NATIONAL CONFERENCE OF BANKRUPTCY JUDGES TUESDAY, OCTOBER 30, 2018 • SAN ANTONIO
EDUCATIONAL MATERIALS
2018 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
2 TABLE OF CONTENTS
Shall I “Stay” or Shall I Pay? The Price You Pay for Discharge Violations...... 5
For Whom the Statute Tolls...... 97
Pitfalls of a Midsize Chapter 11...... 115
Update on Fraudulent Transfer Law...... 135
Involuntary Bankruptcies: A Primer...... 163
All Things Foreign...... 261
Biographies...... 277 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
4 Shall I“Stay”orPay? ThePriceYou Pay forDischarge Violations the eventofviolations. punitive damagesthatmaybeassessedin discharge violations,andthesanctionsor This panelwilldiscussautomaticstayand Violations The PriceYou Pay forDischarge Shall I“Stay”orPay? Oak Park,Ill. Hon. EugeneR.Wedoff (ret.) Max GardnerLaw;Shelby, N.C. Gardner,O. Max III McGlinchey Stafford;NewOrleans Rudy Cerone Parker &Associates;Winchester, Mass. Nina Parker, Moderator
2018 ABI ABIROUNDTABLES PROGRAM 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
6 AMERICAN BANKRUPTCY INSTITUTE
92nd Annual National Conference of Bankruptcy Judges October 28-31, 2018, San Antonio, TX
Shall I “Stay” or Shall I Pay: The Price You Pay for Discharge Violations Table of Contents
1. Shall I “Stay” or Shall I Pay: The Price You Pay for Discharge Violations. By Rudy J. Cerone and Sarah E. Edwards (both of McGlinchey Stafford PLLC)……………….….2
1. “Shall I Stay or Shall I Pay?” The Price You Pay for Discharge Violations: Automatic stay and discharge violations and sanctions or punitive damages that may be assed in the event of violations. By O. Max Gardner (of Max Gardner Law, PLLC)……………….21
Nina Parker, Moderator, Attorney, Parker & Associates Hon. Eugene R. Wedoff (ret.), USBC, N.D. Ill. O. Max Gardner, III, President, Max Gardner Law Rudy J. Cerone, Member, McGlinchey Stafford, PLLC
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This presentation summarizes certain cases and developments, and is for educational purposes only. It is not, and should not be attributed as, the views of the authors, of the panel members, of their respective courts or offices, or of their respective firms or clients.
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2018 NCBJ Conference ABI Roundtables
Marriott Rivercenter San Antonio, Texas
October 28, 2018
Shall I “Stay” or Shall I Pay: The Price You Pay for Discharge Violations
Rudy J. Cerone Sarah E. Edwards McGlinchey Stafford, PLLC 601 Poydras Street, 12th Floor New Orleans, LA 70130 (504) 586-1200 [email protected] [email protected]
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I. Introduction
Section 524(a) of the Bankruptcy Code protects a debtor who receives a bankruptcy discharge. A discharge is one of the most basic bankruptcy protections afforded to individual debtors. The discharge effectuates the central goal of bankruptcy by providing debtors a fresh financial start. It discharges the debtor’s personal liability for pre-bankruptcy debts and operates as an injunction against acts to collect or recover any discharged debt as a personal liability of the debtor.
Entry of a discharge order in favor a debtor automatically extinguishes the automatic stay and creates the discharge injunction.1 The injunction prohibits an act, to collect, recover or offset any discharged debt as a personal liability of the debtor, whether or not discharge of such debt is waived.2
Section 524 does not provide an express enforcement mechanism. Debtors have enforced the discharge injunction by reopening their bankruptcy and filing an adversary proceeding or requesting that the offending party be held in contempt.3
After discussing briefly the standards for proving and the remedies for a discharge violation, these materials examine two discrete issues impacted by the § 524(a) discharge injunction. First, we examine the availability of class actions claims for violations of the discharge injunction. Second, we consider whether post-discharge refinancing or modifications “ride-through” loans violation the discharge injunction.
II. Standard for Proving a Discharge Violation
A contemnor is liable for its willful violations of the discharge injunction. To prove a claim of a discharge violation, a debtor must show that the alleged contemnor: (1) knew the discharge injunction was applicable and (2) intended the actions which violated the injunction.4 The standard of proof may be clear and convincing evidence,5 or preponderance of the evidence,6 depending on the jurisdiction.
1 11 U.S.C. § 362(c)(2)(C); 11 U.S.C. § 524(a)(2) (“A discharge in a case under this title-- . . . operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived[.]”). 2 Id. 3 Most courts agree that no private right of action for violation of the discharge injunction exists. See, e.g., Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 (9th Cir. 2002); Pertuso v. Ford Motor Credit Co., 233 F.3d 417 (6th Cir. 2000). However, courts disagree on whether bankruptcy courts may invoke § 105(a) to remedy discharge injunction violations. Compare Pertuso, 233 F.3d 417 (holding that no private right of action exists to enforce discharge injunction and that § 105(a) cannot be invoked to remedy discharge injunction violations) with In re Haynes, No. 11-23212 (RDD), 2014 WL 3608891, at *3 (Bankr. S.D.N.Y. July 22, 2014) (using § 105(a) to enforce the discharge injunction). 4 Rogerson v. Shaw (In re Shaw), No. 1:14-BK-11318, 2017 WL 2791663 (B.A.P. June 27, 2017) (unpublished); In re Zilog, Inc., 450 F.3d 996, 1007 (9th Cir. 2006). 5 Shaw, 2017 WL 2791663 at *5. 6 Sprague v. Williams, et. al. (In re Van Winkle), No. 13-11743 T7, 2017 WL 2729069 (Bankr. D.N.M. June 23, 2017).
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Courts differ on the requisite level of knowledge required to prove a discharge violation. Some jurisdictions require the contemnor’s actual knowledge that the discharge injunction was applicable.7 Actual knowledge requires the contemnor was aware of the discharge injunction and aware that it applied to his or her claim.8 A belief, even an unreasonable one, that the injunction did not apply to the claim, could preclude willfulness.9
However, other jurisdictions also permit a finding of constructive knowledge.10 In constructive knowledge jurisdictions, “the state of mind with which the contemnor violated the court order is irrelevant and therefore good faith, or the absence of intent to violate the order, is no defense.”11
Courts agree that an alleged contemnor must have specific intent to undertake the actions that violate the discharge injunction.12 In practice, the courts look for a showing of intent to collect a debt.13 Where a discharge violation may have occurred, even with knowledge, the court may find that the violation is mere “technical” violation that lacks the requisite level of intent and, therefore, not actionable.14
III. Remedies for Discharge Injunction Violations
Section 524 does not specify a particular remedy for a discharge violation. As a result, courts rely both on their statutory powers under 11 U.S.C. § 105(a) and on their inherent powers to sanction discharge injunction violations.15 Courts award a variety of damages for discharge injunction violations; however, courts in different jurisdictions may or may not choose to award damages at all, even in similar factual circumstances.
A. Actual Damages
Courts may award actual damages to a debtor harmed by a willful discharge violation. Actual damages may include lost wages16 and costs for mileage, lodging and other travel expenses.17 Some courts even have awarded actual damages for emotional distress caused by a
7 Shaw, 2017 WL 2791663 at *5 (holding that the bankruptcy court applied an incorrect standard when it failed to consider whether the alleged contemnor knew the discharge injunction applied to her cause of action). 8 Id. 9 Zilog, 450 F.3d at 1009; see also Romanucci & Blandin, LLC v. Lempesis, 2017 Bankr. LEXIS 71526 at *12 (N.D. Ill. 5/4/17). 10 See Erhart v. Fina (In re Fina), 2012 LEXIS 163855 (E.D. Va. 11/14/12); In re Nassoko, 405 B.R. 515, 522 (Bankr. S.D.N.Y. 2009). 11 In re Cherry, 247 B.R. 176, 187 (Bankr. E.D. Va. 2000); Scott v. Wells Fargo Home Mortg., Inc., 326 F. Supp. 2d 709, 718 (E.D. Va. 2003). 12 Cherry, 247 B.R. at 190. 13 Helmes v. Wachovia Bank, N.A. (In re Helmes), 336 B.R. 105 (Bankr. E.D. Va. 2005); Gary V. Otten v. Majesty Used Cars, Inc., Robert Semitekolos (In re Gary V. Otten), No. 10-74946-AST, 2013 WL 1881736, at *12 (Bankr. E.D.N.Y. May 3, 2013) (considering intent in the context of cooperation with a criminal prosecution). 14 See In re Dabrowski, 257 B.R. 394, 415 (Bankr. S.D.N.Y. 2001) (landlord was not liable for discharge violation where his actions were not taken with malevolent intent and a finding of contempt would be inappropriate and unjust). 15 See, e.g., In re Riser, 298 B.R. 469, 472 (Bankr. M.D. Fla. 2003). 16 In re Ridley, 572 B.R. 352 (Bankr. E.D. Okla. May 31, 2017); In re Humbert, 567 B.R. 512, 520 (Bankr. N.D. Ohio Feb. 16, 2017). 17 In re Lewis, No. 16-60898-7, 2017 WL 1233816, at *3 (Bankr. D. Mont. Apr. 3, 2017).
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discharge violation.18 However, the debtor will bear the burden to prove a direct relationship between the alleged contemnor’s actions and the emotional distress.19
Courts have also awarded attorney’s fees.20 Attorney’s fees awards for discharge violations are calculated using the lodestar method that also is used to calculated damages for stay violations.21
B. Injunctive Relief
A debtor may also obtain injunctive relief, such as ordering a lien release, 22 or cancellation of a state court judgment.23
C. Punitive Damages
In some courts, an award of punitive damages also is available for discharge violations.24 These courts rely on the broad language of § 105(a), allowing the court to issue “any order” necessary to carry out the provisions of title 11 to justify an award of punitive damages.25
In jurisdictions where punitive awards are permissible, the courts will consider the following factors: (i) the defendant's conduct; (ii) the defendant's ability to pay; (iii) the motives for the defendant's actions; and (iv) any provocation by the debtor.26 Where conduct is particularly egregious, a court may award continuing damages for subsequent violations,27 or require the contemnor to verify that it has taken steps to prevent further bad behavior.28
However, most courts hold that punitive damages awards are impermissible as criminal contempt sanctions, which are outside the purview of the bankruptcy courts.29 A contempt
18 Compare In re Lempesis, 557 B.R. 659, 669 (Bankr. N.D. Ill. 2016) aff’d, 2017 Bankr. LEXIS 71526 at *16-17 (N.D. Ill. 5/4/17) (emotional distress damages allowed, at least as an addition to other financial damages) with Aiello v. Providian Financial Corp., 239 F.3d 876, 880 (7th Cir. 2001) (damages not allowed as stand-alone remedy). 19 In re Bates, No. AP 13-1043-JMD, 2015 WL 1777481, at *5 (Bankr. D.N.H. Apr. 16, 2015), aff'd sub nom. Bates v. CitiMortgage, Inc., 550 B.R. 12 (D.N.H. 2016), aff'd, 844 F.3d 300 (1st Cir. 2016) (the evidence did not establish that the debtors’ emotional distress were caused by a phone call in violation of the discharge injunction, rather than daily stresses of being married and raising children). 20 Sprague, 2017 WL 2729069 ($33,161.70, composed of $31,046.45 in attorney’s fees and $2,115.25 in estate representative fees); Lewis, 2017 WL 1233816 ($2,586.05). 21 Bates, 2015 WL 1777481, at *5. 22 In re James, 285 B.R. 114 (Bankr. W.D.N.Y. 2002). 23 In re Meadows, 428 B.R. 894 (Bankr. N.D. Ga. 2010). 24 See, e.g., Lempesis, 557 B.R. at 670 ($50,000.00); Sprague, 2017 WL 2729069 at *7 ($16,838.30). 25 Lempesis, 557 B.R. at 669. 26 Sprague, 2017 WL 2729069 at *7. 27 See e.g., Ridley, 572 B.R. 352 ($12,000.00, plus $1,000.00 for each month the creditor failed to correctly reflect the debtor’s account default). 28 Lewis, 2017 WL 1233816 at *4 ($5,000.00 awarded (based on $500 per violation) plus the requirement to file a notice with the Court within 30 days representing that the creditor: (i) tendered payment to the Debtor; (ii) has taken all necessary steps to insure that Debtor will not receive another invoice in violation of the discharge; (iii) that the creditor advised its agents and third-parties to cease and desist all collection efforts; and (iv) that the creditor has submitted all appropriate information to any third-party credit reporting entity). 29 Humbert, 567 B.R. at 521 (Bankr. N.D. Ohio Feb. 16, 2017) (“An award of punitive damages for contempt of a discharge injunction sounds in the nature of criminal contempt and therefore lies beyond the authority of a
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proceeding for violation of the discharge injunction is civil in nature which should be designed to remedy past misconduct and deter future violations.30 Bankruptcy courts have no criminal contempt power to punish past behavior.31
IV. Class Claims for Discharge Injunction Violations
Federal Rule of Civil Procedure 23, governing class actions, is made applicable to bankruptcy proceeding by Bankruptcy Rule 7023. Accordingly, every such action must meet the numerosity, commonality, typicality and adequate representation prongs of Rule 23(a).32 The case also must meet one of the elements of Rule 23(b) (risk of inconsistent adjudications, preservation of a limited fund, grounds generally applicable to the class, or common questions of law or facts). Compliance with these elements presents issues unique to bankruptcy cases, and the courts vary on their resolution of those issues.
Bankruptcy class actions alleging violations of the discharge injunction typically arise in an individual consumer’s bankruptcy case against a single creditor, such as a mortgage lender or servicer. The issues facing such a class action may involve the geographic scope of the class and the nature of the remedies sought.
Most often, bankruptcy courts grapple with their authority to adjudicate contempt claims for violations of the discharge injunction stemming from a discharge injunction order entered by a single court. The courts consider whether their jurisdiction is limited to enforcement on a district-wide level, or may be expanded nationwide.
A. Class Action for Discharge Injunction Violations: Select Case Law Survey
McNamee v. Nationstar Mortg., LLC, No. 2:14-CV-1948, 2018 WL 1557244, at *8 (S.D. Ohio Mar. 30, 2018)
Facts
The plaintiff and his wife received a chapter 7 discharge of their residential mortgage loan. The couple surrendered and vacated the home, but their post-discharge mortgage servicer began to send correspondence to the plaintiff titled “Mortgage Loan Statement” specifying amounts due and payment due date. The plaintiff received correspondence for years, even after the lender foreclosed on the home.
Plaintiff alleged that the correspondence violated the discharge injunction as well as the Fair Debt Collection Practices Act (FDCPA). Plaintiff filed and Adversary Proceeding on behalf of himself and individuals who, like him, vacated the surrendered residences and continued to receive debt collection correspondence from the
bankruptcy judge.”); In re Northlund, 494 B.R. 507, 521 (Bankr. E.D. Cal. 2011); Riser, 298 B.R. at 472 (“Pursuant to its statutory contempt powers under § 105, a court may impose coercive but not punitive sanctions.”). 30 In re Diaz, Order and Judgment on Debtors’ Motion for Sanctions for Violation of the Discharge Injunction, Doc. No. 51, No. BKS-10-25047-BTB (Bankr. D. Nev. Oct. 23, 2017) (fines for future violations “are intended to deter (creditor’s) contemptuous conduct and (creditor) may avoid these fines by not sending further correspondence to the Debtors.”). 31 See, e.g., Humbert, 567 B.R. at 521; Lewis, 2017 WL 1233816 at *3. 32 See, e.g., In re Wilborn, 609 F.3d 748 (5th Cir. 2010) (reversing bankruptcy court’s certification of class of Chapter 13 debtors because the proposed class did not satisfy the requirements of Federal Rule of Civil Procedure 23 and Bankruptcy Rule 7023); see also In re Rodriguez, 695 F.3d 360 (5th Cir. 2012) (affirming certification of “fail-safe” class of Chapter 13 debtors whose membership could only be ascertained by a determination of the merits of the case).
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servicer.
Argument
Debtor Lender (Servicer)
The plaintiff defined four categories of class members The asserted that the Plaintiff could not meet any of the who were allegedly harmed by the servicer’s attempts requirements of Federal Rule 23(a). to collect.
Analysis
The plaintiff met his burden under Federal 23 in the following ways:
Ascertainability: The class is ascertainable because it is defined by individuals who received specific letters from Defendant after filing a Statement of Intent and vacating the property.
Not Overly Broad: Every proposed class definition contemplates that the putative class member has already vacated the property.
Commonality: The class is defined both by reference to a document that governs the post-discharge relationship and by the observations of the servicer’s own contractors as to the occupancy status of the house. Thus, once the class is identified, no thorny questions as to the exact nature of the post-discharge relationship remain live.
Typicality: The Plaintiff could still meet typicality requirements, even though he did not stop receipt of the correspondence by contacting his servicer.
Predominance/Superiority: Questions of liability are common to each putative class member who, after receiving bankruptcy discharge and vacating their surrendered residence, received either a Mortgage Loan Statement or a Force-Placed Insurance Communication.
Holding
The court certified two district-wide classes on the plaintiff’s discharge injunction violation allegations.
In re Anderson, 884 F.3d 382 (2d Cir. 2018)
Facts
Former chapter 7 debtor filed putative class action to recover for credit card issuer's alleged violation of discharge injunction in continuing to report, as “charged off,” credit card debt that had been discharged in bankruptcy. The debtor alleged that debt marked as “charged off” rather than “discharged” is more valuable to third-party debt buyers, who believe debtors will be compelled to pay the discharged debt in order to clear this negative item from their credit reports.
Argument
Debtor Lender
The credit issuer’s refusal to update the debtor’s credit The credit card issuer moved to compel arbitration. information reflected “a policy of not updating credit
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information for debts that are discharged in bankruptcy for the purpose of collecting such discharged debt.
Analysis
The debtor’s claim is non-arbitrable because it is a core bankruptcy proceeding that goes went to the heart of the “fresh start” guaranteed to debtors under the Bankruptcy Code. The discharge is the foundation upon which all other portions of the Bankruptcy Code are built. The “fresh start” is only possible if the discharge injunction crafted by Congress and issued by the bankruptcy court is fully heeded by creditors and prevents their further collection efforts. Violations of the injunction damage the foundation on which the debtor's fresh start is built.
The court distinguished its holding in MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104 (2d Cir. 2006), where the plaintiff claimed a violation of the automatic stay long after that stay had been rendered moot by the closing of her bankruptcy case.
Holding
The court did not address class certification, but noted that because putative class members are all allegedly victims of willful violations of the discharge injunction issued by the bankruptcy court there is a continuing disruption of the debtors' ability to obtain their fresh starts.
Sellers v. Rushmore Loan Mgmt. Servs., LLC, No. 3:15-CV-1106-J-32PDB, 2017 WL 6344315, at *3 (M.D. Fla. Dec. 12, 2017), reconsideration denied, No. 3:15-CV-1106-J-32PDB, 2018 WL 340009 (M.D. Fla. Jan. 9, 2018)
Facts
Former chapter 7 debtors filed class action against mortgage servicer that purchased their residential mortgage. The debtors received a discharge of their personal liability on the debt. However, their servicer continued to send them Mortgage Statements in connection with the discharged mortgage debt. The Plaintiff-debtors asserted claims for violation of the discharge injunction, FDCPA, and Florida Consumer Collection Practices Act (FCCPA).
Argument
Debtor Lender
The plaintiffs identified three common issues which Determination of the viability of claims will require an they argue will turn on common evidence: (1) Whether individualized examination of the Bankruptcy Code’s the account statements were an attempt to collect a application to each borrower. debt;
Analysis
The Court limited its analysis to consideration of predominance under Rule 23(b). Certification is inappropriate in the event that plaintiffs must still introduce a great deal of individualized proof or argue a number of individualized legal points to establish most or all of the elements of their individual claims.
In this matter alone, the Court had to examine whether the property was Plaintiffs' principal residence at the time they received the challenged communications and whether making periodic payments in lieu of foreclosure was an option available to them. These inquiries were relevant to both of the main issues before the Court: whether the Mortgage Statements would be misleading to the least sophisticated consumer and whether the § 524(j)
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exception to the Bankruptcy Code discharge injunction applied.
Holding
The court declined certification of class of chapter 7 debtors who received a discharge but thereafter received mortgage statements. The plaintiffs failed to show predominance because individualized inquiries would be required for every class member to determine whether the § 524(j) exception applied, and if so, whether the Bankruptcy Code precluded and/or preempted the FDCPA and FCCPA.
In re Haynes, No. 11-23212 (RDD), 2014 WL 3608891, at *2 (Bankr. S.D.N.Y. July 22, 2014)
Facts
Former debtor brought suit against his former lender, Chase, alleging that Chase fails to correct credit reports that list debts, post-discharge under Section 727 of the Bankruptcy Code, as being only “charged off,” rather than being “discharged in bankruptcy.” The debtor sued on behalf of himself and a class of similarly situated plaintiffs, nationwide.
Argument
Debtor Lender
The debtor asserted that Chase has adopted a pattern Chase contended that, under the circumstances pled in and practice of failing and refusing to update credit the complaint, it already corrected the plaintiff-debtor’s information with regard to debts discharged in credit report and, as a result, he could not represent a bankruptcy because it sells those debts and profits by class of individuals alleging that their credit reports had the sale. Chase knows that if credit information is not not been updated. updated, many class members will feel compelled to pay off the debt, even though it is discharged in bankruptcy.
Analysis
Assuming the facts in the Complaint in a light most favorable to the plaintiff-debtor, it appears that Chased fails, on a systematic basis, to correct credit reports of discharged debtors. As a result, Chase is enhancing its purchasers' ability to collect on the debt. Chase profits from that practice by getting a higher purchase price from its buyers, even if those buyers buy the debt before the bankruptcy has occurred. The buyers know that, post-sale, Chase will refuse to correct the credit report to reflect the obligor's bankruptcy discharge, which means that the debtor will feel significant added pressure to obtain a “clean” report by paying the debt.
Regarding its jurisdiction over a nationwide class, the court considered 28 U.S.C. § 1334(a) and (b). The court found important § 1334(b)’s language granting bankruptcy courts “jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” There is a fundamental difference between the normal injunction issued by a court after considering the factors required to be applied in issuing an injunction order and the injunction created by Congress in Section 524(a) to support the discharge under Section 727 of the Bankruptcy Code. The bankruptcy discharge order is a national form, which is issued in every case when there is a discharge. By statute, in 524(a)(2), it operates as an injunction. Additionally, § 105(a) of the Code goes beyond a bankruptcy court’s own contempt power by enabling the Court to carry out specific provisions of the Bankruptcy Code.
Holding
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The Court has the statutory power and the subject matter jurisdiction to decide this nationwide class action.
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In re Forson, No. 08-61001, 2018 WL 1635231 (Bankr. S.D. Ohio Mar. 21, 2018) and In re Forson, 549 B.R. 866 (Bankr. S.D. Ohio 2016) Facts
Plaintiff successfully completed Chapter 13 bankruptcy wherein he received a discharge upon successful payment of pre-petition arrearage and monthly mortgage maintenance payments. After the bankruptcy closed, plaintiff moved to reopen and filed an Adversary Proceeding alleging that his mortgage lender failed to treat his loan a current post-bankruptcy. Plaintiff alleged that his lender collected discharged fees and that the lender systematically attempted to collect such fees from other discharged debtors. The debtor sought to certify and district-wide and nationwide class of similarly situated plaintiffs.
Argument
Debtor Lender
Plaintiff alleged that discharge injunction is not an The lender alleged that the Bankruptcy Court lacked individualized, court-specific order, but is instead a jurisdiction over the class claims. A contempt statutorily imposed injunction that has the same effect proceeding resulting from a violation of an order or in every bankruptcy nationwide. injunction may only be maintained in the court that issued the order or injunction that was violated.
Analysis
Nationwide certification would require the court to rule upon violations of discharges issued by other courts. However, Plaintiff could continue to prosecute this case on behalf of the Districtwide Class pursuant to Bankruptcy Rule 7023.
Holding
Bankruptcy Court lacked jurisdiction to certify nationwide debtor class, because one bankruptcy court could not enforce injunctions issued by other courts across the country. However, the Court left open possibility of district- wide certification.
2018 Update: Class still has not been certified. The court ruled on dispositive motions finding that lender violated discharge injunction by sending letters and mortgage statements to debtor indicating that mortgage loan was delinquent, indicating past amounts due and stating that there was an additional fee if payment was not received by certain date
In re Beiter, 554 B.R. 433 (Bankr. S.D. Ohio 2016)
Facts
Plaintiff brought Adversary Proceeding against mortgagee on behalf of herself and other similarly situated discharged debtors alleging violation of the discharge injunction. Plaintiff contended that mortgagee repeatedly sent her incorrect and inconsistent mortgage statements that contained unexplained late fees, indicated erroneous past-due amounts, and failed to reflect her bankruptcy discharge.
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Argument
Debtor Lender
The debtor alleged that there is a sufficient number of The lender asserted that the bankruptcy court does not other similarly situated debtors that experienced similar have jurisdiction over the class because contempt if not the same violations of the discharge injunction proceedings can only be heard and determined by the by the lender such that a nationwide class and district- individual judge who presided over the matter. Thus, wide class may be formed to seek redress for all class the class allegations must be stricken since they include members. bankruptcy cases over which other judges presided.
Analysis
Sixth Circuit precedent provides that a contempt proceeding must be initiated in the bankruptcy court which issued the discharge. However, the lender conflates the terms “court” and “judge.” While, generally, only the court that issues the injunction may enforce it, the injunction is not personal to a specific judge of that court.
Holding
The court lacks jurisdiction over a nationwide class, but has jurisdiction over a district-wide class.
In re Beck, 283 B.R. 163, 175 (Bankr. E.D. Pa. 2002)
Facts
Former Chapter 7 debtors discharged automobile lease and did not reaffirm. However, the lease creditor attempted to collect its debt after the discharge had been granted. Plaintiff-debtors brought adversary proceeding on behalf of nationwide debtor class to recover for creditor's alleged contempt in violating discharge injunction.
Argument
Debtors Lender
Plaintiffs argued that the § 524 statutory injunction is The bankruptcy court did not authority to hold the not individually crafted so that “few of the practical creditor in contempt for violation of section 524(a) reasons for confining contempt proceedings to the discharge injunctions issued not only by the court itself issuing tribunal apply here.” but by bankruptcy courts nationwide.
Analysis
The Court can only provide a remedy consistent with the contempt power of the Bankruptcy Court. The Court that issues the order that was violated is the Court that determines whether a person is in contempt. While this Court can issue contempt findings for persons or entities subject to an order of this Court, it cannot issue orders for parties not within its authority.
Holding
The plaintiffs’ remedy was limited to enforcement of the discharge order through a contempt proceeding. The court deferred ruling on whether it could enforce any discharge order within its district.
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V. Post-Discharge Mortgage Modification and Refinancing
A. Introduction
In a consumer bankruptcy, the debtor has three primary options for addressing her residential mortgage debt. The debtor may: (1) keep the property and pay (2) surrender the property; (2) enter into a reaffirmation agreement.33
Reaffirmation is governed by 11 U.S.C. § 524(c). In chapter 7 or chapter 13 bankruptcies, a reaffirmation agreement is valid if: (1) the agreement was made before the debtor was granted a discharge; (2) the debtor received disclosures required in subsection (k); (3) the agreement is filed with the court; and (4) if applicable, the agreement contain an affidavit from the debtor’s attorney stating that the debtor was fully informed, the agreement is voluntary and does not impose undue hardship on the debtor or her dependent, and the attorney had fully advised the debtor of the legal effect and consequences of the agreement and any default thereunder.
A majority of courts recognize a fourth option for residential mortgage loans in bankruptcy: “ride-through”.34 When a debtor chooses ride-through, she is discharged of personal liability for her mortgage debt, but the lender retains in rem liability.
Because ride-through relieves the debtor of personal liability on her mortgage debt, a lender may choose to foreclose after the bankruptcy closes. Creditors are not prevented from post-discharge enforcement of a valid pre-bankruptcy lien on the property provided that the lien was not avoided or set aside under other provisions of the Bankruptcy Code.35
Alternatively, a borrower may simply continue to make monthly mortgage payments without a formal reaffirmation agreement. 36 The debtor’s payments alone will not revive personal liability on the mortgage.
B. A Fourth Option? Post-Discharge Mortgage Modification or Refinancing
Courts debate whether a viable fourth option exists for addressing post-discharge residential mortgage loans through modification or refinancing.37 Case law considering the validity and enforceability of such agreements often conflict, with one Court of Appeals describing case law as “replete with irreconcilable conflict and confusion.”38
33 11 U.S.C. 521(a)(2)(A) (chapter 7). 34 Some courts do not recognize the “ride-through” option. See, e.g., In re Linderman, 435 B.R. 715 (Bankr. M.D. Fla. 2009) (a debtor does not have the ability to “ride through” and cannot keep real property securing a mortgage loan simply by making payment and not reaffirming the debt after the enactment of BAPCPA in 2005”). 35 11 U.S.C. § 524(j). Johnson v. Home State Bank, 501 U.S. 73, 81 (1991). A lender collecting on the basis of in rem liability creditor must be clear that it is not attempting to collect a debt for which the debtor is personally liable. If not, collection attempts could be construed an improper attempt to collect on a discharged debt. 36 See 11 U.S.C. § 524(f). 37 In March 2010, in connection with administering HAMP, the U.S. Treasury Department issued Supplemental Directive 10-02, which makes it clear that (in its view) discharged borrowers are eligible for HAMP as long as the borrowers understand they are not personally liable for the modified debt. 38 Venture Bank v. Lapides, 800 F.3d 442, 447 (8th Cir. 2015).
