Source: https://www.bankruptcystrategies.com/blog/2015/07/involuntary-bankruptcy-petitions-may-be-1.shtml
Timestamp: 2019-04-24 18:24:41+00:00

Document:
By Wayne Greenwald of Wayne Greenwald, P.C. posted in Bankruptcy on Friday, July 24, 2015.
Involuntary bankruptcy petitions may be the nuclear weapon in the commercial debtor-creditor collections arsenal. Like its military counterpart, it devastates. An alleged debtor may be crippled economically, where it was viable before the involuntary petition was filed.
A creditor can get burned playing with explosives.
First Defense ­- Who Qualifies?
The best defense to involuntary petitions may be the petitioning creditors themselves. Generally, petitioning creditors must have claims that are "not contingent as to liability or subject of bona fide dispute as to liability or amount."3 It's hard to imagine an alleged commercial debtor who can't argue "we don't owe you that" or "we don't owe you that much."
One approach for determining whether a claim is subject to a "bona fide" dispute is the "reverse summary judgment" standard.5 Using this approach, a court would not grant summary judgment to the claimant on their claim in a regular civil action,6 subject to a bona fide dispute.
If a petitioning creditor's claim is subject to a bona fide dispute, they are disqualified as a petitioner. If an involuntary lacks the necessary petitioning creditors,7 the petition fails8 and is dismissed. The court then assesses damages against the petitioners.
Last week the U.S. Court of Appeals for the Second Circuit affirmed a bankruptcy court dismissing an involuntary petition and awarding $315,000 in damages against the petitioning creditors.9 The bankruptcy court withheld punitive damages because it believed the $315,000 award to be example enough.
The bankruptcy court found those petitioning creditors' claims subject to bona fide disputes. The court saw the already pending "plethora of ongoing litigation," in other courts and the debtor's factual showing questioning their involvement in the transaction at issue generating the dispute. The bankruptcy court also concluded that abstaining its jurisdiction10 was proper. The pending litigation regarding the same issues was already progressing in other forums.
The Second Circuit affirming the damage award shows that the "abstention" refuge for dismissed involuntary petitioners may be gone. Involuntary petitioners should be doubly sure of their claims and standing before engaging in "kamikaze" collections strategies. The tables of financial embarrassment may get turned.
First, why would a creditor with a judgment pursue an involuntary bankruptcy case? Judgment creditors can enforce their judgment ahead of other creditors. A bankruptcy case forces a debtor's universe of creditors to share its assets. Voluntarily sharing with other junior creditors lacks business sense, absent other factors.
Involuntary bankruptcy petitions have their place in creditors' quivers. For self-preservation, creditors need to be careful and judicious in using them.
As always, we'd love to hear your comments and experiences.
2 11 U.S.C. § 303(I).
3 11 U.S.C. § 303(b)(1).
4 We'll discuss your alternative later.
6 'If there is a genuine issue of a material fact that bears upon the debtor's liability, ... then the petition must be dismissed . . .so long as the factual questions are "substantial." In re Tobacco Road Associates, LP, 2007 WL 966507 (E.D.Pa.).
7 Usually three. See 11 U.S.C. § 303(b)(1).
8 The petition can be supplemented with joining creditors who remedy the loss. However, they must be qualified petitioners.
9 In re TPG Troy, LLC, ­­­ ---F.3d---­­­­, 2015 WL 4220619 (2nd Cir.)("Troy").
11 There is a dispute among the districts whether an award under 11 U.S.C. § 303(i) can be granted when a case is dismissed based on abstention. For example, Koffman v. Osteoimplant Technology, Inc., 182 B.R. 115, 121 (D. Md. 1995) says no award can be granted. Troy apparently disagrees.
12 See, 11 U.S.C. § 701.
13 An interim trustee can be appointed while the involuntary petition is pending to protect the estate. See, 11 U.S.C. § 303(g).
14 These remedies are also available in federal courts. See, Fed.R.Civ.P. 69.

References: § 303
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