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Bankruptcy Litigation

Involuntary Bankruptcy: Limited Remedy and Strong Sanctions for Abuse

A bankruptcy court decision recently detailed how courts applying Bankruptcy Code §303(i) can sanction creditors who “abuse … the power given to [them] … to file an involuntary bankruptcy petition.” The decision shows why the filing of an involuntary bankruptcy requires careful pre-filing legal judgment.

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The remedy of involuntary bankruptcy “exists as an avenue of relief for the benefit of the overall creditor body …. [I]t was not intended to redress the special grievances, no matter how legitimate, of particular creditors ….” In re Murray, 900 F.3d 53, 59-60 (2d Cir. 2018). The courts of appeals have been consistent. In re Edgar A. Reyes-Colon, 2019 WL 1785039, at 1 (1st Cir. Apr. 24, 2019) (affirmed dismissal of involuntary petition filed by only two creditors; at least three petitioners required; parties engaged in “twelve years of litigation concerning the number of [debtor’s] creditors and whether he might … be placed in bankruptcy involuntarily for ‘equitable’ reasons.”); In re 8 Speeds 8, Inc., 2019 WL 1891802, at 3 (9th Cir. Apr. 29, 2019) (dissent) (“Involuntary bankruptcy is a drastic course of action that carries significant consequences, and ‘[f]iling an involuntary petition should be a measure of last resort’ …. The fee-shifting and damages provision of [Bankruptcy Code] §303(i) are intended to deter frivolous filings …. The Majority holds that … a third party who appears for a debtor and successfully defends against an involuntary petition can never request that the debtor be awarded costs, a reasonable attorney’s fee, or damages.”).

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