# In Re Caucus Distributors, Inc.

> United States Bankruptcy Court, E.D. Virginia · October 25, 1989 · 106 B.R. 890

URL: https://www.frixlaw.com/law-library/cases/1919442

## Case

- **Full name:** In Re CAUCUS DISTRIBUTORS, INC., Debtor. in Re CAMPAIGNER PUBLICATIONS, INC., Debtor. in Re FUSION ENERGY FOUNDATION, INC., Debtor
- **Court:** United States Bankruptcy Court, E.D. Virginia
- **Decided:** October 25, 1989
- **Citations:** 106 B.R. 890; 19 Bankr. Ct. Dec. (CRR) 1556; 1989 Bankr. LEXIS 1829; 1989 WL 127485
- **Precedential status:** Published
- **Opinion:** Opinion by Bostetter
- **Judges:** Martin, Bostetter
- **Cited by:** 28 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/1919442

## How later opinions describe it (automated extraction)

- holding that burden of proof on the involuntary debtor is preponderance of the evidence

## Opinion text

MEMORANDUM OPINION
MARTIN V.B. BOSTETTER, Jr., Chief Judge.
This matter is before the Court upon the involuntary petitions in bankruptcy filed by the United States against Caucus Distributors, Inc. (“Caucus”), Campaigner Publications, Inc. (“Campaigner”), and Fusion Energy Foundation, Inc. (“Fusion”).
1
The involuntary petitions, which request relief under Chapter 7 of the United States Bankruptcy Code (“the Code”), were filed on April 20, 1987.
See
11 U.S.C. § 101
et seq.
The United States based the petitions upon claims outstanding against the debtors to-talling approximately 16-million dollars. The claims consisted of contempt fines imposed upon the debtors for their failure to comply with grand jury subpoenas. The United States filed the petitions as a sole petitioning creditor and did not make reference to the total number of creditors of each debtor.
2
Upon the denial of two motions for dismissal, answers to the petitions were filed on June 25, 1987. The government then filed a motion for summary judgment in each case. After the filing of the debtors’ answers but before the Courts' disposition of the motions for summary judgment, creditors intervened in each of the petitions, bringing the number of petitioning creditors to a minimum of three in each case.
*893
On March 8, 1988, this Court issued a memorandum opinion, which clarified that the United States was the holder of a claim, which was not contingent as to liability, nor subject to a bona fide dispute.
See In re Caucus Distributors, Inc.,
83 B.R. 921, 927-28 (Bankr.E.D.Va.1988). This Court denied the government’s motion for summary judgment, however, on the basis that a genuine issue remained as to whether Caucus and Fusion were debtors against whom the United States may proceed, and whether the debtors were generally not paying their debts.
Id.
at 930, 932 ;
see
11 U.S.C. §§ 303 (a), (h)(1).
3
Accordingly, the Court declined to rule on the issue of whether the government filed the involuntary petitions against the debtors in bad faith.
Id.
at 932 n. 12.
A trial on the issues remaining for adjudication was held and at the close of the government’s case, counsel for the debtors moved again to dismiss the involuntary petitions.
See
Fed.R.Civ.P. 41(b). The Court took the debtors’ motion under advisement and completed the trial on the merits.
4
Pursuant to Federal Rule of Civil Procedure 41(b), we now consider whether this Court should dismiss these involuntary proceedings “on the ground that upon the facts and the law the plaintiff has shown no right to relief.”
Id.
The first basis asserted by the debtors in support of the instant motion to dismiss is that the government should not be allowed to proceed as a matter of law in an involuntary bankruptcy proceeding against parties whom the government also is prosecuting for criminal violations in anoth.er forum. Secondly, the debtors assert that an involuntary petition filed by a sole petitioning creditor
with
the knowledge that a debtor has in excess of twelve creditors warrants dismissal as a matter of law. We consider these grounds in the order proposed.
PARALLEL CRIMINAL PROCEEDINGS
At the time the involuntary petitions were filed, the alleged debtors had been the subject of criminal investigations for approximately two and one-half years.
5
Accordingly, the debtors have identified the threshold issue to be “whether the Government of the United States may file an involuntary bankruptcy petition against an entity when such entity concurrently is the target of a federal prosecution or investigation.” Alleged Debtors’ Proposed Conclusions of Law, p. 1. We decline to address the issue as posed, however, in view of the fact that the eligibility of a creditor to file an involuntary bankruptcy petition is governed by the provisions of the Bankruptcy Code.
See
11 U.S.C. § 303 (b)(1),
infra
at 896; 11 U.S.C. §§ 101 (9) (defining “creditor”); 101(4) (defining “claim”). It is beyond the purview of this Court, therefore, to determine that the government may
never
file an involuntary petition against an entity defending a parallel criminal proceeding. We shall consider, however, whether the harm alleged by the debtors from the prosecution of parallel proceedings has occurred here, and a stay or dismissal warranted on the facts of this case.
*894
The debtors base their assertion that the government’s prosecution of parallel criminal and bankruptcy cases against them is prohibited as a matter of law upon the United States Supreme Court’s ruling in
United States v. Kordel,
397 U.S. 1 , 90 S.Ct. 763 , 25 L.Ed.2d 1 (1970) and its progeny. In
Kordel ,
the Supreme Court examined the criminal convictions of two corporate officers and the issue of whether the “Government’s use of interrogatories to obtain evidence from the respondents in a nearly contemporaneous civil condemnation proceeding operated to violate their Fifth Amendment privilege against compulsory self-incrimination.”
6
397 U.S. at 2-3 , 90 5.Ct. at 764-65.
With respect to the discovery requests, the
Kordel
Court noted that the defendants “never asserted, let alone demonstrated that there was no authorized person who could answer the interrogatories without the possibility of compulsory self-incrimination.”
Id.
at 9 , 90 S.Ct. at 768 (footnote omitted). In fact, the Court noted that the first defendant who answered the interrogatories never claimed the Fifth Amendment privilege nor claimed that he answered without representation of counsel or an appreciation of the possible consequences.
Id.
at 9-10 , 90 S.Ct. at 768-69 . In so doing, that defendant could not “complain now that he was compelled to give testimony against himself.”
Id.
at 10 , 90 S.Ct. at 768 . The Supreme Court further observed with respect to the second defendant that “[n]ot only did [he] never assert the privilege; he never even answered any interrogatories[,]” thus making the claim of compulsory self-incrimination even more tenuous.
Id.
The Supreme Court also rejected the defendants’ assertions that the government’s conduct if not violative of the Fifth Amendment nevertheless “reflected such unfairness and want of consideration for justice,” on the basis that such a ruling would “stultify enforcement of federal law[.]”
Id.
at 11 , 90 S.Ct. at 769 . Accordingly, the Supreme Court reversed the Sixth Circuit and upheld the convictions.
Id.
at 13 , 90 S.Ct. at 770 . It was in dictum that the Supreme Court suggested that
had
the defendants claimed that no one could “answer the interrogatories addressed to the corporation without subjecting himself to a ‘real and appreciable’ risk of self-incrimination.... the appropriate remedy would be a protective order under Rule 30(b), postponing civil discovery until termination of the criminal action.”
7
Id.
at 8-9 , 90 S.Ct. at 767-68 .
In
Afro-Lecon, Inc. v. United States,
the Federal Circuit examined the issue left open in
Kordel.
820 F.2d 1198 (Fed.Cir.1987). In
Afro-Lecon,
a corporation that had filed a civil claim against the United States discovered during the midst of the proceedings that it was the subject of a grand jury investigation of matters related to its civil suit.
Id.
at 1199-1200 . The corporation moved to suspend the civil proceedings before the General Services Administration Board of Contract Appeals (“the Board”) because key witnesses had been advised by counsel not to respond to discovery requests to avoid incrimination in the criminal proceedings.
Id.
at 1200 . The Board denied the motion to suspend, noting “that Afro-Lecon, as the party asserting the civil claim, could not use the fifth amendment as a basis to defer civil proceedings.”
Id.
The Federal Circuit noted that “[t]he non criminal proceeding, if not deferred might undermine the party’s Fifth Amendment privilege against self-incrimination, expand rights of criminal discovery beyond the limits of Federal Rule of Criminal Procedure 16(b), expose the basis of the defense to the prosecution in advance of criminal trial, or otherwise prejudice the case.” 820 F.2d at 1203 (quoting
Securities & Exchange Comm’n v. Dresser Indus., Inc.,
628 F.2d 1368 , 1375-76 (D.C.Cir.),
cert. denied,
449 U.S. 993 , 101 S.Ct. 529 , 66 L.Ed.2d 289 (1980)). While determining that the “dangers of parallel proceedings ha[d] already
*895
been realized,” (a motion to suppress the fruits of the discovery abuses had been granted in part and denied in part), the Federal Circuit remanded the ease to determine whether there was any further danger of discovery abuse, if the continuance of the civil case would interfere with the administration of the criminal proceedings, and for a more complete assessment of any sources of information in Afro-Lecon’s files that could be conveyed to a corporate agent designated to respond.
Id.
at 1204, 1207.
At the outset, we find the instant situation clearly inapposite. We deal here not with the propriety of convictions based upon information obtained in civil proceedings, as in
Kordel ,
nor with an attempt to prevent discovery abuses, as in
Afro-Le-con.
In fact, the debtors maintain not that the United States has gained an advantage in any criminal trial as a result of the filing of these petitions, but rather that the government somehow has gained an advantage in these civil proceedings by the mere existence of the criminal actions, and/or that these petitions could not be defended adequately in view of the need of the debtors’ representatives to assert the Fifth Amendment.
The debtors’ insistence that the parallel proceedings and the alleged advantage gained by the government in the instant situation is somehow violative of the debtors’ rights is unfounded. Even if we assume that there has been a transfer of information from the criminal division to the civil, the primary basis for the courts’ rulings in
Kordel
and
Afro-Lecon,
the fear that the criminal division may gain access to incriminating information by use of a more liberal discovery process in civil litigation, is not present. If the debtors believe that
any
cooperation between the criminal and civil division is prohibited, a contention which the debtors do not support with any authority,
8
we note that no harm has come from the interaction. The representatives of the debtors all claimed the Fifth Amendment, not one ever testified or complied with requests for discovery.
The potential for abuse may have existed when the government requested a list of creditors from the debtors under Bankruptcy Rule 1003(b), or when representatives of the debtor corporations were subpoenaed to testify at trial, but the debtors do not allege that the government obtained new information as a result of the filings.
9
In
*896
fact, if any party was hurt by the existence of- the criminal proceedings, it was the government. It received no new information aside from what it had obtained from the efforts of the criminal division. Ironically, if the government had waited until the parallel criminal proceedings had concluded, the government may have benefited from of the testimony of representatives of the alleged debtors who had invoked the Fifth Amendment, as well as the United States Supreme Court’s ruling in
Braswell v. United States,
487 U.S. 99 , 108 S.Ct. 2284 , 101 L.Ed.2d 98 (1988). The
Braswell
Court held on June 22, 1988, less than two months after the trial on these involuntary petitions that a representative of a corporation “c[an] not resist [a] subpoena for corporate documents on the ground that the act of production might tend to incriminate him.” 487 U.S. at-; 108 S.Ct. at 2295 .
With respect to the alleged debtors’ contention that they were unable to defend themselves adequately in the instant proceedings, we note that such an argument only has merit, if any at all, if the outcome of these cases is unfavorable to the debtors. We, therefore, decline to consider this argument as a proper element of the debtors’ motion to dismiss.
Accordingly, we find no improprieties in the prosecution of parallel criminal and civil proceedings against the alleged debtors in the instant cases, and deny the debtors’ motion to dismiss on this basis. Whether the government acted in “bad faith” by pursuing relief in this Court with a “prose-cutorial mind-set” is a different question entirely and must be examined in view of the totality of the circumstances in these cases. We, therefore, defer our examination of the issue of bad faith until we have evaluated the defenses of the alleged debtors to the instant petitions.
THREE CREDITOR REQUIREMENT
The requirements for filing an involuntary petition in bankruptcy may be found in Section 303(b) of the Bankruptcy Code which provides:
(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title—
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute, or an indenture trustee representing such a holder, if such claims aggregate at least $5,000 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $5,000 of such elaims[.]
11 U.S.C. §§ 303 (b)(1), (b)(2). Under this section, a single creditor may file an involuntary petition “only if the debtor against whom the proceeding is commenced has fewer than twelve creditors.”
Basin Electric Power Coop. v. Midwest Processing Co.,
47 B.R. 903, 907 (D.N.D.1984),
aff'd,
769 F.2d 483 (8th Cir.1985),
cert. denied,
474 U.S. 1083 , 106 S.Ct. 854 , 88 L.Ed.2d 894 (1986). It appears then that how a creditor proceeds with the filing of an involuntary bankruptcy petition must depend in part upon his knowledge of the number of the debtor’s creditors.
The extent of the government’s knowledge with respect to the number of the debtors’ creditors in the instant case is an issue which has been raised several times
*897
since the filing of these petitions. This Court has denied prior motions to dismiss, however, because the evidence before the Court at the time the rulings were issued did not establish conclusively that the government had demonstrated bad faith in the act of filing.
