Involuntary Debtors’ Evidence Improperly Blocked

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By Diane Davis

A married couple facing an involuntary Chapter 7 bankruptcy petition should’ve been allowed to prove how many creditors they have in their attempt to dismiss the suit, the Sixth Circuit Bankruptcy Appellate Panel held Jan. 17 ( In re Zenga , 2017 BL 12239, B.A.P. 6th Cir., No. 16-8022/8023, 1/17/17 ).

If there are 12 or more creditors in an involuntary bankruptcy, Section 303(b) of the Bankruptcy Code requires at least three creditors to file the suit (see Bloomberg Law: Bankruptcy Treatise, pt. I, ch. 15 (D. Michael Lynn et al. eds., 2016)).

Here, just one creditor, Ivan Qi, filed the involuntary bankruptcy petition against Vincent and Robin Zenga after he won a $2.5 million judgment against them in state court, Judge Guy R. Humphrey’s opinion for the court said.

The Zengas originally said in state court that they only had 10 creditors, which was a factual misrepresentation, the U.S. Bankruptcy Appellate Panel of the Sixth Circuit said.

Qi reasonably relied on that misrepresentation when he filed his petition, but his reliance shouldn’t have kept the Zengas from being allowed to introduce new evidence, the BAP said.

That’s because the bankruptcy court didn’t make a factual finding that Qi suffered a detriment due to his reliance on the misrepresentation, the BAP said.

If the bankruptcy court had taken evidence and found that the Zengas had more than 11 creditors, the court could have granted Qi leave to add additional creditors to the lawsuit, the BAP said.

Other courts faced with similar circumstances have granted petitioning creditors leave to seek additional creditors, the BAP said.

Judges Daniel S. Opperman and C. K. Preston joined the opinion.

Lefkovitz & Lefkovitz represented the Zengas.

Bass, Berry & Sims PLC represented Qi.

To contact the reporter on this story: Diane Davis in Washington, D.C. at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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