In Wolverine Endeavors VIII, LLC v. East West Bank, et al. (In re Carole D. King), BAP No. CC-24-1008 (9th Cir. B.A.P. Oct. 29, 2024), the Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) addressed an issue of first impression: whether, in an involuntary bankruptcy case, fully secured creditors should be counted when determining the number of creditors a debtor has under 11 U.S.C. § 303(b). The BAP held that fully secured creditors, whether recourse or nonrecourse, are countable creditors under § 303(b) in involuntary bankruptcy petitions.
In the case, Wolverine Endeavors VIII, LLC (“Wolverine”) filed an involuntary Chapter 7 bankruptcy petition against Carole D. King (the “Debtor”), claiming she owed them over $7 million from a judgment. Under 11 U.S.C. § 303(b), an involuntary bankruptcy petition can only proceed if the alleged debtor has fewer than twelve creditors, in which case one qualifying creditor may file the petition, or if the Debtor has twelve or more creditors, which requires at least three petitioning creditors.
The Debtor moved to dismiss the involuntary petition arguing that she had at least twelve qualifying creditors and that Wolverine did not meet the statutory requirement of three petitioning creditors. Several additional creditors joined Wolverine’s petition, but the bankruptcy court found that only two creditors (Wolverine and Insurance Company of the West) qualified as petitioning creditors under Section 303(b). The bankruptcy court then examined how many creditors the Debtor actually had—and determined that she had thirteen countable creditors, including three fully secured creditors. Since three petitioning creditors were required but only two qualified, the court dismissed the case.
Wolverine appealed, arguing that fully secured creditors should not count toward the total number of creditors under Section 303(b). The central issue on appeal was whether fully secured, nonrecourse creditors should be counted when determining the total number of creditors under Section 303(b). Wolverine argued that because secured creditors have the right to foreclose on collateral interests rather than pursue collection through bankruptcy, they should not be considered “holders” of a claim for Section 303(b) purposes.
The BAP disagreed, affirming that under Section 303, fully secured creditors are not excluded from the creditor count. While secured creditors generally cannot be the sole petitioning creditor, the statute does not prevent them from being countable creditors. Under the previous Bankruptcy Act, fully secured creditors were explicitly excluded from the creditor count. Congress removed that exclusion, suggesting an intent to include them. Wolverine argued that secured creditors lack an incentive to force a debtor into bankruptcy, but the BAP noted that secured creditors can benefit from bankruptcy—for instance, when they prefer court-supervised liquidation over lengthy foreclosure proceedings. The BAP aligned with the majority of courts that have addressed this issue, concluding that fully secured creditors should be counted toward the total number of creditors under § 303(b).
The BAP’s decision in Wolverine Endeavors VIII, LLC v. East West Bank establishes that fully secured creditors are included in the creditor count under Section 303(b). This ruling impacts when creditor(s) may file an involuntary petition, making it integral for creditor(s) to carefully assess a debtor’s creditor count before filing an involuntary petition.