Article courtesy of David Simonds and Edward McNeilly (Hogan Lovells)
In re Priddis, 2023 WL 2203562 (9th Cir. Feb. 24, 2023)
In February 2023, the Ninth Circuit Court of Appeals weighed in on the numerosity requirement for involuntary bankruptcy petitions. Overruling the lower courts, the Ninth Circuit held that an involuntary petition filed by 14 entities that shared a single $3 million judgment against a debtor satisfied the numerosity requirement under section 303(b) of the Bankruptcy Code.
Fourteen copyright holders obtained a $3 million judgment against Richard L. Priddis (“Priddis”) for willful copyright infringement. The 14 plaintiffs subsequently filed an involuntary chapter 7 petition against Priddis. Section 303(b)(1) of the Bankruptcy Code provides that, where a putative debtor has 12 or more creditors, involuntary bankruptcy proceedings may be initiated against a debtor only by three or more creditors each holding “noncontingent, undisputed claims” in the amount of at least $16,750. Because the parties did not dispute that Priddis has 12 or more creditors, the sole issue was whether three or more of those creditors held separate claims.
Priddis moved to dismiss the involuntary petition on the basis that the judgment only represented one claim, not three claims from three creditors, as required for involuntary petitions. The bankruptcy court dismissed the involuntary petition on this basis and the district court affirmed.
In a 2-1 decision, a panel of the Ninth Circuit Court of Appeals reversed the lower courts, finding that the fourteen claimants each held a separate claim because each had a right to payment of a certain amount of the judgment that could be readily ascertained from information in the underlying lawsuit, which contained a list of each creditor’s ownership interest in the applicable copyrights.
Further, under the Copyright Act, when a copyright owner elects to receive statutory damages for infringement, the copyright owner receives a fixed amount of the awarded judgment based on its ownership interest. Because the judgment was easily divisible and a portion of the judgment was traceable to each creditor, the court held that each claimant was an individual creditor and, therefore, more than three creditors filed the involuntary petition in accordance with the applicable requirements.