CHAPTER 3CASE ADMINISTRATION
Sub Chapter Commencement of a Case
Sec. 303. Involuntary cases
(a) An involuntary case may be commenced only under chapter 7 or 11
of this title, and only against a person, except a farmer, family
farmer, or a corporation that is not a moneyed, business, or commercial
corporation, that may be a debtor under the chapter under which such
case is commenced.
(b) An involuntary case against a person is commenced by the filing
with the bankruptcy court of a petition under chapter 7 or 11 of this
(1) by three or more entities, each of which is either a holder
of a claim against such person that is not contingent as to
liability or the subject of a bona fide dispute, or an indenture
trustee representing such a holder, if such claims aggregate at
least $10,000 more than the value of any lien on property of the
debtor securing such claims held by the holders of such claims;
(2) if there are fewer than 12 such holders, excluding any
employee or insider of such person and any transferee of a transfer
that is voidable under section 544, 545, 547, 548, 549, or 724(a) of
this title, by one or more of such holders that hold in the
aggregate at least $10,000 of such claims;
(3) if such person is a partnership--
(A) by fewer than all of the general partners in such
(B) if relief has been ordered under this title with respect
to all of the general partners in such partnership, by a general
partner in such partnership, the trustee of such a general
partner, or a holder of a claim against such partnership; or
(4) by a foreign representative of the estate in a foreign
proceeding concerning such person.
(c) After the filing of a petition under this section but before the
case is dismissed or relief is ordered, a creditor holding an unsecured
claim that is not contingent, other than a creditor filing under
subsection (b) of this section, may join in the petition with the same
effect as if such joining creditor were a petitioning creditor under
subsection (b) of this section.
(d) The debtor, or a general partner in a partnership debtor that
did not join in the petition, may file an answer to a petition under
(e) After notice and a hearing, and for cause, the court may require
the petitioners under this section to file a bond to indemnify the
debtor for such amounts as the court may later allow under subsection
(i) of this section.
(f) Notwithstanding section 363 of this title, except to the extent
that the court orders otherwise, and until an order for relief in the
case, any business of the debtor may continue to operate, and the debtor
may continue to use, acquire, or dispose of property as if an
involuntary case concerning the debtor had not been commenced.
(g) At any time after the commencement of an involuntary case under
chapter 7 of this title but before an order for relief in the case, the
court, on request of a party in interest, after notice to the debtor and
a hearing, and if necessary to preserve the property of the estate or to
prevent loss to the estate, may order the United States trustee to
appoint an interim trustee under section 701 of this title to take
possession of the property of the estate and to operate any business of
the debtor. Before an order for relief, the debtor may regain possession
of property in the possession of a trustee ordered appointed under this
subsection if the debtor files such bond as the court requires,
conditioned on the debtor's accounting for and delivering to the
trustee, if there is an order for relief in the case, such property, or
the value, as of the date the debtor regains possession, of such
(h) If the petition is not timely controverted, the court shall
order relief against the debtor in an involuntary case under the chapter
under which the petition was filed. Otherwise, after trial, the court
shall order relief against the debtor in an involuntary case under the
chapter under which the petition was filed, only if--
(1) the debtor is generally not paying such debtor's debts as
such debts become due unless such debts are the subject of a bona
fide dispute; or
(2) within 120 days before the date of the filing of the
petition, 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.
(i) If the court dismisses a petition under this section other than
on consent of all petitioners and the debtor, and if the debtor does not
waive the right to judgment under this subsection, the court may grant
(1) against the petitioners and in favor of the debtor for--
(A) costs; or
(B) a reasonable attorney's fee; or
(2) against any petitioner that filed the petition in bad faith,
(A) any damages proximately caused by such filing; or
(B) punitive damages.
(j) Only after notice to all creditors and a hearing may the court
dismiss a petition filed under this section--
(1) on the motion of a petitioner;
(2) on consent of all petitioners and the debtor; or
(3) for want of prosecution.
(k) 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.
(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2559; Pub. L. 98-353, title III,
Secs. 426, 427, July 10, 1984, 98 Stat. 369; Pub. L. 99-554, title II,
Secs. 204, 254, 283(b), Oct. 27, 1986, 100 Stat. 3097, 3105, 3116; Pub.
L. 103-394, title I, Sec. 108(b), Oct. 22, 1994, 108 Stat. 4112.)
Historical and Revision Notes
Section 303(b)(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(b)(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
senate report no. 95-989
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
Subsection (b) 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 (b)(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.
1994--Subsec. (b). Pub. L. 103-394 substituted ``$10,000'' for
``$5,000'' in pars. (1) and (2).
1986--Subsec. (a). Pub. L. 99-554, Sec. 254, inserted reference to
Subsec. (b). Pub. L. 99-554, Sec. 283(b)(1), substituted ``subject
of'' for ``subject on''.
Subsec. (g). Pub. L. 99-554, Sec. 204(1), substituted ``may order
the United States trustee to appoint'' for ``may appoint''.
Subsec. (h)(1). Pub. L. 99-554, Sec. 283(b)(2), substituted ``are
the'' for ``that are the''.
Subsec. (i)(1). Pub. L. 99-554, Sec. 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. (b). Pub. L. 98-353, Sec. 426(a), inserted ``against a
person'' after ``involuntary case''.
Subsec. (b)(1). Pub. L. 98-353, Sec. 426(b)(1), inserted ``or the
subject on a bona fide dispute,''.
Subsec. (h)(1). Pub. L. 98-353, Sec. 426(b)(2), inserted ``unless
such debts that are the subject of a bona fide dispute''.
Subsec. (j)(2). Pub. L. 98-353, Sec. 427, substituted ``debtor'' for
Effective Date of 1994 Amendment
Amendment by Pub. 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 Pub. L. 103-394, set out as a note under
section 101 of this title.
Effective Date of 1986 Amendment
Effective date and applicability of amendment by section 204 of Pub.
L. 99-554 dependent upon the judicial district involved, see section
302(d), (e) of Pub. L. 99-554, set out as a note under section 581 of
Title 28, Judiciary and Judicial Procedure.
Amendment by section 254 of Pub. 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 Pub. L. 99-554.
Amendment by section 283 of Pub. L. 99-554 effective 30 days after
Oct. 27, 1986, see section 302(a) of Pub. L. 99-554.
Effective Date of 1984 Amendment
Amendment by sections 426(a) and 427 of Pub. L. 98-353 effective
with respect to cases filed 90 days after July 10, 1984, and amendment
by section 426(b) of Pub. L. 98-353 effective July 10, 1984, see section
552(a), (b) of Pub. L. 98-353, set out as a note under section 101 of
Adjustment of Dollar Amounts
For adjustment of dollar amounts specified in subsec. (b)(1), (2) of
this section by the Judicial Conference of the United States, effective
Apr. 1, 1998, see note set out under section 104 of this title.
Section Referred to in Other Sections
This section is referred to in sections 101, 104, 106, 306, 362,
503, 504, 522, 541, 549 of this title; title 28 sections 1411, 1480.