## Facts

- A bank filed an involuntary Chapter 7 petition against Bette Mae Lough under 11 U.S.C. § 303, alleging she had fewer than twelve creditors and was not generally paying debts as they became due.
- The petition relied on two alleged obligations totaling about $210,000.
- First, Lough and her husband executed a 1973 joint promissory note with an approximate $75,000 balance, secured by a mortgage on property they held as tenants by the entirety.
- The secured property was later deeded to the bank in lieu of foreclosure and then sold by the bank.
- Lough asserted the sale proceeds should have been applied to the joint note and would have fully satisfied it, but the bank applied the proceeds to a different obligation owed only by her husband.
- The parties stipulated that the Loughs’ former attorney would testify that the intent was to apply the proceeds to the joint debt.
- Second, Lough signed a 1967 open-ended guaranty relating to her husband’s obligations; her husband’s later individual debts were consolidated into a single 1981 note of about $135,000.
- The bank claimed the 1981 consolidated note fell within the scope of Lough’s 1967 guaranty.
- Lough denied liability on the guaranty-based claim, asserting she did not intend to guarantee a substantially larger debt incurred 14–15 years later and arguing lack of consideration and lack of bank reliance.
- Lough answered that the bank’s claims were subject to a bona fide dispute, making the bank ineligible to be a petitioning creditor.

## Issues

1. Whether the bank held a claim “not contingent as to liability” and “not the subject of a bona fide dispute” as required for an involuntary petition under 11 U.S.C. § 303(b).
2. Whether disputes over application of collateral sale proceeds to the 1973 joint note created a bona fide dispute as to Lough’s liability or the amount due.
3. Whether disputes over the scope, consideration, and enforceability of the 1967 guaranty as applied to the 1981 consolidated note created a bona fide dispute.

## Decision

- The court found a bona fide dispute existed as to both the 1973 joint note claim and the 1967 guaranty/1981 consolidated note claim.
- Because the bank’s claim was subject to bona fide dispute, the bank was not a qualified petitioning creditor under § 303(b).
- The court dismissed the involuntary Chapter 7 petition.

## Legal Principles

- A creditor may file an involuntary bankruptcy petition only if it holds a claim that is not contingent as to liability and is not the subject of a bona fide dispute under 11 U.S.C. § 303(b).
- A bona fide dispute exists when there are genuine issues of material fact or substantial, non-frivolous legal questions regarding the debtor’s liability or the amount of the claim.
- The inquiry focuses on whether legitimate factual or legal questions exist, not on which side is likely to prevail on the merits.
- Where collateral disposition and application of proceeds plausibly could extinguish or materially reduce an asserted debt, the resulting contest over liability or amount can constitute a bona fide dispute.
- Where enforceability or scope of a guaranty is challenged on substantial grounds (including intent, consideration, and reliance), the guaranty-based claim may be subject to bona fide dispute and cannot support an involuntary petition.

## Conclusion

The court dismissed the involuntary Chapter 7 case because the bank’s two asserted bases for liability were both legitimately contested on substantial factual and legal grounds, rendering the bank’s claims subject to bona fide dispute and disqualifying it as a petitioning creditor under 11 U.S.C. § 303(b).


In re Lough, 57 B.R. 993 (Bankr. E.D. Mich. 1986)