10
This Court also permitted the intervention of other creditors over the objection of the debtors on the same basis.
11
In response to the debtors’ motion to dismiss made on the second day of trial, however, counsel for the government replied in part as follows:
We have never made a secret, Your Honor, as to the Government’s knowledge as to potential creditors. If you look, for instance, to the Motion for Appointment of Interim Trustees, we attached the Egan affidavit which debtors have continually pointed to as the evidence of our knowledge. We made no secret of that.
In the motion for treating that Motion for Appointment of Interim Trustees
ex parte
matter we also submit much the same information. We have acknowledged to the Court in open court. Mr. Hudson last summer made that explicit.
Your Honor has observed from the very context of our pleadings that it’s no secret and I just don’t understand how [opposing counsel] can stand here and straight face (sic) suggest that we in any way hid that point.
It is our contention that if the matters can be waived, then it was our right to file the petition and see what the debtors want to do as far as that potential defense, and then once they elected to controvert the issue, then it is our view that as a procedural affirmative defense, the affirmative predicate is to comply with 1003(d).
12
Tr. Yol. Ill, pp. 83-84. In view of the government’s clear admission that prior to April 20,1987 it knew that the debtors each had more than twelve creditors, the issue here is whether this Court should dismiss these involuntary petitions as a matter of law.
The first statutes attempting to establish a uniform system of bankruptcy did not require that a minimum number of creditors file an involuntary petition in bankruptcy under any circumstances.
13
The Bankruptcy Act of 1898, however, provided that
three
creditors were required to file an involuntary petition against a debtor having a total number of more than twelve creditors.
14
The change from earlier stat
*898
utes reflected the compromise of a “pitched battle between those [in Congress] who wanted to give the creditor an effective remedy to assure equal distribution of a bankrupt’s assets and those who were determined to protect the debtor from the harassment of ill-considered or oppressive involuntary petitions, including those by a single creditor interest.”
In re Gibraltor Amusements, Ltd.,
291 F.2d 22, 28 (2d Cir.) (Friendly, J., dissenting),
cert. denied,
368 U.S. 925 , 82 S.Ct. 360 , 7 L.Ed.2d 190 (1961).
15
Section 59 of the Bankruptcy Act of 1898 also provided that creditors other than the original petitioners may appear and join the involuntary petition at any time.
16
Its present day counterpart is 11 U.S.C. § 303 (c).
17
Since the Act of 1898, the statutory provisions applicable to the filing of involuntary proceedings have undergone various changes. The minimum requirement of three petitioning creditors to commence a petition against a debtor who has in excess of twelve creditors, however, has remained the same.
18
To better understand the significance of Section 303 of the Bankruptcy Code, we examine its historical development.
The earliest case we have found on the issue of the proper filing of an involuntary petition was decided by the District Court for the Western District of Pennsylvania in
Robinson v. Hanway
in 1879. 20 F.Cas. 1012 (W.D.Penn.1879) (No. 11,953). In
Robinson ,
the precise question before the court was whether an original involuntary petition filed by a partnership against one of its partners was valid.
Id.
After the original petition was filed, several creditors intervened, “making of themselves suffi
*899
cient in number and amount to constitute the quorum required[.]”
Id.
at 1013 .
The
Robinson
court observed that under common law “no action could be sustained by a partnership firm against one of its members,” and no statute had since been passed to authorize this practice.
Id.
at 1012 . The court concluded, therefore, that the:
original creditors’ petition is void for want of proper petitioners, and did not give the court jurisdiction of the case, and that the intervening petitions are also void for want of an original petition to give them force. It is not a case of amendment of a defective petition of which the court has jurisdiction, and when the interveners perfect the petition by additional numbers and amounts. But it is an attempt to give life to a dead petition ... The intervenors must draw their support, if at all, from the original petition; but in this case the original petition is dead, and neither supports the interveners nor itself.
Id.; see also Despres v. Galbraith,
213 F. 190, 193 (8th Cir.1914) (original petition void for want of proper petitioner and therefore intervening petitioners could not draw support from original filing).
A decision seemingly contrary to the decision in
Robinson
later was rendered by the District Court for the District of Massachusetts in
In re Romanow.
92 F. 510 (D.Mass.1899). In
Romanow,
several of the creditors who had filed an involuntary petition had assented to a general assignment, the act of bankruptcy upon which the petition was based.
Id.
at 511 . Subsequent to the filing, several creditors intervened and opponents of the petition maintained that in view of the petitioning creditors’ assent to the assignment, the petition could not be sustained.
Id.
at 511-12 . Moreover, the opponents alleged, if the petition were allowed to stand because of the
intervening
petitions, “[t]his practice ... would permit a petition, at the time of its filing insufficient in substance as well as in form, to be made good by subsequent acts.”
Id.
at 511 . The
Romanow
court admitted that there was “weight in this argument, but [also noted that] the language of the act is clear; and the inconvenience, if inconvenience there be, was not deemed by congress a controlling consideration in the act of 1867 ... nor in some eases, at least, under the act of 1898[,]” and allowed the other creditors who had intervened to retain their standing as petitioning creditors.
Id.
at 511-12 .
The District Court for the Northern District of Georgia subsequently reasoned in
In re Bedingfield,
96 F. 190 (N.D.Ga.1899), however, that the
Romanow
court spoke only to the situation in which an involuntary petition was sufficient on its face upon its filing and at some time prior to adjudication it was established that certain creditors “did not have debts, or their debts were not provable,” a situation in which other creditors could intervene to correct any defects.
Id.
at 192 . The
Bedingfield
court emphatically stated that:
[t]he court would never entertain a mere sham petition prepared originally with a view to doing this, but it would be only where a petition was brought in good faith, and some such contingency as has been referred to occurred.
Id.
It is indicated from the above referenced cases and others which have followed that courts historically have attempted to distinguish between a petition “sufficient” and “insufficient” on its face at the time of its filing,
19
and between petitioners with bona
*900
fide and fraudulent motives.
20
Only with the former, in each instance, were petitioners permitted to amend the original filing to add creditors who sought intervention and cure the original defect.
Once the above rules of law emerged from the courts, parties began to focus more specifically on the mechanics of filing the involuntary petition itself.
See In re Coburn,
126 F. 218, 219 (D.Mass.1903) (determining how and when to calculate the number of the debtor’s creditors),
aff'd,
131 F. 201 (1st Cir.1904),
cert. denied,
196 U.S. 640 , 25 S.Ct. 796 , 49 L.Ed. 631 (1905);
W.A. Gage & Co. v. Bell,
124 F. 371, 380 (W.D.Tenn.1903) (determining what information the “list of creditors” filed in response to a petition should contain);
see also In re Berkebile,
144 F. 572, 576 (W.D.N.Y.1905) (indicating that objection to involuntary petition may be waived);
In re Plymouth Cordage Co.,
135 F. 1000, 1003-05 (8th Cir.1905) (determining that failure to allege the total number of the debtor’s creditors was not fatal to court’s jurisdiction over petition).
Despite efforts by courts to clarify the procedure for filing involuntary petitions, however, debtors and creditors alike continued to attempt to manipulate the status of claims to defeat or accomplish a proper filing.
See Moulton v. Coburn,
131 F. 201, 204-05 (1st Cir.1904) (creditors assigned claims to voluntary assignee to reduce number of creditors to sustain involuntary petition by less than three creditors; court held that upon a petition by less than three creditors it must appear that the debtor had less than twelve creditors on the date of filing),
cert. denied,
196 U.S. 640 , 25 S.Ct. 796 , 49 L.Ed. 631 (1905);
Leighton v. Kennedy,
129 F. 737, 741 (1st Cir.1904) (bankrupt made general assignment to one creditor who reassigned claim to twelve creditors to defeat sole creditor petition; court determined debtor intended to defeat scheme of bankruptcy statute and petitioning creditors’ statutory right to file involuntary petition);
In re Branche,
275 F. 555, 557 (N.D.N.Y.1921) (where debtor named as creditors individuals whose bills were payable monthly to increase total number of claim holders beyond twelve to defeat single creditor petition, court noted “[m]ere schemes and artifices to avoid letter and spirit of law will not be tolerated");
In re Blount,
142 F. 263, 263-64 (E.D.Ark.1906) (debtor transferred property for benefit of all but three creditors, but preferred creditors remained “unpaid” to ensure their inclusion in the total creditor count).
In
Canute S.S. Co. v. Pittsburgh & West Virginia Coal Co.,
263 U.S. 244 , 44 S.Ct. 67 , 68 L.Ed. 287 (1923), the United States Supreme Court addressed several of the issues pertaining to the proper filing of an involuntary bankruptcy which had been the focus of litigation at that time. In
Canute,
three creditors filed an involuntary petition in bankruptcy. 263 U.S. at 245 , 44 S.Ct. at 67 . The bankrupt denied the allegations of the petition, and several creditors were granted leave to intervene.
Id.
at 245-46 , 44 S.Ct. at 67-68 . Prior to adjudication, several creditors sought intervention to
oppose
the petition, but the bankrupt withdrew its objection to the petition and consented to an adjudication on the merits of the original creditors’ petition.
Id.
at 246 , 44 S.Ct. at 68 . The opposing creditors appealed the lower court’s decision to permit
*901
the intervention of several creditors, claiming that the original petition was defective and could not be cured.
Id.
The district court determined
inter alia
that the intervening creditors had cured any defect in the original petition, and the court of appeals affirmed.
Id.
On appeal to the Supreme Court, the opposing creditors maintained that to give a court jurisdiction over an involuntary petition it must be filed by not less than three creditors having provable claims, unless the creditors are less than twelve in number; and, where less than three of the original creditors qualify, the joinder of intervening creditors is in substance an amendment but in effect the equivalent to a new filing.
Id.
at 247-48 , 44 S.Ct. at 68 . The appellants further maintained that such an amendment could not validate the original petition
ab initio
or authorize an adjudication of bankruptcy to be made thereunder, for such an adjudication would be based upon an act committed more than four months prior to the date on which the requisite number of creditors entitled to maintain the action had become petitioners.
Id.
at 248 , 44 S.Ct. at 68 .
The United States Supreme Court in
Canute
observed that the argument of the opposing creditors that the creditors who sustain the petition must in fact be the original petitioners, failed to give weight to Section 59 of the Bankruptcy Act, which allowed creditors to intervene in an involuntary petition at any time until a dismissal or an adjudication on the merits.
Id.
Consequently the Supreme Court concluded:
that where a petition for involuntary bankruptcy is sufficient on its face, alleging that the three petitioners are creditors holding provable claims and containing all the averments essential to its maintenance, other creditors having provable claims who intervene in the proceeding and join in the petition at any time during its pendency before an adjudication is made, after as well as before the expiration of four months from the alleged act of bankruptcy, are to be counted at the hearing in determining whether there are three petitioning creditors qualified to maintain the petition, it being immaterial in such case whether the three qualified creditors joined in the petition originally or by intervention.
Id.
at 249 , 44 S.Ct. at 68 .
The Supreme Court’s opinion in
Canute,
while clarifying the issue of a court’s jurisdiction over an involuntary petition sufficient on its face, expressly noted that the “question, upon which the decisions show a conflict of opinion, as to the joinder of an intervening creditor in an original petition insufficient upon its face, is not here involved and is not determined.”
Id.
at 250 , 44 S.Ct. at 69 .
The first to address the issue left open by the Supreme Court’s decision in
Canute
was the First Circuit in
Myron M. Navison Shoe Co. v. Lane Shoe Co.,
36 F.2d 454 (1st Cir.1929). In
Navison Shoe,
a single creditor filed an involuntary petition based on the allegation that the alleged bankrupt had less than twelve creditors. In its response, the debtor admitted the act of bankruptcy alleged but maintained that the
allegation of the petition as to the number of creditors (setting out the facts) was false, and was fraudulently inserted in the petition, with the purpose of circumventing the provisions of the Bankruptcy Act, and that the petitioner did not come into court with clean hands.
36 F.2d at 455 .
The petition and answer were submitted to a special master for review who concluded that prior to the filing, Navison Shoe, the alleged bankrupt, made a general assignment for the benefit of its creditors, and that on the date of the filing, the alleged bankrupt had 29 creditors who had not assented to the assignment.
Id.
The master noted, however, that
after
the petition was filed, several of the claims were purchased by Joseph Navison, beneficial owner of all of the stock of Navison Shoe Co., and his nominees, and that several individuals could not be counted as creditors in view of the nature of their claims.
Id.
at 456 .
With respect to the petitioner’s knowledge of the debtor’s other creditors, the master observed that prior to the filing, the
*902
petitioning creditor had examined the bankrupt’s books and records.
Id.
The master also noted that correspondence and answers to interrogatories revealed that the debtor in fact had more than twelve creditors.
Id.
The master, however, found that there was "no evidence that [counsel for the petitioning creditor]
believed
that there were this number of creditors.”
Id.