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A loan modification is an adjustment to the terms of the borrower’s existing loan, often for a short period of time to help the borrower get back on their financial feet, but the original loan is still in place.
A refinance loan replaces the existing mortgage with a new loan with a lower rate, and/or more favorable terms, such as a fixed rate loan versus an adjustable one. When a loan is refinanced, the borrower signs a new note promising to repay the debt to the lender.
However, most courts do not distinguish between post-discharge mortgage refinance or loan modification agreements.
C. Does a Post-Discharge Loan Modification or Refinance Violate the Discharge Injunction?
Nothing in the Bankruptcy Code expressly prevents a debtor from entering into new financing post-discharge. However, courts grapple with whether post-discharge financing between the debtor and her pre-petition lender, affecting pre-petition property that “rode through” the bankruptcy violates the discharge injunction.
Courts often have two primary considerations when determining whether a post- discharge loan modification or refinance violated the discharge injunction: (1) Did the new agreement provide sufficient “new consideration” to create an independent financing agreement; and (2) Is the debtor’s acquiescence to the new agreement “voluntary”? .
D. Post-Discharge Loan Modification or Refinance: Select Case Law Survey
Solomon Smith v. First Suburban Nat'l Bank (In re First Suburban Nat'l Bank), 224 B.R. 388 (Bankr. N.D. Ill. 1998)
Facts
Chapter 7 debtor defaulted on his mortgage loan and lost his home in a foreclosure proceeding. Post-discharge, the debtor, his wife, and their daughter obtained financing on a new home from the same lender. As consideration for the new loan, the debtor agreed to pay the deficiency balance on his first mortgage loan. By rolling the deficiency balance into the new loan, the bank agreed that it would not pursue the deficiency against the debtor’s wife (who was not discharged from personal liability on the mortgage affecting the first property). The second home was purchased in a land trust, wherein the lender was appointed trustee and the debtor, his wife, and their daughter were the sole beneficiaries of the trust. At trial, the debtor’s wife also testified that she unaware that the deficiency balance from the mortgage affecting her first home would be added to her new mortgage loan.
Argument
Debtor Lender
The lender violated the discharge injunction by The Lender argued that it offered the debtor new negotiating to add discharged debt to the debtor’s consideration sufficient to support an new, independent mortgage on his new home. loan.
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Analysis
There is no real distinction between the debt that the debtor’s wife owed the lender and the debt to the lender from which Debtor was discharged. Their obligations were based on the same debt. Moreover, the debtor’s wife had no ability or income sufficient to repay the debt herself, and collection efforts or threats against her would be indirect pressures to collect from debtor.
Holding
The new agreement was not a valid reaffirmation because the agreement was not filed with the bankruptcy court and failed to comply with statutory requirements under § 524.
Any post-petition agreement which obligates a debtor on a discharged debt must comply with the relevant Code sections dealing with reaffirmation. Failure to do so will result in the agreement being considered invalid and collection upon that agreement a violation of the discharge injunction.
In re Martin, 474 B.R. 789 (B.A.P. 6th Cir. 2012) (unpublished)
Facts
Chapter 7 debtor rode through commercial real estate which her lender (an individual) refused to foreclose upon. The debtor continued to make post-petition payments. After the debtor received her discharge, the lender filed suit in state court to collect the outstanding balance of the debt on the commercial property. The lender alleged that, prior to discharge, the debtor made an oral promise to continue to make payments on the debt.
Argument
Debtor Lender
The debtor denied making an oral promise to repay the The debtor’s oral promise to repay constituted a new debt or that she otherwise entered any new agreement agreement and that, pursuant to 11 U.S.C. § 524(f) the with the lender to repay her debt. debtor’s post-petition payments obligated her to continue making payments until the debt was paid in full.
Analysis
The discharge injunction applies only to debts that were discharged by the bankruptcy proceeding. Pursuant to § 727(b), any debt that arises after the debtor files for bankruptcy relief is not affected by the chapter 7 discharge and the discharge injunction does not prohibit a creditor from enforcing said debt. As a result, post-petition agreements can create an enforceable obligation.
To create an enforceable, post-petition agreement, the parties must prove the essential elements of a contract: offer, acceptance, contractual capacity, consideration, and a meeting of the minds. Executing a new promissory note to repay a debt that was discharged in order to avoid a foreclosure on debtor's home is new consideration that supports a finding of a valid post-discharge agreement.
Holding
Voluntary payments under § 524(f) do not revive personal liability on a debt or obligate the debtor to continue to make payments.
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There was no evidence of any new consideration supporting a new agreement. Additionally, an oral agreement to continue mortgage payments on commercial property did not satisfy state Statute of Frauds laws.
As a result, the lender’s attempts to collect on the commercial mortgage violated the discharge injunction and the lender was ordered to pay the debtor’s attorney’s fees and lost wages.
• Minster State Bank v. Heirholzer (In re Heirholzer), 170 B.R. 938 (Bankr. N.D. Ohio 1994)
Facts
The debtor was discharged from a second mortgage debt. Shortly after the debtor received his discharge, he executed a new promissory note with accompanying mortgage. The sum of the new note was identical to the amount owed under the first note and the debtor used funds from the new note to pay off the discharged debt. As consideration for the new note, the lender agreed not to foreclose on the debtor’s home. However, the debtor’s home was foreclosed upon by another priming lender. Because the second lender did not received proceeds from the foreclosure sale, it sought to garnish the debtor’s wages. The debtor thereafter sought determination that the debt at issue was discharged.
Argument
Debtor Lender
The debtor argued that the second note was an invalid The Lender argued that the second note was a separate reaffirmation agreement. Because the second note was and enforceable post-discharge contract. based in part on a dischargeable debt, the note can be enforced by a valid reaffirmation agreement.
Analysis
The court found it relevant that the parties executed a completely new set of paperwork to document the second agreement. The court also cited § 362(a) to explain that the lender had every right to foreclose upon the debtor’s home post-bankruptcy, which supports the lender’s contention that consideration was established by the lender’s agreement not to foreclose.
Holding
The second note was not a reaffirmation agreement. However, the lender’s decision to forego foreclosure represents new and sufficient consideration to support a new, binding post-discharge obligation.
Rajotte v. Carter & Rajotte (In re Rajotte), 81 F. App'x 29 (6th Cir. 2003) (unpublished)
Facts
Prior to bankruptcy, the debtor obtained a commercial loan that was guaranteed by his brother-in-law. The debt was discharged in bankruptcy and the lender looked to the guarantor for full payment. After payment in full from the debtor’s brother-in-law, the lender released an unmatured note payable to the debtor from his first wife, which the debtor had pledged to the bank. After the debtor received his discharge, he arranged a tripartite agreement between himself, his brother-in-law, and his first wife. According to this agreement, the brother-in-law accepted partial payment from the first wife in full satisfaction of the unmatured note, the first wife agreed to drop litigation against the debtor for past-due child support, and the debtor agreed to repay his brother-in-law the full
22 AMERICAN BANKRUPTCY INSTITUTE
value of the commercial loan, plus accumulated interest. When the debtor failed to make payments, the brother- in-law filed suit against the debtor.
Argument
Debtor Lender
The debtor argued that the tripartite agreement was an The lender argued that the tripartite agreement was invalid reaffirmation agreement. new obligation, proposed by the debtor, and supported by independent consideration.
Analysis
The court distinguished case law wherein debtors obligated themselves on post-discharge notes with pre-petition lenders because, in the instant case, it was the debtor who proposed the tripartite agreement.
Holding
The appellate court confirmed the lower’s decision finding that there was untainted consideration in the tripartite agreement because the debtor received relief from his child support payments, which helped him avoid possible jail time. However, the brother-in-law was only permitted to collect amounts he loaned to the debtor post-petition for new consideration.
• Venture Bank v. Lapides, 800 F.3d 442 (8th Cir. 2015)
Facts
Chapter 7 debtor discharged a third-mortgage on his home. During the pendency of bankruptcy, the debtor and lender executed a “Re-Affirmation” agreement that was not signed by the debtor’s attorney or filed with the bankruptcy court. The debtor hoped to reestablish his credit with the lender in order to refinance his three mortgages. After the debtor received a discharge, he missed payments due under the Re-Affirmation agreement. The lender attempted to foreclose and filed suit seeking a declaratory judgment that the Re-Affirmation agreement was enforceable.
Argument
Debtor Lender
The debtor argued that his payments were not The lender argued that the debtor made post-discharge voluntary. payments voluntarily to induce the lender to refinance his mortgages.
Analysis
The Court of Appeals considered whether the bankruptcy court erred when it found that the post-discharge loan agreements were valid if either (1) they complied with the requirements of § 524(c), or (2) all essential elements of a contract are present.
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Holding
The Court of Appeals held that the bankruptcy court erred when it found that the post-discharge loan agreements were valid if either (1) they complied with the requirements of § 524(c), or (2) all essential elements of a contract are present. Instead, appellate court found that the agreement must comply with and must contain all elements of a contract. Because the agreements did not comply with § 524(c), the court need not consider whether the lender’s promise not foreclose constituted adequate consideration.
Additionally, the debtor’s payments were not “voluntary” because the lender required the debtor to obligate himself to repay his discharged debt in the hope that the lender would refinance his mortgages.
• In re Eppolito, 583 B.R. 822 (Bankr. S.D.N.Y. 2018)
Facts
Chapter 7 debtor rode through a home mortgage and received a discharge, but subsequently defaulted in mortgage and real estate tax payments. Four years later, while still in possession of the home, she and her lender discussed a loan modification. The lender proposed an arrangement that would reduce the applicable interest rate and monthly payment and capitalize the amounts in default. The debtor would not be personally liable on this modified loan. However, to obtain these benefits, the debtor would have to enter into a separate, subordinated loan agreement with HUD for 30% of the discharged debt, for which she would be personally liable. This loan would be interest free and payable only when the property was sold or the balance of the original lender’s claim paid in full. The original lender would be entitled to receive a portion of the proceeds of the subordinated loan.
Argument
Debtor Lender
Requesting the subordinated loan violated the The proposed modification would not have resulted discharge injunction, for which the original lender in the debtor having any personal liability to the should be held in contempt. The lender should be original lender and so does not violate her required to enter into the loan modification without discharge. The proposal is an alternative to the the subordinated loan. lender’s in rem rights.
Analysis
The subordinate note represented a portion of the discharged debt and was effectively a reaffirmation that debt. The original lender attempted to coerce the Debtor into this reaffirmation.
Holding
The original lender is held in contempt and ordered to pay the debtor’s attorney fees and costs of about $9.100.
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• Jester v. Wells Fargo Bank N.A. (In re Jester), 656 F. App'x 425 (10th Cir. 2016)
Facts
Chapter 7 debtor rode through a home mortgage and received a discharge, and afterward entered into a loan modification agreement with the lender. In this agreement the debtor acknowledged the validity of the mortgage and agreed that if he defaulted in future payments, he would surrender the home to the lender. On this basis, the lender dismissed a pending foreclosure action. Thereafter, the debtor again defaulted, and the lender filed a new foreclosure action. The debtor sought to reopen the bankruptcy case, seeking relief on several bases.
Argument
Debtor Lender
The loan modification violated the automatic stay The modification did not affect the debtor’s and the discharge injunction; reaffirmation was personal liability, but only his right to retain required to enter into the loan modification. ownership of the property. Therefore it did not require a reaffirmation and was not affected by the discharge.
Analysis
The debtor “fails to appreciate the difference between the discharge of [his] personal obligation on the loan secured by the property and [the lender’s] continued interest in the property via the security instrument. The former was discharged, the latter was not. See Johnson v. Home State Bank, 501 U.S. 78, 84, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991) (‘[A] bankruptcy discharge extinguishes only one mode of enforcing a claim — namely, an action against the debtor in personam — while leaving intact another — namely, an action against the debtor in rem.’). Consequently, the parties' failure to reach a reaffirmation agreement in the bankruptcy proceedings had no effect on [the lender’s] ability to foreclose on the property, with or without loan modification. 656 F. App'x at 428.
Holding
The bankruptcy court properly declined to reopen the bankruptcy case.
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26 AMERICAN BANKRUPTCY INSTITUTE
“Shall I Stay or Shall I Pay?”
h Pr o Pay or har olat o to at tay a har olat o a a t o or t a a that ay a th t o olat o
a ar r III a ar r a P Patto r Sh l y a ar r a ar r o
27 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
h to at Stay a th har —Sta ar a a a
o th y t r al th th a to at tay o S t o a th
Discharge Injunction under Section 524 is the meaning of the term “willful” as used
oth tat t It a ar that at l a t y th t r ha a ta l h
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t o a r th ta l h a a r tor oo a th l a
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o l o ro o Sa o I o o rr S
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28 AMERICAN BANKRUPTCY INSTITUTE
In sum as the Su reme ourt has re eatedl stated willfull is a
word of man meanings whose construction is often de endent on the conte t in which it a ears Id at 5 uoting r an 524 S at see also at laf
nited States 5 S 5 4 4 nited States urdoc 2 S
4 5
he automatic sta is one of the fundamental de tor rotections ro ided
the an ru tc laws idlantic at an De t of n tl rot 4 4 S
4 4 5 uoting S e o 5 54 e o 5 5 5 4
he sta gi es a reathing s ell to the de tor and stops ‘all collection efforts all harassments and all foreclosure actions ringali athawa ach
o Inc 2d 55 5 2 st ir uoting e o 5 5 5 4
ongress enacted then section 2 h of the an ru tc ode in 4 to
ro ide a ri ate cause of action to a n indi idual injured an willful iolation of a sta S 2 h est see ahlsing omm nion Ins o
Inc 2 2d 4 4 n st ir efore this ro ision was added to the
an ru tc ode some courts had im osed sanctions for willful iolations of automatic sta s ursuant to the authorit of an ru tc courts to order arties in contem t r sen ontena nerg o sselen ssocs Inc In re
r sen ontena nerg o 2 2d 4 2d ir or this reason the standard courts had used for e aluating whether a iolation was willful was the standard that go erned contem t roceedings a art generall would not ha e sanctions im osed as long as it had acted without maliciousness and had had a
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29 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
ood ait a ent and elie t at its actions did not iolate t e sta d
o e e eca se c eated an independent stat to asis to old iolato s
o t e a to atic sta lia le co ts e an to appl a standa d less st in ent t an
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cases d
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ill l iolation o an a to atic sta nde occ s en an indi id al no s
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4
30 AMERICAN BANKRUPTCY INSTITUTE
onte po a e sions o leadin an ptc t eatises de ined a ill l
iolation o t e a to atic sta in t e sa e anne ee eo e eiste et al
nda entals o an ptc a t ed c ill l iolation o t e sta does not e i e an intent to iolate no an a a eness t at t e cond ct as p o i ited t e sta t s ices t at t e iolato ne o t e e istence o t e sta i e t at e ne o t e pendenc o t e an ptc and t at e intentionall did t e iolatin act a id pstein et al an ptc c speci ic intent to iolate t e sta is not e i ed o e en an a a eness t e c edito t at e cond ct iolates t e sta t is s icient t at t e c edito no s o t e
an ptc and en a es in deli e ate cond ct t at it so appens is a iolation o t e sta ese conte po a so ces t e s o t at t e p ase ill l
iolation ad a ene all accepted eanin at t e ti e on ess enacted
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n e e c ant d t i e e an e s i e
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31 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
g o n a lo v. eelan on , .S. , . o eve , it an e
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6
32 AMERICAN BANKRUPTCY INSTITUTE
, an t o t a elie on t ei e ita le o e , g ante
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o o ition t at a ta violation o l not e a tiona le vi ., ill l i t e
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33 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
e ito a a e a goo ait i ta e. . e o t t en el t at t e e ito in
att ill ll violate t e i a ge o e e a e t e e ito
a not gge te no o l it la i l o o on t e e e o a t t at it i not no o t e e i ten e o t e e to a te i a ge, o t at it i not inten to o ni ate to t e e to it e al to elea e it lien in t e a to o ile o t at it o l e n e .
e a t in t e i t i it
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e e to ile a a te etition an e eive a i a ge. e S a
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t e ta e t a not a to ati all i a ge n e Se tion . , t e S
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it elie t at t e ta e e e not a to ati all i a ge . te t e S event all
levie again t an a o nt e eiva le o ing to t e e to , e ile an a ve a
o ee ing in an t o t ee ing a e la ation t at t e e t in ee a een
8
34 AMERICAN BANKRUPTCY INSTITUTE
i a ge . llege l e a e o ental in i itie a li ting t e a i tant .S.
tto ne S o e e ente t e S, t e gove n ent e ente in i ient evi en e, lea ing t e an t ge to g ant a g ent e la ing t at t e ta e e e i a ge . e S i not a eal t e ling t at t e e t a
i a ge .
e e to late ile a o laint again t t e S n e .S. . e ,
ee ing an tion o ill l violation o t e i a ge in n tion i ing levie again t i a et . n e en e, t e S a g e t e e a no ill l violation e a e t e gove n ent ea ona l elieve t at t e e t a not i a ge .
e an t ge o n a ill l violation an le in avo o t e e to .
n a eal, t e i t i t o t e an e o t e an t o t to on i e t e
AUSA’s mental impairment.
n e an , t e S an t e e to ea e a a tial ettle ent na o ing t e i e . o avoid extensive litigation over the AUSA’s mental impairment and whether
i i ai ent o l give t e gove n ent a e en e, t e S ag ee t at t e e to
o l ave , in a age i an a ellate o t lti atel e e to le t at a
ea ona le elie t at t e e t a e e te o i a ge a not a e en e to
onte t.
e an t o t e i e t at goo ait a not a e en e an le again t t e S. e i t i t o t a i e , an t e S a eale .
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35 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
he a orit pinion
iven the stip lation limiting the iss e on appeal dge Stahl said the
appeals court would decide whether the IRS’s good faith belief meant there was no
will l violation o the dis harge in n tion nder Se tion e .
Adopted in Se tion e allows a taxpa er to re over damages rom
the U.S. if the IRS, in connection with the collection of taxes, “willfully violates any
provision of” the automatic stay under Section 362 of the Bankruptcy Code or Section
and its in n tion arring the olle tion o dis harged de t.
Judge Stahl said that the statute defines neither “willfully” nor the phrase
“willfully violates.” To find a meaning for the terms, he surveyed the definition given
those words the ir it o rts when the stat te was adopted in .
Altho gh the dissenter disagreed a o t nanimit among the o rts o
appeals, Judge Stahl said that the circuit courts agreed that the “phrase ‘willful
violation’ had an established meaning in the context of violations of the automatic
sta s si as o a reditor will ll violated the a tomati sta i it new o the
a tomati sta and too an intentional a tion that violated the a tomati sta . A
good aith elie in a right to the propert was not relevant to determining whether
the creditor’s violation was willful.”
dge Stahl next on l ded that ongress intended to give the same meaning
to violations of the discharge injunction, in part because “the plain language of
Section 7433(e) does not distinguish between” violations of the automatic stay and
dis harge.
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36 AMERICAN BANKRUPTCY INSTITUTE
Although Judge Stahl said he was relying “primarily” on what Congress understood “willful violation” to mean in 1998 on adopting Section 7433(e), he said that later irst Circuit decisions hewed to the same definition for violations of both the automatic stay and the discharge injunction.
Although the dissenter disagreed, Judge Stahl said that his definition of
“willful violation” did not entail an overbroad interpretation of the wavier of sovereign immunity in Section 7433(e).
he IRS contended that Judge Stahl’s interpretation would force the government to see a declaration about the dischargeability of debts for ta fraud, even though Section 3(a)(1)(C) e cepts them from discharge automatically.
Judge Stahl rejected the argument, finding “policy considerations” against
“allowing the IRS to attempt to collect purportedly discharged debts without facing potential consequences.” He said the IRS had several alternatives.
irst, the IRS could have filed an objection to the dischargeability of the debt, although it was not required to do so before the entry of the general discharge. Second, the IRS could have filed an adversary proceeding and sought a declaration about dischargeability before beginning collection activity.
hird, the IRS could have attempted to collect the debt, as it had done in the case at bar, and gamble that the ban ruptcy court would find for the government and rule that the ta es were not discharged.
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he issent
In dissent, Judge ynch said that her panel was handing down the first circuit
court opinion construing “willfully violates” in Section 7433(e). The majority, she said,
“gets this one wrong.”
Judge ynch said her circuit was the first to deprive the government of
sovereign immunity when acting “on a reasonable and good faith belief.” In Section
7433(e), she found no indication of a waiver of immunity “where the IRS acts
reasonably and in good faith,” even if the belief turns out to be erroneous.
Rather than following circuit law, Judge ynch would have adopted the
approach of the Supreme Court where she said the justices held in the conte t of
Section 523 that a willful injury includes only acts that “were specifically intended to
cause injury, not all intentional acts that resulted in injury.”
f special significance, Judge Lynch disagreed with the majority’s statement
that the circuits were in agreement before 1998. Although the majority opinion
reflected the holding of seven circuits, she said that the irst, ifth and Si th Circuits
would allow a good faith defense to an alleged willful stay violation. here she said
the “majority attempts to deny the existence of this circuit split,” Judge Lynch said
that those three circuits “had held that the mere knowledge of a stay was insufficient
to show a ‘willful violation.’”
In addition to older authority from those three circuits, she cited aggart,
decided by the inth Circuit on April 3. She read the inth Circuit as allowing a
good faith defense. “Indeed,” she said, “the Ninth Circuit does not even impose a
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38 AMERICAN BANKRUPTCY INSTITUTE
reasonableness requirement.” Judge Lynch placed significant reliance on Section
523(a)(1)(C), which does not “require the IRS to first obtain a judicial determination that an exception to discharge applies.” The subsection, she said, “means that
Congress chose not to re uire that the IRS seek a pre collection determination from the bankruptcy court.” [Emphasis in original.]
“Given that Congress created this exception to discharge and did not require the IRS to seek a pre collection determination that the tax debts are not dischargeable, there is no reason to say that the IRS should incur the risk of having damages found against it even if it acted on a reasonable and good faith belief,” Judge
Lynch said.
The acts of the th Circuit Case
Loren en v. Taggart (In re Taggart), 354 2 ( th Cir. pril 23, 2 )
In Taggart, the Court held that a creditor’s subjective, good faith belief that its action does not violate the discharge injunction precludes finding the creditor in contempt, even if the discharge injunction did apply and the creditor’s belief was
“unreasonable.”
The opinion appears to mean that a creditor can act in good faith even if the creditor’s belief is unreasonable. In other words, litigation in the Ninth Circuit over contempt of the discharge injunction will focus on the creditor’s subjective good faith, without regard to whether the creditor’s belief was right or wrong, reasonable or unreasonable.
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39 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
efore bankruptcy in Taggart, the debtor transferred his interest in a closely
held corporation. fter the debtor received his chapter discharge, two other
shareholders sued the debtor in state court for transferring his interest without
honoring their contractual right of first refusal. They also sued the transferee of the
stock.
fter the debtor raised his discharge as a defense in state court, the parties
agreed he would not be liable for a monetary judgment. The state court eventually
ruled in favor of the creditors and unwound the transfer.
The creditors then sought attorneys’ fees as the prevailing parties, invoking a
fee shifting provision in the shareholders’ agreement. The state court ruled that the
debtor “returned to the fray” and thereby made himself liable for post discharge
attorneys’ fees.
eanwhile, the debtor reopened his bankruptcy case, seeking to hold the
creditors in contempt for violating the discharge injunction. The bankruptcy judge
sided with the debtor and imposed sanctions. The ankruptcy ppellate anel
reversed the finding of contempt, ruling that the creditors’ good faith belief that their
actions did not violate the injunction absolved them of contempt.
eanwhile, the state appellate court and a federal district court in related
litigation both ruled that the debtor’s participation in the litigation did not constitute
returning to the fray, thus taking away the grounds for imposing attorneys’ fees and
lending credence to the notion that the creditors did technically violate the injunction.
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40 AMERICAN BANKRUPTCY INSTITUTE
n sum, udges disagreed over whether the discharge in unction applied to the litigation to recover attorneys’ fees.
The debtor appealed the BAP’s opinion to the Ninth Circuit, where Circuit
udge arlos T. ea upheld the and found no contempt. n the process, he e panded the defenses available to someone charged with contempt of a discharge in unction.
To impose sanctions, e isting inth ircuit precedent re uires the debtor to show that the creditor knew the discharge in unction was applicable and prove that the creditor intended the actions that violated the in unction. n the case at hand, knowledge of the applicability of the in unction was the only issue.
ased on n re ilog nc., . d th ir. , udge ea said that knowledge of the in unction cannot be proven by merely showing that the creditor was aware of the bankruptcy. iting a footnote in ilog, he went on to hold that “the creditor’s good faith belief that the discharge in unction does not apply to the creditor’s claim precludes a finding of contempt, even if the creditor’s belief is unreasonable.”
udge ea acknowledged that his interpretation of ilog is “somewhat at tension” with two other Ninth Circuit precedents. lthough udge ea said that ilog was binding, it is arguable that the footnote in ilog was dicta and therefore was not binding. egardless of whether ilog was binding or not, Judge Bea’s opinion is now law in the inth ircuit, although it is unclear whether it was necessary for him to rule that an unreasonable belief is not actionable.
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41 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
Based on his reading of ilog, Judge Bea concluded, li e the BAP, that the
creditor had a good faith belief that the discharge in unction was inapplicable on the
theory that the debtor had “returned to the fray.” The creditor’s belief in that regard
was strengthened because the state trial court agreed.
ecall, however, that the state appellate court and the district court too the
opposite view by concluding that the debtor had not “returned to the fray” but had
been compelled to litigate. n other words, udges disagreed about the applicability of
the in unction.
Although the creditors’ belief in the inapplicability of the injunction ultimately
was proven wrong, Judge Bea said that “their good faith belief, even if unreasonable,
insulated them from a finding of contempt.”
Judge Bea’s opinion applies a subjective test with respect to belief in the
inapplicability of the in unction. oreover, there is no contempt even if the creditor’s
sub ective belief is unreasonable.
Judge Bea’s opinion also seems to stand for the proposition that there is no
contempt if reasonable minds could differ on the applicability of the in unction. ince
it’s often debatable whether the discharge in unction applies, contempt henceforth
may be difficult to prove in the Ninth Circuit.
Because an unreasonable belief is not grounds for a finding of contempt, an
argument evidently must be at least frivolous before there is contempt.
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t is not clear from the opinion whether the same contempt standard applies to violation of the automatic stay. f it does, the automatic stay will have lost its teeth in the inth ircuit.
The First Circuit’s decision and Taggart are very much at odds. The inth
ircuit permits a good faith defense to a discharge violation, while the irst ircuit does not.
hould the losing parties in either circuit petition for certiorari, they surely will claim there is a circuit split. owever, the majority on the irst ircuit found no circuit split, although the dissenter did.
By ruling on ection e , the irst ircuit was not construing the same statute as the inth. f a certiorari petition is based on divergent opinions by the two circuits just seven wee s apart, the justices might shy away from granting the petition because the underlying statutes are not the same.
owever, there surely is a lac of clarity about the availability of a good faith defense when a panel of the irst ircuit cannot agree on whether there is a circuit split. The upreme ourt might decline to grant certiorari until there is a decision more star ly raising a circuit split. Although the dissent in the irst ircuit says there is a circuit split about the good faith defense generally, the dissenter also said her panel was the first appeals court to rule on ection e . ven though the underlying issue is applicable to ections and of the Ban ruptcy ode, the
upreme ourt might not be inclined to grant certiorari to the irst ircuit and review the first decision on ection e .
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a a es or ta and ischar e io ations
otiona distress da a es a e a arded or i u io ation o the
auto atic sta ansa o aites n re ansa o rd Cir ri
arth and e orah ansa o erated a da care center out o ro ert the
eased ro Fran o aites The ansa s and r o aites had nu erous dis utes
durin the course o their re ationshi and the ansa s e entua entered into a
ease ith a third arty. Mr. Zokaites asserted a lien against the Lansaws’ personal
ro ert or un aid rent and the ne t da the ansa s i ed a an ru tc etition
es ite notice o the an ru tc r o aites entered the da care center durin
usiness hours too hoto ra hs and eha ed in a h sica threatenin anner
to ard s ansa r o aites a so entered the ro ert durin o hours
confronted Ms. Lansaw’s mother who was there to clean, and padlocked the door,
a o in s ansa to reenter on in the co an o a o ice o icer dditiona
Mr. Zokaites threatened the Lansaws’ new landlord with legal action if he did not end
the ease ith the ansa s ter a en th rocedura histor and a hearin the
an ru tc court a arded the ansa s or e otiona distress in
attorne ees and in uniti e da a es
On Mr. Zokaites’ appeal, the Third Circuit, quoting a ens o e et or
er s C F d d Cir stated its standard o re ie o the
bankruptcy court’s factual findings as “clearly erroneous only if it is ‘completely
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de oid of minimum e identiary support displaying some hue of credibility or bears no rational relationship to the supportive evidentiary data.’”
The circuit court then turned to the question of whether section 362(k)(1)’s reference to “actual damages” includes damages for emotional distress. While the
irst, inth and le enth Circuits ha e e pressly allowed such damages, the ifth and e enth Circuits ha e left the question open, and a district court out of the i th
Circuit, nited tates . archar, . . . . Ohio , found that such damages are not included in the scope of section 362(k)(1)’s “actual damages.”
