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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).
Even when creditors file an otherwise valid involuntary petition, “that doesn't mean the bankruptcy court can't dismiss the case.” In re Forever Green, 804 F.3d at 334. Because an involuntary bankruptcy petition is an extreme remedy, the Second Circuit stressed in Murray that “Congress provided bankruptcy courts with a variety of tools with which to police their use.” Murray, 2018 WL 3848316, at 4.
Facts
A creditor obtained a $19 million judgment against the debtor and assigned the judgment to its counsel (W) as part of a fee settlement, agreeing to split any recovery on a 70/30 basis. Id., at 1. The debtor was jobless, had no income and made no payments to satisfy the judgment. According to W, the debtor sold assets and transferred the sale proceeds “to an offshore asset-protection trust.” Id.
The debtor's sole remaining asset was a $4.6 million residential cooperative apartment in Manhattan, the shares of which the debtor held with his wife as tenants by the entirety. The debtor lived in the apartment with his spouse and their two children. With its judgment, W obtained a lien on the shares of the cooperative apartment.
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