(emphasis supplied). The master ultimately ruled that Navison Shoe had less than twelve creditors who could qualify as petitioning creditors, and, therefore, the petition was proper and an adjudication could be made.
Id.
The District Court approved the master’s recommendation and ordered adjudication.
Id.
On appeal, the First Circuit cited as “wholly immaterial” what the petitioning creditor’s counsel “believed,” and identified the material question “to be what the Lane Shoe Company
knew, or should have known and believed,
on the date it filed its petition ... having previously received the information that it had.”
Id.
(emphasis supplied).
At the outset of its analysis the First Circuit in
Navison Shoe
noted that an allegation regarding the number of an alleged bankrupt’s creditors must be verified in accordance with the number of creditors existing on the date the involuntary petition is filed.
Id.
at 456-57 . On the facts of the
Navison Shoe
case there were 28 creditors, and no other creditors had intervened; therefore, the First Circuit determined the “order of adjudication was improper, unless some valid reason, disclosed by the facts found by the master require[d] a different conclusion.”
Id.
at 457 .
The
Navison Shoe
court noted that the question posed had been addressed previously by the circuit in
Moulton v. Coburn,
131 F. 201 (1st Cir.1904),
cert. denied,
196 U.S. 640 , 25 S.Ct. 796 , 49 L.Ed. 631 (1905).
Id.
at 458. The First Circuit in
Moulton
established that while the Bankruptcy Act grants intervening creditors the right to proceed as parties to a petition, there is no evidence in the statute that rights not in existence at the time of filing can be made effective thereunder, or that a sole petition which alleges falsely that the debtor has less than twelve creditors can be validated later by a reduction in the number of eligible creditors. 131 F. at 204-05 ;
see
36 F.2d at 459 .
The court in
Navison Shoe
then indicated that there was:
a further ground upon which ... the creditor’s petition should .be dismissed, and that is, that the conclusion to be drawn from the primary facts found by the master is clear — that the Lane Shoe Company, on November 10,1928, when it filed the petition, in which it alleged that the creditors of the Navison Shoe Company, Inc., were less than twelve, did so knowing that the allegation was false; or did so recklessly not caring whether the allegation, which it affirmed as of its own knowledge to be true, was true or false, and, being false, its conduct was a fraudulent attempt to confer jurisdiction upon the court, where none existed....
[[Image here]]
... It is incredible that the petitioner did not believe the information that had been given it, or, having such information, did not suspect what it affirmed in its petition to be true was false, in which event its conduct would be fraudulent, for one cannot affirm as of his own knowledge a thing to be true, intending it to be relied upon, if he suspects it to be false, without being guilty of fraud, [citation omitted] A person who suspects his statement is false does not entertain an honest belief it is true, or is consciously and wickedly indifferent to its truth or falsity.
36 F.2d at 459 .
Thus,
Navison Shoe
clarified that a petition which fails to aver the total number of the debtor’s creditors, or is mistaken on this point is indeed “sufficient on its face” for the purpose of invoking the court’s jurisdiction, (assuming that it contains the averments necessary to sustain an adjudication on the merits), but that a court should not retain jurisdiction over an involuntary proceeding initiated by a single creditor who intentionally or recklessly
*903
files a petition against a debtor who had more than twelve creditors.
The First Circuit’s decision in
Navison Shoe
reflects the underlying principle evident since the earliest decisions on involuntary bankruptcy petitions, which is the duty of a court to enforce compliance with the provisions of bankruptcy statutes.
Accord In re Blount,
142 F. 263, 265 (E.D.Ark.1906) (“The duty of the courts is to carry this intention of Congress [to secure equal distribution] to the extent which the language of the act justifies. Mere schemes and artifices to avoid the letter and spirit of the law will not be tolerated.”);
Leighton v. Kennedy,
129 F. 737, 741 (1st Cir.1904) (“An attempt ... to defeat the scheme of the [involuntary bankruptcy] statute, is unlawful and void, and so clearly so that we need not elaborate the proposition.”). The rule of law as expressed by the Seventh Circuit in
In re Crofoot Nielsen & Co.
in 1963 was that:
if a single creditor files a petition with knowledge that the allegation (less than twelve creditors) is false, the petition will be dismissed as a fraudulent attempt to confer jurisdiction where none exists and intervention ‘presumably’ will be denied.
313 F.2d 170 , 171 (7th Cir.1963) (citations omitted).
It was the First Circuit’s decision in
In re Crown Sportswear, Inc.,
which modified slightly the developing trend by discussing its ruling in terms of “bad faith,” in addition to fraud. 575 F.2d 991 (1st Cir.1978). In
Crown Sportswear,
a sole petitioning creditor alleged that the debtor had fewer than twelve creditors in its involuntary petition.
Id.
at 992 . The debtor filed a motion to dismiss on the basis that “since it had more than eleven creditors, the bankruptcy court had no jurisdiction over the petition.”
Id.
The bankruptcy court determined that the “allegation of fewer than twelve creditors was not made in bad faith, nor was the conduct of the petitioner’s attorney reckless[,]” and the district court affirmed.
Id.
To the
Crown Sportswear
court, it was “obvious” that the Bankruptcy Act anticipated the situation in which sole creditors were mistaken as to the number of a debt- or’s creditors, and that the emphasis of the statute was not the “correctness of the originating petition.”
Id.
at 993 . Moreover, the court found no authority indicating that a “cursory investigation amounted] to bad faith as a matter of law.”
Id.
The First Circuit distinguished its prior holding in
Navison Shoe
on the basis that the petitioning attorney in
Navi-son
was informed several times prior to the bankruptcy proceedings that there were more than thirty creditors.
Id.
at 993-94 . The court in
Crown Sportswear
also acknowledged the proposition stated in
In re Crofoot Nielsen,
that a fraudulent filing will result in a dismissal, but ultimately determined that the facts before it were more analogous to those in
In re Security Motor Co.,
51 F.Supp. 559 (W.D.Mo.1943), a case in which the court did not find bad faith upon the filing of an involuntary petition by a single creditor because it was not “the usual case of fraud and deceit.”
Id.
at 994;
see
51 F.Supp. at 561 .
21
*904
The
Crown Sportswear
court concluded its opinion by responding to the debtor’s allegation that in making an inaccurate allegation regarding the number of the debt- or’s creditors, the petitioning creditor had violated Bankruptcy Rule 911, which required that a pleading or motion be filed in good faith. 575 F.2d at 994 .
22
The court noted that the debtor had attempted to proffer testimony on the issue of whether the creditor knew or should have known that the debtor had in excess of twelve creditors, but the bankruptcy court excluded the evidence and no objection was made.
Id.
The First Circuit agreed that the “rule requires that a pleading or motion must be filed in good faith[,]” but ultimately concluded that there was no such proof on the issue.
Id.
After
Crown Sportswear,
many courts addressing the situation in which a petitioning creditor failed to make a due investigation of the number of the debtor’s creditors, or knew or should have known that the debtor had more than twelve creditors, have couched their analy-ses in terms of good faith.
23
The most recent decision directly addressing the issues attendant to a proper filing of an involuntary petition by a single creditor is the Eighth Circuit’s decision in
Basin Electric Power Coop. v. Midwest Processing Co.,
769 F.2d 483 (8th Cir.1985),
cert. denied,
474 U.S. 1083 , 106 S.Ct. 854 , 88 L.Ed.2d 894 (1986). In
Basin Electric,
a sole petitioning creditor filed an involuntary petition and shortly thereafter, two creditors intervened. 41 B.R. 90, 96-97 (Bankr.D.N.D.1984). The debtor alleged
inter alia
that the petition was filed in bad faith because the petitioning creditor knew that the debtor had more than twelve creditors.
See id.
at 102 . The bankruptcy court observed, however, that the debtor could not argue that the petitioning creditor knowingly included false allegations in the petition because the creditor had avoided making
any
allegations regarding the number of the debtor’s creditors in the involuntary petition.
Id.
at 103 . Consequently, the bankruptcy court found that it could not find “bad faith merely from the conduct of Basin Electric wherein it filed the involuntary petition with knowledge
*905
that it needed two additional supporting petitioners.”
Id.
On appeal, the district court independently examined the three creditor requirement imposed under Section 303 of the Bankruptcy Code, and the allegations of bad faith.
See
47 B.R. 903, 907-09 (D.N.D. 1984); 11 U.S.C. § 303 ,
supra
text at 12-13. In its review of the record, the district court observed that the debtor had 100 creditors and that the petitioning creditor had “simply ignored the three creditor requirement of § 303(b), even though [it] knew that [the debtor] had twelve or more creditors.” 47 B.R. at 907-08 .
Addressing the bankruptcy court’s decision to allow other creditors to join the petition, the district court stated:
Despite the liberal joinder envisioned under § 303(c), the three creditor requirement of § 303(b) would be rendered meaningless if subsequent joinder of additional parties were sufficient in all cases where fewer than three creditors originally commenced an involuntary case against a debtor who has twelve or more creditors. Section 303(c) may properly be invoked where a single petitioning creditor is unaware that a debtor has twelve or more creditors. But where, as in this case, a single'creditor commences an involuntary case despite knowledge that the debtor has twelve or more creditors, the petition is deficient and should be dismissed absent special circumstances.
Id.
at 908. The district court ultimately concluded that the “bankruptcy court erred in not dismissing [the creditor’s] petition against [the debtor] for failure to meet the three creditor requirement of § 303(b).”
Id.
To evaluate the allegations of bad faith, the district court considered the creditor’s subjective motives for filing, in addition to whether a reasonable person in the position of the petitioning creditor would have filed the petition.
Id.
at 909. The district court ultimately concluded that the bankruptcy court
also
erred in not dismissing the petition by reason of the petitioning creditor’s bad faith.
Id.
at 910.
On appeal to the Eighth Circuit, it appears that the petitioning creditor challenged only the lower court’s finding of bad faith and argued that “because the three creditor requirement is not jurisdictional and may be waived, [citations omitted], it did not act in bad faith by knowingly filing a deficient petition that omitted reference to the number of [the debtor’s creditors].” 769 F.2d at 485 . The Eighth Circuit found with respect to the filing, however, that:
[accepting appellant’s argument would circumvent unduly the three creditor requirement of section 303(b). The three creditor requirement is not a meaningless formality that a creditor may ignore until after filing the involuntary petition. While an involuntary petition may be cured after filing when a single creditor files in good faith believing the debtor has fewer than twelve creditors, a single creditor may not file an involuntary petition knowing the debtor has twelve or more creditors....
[[Image here]]
... Basin Electric knew that Midwest Processing had twelve or more creditors and intentionally filed a deficient petition. Merely because the defects were subject to waiver does not excuse the intentional filing of a defective petition.
The three creditor requirement is designed to prevent use of involuntary bankruptcy proceedings by creditors as a means of harassing an honest debtor, [citations omitted]. If the three creditor requirement is to have any legal significance, it may not be knowingly circumvented with an eye to adding other creditors later on.
Id.
at 486-87 .
Although the district court and the court of appeals in
Basin Electric
did not cite an historical basis for their analyses, it is clear that their opinions are well-supported by the decisions we have reviewed above. Courts consistently have attempted to uphold the integrity of the bankruptcy statutes, and more specifically the three creditor requirement. While it has long been established that a defective petition
*906
may be amended, or a particular defect waived, the
intentional
violation of a statute has never been ignored; for to allow such conduct would render the statute meaningless and creditors could file involuntary petitions as they did prior to 1898. We, therefore, concur with the ultimate holding of the Eighth Circuit that an involuntary petition filed by a single creditor with the knowledge that the debtor had in excess of twelve creditors must be dismissed, and adopt the approach of the district court in
Basin Electric,
and which analyzed the issue of the intentional filing of a deficient petition independently from the issue of bad faith.
The issue of whether a sole petitioning creditor intentionally and knowingly filed a deficient involuntary petition in bankruptcy is a limited one. If the alleged debtor establishes that the creditor knew that the debtor had in excess of twelve creditors and filed as a sole creditor nevertheless, the appropriate result is the dismissal of the involuntary petition.
