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Necessities And Dangers In Petitioning For An Involuntary Chapter Case


This text gives an summary of the necessities petitioning collectors should fulfill to start an involuntary course of and discusses sure circumstances beneath which an involuntary submitting could also be contested by a putative debtor.

Other than the standard path of pursuing a judgment in opposition to the putative debtor in state courtroom, a number of collectors—if sure standards are met—can pressure a delinquent debtor right into a chapter continuing via the submitting of an involuntary chapter petition. Commencing an involuntary chapter is a robust treatment to safe fee. Nonetheless, involuntary chapter circumstances account for lower than one p.c of chapter proceedings in america every year.1

An involuntary chapter “exists as an avenue of reduction for the good thing about the general creditor physique . . .[I]t was not meant to redress the particular grievances, irrespective of how official, of explicit collectors . . . .” Wilk Auslander LLP v. Murray (In re Murray), 900 F.3d 53, 59–60 (2nd. Cir. 2018) (quotation omitted). For instance, an involuntary chapter is an acceptable software to stop funds and belongings from being dissipated to the detriment of collectors or to make sure sure collectors should not receiving preferential remedy or funds. Graduation of an involuntary continuing can be an efficient method to supply a supervised discussion board to assessment the debtor’s prepetition transactions and implement an orderly liquidation. Alternatively, the case legislation and Chapter Code are clear that an involuntary chapter filed for the aim of settling a two-party dispute might be dismissed. Whereas a creditor could also be in technical compliance with the Chapter Code, the danger of dismissal stays the place the chapter courtroom determines the petition was filed in dangerous religion—for instance to harass or train leverage over the putative debtor.

This text gives an summary of the necessities petitioning collectors should fulfill to start an involuntary course of and discusses sure circumstances beneath which an involuntary submitting could also be contested by a putative debtor.

I. The Chapter Code Necessities for Involuntary Petitions

The Chapter Code’s necessities for commencing an involuntary continuing are straight ahead. The eligibility necessities, set forth in Part 303(b)(1) of the Chapter Code, direct that the requisite variety of petitioning collectors holding non-contingent, undisputed, unsecured claims should maintain an combination debt throughout all petitioning collectors totaling at the very least $16,750.2 The petitioning collectors bear the preliminary burden of building a prima facie case that they meet the eligibility necessities set forth in Part 303(b) of the Chapter Code. See, e.g., In re Persico Contracting and Trucking, Inc., No. 10-22736 (RDD), 2010 WL 3766555, at *3 (Bankr. S.D.N.Y. Aug. 10, 2010).

A. Eligible Debtor:

With sure exceptions, any “particular person”3 who’s eligible to file a voluntary chapter petition would be the putative debtor in an involuntary chapter petition. Notably, courts have additionally held that involuntary petitions can’t be filed in opposition to nonprofit organizations or municipalities. See, e.g., Official Comm. of Unsecured Collectors v. Archdiocese of Saint Paul & Minneapolis (In re Archdiocese of Saint Paul & Minneapolis), 888 F.3d 944 (eighth Cir. 2018). Equally, an involuntary petition can’t proceed in opposition to a farmer, except the farmer consents to entry of an order for reduction.

B. Variety of Petitioning Collectors:

If the putative debtor has twelve or extra collectors, at the very least three qualifying collectors should be a part of as petitioning collectors to collectively file the involuntary petition. Nonetheless, the Chapter Code requires just one petitioning qualifying creditor in situations the place the putative debtor has lower than twelve collectors.

