In re- QDOS, Inc.

Case Type:
Case Status:
Reversed and Remanded
CC-18-1301-TaFS (9th Circuit, Nov 07,2019) Published
Before dismissing an involuntary bankruptcy petition based solely on an inadequate number of petitioning creditors, the bankruptcy court must ensure that the debtor's creditors are given notice of the involuntary petition and a reasonable opportunity to join the involuntary petition. The bankruptcy court upended Fed. R. Bankr. P. 1011 by allowing the debtor to avoid responding to the petitioning creditors' discovery requests, especially the list of creditors required by Fed. R. Bankr. P. 1003(b).
Procedural context:
The bankruptcy court dismissed an involuntary chapter 11 petition after concluding that (1) based solely on the putative debtor's assertions, but no list of creditors, the debtor had 12 or more creditors, and (2) there were fewer than three qualifying petitioning creditors. The petitioning creditors appealed.
Three alleged creditors of QDOS, Inc. filed an involuntary chapter 11 petition against QDOS. QDOS did not dispute that it was not paying its debts as they came due. Instead, QDOS asserted that it had 12 or more creditors, and that the involuntary petition was defective under 11 U.S.C. § 303(b). QDOS moved to dismiss the petition under Rule 12(b)(6). Two days before the hearing on the Rule 12(b)(6) hearing, the bankruptcy court issued a "tentative" ruling granting the motion, holding that one petitioner was not a qualifying creditor. Another petitioner joined the petition, and the bankruptcy court set another trial. QDOS, the debtor, refused to file a Fed. R. Bankr. P. 1003(b) list of creditors. At the trial, one of the petitioning creditors failed to appear. The bankruptcy court held that another of the petitioning creditors was not a qualifying creditor because he was an equity holder of securities in QDOS. The bankruptcy court also ruled that the absent petitioning creditor was not a qualifying creditor because his claim was subject to a bona fide dispute and because he was absent and failed to meet his burden of proof as to whether he was a qualifying petitioning creditor.
TAYLOR, FARIS, and SPRAKER, Bankruptcy Judges

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