24
See In re Rush,
10 B.R. 526, 527 (Bankr.N.D.Ala.1981) (if issue of fraud or other bad faith is determined by Court against original petitioners, petition and case instituted thereon should be dismissed, regardless of later intervention of creditors);
In re Earl’s Tire Serv., Inc.,
6 B.R. 1019 , 1022 n. 9 (D.Del.1980) (stating in dicta that assuming sole creditor filed with knowledge that debtor had more than twelve creditors, debtor could have obtained dismissal of petition); In
re Trans-High Corp.,
3 B.R. 1, 4 (Bankr.S.D.N.Y.1980) (noting that courts have “imposed the sanction of dismissal of the petition as a sort of punitive measure.”);
In re Herriott,
1 Bankr.Ct. Dec. (CRR) 793, 794 (Bankr.D.Mass.1975) (if allegation that debtor had less than twelve creditors is found to have been made in bad faith, recklessly, or fraudulently, the court lacks jurisdiction and therefore the involuntary petition must be dismissed and there is nothing in which other creditors can intervene);
accord Securities & Exch. Comm’n v. United States Realty & Improvement Co.,
310 U.S. 434, 457-58 , 60 S.Ct. 1044, 1054 , 84 L.Ed. 1293 (1940) (noting long practice of bankruptcy courts to permit parties in interest to assert, whether on strictly jurisdictional grounds or not, that the proceeding should not be allowed to proceed);
In re Ettinger,
76 F.2d 741, 742 (2d Cir.1935) (“[I]t is the duty of the court,
sua sponte,
when it believes its jurisdiction may have been imposed upon, to inquire into the facts and act in accordance therewith.”);
In re Harvey Probber, Inc.,
44 B.R. 647, 651 (Bankr.D.Mass.1984) (citing decisions which have sanctioned
sua sponte
dismissals);
In re Century City, Inc.,
8 B.R. 25, 29 (Bankr.D.N.J.1980) (power of court to dismiss case
sua sponte
when its jurisdiction has been improperly invoked is inherent in the bankruptcy court as a court of equity, guided by equitable doctrines and principles);
In re Fast Foods Properties, Ltd.,
5 B.R. 539, 540 (Bankr.C.D.Cal.1980) (“a court of bankruptcy has always had the inherent power to dismiss a case which imposed upon its jurisdiction.”);
In re Northwest Recreational Activities,
4 B.R. 36, 39 (Bankr.N.D.Ga.1980) (good faith is merged with power of court to protect its jurisdictional integrity from petitioners seeking to circumvent jurisdictional restrictions and from petitioners with demonstrable frivolous purposes absent any economic reality);
In re Saint Matthew Lutheran Church of Irvine, CA,
6 Bankr.Ct. Dec. (CRR) 578, 579 (Bankr.C.D.Cal.1980) (bankruptcy court has always had inherent power to dismiss a case which imposed upon its jurisdiction).
We acknowledge that the instant situation differs slightly from those prior in which petitions were dismissed, in that the petitions at hand are indeed sufficient on their face, thereby invoking the jurisdiction of this Court, and that the government did not make a “fraudulent statement” regarding the number of the debtors’ creditors. We note, however, that it is precisely because the jurisdiction of this Court may be
*907
invoked so easily, thrusting an unsuspecting debtor into the uncertain status imposed during the “gap” period of an involuntary petition, that this Court has the obligation to determine once a petition is filed whether to
retain
jurisdiction if the circumstances of the filing indicate a dismissal is warranted. Moreover, despite the government’s having avoided a finding of actual fraud, by making no statement regarding the number of debtors’ creditors, we find the government’s deliberate actions and omission of an allegation pertaining to the number of the debtors’ creditors to evidence the improper use of the statute and invocation of this Court’s jurisdiction.
25
In contrast to the narrow legal issue of whether a deficient petition intentionally has been filed, the issue of bad faith is factual,
see United States Fidelity & Guar. Co. v. DJF Realty & Suppliers,
58 B.R. 1008, 1011 (N.D.N.Y.1986) (bad faith in an involuntary petition is a factual issue), and based upon the totality of the circumstances,
see In re Elsub Corp.,
66 B.R. 189, 193 (Bankr.D.N.J.1986) (existence of bad faith is determined by the totality of the circumstances). It may well be that a creditor who filed an involuntary petition with knowledge that the debtor has more than twelve creditors acted in bad faith, but the two issues are not necessarily one and the same.
It appears that the government’s strategy to “file and wait” was in part based upon the fact that a debtor may waive its right to object to a petition filed by an insufficient number of petitioning creditors.
See
Tr. Vol. II, p. 85;
In re Earl’s Tire Serv.,
6 B.R. 1019, 1022 (D.Del.1980) (debtor waived any right it had to object to
*908
defects in petition and consent to being adjudicated a bankrupt). Prior to waiving the debtor’s defense, however, the reviewing court must establish that the petitioning creditor took reasonable steps to ascertain the number of the debtors’ creditors
before
filing the petition.
See In re McIsaac,
19 B.R. 391, 397 (Bankr.D.Mass.1982). Again, the distinguishing factor which this Court believes is dispositive is that the government at the time of filing knew that the debtors had in excess of twelve creditors, and filed as a single petitioning creditor despite that knowledge.
Also in its defense, the government contends that pursuant to Bankruptcy Rule 1003(b), it had the right to file as a single creditor and wait for the debtors to file lists of their creditors. Bankruptcy Rule 1003(b) Provides that “[i]f the answer to an involuntary petition filed by fewer than three creditors avers the existence of 12 or more creditors, the debtor shall file with the answer a list of all its creditors[.]” Bankr.R.P. 1003(b). Rule 1003(b), however, addresses only the situation in which the sole petitioning creditor unknowingly files a deficient petition, and the debtor’s answer then reveals the existence of more than twelve creditors. Rule 1003(b) was not meant to be used as a weapon to “flush out” creditors and force the debtor to assist in the
preparation
of the involuntary petition pending against him.
See In re McDonald Trucking Co., Inc.,
74 B.R. 474, 479 (Bankr.W.D.Pa.),
motion for reconsideration denied,
76 B.R. 513 (Bankr.W.D.Pa.1987).
26
Nor do we believe that Rule 1003(b) anticipates reliance by a petitioning creditor who
had
lists of creditors prior to filing, which the government did in this case.
See
Tr. Vol. Ill, p. 82 (Court noted that government wanted lists of creditors when the government had extensive information regarding the debtors’ creditors);
In re Beacon Reef Ltd. Partnership,
43 B.R. 644, 646 (Bankr.S.D.Fla.1984) (“The Court attaches no importance to the debt- or’s failure to file a list of creditors under Rule 1003(d), because the petitioning creditor had access prior to trial to the names and addresses of all creditors claimed to have existed as of the date of filing and did not seek to join any of those creditors in his petition.”).
The government also gave policy reasons to support its actions. First the government asserted that the debtors’ defense to the criminal proceedings has been that the debtors do not in fact owe debts to any party. The government suggested, therefore, that the debtors’ defense provided the government with a good faith basis for questioning the actual identity of the debtors’ creditors. Tr. Vol. Ill, p. 84. Secondly, the government asserted that in accordance with the Code and applicable ease law, prior to dismissal a court must allow sufficient time for other creditors to join the petition, and other creditors in fact had joined.
Id.,
p. 85. Thirdly, government’s counsel noted, “we had a real problem as to whether word would get out what we were going to do, and we made it very clear in that motion,
ex parte
treatment of the interim trustee motion (sic) that it was the secrecy obligation that compelled us to come in and ask for that particular treatment, and I think that is also a proper justification for proceeding as we did.”
Id.
p. 86. The above policy arguments, however, go to the issue of whether the petitions were filed in bad faith, a consideration independent from whether the integrity of the three creditor provision must be upheld.
We note that some courts have cited an increased “flexibility” in the provisions of the Code pertaining to involuntary petitions,
see In re CLE Corp.,
59 B.R. 579, 585 (Bankr.N.D.Ga.1986) (“courts have found a Congressional intent in section 303(h) to grant more flexibility and make it easier to commence involuntary proceed
*909
ings against debtors”), however, the added flexibility in the involuntary mechanism is reflected in the substantive aspects of Section 303. For example, under the Bankruptcy Act a petitioning creditor was required to establish “[technical and often hard to prove ‘acts of bankruptcy’ the Code has eliminated “acts of bankruptcy” and now requires the petitioning creditor to establish that the “debtor is generally not paying its debts as they become due[.]” 2
Collier on Bankruptcy
If 303.01 at 303-7 (15th ed.1989);
see In re All Media Properties,
5 B.R. 126, 135 (Bankr.S.D.Tex.1980) (reviewing changes in § 303 from the Act),
aff'd,
646 F.2d 193 (5th Cir.1981). Congress, however, has kept the three creditor requirement intact. We, therefore, have no basis to infer that Congress intended the increased “flexibility” to apply to the provision specifying the number of creditors required to commence a petition under the statute.
See In re James Plaza Joint Venture,
67 B.R. 445, 447 (Bankr.S.D.Tex.1986) (“Involuntary petitions commenced under 11 U.S.C. Section 303 must be initiated by the correct number of creditors. A single creditor is sufficient to commence an involuntary proceeding if the debtor has fewer than twelve creditors.”);
see also
“Involuntary Petitions Under the Code,” 97 Banking L.J. 292, 301 (April 1980) (noting that if debtor has more than twelve creditors, involuntary petition “must be executed by at least three petitioning creditors.”).
On the basis of the foregoing, we find that the government had actual knowledge that each of the debtors had in excess of twelve creditors on the date the petitions were filed. The government’s decision to file the petitions despite that knowledge constituted an improper use of the involuntary bankruptcy statute and consequently an improper invocation of this Court’s jurisdiction; we, therefore, dismiss the involuntary petitions pending against the three named debtors. We again note that to determine whether the government acted in “bad faith” in filing these involuntary cases, we must examine the totality of the circumstances surrounding the decision to file. We, therefore, proceed at this time to examine the merits of the government’s cases against the debtors.
MONEYED, BUSINESS, OR COMMERCIAL CORPORATION
Even assuming that this Court denied the debtors’ motion to dismiss the involuntary petitions, serious questions remain with respect to the merits of the petitions themselves. First, in opposition to the government’s filings, the alleged debtors, Fusion and Caucus, claimed that they were not-for-profit corporations, and, therefore, were ineligible for relief under the Code.
27
See
11 U.S.C. § 303 (a),
supra
note 3. In this Court’s opinion on the government’s motion for summary judgment, we stated that the debtors must plead and prove the issue of their eleemosynary status.
See Caucus,
83 B.R. at 929 (citing
In re Johnson,
13 B.R. 342, 346-47 (Bankr.D.Minn.1981)). We review below the factors that this Court must consider in its evaluation of this issue.
In
In re Allen University,
the Fourth Circuit considered whether a university could be subject to an involuntary reorganization under chapter 10 of the Bankruptcy Act.
See
497 F.2d 346, 347 (4th Cir.1974). In accord with its prior ruling in
Hoile v. Unity Life Ins. Co.,
136 F.2d 133 (4th Cir.1943), the Fourth Circuit noted that the phrase “ ‘moneyed, business, or commercial corporation’ ha[d] acquired a meaning which limit[ed] it to corporations organized for profit[.]”
Id.
at 348. To determine whether the debtor could become subject to an involuntary proceeding, the Fourth Circuit examined its charter of incorporation and its corporate activities.
28
497 F.2d at
*910
347-48;
see Hoile v. Unity Life Ins. Co.,
136 F.2d at 135 .
The
Allen University
court noted that the university neither issued capital stock, nor a return of capital to investors outstanding. 497 F.2d at 348 . The Fourth Circuit concluded, therefore, that although the university carried on a number of activities, which if standing alone could be perceived to be commercial in nature, such activities did not affect the “institution’s main purpose of education.”
Id.
Implicit in the Fourth Circuit’s rulings we believe is a position expressly stated by the court in
Schuster v. Ohio Farmers’ Co-op Milk Ass’n.,
61 F.2d 337 (6th Cir.1932) which explained that:
where the
chief purpose
of the corporation is to carry on trade or commerce in an established field, and to do this primarily for the financial benefit of those who have joined in its organization and in the conduct of its affairs, there is but little room for doubt that the corporation is a ‘business or commercial’ one within the intendment of the Bankruptcy Act.
61 F.2d at 338 (emphasis supplied).
Turning to the evidence proffered by Fusion Energy Foundation, we note that the exhibit upon which it primarily relies is its corporate charter.
See
Exh. Z. The charter reflects that Fusion was founded in August 5, 1975 and provides in pertinent part:
3. The purposes for which the corporation is to be formed are for scientific, educational and charitable purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code of 1954 and in this connection are:
a. To provide sustained intellectual and financial support and direction to educational and scientific activities directed to the achievement of industrial-scale fusion power, and to initiate and conduct campaigns in its own name to that end.
b. To sponsor and receive studies relevant to scientific and technical strategies for the achievement of a Manhattan Project-type crash program for the development of fusion energy on an industrial scale, and relevant to the economics of fusion-based production.
c. To disseminate the results to government and international officials and bodies, the press, and the population-at-large.
d. To establish liason (sic) with representatives of labor, farms, anti-fission and environmental groups, scientists and other professionals, and governmental and international agencies.
e. To produce, buy, distribute and lease film and related media and material on the nature and necessity of fusion power for the achievement of purposes stated above paragraphs a, b and c.
Exh. Z. In connection with its stated purposes Fusion publishes two journals entitled “Fusion” (Exh. AU), and “International Journal of Fusion Energy,” (Exh. AV).
Fusion also proffered the testimony at trial and the affidavit of Stephen 0. Dean, president of Fusion Power Associates. Tr. Vol. Ill, pp. 204-222; Exh. AF. Mr. Dean testified that he had been acquainted with Fusion since 1974, participated in two to three of its conferences, subscribed to Fusion Magazine, (Tr. Vol. Ill, pp. 208-09), and that the activities of Fusion Energy Foundation “taken as a whole ... are primarily educational in nature and that their purpose is to provide technical information to stimulate ideas to the solution of some of the major problems facing the world.” Exh. AF. Fusion also introduced letters from the Internal Revenue Service that referred to its tax exempt status. Exh. CD, CE. Finally, Fusion introduced a letter from the guardian of petitioning creditor, Charles R. Zimmerman, referring to amounts given by Zimmerman to Fusion that were deducted by Zimmerman as charitable contributions. Exh. 0;
see also
Orr Deposition at 44-45.