The archar court rested its decision on legislati e history, finding that prior to enactment of section k in , enforcement of the automatic stay pro ision was governed by the court’s contempt powers. When the extent of those powers was called into question by orthern ipeline Construction Co. . Marathon ipe Line
Co., . . , Congress enacted section k to gi e debtors a method of enforcing the automatic stay. The district court found that section k was enacted to counteract the decision in orthern ipeline as to enforcement power, and that the non inclusion of emotional distress damages indicated that Congress did not intend those damages to be deemed “actual damages.”
The e enth Circuit, in iello . ro idian in. Corp., . d th Cir.
, held that because the automatic stay was intended to afford financial protection during bankruptcy, at the ery least an award of damages for emotional distress had to be tied to pecuniary loss.
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he inth ircuit on the other hand held in awson v. Washington ut.
ank . . ( n re awson) 3 .3d 113 ( th ir. 2 ) abrogation on other grounds
recogni ed in ugliu a v. ( n re ugliu a) –– .3d –– 2 1 W 11 1 ( th
ir. ar. 2 2 1 ) that an award of damages for emotional distress was included in
the scope of “actual damages” and need not be tied to pecuniary loss. Like the archar
court the inth ircuit looked to legislative history but rather than limiting that
analysis to the history of section 362(k) the court looked to the history of the
automatic stay provision enacted six years earlier in the 1 amendments. t found
that an important purpose of the automatic stay was to give the debtors breathing
room free of financial burdens including collection efforts and harassment by
creditors. ecause ongress considered abusive creditor conduct when enacting the
automatic stay provision the later enforcement provision could be deemed to address
those same considerations.
he ansaw court was persuaded by the Ninth Circuit’s reasoning in awson.
“If the automatic stay was meant to protect against non pecuniary emotional harm
it is only logical that ongress would intend to include damages resulting from that
harm when it introduced the award of ‘actual damages’ as the enforcement
mechanism six years later.” In finding that emotional distress damages were
available however the court specifically declined to decide whether a finding of
pecuniary loss was a predicate to that award finding that pecuniary damages in the
form of attorney fees were present here. ( n a footnote the court suggested that since
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section k is likely to pro ide the only a enue for such relief pecuniary loss would likely not be a prere uisite .
ddressing the specific emotional distress award in this case the court disagreed with r. okaites that any such claim must include corroborating medical evidence. Rather, the court found that “where a stay violation is patently egregious, a claimant’s credible testimony alone can be sufficient to support an award of emotional distress damages.” Here, the emotional distress claim was supported by the Lansaws’ credible testimony of nightmares, fear, depression, ulcer and general withdrawal from society. That, in conjunction with the evidence of Mr. Zokaites’s threatening physical beha ior and interference with the Lansaws’ business and new lease was sufficient to support the emotional distress award.
urning finally to the issue of puniti e damages the court found that based on the egregiousness of Mr. Zokaites’s behavior, the ratio between actual damages and the amount of the puniti e damage award and puniti e damages awarded in similar cases the court did not err either in the award itself or its amount.
Contempt ower of the ankruptcy Court
bankruptcy court lacks inherent or statutory power to award in punitive damages based on the creditor’s violation of Rule 3002.1(c) and disregard of a court order so held the court in ortgage Corporation . eaulieu Nos.
. t. ec. .
he debtors in three chapter cases had confirmed plans under which they were able to remain in their homes post petition and pay their mortgages through
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the trustee. Two sets of debtors, the ravels and the eaulieus, successfully
completed their payments and the court issued an order stating that they were
current on their mortgages and charges through the completion of their plans. HH
sent all three sets of debtors a monthly statement for fees based on property
inspection, late charges, and insufficient funds, all of which were incurred more than
1 0 days prior to the statement in violation of Rule 3002.1(c). The trustee moved for
sanctions in all three cases for violation of Rule 3002.1(c) and, in the Beaulieus’ and
the Gravels’ cases, for violation of the Bankruptcy Court’s Order at the close of their
cases.
The bankruptcy court imposed sanctions of 2 ,000 for the Rule 3002.1
violation in each case. t further found, in the case of the ravels and eaulieus, that
HH had violated the ebtors urrent rders, and, citing its powers under section
10 (a), imposed sanctions in the amount of 100,000 for the eaulieus and 200,000
for the ravels. The court ordered the total sanction of 3 ,000 be paid to Legal
ervices Law Line of ermont. n appeal HH argued that the bankruptcy had no
authority to award sanctions, and, if it did, that the sanctions were e cessive.
The district court began with Rule 3002.1(c) to determine whether it
empowered the bankruptcy court to order the ,000 in sanctions. aragraph (i)(2)
of the Rule provides that a court finding a violation may order “other appropriate
relief, including reasonable expenses.” The court premised its analysis of the scope of
the Rule on the principle that “[t]he authority conferred by Rule 3002.1(i) cannot
e ceed the scope of the substantive powers of the Bankruptcy Court.” It found that
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the bankruptcy court did not have the power to order the sanctions against for violation of the rule.
xplaining its decision, the court addressed a bankruptcy court’s substantive powers. nder section 10 (a), a bankruptcy court has broad power to enforce its orders including ad udicating civil contempt cases and awarding compensatory damages. unitive damage awards and criminal contempt proceedings, however, are not so clearly within the bankruptcy court’s powers. In addressing that question, the court took a stroll through the history of the bankruptcy court’s contempt powers noting a trend since 1 3 toward limitations on that power. The court was ultimately persuaded by the inth Circuit decision in In re yer, 322 .3d 11 , 11 3 n.1 ( th
Cir. 2003), to the effect that neither the court’s inherent authority nor its power under section 105(a) were extensive enough to enable an order of “serious” punitive sanctions in light of the less strenuous due process protections available in bankruptcy. The court was further convinced by the Fifth Circuit’s finding in In re
ipp, Inc., .2d 1 03 ( th Cir. 1 0), that bankruptcy courts lack authority to conduct criminal contempt proceedings due to the absence of udicial independence caused by the tenure and compensation structure of bankruptcy udgeships.
The court noted that the irst Circuit, in In re Charbono, 0 .3d 0, (1st
Cir. 201 ), expressed the view that punitive damages are within a bankruptcy court’s inherent powers but disagreed with that court’s conclusion as having been based on too broad a reading of Supreme Court dicta. “The First Circuit also gave little weight
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to the crucial institutional differences between rticle III courts and the ankruptcy
Court, which, in this court’s view, are important to the resolution of this question.”
The district court concluded “that the statutory and inherent powers of the
ankruptcy Court are not sufficient to support the ankruptcy Court’s imposition
upon PHH of $300,000 in punitive sanctions.”
ike the recent case, cwen oan Servicing v. arino, os. 1 122 , 1 123
( . . . th Cir. ec. 22, 201 ) (which held that bankruptcy courts could impose non
substantial punitive damages) (blogged here), the court noted that the bankruptcy
court was not without recourse. The district court, unrestrained by the limitations
imposed on non rticle III bankruptcy udges, has the power to conduct criminal
contempt proceedings based on conduct before the bankruptcy court.
ower to Incarcerate
A Ninth Circuit opinion on June 21, 2018 held that the bankruptcy court’s
contempt power includes incarcerating someone for more than three years. See
harib v. Casey (In re enny . nterprises C), 1 5502 ( th Cir. une 21, 201 ).
man defied a turnover order by refusing to cough up 1. million belonging
to the estate. ntil he purged his contempt, ankruptcy udge Theodore C. lbert of
Santa na, Calif., sent him to ail in ay 2015. In addition, the bankruptcy udge
imposed civil contempt sanctions of 1. million and 1,000 a day until the man
complied.
The inth Circuit in substance upheld all the sanctions in uly 201 , including
what was then more than two years of incarceration.
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Notin that the contemnor had been in ail for 2 months, the circuit court noted, however, that the $1,000 in daily sanctions “at some point” will have ceased to be coercive and would become punitive, requiring release from jail under “due process considerations.” harib v. Casey n re enny nterprises C , 2 ed. App .
950, 953 (9th Cir. July 28 2017); rehearing denied May 8, 2018. To read ABI’s discussion of the opinion and the denial of rehearin , click here and here.
ather than seek his freedom from the upreme Court, the man brou ht more appeals in district court, where he lost a ain in ecember 201 . He ar ued that his civil incarceration had become criminal because the passa e of almost three years in
ail had proven coercion to be futile.
pholdin incarceration a second time, the district ud e paraphrased the bankruptcy court as describing how the man “defied a court order though a series of shady transfers to various shell companies.” With regard to futility, the district judge said that the only evidence in support of the claim was the man’s own uncorroborated testimony that he had transferred his “entire net worth to unknown foreign investors” and that his bank accounts had been cleaned out after he was ailed.
The district ud e upheld the bankruptcy court’s finding that the man’s unsupported testimony did not show futility in further imprisonment.
Ne t, the man ar ued that incarceration for more than two years by itself made his confinement punitive, notin that he had been ailed lon er than the minimum mandatory sentence for obstruction of ustice.
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The district court turned down the argument, finding no “authority for the
proposition that length of confinement, on its own, renders contempt punitive and
criminal, as opposed to civil and coercive.”
The man appealed once again to the Ninth Circuit and lost again in a
nonprecedential, per curiam opinion on une . The appeals court said that the
bankruptcy court “did not clearly err” by finding that the man failed to carry his
burden by showing his inability to comply.
Because the man’s incarceration for noncompliance “remained coercive at the
time of enforcement,” the Ninth Circuit rejected his due process argument.
n the new opinion, the appeals court said nothing about sanctions becoming
punitive “at some point.”
NB ule f of the Bankruptcy ules
“An order of discharge that has become final may be registered in any other
district by filing a certified copy of the order in the office of the clerk of that district.
hen so registered the order of discharge shall have the same effect as an order of
the court of the district where registered.”
The Argument for andatory Arbitration of ischarge iolations Credit ne Bank NA v. Anderson, up. Ct. et. Cert ranted une
rrin Anderson opened a credit card account in with irst National
Bank of arin, the predecessor to Credit ne, N.A. Anderson’s cardholder agreement
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contained an arbitration clause governed by the ederal Arbitration Act, . .C. et se . The agreement provided that “[y]ou and we i.e., the bank agree that either you or we may, without the other’s consent, re uire that any controversy or dispute be tween you and us” be “submitted to mandatory, binding arbitration.”
The agreement e pressly covered disputes relating to “credit reporting” and
“collections matters,” as well as claims for “injunctive or declaratory relief.” t also e pressly stated that arbitration “replaces the [cardholder’s] right to go to court, including … the right to participate in a class action or similar proceeding,” and re uired that claims “made as part of a class action or other representative action” be arbitrated “on an individual basis.”
n , Anderson defaulted on his Credit ne credit card account. As re uired by federal regulations, after days of nonpayment, Credit One “charged off” Anderson’s account, i.e., reclassified the account from a receivable to a loss. ee
ederal inancial nstitutions amination Council, niform e tail Credit
Classification and Account anagement olicy, ed. eg. , , , une
, 2000) (“open end retail loans that become past due cumulative days from the contractual due date should be classified oss and charged off”). Credit ne thereafter reported to the national credit reporting agencies that Anderson’s debt was charged off.
n , Credit ne sold Anderson’s account to a third party debt buyer. Credit
ne reported to the credit reporting agencies that Anderson’s debt was charged off and sold to another lender, and that ero dollars were owed to Credit ne on the
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account. ee also onsumer ata ndus. Ass’n, 20 redit eporting esource
uide , (20 ).
o years later, Anderson filed a hapter ban ruptcy petition in the nited
tates an ruptcy ourt for the outhern istrict of e or . On ay , 20 ,
the court entered a form “Discharge of ebt or Order of inal Decree,” and closed
Anderson’s ban ruptcy case. Anderson subse uently informed redit One of his
ban ruptcy discharge and re uested that the ban direct the credit reporting agencies
to remove from his credit report the indication that redit One had charged off his
account. redit One declined to remove the “charged off” history from the trade line.
n late 20 , the ban ruptcy court granted Anderson’s motion to reopen his
ban ruptcy case so that he could initiate the adversary proceeding on behalf of
himself and a putative class, challenging redit One’s credit reporting practices
ith respect to charged off, sold credit card debt subse uently discharged in a
hapter ban ruptcy. he complaint alleged that redit One’s failure to report
updates to the credit reporting agencies to reflect post sale ban ruptcy discharges on
its former credit card accounts as intended to coerce payment on discharged debt, in
violation of the discharge injunction in ban ruptcy, . . . 2 . Anderson’s class
allegations start from the premise that the nited tates an ruptcy ourt for the
outhern istrict of e or — here his putative class action is pending—is
empo ered to enforce the statutory discharge injunction of 2 as to discharge
orders entered by ban ruptcy courts across the country in the hundreds of thousands
of individual ban ruptcy cases filed by putative class members.
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either the com laint nor the defensive motions in this case ma e any reference to le f of the ederal les of an r tcy roced re his le provides that “an order of discharge that has become final may e registered in any other district y filing a certified co y of the order in the office of the cler of that district hen so registered the order of discharge shall have the same effects as an order of the court of the district where registered.”
redit One moved the an r tcy co rt to stay Anderson’s adversary
roceeding in favor of ar itration nder ection of the Ar itration Act, , and to com el him to ar itrate his claim nder a , nder ection ,
he an r tcy co rt denied the motion he co rt e lained that the ar itra ility of claims in an r tcy as governed in the econd irc it y the co rt of appeals’ decision in A America an , A v ill, d d ir ,
hich held that “the an r tcy co rt ill not have discretion to override an ar itration agreement nless it finds that the roceedings are ased on rovisions of the an r tcy ode that ‘inherently conflict’ ith the Ar itration Act or that ar itration of the claim o ld ‘necessarily jeopardize’ the o ectives of the
an r tcy Code.” d at A lying that standard, the co rt of a eals held in
ill that ar itrating the plaintiff’s claim for violation of the a tomatic stay in
an r tcy, , o ld not eo ardi e the o ectives of the ode, rimarily
eca se ar itration of her claim “would not interfere ith or affect the distri tion of the estate,” d at hat as so, the co rt o served, in art eca se
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plaintiff’s debts had been discharged and her ban ruptcy case closed, and so she no
longer needed the automatic stay to preserve her “fresh start” in ban ruptcy. d.
Applying ill, the ban ruptcy court concluded that arbitration of Anderson’s
claim would undermine the objectives of the an ruptcy ode primarily
because “ ill put a premium on the debtor’s fresh start,” and so where, as here,
the debtor’s “fresh start” is implicated, ongress intended to preclude arbitration.
The court further e plained that it was “hard … to believe that ongress, where there
was an allegation that the discharge is being violated, would so jeopardi e the fresh
start as to re uire the debtor to shell out the cost of an arbitration.” d. inally,
notwithstanding the parties’ agreement e plicitly authori ing arbitration of claims for
“injunctive or declaratory relief,” and giving the arbitrator “the power to award to a
party any damages or other relief provided for under applicable law,” and
notwithstanding the ban ruptcy court’s recognition that it is “generally accepted”
that arbitrators have the power to provide e uitable and injunctive relief citing n re
elton, , at an r. . . . . ov. , , the court
articulated its “concern that there’s no e press ac nowledgement of e uitable relief or
injunctive relief” in the arbitration agreement because “that power is at best ha y
and time consuming if one goes the arbitration route even when there is an e press
ac nowledgment of injunctive and e uitable remedies in the agreement.” The
ban ruptcy court thus concluded that “arbitration was not intended by ongress when
a violation of the discharge was at issue … whether that’s for an individual debtor …
or debtors generally.”
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n interlocutory appeal under . . . , the district court affirmed, holding that claims under are “core” ban ruptcy proceedings, and that arbitrating such claims would “necessarily jeopardi e the objectives of the an ruptcy ode.”
pecifically, the district court, li e the ban ruptcy court, found that ensuring debtors’
“fresh start” is the “central objective of the an ruptcy ode,” and concluded that arbitration is “inadequate” to preserve that right in view of the “high barriers” a debtor might confront “if arbitrating on an individual basis.” The court also reasoned that because “the claims here arise from a discharge injunction, which is an affirmative order of the ban ruptcy court,” arbitration would necessarily interfere with the ban ruptcy court’s authority to enforce its own orders.
The econd ircuit affirmed. The court e plained that, in determining the arbitrability of Anderson’s claim, it would follow a multi step test uni uely fashioned for ban ruptcy claims. irst, the court must determine “whether the issue involves a ‘core’ or ‘non core’ proceeding. f the proceeding is ‘non core,’ ban ruptcy courts generally must stay the proceedings in favor of arbitration.” d. uotation mar s omitted . “If the matter involves a core proceeding, the ban ruptcy court is tas ed with engaging in a particulari ed in uiry into the nature of the claim and the facts of the specific ban ruptcy. f the ban ruptcy court determines that arbitration would create a severe conflict with the purposes of the an ruptcy ode, it has discretion to conclude that ongress intended to override the Arbitration Act’s general policy favoring the enforcement of arbitration agreements.” d. citation and uotation mar s omitted .
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A l ing this rotocol to Anderson’s concededly “core” clai the court of a eals
concluded that ar itration of Anderson’s clai under a would “seriousl
eo ardi e” his an ru tc roceeding ecause “1 the discharge in unction is integral to
the an ru tc court’s a ilit to ro ide de tors with the fresh start that is the er
ur ose of the ode the clai regards an ongoing an ru tc atter that requires
continuing court su er ision and the equita le owers of the an ru tc court to
enforce its own in unctions are central to the structure of the ode ”
he Argu ent for andator Ar itration
In allowing Anderson to a oid the lain ter s of his otherwise enforcea le
ar itration agree ent howe er the econd ircuit unaccounta l a lied a test it
created s ecificall to e aluate the ar itra ilit of statutor clai s arising under the
an ru tc ode whether there is a conflict etween ar itration and the an ru tc
Act’s goals of granting de tors a fresh start and efficientl and effecti el resol ing
an ru t estates
he econd Circuit’s er issi e standard for deter ining whether there is an
“inherent conflict” in the an ru tc conte t if sustained would ean that irtuall
no clai arising under the an ru tc ode—or an other federal statute since there
is no reason the test should e confined to an ru tc —would e ar itra le contrar
to the esta lished federal olic fa oring the enforce ent of ar itration agree ents
hat o iousl contra enes this Court’s an recedents on the ar itra ilit of federal
statutor clai s Indeed ust two wee s ago in ic ste s this ourt declared
that e en statutor ro ision for federal udicial rocedures to resol e federal
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st tutory cl i s ithout ore does not e ince the cle r nd nifest con ression l intent needed to dis l ce the Ar itr tion Act’s nd te th t feder l courts res ect
r itr tion ree ents
A A l intiff see in to ersu de feder l court to disre rd n r itr tion
ree ent f ces he y urden odyin “‘liberal feder l olicy f orin
r itr tion agreements,’” itsu ishi otors Cor oler Chrysler– ly outh nc
1 1 uotin oses Cone e ori l os it l ercury
Construction Cor 1 1 the Ar itr tion Act “mandates enforce ent of ree ents to r itr te st tutory claims,” he rson A eric n ress nc
c hon 1 see C Accordin ly “courts ust ri orously enforce ree ents to arbitrate.” e n itter eynolds nc yrd
1 1 1
his nd te “may e overridden,” ut only “by contr ry con ression l command.” c hon t or “[j]ust s it is the con ression l olicy
nifested in the eder l Ar itr tion Act th t re uires courts li er lly to construe the sco e of r itr tion ree ents co ered y th t Act it is the con ression l intention e ressed in so e other st tute on hich the courts ust rely to identify ny c te ory of cl i s s to hich ree ents to r itr te ill e held unenforceable.”
itsu ishi otors t Accordin ly l intiff see in to oid n
r itr tion ree ent nd ursue feder l st tutory cl i in court ust sho th t
Con ress “intend[ed] to li it or rohi it i er of udici l foru for rticul r
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claim.” c ahon, . . at . uch intent may e found only in the other Act’s
“text or legislati e history,” or in “an inherent conflict et een ar itration and the
[other] statute’s underlying purposes.” Id. uoting itsu ishi otors, . . at
.
eflecting this Court’s respect for Congress’s ill, the “inherent conflict” test
has pro ed exacting. “In many cases o er many years,” this Court declared recently,
“this Court has heard and re ected efforts to con ure conflicts et een the
Ar itration Act and other federal statutes. In fact, this Court has re ected e ery such
effort to date[.]” pic ystems, lip op. ay , .
or at least forty years, the Court has maintained that there is an inherent
conflict et een ar itration and another federal statute only here the litigant
could not effecti ely indicate the claim under that statute in ar itration. itigants
ha e een ad ancing increasingly aggressi e arguments that ar itration ould e
at odds ith the importance of the asserted federal claim, the federal udicial scheme
erected to resol e such claims, or the underlying interests. ut time and again, this
Court has re ected those arguments, finding them insufficient to sho an inherent
conflict that o ercomes the strong federal policy fa oring enforcement of ar itration
agreements.
or example
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In itsu ishi otors, the Court re ected the notion that the “fundamental importance” of the federal antitrust la s ustified departure from the ederal
Ar itration Act’s mandate, explaining that “so long as the prospecti e litigant effecti ely may indicate [his or her] statutory cause of action in the ar itral forum, the [antitrust] statute ill continue to ser e oth its remedial and deterrent function.” . . at , .
In c ahon, the Court reached the same conclusion regarding claims asserted under the ac eteer Influenced and Corrupt rgani ations Act and section
of the ecurities xchange Act of . ismissing the plaintiffs’ insistence that ar itration ould undermine “the pu lic interest in the enforcement” of those federal la s, the Court held that there as no inherent conflict e incing congressional intent to preclude ar itration ecause “[t]he suita ility of ar itration as a means of enforcing [the plaintiffs’] rights is evident.” . . at ,
. he Court explained that if the litigant “may effecti ely indicate their … claim in an ar itral forum, … there is no inherent conflict et een ar itration and” the other Act that ould indicate congressional intent to o erride the Ar itration Act’s mandate, id. at such a conflict exists “only here ar itration is inade uate to protect the su stanti e rights at is sue,” id. at see also id. at , accord
odrigue de ui as . hearson American x press, Inc., . . , ,
.
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n ilmer v. nterstate ohnson ane orp., the ourt found no “inherent
inconsistency between” ar itration and the “important social policies” underlyin the
A e iscrimination in mployment Act (“ADEA”) ecause ar itration “can further
roader social purposes.” . . , .
n reen ree inancial orp.–Ala ama v. andolph, the ourt declined
to invalidate an a reement to ar itrate claims under the ruth in endin Act and
the ual redit pportunity Act ecause the record did not sho that ar itration
costs ould e so reat as to render the plaintiff “unable to vindicate her statutory
ri hts in arbitration.” . . , . he ourt a ain stressed that “even
claims arisin under a statute desi ned to further important social policies may e
ar itrated ecause ‘so lon as the prospective liti ant effectively may vindicate [his
or her] statutory cause of action in the ar itral forum,’ the statute serves its functions.”
d. uotin ilmer,
. . at .
. his as the la as it stood hen the court of appeals issued its decision in
this case, and it cannot e s uared ith that court’s holdin that on ress intended
that the Ar itration Act not apply to statutory dischar e in unction claims rou ht
under the an ruptcy ode.
othin in the te t or le islative history of the an ruptcy ode su ests
an intent to preclude ar itration. Anderson’s claim arises under . . . , hich
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provides that a dischar e under the ode “operates as an in unction a ainst … an act, to collect, recover or offset an such debt as a personal liabilit of the debtor, whether or not dischar e of such debt is waived.” ection does not include an e plicit enforcement mechanism, but rather is enforceable throu h ection of the
an ruptc ode, which authori es the ban ruptc court to “issue an order, process, or ud ment that is necessar or appropriate to carr out the provisions of this title.”
d. (a) see, e. ., alls v. ells ar o an , .A., . d , ( th
ir. ) (“bankruptcy court is authori ed to invo e to enforce the dischar e injunction”). There is no indication in either provision—or an other provisions of the
ode—that on ress intended to preclude arbitration of claims.
o the e tent statutor te t provides an indication of con ressional intent on this uestion, it demonstrates that on ress did not intend for claims to be liti ated e clusivel in the ban ruptc court and therefore e cepted from the
Arbitration Act. on ress has carefull parceled urisdiction over ban ruptc related claims amon the federal district and ban ruptc courts, rantin federal district courts “original but not e clusive urisdiction of all civil proceedin s arisin under title 11,” . . . (b), e cept with respect to “claims or causes of action that involve construction of section of title 11,” concernin the retention and compensation of professionals in connection with ban ruptc proceedin s, over which the district court has “exclusive jurisdiction,” id. (e)( ).
his arran ement stron l supports the view that claims are arbitrable.
n ilmer, this ourt found that “Congress’ rant of concurrent urisdiction over
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claims to state and ederal courts” supported the conclusion that Congress
did not intend to preclude arbitration o such claims, “because arbitration agreements,
like the provision or concurrent jurisdiction, serve to advance the objective o
allowing claimants a broader right to select the orum or resolving disputes, whether
it be judicial or otherwise.” . . at ( uotation marks, citation, and brackets
omitted) see also odrigue de uijas, . . at (Congress’s grant o
concurrent ederal state jurisdiction over claims under the ecurities ct “suggest[s]
that arbitration agreements, which are in e ect, a speciali ed kind o orum selection
clause, … should not be prohibited under the ecurities Act” ( uotation marks and
citation omitted)). ikewise here, ar rom speci ying that claims must have the
special protection o bankruptcy courts—the kind o “contrary congressional command”
that the Court has re uired or inding an exception to the rbitration Act’s
mandate to honor arbitration agreements, c ahon, . . at —Congress has
made uite clear that bankruptcy court is not a re uired orum or these claims.
ith nothing in the text or legislative history supporting it, the court o appeals
resorted to a inding o inherent con lict based on its view that certain eatures o the
ederal bankruptcy system were important to the ability o the ederal courts to grant
debtors a resh start. ccording to the court, “discharge is the paramount tool used
to e ectuate the central goal o bankruptcy providing debtors a resh inancial
start.” App.13a. nd, the court said, judicial “enforcement” o discharge injunctions
(even “after the close o bankruptcy proceedings”) “is a crucial pillar o the powers
o the bankruptcy courts and central to the statutory scheme.” pp.1 a. “Because
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there is no matter more central to the purposes and policies of the Ban ruptcy Code than the fresh start pro ided by discharge,” the court concluded “arbitration of
[respondent’s] claim presents an inherent conflict with the Bankruptcy Code.”
App.13a ( uotation mar s omitted) see also id. (“we find that arbitration of a claim based on an alleged iolation of ection (a)( ) would seriously eopardi e a particular core ban ruptcy proceeding” ( uotation mar s omitted)).
nder this Court’s precedent these considerations of the importance of the discharge to the Ban ruptcy Code are irrele ant. As ust e plained the importance of a public interest protected by a federal udicial scheme is not a proper basis for finding an inherent conflict with arbitration. any federal rights are important but
Congress’s recognition of that importance does not indicate one way or the other whether Congress intended statutory claims implicating such rights to be non arbitrable. At bottom the econd Circuit’s reasoning amounted to nothing more than a conclusion that the federal udicial process is important and arbitration is not the same thing. But if that is all that can be said about the difference between arbitration and the rele ant udicial proceedings the congressionally prescribed strong presumption in fa or of enforcing arbitration agreements must pre ail.
oreo er the court below ne er considered the one uestion that mattered whether Anderson could use arbitration to effecti ely indicate his alleged right to compel Credit ne “to update the credit reporting agencies regarding the discharged debt.” App. a. ( or the record he could. ee App. a a (defining scope of claims and relief a ailable in arbitration) infra p. .) By thus pri ileging a federal forum o er an
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arbitra oru because o the i portance o the edera right, the court be ow e hibited
the ery “judicial hosti ity to arbitration agreements” that Congress intended to
“reverse” and outed the “federal po icy a oring arbitration.” c ahon, . . at
( uotation arks and brackets o itted .
