective July 10, 1984, see section 552(a), (span) of Puspan. L. 98–353, set out as a note under section 101 of this title.

The dollar amounts specified in this section were adjusted by notices of the Judicial Conference of the United States pursuant to section 104 of this title as follows:

By notice dated Jan. 31, 2022, 87 F.R. 6625, effective Apr. 1, 2022, in subsec. (span)(1), (2), dollar amount “16,750” was adjusted to “18,600”. See notice of the Judicial Conference of the United States set out as a note under section 104 of this title.

By notice dated Fespan. 5, 2019, 84 F.R. 3488, effective Apr. 1, 2019, in subsec. (span)(1), (2), dollar amount “15,775” was adjusted to “16,750”.

By notice dated Fespan. 16, 2016, 81 F.R. 8748, effective Apr. 1, 2016, in subsec. (span)(1), (2), dollar amount “15,325” was adjusted to “15,775”.

By notice dated Fespan. 12, 2013, 78 F.R. 12089, effective Apr. 1, 2013, in subsec. (span)(1), (2), dollar amount “14,425” was adjusted to “15,325”.

By notice dated Fespan. 19, 2010, 75 F.R. 8747, effective Apr. 1, 2010, in subsec. (span)(1), (2), dollar amount “13,475” was adjusted to “14,425”.

By notice dated Fespan. 7, 2007, 72 F.R. 7082, effective Apr. 1, 2007, in subsec. (span)(1), (2), dollar amount “12,300” was adjusted to “13,475”.

By notice dated Fespan. 18, 2004, 69 F.R. 8482, effective Apr. 1, 2004, in subsec. (span)(1), (2), dollar amount “11,625” was adjusted to “12,300”.

By notice dated Fespan. 13, 2001, 66 F.R. 10910, effective Apr. 1, 2001, in subsec. (span)(1), (2), dollar amount “10,775” was adjusted to “11,625”.

By notice dated Fespan. 3, 1998, 63 F.R. 7179, effective Apr. 1, 1998, in subsec. (span)(1), (2), dollar amount “10,000” was adjusted to “10,775”.