In response to the above, the government proffered the affidavit of Agent Egan
*911
of the Federal Bureau of Investigation (FBI), alleging that Fusion engaged in commercial activities (Exh. 41, p. 1); an internal document indicating that Fusion produced a magazine which had a circulation of 45,000, and sold at a set price of $20 (Exh. 46); and several documents seized from a location allegedly occupied by the debtors (hereinafter “internal documents”), which revealed that Fusion used accounting methods, based upon an income, expense, and profit analysis, to manage its operations (Exhs. 45, 63, 72, 108, 118).
29
The government also challenged on cross-examination, the testimony of Mr. Dean by eliciting that he was not familiar with the financial composition of Fusion. In its post trial memorandum, the government also questioned the significance of the tax exempt status in view of the dependence of the Internal Revenue Service upon the debtor for information. Post Trial Memorandum of the Government, p. 33.
While the government has proffered the larger number of exhibits on this issue, they do not, taken individually or as a whole, outweigh the evidence proffered by Fusion. First, the affidavit of FBI Agent Egan proffered by the government was executed to support the issuance of a search warrant. While this Court determined the exhibit to be admissible, we conclude that the probative value of the agent’s affidavit with respect to the issue of the debtor’s eleemosynary status is minimal.
The government cites a number of cases in which the findings of agencies may be accepted to establish the truth of the matter asserted. Those cases, however, all involved agency personnel who drew conclusions based upon personal knowledge, factual inquiries, or hearings involving interested parties.
See Ellis v. International Playtex, Inc.,
745 F.2d 292, 301, 304 (4th Cir.1984) (district court erred in excluding epidemiological studies of toxic shock syndrome made by Federal Center for Disease Control; noting report contained “factual findings” compiled with “professional impartiality”);
In re Japanese Electronic Products,
723 F.2d 238, 268 (3d Cir.1983) (reports prepared by United States Treasury Department pursuant to duty imposed under 1921 Dumping Act admissible under Federal Rule of Evidence 803(8)(C); court noted that during investigation parties were represented by counsel and had opportunity to make written submissions and oral arguments),
rev’d on other grounds,
475 U.S. 574, 580 , 106 S.Ct. 1348, 1352 , 89 L.Ed.2d 538 (1986);
Hodge v. Seiler,
558 F.2d 284, 288-89 (5th Cir.1977) (“Final Investigation Report” prepared by investigator for agency of Housing and Urban Development reciting facts in narrative form was admissible);
Diaz v. United States,
655 F.Supp. 411, 416-17 (E.D.Va.1987) (report compiled by navy officer charged to investigate slip and fall of business invitee aboard naval vessel admitted because report was timely, no special skill was required of author and report was routinely prepared as a candid recitation of facts);
Baker v. Elcona Homes Corp.,
588 F.2d 551, 558 (6th Cir.1978) (policeman’s conclusion in accident report held admissible because report was timely, author was skilled and impartial)
cert. denied,
441 U.S. 933 , 99 S.Ct. 2054 , 60 L.Ed.2d 661 (1979);
Melville v. American Home Assur. Co.,
584 F.2d 1306, 1315-16 (3d Cir.1978) (Federal Aviation Agency report concluding particular make of plane had safety problem and containing other expert opinion admissible on issue of whether air crash was suicide, absent evidence which impugned its trustworthiness). The contrast between the circumstances in the cases cited and the present ones is readily apparent. While Agent Egan submitted what may be considered an agency finding, the evidence was gathered and the affidavit executed solely to persuade a magistrate that there was “probable cause” to believe crimes were being committed at the location cited.
*912
See
Exh. 41, pp. 67-68. The affidavit is not impartial, was prepared in anticipation of litigation, and cited statements made by confidential informants identified only as “John Doe # ”.
See e.g.,
Exh. 41, p. 60 (“John Doe No. 19 further stated that the Fusion Energy Foundation, a tax exempt organization, was not used for tax exempt purposes but was rather principally used to support the lifestyle of Lyndon La-Rouche.”). Courts admitted the agency findings cited in the cases above because they were able to rely on the agency’s conclusions. Here, while we acknowledge the authenticity of the document, and consider the affidavit as evidence of the procedure by the which the debtors’ internal documents were obtained, or as an example of information available to the United States Attorney’s office at the time of the filings, we accord little weight to the affidavit as evidence of the truth of the matters asserted therein.
Cf. Ellis,
745 F.2d at 303 (concern over methodology of studies relates to weight to accord evidence, not admissibility).
With respect to the documents proffered by the government pertaining to the alleged debtors’ accounting procedures, we note that the information contained therein is not entirely supportive of the government’s position. For example, the government cites Exhibit 63, a document entitled “1986 Budget Requests C & E,” as proof that Fusion allots only 3% of its budget to “Travel and Seminars.” In the same document, however, it is apparent that approximately half of Fusion’s budget was allotted to “Editorial” expenses and “Basic Science Research.” Exh. 63, p. 3. We also note that the government’s Exhibit No. 108, entitled “Consolidated Profit & Loss for February 1984,” shows a
net loss
for Fusion.
More importantly, however, we find that evidence indicating that an organization uses the word “profit” or even reflects a “profit” is not dispositive of the issue at hand. While nonprofit organizations are not expected to benefit from the sales or services that they provide in the same way that commercial entities do, they must like any other organization monitor income and expenses. As noted in
In re United Kitchen Assoc., Inc.,
“[i]t is not a requirement that disbursements equal or exceed contributions in order to retain the status of a non-profit eorporation[.]” 33 B.R. 214, 216 (Bankr.W.D.La.1983).
Finally, while attacking the credibility of the findings of the IRS in its post trial memorandum and the testimony of Mr. Dean, the government did not proffer evidence revealing that the tax exempt status of Fusion has been revoked, nor did the government challenge Mr. Dean’s conviction that Fusion’s activities were primarily educational in nature.
Turning now to the evidence submitted by Caucus Distributors Inc. in its behalf, we note that its charter of incorporation states the purposes of Caucus to be:
To promote and encourage the political and (sic) ideas and beliefs fostered by the International Caucus of Labor Committees and other organizations advocating the same ideas and beliefs; to distribute to the general public, sell and obtain subscriptions to publications specifically dedicated to the political ideas and beliefs fostered by the International Caucus of Labor Committees and other organizations; to solicit membership for certain membership organizations associated with the publications distributed by the corporation consonant with the goals, purposes and programs of those organizations
To advertise and promote the publications distributed by the corporation;
To engage the services of writers, reporters, editors distributors, corporations, associations, partnerships and news agencies in furtherance of these purposes; To acquire, own, hold and dispose of all real and personal property necessary, convenient or incidental to accomplishing the purposes of this corporation^]
Exh. AA, 11 3.
30
The charter also stated that Caucus was “not formed for pecuniary
*913
profit or financial gain, and in that (sic) no part of the assets, income or profit of the corporation is distributable to, or inures to the benefit of its members, directors or officers, or any private person except to the extent permissible under the Not-For-Profit Corporation Law.” Exh. AA, 112. Caucus further relies upon a document seized by the government which explicitly states that Caucus is a not-for-profit corporation, and refers to its production of several educational magazines.
See
Exh. 46.
In rebuttal, the government cites the affidavit of FBI Agent Lytle, which was prepared “in support of the government’s Motion for Appointment of Interim Trustee^]” and refers in part to alleged investments in real estate by Caucus (Exh. 39, p. 1). The government also relies upon documents similar to those used in the government’s case against Fusion containing accounting data and discussions of that data.
See
Exhs. 45, 46, 48, 63, 65, 72, 79. The government also proffered Exhibit 111, an internal document labelled as “attorney-client work product,” which the government maintains refutes the not-for-profit status of Caucus.
31
We have the same reservations regarding an affidavit of an FBI agent, and documents which reflect only accounting information that we expressed above and need not repeat the relevant discussions here. Rather, we address the alleged admission by Caucus on this issue, which according to the government may be found in Exhibit 111. Exhibit 111 is a memorandum from “Rich Welsh” to “Mayer Morganroth, Esq.” entitled “Accounting Issues (Report on Meeting, 7/17/85). On the last page of the exhibit, the author remarks that accountants have indicated Caucus could not qualify as an “exempt (not-for-profit) corporation” because it “market[s] subscription sales for commercial companies.” Exh. Ill, p. 11. The author of the document also observed:
Remember, that although CDI filed as not-for-profit in its NY State incorporation papers, it has not formally applied for such status with IRS, which is where it counts.
Id.
At the top of every page of the document but the first page are the words, “PRIVILEGED ATTORNEY-CLIENT WORK PRODUCT PREPARED FOR USE OF COUNSEL.” At trial, the alleged debtors objected to the admission of Exhibit No. Ill in part on the basis of its privileged nature. This Court admitted Exhibit 111 subject to the alleged debtors’ ability to establish that the information contained in the document was protected by an attorney-client privilege. Tr. Vol. Ill, p. 59. The alleged debtors now have stated in a post trial submission “[d]ue to the invocation of their Fifth Amendment rights, there is no one who can testify as to the document’s privileged status,” and have requested that the document be stricken from the record. Alleged Debtors’ Proposed Findings of Facts at 14, n. 1.
We note that the attorney-client privilege is applicable only to a client’s communication made “for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding.”
32
United States
*914
v. Jones,
696 F.2d 1069, 1072 (4th Cir.1982). The alleged debtors themselves acknowledge that Exhibit 111 is a memorandum merely apprising an attorney of information gathered by accountants pertaining to Caucus’ accounting procedures.
See
Alleged Debtors’ Proposed Findings of Facts, p. 14 (“(Exhibit 111) merely suggests that at a point almost two years prior to the filing of the petition some discussion was held concerning Caucus’ accounting methods.”). Based upon the contents of the memorandum, we find that the author did not intend the recipient to proffer legal advice, and in fact with regard to the possible connection between Caucus’ First Amendment rights and its tax exempt status the author stated: “We must become clearer on how this works, including such legal consultation
as is
necessary.” Exh. Ill, p. 11 (emphasis supplied). Consequently, we decline to strike Exhibit No. Ill, not on the basis of the alleged debtors’ invocation of the Fifth Amendment, but upon this Court’s review of the entire document and conclusion that the statements made therein are not privileged.
We note further, however, that the admission of Exhibit 111 is in actuality of little significance. In
In re United Kitchen Assoc., Inc.,
the petitioning creditor argued that “because the debtor corporation ha[d] not filed an exemption number for status as a non-profit corporation with the Internal Revenue Service then the court should recognize the debtor corporation as a nonprofit corporation.” 33 B.R. at 216 . The
United Kitchen
court responded by stating that “[t]his is a procedural matter for tax considerations to contributors, and does not change the status of the corporation under state law, nor does it change the character or the nature of the activities of the corporation.”
Id.
at 216-17 .
Finally, proffered against both Fusion and Caucus, the government introduced numerous cease and desist orders, and an indictment issued against the debtors by state agencies that monitor the sale of securities. The government also proffered the summaries of the loans allegedly granted by creditors which the government demonstrated at trial could be cross referenced to the cease and desist order exhibits.
See
Exhs. 7, 15, 21, 125-127 (Fusion); 8-18, 21, 125-127 (Caucus).
We note at the outset that all of the cease and desist orders are temporary and provide that they will become permanent
if
no further hearing is requested. The government acknowledges that “certain of these cease and desist orders are technically denominated ‘temporary’,” but contends that the “continuing refusal of the debtors to respond to state information requests or request hearings has as a practical matter rendered them permanent.” Government’s Amended Statement of Facts ¶ 157. The government also explained that copies of the temporary orders were all that the government received when it requested copies of the agencies’ files. Tr. Vol. II, p. 59.
While a court may take judicial notice of agency findings, this Court indicated during the course of the trial that it would not consider the agency findings to be conclusive of any issue. Tr. Yol. II, pp. 57-59. The government in response to this Court’s remarks stated:
Nor do we ask, just to be clear, that this be treated as a
res judicata
finding or anything. The cases that we cited in the
*915
memorandum merely say that those findings are extrinsic evidence to go to the point that we offered, and that’s all we suggest it’s for.
Tr. Vol. II, p. 59.
Again, the cases to which the government refers, which discuss agency findings after timely, impartial, factual inquiries are not similar the cease and desist orders at hand, which were issued on the basis of
ex parte,
administrative hearings most of which date back one to two years prior to the date of the filings. Moreover, even if this Court accepted the information contained in the orders and the loan summaries as true, the evidence only would establish that the debtors obtained promissory notes from individuals in various states, perhaps fraudulently or without the requisite licenses. That proposition alone is not probative of the ultimate concerns of
this
Court: whether the chief purpose of the alleged debtor is to engage in commercial enterprises; and, whether the money obtained by the alleged debtor was used to benefit the corporate officers personally or investors realized gain because of their ownership interest in the corporation. The government’s evidence does not shed light on either aspect of this issue.