C. his Court’s subse uent decision in pic yste s e phatica y c oses the
door on the econd Circuit’s conc usion that an inherent con ict renders nderson’s
c ai non arbitrab e.
n pic yste s, the Court began by reiterating that Congress had
“establish[ed] ‘a ibera edera po icy a oring arbitration,’” ip op. ( uoting oses
. Cone e oria ospita . ercury Construction Corp., . . , ( , and
that “the rbitration ct re uires courts ‘rigorously’ to ‘enforce arbitration
agree ents according to their terms,’” id. at ( uoting erican press Co. .
ta ian Co ors estaurant, . . , ( . e t, the Court re inded
itigants that when they c ai that another statute “displaces” the rbitration Act’s
andate, they “bear” the hea y burden o showing a c ear y e pressed congressiona
intention that such a resu t shou d follow.” d. at . ndeed, the Court said, out o
“[r]espect or Congress as drafter” and “for the separation o powers,” that “intention
ust be c ear and manifest.” d. ( uotation arks o itted .
uided by these precepts, the Court he d that there was no “inherent
conflict” between arbitration and section o the ationa abor e ations ct,
which “secures to e p oyees rights to organi e unions and bargain collectively.” pic
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ystems, lip op. . ection , the Court said, “does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly, as our precedents demand.” d. at . or one thing, section “says nothing about how judges and arbitrators must try legal disputes that leave the wor place and enter the courtroom or arbitral forum.” d. at see also id. at . And section 7’s underlying
“policy of protecting workers’ concerted activities for the purpose of collective bargaining or other mutual aid or protection” did “not conflict with Congress’s statutory directions favoring arbitration,” even where the arbitration agreement waived class and collective action to resolve employment disputes. d. at
uotation mar s omitted . here was no suggestion that the employee could not effectively vindicate his rights by having to proceed in individuali ed arbitration.
imilarly, the discharge injunction of of the an ruptcy Code displays no clear and manifest congressional intent to displace the Arbitration Act’s mandate.
he Code says nothing about the availability of arbitration or the waivability of any right to judicial procedures for enforcement of . And as noted above, there is no reason to conclude that respondent could not effectively vindicate his asserted right to a fresh start in arbitration. oreover, the underlying policy of promoting efficient and effective resolution of ban rupt estates through consolidated action in federal court would not be thwarted by arbitration of respondent’s claim because the estate was settled before his claim arose.
o be sure, the an ruptcy Code provides for judicial action in ban ruptcy, including enforcement of discharge injunctions. ee . .C. , cf. ellness
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Int’l etwor td. v. harif . Ct. . .C. . ut the
Court in pic ystems once and for all disposed of the notion that such provisions are
enough on their own to create an inherent conflict. he Court explained that—as
shown by “so much precedent”—“even a statute’s express provision for some type of
legal action does not necessarily mean that it precludes … arbitration.” lip op. .
or example the Court noted that in ilmer it “‘had no ualms in enforcing a class
waiver in an arbitration agreement even though’ the Age iscrimination in
mployment Act ‘expressly permitted collective legal actions.’” Id. at uoting
Italian Colors . . at . And in CompuCredit the Court “refused to find a
conflict even though the Credit epair rgani ations Act expressly provided a ‘right
to sue’ … and even declared ‘any waiver’ of the rights it provided to be ‘void.’” Id.
uoting . . at brac ets omitted . Again it must be so. therwise the
strong congressionally mandated presumption in favor of arbitration agreements would
be inverted and federal udicial forums would have priority over arbitral forums
contrary to Congress’s intent in enacting the Arbitration Act.
In short pic ystems confirms that the an ruptcy Code does “not
provide a congressional command sufficient to displace the Arbitration Act.” lip op.
.
his case is ust the latest example of the confusion that is widespread among
the lower courts about the interaction between the an ruptcy Code and the
Arbitration Act. As one scholar has put it the “numerous approaches and analyses
adopted by the various federal courts of appeals” have led to substantial “uncertainty
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and confusion … with respect to the interplay between arbitration and ban ruptcy and whether an arbitration clause should be enforced in a particular proceeding in a ban ruptcy case.” esnic he nforceability of Arbitration Clauses in an ruptcy
Am. an r. Inst. . ev. see also eventhal lias Competing
fficiencies he roblem of hether and hen to efer isputes to Arbitration in
an ruptcy Cases Am. an r. Inst. . ev. in ban ruptcy context “[i]nterpretation of c ahon has not been uniform …, and the circuit courts interpreting the upreme Court holding have emphasi ed the importance of different considerations and have reached different outcomes”); irgis Arbitration
an ruptcy and ublic olicy A Contractarian Analysis Am. an r. Inst. .
ev. noting the “morass” of conflicting and inconsistent circuit decisions .
his confusion which has persisted despite this Court’s fre uent efforts to clarify the inherent conflict test is problematic. oth the an ruptcy Code and the
Arbitration Act were intended to provide efficient resolution of disputes. ee
A obility C v. Concepcion . . Arbitration Act
“allow[s] for efficient streamlined procedures tailored to the type of dispute”); ean
itter . . at noting Arbitration Act’s “goal of speedy and efficient decision making”). he vexatious uestion of how to harmoni e these two laws however generates a significant volume of unpredictable litigation which undermines that shared goal. ee esnic Am. an r. Inst. . ev. at . n the heels of pic ystems’s decisive embrace of the proposition that only a clear and manifest
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congressional intent to displace the Ar itration Act’s mandate will suffice, and its
recognition that this re uirement has een applied in “many cases”— ut never
satisfied—across a “rang[e]” of federal statutes, pic stems, lip op. , this is an
opportune case to “clear the confusion” in the ankruptc conte t, id. at .
he courts of appeals have taken a range of divergent approaches to
determining the ar itra ilit of claims arising in ankruptc —none of which reflects
a straightforward application of this Court’s precedent. or e ample, the hird Circuit
has held that, regardless of whether the proceeding is “core,” “[w]here an otherwise
applica le ar itration clause e ists, a ankruptc court lacks the authorit and
discretion to den its enforcement, unless the part opposing ar itration can esta lish
congressional intent, under the c ahon standard, to preclude waiver of udicial
remedies for the statutor rights at issue.” n re int e, . d , d Cir.
). And, the court determined, there is no “inherent conflict” etween the
ankruptc Code and ar itration of federal claims that were not “created the
ankruptc Code.” d. at . eaching a similar conclusion in an earlier case,
the hird Circuit had determined that, given this Court’s precedent, it could not
“subscribe to a hierarch of congressional concerns that places the ankruptc law in a
position of superiorit over [the Ar itration] Act.” a s Co. v. errill nch,
ierce, enner mith, nc., . d , , d Cir. ).
eanwhile, the ifth Circuit has declared that, “at least where the cause of action
at issue is not derivative of the pre petition legal or e uita le rights possessed a
de tor ut rather is derived entirel from the federal rights conferred the
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an ru tcy Code, a ban ru tcy court retains significant discretion to assess whether arbitration would be consistent with the ur ose of the Code, including the goal of centrali ed resolution of urely ban ru tcy issues, the need to rotect creditors and reorgani ing debtors from iecemeal litigation, and the undis uted ower of a ban ru tcy court to enforce its own orders.” n re ational y sum Co., . d ,
th Cir. . urther, that court has said, “where a core roceeding in ol es ad udication of federal ban ru tcy rights wholly di orced from inherited contractual claims, … the ad udication of [such] actions outside the federal ban ru tcy forum could in many instances resent the ty e of conflict with the ur ose and
ro isions of the an ru tcy Code alluded to in c ahon.” d. at . A lying these rinci les, the court concluded that a debtor’s action to enforce a discharge in unction a “core” ban ru tcy roceeding was not sub ect to arbitration because it
“raised no issues under [a re ban ru tcy contract] and was restricted entirely to the ad udication of federal ban ru tcy issues.” d. at see also n re andy,
. d , th Cir. ban ru tcy court had discretion to deny arbitration of fraudulent con eyance action arising under the an ru tcy Code .
he ourth Circuit—li e the econd Circuit—has found that, with res ect to core ban ru tcy roceedings, “[a]rbitration is inconsistent with centrali ed decision ma ing because ermitting an arbitrator to decide a core issue would ma e debtor creditor rights contingent u on an arbitrator’s ruling rather than the ruling of the ban ru tcy udge assigned to hear the debtor’s case.” n re hite ountain ining
Co., . d , th Cir. uotation mar s omitted . i en that swee ing
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rationa e the ourth ircuit echoin the econd ircuit has dec ared cate orica that
“‘[i]n the ban ru tc settin con ressiona intent … to en oin arbitration is su icient
c ear to o erride … arbitration agreements.’” d. at uotin n re nited tates
ines nc. . d d ir. see a so oses . ash a nc.
. d th ir. er curia arbitra a ree ent he d unen orceab e
a ainst debtor’s c ai to dec are oan oid because arbitration wou d “interfere” with
ur oses o an ru tc ode to “provide debtors and creditors with the ro t
and e ectua ad inistration and sett e ent o the debtor’s estate” and “to centra i e
dis utes o er the debtor’s assets” uotation ar s o itted .
n the inth ircuit a ru e si i ar to the econd and ourth Circuits’ re ai s
with courts ho din that arbitration inherent con icts with “centralization o
dis utes concernin a debtor’s e a obligations” and “protecting creditors and
reor ani in debtors ro iece ea litigation.” n re hor e nsu ation o. . d
th ir. uotation ar s and brac ets o itted . thou h the
inth ircuit ac now ed ed that this ourt has re ected such concerns as a basis
or re usin to en orce arbitration a ree ents that court nonethe ess stated that
this Court’s reasonin “does not ho d in the ban ru tc context.” d. at n. see
a so n re n . o. . d th ir. arbitration a ree ent
unen orceab e with res ect to c ai s o raudu ent con e ance subordination and
disa owance because o con ict with Code’s centra i ation ur ose n re ber
. d th ir. a in hor e nsu ation to ho d arbitration
a ree ent unen orceab e with res ect to dischar eabi it o debt .
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n short the courts of appeals have devised an arra of bespo e approaches to addressing the arbitrabilit of ban ruptc claims—none of hich comports ith this
Court’s clear dictate in pic stems.
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RECOMMENDED FOR FULL-TEXT PUBLICATION Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 18a0156p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
WILBUR MACY; PAMELA J. STOWE, ┐
Plaintiffs-Appellees, │ │ > No. 17-5593 v. │ │ │ GC SERVICES LIMITED PARTNERSHIP, │ Defendant-Appellant. │ ┘
Appeal from the United States District Court for the Western District of Kentucky at Louisville. No. 3:15-cv-00819—David J. Hale, District Judge.
Argued: January 23, 2018
Decided and Filed: July 30, 2018
Before: GIBBONS, WHITE, and STRANCH, Circuit Judges.
______
COUNSEL
ARGUED: William S. Helfand, LEWIS BRISBOIS BISGAARD & SMITH, Houston, Texas, for Appellant. James L. Davidson, GREENWALD, DAVIDSON RADBIL PLLC, Boca Raton, Florida, for Appellees. ON BRIEF: William S. Helfand, LEWIS BRISBOIS BISGAARD & SMITH, Houston, Texas, for Appellant. James L. Davidson, GREENWALD, DAVIDSON RADBIL PLLC, Boca Raton, Florida, for Appellees. ______
OPINION ______
HELENE N. WHITE, Circuit Judge. Plaintiffs Wilbur Macy and Pamela J. Stowe (Plaintiffs) brought this putative class action against GC Services Limited Partnership (GC), a
74 AMERICAN BANKRUPTCY INSTITUTE
No. 17-5593 Macy, et al. v. GC Servs. Ltd. P’ship Page 2 debt collector, alleging violations of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq. Plaintiffs alleged that GC, in attempting to collect debt owed by Plaintiffs to GC’s client, sent Plaintiffs letters that contained legally deficient warnings and advisories, in violation of Section 1692g of the FDCPA. GC moved to dismiss the action for lack of Article III standing, arguing that the alleged violations of the FDCPA do not constitute harm sufficiently concrete to satisfy the injury-in-fact requirement of standing. The district court denied GC’s motion and later certified the class. We granted GC’s petition for interlocutory review of the certification order and permitted GC to challenge Plaintiffs’ standing. We now AFFIRM the district court’s certification order and hold that Plaintiffs have Article III standing.
I. BACKGROUND
The facts are undisputed. Plaintiffs both received a letter from GC notifying them that their Synchrony Bank credit-card accounts had been referred to GC for collection. The letters contained the following statement about the procedure for obtaining verification of the debt and the name and address of the original creditor:
[I]f you do dispute all or any portion of this debt within 30 days of receiving this letter, we will obtain verification of the debt from our client and send it to you. Or, if within 30 days of receiving this letter you request the name and address of the original creditor, we will provide it to you in the event it differs from our client, Synchrony Bank.
(R. 1-1, PID 14; R. 1-2, PID 16.)
Plaintiffs assert that the letters were deficient because they failed to inform Plaintiffs that GC was obligated to provide the additional debt and creditor information only if Plaintiffs disputed their debts in writing. Plaintiffs filed a complaint on their own behalf and on behalf of a class of similarly situated individuals, alleging violations of two subsections of the FDCPA that impose notice requirements containing the in-writing provisions, 1692g(a)(4) and (5).
GC moved to dismiss the suit for lack of standing. In denying GC’s motion, the district court determined that GC’s letters created a “substantial” risk that consumers would waive important protections afforded to them by the FDCPA by following GC’s deficient instructions for obtaining verification of the debt or the identity of the original creditor.
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No. 17-5593 Macy, et al. v. GC Servs. Ltd. P’ship Page 3
GC reasserted its challenge to standing at the class-certification stage. The district court certified a class of Kentucky and Nevada consumers, rejecting GC’s argument that certain elements of Federal Rule of Civil Procedure 23 were not satisfied because Plaintiffs had not shown that each member of the class had standing. We granted GC’s petition for interlocutory review of the district court’s certification order.
On appeal, GC argues that: 1) Plaintiffs’ claims must be dismissed because Plaintiffs lack Article III standing, and 2) the district court abused its discretion by certifying the class “because the certified class is not limited to individuals who sustained a concrete injury.” (Appellant’s Br. at x.)
II. STANDING
A. Standard of Review
We “review a district court’s decision regarding a plaintiff’s Article III standing de novo.” Murray v. U.S. Dep’t of Treasury, 681 F.3d 744, 748 (6th Cir. 2012) (citation omitted).
B. Applicable Law
“Article III of the Constitution limits the judicial power of the United States to the resolution of ‘Cases’ and ‘Controversies,’ and ‘Article III standing . . . enforces the Constitution’s case-or-controversy requirement.’” Hein v. Freedom From Religion Found., Inc., 551 U.S. 587, 597–98 (2007) (alteration in original) (quoting DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 342 (2006)). A plaintiff must possess “‘such a personal stake in the outcome of the controversy’ as to warrant his invocation of federal-court jurisdiction and to justify exercise of the court’s remedial powers on his behalf.” Warth v. Seldin, 422 U.S. 490, 498–99 (1975) (quoting Baker v. Carr, 369 U.S. 186, 204 (1962)).
“[T]he irreducible constitutional minimum of standing contains three elements.” Lujan v. Defs. of Wildlife, 504 U.S. 555, 560 (1992). “First, the plaintiff must have suffered an ‘injury in fact’—an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical.” Id. (internal quotation marks and citations omitted). “Second, there must be a causal connection between the injury and the conduct
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No. 17-5593 Macy, et al. v. GC Servs. Ltd. P’ship Page 4 complained of—the injury has to be ‘fairly . . . trace[able] to the challenged action of the defendant, and not . . . th[e] result [of] the independent action of some third party not before the court.’” Id. at 560–61 (alteration in original) (quoting Simon v. Eastern Ky. Welfare Rights Org., 426 U.S. 26, 41–42 (1976)). “Third, it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.” Id. at 561 (internal quotation marks and citation omitted).
“Each element of standing ‘must be supported in the same way as any other matter on which the plaintiff bears the burden of proof, i.e., with the manner and degree of evidence required at the successive stages of the litigation.’” Fair Elections Ohio v. Husted, 770 F.3d 456, 459 (6th Cir. 2014) (quoting Lujan, 504 U.S. at 561). “Where, as here, a case is at the pleading stage, the plaintiff must ‘clearly . . . allege facts demonstrating’ each element.” Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547 (2016) (alteration in original) (footnote omitted) (quoting Warth, 422 U.S. at 518). Further, in class actions, “named plaintiffs who represent a class ‘must allege and show that they personally have been injured, not that injury has been suffered by other, unidentified members of the class to which they belong and which they purport to represent.’” Simon, 426 U.S. at 40 n.20 (quoting Warth, 422 U.S. at 502); see also O’Shea v. Littleton, 414 U.S. 488, 494 (1974).
Here, GC challenges Plaintiffs’ ability to demonstrate the first standing requirement— injury in fact.
C. Injury in Fact and Spokeo
The Supreme Court in Lujan stated that injury in fact “may exist solely by virtue of statutes creating legal rights, the invasion of which creates standing.” 504 U.S at 578 (citation and internal quotation marks omitted). However, after Lujan, courts divided over whether a statutory violation, in and of itself, is sufficient to establish injury in fact; the Supreme Court addressed the issue in Spokeo. See 136 S. Ct. at 1549.1 The Court held that a plaintiff does not
1Spokeo involved alleged violations of the federal Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq. The purpose of the FCRA is to guarantee “fair and accurate credit reporting.” Id. § 1681(a)(1). To that end, the statute imposes several requirements concerning the creation and use of consumer reports, including that consumer-reporting agencies must “follow reasonable procedures to assure maximum possible accuracy of the
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“automatically satisf[y] the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right” because “Article III standing requires a concrete injury even in the context of a statutory violation.” Id. Thus, a plaintiff does not satisfy the standing requirement by alleging a “bare procedural violation” of a statute. Id. Rather, to establish injury in fact, a plaintiff must allege that the procedural statutory violation caused the plaintiff to suffer some harm that “actually exist[s]”; there must be an injury that is “real” and not “abstract” or merely “procedural.” Id. at 1548–49 (internal quotation marks omitted).
However, the Court went on to explain that a “violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury in fact,” and “in such a case [a plaintiff] need not allege any additional harm beyond the one Congress has identified.” Id. at 1549. The Court also explained that both tangible and intangible injuries, as well as a “risk of real harm” could “satisfy the requirement of concreteness.” Id.2
Applying this framework to the claim before it, the Court stated:
On the one hand, Congress plainly sought to curb the dissemination of false information by adopting procedures designed to decrease that risk. On the other hand, Robins cannot satisfy the demands of Article III by alleging a bare procedural violation. A violation of one of the FCRA’s procedural requirements may result in no harm. For example, even if a consumer reporting agency fails to provide the required notice to a user of the agency’s consumer information, that information regardless may be entirely accurate. In addition, not all inaccuracies cause harm or present any material risk of harm. An example that comes readily to mind is an incorrect zip code. It is difficult to imagine how the dissemination of an incorrect zip code, without more, could work any concrete harm.
Id. at 1550. Ultimately, the Court remanded the case without deciding whether Robins had adequately alleged injury in fact.
information” contained within consumer reports. Id. § 1681e(b). In his complaint, Robins alleged that Spokeo willfully failed to comply with the FCRA because Spokeo, a “people search engine” that gathers and provides information about an individual’s address, phone number, marital status, approximate age, occupation, finances, shopping habits, etc., collected and disseminated incorrect information about Robins. Spokeo’s profile of Robins stated that Robins was married, had children, was in his 50s, had a job, was relatively affluent, and held a graduate degree. According to Robins, this information was entirely inaccurate. 2Spokeo noted that “[i]n determining whether an intangible harm constitutes injury in fact, both history and the judgment of Congress play important roles.” 136 S. Ct. at 1549.
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Unsurprisingly, the parties present diverging interpretations of Spokeo.3 Plaintiffs argue that they need not allege any “additional harm beyond the one Congress has identified.” GC, on the other hand, argues that “accusations of procedural violations of a statute, without a concrete injury, do not confer standing,”4 and that standing exists only when a plaintiff alleges an injury beyond the harm to a statutory interest identified by Congress. We disagree.
A long line of Supreme Court precedent, cited approvingly in Spokeo, supports the conclusion that Spokeo did not mean to disturb the Court’s prior opinions recognizing that a direct violation of a specific statutory interest recognized by Congress, standing alone, may constitute a concrete injury without the need to allege any additional harm. See Spokeo, 136 S. Ct. at 1549 (“Congress may ‘elevat[e] to the status of legally cognizable injuries concrete, de facto injuries that were previously inadequate in law.’” (alteration in original) (quoting Lujan, 504 U.S. at 578)); id. (“‘Congress has the power to define injuries and articulate chains of causation that will give rise to a case or controversy where none existed before.’” (quoting Lujan, 504 U.S. at 580 (Kennedy, J., concurring))); id. (“[T]he violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury in fact. In other words, a plaintiff in such a case need not allege any additional harm beyond the one Congress has identified.” (citing Fed. Election Comm’n v. Akins, 524 U.S. 11, 20–25 (1998); Pub. Citizen v. Dep’t of Justice, 491 U.S. 440, 449 (1989))). But the injury must be “both concrete and particularized.” Id. at 1548 (citing Summers v. Earth Island Institute, 555 U.S. 488, 493 (2009)).
As the Second Circuit recognized in Strubel v. Comenity Bank, 842 F.3d 181 (2d Cir. 2016), the Supreme Court’s citation to Lujan and Summers is “instructive” because “[t]hese cases indicate that, to determine whether a procedural violation manifests injury in fact, a court properly considers whether Congress conferred the procedural right in order to protect an
3The leading treatise observes “[t]he persisting obscurity of doctrine in this area,” and notes that Spokeo “does little to relieve the uncertainty surrounding the Article III theories that limit Congressional authority to create a new legal right, invasion of which supports standing.” 13B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 3531.13 (3d ed. 2017). 4Specifically, GC argues that Plaintiffs “clearly allege no more than an observed procedural violation of the FDCPA, [and] it is abundantly clear that a ‘bare procedural violation, divorced from any concrete harm’ does not satisfy the concrete injury requirement of Article III of the United States Constitution.” (Appellant’s Br. at 11 (quoting Spokeo, 136 S. Ct. at 1549).)
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individual’s concrete interests.” Id. at 189. Thus, Spokeo does not “categorically . . . preclude[] violations of statutorily mandated procedures from qualifying as concrete injuries”; rather,
where Congress confers a procedural right in order to protect a concrete interest, a violation of the procedure may demonstrate a sufficient “risk of real harm” to the underlying interest to establish concrete injury without “need [to] allege any additional harm beyond the one Congress has identified.”
Id. (citing Spokeo, 136 S. Ct. at 1549). However, “in the absence of a connection between a procedural violation and a concrete interest, a bare violation of the former does not manifest injury in fact.” Id.
On remand from the Supreme Court, the Ninth Circuit in Robins v. Spokeo, Inc., 867 F.3d 1108 (9th Cir. 2017) (“Spokeo II”), cert. denied, 138 S. Ct. 931 (2018), adopted Strubel’s understanding of Spokeo as “instruct[ing] that an alleged procedural violation [of a statute] can by itself manifest concrete injury where Congress conferred the procedural right to protect a plaintiff’s concrete interests and where the procedural violation presents a risk of real harm to that concrete interest.” Spokeo II, 867 F.3d at 1113 (second alteration in original) (internal quotations marks omitted) (quoting Strubel, 842 F.3d at 190). This test, the Ninth Circuit said, “best elucidates the concreteness standards articulated by the Supreme Court in Spokeo.” Id. Thus, relying on Strubel, Spokeo II held that courts confronting claims based on procedural violations must “ask: (1) whether the statutory provisions at issue were established to protect [a] concrete interest[] (as opposed to purely procedural rights), and if so, (2) whether the specific procedural violations alleged in this case actually harm, or present a material risk of harm to, such interests.” Id.5
5Other circuits have suggested similar interpretations of Spokeo. See, e.g., Dreher v. Experian Info. Sols., Inc., 856 F.3d 337, 346 (4th Cir. 2017) (holding that concrete harm may be shown by FCRA violation that causes a plaintiff to “suffer[] . . . the type of harm Congress sought to prevent when it enacted the FCRA”). But see Braitberg v. Charter Commc’ns, Inc., 836 F.3d 925 (8th Cir. 2016) (affirming the dismissal of a complaint alleging violations of the Cable Communications Privacy Act for lack of standing, concluding that the risk of harm is insufficient); Nicklaw v. Citimortgage, Inc., 839 F.3d 998, 1002–03 (11th Cir. 2016). In Nicklaw, the Eleventh Circuit held that a plaintiff, alleging a violation of New York’s prompt-recording statute, did not have “standing to sue when he allege[d] only a failure to record a satisfaction of mortgage within a statutory period and fail[ed] to bring suit until after that statutory violation ha[d] been remedied.” 839 F.3d at 1000. The court rejected the argument that “the intangible harm that occurs when the discharge of a mortgage is not timely recorded constitutes a concrete injury” even if the “legislature intended to create a substantive right to have the certificate of discharge timely recorded.” Id. at 1002. As explained infra, however, this court in Lyshe v. Levy, 854 F.3d 855 (6th Cir.
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The Sixth Circuit has also had occasion to interpret and apply Spokeo. In Soehnlen v. Fleet Owners Ins. Fund, 844 F.3d 576, 580–82 (6th Cir. 2016), we held that the plaintiffs lacked standing where they alleged that a health plan “fail[ed] to comply with the [Patient Protection and Affordable Care Act] provisions enjoining annual and life-time limitations on benefits” because the named “[p]laintiffs never show[ed] precisely what concrete harm they suffer[ed],” alleging only “in extreme generality, that certain members of their class suffer[ed] from conditions that [had] previously required medical expenses in excess of the benefit caps.” We nevertheless “recognize[d] that the Supreme Court acknowledged that non-tangible injuries, including violations of statutory rights, may satisfy the constitutional showing of an injury-in- fact.” Id. at 582. Recently, we applied Spokeo to alleged FDCPA violations in Lyshe v. Levy, 854 F.3d 855 (6th Cir. 2017), and although finding no standing in that case, we noted that “Spokeo allows for a bare procedural violation to create a concrete harm” in cases alleging “failure to comply with a statutory procedure that was designed to protect against the harm the statute was enacted to prevent.” Id. at 859; see also id. at 860 (citing with approval Strubel’s conclusion that “a plaintiff may establish standing based on an alleged procedural violation if Congress conferred that procedural right to protect a plaintiff’s concrete interest and if that violation presents a [material] risk of harm to that interest”).
In sum, Spokeo categorized statutory violations as falling into two broad categories: (1) where the violation of a procedural right granted by statute is sufficient in and of itself to constitute concrete injury in fact because Congress conferred the procedural right to protect a plaintiff’s concrete interests and the procedural violation presents a material risk of real harm to that concrete interest; and (2) where there is a “bare” procedural violation that does not meet this standard, in which case a plaintiff must allege “additional harm beyond the one Congress has identified.” Spokeo, 136 S. Ct. at 1549.
2017), made clear that an alleged procedural violation of a statute may give rise to a sufficiently concrete injury for standing purposes when the violation presents a real risk of harm to a plaintiff’s interest that Congress sought to protect.
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D. Analysis
Congress enacted the FDCPA because of “abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors” that “contribute to the number of personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy.” 15 U.S.C. § 1692(a). Thus, the FDCPA’s purpose “is to protect consumers from a host of unfair, harassing, and deceptive debt collection practices,” S. Rep. No. 95-382, at 2 (1977), and to “eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.” 15 U.S.C. § 1692(e); see also Barany-Snyder v. Weiner, 539 F.3d 327, 332 (6th Cir. 2008) (“As this court has noted, the FDCPA is extraordinarily broad, crafted in response to what Congress perceived to be a widespread problem.” (citation and internal quotation marks omitted)); Hamilton v. United Healthcare of La., Inc., 310 F.3d 385, 392 (5th Cir. 2002) (“Congress, through the FDCPA, has legislatively expressed a strong public policy disfavoring dishonest, abusive, and unfair consumer debt collection practices, and clearly intended the FDCPA to have a broad remedial scope.”).
To advance these goals, the FDCPA codified several specific consumer-protective rights, including those in Section 1692g, which sets out requirements for a debt collector’s “initial communication with a consumer in connection with the collection of any debt,” including that the communication notify the consumer of the right to dispute the debt and to seek verification of the validity of the debt through written notice and request to the creditor. 15 U.S.C. § 1692g(a). If the debtor makes such a written verification request, the debt collector must cease collection efforts until the verification is provided to the consumer. Id. § 1692g(b). Specifically, Section 1692g(a) requires a debt collector to provide a consumer with a notice that contains:
(4) a statement that if the consumer notifies the debt collector in writing within [a] thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and
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(5) a statement that, upon the consumer’s written request within [a] thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.
15 U.S.C. § 1692g(a) (emphases added).6 And Section 1692g(b) provides that
[i]f the consumer notifies the debt collector in writing within the thirty-day period . . . that the debt, or any portion thereof, is disputed, or that the consumer requests the name and address of the original creditor, the debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt or a copy of a judgment, or the name and address of the original creditor, and a copy of such verification or judgment, or name and address of the original creditor, is mailed to the consumer by the debt collector.
Id. § 1692g(b).
Significantly, the FDCPA gives consumers a private right of action to enforce its provisions against debt collectors. 15 U.S.C. § 1692k(a).
Assuming arguendo that the language of GC’s letters constitutes a procedural violation of the FDCPA, Plaintiffs have demonstrated a sufficient “risk of real harm” to the underlying interest to establish concrete injury without the “need [to] allege any additional harm beyond the one Congress has identified.” Spokeo, 136 S. Ct. at 1549.
As the Second Circuit explained, “Section 1692g furthers th[e] purpose [of protecting debtors from abusive debt collection practices] by requiring a debt collector who solicits payment from a consumer to provide that consumer with a detailed validation notice, which allows a consumer to confirm that he owes the debt sought by the collector before paying it.” Papetti v. Does 1-25, 691 F. App’x 24, 26 (2d Cir. 2017). Importantly, “[t]he aim of § 1692g is to provide a period for the recipient of a collection letter to consider her options. It is also to make the rights and obligations of a potentially hapless debtor as pellucid as possible.” Jacobson v. Healthcare Fin. Servs., Inc., 516 F.3d 85, 95 (2d Cir. 2008); see also Zirogiannis v. Seterus, Inc., 707 F. App’x 724, 727 (2d Cir. 2017) (“We have no trouble concluding that § 1692g of the
6This notice must be either contained in the “initial communication with a consumer” or provided within five days of such communication. 15 U.S.C. § 1692g(a). It is undisputed that GC did not inform Plaintiffs that they must dispute their debt in writing. GC, however, does not concede that the omission of the in-writing requirement constitutes a violation of the FDCPA, and we express no opinion on that issue.
