By Michael L. Cook (Schulte Roth & Zabel LLP)
Involuntary bankruptcy cases are relatively rare. According to the Second Circuit “far fewer [cases] are initiated as involuntary petitions by creditors, much less a single creditor,” citing statistics from the Administrative Office of the United States Courts. In re Murray, 900.
F.3d 53, 59 (2d Cir. 2018) (less than 1/10 of 1% of all bankruptcies). The numbers suggest that involuntary bankruptcy is a limited creditors’ remedy, causing at least 5 courts of appeals to pen strong opinions in the past 4 years that define the limits of this remedy and describe the sanctions available to an aggrieved debtor.
This article shows why courts have declined to allow bankruptcy courts to become collection agencies for a single creditor when available state law remedies are adequate. The courts have also not shied away from sanctions and damage awards to discourage the filing of improper involuntary bankruptcy petitions. The Third Circuit even held that “bad faith provides an independent basis for dismissing an involuntary petition,” despite the creditors’ having met all of the “statutory requirements,” stressing the “equitable nature of bankruptcy…” In re Forever Green Athletic Fields Inc., 804 F.3d 328, 334 (3d Cir. 2015).
The article also discusses a well-reasoned bankruptcy court decision sanctioning creditors who had “abuse[d]. . . the power given to [them] to file an involuntary bankruptcy petition.” In re Anmuth Holdings LLC, 2019 WL 1421169, *1 (Bankr. E.D.N.Y. Mar. 27, 2019). In that case, after trial, the court awarded not only attorneys’ fees and costs of about $115,000, but also punitive damages of $600,000, noting the petitioning creditors’ “egregious bad faith conduct,” their “lack of remorse and threats of future involuntary petitions,” plus their “knowingly false statements.”
Involuntary bankruptcy, when used as part of a collective process for all creditors, can insure the orderly and fair distribution of a debtor’s estate. But it is hardly a mechanism for resolving a two-party dispute. Whatever an involuntary bankruptcy petition may be, it is always a risky, limited remedy.
The full article is available here.