C. Qualification of Collectors:

Every petitioning creditor should maintain non-contingent, undisputed, unsecured claims and be in any other case certified to hitch the petition. Examples of collectors which doubtlessly can function petitioning collectors (if the opposite necessities above are met) embrace (i) a judgment holder in opposition to the putative debtor, (ii) a transferee or transferor of a declare as long as the switch was not for functions of initiating the involuntary chapter case, (iii) a totally or partially secured creditor, or (iv) an indenture trustee. Notably, sure odd course collectors with de minimis recurring claims (i.e., utility payments or insurance coverage premiums), though holding official claims in opposition to the putative debtor, are usually not eligible to qualify as a petitioning creditor. As well as, sure collectors resembling workers, insiders, and transferees of avoidable transfers are statutorily excluded from being counted in direction of the requisite variety of petitioning collectors. 11 U.S.C. § 303(b)(2).

Makes an attempt by artistic, scorned collectors to skirt these stringent necessities are sometimes rejected by courts. For instance, a creditor could not promote or assign a portion of its declare in opposition to the putative debtor to a different celebration purely for the aim of artificially creating the requisite variety of qualifying collectors to file an involuntary petition. An entity that has transferred or acquired a declare for the aim of commencing an involuntary petition is not going to be thought-about a qualifying creditor eligible to turn out to be a petitioning creditor. Fed. R. Bankr. P. 1003(a).

Equally, if two or extra collectors are each eligible to doubtlessly gather on a debt—resembling associates or events who offered the best, in full or partly, to gather on a declare or in any other case share the best to fee over the identical debt—these collectors don’t rely as a number of qualifying collectors. Thus, if a putative debtor has twelve or extra collectors, at the very least three collectors with a separate proper to fee beneath relevant state legislation are required as petitioning collectors.

D. Qualifying Debt:

A qualifying creditor should additionally maintain a “qualifying” debt, that means the creditor should maintain a definite declare (as set forth above) that isn’t contingent4 or the topic of a bona fide dispute as to legal responsibility or quantity. Though the Chapter Code doesn’t outline the time period “bona fide dispute”, courts make the most of an goal commonplace, analyzing “whether or not there’s an goal foundation for both a factual or a authorized dispute as to the validity of the debt.” In re Biogenetic Techs., Inc., 248 B.R. 852, 856–57 (Bankr. M.D. Fla. 1999) (citations omitted). For instance in In re Biogenetic Applied sciences, Inc., the chapter courtroom discovered a bona fide dispute existed as to the enforceability of the contract the debt was primarily based upon, and subsequently the creditor was not eligible to be a petitioning creditor within the involuntary chapter continuing. Id. at 859.

E. Show Grounds for the Reduction:

Part 303(h) of the Chapter Code additionally requires the petitioning collectors to show certainly one of two various grounds for the involuntary reduction. Both (i) the putative debtor is usually not paying its money owed as they turn out to be due (except the debt is the topic of a bona fide dispute as to legal responsibility or quantity); or (ii) inside 120 days earlier than the submitting of the involuntary petition, a custodian, aside from a trustee, receiver, or an agent appointed or licensed to take cost of lower than considerably the entire property of the debtor for the aim of implementing a lien in opposition to such property, was appointed or took possession. 11 U.S.C. § 303(h). Satisfaction of both prong requires the putative debtor to be in vital monetary misery—thus, offering a restrict on a creditor’s skill to inappropriately start an involuntary continuing.

Whether or not a debtor is usually not paying its money owed as they turn out to be due is a extremely factual inquiry. Chapter courts have rejected a purely mechanical check and have held that “typically” doesn’t essentially imply normally or more often than not, as a result of the usual is versatile and relies on the totality of circumstances. Frequent elements embrace the variety of money owed, the quantity of the delinquency, the materiality of the nonpayment, and the character and conduct of the debtor’s enterprise.

The second floor for reduction, the place a custodian has been appointed, was included within the Chapter Code to supply collectors in these circumstances a less complicated check for getting into an involuntary chapter, permitting collectors to simply get hold of protections that the Chapter Code gives. After the preliminary 120-day interval, nevertheless, a creditor in these circumstances might want to show the more difficult check described above.