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FDCPA ‘protect[s] an individual’s concrete interests. . . . Congress plainly sought to protect consumers’ concrete economic interests by requiring debt collectors to comply with the notice provisions articulated in § 1692g.” (citation omitted)).
GC’s letters present a risk of harm to the FDCPA’s goal of ensuring that consumers are free from deceptive debt-collection practices because the letters provide misleading information about the manner in which the consumer can exercise the consumer’s statutory right to obtain verification of the debt or information regarding the original creditor. In responding to a debt- collection notice, an oral inquiry or dispute of a debt’s validity has different legal consequences than a written one. See Camacho v. Bridgeport Fin. Inc., 430 F.3d 1078, 1082 (9th Cir. 2005) (noting that Section 1692g “assigns lesser rights to debtors who orally dispute a debt and greater rights to debtors who dispute it in writing”); Hooks v. Forman, Holt, Eliades & Ravin, LLC, 717 F.3d 282, 286 (2d Cir. 2013) (“Debtors can protect certain basic rights through an oral dispute, but can trigger a broader set of rights by disputing a debt in writing.”). If a consumer contests a debt by telephone rather than in writing, the consumer loses most of the protections for debtors set forth in Section 1692g7; the debt-collection agency is under no obligation to verify the debt and to cease all collection efforts as required by §1692g(b).
Plaintiffs allege in their complaint:
33. Defendant’s misstatement of the rights afforded by the FDCPA would cause the least-sophisticated consumer[8] to understand, incorrectly, that validation of the debt, or a request for the name and address of the original creditor, could be obtained through an oral request, or by means other than in writing. Such a misunderstanding could lead the least-sophisticated consumer to waive or otherwise not properly vindicate her rights under the FDCPA.
34. Indeed, failing to dispute the debt in writing, or failing to request the name and address of the original creditor, in writing, would cause a consumer to waive the important protections afforded by 15 U.S.C. § 1692g(b)—namely, that a debt collector cease contacting the consumer until the debt collector provides the
7If consumers contest a debt orally, they may still dispute the debt, 15 U.S.C. § 1692g(a)(3), but they do not invoke their rights under Sections 1692g(a)(4), (a)(5), and (b), at issue here. 8The FDCPA is a strict liability statute that is liberally construed in favor of the consumer and courts evaluate FDCPA claims under the “least sophisticated consumer” standard. Stratton v. Portfolio Recovery Assocs., LLC, 770 F.3d 443, 448–50 (6th Cir. 2014).
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consumer with verification of the alleged debt and/or the original creditor’s name and address, as requested.
(R. 1, PID 6-7.)
Thus, Plaintiffs allege a risk of harm that is traceable to GC’s purported failure to comply with federal law, namely, the possibility of an unintentional waiver of FDCPA’s debt-validation rights, including suspension of collection of disputed debts under Section 1692g(b). Without the information about the in-writing9 requirement, Plaintiffs were placed at a materially greater risk of falling victim to “abusive debt collection practices.” 15 U.S.C. § 1692(e); see also Anarion Invs. LLC v. Carrington Mortg. Servs., LLC, 794 F.3d 568, 572 n.2 (6th Cir. 2015) (noting that debt-collector abuse takes many forms, “including . . . misrepresentation of a consumer’s legal rights”). And, as the FDCPA declares, its purpose is to eliminate such abusive practices. 15 U.S.C. § 1692(e). To that end, the FDCPA grants a private right of action to a consumer who receives a defective communication. Id. § 1692k.
GC advances several arguments in response. First, GC argues that “the undisputed evidence forecloses any finding of standing because it is undisputed [GC] follows a policy of honoring verbal disputes of debts for obtaining debt verification and verbal requests for the name and address of the original creditor exactly as it does disputes or requests made in writing.” (Appellant’s Br. at 14-15 (citing Decl’n of Mark Schordock, Executive Vice President of GC’s Operations, R. 25-1, PID 245-247).) However, when considering whether pleadings fail to make out a justiciable case for want of standing, our analysis must be confined to the four corners of the complaint. Parsons v. U.S. Dep’t of Justice, 801 F.3d 701, 706 (6th Cir. 2015). GC’s policy is beyond the four corners of the complaint. Further, our task is merely to determine whether Plaintiffs’ complaint adequately establishes standing such that they are entitled to an adjudication of their asserted claims. GC improperly asks us to examine issues that pertain to liability and damages. See Rocky Mountain Helium, LLC v. United States, 841 F.3d 1320, 1325 (Fed. Cir.
9Congress distinguished between FDCPA protections that may be triggered orally (such as those in Section 1692g(a)(3)), and those that may only be invoked in writing (such as the ones in Sections 1692g(a)(4), (a)(5), and (b)).
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2016) (“[A] merits determination is not a permissible one for the standing analysis, which assumes the merits of a litigant’s claim.”).
GC next argues that its failure to include the in-writing requirement never materialized into actual harm.10 However, as explained, Plaintiffs may satisfy the concreteness prong of the injury-in-fact requirement of Article III standing by alleging that GC’s purported FDCPA violations created a material risk of harm to a congressionally recognized interest. The FDCPA’s requirement that debt collectors “not use any false, deceptive, or misleading representation or means in connection with the collection of any debt” is a core object of the FDCPA, which aims to “eliminate abusive debt collection practices by debt collectors.” 15 U.S.C. § 1692(e). Including a materially false, deceptive, or misleading statement in a debt- collection communication may cause an individual “to lose the very . . . rights that the law affords him.” Strubel, 842 F.3d at 190. And the communication here risked just that – without the required notice of the in-writing requirement, consumers risked waiving important verification rights under Section 1692g(a)(4) and (a)(5) and their right to suspension of collection of disputed debts pending verification under Section 1692g(b). Accordingly, “[h]aving alleged such procedural violations, [Plaintiffs were] not required to allege ‘any additional harm’ to demonstrate the concrete injury necessary for standing,” id. at 191 (quoting Spokeo, 136 S. Ct. at 1549), and GC’s claim that Plaintiffs have not alleged a concrete injury because they did not identify actual harm stemming from GC’s defective notices fails.
GC next invokes Clapper v. Amnesty Int’l USA, 568 U.S. 398 (2013), arguing that “a ‘possible future injury,’ which is the most [Plaintiffs] have alleged, even one that is concrete and particularized, is not imminent and does not confer standing.” (Appellant’s Br. at 10.) Clapper, however, is distinguishable. Clapper focused on allegations by attorneys and journalists who feared government surveillance of their communications with clients and sources in foreign countries. 568 U.S. at 406–07. The plaintiffs had curtailed telephone and electronic
10Specifically, GC argues that Plaintiffs “do not show, or even argue, the challenged letters led them to waive any right(s) under the FDCPA, or caused them any confusion or inconvenience. [Plaintiffs do not] allege they wished to dispute their debt or that they wished to request [that GC] provide the name and address of the original creditor. Indeed, the identity of the original creditor is not even relevant as [Plaintiffs] allege the original creditor is Synchrony Bank, who engaged [GC].” (Appellant’s Br. at 14.)
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In Clapper, the plaintiffs sought to establish standing on the basis of harm they would supposedly suffer from threatened conduct that had not happened yet but which they believed was reasonably likely to occur—specifically on their belief that “some of the people with whom they exchange[d] . . . information [were] likely targets of surveillance” under a federal statute. Id. at 1145 (emphasis added). The plaintiffs sought to strike down the statute authorizing such surveillance in order to remove the threat that their communications would eventually be intercepted. Id. at 1145–46. The question for the Court was how certain such predicted surveillance needed to be in order to create an injury in fact. In such a case, the Supreme Court explained that a plaintiff cannot show injury-in-fact unless the “threatened injury [is] certainly impending” as opposed to merely speculative. Id. at 1147–48 (emphasis added) (internal quotation marks omitted). ***
Clapper’s discussion of what must be shown to establish standing based on anticipated conduct or an anticipated injury is therefore beside the point. Clapper did not address the concreteness of intangible injuries like the one [Plaintiff] asserts, and the Court in [Spokeo] did not suggest that Congress's ability to recognize such injuries turns on whether they would also result in additional future injuries that would satisfy Clapper. Many previous Supreme Court cases recognize that such statutorily recognized harms alone may confer standing (without additional resulting harm), none of which the Court purported to doubt or to overrule in [Spokeo].
Spokeo II, 867 F.3d at 1118 (citations omitted; first through fourth alterations in original).
GC next relies on Lyshe in arguing that we have already “applied Spokeo to a claim under the FDCPA and found no standing where, as here, the plaintiff did not sustain a concrete injury.” (Appellant’s Br. at 11.) In Lyshe, the alleged FDCPA violation arose when the defendants, in the course of attempting to collect the plaintiff’s debt in state court, “made misstatements in their discovery requests about state procedural rules.” 854 F.3d at 859. Specifically, the defendants told the plaintiff that his responses to their requests for admission needed to be sworn and
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notarized, when in fact they did not. Id. at 857. The defendants also allegedly failed to serve their discovery requests in an electronic format, although they offered to do so upon request. Id. We held that those alleged violations, standing alone, did not state a concrete harm, reasoning that “the procedural violation alleged here—a violation of state law procedure not required under FDPCA,” at most could have caused the plaintiff to “visit a notary and contact Appellees to obtain electronic copies of the discovery,” which “was not the type of harm the FDCPA was designed to prevent.” Id. at 859. Thus, Lyshe is distinguishable. Here, the harm Plaintiffs allege—being misled by a debt collector about the rights the FDCPA gives to debtors—is precisely the type of harm—abusive debt-collection practices—the FDCPA was designed to prevent.
Nor is Hagy v. Demers & Adams, 882 F.3d 616 (6th Cir. 2018), our most recent opinion addressing FDCPA standing, of any help to GC. Hagy involved a claim alleging violations of the FDCPA based on a letter that failed to disclose that it was a “communication . . . from a debt collector.” Id. at 621-23. In dismissing the claim on standing grounds, we observed that the plaintiffs “have not shown, in truth have not even tried to show, that this failure to disclose caused them any actual harm beyond [a] ‘bare procedural violation.’” Id. at 622. In fact, the allegedly deficient letter turned out to be helpful to the plaintiffs. Id. To be sure, Hagy did not conduct a risk-of-harm analysis, but no risk of harm was alleged. Indeed, Hagy explained that the claim failed in part because the plaintiffs did not allege any risk of harm, such as “that the non-disclosure created a risk of double payment,” which is the kind of abusive debt-collection practice the mandated disclosures were aimed to prevent. Id. at 621–22. Thus, Hagy is not inconsistent with Lyshe, Strubel, Spokeo II, or our decision here.
Finally, GC argues that “[t]he district court incorrectly found standing based on potential harm to class members instead of” to the two named Plaintiffs. (Appellant’s Br. at 15-17.) GC is correct that potential class representatives must demonstrate “individual standing vis-a-vis the defendant; [they] cannot acquire such standing merely by virtue of bringing a class action.” Fallick v. Nationwide Mut. Ins. Co., 162 F.3d 410, 423 (6th Cir. 1998). However, we conclude de novo that the named Plaintiffs have standing, thus, even if the district court found standing
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In sum, Plaintiffs have satisfied the concreteness prong of the injury-in-fact requirement of Article III standing by alleging that GC’s purported FDCPA violations created a material risk of harm to the interests recognized by Congress in enacting the FDCPA.
III. CLASS CERTIFICATION
A. Standard of Review
We “review the district court’s decision to grant or deny class certification under an abuse-of-discretion standard.” Rikos v. Procter & Gamble Co., 799 F.3d 497, 504 (6th Cir. 2015) (citation omitted). “An abuse of discretion occurs if the district court relies on clearly erroneous findings of fact, applies the wrong legal standard, misapplies the correct legal standard when reaching a conclusion, or makes a clear error of judgment.” Young v. Nationwide Mut. Ins. Co., 693 F.3d 532, 536 (6th Cir. 2012). In the class action context, a district court is given “substantial discretion in determining whether to certify a class, as it possesses the inherent power to manage and control its own pending litigation.” Rikos, 799 F.3d at 504 (citation and internal quotation marks omitted). Therefore, our review is “very limited”; we may reverse “only if a strong showing is made that the district court clearly abused its discretion.” Young, 693 F.3d at 536 (citation omitted).
B. Applicable Law
To merit certification, a putative class must satisfy the four requirements of Rule 23(a):
(1) numerosity (a class [so large] that joinder of all members is impracticable); (2) commonality (questions of law or fact common to the class); (3) typicality (named parties’ claims or defenses are typical . . . of the class); and (4) adequacy of representation (representatives will fairly and adequately protect the interests of the class).
Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 613 (1997) (alterations in original) (internal quotation marks omitted). A putative class must also fit within one of the three types of classes listed in Rule 23(b). The only type relevant here is Rule 23(b)(3), which permits a class to be
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certified where “the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Fed. R. Civ. P. 23(b)(3).
C. Analysis
GC’s opposition to certification rests primarily on its contention that Plaintiffs lack standing. Thus, having rejected GC’s standing argument, we reject GC’s class certification challenge as well.
GC argues that “there is no commonality as [Plaintiffs] have failed in their burden to demonstrate any injury at all.” (Appellant’s Br. at 18-19, 21.)11 The district court found that Plaintiffs satisfied the commonality requirement because, as Plaintiffs alleged,
“[e]ach class member . . . has the same claim against” [GC]: that the company violated the FDCPA by failing to include the in-writing requirement in the debt- collection letters it sent to them[, and the] [r]esolution of this “common contention . . . will resolve an issue that is central to the validity of each one of the claims in one stroke.” [Wal-Mart Stores, Inc. v.] Dukes, 564 U.S. [338,] 350 [(2011)].
Macy v. GC Servs. Ltd. P’ship, 318 F.R.D. 335, 339 (W.D. Ky. 2017) (record citations omitted). As the district court noted, “[r]eceipt of similar dunning letters from the same debt collector has repeatedly been found to satisfy Rule 23’s commonality requirement.” Id. (citing Fariasantos v. Rosenberg & Assocs., 303 F.R.D. 272, 275 (E.D. Va. 2014); Edwards v. McCormick, 196 F.R.D. 487, 494 (S.D. Ohio 2000)). Other FDCPA cases also support the district court’s finding regarding commonality. See, e.g., Quiroz v. Revenue Prod. Mgmt., Inc., 252 F.R.D. 438, 442 (N.D. Ill. 2008) (“The requisite common nucleus of operative fact exists in FDCPA claims when the controversy arises from a standard form debt collection letter.” (citations omitted)); Bicking, 2011 WL 5325674, at *2; Wess v. Storey, No. 08-623, 2011 WL 1463609, at *7 (S.D. Ohio Apr.
11Specifically, GC contends that “because “neither [Plaintiff] presented any allegation or evidence that either sustained the same risk; neither alleged either disputed the debt, sought to verify the debt, or sought the name and address of the original creditor. In fact, there was no actual risk to either because it is undisputed they made no effort to contact [GC].” (Appellant’s Br. at 18-19.)
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No. 17-5593 Macy, et al. v. GC Servs. Ltd. P’ship Page 18
14, 2011). Apart from merely repackaging its standing argument with a commonality label, GC makes no effort to argue that the district court abused its discretion.
The same is true of GC’s argument regarding adequacy, (Appellant’s Br. at 21 (“The record does not support the district court’s implied finding that [Plaintiffs] have a common interest with the members of the class because neither [Plaintiff] alleged an injury in fact.”)), and typicality, (id. at 18 (“Here, there is clearly no typicality. As already shown, [Plaintiffs] have not alleged they sustained any injury as a result of the wording of the letters.”)). GC’s argument regarding predominance is also a derivative of its standing argument. (Id. at 22-23 (“[E]ach individual would have to prove he or she contacted [GC] by a non-written means to dispute his or her debt or request the name and address of his or her original creditor to prove he or she suffered the requisite ‘concrete and particularized’ injury. There is no evidence all of the class members sustained a concrete injury.”).)
Thus, because GC failed to demonstrate that the district court abused its discretion, we will not disturb the district court’s grant of class certification.
IV. CONCLUSION
We AFFIRM the district court’s grant of class certification and hold that Plaintiffs have Article III standing.
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TEN TIPS ON WINNING SPOKEO CHALLENGES IN FDCPA LITIGATION https://library.nclc.org/ten-tips-winning-spokeo-challenges-fdcpa-litigation By Carolyn Carter April 25, 2018
The Supreme Court’s 2016 decision in Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547, 194 L. Ed. 2d 635 (2016), continues to bedevil FDCPA cases. In Spokeo, the Supreme Court vacated a Ninth Circuit decision that held that a litigant had standing under Article III of the Constitution to pursue a Fair Credit Reporting Act claim. The Court remanded the case to the Ninth Circuit to evaluate whether the litigant had alleged a sufficiently “concrete” injury to constitute an injury-in-fact, and it sketched out some of the criteria for determining when an intangible injury is concrete.
Since Spokeo, a motion to dismiss for lack of Article III jurisdiction can be expected in almost every FDCPA case. Even if the defendant has not made such a motion, Article III goes to subject matter jurisdiction, so the court—even a court of appeals—can raise the issue sua sponte.
The first two years of decisions applying Spokeo to FDCPA claims have overwhelmingly found standing. However, several of the favorable circuit-level decisions are unreported, and, of the five reported decisions, two—both from the Sixth Circuit—find a lack of standing. Consumer attorneys risk not only losing a case but also undermining the viability of FDCPA claims in their circuit if they do not prepare FDCPA cases with Spokeo in mind and brief the Spokeo issues carefully.
NCLC’s new Fair Debt Collection (9th ed. March 2018) (2 vol. 1774 pp.) contains a new § 11.10 that analyzes in depth all FDCPA Spokeo court decisions. NCLC has also just updated that print edition’s analysis with almost 100 new Spokeo decisions, making the treatise’s digital version virtually up-to-the-minute. This article provides ten practice pointers on overcoming Spokeo challenges, with live links to Fair Debt Collection’s updated digital version, including the 100 new cases.
Tip # 1: Carefully Interview the Client Concerning Any Type of Harm Suffered
Always interview the consumer in detail about all harm caused by the FDCPA violation. Consumers may be reluctant to confess the fear that a collection effort caused them, or
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to admit how con used they were so may not volunteer this in ormation See 2 1 2 2 2 ut many C decisions hold that intangi le harms such as con usion wasted time and annoyance and emotional distress are concrete harms that meet rticle re uirements See 11 10
C statutory damages are availa le without proo o actual damages and in Spo eo the Supreme Court agreed that some statutory claims might amount to cases or controversies over which courts have rticle jurisdiction even i the plainti su ered no damages Spo eo 1 6 S Ct at 1 owever a case will e much stronger and much more li ely to avoid dismissal on rticle grounds i the plainti can present some harm ecause o the C violation
Tip 2 is o arm ay e Su icient ven hen There s No ctual arm
Spo eo makes it crystal clear that a “risk of real harm” can be sufficiently concrete to meet rticle re uirements See 11 10 2 11 10 lways identi y the ris s o harm that low rom the C violation where there is little or no actual harm or e ample i the violation involves a alse or misleading statement what harm might e all a consumer who relies on the statement the violation involves non disclosure what harm is the disclosure intended to prevent hat ris s o harm does disclosure o a de t to a third party create
Tip lead arm or is o arm with Speci icity
the consumer su ered any type o harm tangi le or intangi le plead it with speci icity and e prepared to prove it the violation caused a ris o harm plead that too and loo or acts or legislative history that show that the ris is signi icant and the harm real
Tip Loo or Tort nalogs
ccording to the Supreme Court one way to show that an intangi le harm is su iciently concrete is if it has “a close relationship to a harm that has traditionally een regarded as providing a basis for a lawsuit in English or American courts.” Spo eo 1 6 S Ct at 1 any C violations have common law tort analogs such as invasion o privacy raud slander malicious prosecution and a use o process See 11 10 11 10 to 11 10 12 denti y any common law tort analogs e ore iling the suit and rame the allegations to highlight the similarities etween any intangi le harms that may e caused y the C violation and the harms that common law torts ma e actiona le
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ip tress nformational n uries
n pokeo the upreme ourt cited with approval to two of its earlier decisions that held that denial of information that ongress re uires to be provided is a concrete in ury that meets Article re uirements. pokeo . t. at – . any A provisions include a disclosure re uirement or prohibit deception. ighlight these in the complaint and be prepared to argue that they involve informational in uries that satisfy the concreteness re uirement of Article . ee . . . . .
Tip # 6: Play It Safe: Don’t Just Argue That Any FDCPA Violation by Itself Meets Article III e uirements
he pokeo Court held that Congress’s judgment in making a violation actionable is entitled to weight in evaluating whether a claim meets Article re uirements “Congress is well positioned to identify intangible harms that meet minimum Article III re uirements and its udgment is also instructive and important.” pokeo . t. at . A number of courts follow this statement and hold that any or almost any A violation meets Article III’s requirements simply because Congress determined that the violation should be actionable.
owever two of the five reported circuit decisions specifically re ect this argument. ee . . . . . . . . henever possible supplement this argument with other reasons that the plaintiff has standing for e ample that the plaintiff has suffered some actual harm that there is a risk of real harm from the violation that the violation involves an informational in ury or that the harm has a close relationship to one actionable at common law.
ip how hat the ight reated by the A s ubstantive
n pokeo, the Supreme Court drew a distinction between “procedural” rights and “substantive” rights. This distinction is important because the Court stated that, at least in some circumstances, deprivation of a “bare procedural right” without some other concrete harm would not establish standing. pokeo . t. at . henever possible show that the A protections that the defendant violated are substantive. Some courts have concluded from the Supreme Court’s opinion that, as long as a right created by the A can be characteri ed as substantive the plaintiff has standing without the need to allege any other concrete harm. ee . . . .
ip n a lass Action the amed laintiff hould llustrate the arm the A iolation an ause
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Most courts hold that, in a class action, only the class representative need establish Article III standing. See . . . . Choose a named plaintiff whose facts illustrate the harm the violation can cause. f course, there is some danger that tying the named plaintiff’s claim too closely to some particular harm he or she has suffered will lead the court to conclude that the class representative’s claim is not typical of those of the class, or that there are too many individual issues to allow class certification. If the named plaintiff’s particular injuries can be presented in a way that merely illustrates the concreteness of the harm caused to that individual, and not as an integral part of the claim that is asserted on behalf of the class, there will be fewer problems with class certification.
Tip # : Cases with Strong Substantive Claims Fare etter in Spokeo Challenges
In evaluating whether to file or appeal a case, consider not only the intricacies of Spokeo and the many decisions interpreting it, but also whether the complaint smacks of something serious or something trivial. FDCPA claims fare better against Spokeo challenges when the violation relates to a core purpose of the FDCPA that can be supported with legislative history. See . , App . A. .
valuating Spokeo issues is particularly important before deciding to appeal a case. specially if the circuit has not yet addressed the specific Spokeo issue that the appeal will raise, appeal only strong cases that present easily recogni able substantive wrongs. The materiality standard that some courts require in FDCPA cases see . . is a good initial screening criterion. Also obtain at least one second opinion from another attorney about whether the case presents the Spokeo issues in a favorable light.
Tip # : now our Circuit
Despite there already being hundreds of case decisions, case law interpreting Spokeo is still in the early stages of development. Many circuits have not yet applied Spokeo to any FDCPA claims. Before appealing a case, research not only your circuit’s decisions applying Spokeo to FDCPA claims, but also any decisions applying it to other consumer protection claims, such as claims under the Fair Credit eporting Act or the Truth in ending Act. See Fair Debt Collection . . ; NCLC’s Fair Credit eporting . . . NCLC’s Truth in ending . . a. ; and NCLC’s Foreclosures and Mortgage Servicing . . . . SPA claims .
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96 For WhomtheStatuteTolls Cohen, Todd, Kite&Stanford, LLC;Cincinnati Richard Nelson Standing Chapter13Trustee; SouthBend,Ind. Debra Miller Branson Law;Orlando Robert Branson (D.Ariz.);Phoenix Court U.S. Bankruptcy Hon. DanielP. Collins,Moderator tolling argument. tolled andhow§108 helpsand/orhindersa Find outwhenstatutesoflimitationsare For WhomtheStatuteTolls
2018 ABI ROUNDTABLES 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
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92nd Annual National Conference of Bankruptcy Judges October 28-31, 2018, San Antonio, TX
For Whom the Bell Tolls
Hon. Daniel Collins, Moderator, USBC D. Ariz. Richard Branson, Managing Partner, BransonLaw PLLC Debra L. Miller, Chapter 13 Trustee, N.D. Ind. Richard D. Nelson, Member, Cohen, Todd, Kite & Stanford LLC
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11 U.S. Code § 108 - Extension of time (a) If applicable non-bankruptcy law, an order entered in a non-bankruptcy proceeding, or an agreement fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of— (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (2) two years after the order for relief. (b) Except as provided in subsection (a) of this section, if applicable non-bankruptcy law, an order entered in a non-bankruptcy proceeding, or an agreement fixes a period within which the debtor or an individual protected under section 1201 or 1301 of this title may file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only file, cure, or perform, as the case may be, before the later of— (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (2) 60 days after the order for relief. (c) Except as provided in section 524 of this title, if applicable non-bankruptcy law, an order entered in a non-bankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of— (1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or (2) 30 days after notice of the termination or expiration of the stay under section 362, 922, 1201, or 1301 of this title, as the case may be, with respect to such claim.
What role does §108 have in bankruptcy?
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Section 108 of the Bankruptcy Code covers three situations where the filing of the bankruptcy petition will extend the time for trustee, co-debtor or creditor action.
Subsection (a) extends the trustee’s time for commencing an action, if that time has not expired under applicable non-bankruptcy law prior to the bankruptcy filing, to the later of the end of the time period for taking action, including any suspension which occurred in the bankruptcy case or two years after the order for the relief.1
Subsection (b) extends the trustee’s time for filing pleadings, demands, notices or proof of claims or loss; curing any defect or performing any other similar act if that time has not expired under the applicable non-bankruptcy law prior to the filing.2
Subsection (c) protects parties (normally creditors) who have been delayed during the case by the automatic stay from taking any action against the debtor. Except as prohibited by the discharge injunction, this subsection extends the time for taking action that was interrupted during the case until the later of specific times set forth in the subsection.3
Which parties in interest generally use Section 108?
Generally, §108(a) and (b) are designed for the benefit of the trustee (or a debtor-in- possession (DIP) in a Chapter 11) who steps into the shoes of the debtor and is generally considered an extension for the benefit of the estate.4 §108(c) is designed for creditors who were inconvenienced by the automatic stay to pick up where they left off as long as doing so does not violate the discharge injunction.5
Section 108(a) From the Chapter 7 or 11 Trustee’s perspective
A chapter 7 case will, by statute, have an interim trustee appointed for its administration. A chapter 11 case will usually be commenced with the debtor seeking to act as the DIP. The role of an Interim trustee does not become "official" and permanent until the "conclusion" of the §341 meeting as before that there can be a trustee election.
1 Bankruptcy Law Manual, 5th Ed. §2:24, Dreher, Feeney and Stephen 2013-2. 2 Id. 3 Id. 4 In re Durability, Inc., 273 B.R. 647 (Bankr. N.D. Okla. 2002). Salta Group, Inc. v. McKinney, 380 B.R. 515 (C.D. Ill. 2008). 5 In re Harris, 167 B.R. 680 (Bankr. M.D. Fla. 1994).
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A Chapter 11 trustee can be appointed during the proceedings while under chapter 11 but a trustee will definitely be appointed if there is a conversion to chapter 7. During the pendency of the 11 the DIP, an appointed or elected trustee, examiner or official committee formed and recognized by the court should have a focus on the details of the case in terms of §108 to determine which clocks are ticking towards the expiration of an estate's right to administer an asset or take some other action necessary to maximize the recovery to creditors and benefit to the debtors before these rights, opportunities and options expire.
Both §108(a) and (b) have two categories to use and to compare. In category 1 of §108(a), the clock starts upon the commencement of the case. In category 2 of 108(a), the clock begins at the time of the order for relief. Both tests are connected to non-bankruptcy law of the venue of at least the State of filing and non-bankruptcy proceedings including agreements for the computation of deadlines. Under §108(a), because of the importance of non-bankruptcy law, the trustee may have difficulty immediately identifying the application of non-bankruptcy statutes, especially in a case involving multi-state locations in a one-state bankruptcy. Both § 108(a) and (b) only apply to deadlines that existed at the time the debtor’s petition was filed.6
What is the purpose of §108(a)?
The purpose of §108(a) is “to allow the trustee additional time ‘to discover and evaluate potential causes of action after stepping into the shoes of the debtor’7 §108(a) is not limited to only “scheduled” claims, but extends to any prepetition cause of action for which the statute of limitations had not run before the date of the filing of the petition. If the Trustee fails to discover and commence the cause of action before the §108(a) period lapses, the Trustee is forever barred from asserting the claim.8
This section of the Code only applies to trustees and the DIP and does not apply to creditors or assignees of interests. This section exists because trustees have a fiduciary obligation to all of
6 2 Collier On Bankruptcy ¶ 108.02[4] (Richard Levin & Henry J. Sommer eds., 16th ed.) citing In re Dougherty, 187 B.R. 883 (Bankr. E.D. Pa. 1995). 7 In re Chenault, 2010 WL 797015 (Bankr. C.D. Ill. 2010); In re Ranasinghe, 341 B.R. 556, 567 (Bankr. E.D. Va 2006); In re Johnson, 2009 WL 2259088 (Bankr.S.D.Ill.2009). 8 Id.
