In this, the first of a two-part series, I intend to provide a discussion as to the reasons why a creditor should file an involuntary petition. In the next installment, I take a look at the other side — why a creditor should not file an involuntary petition. Both articles include a discussion of the law regarding involuntary bankruptcy proceedings.
Part One — File the Petition and Force the Debtor to Pay
The reasons why a creditor should consider filing an involuntary bankruptcy petition against a borrower, lessee or guarantor (debtor) are set forth below as follows:
A Summary of the Law on Involuntary Bankruptcy Petitions
Therefore, there are a number of reasons why a creditor may want to file an involuntary bankruptcy petition against the debtor and some of them have been set forth above. However, a creditor needs to know how and when an involuntary petition may be filed.
In order to file an involuntary bankruptcy petition, §303 of the Bankruptcy Code provides in pertinent part as follows:
“(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, which such case is commenced.
(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under Chapter 7 or 11 of this title —
(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, … if such noncontingent, undisputed claims aggregate at least $14,425 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims (emphasis added);
(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under §544, §545, §547, §548, §549 or §724(a) of this title, by one or more of such holders that hold in the aggregate at least $14,425 of such claims….
(h) If the petition is not timely controverted, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed. Otherwise, after trial, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed, only if —
(1) the debtor is generally not paying such debtor’s debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount;…”
In the event that the petitioning creditor does not prevail against the debtor at trial and is unable to prove both that the debtor was not generally paying its debts as they become due and that there is no bona fide dispute as to liability and amount, and the debtor prevails against the petitioning creditor dismissing the involuntary petition, the debtor can then recover against the petitioning creditor, its costs and reasonable attorneys fees, and if the court holds that the filing of the involuntary petition was in bad faith, any damages proximately caused by the filing and even punitive damages (see 11 USC §303 (i)).
The Decision to File an Involuntary Petition
Once the creditor decides that it makes sense for one or more of the reasons discussed above to commence an involuntary petition, procedurally the following issues may arise:
What Happens Once the Petition is Filed?
Procedurally, once the Involuntary Bankruptcy Petition is filed, the debtor has the opportunity to file an answer and contest the filing of an involuntary petition and whether the petitioner(s) have met the elements set forth in §303. If an answer is filed, then the involuntary petitioner or petitioners will go to trial on the issue as to whether an Order for Relief shall be entered. If the Order for Relief is entered, then the bankruptcy process proceeds. If the Order for Relief is not entered, then the Involuntary Petition will be dismissed and the creditor can be liable for the damages discussed above.
Until such time as an Order for Relief is entered, the debtor may continue to operate its business and continue to use, acquire or dispose of property (see 11 USC §303 (f)). Therefore, in a proper case and under the appropriate circumstances, an involuntary petitioner should consider obtaining the immediate appointment of a trustee pursuant to 11 USC §303 (g) or custodian pursuant to 11 USC §303(h) to take over the debtor’s operations and/or assets so that the debtor cannot continue to dissipate them.
Once the involuntary petition is filed, the automatic stay of §362 is applicable, even though an Order for Relief may not be entered for quite some time. In addition, although an Order for Relief may not be entered for quite some time, the date of the Involuntary Petition marks the commencement of the case.
Part Two of this series on involuntary bankruptcy petitions will deal with the issues in an involuntary bankruptcy case and the problems a creditor will encounter if it does not prevail and the involuntary bankruptcy is dismissed.
Andrew K. Alper is a partner with the law firm of Frandzel Robins Bloom & Csato, LC in Los Angeles. Alper has been representing equipment lessors, funding sources and other financial institutions since 1978. Alper obtained his Bachelor of Arts degree in Political Science, magna cum laude, from the University of California at Santa Barbara, and received his Juris Doctor from Loyola Marymount University School of Law making the Dean’s List. Alper’s practice emphasizes the representation of equipment lessors and funding sources in all aspects of equipment leasing including litigation, documentation, bankruptcy and transactional matters. Besides representing equipment lessors and funding sources, Alper represents banks and other financial institutions in the area of commercial litigation, insolvency, secured transactions, banking law, real estate and business litigation.
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