Involuntary Bankruptcy: A Useful Tool for Lessors and Creditors

One of the luxuries we have when discussing BAPCPA and filing involuntary petitions is that we don't have to meticulously lay out the law under the former Bankruptcy Code, as anyone filing an involuntary petition after reading this article will certainly be operating under BAPCPA, which is now the law. Under the current Bankruptcy Code, an involuntary petition may only be filed by a minimum of three creditors with debts totaling at least $12,300 in the aggregate. If the alleged debtor challenges the petition, the petitioning creditors will need to show that the debtor is unable to meets its obligations as they come due and that the creditors' claims are not contingent as to liability or the subject of a bona fide dispute as to liability or amount. If the debtor has fewer than 12 creditors, then a single creditor holding a claim of at least $12,300 can file an involuntary petition. Successfully prosecuting an involuntary petition generally means the fees and costs associated therewith are an expense to be borne by the debtor's estate, provided it has sufficient assets to do so. This right is preserved in Section 503(b)(3)(A). Congress recognized that creditors should not bear the financial burden of declaring an already delinquent customer bankrupt. However, make sure to first seek the advice of experienced counsel before filing an involuntary petition, as the court is empowered to grant judgment in favor of the debtor for its costs or attorneys' fees if the involuntary petition is filed in bad faith and ultimately dismissed. Thus, before filing an involuntary petition against an account debtor, it is vitally important to make sure the creditor(s) joining in the petition meet the requirements of Section 303(b).

So when is it appropriate to use an involuntary bankruptcy petition? For starters, almost every company that leases equipment or sells on credit has either encountered or heard the story of the account debtor transfers its assets the week before the creditor executes on judgment, and many times the transfer is made to a related entity. In this situation, it may be critical to preserve the rights of creditors by filing an involuntary petition in bankruptcy. In this scenario, there are a couple of important tools that can be utilized by the bankruptcy estate. Whether the action is prosecuted by the trustee in a Chapter 7, the debtor-in-possession, trustee or committee of unsecured creditors in a Chapter 11, grounds may exist for avoiding the sale under Sections 548 or 547 of the Code, relating to fraudulent transfers and preferences, respectively.