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the debtor's creditors where creditors and assignees bring lawsuits against the debtors for their own interests and not those of the estate or other creditors.
One possible extension of the power would be official committees authorized and recognized by the Court. In Rajala v. Hodes9, the Court recognized that in involuntary cases there is an "involuntary gap period" between the commencement of the case and the order for relief. An additional discussion of §108 in an involuntary case that barely covers the tolling provision can be found in R. Hassell Builders, Inc. v Texan Floor Serv.10
There are no bankruptcy provisions that toll the statute of limitations other than this section, and, as a result this section does not refer to any Bankruptcy Code provisions. Instead, it applies to state or federal non-bankruptcy law provisions that are triggered after the petition is filed. Common examples include conversion and fraudulent conveyance actions commenced under state or non-bankruptcy federal law.
It is important to note that section (a) only applies to an "action." This section extends the statute of limitations to commence an action that the debtor could have brought before the filing of the bankruptcy petition, for either the time period allowed by state law or two years after the date of the filing, whichever is later. The term "commencement of an action" applies to the bringing of a suit in court, and not to procedures such as administrative proceedings that may precede a suit. "An action in its usual legal sense means a lawsuit brought in a court; a formal complaint brought within the jurisdiction of a court of law."11
With regard to a Chapter 11 proceeding, it is worth noting that the powers vested in the trustee do extend to committees if those committees are acting for the benefit of the estate as a whole: “Although a creditor may not use 11 U.S.C §108(a) to extend an expired statute of limitations”12 a creditor or committee of creditors appointed by the bankruptcy court can use
9 In re Hodes, 289 B. R. 5, 13 n.4 (D. Kan. 2003) 10 R. Hassell Builders, Inc. v Texan Floor Serv., 2018 Tex. App.Lexis 1588. 11 Ramming v. US, 281 F.3d 158 (5th Cir. 2001). 12 United States v. C.I.T. Constr. Inc. of Texas, 944 F.2d.253,259-260 (5th Cir. 1991)
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§108(a) because under that circumstance the creditor or committee of creditors appointed by the bankruptcy court are not suing on their own behalf but, rather, "for the benefit of the estate."13
While there is no definite answer, there is an argument that the §108(a) powers may be available to a §1104 examiner. An article on the ABl's website14 appears to conclude that even though an examiner does not normally take action on behalf of the estate but rather has an investigative role: "The court can mold an examiner's duties to fit a particular case. The examiner can be ordered to simply investigate the debtor's conduct, or the duties can be expanded to prosecuting actions on the estate's behalf or mediating between the parties."
Reference - What are the requirements under 11 U.S.C. §108(a)? 1. Understand the basic elements a. Order for relief b. Applicable sources of a deadline i. Non-bankruptcy law ii. Prior orders iii. Written agreements containing extensions iv. Possible causes of action c. Identify and evaluate applicable laws and statute of limitations i. Date of expiration ii. Potential and procedure for extension/enlargement iii. Ensure period not expired before the date of the filing of the petition 2. Commence such action before the later of the end of such period, including any suspension of such period occurring on or after the commencement of the case OR Two years after the order for relief. Reference - Other considerations 1. Determine if there is an existing right to act 2. Determine whether §108(a) or (b) is available/preferable 3. Establish the responsibility to be informed/notified
13 944 F.2d. at 260 n.10. Beloit Liquidating Tr. V. Grade, 2003 WI App 176, para 24, 266 Wis. 2d 388, 409, 669 N.W. 2d 232, 24. 14 Chapter 11 Examiner When Why What and How Part 1, Krista Fuller, ABI Journal March 2005 (https://www.abi.org?abi-journal/chapter-11-examiner-when-why-and-how-part-i.)
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a. Newly discovered rights to be reported b. Establish in writing c. Verbally on the record 4. The increased urgency in the case of a conversion a. Possibly consider a pre-341 meeting 2004 exam i. Immediacy ii. Mobility iii. Alternative definition of DIP (Debtor in Prison)
What are the requirements of §108(b)?
Except as provided in section (a), if
1. Applicable non-bankruptcy law, an order entered in a non- bankruptcy proceeding or an agreement fixes a period within which the debtor or an individual protected under section 1201 or 1301, may file any pleading, demand, notice or proof of claim or low, cure a default or perform any similar act AND 2. Such period has not expired before the date of the filing of the petition, 3. TRUSTEE may only file, cure, perform, as the case may be, before the later of: a. The end of the period, including any suspension of such period occurring on or after the commencement of the case OR b. 60 days after the order for relief.
What is the purpose of §108(b)?
This subsection provides the extension of statutory and contractual time periods for the purpose of preserving assets for the benefit of the bankruptcy estate.15 It extends the statute of limitations for matters other than commencing an action. Examples include: administrative claims, contract claims, right of redemption, insurance claims, demand notices, etc.
Who is the “Trustee” in 11 U.S.C. §108?
15 In re Frazer, 377 B.R. 621 (9th Cir BAP 2007); In re Francis, 489 BR 262, 269 (Bankr. ND Ga. 2013).
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Courts are split as to whether §108(a) can be used by chapter 13 debtors in addition to Trustees.16
As Chapter 13 debtors are given the rights and powers of a trustee over property of the estate courts have found that as §1203 and §1303 provides that the Debtor has the rights and powers of a trustee under §363 to use, sell or lease property and Courts have found that Debtors can use §108(b) to the extent that the action benefits the estate.17
Section 108(b) From the Chapter 7, 12 or 13 Trustee’s perspective
Under this section, a trustee is given 60 days, or the time period allowed by applicable state or federal non-bankruptcy law, whichever is later, to take actions not covered by 108(a), as long as the period for taking those actions did not expire before the petition was filed.
The 60 day extension can still be a difficult schedule for a trustee to meet, especially if the initial filing was done on an emergency basis or as an involuntary proceeding and, as a result, lacks all of the required completed schedules and supporting documents.
When suggested by the circumstances of the case and the timing, a trustee should consider accelerating the discovery process by scheduling a deposition or a Rule 2004 examination including the production of documents before the meeting of creditors and should do so at the earliest possible date. The trustee should consider drafting the pleadings so that he or she maintains some control over the examination and can have all of the time needed to do the trustee's initial investigation and identification of additional documents to produce. The trustee may also wish to either include in the language of the Rule 2004 motion or by separate interrogatories specific requests for documents regarding particular assets and causes of action such as options, rights of
16 In re Hatton, 2018 BNH 002, Case 16-11327, Bankr. N.H. 2018 citing Estate of Carr v. United States, 482 F.Supp.2d 842, 850 (Bankr. W.D. Tex. 2007) (“[I]n the context of bankruptcies filed under Chapter 13, the extension offered by section 108(a) is available to Trustees only, and not to Chapter 13 debtors.”); Ranasinghe v. Compton (In re Ranasinghe), 314 B.R. 556, 567 (Bankr. E.D. Va 2006) (“[S]ince § 108(a) is not a specific trustee power of a trustee given to a chapter 13 debtor, and absent a provision allowing a chapter 13 debtor to 9 generally exercise the rights and powers of a trustee (as exists in chapter 11 when a trustee has not been appointed), a chapter 13 debtor does not receive the benefit of the § 108(a) extension. 17 Several courts of appeals have stated without discussion that a chapter 13 debtor has the benefit of § 108(b). In re Connors, 497 F.3d 314, 321 (3d Cir.2007); Canney v. Merchants Bank (In re Canney), 284 F.3d 362, 373 (2d Cir.2002); In re Roach, 824 F.2d 1370, 1372 n. 1 (3d Cir.1987); Goldberg v. Tynan (In re Tynan), 773 F.2d 177 (7th Cir.1985); Johnson v. First Natl Bank, 719 F.2d 270, 278 (8th Cir.1983).
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redemption, annuities or other assets which the trustee either suspects might not be disclosed or which the trustee otherwise feels the subject of appropriate investigation. Creditors and creditor's committees can be an invaluable source of information regarding these subjects.
Time periods are crucial to the use of §108(a) & (b) by a Trustee and can be extended
In the filing of a voluntary petition in bankruptcy under either chapter 7, 11, 12 or 13, the order for relief is entered simultaneously with the filing of the petition as the bankruptcy "is" a bankruptcy. In the case of an involuntary petition, a specific order for relief is entered of record only after an agreed order is tendered or the court grants the involuntary petition which may come after a trial. This delay in the order for relief can extend the time available to the trustee under §108(b) and potentially help preserve causes of action. It is possible for a trustee to be appointed during the pendency of the involuntary petition and before the order for relief which can also afford the trustee additional time to conduct his or her investigation.
Generally speaking it is important to recall that the time periods of both §108(a) and §108(b) can be extended by agreement between potentially opposing parties as long as the statute of limitations have not expired. This language regarding agreements exist but at both §108(a) and §108(b) and should be considered and noted on the court's docket such as by stipulation or entry.
While the trustee cannot affirmatively act to stop time from running on the statute of limitations, the trustee can seek the relief of a suspension. Suspension can be interpreted more closely to "tolling." Since there is no bankruptcy provision that tolls the statute of limitations, this is not referring to any bankruptcy law tolling. Instead, "suspension" refers to some non-bankruptcy tolling provision that is triggered after the bankruptcy petition is filed.
For example, Pennsylvania law would probably incorporate common law tolling principles into its limitations periods for claims of conversion or fraudulent conveyance. Specifically, state law may toll the limitations period as to prepetition claims by a corporation against those who control it. The equitable principle most germane to these proceedings has been referred to as the tolling doctrine of 'adverse domination,' which was recently described as follows:
“Under the doctrine of adverse domination, the statute of limitations is tolled for as long as a corporate plaintiff is controlled by the alleged wrongdoers ... The doctrine is based on the theory that the corporation which can only act through the controlling wrongdoers
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cannot reasonably be expected to pursue a claim which it has against them until they are no longer in control."18
In certain circumstances a non-bankruptcy tolling provision, referred to in the bankruptcy code as a "suspension," may prolong the two year or sixty day extension in the interests of fairness to the debtor.
There are very few cases that have explored what constitutes a "suspension," and as a result little guidance exists other than "such a suspension may result from either state or federal non- bankruptcy law."19 §108(c)(1) incorporates suspensions provided for under federal non- bankruptcy or state law 20 as the reference to suspensions in §108(c)(1) "incorporates suspensions of deadlines that are expressly provided in other [non-bankruptcy] federal or state statutes."21.
There are conflicting decisions. The Southern District of Texas has ruled, however, that suspension does not apply to agreements of the parties.22
It is important to note that where property in a chapter 11 has revested in the
debtor upon confirmation of the plan, the benefit of an extension afforded by §108
may be lost unless the plan provides that causes of actions related to the extension are
preserved, remain property of the estate, and are subject to the bankruptcy court’s
administration.23
Time period calculations in conversions and involuntary cases
18 Matter of LaJet, Inc., 150 B.R. 648 (Bankr. E.D. La. 1993), citing In re Harry Levin, Inc., 175 B.R. 560, 572 (Bankr. E.D. Pa. 1994). 19 Even then, this statement was in the context of 108(c), rather than 108(a) or (b). 2 Lawrence P. King, Collier on Bankruptcy 108.04[2] (15th ed. Rev. 2001). 20 Rogers v. Corrosion Prods., Inc., 42 F.3d 292, 297 (5th Cir. 1995) 21 Aslanidis v. United States Lines, Inc., 7 F.3d 1067, 1073 (2d Cir. 1993). 22 Seven Seas Petroleum, Inc. v. Cibc World Mkts. Corp., No. H-08-3048, 2013 U.S. Dist. LEXIS 101112, at *37 (S.D. Tex. July 19, 2013). 23 In re National Envt’l Waste Corp., 200 F.3d 1266 (9th Cir. 2000); 2 Collier On Bankruptcy ¶ 108.02[4] (Richard Levin & Henry J. Sommer eds., 16th ed.).
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Generally, because conversion does not affect the date of the order for relief, the 2 year limitations period found in 11 U.S.C. §108(a)(2) is not extended or affected by the conversion of a bankruptcy case.24 The date the extension begins to run is the date of the filing of the petition and a simultaneous order for relief (if voluntary) or separately entered order for relief which may come about at a later or sometimes much later date (if involuntary). The only action that may influence this period is a suspension under state or federal non-bankruptcy law.
The time provided to bring an action under §108(b)(2) like §108(a)(2) concludes on a date computed from the date of the order for relief. Occasionally in an involuntary chapter 11 case the action is brought by creditors or investors because of the fraudulent and potentially criminal actions of the debtor either individually or under the structure of a corporation or an LLC. Under circumstances such as this, there may be a criminal investigation that will be quite lengthy or the defendant/debtor may insist on taking that matter to trial and as opposed to negotiating a plea agreement.
Sometimes when caught the debtor will quickly consent to a plea and immediately begin cooperating with the trustee for purposes of a favorable sentencing recommendation. The delay in the proceedings may also include a delay in obtaining critical records being analyzed by the government for purposes of investigation and trial. If this type of circumstance is facing the trustee a suspension would seem appropriate and should at least be sought until sometime after jeopardy has attached and the records have been produced for review and analysis.
Finally, an additional concern that a trustee needs to consider is a general obligation to all parties including the debtor that the trustee should be wary to the danger of damaging a valid interest a debtor may have in “contingent” cases by keeping the cause of action as a potential asset of the bankruptcy estate without administration to the effect that the debtor or another party in interest such as a creditor lose their rights by the passage of time. The Southern District of Ohio has begun a procedure whereby a trustee can file a motion to close proceedings without abandoning a particular asset of the bankruptcy estate under 11 U.S.C. §554. The trustee can then notice all creditors of this motion and file a Report of No Distribution without losing the potential to reopen
24 Schwartz v. Kursman (In re Harry Levin, Inc.), 175 B.R. 560, 563 (Bankr. E.D. Pa. 1994).
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the bankruptcy at a later date once the value of the recovery is known if the net exceeds the applicable exemptions.
What types of §108 (a) and (b) actions are brought in Chapter 12 and 13 cases?
1. File a cause of action within the later of its ordinary limitations or two years after the filing of the bankruptcy case if a statute of limitations on a debtor cause of action has not expired as of the filing of the bankruptcy case25 2. Re-file a cause of action where statute of limitations has not expired that was dismissed where the litigation will benefit the estate.26 3. Cure a tax sale actions where the right to redeem property has not expired at the time the bankruptcy was filed.27 4. Cure foreclosure sales and tax sales where redemption period that expires PRIOR to the date of filing by providing a 60 days extension of the right to redeem in full. 5. Extend the real estate option agreement on the Debtor’s land contract or to exercise an option to renew a lease.28 6. Extend the time to file an appeal or bring an action under the statute of limitations. 7. In some states, extend the redemption period in a pawn contract (remembering that state law must also be reviewed).29 8. Extend time to bring a TILA (Trust in Lending Act) action extending TILA’s statute of limitations to 2 years from the date of filing.30 §108 can extend a state statute with a one year cutoff for malpractice claim. 31 9. Act within the extension of the right of redemption period to use any additional provision to cure (such as §1322) under the Code. 10. Extend time to pursue Debtors for cause of actions include administrative claims as well as non-litigation rights or claims.
25 In re Southwest Supermarkets, LLC, 325 B.R. 417 (Bankr. D. Ariz. 2005). 26 McConnell v. K-2 Mortgage (In re McConnell), 390 B.R, 170 (Bankr. W.D. Pa. 2008). 27 In re Bryant, 548 B.R. 239 (Bankr. E.D. Tenn. 2016). 28 In re Johnson, 513 B.R.365 (Bankr. WD Wisc. 2014) with the cure provisions of §1322. In re Future Growth Enter., Inc., 61 B.R. 469 (Bankr. E.D. Pa. 1986); In re Dulan, 52 B.R. 739 (Bankr. C.D. Cal. 1985). 29 In re Sorensen, __ B.R. __, 2018 WL 3032973 (9th Cir. BAP 2018), In re Alexander, 578 B.R. 669 (Bankr. ND Ga. 2017). 30 In re Dawson, 411 B.R. 1 (Bankr. D. D.C. 2008). 31 In re Stanley, 579 F.3d. 515 (5th Cir. 2009).
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11. Exercise Trustee’s right of redemption (after review of §362 and 108(b)). 12. BUT know your jurisdiction as some courts take the position that §1222(b)(2) and §1322(b)(2) provisions to cure within a reasonable time trump the cure time limits in §108 as the more specific cure provisions control.32
How does 11 U.S.C. §108(c) effect civil claims brought or could have been brought against the Debtor?
1. This section includes co-debtors under §1201 and §1301 and subjects them to an extended period of liability under §108(c) 2. Extends time to: if not expired, then at petition date to its expiration, OR 30 days after notice of expiration of auto stay – §362, §722, §1201, §1301 3. But – some courts interpret IRS §§ 6501, 6502 and 6503 and 11 U.S.C. §108(c) to a be a tolling of time, as opposed to a filing extension.33 4. Extension under §108(c) is limited to non- bankruptcy proceedings.34 5. But note § 546(b) – Trustee’s Powers 6. Of special note are mechanics liens 7. Is it enforcement (separate from perfection of lien) OR It is perfection of a lien 8. If the commencement of an enforcement suit or action is NOT part of the perfection process and the bankruptcy operates as a stay and lien remains in effect for 60 days after termination of the §362 stay. 9. If the enforcement action is needed to prefect a lien, creditor must provide written notice in accordance with §546(b). 10. State law regarding statute of limitations to foreclose on deeds of trust on mortgages that are not reaffirmed or paid on after a discharge remain in place as the statute of 35 limitations runs from the last installment due before the bankruptcy discharge.
32 In re Pellegrino, 284 BR 326 (Bankr. D. Conn. 2002), In re Frazer, 377 B.R. 621 (B.A.P. 9th 2007). 33 In re Fiels , 260 B.R. 362 (Bankr. D. Md. 2001). 34 McCartney vs. Integra N B North 106 F.3d 506 (3rd Circuit 1997). 35Jarvis v. FNMA, D.C. No. 3:16-cv-05194 RBL, Case 17-35428, (9th Cir. 2018) not for publication.
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11 U.S.C. 108(c) - Extension of Time
What is the purpose of §108(c)?
The subsection on its face extends the time for creditors to proceed with their non- bankruptcy cause of action. In short, the statute of limitations is extended for a period of 30 days after notice of the event by which the stay is ended either by relief from stay, the closing of the estate, or by virtue of an exception to discharge.36
What parties can utilize §108(c)?
Subsection (c) uses the term individual, not debtor, so co-debtors are subject to the same extended liability in this subsection.
Statutory Interplay of Subsection (c)
Subsection (c) has been interpreted in conjunction with other statutes to convert subsection (c) into a tolling statute, not just an extension of time to file. In re Fiels37 the Court held that the priority period of a tax claim under 11 U.S.C.§ 507(a)(8)(A)(i) was suspended during the pendency of the automatic stay in a prior bankruptcy case, as the automatic stay barred creditor from going forward.
Likewise, 11 U.S.C. §546 subjects the rights and powers of a trustee to any generally applicable law which permits perfection of an interest or provides for the maintenance or continuation of a perfection process. In a mechanic’s lien context or judgment renewal, this allows a creditor to take action to preserve a previously perfected interest by giving notice. This notice is a ministerial act, not prohibited by the automatic stay. The failure to comply with non-bankruptcy law to maintain or continue a lien may preclude creditors from using those rights during the Section 108(c) extension period, and a trustee or debtor(s) would be entitled to avoid such lien.
A concise summary of the interplay of §108(c) and other statutes rests on whether it is a stayed action under §362 that “create, perfect or enforce liens or judgments” where §108(c) would
36 In re Kauanui, 2015 WL 359088 at *1 (Bankr. D. Haw. Jan. 23, 2015). 37 In re Fiels 2001 Bankr Lexis 301 (Bankr. D.Md. 2001).
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apply or whether it is a ministerial act, as in the case of an affidavit renewing a judgment and therefore the time would not be tolled.
Application and Cases
In re Casillas38 Case Summary - Motion to Vacate 2004 Exam Order granted, as creditor holds no claim and is not a party in interest. Background - Chapter 11 filed 2007, Creditor gets stipulated non-dischargeable judgment, case ends, judgment never renewed. New bankruptcy filed 2017, purported creditor requests 2004 exam, debtor objects as not a party in interest. Issue - Is statute of limitations concerning renewal of judgment tolled during pendency of bankruptcy cases? Holding: No, because renewal of judgment is a ministerial act, renewal of the judgment was not tolled. Order Granting 2004 Exam vacated.
In re Va Bene Trist, LLC39 Issue - Does Arizona’s 6-year statute of limitations bar creditor from foreclosing its lien? Is statue tolled during automatic stay? Facts - First bankruptcy 2007, in 2006 debt accelerated, statute begins to run. Automatic stay remains in place until dismissal in 2014. Stay prevents creditor from proceeding. Second bankruptcy 2017-Creditor moves for relief, Debtor’s response claims statue has run. Holding - Stay relief granted, Movant may still foreclose as statute of limitations was tolled during first bankruptcy.
Contrast:
38 In re Casillas, Case Number: 2:17-bk-12897-DPC. 39 In re Va Bene Trist, LLC, 2017 WL 4862743 (Bankr. D.Ariz. Oct. 26, 2017)
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In Casillas, the renewal of a judgment was a ministerial action not subject to the automatic stay. Therefore, the time to renew the judgment was not tolled during the pendency of the bankruptcy case. This contrasts with Va Bene Trust, where the Court held that the stay did prevent creditor from proceeding in their action to “create, perfect or enforce liens or judgments”.
Does the tolling provision of §108(c) “stop the clock” or provide a “grace period”?
1. “Toll” means hold in abeyance or stop the clock in the context of a time prescription, and that the limitations period is suspended, or stops running and then starts running again when the tolling period ends, picking up where it left off.40 A stop-the-clock rule as to statute of limitations are to prevent surprises to defendants and bar a plaintiff who has slept on his rights. 2. “Grace period” which provides a fixed time period in which to file an action to avert the risk of a time bar as a limitations period to continues to run.41
40 Artis v. District of Columbia, 138 S. Ct. 594, 199 L. Ed.2d 473 (2018) holding that §1367(d) instruction to “toll” a statute of limitations period means to hold it in abeyance, i.e. stop the clock. 41 Id.
114 Pitfalls ofaMidsizeChapter11 Getzler Henrich&AssociatesLLC William H.Henrich (W.D. Court U.S. Bankruptcy Mo.); KansasCity Hon. DennisR.Dow Cole SchotzP.C.; Del. Wilmington, J. Kate Stickles, Moderator Kolesar &Leatham; LasVegas James Patrick Shea Dinsmore &ShohlLLP;Cincinnati LewisKim Martin present inlarge andmegabankruptcycases. personnel, andfinancialdifficultiesnotoften a midsizecase,includingmanagement, practical adviceforplanningandmanaging business cases.Thediscussionwillprovide in theadministration ofmidsizechapter11 This panelwilldiscussuniquechallenges Pitfalls ofaMidsizeChapter11
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Pitfalls of a Midsize Chapter 11 Case
J. Kate Stickles, Moderator, Partner, Cole Schotz P.C.
Hon. Dennis R. Dow, USBC, W.D. Mo.
James Patrick Shea, Partner, Kolesar & Leatham
Kim Martin Lewis, Partner, Dinsmore & Shohl LLP
William H. Henrich, Co-Chairman, Getzler Henrich & Associates LLC
A special thank you to Katherine Devanney of Cole Schotz P.C. for her research assistance.
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What is a Midsize Chapter 11 Case?
It’s not a –
§ Small Business Case;
§ Complex or Large Chapter 11 Case; or
§ Mega Chapter 11 Case.
§ 11 U.S.C. §101(51D) defines a “small business debtor” as a debtor and any debtor affiliates that have in aggregate no more than $2,566,050 (excluding debts owed to one or more affiliates or insiders) of noncontingent, liquidated secured and unsecured debt, and that are not in the business of owning or operating real property.
§ A small business case must not have a creditors’ committee or, if a creditors’ committee has been appointed, it must not be “sufficiently active and representative to provide effective oversight of the debtor.” Fed. R. Bankr. P. 1020(c).
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§ $50 million or more in assets or liabilities, aggregated for jointly administered cases.
See United States Trustee Program Guidelines for Reviewing Applications for Compensation and Reimbursement of Expenses Filed Under 11 U.S.C. § 330 for Attorneys in Larger Chapter 11 Cases.
§ Some courts have adopted definitions in local rules, orders and procedures for identifying and managing complex or large Chapter 11 cases.
§ Pursuant to certain local rules, a party in interest may seek to designate a case as one to which special procedures for complex Chapter 11 cases should apply. Factors to be considered by the court in designating a case as complex or large generally include: § large number of parties in interest; § large amount of assets and liabilities; § publicly traded; § the need for a “first day” emergency hearing; and § the need for simplified notice and hearing procedures.
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Flexible Guideline Numerical § No suggested rangeof § Suggested amount of § Strict cut-off for amount of debt/number of creditors or debt/number of creditors debt/number of creditors parties in interest necessary to qualify as necessary to qualify as § Wide judicial discretion to “complex,” but no strict “complex” designate a case as complex requirement § Example: Eastern District of on a case-by-case basis § Jurisdictions vary as to Pennsylvania § Examples: District of New applicable debt level § total debt must be more Jersey, Western District of § $5M or more in total debt than 3 times the dollar Pennsylvania, Eastern or $2M or more in non- amount stated in District of Kentucky priority debt (Western §101(51D), District of Missouri) § debtor’s debt or equity § $10M or more total debt securities are publicly (Northern District of traded, or Texas) § 100 or more parties in § $50M or more total debt interest in the case. (District of Maryland)
* Following are select examples of local rules and orders defining a complex chapter 11 case.
§ General Order Governing Procedures for Complex Chapter 11 Cases, entered November 25, 2009
A “Complex Chapter 11 Case” is defined as a case under Chapter 11 of the Bankruptcy Code that requires special scheduling and other procedures because of the existence of one or more of the following factors:
a. The size of the case in terms of assets, liabilities or number of creditors and/or parties in interest; b. The fact that claims against the debtor and/or equity interests in the debtor are publicly traded; or c. The case, for reasons satisfactory to the Court, would be more efficiently administered as a Complex Chapter 11 Case.
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§ W.PA.LBR. 1002-2. Complex Chapter 11 Cases
A “Complex Chapter 11 Case” is defined as a case under Chapter 11 that requires special scheduling and other procedures because of a combination of factors, including, but not limited to, one or more of the following factors:
1. the need for expedited hearings for consideration of case management and administrative orders, the use of cash collateral, DIP financing, retaining professionals on an interim basis, maintaining existing bookkeeping systems, paying employees wages and benefits, utility deposit orders for a limited period, and other matters vital to the survival of the business; 2. the size of the case; 3. the large number of parties in interest in the case; 4. the fact that claims against the debtor and/or equity interests in the debtor are publicly traded; 5. the need for special noticing and hearing procedures.
§ KYEB LBR 2081-2. Chapter 11 – Complex Cases
A “Complex Chapter 11 Case” is defined as a case that requires special scheduling and other procedures because of a combination of one or more of the following factors:
i. the need for “first day” emergency hearings for consideration of the use of cash collateral, DIP financing, and other matters vital to the survival of the business; ii. the size of the case including the amount of debt, number of related debtors, number of creditors and/or parties-in-interest; iii. claims against the debtor in possession and/or equity interests in the debtor in possession are publicly traded (with some creditors possibly being represented by indenture trustees); iv. the need for simplification of noticing and hearing procedures to reduce delays and expense; and v. other factors deemed relevant by the Court.
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§ Local Rule 1002-2. Complex Chapter 11 Cases
A “Complex Chapter 11 Case” is defined as a case filed under Chapter 11 that requires special scheduling and other procedures because of a combination of one or more of the following factors:
1. The need for “first day” emergency hearings for consideration of the use of cash collateral, DIP financing, and other matters vital to the survival of the business; 2. The size of the case (usually total debt of more than $5 million or more than $2 million in unsecured non-priority debt); 3. The large number of parties in interest in the case; 4. The fact that claims against the debtor and/or equity interests in the debtor are publicly traded (with some creditors possibly being represented by indenture trustees); 5. The need for simplification of noticing and hearing procedures to reduce delays and expense; or 6. Other similar factors.
§ Order Implementing Procedures for Complex Chapter 11 Cases, Administrative Order No. 02-03, entered July 31, 2002
A “Complex Chapter 11 Case” is defined as a case filed under Chapter 11 that may require special scheduling and other procedures because of a combination of one or more of the following factors:
1. The need for “first day” emergency hearings for consideration of the use of cash collateral, DIP financing, and other matters vital to the survival of the business; 2. The size of the case (usually total debt of $50 million or more); 3. The large number of creditors and other parties in interest in the case; 4. The fact that claims against the debtor and/or equity interests in the debtor are publicly traded (with some creditors possibly being represented by indenture trustees); 5. The need for simplification of noticing and hearing procedures to reduce delays and expense; or 6. Other similar factors.