II. Putative Debtor’s Makes an attempt to Dismiss the Involuntary Chapter

As soon as a prima facie case has been established by the petitioning collectors, the burden then shifts to the entity in opposition to whom the involuntary petition has been filed (referred to herein because the putative debtor) to show that the eligibility necessities haven’t been met. See Persico, 2010 WL 3766555, at *3. Even the place the elements set forth above have been met, petitioning collectors mustn’t count on a putative debtor to offer in quietly to the involuntary petition. Along with searching for dismissal of the petition, the putative debtor may search damages in opposition to the petitioning collectors if it believes the involuntary petition was filed in dangerous religion. As such, collectors contemplating submitting an involuntary petition should rigorously take into account the putative debtor’s potential defenses to the petition and the associated penalties if the involuntary petition is dismissed.

After the involuntary petition is filed, there’s a 21-day hole interval that gives the debtor with a deadline to answer the involuntary petition. The putative debtor could allege quite a few defenses in its response to the involuntary petition, resembling:5

The involuntary petition has procedural deficiencies, for instance that: (i) the putative debtor is just not eligible to be a chapter debtor; (ii) the petitioning collectors don’t fulfill the requirement for 3 or extra qualifying collectors (in circumstances the place the putative debtor has twelve or extra collectors); or (iii) the venue of the case is improper.

The petitioning collectors should not qualifying collectors and/or their claims are topic to bona fide dispute.

The petitioning collectors should not have the requisite combination quantity of qualifying debt.

The putative debtor is usually paying its money owed as they turn out to be due.

Moreover, a putative debtor can search dismissal of an involuntary petition alleging that the petition was not filed in good religion (a requirement beneath the Chapter Code). Even the place the petitioning collectors have met all the necessities for submitting an involuntary chapter case, the case could also be dismissed if it was filed in dangerous religion—for instance, with the aim of harassing the putative debtor. In re Perpetually Inexperienced Athletic Fields, Inc., 804 F.3d 328, 335–36 (3d Cir. 2015). The Chapter Code’s requirement for good religion filings has “robust roots in fairness,” id. at 334, and seeks to stop improper involuntary petition filings by guaranteeing that the “balancing of pursuits is just not undermined by petitioners whose goals are antithetical to the fundamental functions of chapter.” NMSBPCSLDHB, L.P. v. Built-in Telecom Categorical, Inc. (In re Built-in Telecom Categorical, Inc.), 384 F.3d 108, 119 (3d Cir. 2004).

Courts make the most of completely different assessments and elements in figuring out whether or not an involuntary petition was filed in dangerous religion. Perpetually Inexperienced, 804 F.3d at 336. For instance, the next are examples of assessments courts use in making this dedication:

The “improper use” check questions whether or not the submitting was meant to acquire a disproportionate benefit for the petitioning creditor reasonably than to guard the creditor collectively.

The “improper function” check analyzes whether or not the submitting was motivated by ailing will or a want to harass.

The “goal check” assesses the submitting via the lens of “an inexpensive particular person” to see if an inexpensive particular person within the creditor’s place would have filed the involuntary petition.

The “totality of the circumstances” check is a extremely fact-based commonplace via which the chapter courtroom considers a myriad of things together with, inter alia, the improper use check, the improper function check, and whether or not (i) the statutory necessities have been met, (ii) the collectors made “an inexpensive inquiry into the related info and pertinent legislation earlier than submitting”, (iii) the submitting was used to create a tactical benefit and/or was used instead to debt-collection procedures, (iv) the timing of the submitting was suspicious, and (v) the collectors had proof of dissipation of the debtor’s belongings.

Id. at 335–36.

In In re Perpetually Inexperienced Athletic Fields, Inc., the courtroom dismissed the involuntary petition as being filed in dangerous religion making use of the totality of circumstances check. The courtroom primarily based its determination on a large number of info, together with that the petitioning creditor, (i) made clear he had a litigation technique of utilizing “any means essential to pressure fee” of his lien, (ii) acted in a method that “ran counter to the spirit of collective creditor motion”, (iii) used the chapter continuing to exert stress on the debtor and acquire a private benefit, (iv) didn’t conduct any diligence relating to funds to different collectors, and (v) filed the petition days earlier than he was required to file a short within the associated state courtroom continuing between the events. Id. at 336–37.

