MARK A. GOLDSMITH, District Judge.
This is a bankruptcy appeal. On September 29, 2010, the Bankruptcy Court for the Eastern District of Michigan entered an order denying the motion of Appellants William and Anna Huszti to dismiss the involuntary bankruptcy petition filed against them by Appellees Michael and HeChung Huszti, and their business, BAM Investment Group, LLC. The Bankruptcy Court denied the motion, finding that "three or more entities ... each of which is a holder of a claim" filed the involuntary bankruptcy petition, as required pursuant to 11 U.S.C. § 303(b)(1), and that the action should therefore proceed. Appellants appeal, claiming that only two entities, at most, filed the involuntary petition and that, accordingly, § 303(b)(1)'s requirement for "three or more entities" is unsatisfied, rendering the filing of the involuntary petition improper.
This matter is fully briefed. On February 17, 2011, the Court held a hearing on this matter. For the reasons that follow, the Court reverses the Bankruptcy Court's order allowing the involuntary bankruptcy petition to proceed, and remands the case to the Bankruptcy Court with instructions to dismiss the petition.
The background facts are not in dispute. Appellants Michael and HeChung Huszti are husband and wife, as are Appellees William and Anna Huszti. Michael and William are brothers. Appellants and Appellees were joint owners of BAM Investment Group, LLC; however, all interests in the business were eventually transferred to Appellees.
The business relationship between the brothers fell apart, leading Appellees to file a lawsuit in a Michigan state court against Appellants. The state court complaint contained five counts, each of which was brought on behalf of "Plaintiffs" collectively. The state court action ended in a settlement embodied in a consent judgment:
On August 16, 2010, Appellees filed an involuntary bankruptcy petition against Appellants pursuant to 11 U.S.C. § 303(a). On September 8, 2010, Appellants filed a motion to dismiss the petition pursuant to 11 U.S.C. § 303(b)(1), which authorizes the filing of an involuntary petition if commenced "by three or more entities, each of which is ... a holder of a claim against [a debtor] that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount." Appellants argued that, although the involuntary petition was brought by three entities (i.e., William and Anna Huszti, and BAM Investments), the three entities only count as one for the purposes of § 303(b)(1) because, under the case law, multiple entities that jointly hold a claim constitute only one entity for purposes of § 303(b)(1).
This appeal followed.
The bankruptcy court's findings of fact are reviewed for clear error; its conclusions of law are reviewed de novo. In re United Producers, Inc., 526 F.3d 942, 946 (6th Cir.2008).
Title 11, § 303(b)(1) of the United States Code authorizes the filing of an involuntary petition against a debtor if commenced "by three or more entities, each of which is ... a holder of a claim against [a debtor] that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount." A "claim" is defined in the Bankruptcy Code as a "right to payment, whether or not such right is reduced to judgment." 11 U.S.C. § 101(5)(A).
"The purpose of requiring at least three creditors to launch an involuntary case ... is to necessitate some joint effort between creditors." In re Iowa Coal Mining Co., Inc., 242 B.R. 661, 670 (Bankr.S.D.Iowa 1999). As one court has explained,
In re McMeekin, 18 B.R. 177, 177-178 (Bankr.D.Mass.1982).
The sole question for decision in this case is: Do Appellees William and
The Bankruptcy Code does not address whether joint holders of a single obligation are treated as one holder of the claim or, rather, as separate holders of the claim for numerosity purposes under § 303(b)(1). In determining whether Appellees hold separate claims against Appellants for counting purposes under § 303(b)(1), the Court is guided by the discussion and examples set forth in a respected bankruptcy treatise:
2 Collier on Bankruptcy ¶ 303.14[7] (16th ed. 2010) (footnotes omitted). See also 2 Bankruptcy Service, Lawyers Edition, Ch. 13: Code §§ 301-303, at § 13:218 (2010) ("For purposes of determining number of petitioning creditors under 11 USCA § 303, creditors who obtained single judgment against debtor hold only one claim between two of them in form of their joint judgment, rather than 2 claims").
In their briefs, the parties cite a number of cases, all of which are in accord with Collier's succinct discussion of § 303(b)(1), and reflect the flexible manner in which the case law has developed to address a variety of different factual circumstances. These cases, which are described in the margin, inform the Court's analysis.
