Second Circuit Rejects Use of Involuntary Bankruptcy Petition As Collection Tool

A bankruptcy court properly dismissed a creditor's involuntary bankruptcy petition “for cause” when it “would serve none of the Bankruptcy Code's goals or purposes … and [when] the sole [petitioning] creditor is not substantially prejudiced by remedies available under state law,” held the U.S. Court of Appeals for the Second Circuit on August 14, 2018. In re Murray, 2018 WL 3848316, 7 (2d Cir. Aug. 14, 2018). In its view, the bankruptcy court “declined to serve as a 'rented battle field' or 'collection agency'” for a single creditor. Id., at 7. The bankruptcy court had stressed that “bankruptcy is not a judgment enforcement device.” In re Murray, 543 B.R. 484, 494 (Bankr. S.D.N.Y. 2016).

Relevance

“Most bankruptcy filings are initiated as voluntary petitions,” and “[f]ar fewer are initiated as involuntary petitions by creditors, much less a single creditor,” explained the Second Circuit. Id., at 4, citing Administrative Office of the United States Courts, Judicial Facts and Figures, tbl 7.2. According to the bankruptcy court, “less than 1/10 of 1% of all bankruptcy cases” are involuntary. 543 B.R. at 497. In the view of the Third and Seventh Circuits, involuntary bankruptcy petitions have “serious consequences [for] the alleged debtor, such as loss of credit standing, inability to transfer assets and carry on business affairs, and public embarrassment.” In re Forever Green Athletic Fields, Inc., 804 F.3d 328, 335 (3d Cir. 2015), quoting In re Reid, 773 F.2d 945, 946 (7th Cir. 1985).