In one of the internal documents to which the government has directed our attention in connection with the issue of the debtors’ eleemosynary status, we took note of the following excerpt:
1984 was the “Year of the Loan” in which a majority of income was comprised of loans. Infrastructure loan principal (including the first quarter of 1985) now stands somewhere around $10,000,000. About 90% of these notes come due in 1985. The attempt to change the composition of income is not only necessary from the standpoint of expanding our numbers and educating our base. It is also the case that we are
losing a large number of supporters (and some quite bitterly) who made 1984 loans in the $1000-$5000 range.
Exh. 79, p. 1. This passage is representative of many within the internal documents seized by the government, which has led this Court to conclude that the debtors strived more to expose the world to its political viewpoint than attain private monetary gain. While the government has alleged that their methods of fund raising were reprehensible, that alone does not change the debtors’ status and provide the appropriate basis for the invocation of
this
Court’s jurisdiction.
See Sweatt v. Boston, H. & E.R. Co.,
23 F.Cas. 530, 534 (C.C.D. Mass.1871) (No. 13,684) (“Religious, charitable, literary, and educational corporations are not subject to the bankrupt act, nor are corporations created for political purposes, even though they or some of them may transact large amounts of business, as their chief and ultimate purpose shows that they are not properly denominated moneyed, business, nor commercial corporations.”).
In view of the foregoing, this Court finds that the government could not proceed against the alleged debtors, Fusion and Caucus, in an involuntary bankruptcy proceeding. In so holding, we seek not to protect the promotion of a particular ideology, but to preserve the intention of the Act and now the Code to limit the application of involuntary bankruptcy proceedings to only those entities truly commercial in nature.
BONA FIDE DISPUTE
In addition to questions relating to the eligibility of the alleged debtors, this Court also had concerns regarding the status of a claim by an intervening petitioning creditor, NCNB/National Bank of Florida. By trial’s end, this Court had allowed several creditors to join in the involuntary petitions against the alleged debtors.
33
*916
The act' of intervention itself, however, does not guarantee that the creditor will be allowed to remain in the litigation. A creditor whose claim is subject to a bona fide dispute can not be counted as a petitioning creditor under section 303(b)(1) and would be dismissed. 11 U.S.C. § 303 (b)(1).
NCNB/National Bank of Florida on behalf of Mr. Charles R. Zimmerman, filed a proof of claim against Fusion and Caucus in an amount in excess of 2.5 million dollars.
34
NCNB contends that between May 21, 1985 and February 17, 1986, Mr. Zimmerman made numerous loans to the debtors and upon discovering the extent of the loans and gifts, “took steps to protect his welfare.” NCNB Post Trial Brief, p. 5. Accordingly, NCNB asserts that on February 24, 1986, Mr. Zimmerman wrote to the Executive Director of Fusion requesting that Fusion refrain from contacting him or NCNB regarding future gifts or loans and that the interest on the notes “be paid promptly when due.” NCNB Exh. 50.
35
NCNB then obtained an “Order Appointing Guardian Upon Petition of Voluntary Guardian” from the Circuit Court of the Twelfth Judicial Circuit in Sarasota, Florida, dated February 28, 1986. NCNB Exh. 45. NCNB took possession and on June 25, 1986 filed an inventory of the property in its control which listed the promissory notes from Fusion and Caucus.. NCNB Exh. 46.
The alleged debtors claim, however, that also on February 24, 1986, Mr. Zimmerman forgave all outstanding loans to both Caucus and Fusion. In support of their contention, the alleged debtors cite the deposition of Mr. Anthony Orr, former Head of Personal Trust Administration for NCNB in Orlando, Florida, the deposition of Mr. Zimmerman, and correspondence between Mr. Zimmerman and the debtors.
36
In his deposition, Mr. Orr testified that a meeting took place on February 24, 1986 and the topic of forgiveness of debt arose between Mr. Zimmerman and representatives of Fusion.
See
Orr Deposition at 27, 29. Mr. Zimmerman’s deposition testimony taken on July 7, 1987, indicates that he recalled a meeting in February 1986, and recalled forgiving notes rather than honoring checks to Fusion which had been returned for insufficient funds. Zimmerman Deposition at 111-13; Zimmerman Deposition Exh. T (letter from Fusion to Mr. Zimmerman regarding checks returned for insufficient funds).
The debtors contend, therefore, that although NCNB was appointed as the guardian of Mr. Zimmerman’s property as the result of a voluntary guardianship proceeding, the loans in question were not property of the estate under Florida law.
See
Deposition of Mr. Orr at 53;
Bryan v. Century Nat’l Bank,
498 So.2d 868, 872 (Fla.1986) (“The ward may, of course, deal with or dispose of any property left in his control without fear of later judicial invalidation.”). Moreover, the debtors add that a genuine
*917
issue of fact remains as to whether Mr. Zimmerman was competent on February 28, 1986, the day he allegedly agreed to submit to a voluntary guardianship. The debtors maintain that such a guardianship requires an affirmative judicial determination of competency.
See
Fla.Stat. § 744.341(1) (1984) (stating in part: “The [voluntary] petition shall be accompanied by a certificate of a licensed physician that he has examined the petitioner and that the petitioner is competent to understand the nature of the guardianship and his delegation of authority.”).
In response to the debtors’ assertion that the loans have been forgiven, NCNB notes that the actual letter allegedly signed by Zimmerman forgiving all outstanding loans is dated March 2, 1986 and the deposition of Mr. Zimmerman upon which the debtors rely was taken on July 7, 1987, both of which were subsequent to the date on which the voluntary guardianship became effective, February 28, 1986.
Applying the guidelines in
In re Lough,
cited in this Court’s opinion on the government’s motion for summary judgment, a claim may be subject to a “bona fide dispute” within the meaning of section 303 of the Bankruptcy Code, when there is a “genuine issue of a material fact that bears upon the debtor’s liability or a meritorious contention as to the applicability of the law to the facts.” 57 B.R. 993, 997 (Bankr.E.D.Mich.1986);
see In re Busick,
831 F.2d 745, 749-50 (7th Cir.1987)
(applying Lough); In re Leach,
92 B.R. 483, 487 (Bankr.D.Kan.1988) (applying
Lough); see Caucus,
83 B.R. at 929 . The role of the bankruptcy court is not to resolve the dispute, but merely to identify its presence for the purpose of including or eliminating the creditor from the count of petitioning creditors.
In re Lough,
57 B.R. at 997 ;
see In re Leach,
92 B.R. at 487 (statute does not require court to determine outcome of any dispute just its presence or absence).
Although NCNB states in its post trial memorandum that the discrepancies between the positions of the two parties may be resolved by this Court’s determining a “very simple issue ... whether Zimmerman’s signature on [the] March 2, 1986 [forgiveness letter], or his [deposition] testimony in July,' 1987, was effective as a matter of law to ‘forgive’ th[e] loans as alleged by the debtors[,]” this Court need only ascertain the presence of a dispute. NCNB Post Trial Brief, p. 12. We also note, however, that the task of resolving the dispute would not be easy and perhaps not advisable given the existence of a state court action for rescission and money damages pending in the Circuit Court for the Twelfth Judicial Circuit for Sarasota County, Florida against the alleged debtors, involving the same subject matter.
37
Accordingly, this Court, following the analysis set out in
In re Lough,
finds that the claim of Charles R. Zimmerman is subject to a bona fide dispute, which disqualifies NCNB as a petitioning creditor.
38
GENERALLY NOT PAYING
Assuming that the instant petitions did not contain the aforementioned deficiencies, we find that the government has not established that the status of the debtors’
*918
financial affairs warrants the administration of their estates in bankruptcy.
Section 303(h)(1) of the Bankruptcy Code prescribes that an order of relief may be entered on an involuntary basis if “(1) the debtor is generally not paying such debt- or’s debts as such debts become due[.]” 11 U.S.C. § 303 (h)(1). The burden of establishing the above standard is upon the petitioning creditor(s).
In re Win-Sum Sports, Inc.,
14 B.R. 389, 392 (Bankr.D.Conn.1981);
In re SBA Factors of Miami, Inc.,
13 B.R. 99, 100 (Bankr.S.D.Fla.1981). In this Court’s summary judgment opinion, we noted the varying considerations in determining whether a debtor is generally not paying its debts.
See Caucus,
83 B.R. at 931 -32 (citing
In re Dill,
731 F.2d 629 , 632 (9th Cir.1984) (generally not paying standard requires more general showing than merely establishing a few unpaid debts);
In re Dakota Lay’d Eggs,
57 B.R. 648, 657 (Bankr.D.N.D.1986) (court must examine timeliness of payments, amount of debts overdue, length of time debtor unable to pay debts, reduction in debtor’s assets and debtor’s financial situation);
In re Leek Corp.,
52 B.R. 311, 314 (Bankr.M.D.Fla.1985) (court must compare number of debts unpaid each month to those paid, amount of delinquency, materiality of nonpayment, nature of debtor’s conduct of financial affairs);
In re Win-Sum Sports, Inc.,
14 B.R. 389, 392 (Bankr.D.Conn.1981) (number and amount of debts significant);
In re All Media,
5 B.R. 126, 143 (Bankr.S.D.Tex.1980) (generally not paying debts includes regularly missing a significant number of payments which are significant in amount in relation to size of debtor’s operations),
aff'd,
646 F.2d 193 (5th Cir.1981)). All of the guidelines cited, while varying slightly in their emphasis, however, presume an analysis of the debtor’s overall financial status
on the date the petition was filed. See In re Bishop, Baldwin, Rewald, Dillingham, & Wong, Inc.,
779 F.2d 471, 475 (9th Cir.1985) (“generally not paying test is to be applied as of the date of filing of the involuntary petition”);
In re Laclede Cab Co.,
76 B.R. 687, 691 (Bankr.E.D.Mo.1987) (“It is well settled that-the operative date with respect to nonpayment of debt in an involuntary proceeding is the date of filing of the involuntary petition.”);
In re Molen Drilling Co., Inc.,
68 B.R. 840, 846 (Bankr.D.Mont.1987) (generally not paying test must be applied as of the date of filing);
In re Johnston Hawks,
49 B.R. 823, 832 (Bankr.D.Haw.1985) (for the purpose of granting or denying relief debts must be examined at the time involuntary petition was filed);
In re Win-Sum Sports,
14 B.R. 389, 392 (Bankr.D.Conn.1981) (alleged debt- or’s payment activity must be examined at the time of filing a petition).
In examining the evidence pertaining to the debtors’ financial status, the admission of most of which was strenuously objected to by the alleged debtors,
39
this Court notes that the information contained in the documents evidences substantial nonpayment of the debtors’ debts. Most of the documents proffered by the government, however, contain information pertaining to a period of time between six months to seven years
prior
to the date the petitions actually were filed.
40
The only exhibits upon
*919
which the government relied which pertain to 1987 were five cease and desist orders, copies of petitions filed by intervening creditors, one internal document, and two newspaper articles.
41
*920
As explained above, this Court declines to consider the information contained in the cease and desist orders as evidence of the truth of the matters asserted therein. The admission of the internal document (Exh. 44) was denied at trial on the basis that the government failed to establish its authenticity,
see
Tr. Vol. II, p. 87, and newspaper articles were admitted by this Court for the limited purpose of establishing what the government knew of or had read about the debtors’ creditors at the time the petitions were filed, not for the truth of the assertions made therein,
see
Tr. Vol. II, pp. 79-80.
The government’s Exhibit No. 48 illustrates well the problems inherent in evaluating financial data pertaining to a time much earlier than the petition date. As listed by the government, Exhibit 48 was a “Copy of an Internal Memo Re: Collapse of Field Imprest Funds/Accounting and Cash Flow Procedures,” dated September 25, 1986. The debtors concede that Exhibit 48 contained the following information concerning Caucus’ financial status:
(1) Caucus’ field office operation (which appears to be 12 offices) had monthly expenses of approximately $80,000 to $90,000 per month; those expenses were presumably being paid out of operating revenues until September 1985 when the imprest fund was created; (2) By April 1986 the central imprest fund could only fund approximately 80-95% of the budget, with the field office making up the deficit from locally created revenues; (3) By May 1986 the centralized payments declined to 50% and by September 1986 the central office stopped payments with the local field offices paying expenses directly from locally generated revenues.
Alleged Debtors’ Proposed Conclusions of Law, p. 31, 1177. The government offered no evidence establishing whether the September 1986 condition continued or was corrected.
Assuming
that the admission of all of the documents proffered by the government was proper, the issue of how much weight should be afforded the exhibits in evaluating the debtors’ financial positions is problematic. The alleged debtors claim that the lack of evidence regarding their financial condition on the date the petition was filed is fatal to the government’s case. The government has responded by noting that:
[t]he evidence is unequivocal that each of the debtors had massive unpaid amounts of debt as of October, 1986_ Moreover, the only reason why the Court does not have direct testimony from the debtors on the circumstances between October, 1986 and the petition date is because the debtors invoked a blanket Fifth Amendment.... The clear weight of the evidence, the increasingly difficult cash situation the debtors found themselves in throughout 1986, the willingness of other creditors to join in these petitions, and the failure of the debtors to present any evidence to the contrary as to their payment of any debt whatsoever, certainly establish that as of the petition date, the debtors were generally not paying their debts as they become due.
Post Trial Memorandum of United States, pp. 28-29.
Certainly, courts must evaluate financial information pertaining to a period of time prior to the actual date of the petition to make its assessment of whether debts generally are being paid.
See e.g., In re Molen Drilling,
68 B.R. at 846 (examining evidence of the debtor’s financial condition for the summer months prior to a petition filed in September of the same year). We find,
*921
however, that such a time period should not exceed the bounds of reasonableness. To determine what period of time is reasonable, we look generally to the purpose behind ascertaining the debtor’s financial condition in a trial upon an involuntary petition, which is to determine whether the creditors are entitled to the relief requested.
In the instant case, the government in filing the involuntary petitions under Chapter 7 seeks the liquidation of all of the debtors’ assets. This Court has no basis to grant the drastic relief requested if the
most recent information
before the Court regarding the debtors’ payment practices is dated approximately six months prior to the date the petition was filed. Absent crucial proof relating to the debtors’ financial status as of the date the petitions were filed, other factors cited by the government such as the alleged transfers of assets, the alleged schemes of intentional nonpayment, and the joining of other creditors have little relevance. We note that courts have considered other factors, or “special circumstances” unique to the debtor only in cases in which the petitioning creditor has established the minimal basis for relief, and it appears that the petitioning creditor is the
sole
creditor of the debtor. The concern of the courts in those cases is whether the failure to pay a single creditor is sufficient to warrant a finding that the debtor is
generally
not paying its debts.
See e.g., In re 7 H Land & Cattle Co.,
6 B.R. 29, 30, 32 (Bankr.D.Nev.1980) (allegation in involuntary petition that debtor had less than twelve creditors not controverted, therefore, issue was whether failure to pay single creditor was sufficient under § 303; court determined that special circumstances such as fraud, trick, and artifice may be considered);
see also In re Nordbrock,
772 F.2d 397 , 400 (8th Cir.1985) (in absence of fraud or some special need for bankruptcy relief, failure to pay single debt does not establish that debtor is generally not paying his debts);
In re Central Hobron Assoc.,
41 B.R. 444, 448, 451 (D.Haw.1984) (generally one creditor with one debt cannot put debtor into involuntary bankruptcy absent special circumstances such as debt- or’s trick, fraud, artifice or sham). It appears that no court, however, has determined that the granting of an involuntary petition on the basis of unusual factors alone is proper.
Perhaps the only plausible basis for speculating about the debtors’ financial condition on April 20, 1987 is the government’s request that this Court draw negative inferences on the basis of the debtors’ invocation of the Fifth Amendment.
NEGATIVE INFERENCES
As noted earlier, the alleged debtors by counsel, and by representatives of the debt- or corporations, declined to respond to discovery requests and questions posed during depositions, and also declined to testify at trial on the basis of the Fifth Amendment.
42
Accordingly, the government repeatedly has urged this Court to draw adverse inferences from the debtors’ silence.
While declining to draw adverse inferences to bolster the government’s motion for summary judgment,
Caucus,
83 B.R. at 925-26 , this Court recognizes that the Fifth Amendment does not forbid the drawing of “adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence “offered against them[.]”
Baxter v. Palmigiano,
425 U.S. 308, 318 , 96 S.Ct. 1551, 1558 , 47 L.Ed.2d 810 (1976);
see United States v. Ianniello,
824 F.2d 203, 208 (2d Cir.1987);
RAD Services, Inc. v. Aetna Casualty and Surety Co.,
808 F.2d 271, 274 (3d Cir.1986);
United States v. Local 560 of Internat'l Brotherhood of Teamsters, Etc.,
780 F.2d 267 , 292-93 n. 32 (3d Cir.1985),
cert. denied,
476 U.S. 1140 , 106 S.Ct. 2247 , 90 L.Ed.2d 693 (1986);
National Acceptance Co. of America v. Bathalter,
705 F.2d 924, 929 (7th Cir.1983);
see generally J. Wig-
*922
more on Evidence,
112272 at 439-72 (McNaughton rev. 1961). Prior to a court’s drawing of an adverse inference, however, there must be sufficient independent evidence of the assertion in addition to the mere invocation of the privilege.
See Baxter,
425 U.S. at 318 , 96 S.Ct. at 1558 (requiring “probative” evidence);
United States v. Local 560,
780 F.2d at 293 n. 32 (requiring “independent” evidence);
Bahalter,
705 F.2d at 930, 932 (interpreting
Baxter
as requiring “adverse” evidence);
In re Einhorn,
29 B.R. 966, 970 (Bankr.E.D.N.Y.1983) (requiring “substantial” evidence). Bankruptcy courts previously have drawn adverse inferences where the circumstances have so warranted.
See In re McGohan,
75 B.R. 10, 13 (Bankr.N.D.N.Y.1986) (where debtor failed to appear at trial on basis of Fifth Amendment, court inferred that testimony of debtor would have been unfavorable in view of evidence presented which clearly established debt- or’s actual intent to embezzle funds placed in debtor’s control);
Chase Manhattan Bank, N.A. v. Frenville,
67 B.R. 858, 862 (Bankr.D.N.J.1986) (court drew adverse inference against debtor who asserted Fifth Amendment privilege where evidence set forth in moving papers constituted
prima facie
case);
In re Fields,
44 B.R. 322, 328 (Bankr.S.D.Fla.1984) (court drew logical inference that debtor intended to deceive creditor where debtor failed to testify and evidence established intent of debtor to make false representations). If such independent evidence exists, the drawing of an adverse inference against a silent party in a civil action is not an invalid practice.
Baxter,
425 U.S. at 320 , 96 S.Ct. at 1559 .
In the instant case, the independent evidence supplied by the government suggests that the debtors had major financial difficulties from early 1984 through September 1986. Even if this Court drew the logical inference based upon the government’s evidence, that the debtors indeed did have financial difficulties during the above cited time period, this Court’s conclusion would not relate to the appropriate period of time, the date of the government’s filing, to support the contention that the debtors were generally not paying their debts when due. What the alleged debtors seem to suggest here, however, is that if the evidence reveals financial difficulty from 1984-1986, then this Court has the basis to “infer” that that evidence reflects the debtors’ financial status as of the date of the filings. While this Court is aware that the drawing of negative inferences is appropriate under certain circumstances, it is unwilling and without authority to infer beyond what the independent evidence establishes.
See In re Mart,
90 B.R. 547, 552 (Bankr.S.D.Fla.1988) (totality of evidence did not support drawing of adverse inference against debtor who asserted Fifth Amendment privilege);
In re Stelweck,
86 B.R. 833, 849 (Bankr.E.D.Pa.1988) (absent convincing independent evidence of fraud, court will not infer fraud on the basis of debtor’s invocation of Fifth Amendment privilege);
accord In re Einhorn,
29 B.R. at 970 (declining to grant summary judgment based solely upon debtor’s invocation of Fifth Amendment).
In view of the government’s inability to proffer direct and timely evidence pertaining to the debtors’ financial status, or “independent” evidence enabling this Court to draw “inferences” against the debtors in view of their invocation of the Fifth Amendment, we find that the government has failed to establish that the debtors generally were not paying their debts as they became due as of April 20, 1987, the date the petitions were filed.
BAD FAITH
We now come to perhaps the most important issue before this Court, and that is whether the government filed the instant involuntary petitions in bad faith. The debtors have alleged that the bad faith of the government is evident in three ways. First, they maintain that the filing of involuntary petitions as a single creditor with the knowledge that each debtor had in excess of twelve creditors, in and of itself constitutes bad faith. Second, the debtors claim that the petitions were filed for an ulterior motive. Third, the debtors assert that the government’s bad faith further is established by its failure to utilize traditional methods to collect its judgments.
*923
In response, the government contends that the filing of the involuntary petitions as a single creditor in bankruptcy court is supported by applicable bankruptcy law. More specifically, the government asserts that the authority to file as a sole petitioning creditor may be found in the Fourth Circuit’s decision in
Sun-Lite Awning Corp. v. E.J. Conklin Aviation Corp.,
176 F.2d 344 (4th Cir.1949). The government, also claims that the petitions were not filed to accomplish an ulterior purpose, but in fact were filed for policy reasons that are in complete accord with the goals of federal bankruptcy law.
We note that the allegations by the alleged debtors pertaining to the government’s bad faith constitute an affirmative defense to the maintenance of these involuntary petitions.
See Caucus,
83 B.R. at 932 n. 12. As such, the good faith of the government is presumed,
see In re CLE Corp.,
59 B.R. 579, 583 (Bankr.N.D.Ga.1986), and the debtors must prove bad faith by a preponderance of the evidence,
see In re Alta Title,
55 B.R. 133, 141 (Bankr.D.Utah 1985). The issue of bad faith is factual,
see United States Fidelity & Guar. Co. v. DJF Realty & Suppliers,
58 B.R. 1008, 1011 (N.D.N.Y.1986) (bad faith in an involuntary proceeding is a factual issue);
In re Advance Press & Litho, Inc.,
46 B.R. 700, 704 (D.Colo.1984) (whether party acted in bad faith is a question of fact to be determined by the court);
In re Wavelength,
61 B.R. 614, 620 (Bankr. 9th Cir.1986) (whether party acted in bad faith is a question fact), and a conclusion by the reviewing bankruptcy court must then be based upon the “totality of the circumstances.”
In re Elsub Corp.,
66 B.R. 189, 192 (Bankr.D.N.J.1986).
While the concept of “good faith” is applicable to various aspects of bankruptcy law, the Code does not contain a definition of “good faith.”
See In re Laclede Cab Co.,
76 B.R. 687, 693 (Bankr.E.D.Mo.1987) (“bad faith” is not specifically defined in Bankruptcy Code). Consequently, the factors which a court must take into consideration vary depending upon the matter at hand.
See generally
R. Ordin, “The Good Faith Principle in the Bankruptcy Code: A Case Study,” 38 Bus.L. 1795 (August 1983). Courts, therefore, have devised various guidelines uniquely applicable to involuntary petitions.
43
It is clear now,
*924
however, where the assertion has been made that an involuntary petition was filed in bad faith, a majority of courts evaluate whether a reasonable person would have filed the petition (objective test), as well as the motivations of the petitioning creditor (subjective test), some with reference to Federal Rule of Civil Procedure 11 (“Rule 11»)
44
Ped.R.Civ.P. 11. Bankruptcy Rule 9011, the corresponding rule to Rule 11, provides in part:
The signature of an attorney or a party constitutes a certificate that the attorney or party has read the document; that to the best of the attorney’s or party’s knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass, to cause delay or to increase the cost of litigation.
Bankr.R.P. 9011(a).
We examine first whether a “reasonable person in the position of the petitioning creditor would have initiated the bankruptcy proceeding.”
In re Elsub Corp.,
66 B.R. 189, 196 (Bankr.D.N.J.1986). A court’s evaluation of this issue, must include a review of the petitioner’s pre-filing inquiries into the total number of claim holders,
see id,.,
as well as a review of the legal justification for the filing,
see In re Turner,
80 B.R. 618, 624 (Bankr.D.Mass.1987). With respect to the former, this Court need not dwell upon what inquiries the government made and whether the government should have known that the alleged debtors had in excess of twelve creditors, in view of its admission on this issue. It is clear that the government knew of the number of the debtors’ creditors, and chose to file as a single creditor.
Again, the most recent and authoritative decision on the good faith of petitioning creditors is the Eighth Circuit’s decision in
Basin Electric Power Cooperative v. Midwest Processing Co.,
769 F.2d 483, 486 (8th Cir.1985),
cert. denied,
474 U.S. 1083 , 106 S.Ct. 854 , 88 L.Ed.2d 894 (1986). As noted above, the petitioning creditor in
Basin
*925
filed as a single creditor although it knew that the debtor had in excess of twelve creditors, and on appeal challenged the lower court’s finding of bad faith. 769 F.2d at 486 . Upon a review of the authority on the issue of a bad faith dismissal, the Eighth Circuit observed:
The district court concluded correctly that it is not the making of a false statement alone that constitutes bad faith, but the wrongful attempt to commence a bankruptcy proceeding. As the bankruptcy court noted in
In re Rite Cap, Inc.,
1 B.R. 740, 741 (Bankr.D.R.I.1979), ‘An essential prerequisite for allowing joinder of additional creditors to cure a defective petition is that the petition was filed in good faith. If the original petition was a sham, prepared with a view of being later supported by intervention of other creditors, joinder should be denied.’
Id.
at 486. This Court finds the ruling
of
the Eighth Circuit to be controlling because of the need to uphold the integrity of the provisions of the Bankruptcy Code.
See In re Herriott,
1 Bankr.Ct.Dec. (CRR) 793, 794 (Bankr.D.Mass.1975) (“If there were no restraint a creditor might with impunity ignore the statutory scheme and avoid the difficulty and frustration in seeking two creditors willing to join with him in filing an involuntary petition.”);
accord In re Winn,
49 B.R. 237, 239 (Bankr.M.D.Fla.1985) (“[Rjegardless of the nature of the petition, whether voluntary or involuntary, the Court must protect the integrity of its jurisdiction!!]”). We also note that courts consistently have stated that a “lack of a due investigation” into the number of a debtor’s creditors will result in a finding of bad faith.
See In re Alta Title Co.,
55 B.R. 133, 141 (Bankr.D.Utah 1985) (absence of pre-filing inquiry generally will support bad faith finding);
In re Godroy Wholesale Co.,
37 B.R. 496, 500 (Bankr.D.Mass.1984) (where petitioning creditor failed to make additional inquiries which would not have been time consuming nor disproportionate to the relief it requested, the creditor acted in bad faith). It would be inconsistent, therefore, to reward the creditor who
knows
he is filing improperly as a single petitioning creditor, by enabling him to escape a bad faith finding.
The government’s reliance upon the Fourth Circuit’s ruling in
Sun-Lite Awning Corp. v. E.J. Conklin Aviation Corp.,
is misplaced. 176 F.2d 344 (4th Cir.1949). In
Sun-Lite,
the district court dismissed a bankruptcy petition filed by a sole petitioning creditor against a debtor who had more than twelve creditors.
Id.
at 346 . The Fourth Circuit held that prior to the dismissal of a case in which it has been determined that an insufficient number of petitioning creditors have filed, a court must grant the petitioning creditor time to notify other creditors who may wish to join the petition.
Id.
The
Sun-Lite
court expressly noted, however, that
[w]hether a court could dismiss a petition after the intervention of other creditors on the ground that the allegation that the number of creditors was less than twelve was fraudulent, we need not here decide, as the judge did not here find fraud or even bad faith in the filing of the petition.
Id.
at 347 . Clearly, there was no indication in'
Sunlite
that the petitioning creditor “knew” or “should have known” that the debtor had in excess of twelve creditors. Consequently, the government did not have a reasonable basis for relying upon
Sunlite Awning
as authority to file as a single petitioning creditor in the instant cases.
The government also contended that it felt an obligation to keep the involuntary filings secret, until interim trustees were appointed, to prevent the debtors from transferring assets.
See
Tr. Vol. Ill, p. 86. This argument seems to suggest, however, that the government may file an involuntary petition as a sole creditor in instances where three petitioning creditors are required to avoid publicity of its actions. While the government believed its needs as a creditor to be unique! the treatment of the government cannot be.
Cf. In re Bellucci,
24 B.R. 493, 497 (Bankr.D.Mass.1982) (“[I]t is not within the province of the court to fashion the Bankruptcy Code to meet the facts and needs of the particular case before it.”),
aff'd,
29 B.R. 814, 815 (Bankr. 1st Cir.1983). The same provisions of the Code
*926
which enable the government, like any other creditor, to file an involuntary petition in bankruptcy, also impose upon the government the responsibilities common to all petitioning creditors.
Cf. Cone Mills Corp. v. NLRB,
413 F.2d 445, 454 (4th Cir.1969) (“Few rights, ... exist without corresponding duties and obligations to those against whom the right is being asserted.);
In re Whitten,
11 B.R. 333 , 340 n. 13 (Bankr.D.D.C.1981) (“For every right, there is a correlative duty ... ”).
With respect to the pre-filing inquiries into the substantive aspects of the instant petitions, we note summarily that the government’s decision to file in the instant case reflected less the good faith extension of the law, than a questionable reliance upon existing law. While one court has indicated that the lack of time may justify a less than complete examination of the law on involuntary bankruptcy petitions, the government did not face an inflexible deadline in the instant cases.
See In re Turner,
80 B.R. 618, 620, 626-27 (Bankr.D.Mass.1987) (existence of the first of two
ex parte
court orders approving attachments on debtor’s homes required counsel to make a quick decision to prevent attachment from becoming immune from attack as a preference).
Accordingly, an evaluation of the government’s filing on an objective level leads this Court to conclude that the alleged debtors have established that the government filed the petition in bad faith. It is not the filing of an involuntary petition by the United States that constitutes bad faith, as suggested by the debtors, in that we are aware of at least one instance where the government filed an involuntary petition without notoriety in
Missco Homestead Ass’n v. United States,
185 F.2d 280 (8th Cir.1950), but the failure to comply with the applicable provisions of the Code that compels this conclusion with regard to the objective prong of the bad faith test.
It is quite apparent that a determination of the subjective motivations of a petitioning creditor is a most difficult task. While in some instances courts may have the benefit of direct evidence or testimony regarding the creditor’s decision making process, it is the more usual situation that courts must surmise the petitioning creditor’s intent based upon the circumstances of the case. In this regard, one avenue of the courts has been to grant liberal discovery requests to enable a debtor to determine better what the petitioning creditor’s motivations were.
See In re Elsub,
66 B.R. 189, 196 (Bankr.D.N.J.1986) (“[I]t is clear that this court must permit [the debtor] to conduct further inquiry into the pre-filing inquiry and objective and subjective motivations of [the petitioning creditor] in filing the involuntary petition[.]”);
see also In re Turner,
80 B.R. at 620-28 (reviewing extensively the pre-filing considerations of petitioning creditors and their counsel). This Court in an effort to understand fully the basis for the filing of these involuntary petitions, agreed to review research notes and documents created in preparation for litigation by the government
in camera.
While declining to reveal in detail the contents of each document, we have incorporated our
in camera
review into our findings.
The alleged debtors have in their post trial memoranda outlined extensively their perceptions of how the government conceived and developed the idea to file these involuntary petitions. Essentially, the debtors maintain that the government has initiated criminal investigations of organizations affiliated with Lyndon H. La-Rouche because of the government’s belief that Mr. LaRouche is a “political extremist.”
45
Accordingly, the debtors assert that the civil division of the United States Attorney’s Office derived its inspiration to file these petitions from the criminal division, and thus proceeded to file these peti
*927
tions with a “prosecutorial mind-set;”
46
The debtors maintain that evidence of this mind-set is found not only in the lack of evidence to support the filing of the petitions and in the decision to ignore more traditional means of collection, but by the testimony of the officials who shared responsibility for the decision to file.
The government consistently has responded to these allegations by noting that it was not operating under the direction, or on behalf of the criminal division, and actually had three very distinct policy reasons for filing these petitions. Assistant United States Attorney, Mr. Schiller, described the reasons for filing as follows;
The three social policies, if you will, if I understand how you are using that term, that I thought would be advanced by this course of action that we took were, first of all, that the available remedies and appropriate rulings of this Court and bankruptcy rules would provide the most efficient and effective manner of collection — meaning to collect the sums due the United States given the problems that I saw. Most particularly, we were concerned about the problem of intra-cor-porate and extra-corporate transfers of assets and how to effectively recover them, and I went through the fairly detailed analysis of the law and evidentiary questions of comparing treating something as a fraudulent conveyance under the Virginia Code versus treating something as a preferential transfer under the Bankruptcy Code, and concluded that the bankruptcy alternative would be superi- or, and that was really the germ of the idea to take this route.... The second policy that I was starting to go into was .. that when the United States Attorney’s Office takes a litigative decision that it should reflect not only its effect on the U.S. Treasury in terms of amounts collected, but also whether it would have any adverse effect on citizens elsewhere ... This is ... what makes the U.S. Attorney’s Office different as a litigating party from, say a bank, or any other creditor in that we look not only to our financial interests but also to the social impact of the litigating decision. ■ In this case, it was my estimation, after I researched on the NEXUS data bank and solved the plethora of people who had been defrauded, is one term that’s used frequently.... A corollary to that would be that in my view, primarily in terms of my concentration in bankruptcy, it’s my view that the priority scheme of the Bankruptcy Code is the most equitable form of distribution on a class basis in the commercial realm, and that as a social policy this litigative decision would be to follow that priority scheme as a policy option.
The third policy that came to mind dealt with a number of lawsuits that I found also in my initial research of the NEXUS data bank. It struck me that there were large numbers, as we alleged in our initiating pleadings, large number of lawsuits and unpaid judgments, and from my experience in the A.H. Robins case, if I learned nothing else it was that bankruptcy provides a means of consolidating thousands of lawsuits in one form in an equitable fashion, and it seemed to me by electing the involuntary bankruptcy procedure we would further the policy, if you will, of judicial economy in saving the resources of both the courts and the individuals in terms of the need to pay lots of lawyers to do lots of things at expensive rates, and that was also a policy that would be advanced by electing this course.
Tr. Vol. Ill, pp. 119-22. The government further asserts that the choice to seek relief in this forum as opposed to state court, was based upon the advantage of litigating in the bankruptcy forum as cited above.
The determination of whether an involuntary petition was filed to accomplish an improper purpose, must be examined in light of the purposes of any petition in bankruptcy. The goals of bankruptcy have been described in the Report of the Com
*928
mission on the Bankruptcy Laws of the United States as being threefold: “(1) equality of distribution among creditors, (2) a fresh start for debtors, and (3) economical administration.” Report of the Commission on the Bankruptcy Laws of the United States, Part I, July 1973, p. 75. The involuntary petition seeks to accomplish the same goals only at the instigation of a creditor who is fearful of losing the race against other creditors of the debtor to the state court.
See
“The Occasion for Involuntary Bankruptcy,” 61 Bankr.L.J. 195, 217 (1987) (“circumstances warranting involuntary bankruptcy arise from the need to protect creditors generally from the efforts of individual creditors to collect from the debtor.”); “Involuntary Petitions Under the Code,” 97 Banking L.J. 292, 295 (April 1980) (“The purpose of an involuntary petition for liquidation is to achieve an equal distribution of the debtor’s property among each class of creditors without preferential treatment.”).
Upon a review of all of the evidence, and the serious concern of the debtors that they have been targeted by the government in view of their association with a figure of allegedly “political extremist” views, we find that it is mere speculation that the government was influenced by the media, and/or the criminal division of the United States Attorney’s Office, and that the alleged debtors have not proven their theories by a preponderance of the evidence. Rather, we are impressed by the government’s primary motivation that the involuntary mechanism was the most appropriate under the circumstances. Where the government’s motivations may have been suspect to the alleged debtors, but the primary basis for filing the instant petitions was consistent with the Bankruptcy Code, it does not appear appropriate to condemn the government’s action as constituting bad faith.
See In re Turner,
80 B.R. 618, 627 (Bankr.D.Mass.1987) (noting that suspicions of debtors did not taint petitioners’ actions with bad faith).
With respect to the government’s alleged failure to use more traditional methods of collection, we note that it is not the use of the bankruptcy court alone in spite of the existence of alternative collection methods that converts an involuntary petition into a “bad faith” filing. A petition may be deemed to have been filed in bad faith where the petition does
not
accomplish the goals of bankruptcy and alternatives methods were available to the petitioning creditor.
In re McDonald Trucking Co.,
74 B.R. 474, 478-79 (Bankr.W.D.Pa.1987) (noting that no evidence was offered to indicate that petitioning creditor considered any of the less radical and more traditional methods of debt collection);
In re FRP Indus., Inc.,
73 B.R. 309, 313 (Bankr.N.D.Fla.1987) (noting that petitioning creditor made no effort at all to avail himself of collection remedies provided under state law and true motive was to use Bankruptcy Code as a means of effectuating a takeover of the debtor corporation). After reviewing all of the evidence, it appears that the decision to file the instant involuntary petitions by the government may not have been the best one in hindsight, but was made with the intent to accomplish goals consistent with the Bankruptcy Code.
The Eighth Circuit in
Basin
intimated that a sole petitioning creditor who files with the knowledge that the alleged debtor has in excess of twelve creditors has acted in bad faith. The
Basin
court, however, also found the following:
The sole purpose of Basin Electric was to file a petition quickly before the letter of credit expired. The parties had a contract dispute regarding the letter of credit. Basin Electric was motivated by the desire to attain an advantageous position with regard to the letter of credit. The use of the petition by Basin Electric to affect a nonbankruptcy purpose is
further evidence
of bad faith.
Basin,
769 F.2d at 487 . The Eighth Circuit’s recognition of “further evidence of bad faith” is consistent with the proposition that a court may not find bad faith on the basis of one factor alone.
See In re Dixie Broadcasting,
871 F.2d 1023 , 1027 (11th Cir.1989) (affirming bankruptcy and district court's determination of bad faith because neither court “improperly seized upon any single factor in determining the existence
*929
of bad faith. Rather, the cumulative effect of all of the evidence was appropriately considered.”),
cert. denied,
— U.S. -, 110 S.Ct. 154 , 107 L.Ed.2d 112 (1989).
In determining that the bad faith of the government has not been established on the facts of this c

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1919442. Public record. Not legal advice.