The credit manager of an Akron-based company wrote, asking this: “One of our commercial accounts is pretty far behind in paying on our invoices. Another vendor approached me and asked me to join in signing an involuntary bankruptcy petition. Is there any legal risk in doing this?
In a word, yes. If an involuntary bankruptcy petition is dismissed without the debtor’s consent for any reason other than abstention of the court, Bankruptcy Code § 303(i) provides that the debtor may have judgment against the petitioning creditors for its costs, including a reasonable attorney’s fee. Moreover, if the court determines that the petitioners, or any one of them, filed the petition in bad faith, the debtor may also have a claim for any actual damages caused by the filing and for punitive damages. Therefore, in most cases, the filing of an involuntary bankruptcy petition, while a powerful collection tool, also involves the assumption of a calculated risk by the petitioning creditors. For this reason, and with due regard for the fact that time is often of the essence in involuntary bankruptcy cases, prospective petitioning creditors should appreciate that the decision to go forward does expose them to potential liability that would not be a factor if recourse were limited to their state law alternatives.
[Editors’ Note: this is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to email@example.com and we will try to answer it. For more information on involuntary bankruptcy, please see Getting Over the Scariness of Filing an Involuntary Bankruptcy Petition.]
[Editor’s Note: This 90 Second Lesson is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters. For more information about these publications, please visit www.legalsolutions.com.]
The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.
90 Second Lesson: What is a “composition agreement?”
File Early and Often: Filing and Amending Claims in a Bankruptcy Case
Location, Location, Location – Where to File Bankruptcy
When Your Customer Files for Bankruptcy
When Your Borrower Files for Bankruptcy (DIP Financing, Cash Collateral, and Adequate Protection)
Getting Over the Scariness of Filing an Involuntary Bankruptcy Petition
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