Memorandum of Decision Re: Involuntary Proceedings

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re PACIFIC MEDICAL SERVICES,                                       No. 1-88-01383 INC.,      Debtor. ___________________________/
Memorandum of Decision
     On August 5, 1988, creditor Baxter Health Care Corp. filed an involuntary Chapter 7 petition against the debtor. The petition alleged that the debtor had less than twelve creditors and was not paying its debts as they came due.      The debtor answered the petition by alleging that Baxter's claim was subject to bona fide dispute, and added a counterclaim alleging intentional interference with contract and other torts. The debtor did not deny that it had fewer than twelve creditors. The debtor admits that it is no longer in business and has sold most of its assets for a price insufficient to pay off its creditors. Nonetheless, it has vigorously opposed the petition on the grounds that Baxter is not a proper petitioning creditor because its claim is in dispute.      Upon Baxter's motion, the Court struck the debtor's counterclaim pursuant to Bankruptcy Rule 1011(d), which prohibits assertion of claims by the debtor against petitioning creditors. However, the Court did allow the counterclaim to be treated as a defense relating to whether Baxter's claim is subject to bona fide dispute.      From the beginning, the debtor failed to understand that this court need not and would not resolve the issues raised in its counterclaim or determine the liability of Baxter to the debtor. The bankruptcy court's role in involuntary proceedings is to determine the presence or absence of a bona fide dispute, not resolve the dispute. In re Leach (Bkrtcy.D.Kan.1988) 92 B.R. 483, 487-88. Failing to comprehend the limited issues before this court, the debtor embarked on a course of discovery calculated to prove its case, not just the existence of a dispute. In fact, it seemed that the discovery was a fishing expedition to determine if there were even grounds for the allegations of a dispute. This excessive discovery has spawned the worst type of discovery hearings.      On December 27, 1988, a second creditor, C.D. Medical, Inc., joined in the involuntary petition. The debtor filed an "answer" to the joinder of this creditor by admitting that on the petition date C.D. Medical held an undisputed, noncontingent unsecured claim of $20,973.31. For the first time, however, the debtor alleged that it had more than twelve creditors and attached a list of them. On January 19, 1989, two other creditors claiming a total of about $16,000.00 also joined in the petition.      On January 20, 1989, the matter came before the Court on shortened notice of Baxter's motion for a status conference and further discovery orders. Since all of the above facts are undisputed, the first question the Court asks is whether any trial is necessary at all; if no triable issue of fact exists, the Court may summarily enter an order for relief in an involuntary case. In re Tikijian (Bkrtcy.S.D.N.Y.1987) 76 B.R. 304, 313. A status conference is an appropriate place for summary adjudication where sufficient facts are admitted. 28 Fed.Proc.L.Ed., Pretrial Procedure, section 64:22.      It is clear that with the joinder of three additional creditors the legal issues regarding the bona fides of the Baxter claim have faded to either near or total irrelevancy. Only if the Court finds that three petitioning creditors are necessary, and even then only if one of the creditors besides Baxter is disqualified, will the issue of the debtor's alleged dispute with Baxter have to be considered.      The argument for summary adjudication is simple. The debtor's answer to the petition does not deny that the debtor had less than twelve creditors; the debtor is accordingly deemed to have fewer than twelve creditors pursuant to FRCP 8(d). The debtor has admitted that one petitioning creditor, C.D. Medical, has a valid claim in excess of $5,000.00. Therefore, since the debtor has admitted to a bulk sale of its assets and the failure to pay its creditors anything more than their pro rata share some months ago, all of the elements necessary for an order fore relief pursuant to sections 303(b)(2) and 303(h)(1) of the Bankruptcy Code are present. Stated more simply, the debtor has admitted that it has fewer than twelve creditors, one undisputed petitioning creditor holding a claim over $5,000.00, and is not paying its debts.      The debtor's argument that it raised the issue of the number of its creditors in answer to the joinder of C.D. Medical is without merit. First of all, the joinder is not a new petition; pursuant to section 303(c) of the Code, it relates back to the original petition and is given the same effect as if the creditor was an original petitioning creditor. Secondly, Bankruptcy Rules 1011(b) and (e) contemplate and permit answers only to the original petition. Therefore, the answer of the debtor to the joinder of C.D. Medical is its original answer to Baxter's petition; the "answer" it filed to the joinder is a nullity, except insofar as it admits the bona fides of the C. D. Medical claim. It is insufficient to raise any new issues or undo an allegation the debtor has already been deemed to have admitted.      While it may at first blush seem somewhat harsh to deny the debtor the opportunity to amend its answer, a closer look at the equities makes it clear that such leave should not be granted. The debtor was under a duty, pursuant to Bankruptcy Rule 1003(b), to raise the issue and file a list of its creditors with its original answer if it took the position that three creditors were necessary. By failing to plead the issue, and by filing the required list five months late and on the eve of trial, the debtor has effectively waived its right to present the defense. In re Mason (9th Cir. 1983) 709 F.2d 1313, 1318-19. To hold otherwise would be to approve the debtor's sandbagging of the petitioning creditor and countenance delay of a proceeding which is supposed to proceed expeditiously.      In addition to the above factors, more than 45 days have passed since the debtor was served with requests to admit that, inter alia, at the time the petition was filed the debtor had sold most of its assets and was past due with the majority of its creditors. The debtor admits that its responses are delinquent. These matters are accordingly automatically deemed admitted for all purposes. 10 Fed.Proc.L.Ed., Depositions and Discovery, section 26:471.      For the foregoing reasons, it appears that there is no triable issue of fact, in that the debtor is deemed to have waived any defense as to the number of its creditors and has admitted to the existence of a qualified petitioner and that it is not paying its debts as they become due. An order for relief shall accordingly be entered.
Dated: January 23, 1989                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy