BAD FAITH INVOLUNTARY BANKRUPTCY PETITIONS ABSTRACT Involuntary bankruptcy is a powerful tool that creditors can use as a last resort in attempting to collect a debt. Filing for bankruptcy in bad faith can get you in trouble. Oct. 16, 2015), the Third Circuit Court of Appeals ruled that an involuntary petition may be dismissed for bad faith even when the statutory requirements for filing an involuntary petition are satisfied and the debtor is not paying its debts as they become due. The court found the evidence “overwhelming” that, by pursuing the involuntary petition, each individual petitioning creditor sought a change in management and, additionally, that the testimony of each petitioning creditor indicated that “the filing of the bankruptcy was an attempt, directly or indirectly, to collect on their promissory notes.” Though the Code contemplates dismissal of a bankruptcy case \"for cause,\" bad faith is not enumerated as cause. One of the petitioning creditors sought, unsuccessfully, to wage a proxy fight to take control of the board. The details of the Debtor’s bad faith involuntary petition filing are by now well established and, following the evidentiary hearing on February 6, 2020, proven. Involuntary bankruptcy is a legal proceeding that creditors may bring against a person or business that may force a debtor into bankruptcy. Under section 303(i) of the Bankruptcy Code, a bankruptcy court may enter judgment for proximate or punitive damages based on a petitioning creditor’s bad faith filing. But the debtor also moved to dismiss the involuntary petition “as a bad-faith filing” despite the petitioning creditors’ “facial compliance with” the Code. The bankruptcy court, applying the factors set forth in the Third Circuit’s recent Forever Green decision, found that the involuntary petition was filed in bad faith. Second, there is no principled reason to distinguish bad Because this option is inherently dangerous to undeserving debtors, the Bankruptcy Code provides for extensive damages if creditors pursue involuntary bankruptcy in bad faith. 10. Because this option is inherently dangerous to undeserving debtors, the Bankruptcy Code provides for extensive damages if creditors pursue involuntary bankruptcy in bad faith. Even some of these courts, however, have suggested that the debt will be deemed liquidated if the creditor asserts in the involuntary petition only the undisputed portion of the debt. Courts have warned that the “filing of an involuntary petition is an extreme remedy with serious consequences to the alleged debtor, such as loss of credit standing, inability to transfer assets and carry on business affairs, and public embarrassment,” In re Reid, 773 F.2d 945, 946 (7th Cir. After the dismissal, Rosenberg filed an adversary proceeding against U.S. Bank under 11 U.S.C. However, the grounds for dismissing an involuntary bankruptcy petition have Id. Involuntary bankruptcy is a powerful tool that creditors can use as a last resort in attempting to collect a debt. Luckily for the petitioning creditors in Diamondhead, the court was sympathetic to their frustration over many years of stalled development and the low likelihood of repayment on their notes. 14-3906 (3d Cir. Filing an involuntary petition as a collection tactic is considered a bad faith filing, which is a basis for dismissing the petition. Does the ability of the creditor to receive damages for a bad-faith, involuntary filing affect your opinion? ABC has continuously failed to respond to 123s collection efforts. (a) An involuntary case may be commenced only under chapter 7 or 11 of this title, and only against a person, except a farmer, family farmer, or a corporation that is not a moneyed, business, or commercial corporation, that may be a debtor under the chapter under which such case is commenced. A recent post on this blog, Keep Your Fights Out of Bankruptcy Court: Bad Faith Involuntary Petitions, discussed the Third Circuit’s Forever Green decision, which held that a court may dismiss an involuntary petition for bad faith even when the petitioning creditors otherwise meet the statutory criteria. Judge Tosses Bad Faith Involuntary Filing Primarily Seeking Management Change. § 303 may be dismissed for bad faith. The court questioned whether the petitioning creditors were motivated by their status as creditor, stockholder, or both, and found that the primary reason that they filed the involuntary petition was to change the company’s management and collect on their notes: Based on the totality of the circumstances, the Court finds that the Petitioning Creditors’ primary concern in filing the involuntary petition was to effect a change in management to benefit their investments as stockholders. Debora Hoehne is an Associate at Weil Gotshal & Manges, LLP in New York. . If the involuntary petition is dismissed, the petitioning creditors can be liable for costs and attorney’s fees of the company. 1991). %PDF-1.6
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U.S.C. Background Bankruptcy laws allow a creditor to file an involuntary Chapter 7 or Chapter 11 petition against a debtor. § 303 (i), if the bankruptcy court dismisses the bankruptcy petition, it may order the petitioning creditor to pay the alleged debtor compensatory damages and, if the court determines the involuntary … The U.S. Supreme Court declined to take up a case seeking to establish what type of “bad faith” allows a court to award punitive damages against a creditor that improperly files an involuntary … The classic example of such a bad faith involuntary filing is a business competitor of the debtor initiating the bankruptcy with the primary goal of disrupting the competitor's business, even though the debtor isn't really struggling financially. The court made clear its ruling was not inviting a motion for sanctions, but it had discretion to award fees, which discretion “would be judiciously administered.” Under the Bankruptcy Code, creditors can file an involuntary petition against a debtor under Chapter 7 … Last week’s decision by the U. S. Court of Appeals for the Third Circuit in In re: Forever Green Athletic Fields, Inc., No. In sum, the Court found: • McGuckin directed three purported petitioning creditors to file an involuntary petition against VAC … 8 0 obj
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§ 303(i) permits an award of punitive damages when an involuntary petition is filed in bad faith. But they can include dismissal of your bankruptcy , forever losing the right to discharge debts existing at the time of your filing, and loss of your nonexempt assets. Prior results do not guarantee a similar outcome. Perhaps more important, Section 303 also sets forth the risks associated with forcing a person or company into bankruptcy. No. No. Damages for Bad Faith Filing Under Section 303(i) Not satisfied with just dismissing the involuntary petition, Metrogate also sought damages in connection with the involuntary filing. Takeaway Oct. 16, 2015) held that an involuntary bankruptcy petition filed under 11 U.S.C. Similarly, the Code contains no requirement that bankruptcy petitions must be filed in good faith. Outcome The decision places another hurdle for creditors to surmount when considering whether to put a debtor in bankruptcy and creates another … It also enumerates the standard for evaluating whether a filing is in bad faith. We’ve previously written about this case in our post Delaware Bankruptcy Court Denies Request to Appoint an Interim Trustee During the “Gap Period” in an Involuntary Case, in connection with a failed attempt to appoint an interim trustee during the “gap period” in the involuntary case. The company had sold off its ship-based gambling operations in Florida in 2000 to focus on the Diamondhead project, but since that time had failed to make any progress, had no operations or revenue, and had failed to attract a joint venture partner. The contents of this website may contain attorney advertising under the laws of various states. h�bbd```b``���@$c�d��� ����&��- D���WA$�=�� at *2. This standard is fact-intensive and requires a court to look at any and all relevant factors, including (i) if the statutory criteria were satisfied, (ii) if a reasonable inquiry was made into the facts and law, (iii) whether the petition was meritorious, (iv) evidence of preferential payments, (v) evidence of ill will or desire to harass, (vi) suspicious timing, (vii) use of the filing to obtain a disproportionate advantage rather than to protect against other creditors doing the same, (viii) tactical advantage in pending litigations, and (ix) if the filing was intended to substitute for customary debt collection procedures. While it may be proper in some circumstances for noteholders to band together to file an involuntary bankruptcy petition, it is not appropriate here, where the noteholders are looking to vindicate their equity interests and where myriad state law remedies are available. An involuntary petition under chapter 7 of the Bankruptcy Code filed against a Mississippi casino developer was dismissed for bad faith, even though the petitioning creditors met the statutory requirements for filing the involuntary case. Nonetheless, most courts have expressly interpreted §1112(b) to include dismissal of a chapter 11 case due to \"the lack of good faith in its filing.\" See, e.g., In re Humble Place Joint Venture, 936 F.2d 814, 816-17 (5th Cir. NMI filed a separate action in Pennsylvania federal court against U.S. Bank, alleging the involuntary bankruptcy filing … §1112. Because involuntary Chapter 7 proceedings are intended to protect creditors from debtors wh… §§ 101-1532 (the “Code”), an involuntary petition can be filed against a debtor by three entities which hold claims which are matured, not contingent as to liability or disputed, and which total in the aggregate at least $15,325. In Forever Green, the Third Circuit adopted a “totality of the circumstances” standard for determining bad faith. The debtor bears the burden of proving by a preponderance of evidence that the petition was filed in bad faith. Pursuant to section 303 of the United States Bankruptcy Code, 11 U.S.C. Bad Faith Filings Each of the petitioning creditors was both a stockholder and noteholder. 14-3906 (3d Cir. Creditors can meet all of the statutory requirements for an involuntary petition and still have their petition dismissed upon a finding of bad faith. The petitioning creditors testified that the debtor represented to them over the years that a deal to develop the property with significant players was always on the horizon. The court described the tests as follows: Under the improper purpose test, “bad faith exists where the filing of the petition was motivated by ill will, malice or the purpose of embarrassing or harassing the debtor.” Filing an involuntary Section 303 of the Bankruptcy Code establishes the process and requirements for filing an involuntary petition. Printed on Apr 10, 2021 from Weil Restructuring, Delaware Bankruptcy Court Denies Request to Appoint an Interim Trustee During the “Gap Period” in an Involuntary Case, Keep Your Fights Out of Bankruptcy Court: Bad Faith Involuntary Petitions, Delaware Bankruptcy Court Weighs in: Debtors Are Not Excluded From Bankruptcy Code’s Definition of “Financial Participant” and Safe Harbor, The Aftermath of a Complicated Breakup: Third Circuit Holds Stalking Horse Bidder in Terminated Transaction May Assert Potential Administrative Expense Claim Notwithstanding Disallowance of Its Termination Fee, No Setoff Here: Third Circuit Resolves Triangular Setoff Debate Once and for All. Scarola Ellis, a law firm that claims that Skyworks Ventures Inc. owes them $200,000 in legal fees filed an involuntary bankruptcy petition against the company in bad faith according to … A secondary concern was to collect on their notes. Rosenberg's own bankruptcy case was likewise dismissed. A Bad Faith Filing Can Sink an Involuntary Bankruptcy Petition SeleCted toPIC Involuntary bankruptcy filings have historically, under the right circumstances, been a potent tool for trade and other unsecured creditors. Other courts have said that any good faith dispute over the amount of the debt asserted in the involuntary petition renders the entire debt unliquidated. The involuntary bankruptcy petition was subsequently dismissed. In In re Diamondhead Casino Corporation, the U.S. Bankruptcy Court for the District of Delaware found the petitioning creditors’ primary concern was a change in management that could be pursued under Delaware state law, and was not a proper purpose for filing an involuntary petition. Practice Question: ABC Corp is a large corporation that produces farm chemicals. Get the latest views and developments in the restructuring world from the Restructuring team at Weil. Views and developments in the restructuring world from the Restructuring team at Weil. Copyright © 2021 Weil, Gotshal & Manges LLP, All Rights Reserved. There are also a wide range of tests and standards that the court can use to determine whether an involuntary petition has been filed in bad faith. However, there is still the possibility of sanctions against the petitioning creditors. Having thwarted the involuntary petition, Rosenberg then filed an adversary proceeding seeking compensatory and punitive damages for the bad faith filing… § 303(i) seeking the recovery of costs, attorney’s fees, and damages resulting from a bad faith filing of an involuntary … An involuntary petition under chapter 7 of the Bankruptcy Code filed against a Mississippi casino developer was dismissed for bad faith, even though the petitioning creditors met the statutory requirements for filing the involuntary case. The bankruptcy court agreed. 5?�LTKWh(���uxzZ��'��L,��-�R����1&S��>O���a5 6T�iȂ*�_:��eֳ�:�ɣvmv���D���p��_��},�i$���nA�78�#�����#�ﭽ*���y[y%�!��������%�~H>��En�*�������6���
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However, there are also cases where creditors can act in bad faith, particularly when they force a debtor into involuntary bankruptcy. With the passage of time, and the land still vacant, frustration grew and the petitioning creditors lost faith in management. The Third Circuit first held that an involuntary petition may be dismissed as a bad faith filing even where the petitioning creditors had satisfied all of Bankruptcy Code Section 303's requirements for an involuntary bankruptcy filing. The debtor had been trying for over fifteen years prior to the involuntary filing to develop a property near Diamondhead, Mississippi into a destination resort centered around a luxury waterfront casino. § 303 may be dismissed for bad faith. October 20, 2015. After an evidentiary hearing, the bankruptcy court dismissed the involuntary petition reasoning that because bankruptcy courts are courts of equity, anyone who files a bankruptcy petition, whether voluntary or involuntary, must come to the court for a proper purpose. Before filing an involuntary petition, creditors should remember that it is not sufficient to merely satisfy the statutory requirements for an involuntary filing; a creditor must also carefully consider the reasons for the involuntary filing, and all other available remedies. Redefining Bad Faith in Involuntary Bankruptcy Proceedings Lawtence Ponoroff University of Toledo College of Law, lawrence.ponoroff@law.arizona.edu ... filing of an involuntary petition for an improper purpose, such as to embarrass competition or harass an enemy, and (2) … 1985), so most courts in the right circumstances will not shirk from awarding serious damages to remedy bad … The Bankruptcy Court. Oct. 16, 2015) held that an involuntary bankruptcy petition filed under 11 U.S.C. Therefore, the Bankruptcy Code expressly contemplates that a bad faith involuntary filing may take place. Forever Green defended the involuntary petition by claiming that it should be dismissed because it had been filed in bad faith. 14-3906 (3d Cir. The filing of an involuntary bankruptcy petition has devastating consequences for the putative debtor. Weil, Gotshal & Manges LLP is headquartered in New York and has office locations in Beijing, Boston, Dallas, Frankfurt, Hong Kong, Houston, London, Miami, Munich, New York, Paris, Princeton, Shanghai, Silicon Valley, and Washington, D.C. The consequences of a bad faith filing can vary depending on the egregiousness of your conduct. Although creditors are presumed to act in good faith, the court concluded that a court may dismiss an … Accordingly, the court dismissed the case. If the bankruptcy court determines that the involuntary petition was filed in bad faith, the petitioning creditors can be liable as well for damages caused by the involuntary filing and even for punitive damages. The emails showed bad faith under all three recognized tests for bad faith. Y��es ��g���@�l�� ���3��Hť`v,�����A��m0�D��Mc�2�����n�������RL@��b`��&� M��
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