Conversely, indicia of fine religion discovering embrace: (i) the collectors happy the statutory standards for submitting the petition; (ii) the involuntary petition was meritorious; (iii) the collectors made an inexpensive inquiry into the related info and pertinent legislation earlier than submitting; and (iv) there was proof of preferential funds to sure collectors or of dissipation of the debtor’s belongings. Id. at 335–36. For instance, in Common Buying and selling v. Yale Supplies Dealing with Company, the Eleventh Circuit discovered that the place the petitioning creditor’s main concern in submitting the involuntary chapter petition “was to guard itself in opposition to different collectors’ acquiring a disproportionate share” of the putative debtor’s belongings, the petition was filed for a “correct function” and couldn’t be dismissed for dangerous religion. 119 F.3d 1485, 1502 (eleventh Cir. 1997).

If the chapter courtroom determines that an involuntary petition was the truth is filed in dangerous religion, because it did in Perpetually Inexperienced, or for the explanations set forth above pursuant to any check, the putative debtor could search an award of prices, cheap attorneys’ charges, and damages, to be paid by the petitioning collectors. 11 U.S.C. § 303(i). The specter of sanctions on the petitioning collectors is meant, partly, to discourage petitioners from submitting involuntary petitions to pressure debtors to pay on a disputed debt. Crest One SpA v. TPG Troy, LLC (In re TPG Troy, LLC), 793 F.3d 228, 235 (2nd Cir. 2015).6

As such, a possible petitioning creditor should consider and weigh each the potential advantages and dangers when deciding whether or not an involuntary chapter petition is the most effective technique to make use of in opposition to a counterparty that isn’t paying its money owed as they arrive due. As a result of an improper involuntary submitting can impression the creditor’s personal pockets via a courtroom issuing sanctions in opposition to petitioning collectors or requiring them to publish indemnity bonds, a petitioning creditor must rigorously take into account, with the help of counsel, (i) in the event that they meet the eligibility necessities, and (ii) whether or not submitting an involuntary chapter is an acceptable technique.


1. See Desk 7.2–U.S. Chapter Courts Judicial Details and Figures (September 30, 2022), (obtainable at

2. This greenback quantity is adjusted each three years. 11 U.S.C. § 104(b).

3. The time period “particular person” is outlined within the Chapter Code to incorporate each people and enterprise entities. See 11 U.S.C. § 101(41).

4. A declare is contingent if the debt is just not due and owing except and till a particular future occasion happens.

5. Nonetheless, a debtor may also (i) consent to the entry of an order for reduction, (ii) file its personal voluntary petition in the identical or a distinction venue, (iii) fail to well timed contest the involuntary petition, after which the chapter courtroom can enter an order for reduction (basically holding that the involuntary chapter is correct) and require the debtor to file paperwork resembling a listing of collectors and schedule of belongings. As well as, after the involuntary petition is filed, different collectors could search to hitch the involuntary petition or search to dismiss it. If the involuntary petition is permitted to maneuver ahead, all collectors, together with those who took the laboring oar to provoke the involuntary chapter continuing, should nonetheless share within the debtor’s belongings throughout the Chapter Code’s precedence scheme. Which means a common unsecured creditor, even when it’s a petitioning creditor, must share professional rata with different common unsecured collectors, and might not be paid in full. The precedence and potential fee of its declare also needs to be thought-about by a creditor contemplating submitting an involuntary chapter.

6. A putative debtor may request, and a chapter courtroom may require, that the petitioning collectors publish an indemnity bond to guard the debtor within the occasion the courtroom finds, for instance, the involuntary petition was filed in dangerous religion.

As initially revealed within the Credit score Analysis Basis 2Q 2023 Credit score & Monetary Administration Evaluation.

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