## Facts

- Larry Tarletz was the president of a corporation that had entered Chapter 7 liquidation.
- Tarletz personally guaranteed certain debts of the corporation owed to several creditors.
- The creditors filed an involuntary Chapter 7 petition against Tarletz under 11 U.S.C. § 303 because they did not want to wait for the corporation’s liquidation to conclude and then pursue any deficiency against Tarletz in state court.
- Tarletz’s existing delinquent debts were relatively small, but his potential future liability tied to the guarantees was large.
- Tarletz had no reasonable basis for not paying the past-due debts; instead, he chose to pay current obligations while leaving older delinquencies unpaid.
- There was no showing that Tarletz was liquidating his affairs or dissipating assets.
- Tarletz moved to dismiss, asserting he was regularly paying his legitimate debts as they came due and that the involuntary filing harmed his credit and ability to operate his business.
- Tarletz also stated that if the court did not dismiss the involuntary Chapter 7 case, he would seek to convert the case to a Chapter 11 reorganization.
- The record indicated that ordinary state-law collection procedures remained available to the creditors to pursue Tarletz on the guarantees without using bankruptcy as the collection forum.

## Issues

1. Whether the petitioning creditors established grounds for an order for relief under 11 U.S.C. § 303(h)(1) by showing Tarletz was “generally not paying” his debts as they became due, where he was paying current bills but leaving some past-due debts unpaid.
2. Whether, even if the § 303 requirements were satisfied, the court should dismiss or suspend the involuntary case under 11 U.S.C. § 305(a)(1) because the interests of both the creditors and Tarletz would be better served outside bankruptcy.

## Decision

- The court treated the petitioning creditors as having met the basic prerequisites to proceed under § 303 and did not end the case solely on the ground that the dispute involved guarantee-related claims.
- The court nonetheless dismissed (abstained from) the involuntary case under § 305(a)(1).
- In exercising § 305(a)(1) discretion, the court relied on the overall circumstances: the case functioned largely as a collection effort on guarantees connected to an already-pending corporate liquidation; Tarletz was not shown to be dissipating assets; and nonbankruptcy remedies were available.
- The court also considered the practical effects of an involuntary bankruptcy on Tarletz’s ongoing business and credit, along with Tarletz’s stated intent to seek Chapter 11 if the case continued.

## Legal Principles

- Under 11 U.S.C. § 303(h)(1), whether a debtor is “generally not paying” debts as they become due depends on the debtor’s overall payment pattern, including the number and amount of unpaid obligations and whether nonpayment reflects a general default rather than isolated delinquency.
- In evaluating § 303, disputed or contested claims are not automatically irrelevant; the court may evaluate the circumstances to decide whether such claims can be considered in assessing general nonpayment (a question that later courts discuss in light of pre-1984 practice).
- Under 11 U.S.C. § 305(a)(1), a bankruptcy court may dismiss or suspend a case when the interests of both the creditors and the debtor would be better served by dismissal or suspension.
- Section 305(a)(1) permits a broad, fact-driven inquiry; the court may consider any factors it finds relevant to whether bankruptcy administration will provide a meaningful benefit compared to available nonbankruptcy processes.
- An involuntary bankruptcy should not be maintained when it mainly duplicates ordinary collection litigation and bankruptcy administration would add cost and disruption without improving the position of creditors as a group.

## Conclusion

In In re Tarletz, the bankruptcy court dismissed an involuntary Chapter 7 petition under § 305(a)(1) after determining that, even assuming the petitioning creditors could satisfy § 303’s requirements, the controversy was best resolved outside bankruptcy because the case largely functioned as a guarantee-collection effort tied to a corporate liquidation, there was no showing of asset dissipation, and state-law remedies could address the creditors’ claims without the added harm and expense of an involuntary bankruptcy.


In re Tarletz, 27 B.R. 787 (1983)