Lack of a third petitioning creditor leads First Circuit to reject “special circumstances” exception

The First Circuit Court of Appeals panel affirmed the decision of the U.S. Bankruptcy Court for the District of Puerto Rico to dismiss an involuntary petition by two creditors against a plastic surgeon. In Popular Auto, Inc. v. Reyes-Colon (In re Reyes-Colon), Nos. 17-1971-72, 2019 WL 1785039 (1st Cir. Apr. 24, 2019), the First Circuit held that the Bankruptcy Court’s equitable powers could not be exercised to supersede the requirement of Section 303(b)(1) in the Bankruptcy Code, which requires three or more petitioning creditors to begin an involuntary bankruptcy proceeding where a debtor has twelve or more creditors. The Court of Appeals panel rejected the petitioning creditors argument that “special circumstances” such as the debtor’s fraudulent conduct excuses the Section 303(b)(1) requirement. Central to this decision was an acknowledgment by the court that although the Bankruptcy Court has authority to provide equitable relief, it does not have the power to directly contradict specific statutory provisions in exercising that authority.

First Circuit Rejects “Special Circumstances” Exception To Numerosity Requirement Of Bankruptcy Code Section 303(B)(1)​