In the present case, the judgment is the functional equivalent of the promissory note in McMeekin. Like the payees of the promissory note in McMeekin, the judgment creditors in the present case are separate persons or entities, who are listed in the conjunctive and are collectively entitled to one, indivisible sum of money. Moreover, Michigan has adopted the same U.C.C. provision relied on in McMeekin. See Mich. Comp. Laws § 440.3110(4) ("If an instrument is payable to 2 or more persons not alternatively, it is payable to all of them and may be ... enforced only by all of them").
It is noteworthy that the judgment in the present case, which is the result of a settlement between the parties, is not readily divisible among the creditors. By contrast, in In re Richard A. Turner Co., Inc., 209 B.R. 177, 179 (Bankr.D.Mass. 1997), the case on which Appellees mainly rely, the judgment was readily divisible. There, three separate creditor entities held unrelated claims against the debtor in differing amounts; however, the claims were brought in one lawsuit and reduced to a single judgment totaling the aggregate of the three claims. The debtor argued that because the three claims were reduced to one judgment, there was only one claim for the purposes of § 303(b)(1). The court rejected the argument and instead "look[ed] beyond the judgment to determine the nature of the debt." Because the individual debts comprising the judgment were unrelated and readily allocable among the creditors, the court found that the creditors held divided interests in the judgment and that, accordingly, each creditor held a separate claim—and had a separate right to payment—under the judgment. Id. at 179-180.
Appellees argue that Turner should be followed here. Appellees state that each has a separate and distinct claim against Appellants, and each constitutes a separate "holder" under § 303(b)(1). Appellees explain that BAM Investment Group, LLC had a claim against Appellants in the amount of $540,000 for defalcation of corporate property, and William and Anna Huszti each had a claim against Appellants for approximately $114,691.
The argument is not persuasive. Turner stands for the proposition that individual payees on a single judgment hold separate claims for the purposes of § 303(b)(1) if the judgment is readily divisible. A divisible judgment, in this context, means a judgment that comprises separate claims that have been aggregated and reduced to a single judgment amount, but the constituent amounts are easily traceable to each creditor. In the present case, while the judgment merges the separate claims of each of the Appellees, the judgment cannot be broken down and apportioned to Appellees in the amount of their respective claims, as was the case in Turner. Instead, the judgment in this case reflects a seemingly arbitrary number—the settlement amount—which bears no obvious relationship to the separate claims. The Court acknowledges that the complaint giving rise to the judgment may have contained separate causes of action asserted by Appellees individually; however, the separateness of any individual claims was not maintained and reflected in the final judgment, such that the judgment can be divided among its holders. The Court finds that Appellees hold an undivided interest in the judgment and that, accordingly, Turner is not relevant here.
The Bankruptcy Court reached a conclusion contrary to the one reached by this Court. The Bankruptcy Court determined that Appellees each hold a separate claim against Appellants under § 303(b)(1) based on the fact that the judgment holds Appellants jointly and severally liable for the judgment amount. According to the Bankruptcy Court, the fact that Appellants are jointly and severally liable means "any of the creditors [referring to Appellees]... can pursue that claim individually and therefore is a holder of the claim." This holding is erroneous. The fact that Appellants are jointly and severally liable for the judgment amount means only that Appellants are "each liable [and] individually responsible for the entire obligation, but [the] paying party may have a right of contribution and indemnity from nonpaying parties." Black's Law Dictionary 997 (9th ed. 2009). That Appellants, as judgment debtors, are jointly and severally liable does not mean, as the Bankruptcy Court held, that each of the Appellees, as judgment creditors, can separately enforce the consent judgment against Appellants. As the Court has explained above, Michigan law provides that the consent judgment may only be enforced jointly, given that the consent judgment identifies the judgment creditors in the conjunctive and not in the alternative, and in light of the fact that the judgment is not divisible.
For the reasons stated above, the order of the Bankruptcy Court denying Appellants' motion to dismiss the involuntary bankruptcy petition is reversed; the case is remanded to the Bankruptcy Court with instructions that it dismiss the petition.
SO ORDERED.
Appellees also claim that Appellants "engaged in a number of nefarious transactions designed to make themselves uncollectable." Appellee Br. at 14-15. However, even assuming the truth of this allegation, Appellees have not shown how it is relevant to the present inquiry.