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§ General Order Regarding Procedures for Complex Chapter 11 Cases, General Order 2006-02, entered January 13, 2006; see also N.D. Tex. L.B.R., Appendix E, Procedures for Complex Chapter 11 Cases
A “Complex Chapter 11 Case” is defined as a case under Chapter 11 that requires special scheduling and other procedures because of a combination of the following factors:
a. The size of the case (usually total debt of more than $10 million) b. The large number of parties in interest in the case (usually more than 50 parties in interest in the case) c. The fact that claims against the debtor and/or equity interests in the debtor are publicly traded (with some creditors possibly being represented by indenture trustees); or d. Any other circumstances justifying complex case treatment.
§ The Administrative Office of U.S. Courts’ definition of a mega case:
“an extremely large case with: (1) at least 1,000 creditors; (2) $100 million or more in assets; (3) a great amount of court activity as evidenced by a large number of docket entries; (4) a large number of attorneys who have made an appearance of record; and (5) regional and/or national media attention”
See Laura B. Bartell, A Guide to the Judicial Management of Bankruptcy Mega-Cases, Second Edition, FJC (2009), citing, Guide to Judiciary Policies and Procedures, section 19.01.
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§ There is no clear definition of a midsize Chapter 11 case. § The definition and treatment of a midsize case differs depending on the jurisdiction in which the case is filed. § A midsize could be $5-10 million; $10-25 million; or $25-99 million in debt or assets. § Other criteria contributing to the designation of a case as a midsize case might include: § Single debtor; single business entity § LLC or LLP structure; less formal business structure and operations § Fewer employees § Fewer creditors § Privately held § Other similar factors
The ABI Commission to Study the Reform of Chapter 11 proposed definition of “small or medium-sized enterprise” –
§ “The term “small or medium-sized enterprise” (“SME”) means a business debtor with — (i) No publicly traded securities in its capital structure or in the capital structure of any affiliated debtors whose cases are jointly administered with the debtor’s case; and (ii) Less than $10 million in assets or liabilities on a consolidated basis with any debtor or nondebtor affiliates as of the petition date.” § The definition of SME does not include a “single asset real estate” case as defined in 11 U.S.C. § 101(51B).
See 2012-2014 Final Report and Recommendations of the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11; see also Statement of Robert J. Keach and Bernstein Shur Co-Chair, American Bankruptcy Institute Commission to Study the Reform of Chapter 11, before the Committee on the Judiciary Subcommittee on Oversight, Agency Action, Federal Rights and Federal Courts United States Senate for a Hearing Entitled: “Small Business Bankruptcy: Assessing the System” presented March 7, 2018.
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Midsize cases may involve different legal issues or the issues may be more critical due to the size of the case, limited budget and need to quickly emerge from Chapter 11.
Often midsize debtor companies wait too long to seek legal and financial assistance, with great consequences, including –
§ Lack of contingency planning and bankruptcy planning, resulting in limited legal alternatives and decreased optionality § Need to exit Chapter 11 quickly – requiring a prompt analysis of the issues and determination of an exit strategy § Insufficient time to discover and analyze potential case issues necessitating emergency filings to promptly address issues § Triggering certain legal issues such as WARN liability, section 503(b)(9) claims, interest on taxes, environmental contamination, criminal investigation, etc.
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Midsize Chapter 11 debtor companies face financial challenges, including:
§ Liquidity crisis; smaller pool of assets § Impaired or no negotiating leverage with lender; higher financing costs § Difficulty obtaining financing; fewer DIP financing options § Cash collateral fight § Investor/lender may dictate the course of action (state and federal law insolvency alternatives in lieu of a Chapter 11 filing)
Time pressure impacts other operational issues, including –
§ No control over creditors, landlords, and vendors – finances dictate relationship § Key management and employee departures § Chapter 11 process slow and too costly to accomplish anything other than a liquidation or 363 sale § In a sale scenario, limited marketing opportunity potentially results in less competition and, ultimately, a less robust auction and lower sale price
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Costs of Chapter 11
§ Case filing fees § Professional fees § Operational fees § U.S. Trustee fees § During each of fiscal years 2018 through 2022, if the balance in the United States Trustee System Fund as of September 30 of the most recent full fiscal year is less than $200,000,000, the quarterly fee payable for a quarter in which disbursements equal or exceed $1,000,000 shall be the lesser of 1 percent of such disbursements or $250,000. See 28 U.S.C. § 1930(a)(6)(B). § Previously, the fee for a debtor with $1,000,000 or more in quarterly disbursements ranged from $6,500 to $30,000.
§ Closely held business § Interwoven relationships – founder, owner and management the same – conflicts; ethical issues § Owner identifies personally as the company – intermingled finances/taxes; emotional attachment § Vested equity owners who may have either founded or managed the enterprise § Family and friends employed § No independent board § Less corporate formalities; lack of internal controls; lack of company policies § Less financially sophisticated or experienced management team § Deficient records and record keeping; poor document management – difficult to complete financial reporting obligations, Statements and Schedules, etc.
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§ Employee Departures § Brain drain; lack of knowledgeable sources § Employee fatigue; handling bankruptcy-related tasks in addition to regular tasks § Employee morale suffers
§ Reduced workforce available to assist with bankruptcy filing, respond to factual inquiries, and attend to case management tasks, such as gathering and compiling information to prepare pleadings, Statement and Schedules, Monthly Operating Reports, and maintaining a data room
§ No Chief Restructuring Officer (“CRO”) § No independent professional objectively reviewing the debtor, stabilizing the business, or driving the direction of the case § If there is a CRO, that person may wear multiple hats § Management likely unfamiliar with bankruptcy process/requirements
§ No Financial Advisor and/or Investment Banker § No prepetition financial planning § No professional to assist with budgeting, financial forecasts, Monthly Operating Reports, preference analysis, plan analysis, etc. § No professional to oversee sales process, solicit and negotiate offers from potential investors/purchasers, coordinate site visits with lenders or potential purchasers
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§ No General Counsel or In-House Legal Staff § Lack of in-house counsel or special counsel requires additional and different focus from bankruptcy counsel § No conflicts counsel to represent the various estates and address conflict issues § If there is in-house counsel, that person often handles many legal and business issues, probably stretched thin and may not be well versed in bankruptcy law and practice § In-house counsel may have a stake in the company
§ Many jurisdictions have a significant volume of consumer or small business Chapter 11 cases. Large and mega Chapter 11 cases are generally concentrated in a handful of jurisdictions. Midsize Chapter 11 cases, in contrast, are scattered throughout the country. Consequently, there may be fewer attorneys in certain jurisdictions who practice exclusively in midsize Chapter 11 cases.
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§ No Claims, Balloting and Noticing Agent § No assistance with preparation of Statements and Schedules, claim objections and exhibits, publication notice, etc. § No assistance responding to inquiries from parties in interest § No assistance with solicitation or balloting (tabulation witness)
§ No Crisis Communications Manager § No expert to address case filing; vendor, customer and employee inquiries; or prepare planned press releases and statements § Lack of consistent or controlled message § Company personnel or counsel required to respond to inquiries
§ Legal issues in midsize Chapter 11 cases may differ from large, complex or mega cases
§ Potential claims against management and lenders; fraud claims, D&O recoveries § Vendor issues due to a loss of trade credit § Generally less available cash but the potential for cash recoveries from litigation results in more litigation § Litigation may divert attention from the administration of the case § Limited time and resources may demand a more expedited proceeding
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Sample Rules and Procedures Potentially Beneficial in Midsize Chapter 11 Cases
§ Del. Bankr. L.R. 3017-2, Combined Hearings on Approval of Disclosure Statements and Confirmation of Plans in Liquidating Chapter 11 cases, is applicable to Chapter 11 cases where the following requirements are met:
(i) All or substantially all of the assets of the debtor[s] were or will be liquidated pursuant to a sale under 11 U.S.C. § 363; and (ii) The plan of liquidation proposes to comply with 11 U.S.C. § 1129(a)(9); and (iii) The plan of liquidation does not seek non-consensual releases/injunctions with respect to claims creditors may hold against non-debtor parties; and (iv) The debtor’s combined assets to be distributed pursuant to the proposed plan of liquidation are estimated, in good faith, to be worth less than $25 million (excluding causes of action).
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§ Nev. LR 3017. Expedited Confirmation Procedures; Conditional Approval of Disclosure Statements.
Nev. LR 3017(a) Expedited Chapter 11 plan confirmation procedures. A motion filed pursuant to this rule may request entry of an order implementing expedited confirmation procedures, including but not limited to:
(1) Early deadlines for submitted plans and disclosure statements; (2) Conditional approval of disclosure statements without hearing; (3) Scheduling a combined hearing on the conditionally approved disclosure statement and confirmation of plan; and (4) Submission of a combined plan and disclosure statement.
§ Rule 3016-2 of the Local Rules of the United States Bankruptcy Court for the Western District of Missouri
1. Conditional Approval. The Court may conditionally approve a disclosure statement. On or before conditional approval of the disclosure statement, the Court shall: a. fix a time for filing objections to the disclosure statement; b. fix a date for the hearing on final approval of the disclosure statement to be held if a timely objection is filed; c. fix a date for the hearing on confirmation; and d. fix a time within which the holders of claims and interests may accept or reject the plan.
2. Application of Fed. R. Bankr. P. 3017. If the disclosure statement is conditionally approved, Fed. R. Bankr. P. 3017(a) and (e) do not apply. Conditional approval of the disclosure statement is considered approval of the disclosure statement for the purpose of applying Fed. R. Bankr. P. 3017(d).
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§ Fed. R. Bankr. P. 9006(c)(1) “ … when an act is required or allowed to be done at or within a specified time by these rules or by a notice given thereunder or by order of court, the court for cause shown may in its discretion with or without motion or notice order the period reduced.”
§ Companion Local Rules addressing expedited motions for relief.
§ Potential for expedited proceedings with respect to any relief sought, including, but not limited to sale motion, settlement motion, financing motion, discovery, retention applications, and disclosure statement and confirmation hearing.
§ Miscellaneous Asset Sales Procedures - permitting the sale of assets of a certain value on limited notice (such as 2 days), without further court order
§ Abandonment of Miscellaneous Property Procedures – permitting the abandonment of non-core, obsolete or burdensome assets of de minimis value on limited notice, without further court order
§ Modified Process for Objecting to Claims
§ Claims Settlement Procedure - authorizing the debtor to settle or compromise disputed claims, on certain terms and conditions, without further court order
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134 Update onFraudulent Transfer Law and , Management the teachingsofMerit fraudulent transfer casedevelopments,including Join ourpanelastheydiscussthemostimportant Update onFraudulent Transfer Law Bryan Cave Leighton PaisnerLLP;St.Louis Bryan Brian Walsh ASK LLP;NewYork Edward E.Neiger (N.D.Ill.);Chicago Court U.S. Bankruptcy Hon. JanetBaer LLP;LosAngeles Diamond McCarthy Kathy Phelps,Moderator Tribune. Madoff
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92nd Annual National Conference of Bankruptcy Judges October 28-31, 2018, San Antonio, TX
Update on Fraudulent Transfer Law
Kathy Bazoian Phelps, Moderator, Partner, Diamond McCarthy LLP
Hon. Janet Baer, USBC, N.D. Ill.
Edward Neiger, Co-Managing Partner, ASK LLP
Brian C. Walsh, Partner, Bryan Cave Leighton Paisner LLP
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I. New Issues re 11 U.S.C. § 546(e)
A. Background on § 546(e)
Congress enacted § 546(e) of the Bankruptcy Code in 1982 for the purpose of safeguarding securities markets.
As the legislative history observed, “certain protections are necessary to prevent the insolvency of one commodity or security firm from spreading to other firms and possibl[y] threatening the collapse of the affected market.” H.R. REP. No. 97-420, at 1 (1982), U.S. Code Cong. & Admin. News 1982, p. 583. In drafting Section 546(e), Congress was concerned that if certain financial transactions could be avoided it would result in a “ripple effect” that would destabilize entire markets.
The genesis of § 546(e) was Seligson v. New York Produce Exch., 394 F. Supp. 125 (S.D.N.Y. 1975), in which a bankruptcy trustee filed suit to claw back $12 million in margin payments made by a commodity broker. Avoidance of those payments presented a serious risk to the clearing association, prompting Congress to pass the first version of the current safe harbor. 11 U.S.C. § 764(c) (repealed 1982).
Over the years, the scope of the § 546(e) safe harbor continued to expand. The first enactment of § 546(e) expanded the prior safe harbor to include margin and settlement payments “made by or to a commodity broker, forward contract merchant, stockbroker, or securities clearing agency.” Two years later Congress amended the statute to protect “financial institution[s].” In 2005, Congress added protections for “financial participant[s],” or those entities involved in high-value financial transactions. Congress enacted § 546(e)’s current language in 2006, adding protections for transfers made in connection with securities contracts, commodity contracts, and forward contracts.
1. The Definitions and Scope of § 546(e) Have Frustrated Courts and Litigants
Despite 40 years of existence, courts have found § 546(e)’s language to be difficult to apply. For example, the statutory definition of a “settlement payment” is:
a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade.
11 U.S.C. § 741(8). One judge referred to this definition as “frustratingly self- referential.” In re MacMenamin's Grill Ltd., 450 B.R. 414, 418 (Bankr. S.D.N.Y. 2011).
Courts have also grappled with the scope of the § 546(e) defense. For example, does the § 546(e) safe harbor shield leveraged buy-outs (LBOs) from a trustee’s fraudulent transfer claims? In re Kaiser Steel Corp., 952 F.2d 1230 (10th Cir.1991)
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(answering in the affirmative); Jewel Recovery, L.P. v. Gordon, 196 B.R. 348 (N.D. Tex. 1996) (rejecting Kaiser Steel on policy grounds); In re Adler, 263 B.R. 406, 475–84 (S.D.N.Y. 2001) (refusing to apply § 546(e) safe harbor in fraudulent transfer claim related to an LBO because it “would give a blessing to an . . . integrated scheme to defraud. . . .”).
Some courts have narrowly interpreted § 546(e) as to limit its scope only to transfers that may harm markets, relying on legislative history. See, e.g., Wieboldt Stores v. Schottenstein, 131 B.R. 655, 663–65 (N.D. Ill. 1991) (concluding that private LBO transaction did not involve a “settlement payment” under Section 546(e)). Others have found enough ambiguity in § 546(e)’s terms to resort to legislative history. MacMenamin's Grill Ltd., 450 B.R. 414; In re TVGA Eng'g, Surveying, P.C., 562 B.R. 862 (Bankr. W.D.N.Y. 2016). These cases represent a minority view—most courts have followed the expansive definitions under § 546(e) to shield a wide variety of transfers.
B. The Merit decision — the 546(e) Safe Harbor for “Financial Institutions” Does not Apply when the Transfer Merely Passes Through a Financial Institution
One of the unsettled questions has been whether the safe harbor for “financial institutions” applies when a financial institution is the intermediary in a transaction. That question was conclusively answered in the negative by the United States Supreme Court in Merit Management Group, LP v. FTI Consulting, Inc., 583 U.S. ____ (Feb. 27, 2018).
Merit Management began with two competing entities wishing to open a combination harness horse racing track and casino, or “racino,” in the Commonwealth of Pennsylvania. The two parties, Valley View Downs, LP and Bedford Downs Management Corporation, attempted to obtain the last available license for their respective racino projects, but in 2005 the Pennsylvania State Harness Racing Commission denied both applications.
Bedford Downs withdrew from consideration for a license, and in exchange Valley View agreed to purchase all of Bedford Downs’ stock for $55 million. Valley View eventually won its license and arranged for payment of the $55 million. Credit Suisse, Valley View’s lender, wired the money to Citizens Bank of Pennsylvania, which in turn transferred the money to Bedford Down’s shareholders—including the defendant, Merit Management.
The racino never opened. Valley View was unable to obtain a license to operate the casino portion of the establishment.
Valley View filed for Chapter 11, and eventually confirmed a liquidating plan appointing FTI Consulting as the liquidating trustee.
FTI sued Merit, alleging that the $16.5 million it received from its share of the sale proceeds was a constructively fraudulent transfer under Section 548(a)(1)(B) of the
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Bankruptcy Code. FTI alleged that Valley View significantly overpaid for the Bedford Down stock, such that there was no reasonably equivalent value for the transaction.
Merit argued that because the payment passed through two financial institutions on its way to the recipient it was part of a “settlement payment” and therefore could not be avoided.
The Bankruptcy Court agreed with Merit’s analysis, but the Seventh Circuit reversed. The Supreme Court granted a writ of certiorari.
Justice Sotomayor wrote an opinion for a unanimous Court. The Supreme Court rejected Merit’s argument, concluding that the Section 546(e) safe harbor did not apply when a financial institution was a mere intermediary.
Specifically, Justice Sotomayor’s opinion honed in on the language in Section 546(e) stating that “the trustee may not avoid . . . a transfer that is . . . a settlement payment” (emphasis added). Merit’s argument, in the Court’s view, would have re- written the statute to read a transfer that merely includes a settlement payment.
The Court’s ruling clarifies the scope of Section 546(e): courts interpreting the statute must look at the “overarching transfer” and not the “component parts” to determine whether the safe harbor applies. In the transfer of A – B – C – D, courts are to examine whether A and D are covered entities. The transfer itself must be between covered financial institutions, not just involving financial institutions as intermediaries.
C. Madoff and Peterson decisions
i. The Madoff Decision – A Fictitious Securities Contract Is Still a Securities Contract
In 2008 Bernie Madoff wass arrested for running one of the largest Ponzi schemes in American history, having defrauded thousands of investors through his investment advisory firm, Bernard L. Madoff Investment Securities LLC (“BLMIS”). BLMIS allegedly invested contributions in stock market funds. Instead, BLMS commingled funds in a single checking account and used new money to pay off prior investors.
BLMIS underwent liquidation by the Securities Investor Protection Corporation. The district court overseeing the liquidation assigned Irving Picard as trustee for BLMIS and tasked him with recovering funds to redistribute to victims of Madoff’s scheme. Picard began filing numerous avoidance actions seeking to recover profits given to “net winners” in the Ponzi scheme—those who received more from the scheme than their initial investments. Picard based these actions on both constructive and actual fraudulent transfer theories.
Judge Rakoff of the Southern District of New York dismissed many of the constructive fraudulent transfer claims, concluding that the Section 546(e) safe harbor shielded the transfers from avoidance. See, e.g., Picard v. Katz, 462 B.R. 447 (S.D.N.Y.
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2011). The basis for Rakoff’s decision was that BLMIS was a stock broker, the contracts with the investors were securities contracts, and the payments to those investors were settlement payments.
Picard argued that because BLMIS never invested any of the funds, the “securities contracts” were illusory, and the safe harbor would not apply.
Picard appealed to the Second Circuit. The Court of Appeals affirmed Judge Rakoff. In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d 411 (2d Cir. 2014).
The Second Circuit examined the definitions of a “securities contract” under 11 U.S.C. § 741(7) and concluded that the language was exceptionally broad. Even though the BLMIS contracts were fictitious and BLMIS never purchased securities, the contracts still fell within the definition of a “securities contract” and the safe harbor prevented Picard from avoiding the transfers as constructively fraudulent.
Specifically, the Second Circuit noted that Section 741(7)(A)(vii) defines a “securities contract” to include “any other agreement or transaction that is similar to” a “contract for the purchase, sale or loan of a security[.]” Id. at 419 (emphasis added). Even the fictitious securities contracts were similar to a securities contract, therefore the safe harbor applied.
ii. The Peterson Decision – Section 548(e) Trumps Equity
The Seventh Circuit came to a similar conclusion in another Ponzi scheme case.
Gregory Bell was working with Ponzi scheme operator Thomas Petters to defraud investors. Bell’s firm, Lancelot Management LLC invested $2 billion in hedge funds operated by Petters’ various entities.
Petters was engaged in a lengthy and expansive Ponzi scheme in which his companies allegedly sold electronics to large retailers like Wal-Mart and Best Buy. None of these electronics actually existed, and the records of the sales were entirely fictitious. Meanwhile, Petters bought legitimate businesses such as Polaroid and Sun Country Airlines to help cover for his scheme.
When the Petters empire collapsed in 2008, it took Lancelot and the rest of Bell’s schemes down with it.
Ronald R. Peterson was assigned as the trustee for the Lancelot estates. Peterson filed numerous adversaries to avoid transfers both as preferences and as fraudulent transfers. Interestingly, in his suit against the “net winner” investors Peterson did not pursue actual fraudulent transfer claims, instead relying only on state and federal constructive fraudulent transfer statutes.
The Bankruptcy Court for the Northern District of Illinois granted summary judgment on behalf of the defendant-investors on the basis of the 546(e) safe harbor for
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“financial participants”—those who had investments at issue of $1 million or more. The Bankruptcy Court rejected Peterson’s argument that Section 546(e) does not apply to fraudulent schemes.
The parties sought direct review by the Seventh Circuit.
Judge Easterbrook found that the statutory language shielded the transfers from avoidance despite the Peterson’s arguments that such a result would be inequitable. Judge Easterbrook wrote:
The Trustee is not asking us to choose sides in a debate about interpretive method so much as he is asking us to chuck § 546(e) out the window. Yet a court can't say “this statute is ambiguous, so we will implement the legislative history unencumbered by enacted text.” Ambiguity sometimes justifies resort to legislative history, but it is used to decipher the ambiguous language, not to replace it. The text is what it is and must be applied whether or not the result seems equitable.
Peterson v. Somers Dublin Ltd., 729 F.3d 741, 749 (7th Cir. 2013).
Both Peterson and Madoff stand for the proposition that the Section 546(e) safe harbor for securities is exceptionally broad. Even the “net winners” in Ponzi schemes can be protected.
Note that the Section 546(e) safe harbor does not apply to claims of actual fraudulent transfer, only constructively fraudulent transfer.
D. Issue: Do Section 546(e) and similar safe harbors preempt claims brought under state fraudulent-transfer law?
1. In re Lyondell Chemical Co., 503 B.R. 348 (Bankr. S.D.N.Y. 2014)
a. The debtor filed a Chapter 11 petition in January 2009, less than 13 months after a $12.5 billion leveraged buyout. Because the Second Circuit had interpreted Section 546(e) broadly to preclude the avoidance of constructively fraudulent transfers in securities transactions, the debtor’s plan provided for creditors to contribute their fraudulent-transfer claims arising under state law to a creditor trust. That trust then sued former shareholders that had received $100,000 or more in the LBO.
b. The former shareholders moved to dismiss on several grounds, including the argument that Section 546(e) barred the claims.
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c. Judge Gerber disagreed. He first concluded that Section 546(e) describes claims that “the trustee may not avoid” and does not affect claims brought by or on behalf of individual creditors. He also rejected the defendants’ arguments based on express preemption, “field” preemption (concluding that Congress did not intend to fully occupy the fields of avoidance and recovery of transfers), and “conflict” preemption (concluding that it is not impossible for a party to comply with both state and federal law, nor does state law stand as an obstacle to the accomplishment of the objectives of Congress).
2. In re Tribune Co. Fraudulent Conveyance Litigation, 818 F.3d 98 (2d Cir. 2016), petition for cert. filed (Sept. 9, 2016) (No. 16-317)
a. The debtor filed a Chapter 11 petition in December 2008, less than two years after an $8 billion leveraged buyout. The creditors’ committee sued shareholders and other parties under Section 548(a)(1), alleging intent to hinder, delay, or defraud creditors. Meanwhile, individual creditors filed state-law claims in various jurisdictions around the country, alleging constructive fraud. The debtor’s plan shifted the committee’s case to a litigation trust and confirmed that creditors had the right to pursue their separate actions. The Judicial Panel on Multidistrict Litigation consolidated the creditors’ cases in the Southern District of New York.
b. The district court rejected the defendants’ argument that Section 546(e) preempted the state-law claims. But the court dismissed the complaints, reasoning that the automatic stay precluded creditors from pursuing fraudulent-transfer claims targeting the same transactions being attacked by the litigation trust.
c. The Second Circuit disagreed on both points. It held that the bankruptcy court’s grant of relief from the automatic stay, together with the clear authorization in the plan, cleared the way for the creditors to proceed with their claims. But in a lengthy discussion, the court concluded that Congress intended Section 546(e) to preempt state-law claims. In particular, the court recognized that the language of Section 546(e) is broad and “is intended to protect the process or market from the entire genre of harms of which the particular problem [giving rise to its enactment] was only one symptom.” Allowing securities transactions to be unwound by state-law claims “would create substantial deterrents, limited only by the copious imaginations of able lawyers, to investing in the securities market.” The court of appeals’ decision abrogated Lyondell.
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d. The plaintiffs filed a petition for a writ of certiorari, raising both the scope of Section 546(e) and the preemption question. The Supreme Court held the petition pending the decision in Merit Management. On April 3, 2018, after the mandate issued in Merit Management, Justices Kennedy and Thomas issued a statement suggesting that the Court lacked a quorum to act on the petition, probably because the other justices have investments with some of the many securities firms that are involved in the case. The Court may thus be unable to pursue the course most observers expected: granting the petition, vacating the Second Circuit’s judgment, and remanding for further proceedings in light of Merit Management. But Justices Kennedy and Thomas also suggested that the Second Circuit or the district court might consider recalling the mandate or granting relief from the judgment.
e. On May 15, 2018, the Second Circuit recalled its mandate in anticipation of further review by the panel. The certiorari petition remained pending at the end of the Supreme Court’s term in June.
3. Whyte v. Barclays Bank PLC, 644 F. App’x 60 (2d Cir. 2016), cert. denied, 137 S. Ct. 2114 (2017)
a. SemGroup, an energy company, paid Barclays $143 million to take its commodities derivatives portfolio in June 2008, about a month before SemGroup filed a Chapter 11 petition in Delaware. The portfolio later became profitable. The debtor’s plan created a litigation trust that held both the debtor’s causes of action and claims contributed by creditors. That trust then sued Barclays in district court in New York, alleging that the transaction was a fraudulent transfer under New York law.
b. Barclays moved to dismiss, arguing that the safe harbor for swap transactions in Section 546(g) barred the claims. The trustee acknowledged that the safe harbor applied to the claims that she asserted under Section 544 as successor to the debtor, but she argued that the claims contributed by creditors were not precluded. The district judge disagreed, holding that Section 546(g) preempted state-law claims seeking to avoid swap transactions as fraudulent transfers.
c. The Second Circuit considered Whyte in tandem with Tribune and affirmed the district court’s decision in a per curiam order, relying on the
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reasoning in the Tribune opinion. The trustee filed a petition with the Supreme Court, raising only the preemption issue, and the Court denied it.
4. Questions a. What’s left of Tribune’s preemption theory after Merit Management? Even if the plaintiffs obtain relief from the Second Circuit’s judgment, Merit Management doesn’t fully resolve the preemption question. Some of the defendants in Tribune are stockbrokers and financial institutions, and they would be covered by the Supreme Court’s narrower interpretation of Section 546(e) if they had been sued by a trustee or a debtor in possession. So those defendants still have the ability to argue that the statute preempts parallel attacks based on state law. But how much force is there to the Second’s Circuit’s theory that congressional intent to prevent disruption to the securities markets cannot be undermined by state-law claims, now that the Supreme Court is willing to allow a greater degree of disruption by federal claims?
b. If preemption has any remaining force, is it limited to state-law claims that directly parallel federal claims, or does the theory sweep more broadly? If common-law fraud claims or claims under state securities laws pose as much risk to the securities, commodities, and derivative markets as fraudulent-transfer claims, are they precluded as well? Or is it a sufficient response that Sections 546(e), 546(g), and similar safe harbors include carveouts for actual-intent fraudulent transfers under Section 548(a)(1)(A)?
c. Can creditors avoid preemption problems, or the risk of having their cases transferred to a circuit in which preemption is an issue, by filing suit in state court against resident or non-diverse defendants?
II. Issue: Is a debtor’s deposit of funds into his or her own bank account a “transfer” that a trustee can avoid if it otherwise meets the requirements of Sections 547 or 548 or state fraudulent-transfer law?
A. New York County National Bank v. Massey, 192 U.S. 138 (1904)
1. The debtors deposited about $6,225.25 in their bank account during the last few days before filing their bankruptcy petition. The debtors also owed $40,000 to the bank, but the deposits were not applied to debtors’ notes. In fact, the bank honored one check drawn on the account after the deposits were made.
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2. The bank filed a proof of claim for $33,750.25, crediting the balance of the account on the petition date. The trustee objected to the claim, arguing that the deposits were preferential transfers. Section 57(g) of the Bankruptcy Act required disallowance of a creditor’s claim unless the creditor surrendered a preference, much like today’s Section 502(d).
3. Section 60 defined a preference as “a transfer” that enables a creditor “to obtain a greater percentage of his debt than any other of such creditors of the same class.” Section 1(25) defined a transfer to include a sale and every other and different matter of disposing of or parting with property, or the possession of property.
4. The Supreme Court concluded that a preference contemplates “the parting with the bankrupt’s property for the benefit of the creditor, and the consequent diminution of the bankrupt’s estate.” But a deposit “does not operate to diminish the estate of the depositor, for when he parts with the money he creates at the same time, on the part of the bank, an obligation to pay the amount of the deposit as soon as the depositor may see fit to draw a check against it.”
5. The Court acknowledged that because of its enhanced right of setoff, “in a sense the bank is permitted to obtain a greater percentage of its claim against the bankrupt than other creditors, but this indirect result is not brought about by the transfer of property within the meaning of the law.”
B. Bankruptcy Reform Act of 1978
1. Congress revised and expanded the definition of “transfer,” now in Section 101(54). It now includes disposing of or parting with property or an interest in property.
2. The Senate Report accompanying the bill stated that a transfer includes “a transfer of possession, custody, or control even if there is no transfer of title, because possession, custody, and control are interests in property.” S. Rep. No. 95-989, at 27. It also said, “A deposit in a bank account or similar account is a transfer.”
C. Redmond v. Tuttle, 698 F.2d 414 (10th Cir. 1983)
1. The debtors drew checks on one bank account and sent them to another bank, without including deposit slips or instructions about how they should be posted. The recipient bank credited some checks to the debtors’ business account and some to their personal account, which they had thought was closed.
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2. After filing a Chapter 7 petition, the debtors learned of the funds in the personal account when the bank turned them over to the trustee. The debtors claimed an exemption under Section 522(g)(1), which requires, among other things, that they did not make “a voluntary transfer” of the property recovered by the trustee.
3. The Tenth Circuit cited the Senate Report, but the parties appear to have argued only about whether the transfer to the personal account was voluntary or involuntary, not about whether a transfer occurred at all. The Court held that it was a voluntary transfer and that the funds could not be exempted.
D. In re Prescott, 805 F.2d 719 (7th Cir. 1986)
1. The debtor overdrew his checking account, then made deposits sufficient to clear the overdraft and establish a credit balance, which the bank then set off against other obligations. The trustee sought to avoid the deposits that satisfied the overdraft as preferential transfers.
2. The Seventh Circuit acknowledged cases holding that a deposit into an unrestricted bank account is not an avoidable transfer. In this case, however, the debtor did not have the freedom to withdraw the funds, because the bank applied them to his overdraft. The Court thus concluded that the deposits were preferential transfers.
E. In re Bernard, 96 F.3d 1279 (9th Cir. 1996)
1. The debtors withdrew $64,000 from several bank accounts shortly before a creditor garnished the accounts. The debtors claimed that they placed the money in a safe in their home but later lost it while gambling on vacation.
2. The creditor sought a denial of the discharge under Section 727(a)(2)(A), arguing that the debtors transferred their property with the intent to hinder, delay, or defraud a creditor. The case focused on the withdrawals, not the later disposition or dissipation of the funds.
3. The debtors acknowledged their intent but argued that their withdrawals were not transfers, because they merely moved their assets around.
4. The Ninth Circuit majority relied in part on the legislative history quoted above. If depositing money into a bank account is a transfer, the court reasoned, “later withdrawing money from that account should be a transfer, too—it ought to be a two-way street.” The majority also considered the fact that money on deposit is owned by the bank, not by the customer. Thus, when
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the debtors made withdrawals, they “parted with their claims against the bank” and received cash instead, and this transaction was a transfer.
5. Judge O’Scannlain dissented. He argued that a denial of discharge should require a reduction in the assets available to creditors, which did not occur when the debtors withdrew funds from their bank accounts.
F. In re Whitley, 848 F.3d 205 (4th Cir.), cert. denied, 138 S. Ct. 314 (2017)
1. The debtor operated a Ponzi scheme that eventually collapsed, resulting in an involuntary bankruptcy filing and his conviction for wire fraud and money laundering. He regularly deposited funds in his personal checking account and received wire transfers from his investors as part of his scheme.
2. The trustee sued the bank, alleging that the debtor’s deposits and incoming wire transfers were transfers by the debtor to the bank made with the intent to hinder, delay, or defraud creditors.
3. The bankruptcy court held that the relevant transactions were transfers, but they could not be avoided as fraudulent transfers because they did not diminish the bankruptcy estate or place assets beyond the reach of creditors.
4. The Fourth Circuit asked the parties to address the threshold question of whether the transactions were transfers at all. After a lengthy review of precedents, including Massey and two Fourth Circuit cases from the 1930s, the court concluded that “when a debtor deposits or receives a wire transfer of funds into his own unrestricted checking account in the regular course of business, he has not transferred those funds to the bank that operates the account.”
G. Meoli v. The Huntington National Bank, 848 F.3d 716 (6th Cir. 2017)
1. Eight days after Ivey was handed down, the Sixth Circuit decided this case, which involves a somewhat different issue. A company called Cyberco operated a Ponzi scheme that involved a fictitious customer, Teleservices, that actually was an affiliate of Cyberco. Teleservices deposited millions of dollars into Cyberco’s account at Huntington National Bank over a period of several years. Some of those deposits were used to satisfy loans that the bank had made to Cyberco, but others remained on deposit and at Cyberco’s disposal.
2. Teleservices’ trustee sued the bank, arguing that these “excess deposits” were fraudulent transfers. The parties agreed that the deposits were transfers, but the Sixth Circuit held that the bank did not have dominion and control over the excess deposits and thus was not a “transferee.”
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3. This conclusion is consistent with other cases involving a debtor’s deposit of funds into another person’s bank account: the account holder, and not the bank, is the initial transferee of the funds. But see Bruce A. Markell, Stumbling at the Sixth: A Troubling Test for Transfers in Meoli v. The Huntington National Bank, Bankruptcy Law Letter, vol. 37, no. 5 (May 2017) (arguing that the court “failed to distinguish itself by adopting uncritically invalid theories regarding transfers and transferees from other circuits” and suggesting that the bank should have prevailed instead on the basis of the good-faith defense in Section 548(c)).
4. As part of its analysis, the Sixth Circuit asserted broadly that “banks are not ‘transferees’ with respect to ordinary bank deposits.” The Court did not have occasion to consider whether the result is different when a debtor deposits money with its own bank.
H. In re Tenderloin Health, 849 F.3d 1231 (9th Cir. 2017)
1. Four weeks after Meoli, the Ninth Circuit considered this case, in which the principal issue was whether a debtor’s payment of $190,000 to a bank to satisfy a loan was a preference.
2. The bank moved for summary judgment, arguing that it had a right of setoff in an account of the debtor that had a balance sufficient to satisfy the loan in full, such that the payment did not permit the bank to obtain more than it would have received in a hypothetical Chapter 7 liquidation. The trustee responded that in that hypothetical case, she would have avoided a deposit by the debtor of $526,000, which would have left the bank with a much smaller right of setoff that would not have been sufficient to cover the $190,000 loan that the debtor repaid. (More precisely, the avoidance of the deposit would have resulted in the disallowance of the bank’s claim under Section 502(d) until the bank repaid the amount deposited, and then the bank would have had an insufficient setoff.)
3. Whether the court may consider a hypothetical avoidance action in the context of a hypothetical liquidation is a fascinating question, the details of which are beyond the scope of this discussion. But it is worth noting that the Ninth Circuit reached its conclusion (yes) without citing any decisions, pro or con, directly in point.
4. Considering the hypothetical merits of the hypothetical question, the Court concluded that the deposit would have been an avoidable preferential transfer because the account was pledged as security for the loan, and the deposit enhanced the bank’s secured claim. The Court distinguished Massey because of the 1978 amendment that broadened the definition of “transfer”
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and the accompanying legislative history, and it drew support from its Bernard decision about withdrawals from a bank account. The court also cited the opinions of the district courts in Meoli and Ivey.
5. Judge Korman of the Eastern District of New York, sitting by designation, concurred in part and in the judgment. He agreed that the debtor’s deposits were transfers, but he interpreted Massey as holding that a deposit that enhances a bank’s right of setoff is not an avoidable preferential transfer. He also argued that the funds deposited by the debtor were already subject to the bank’s security interest, and so the deposit did not enhance the bank’s rights. He would instead analyze whether the trustee could avoid a hypothetical setoff by the bank in a hypothetical Chapter 7 case under the standards of Section 553.
I. Questions
1. Can these cases be reconciled?
2. Should a debtor’s deposit in his or her own bank account be treated as:
a. not a transfer?
b. a transfer that’s not avoidable because it doesn’t diminish the debtor’s assets?
c. a transfer that’s not voidable on certain theories under the Uniform Fraudulent Transfer Act or the Uniform Voidable Transaction Act (actual intent, unreasonably small capital, intent to incur debts beyond the ability to pay) because the bank took for value and in good faith (absent extraordinary facts) and has a defense under Section 8(a) of each of those acts?
d. a transfer that’s theoretically avoidable but not recoverable from the bank because the bank isn’t a transferee under Section 550 of the Bankruptcy Code?
e. a transfer that’s theoretically avoidable but not recoverable from the bank because the bank took for value and in good faith (absent extraordinary facts) and is permitted to retain the funds under Section 548(c) of the Bankruptcy Code, Section 8(d) of the Uniform Fraudulent Transfer Act, or Section 8(d) of the Uniform Voidable Transactions Act?
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3. If the bank is treated as the initial transferee of a deposit, does that permit other potential defendants to invoke the good-faith defense of a subsequent transferee under Section 550(b)? Or does any other person who is likely to be a defendant qualify as an “entity for whose benefit such transfer was made” under Section 550(a)(1)?
III. Issue: Are education payments made pre-petition by a debtor for a non-debtor child avoidable transfers? A. Tuition Payments: Can a chapter 7 trustee avoid and recover tuition payments made pre-petition by a debtor-parent for a non-debtor-child?
The courts that have considered the above question seem to agree that, assuming the other elements are satisfied, the answer often depends on whether the debtor “received less than a reasonably equivalent value in exchange for such transfer or obligation.” See 11 U.S.C. § 548(a)(1)(B)(i). However, the developing body of case law on the issue tells us that courts widely disagree as to the definition of “reasonably equivalent value” in this context. See In re Adamo, 582 B.R. 267, 273–74 (Bankr. E.D.N.Y. Mar. 29, 2018) (noting that “[t]he avoidance of pre-petition tuition payments made by a debtor for the education of his or her child is a developing body of law, and courts across the country have reached different results.”)
Interpretations of the phrase “reasonably equivalent value” generally fall into two categories: the strict no value approach and the broad value and moral obligation approach. The factors courts consider when reaching a decision vary widely depending on the approach taken. Adamo, 582 B.R. at 273–74 (citations omitted) (listing factors, including “whether the child is a minor, whether the tuition was for necessary education or extracurricular activities, whether the education was primary, undergraduate, or graduate education, and whether the debtor, by making the payments, satisfied a legal or moral obligation or other societal expectation.”)
1. Strict No Value Approach: A debtor-parent received no value in exchange for tuition payments made pre-petition for a non-debtor-child because any benefit received by a parent does not constitute “value” for purposes of § 548. Under 11 U.S.C. § 548(d)(2)(A), ‘“value’ means property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor.”
Lead Case Summary:
Boscarino v. Bd. of Trs. of Conn. State Univ. Sys. (In re Knight), No. 15-21646, 2017 WL 4410455, (Bankr. D. Conn. Sept. 29, 2017):
The chapter 7 trustee sought to recover approximately $20,000 paid by the debtor pre- petition for college tuition and expenses of her adult son. The university argued that
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the debtor received a reasonably equivalent value because she paid the tuition and expenses to reduce the amount of debt her son would incur, fulfill the Expected Family Contribution for federal financial aid formula, and help her son become self- sufficient to reduce the financial burden on her.
The court denied the defendant-college’s motion for summary judgment and held that the debtor-parent “did not receive any legally cognizable value” in exchange for the pre-petition college tuition and expense payments made for the adult child. The court explained that the definition of value under § 548(d)(2)(A) is limited to economic or monetary consideration and does not include “intangibles” such as moral or familial obligations. Further explaining its position, the court stated that if Congress wants such obligations to qualify under the statute, it has the power to enact legislation to that effect, much like it did for tithes and other donations to religious institutions. Finally, the court rejected the argument that the debtor received value by reducing her son’s future financial dependency because, no matter how reasonable that expectation may be, it is unperformed, speculative, and therefore does not amount to a quid pro quo at the time the payments were made.
Other “Strict No Value Approach” Cases:
Chorches v. The Catholic Univ. of Am., No. 3:16-cv-1964 (D. Conn. Jul. 13, 2018) (denying university’s motion to dismiss because, based on a purely economic definition of “value,” the debtor-parents did not receive value in exchange for over $95,000 in tuition payments for an adult child, and rejecting the argument that tuition is a “household expense” until a child reaches the age of twenty-four because the Expected Family Contribution used for purposes of federal financial aid does not create a legal obligation for a family to contribute).
Roach v. Skidmore Coll. (Matter of Dunston), 566 B.R. 624 (Bankr. S.D. Ga. 2017) (holding that the debtor-parent did not receive reasonably equivalent value because she presented no evidence of an economic benefit, she had no legal duty or obligation to pay her child’s tuition, and the payments did not increase the value of assets available to pay creditors).
Gold v. Marquette Univ. (In re Leonard), 454 B.R. 444 (Bankr. E.D. Mich. 2011) (relying on the “indirect economic benefit” analysis set forth in Lisle v. John Wiley & Sons, Inc. (In re Wilkinson), 196 Fed. Appx. 337 (6th Cir. 2006) and holding that the debtor-parents did not receive reasonably equivalent value in exchange for approximately $21,000 in tuition payments for an adult son because their indirect benefits (peace of mind, affording him opportunities, and reducing future financial dependency) were not economic, concrete, and quantifiable).
Banner v. Lindsay (In re Lindsay), Adv. No. 08-9091, 2010 WL 1780065 (Bankr. S.D.N.Y. May 4, 2010) (ordering turnover of approximately $35,000 because debtor- parents had no legal obligation to pay for their child’s college tuition and rejecting the “moral obligation” argument for failure to offer any authority).
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2. Broad Value and Moral Obligation Approach: A debtor-parent who made tuition payments pre-petition for a non-debtor-child received reasonably equivalent value in exchange because (1) the child’s education increased his or her income earning capacity, thereby reduced the child’s financial dependency on the parent; and/or (2) satisfied the parent’s moral/societal obligation to support the family unit.
Lead Case Summary:
DeGiacomo v. Sacred Heart Univ. (In re Palladino), 556 B.R. 10 (Bankr. D. Mass. 2016):
The chapter 7 trustee sought to avoid and recover $65,000 in tuition payments made pre-petition by the debtor-parents to a university for their daughter’s education. The debtors’ filed affidavits stating that they paid the tuition because they felt obligated as parents to do so, and in hopes that an education would help their daughter become self-sufficient and reduce her financial burden on them in the future.
The court agreed with the debtors and their belief that a financially self-sufficient daughter would confer an economic benefit the debtor-parents. Therefore, the court found that the parents’ belief and motivation was concrete and quantifiable enough to constitute “reasonably equivalent value” in exchange for making tuition payments. To support this conclusion, the court explained that because a parent will not know whether it will be worth it at the time they pay the bill, “future outcome cannot be the standard for determining whether one received reasonably equivalent value.” Thus, the reasonable assumption that paying for a child’s tuition will confer an economic benefit on a parent constitutes a quid pro quo exchange of value at the time of the payment.
Other “Broad Value and Moral Obligation Approach” Cases:
Sikirica v. Cohen (In re Cohen), Adv. No. 07-02517, 2012 WL 5360956 (Bankr. W.D. Pa. Oct. 31, 2012), rev'd on other grounds, 487 B.R. 615 (W.D. Pa. 2013) (holding that, for purposes of Pennsylvania fraudulent transfer statutes only, a debtor receives “reasonably equivalent value” for funds used to satisfy reasonable and necessary expenses for the maintenance of the debtor’s family, and that payments for post-secondary undergraduate educational expenses are reasonable and necessary for the maintenance of the Debtor's family).
Trizechahn Gateway, LLC v. Oberdick (In re Oberdick), 490 B.R. 687 (Bankr. W.D. Pa. 2013) (interpreting “reasonably equivalent value” under the Pennsylvania fraudulent transfer statute, the court held that approximately $83,000 in tuition payments for adult children were not constructively fraudulent because, although there is no legal obligation to pay post-secondary education expenses, “there is
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something of a societal expectation that parents will assist with such expense if they are able to do so.”) (citing Cohen).
Slobodian v. Pa. State Univ. (In re Fisher), 575 B.R. 640 (Bankr. M.D. Pa. 2017) (recommending that defendant-university’s motion to dismiss be denied because the plaintiff-trustee plead a plausible claim and finding that the debtor received some intangible value from making tuition payments, but the court lacked sufficient evidence to determine equivalence of value).
3. Other Approaches:
“Mere Conduit Approach” – In re Adamo, 582 B.R. 267 (Bankr. E.D.N.Y. March. 29, 2018) (universities were “mere conduits” and thus were not initial transferees from which trustee could recover allegedly fraudulent transfers); see also Wilton and William A. McGee, Robbing Peter to Pay for College? November 2016 ABI Journal, at 32) (theorizing that educational institutions could employ the defense that they are not the initial transferee, and received the funds in good faith for value).
“Minor Children Approach” – Geltzer v. Trey Whitfield School (In re Michel), 573 B.R. 46 (Bankr. E.D.N.Y. 2017) (dismissing the chapter 7 trustee’s complaint to avoid and recover private school tuition payments for the debtor-parent’s minor children because the she received reasonably equivalent value by fulfilling her state law obligation to educate her minor children and because debtors and their minor children are views as a single economic unit) (citing Geltzer v. Xaverian High School (In re Akanmu), 502 B.R. 124 (Bankr. E.D.N.Y. 2013) (reaching the same conclusion)).
B. Parent PLUS Loan Proceeds: Can a chapter 7 trustee avoid and recover a debtor- parent’s Parent PLUS Loan proceeds paid to an educational institution for a non-debtor- child?
A strong consensus is forming among courts that the Parent PLUS Loan proceeds are not avoidable or recoverable because the funds were never property of the debtor. The Higher Education Act and related regulations provide that Parent PLUS Loans proceeds transfer directly from the Department of Education to the educational institution—not to the debtor.
Case Summaries:
Eisenberg v. Pennsylvania State University (In re Lewis), 574 B.R. 536 (Bankr. E.D. Pa. 2017) (granting the university’s motion to dismiss for failure to state a claim under § 548(a)(1) because, pursuant to the Higher Education Act and related regulations, Parent PLUS Loan proceeds are paid directly from the Department of Education to the educational institution and are therefore never property of the debtors).
Shapiro v. Gideon (In re Gideon), Adv. Pro. No. 16-04939 (Bankr. E.D. Mich. April 26, 2017) (deciding on summary judgment that Parent PLUS loan payments were never the debtors property and are therefore not recoverable).
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Boscarino v. Ithaca College (In re Ladipo), No. 15-21125, 2018 WL 1121590 (Bankr. D. Conn. Feb. 27, 2018) (following Eisenberg and Gideon and ruling on summary judgment that the loan proceeds were never property of debtor and therefore not recoverable as constructively fraudulent transfers); see also Novak v. University of Miami (In re Demitrus), Adv. Pro. No. 17-02036, 2018 WL 1121589, at *4 (Bankr. D. Conn. Feb. 27, 2018) (dismissing the adversary complaint in a short summary decision congruent with Lapido).
IV. Issue: Avoidance and recovery of tax payments made by the debtor pre-petition.
A. Constructive Fraud: Can a chapter 7 trustee avoid tax payments made pre-petition as constructively fraudulent under 11 U.S.C. § 548?
Assuming that the elements of § 548 are satisfied, there is a consensus that pre-petition tax payments to the IRS are avoidable by the trustee because the defense of sovereign immunity is abrogated by § 106(a)(1). However, the look-back period for transfers under § 548 is limited to two years, so trustees often invoke § 544(b) to use the longer look-back period available under state substantive law thereby potentially increasing the number of transfers that might be subject to avoidance.
B. Trustee's Strong-Arm Power / State Law Fraud: Can a chapter 7 trustee avoid tax payments made pre-petition under 11 U.S.C. § 544(b)(1) and state fraudulent transfer laws?
1. "No Actual Creditor" Approach:
The first court of appeals to address the issue of whether a trustee can bring a § 544(b)(1) claim “even though, outside of bankruptcy, sovereign immunity would bar a regular creditor from doing so” was the Seventh Circuit. See In re Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014). In Equipment Acquisition Resources the court held that a chapter 11 DIP may not avoid pre-petition pass-through tax payments to the IRS under § 544 for failure to satisfy the § 544(b)(1) requirement that an actual creditor exists who could bring the claim. No actual creditor existed who could bring a fraudulent transfer action against the IRS outside of bankruptcy because of the sovereign immunity defense is available to federal agencies under substantive state fraudulent transfer law. Thus, relying on the “two-step process” for determining liability of a federal agency set forth by the Supreme Court in FDIC v. Meyer, 510 U.S. 471 (1994), the court held that the waiver of sovereign immunity provided by § 106(a)(1) does not supersede any sovereign immunity defense available to a creditor under substantive state law.
2. "No Sovereign Immunity" Approach:
Before Equipment Acquisition Resources, the only courts to consider this issue came to the opposite conclusion.
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In re Pharm. Distrib. Servs., Inc., 455 B.R. 817, 821 (Bankr. S.D. Fla. 2011) (finding that § 106(a)(1) waived sovereign immunity with respect to a § 544(b) action against the IRS under state fraudulent transfer law); see also In re Custom Contractors, LLC, 439 B.R. 544, 548–49 (Bankr. S.D. Fla. 2010) (reaching the same conclusion); In re C.F. Foods, L.P., 265 B.R. 71, 84–86 (Bankr. E.D. Pa. 2001) (reaching the same conclusion).
After Equipment Acquisition Resources, the only other court of appeals to consider the issue (so far) disagreed with the Seventh Circuit.
In re DBSI, Inc., 869 F.3d 1004 (9th Cir. 2017) (holding that § 106(a)(1) “unambiguously and clearly abrogates sovereign immunity as to § 544(b)(1), including the underlying state cause of action,” and rejecting the Seventh Circuit’s conclusion that FDIC v. Meyer requires the waiver of sovereign immunity under substantive law in addition to the wavier already provided by § 106(a)(1)).
Lower courts considering the issue have tended to side with DBSI and against Equipment Acquisition Resources. See, e.g. McClarty v. Hatchett (Matter of Hatchett), No. 17- 45163, 2018 WL 1882914 (Bankr. E.D. Mich. Apr. 18, 2018).
C. Recovery: Can the trustee actually recover an avoidable fraudulent transfer if the IRS has already refunded the tax payments?
In the case In re Custom Contractors, LLC, 745 F.3d 1342 (11th Cir. 2014), the Eleventh Circuit held that although tax pre-payments to the IRS were constructively fraudulent, they were not recoverable because the pre-payments had already been refunded, and under the “control test,” the IRS acted as a mere conduit—not an initial transferee as required by § 550(a)(1). But what if the payments had not already been refunded?
V. Issues re Recovery of Fines as Fraudulent Transfers
Can a fine levied by a government agency be a constructively fraudulent transfer? The argument in favor would be that the party being fined does not receive reasonably equivalent value for the transfer.
One court (in dicta) suggested the answer could be yes. In re Standard Johnson Co., Inc., 90 B.R. 41 (Bankr. E.D.N.Y. 1988). Standard Johnson involved a question of what priority to accord a tax penalty. The court mused that a tax penalty may be subject to avoidance under Section 548, but never expanded further.
The Sixth Circuit noted that no cases have ever followed Standard Johnson in avoiding a tax penalty. In re Southeast Waffles, LLC, 702 F.3d 850 (6th Cir. 2012). Specifically:
The impact of a decision to allow avoidance of noncompensatory penalties as fraudulent transfers would be enormous. As noted by both the Bankruptcy Court and the BAP, such a decision could
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open a Pandora's box of litigation by debtors seeking not only to avoid all sorts of noncompensatory fines and penalties that are commonly encountered in bankruptcy cases but also to recover any prepetition payments made in satisfaction of those fines and penalties.
Id. at 859. Southeast Waffles concluded that payment of IRS penalties creates a dollar- for-dollar reduction in a debtor’s overall tax debt, and therefore provides the debtor with reasonably equivalent value.
Other courts have held that payments on fines provide the debtor with reasonably equivalent value. See, e.g., In re Citron, 428 B.R. 562, 573 (Bankr. E.D.N.Y. 2010) (payment of fines and penalties in plea deal).
However, one court concluded that a regulatory taking in exchange for a reduction in fines in penalties was a constructively fraudulent transfer. In re City Wide Investments, LLC, No. 17-22900-SVK, 2017 WL 4417576, at *3 (Bankr. E.D. Wis. Oct. 3, 2017). In City Wide the City of Milwaukee took an eight-unit apartment building in an in rem tax foreclosure. The Chapter 11 debtor had owed approximately $50,000 in taxes on a property the bankruptcy court found to have been valued at $330,000. The bankruptcy court entered judgment against the City for the $280,000 difference.
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Biography of Kathy Bazoian Phelps
Kathy Bazoian Phelps Diamond McCarthy LLP 1999 Avenue of the Stars, Suite 1100 Los Angeles CA 90067 310-651-2997 (office) 310-488-4883 (cell) [email protected] www.theponzibook.com www.ponzi‐proof.com www.theponzischemeblog.com www.kathybphelpsmediator.com
Kathy Bazoian Phelps is a partner at Diamond McCarthy LLP in the Los Angeles office and has been a lawyer since 1991. She practices in the area of bankruptcy law and fraud litigation, and frequently represents bankruptcy trustees and state and federal receivers, as well as serving as a Chapter 11 trustee herself. She represents litigants and parties in interest in bankruptcy and receivership cases and other insolvency proceedings. She is particularly knowledgeable about the administration of Ponzi scheme cases and has extensive litigation experience in claims arising in these types of cases and in tracing and recovering assets. Kathy has lectured widely and written on bankruptcy and receivership matters, with a focus on Ponzi schemes. Her book entitled The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes, co- authored with Hon. Steven Rhodes, has garnered national and international attention as the authoritative work on Ponzi scheme law. In addition to her roles as lawyer, speaker and author, Kathy also serves as a mediator and is currently on the mediation and arbitration rosters for the Financial Industry Regulatory Authority, as well as the Bankruptcy Mediation Panel for the Central District of California and the Bankruptcy Mediation Panel for the District of Arizona. Publications
The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes. co-authored with Hon. Steven Rhodes (Ret.) (LexisNexis® 2012)
Fraud and Forensics: Piercing Through the Deception in a Commercial Fraud Case, co-author (American Bankruptcy Institute 2015)
Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams (IRR Publishing 2013)
The Depths Of Deepening Insolvency: Damage Exposure For Officers, Directors and Others, co- authored with Prof. Jack F. Williams (American Bankruptcy Institute 2013)
Author of The Ponzi Scheme Blog at www.theponzischemeblog.com 7
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Biography of Janet S. Baer
Janet S. Baer is a Bankruptcy Judge in the United Stated Bankruptcy Court for the Northern District of Illinois-Chicago. She was appointed to the bench in March, 2012.
Prior to being appointed to the bench, Jan was a restructuring lawyer for over 25 years and involved in some of the most significant chapter 11 bankruptcy cases in the country. The majority of her practice focused on the representation of large publicly held debtors in both restructuring and chapter 11 matters. She also represented companies in commercial litigation matters including lender liability, fraud, breach of contract and breach of fiduciary duty. Prior to forming her own firm in 2009, Jan was a partner at Kirkland & Ellis LLP, Winston & Strawn and Schwartz, Cooper, Greenberger & Krauss, all in Chicago.
Judge Baer earned an undergraduate degree from the University of Wisconsin – Madison and a J.D. from DePaul College of Law. She is currently serves as:
Judicial Chair of the ABI 7th Circuit Eugene Wedoff Consumer Conference; Member of the National Conference of Bankruptcy Judges’ Membership Services Committee and Marketing Committee; NCBJ Board of Governors 7th Circuit Representative elect Board member of the Chicago chapter of the International Women’s Insolvency & Restructuring Confederation; Chair of the Northern District of Illinois Bankruptcy Court’s Local Rules Committee; Board Member, Chicago CARE -Credit Abuse Resistance Education; Member of the Chicago Bankruptcy Court Liaison Committee.
Judge Baer is a frequent speaker for the ABI, ABA, Chicago Bar Association, IWIRC and the Turnaround Management Association. Judge Baer also acts on a regular basis as the Presiding Judge in the Northern District of Illinois for Naturalization ceremonies.
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Brian C. Walsh
Brian C. Walsh Partner, St. Louis / Atlanta T: +1 314 259 2717 / +1 404 572 6917 [email protected]
PRACTICE Restructuring & Insolvency; Appellate; Commercial Litigation AREAS ADMISSIONS Missouri, 2006; Georgia, 1997; United States Supreme Court; United States Courts of Appeals for the Fourth, Fifth, Sixth, Seventh, Eighth, Ninth and Eleventh Circuits; United States District Courts for the Eastern District of Missouri and the Northern and Middle Districts of Georgia
EDUCATION Harvard University, J.D., magna cum laude, 1996; Duke University, A.B., magna cum laude, 1993
Brian Walsh is the leader of the Restructuring & Insolvency Practice Group at Bryan Cave Leighton Paisner. He represents debtors, secured lenders and other interested parties in Chapter 11 bankruptcy cases, receiverships, workouts and distressed transactions. He regularly advises borrowers, lenders and corporate officers and directors about their alternatives and duties in situations involving insolvency or financial distress. He is a Fellow of the American College of Bankruptcy.
Mr. Walsh also is an experienced appellate advocate. He argued before the Supreme Court of the United States during October Term 2017. He acts regularly as lead counsel in appeals throughout the United States, many of which involve debtor-creditor issues. He also teaches as an adjunct professor in the Appellate Clinic at Washington University Law School, and he served as the President of the Eighth Circuit Bar Association in 2017.
Mr. Walsh served as law clerk to the Hon. Pasco M. Bowman of the United States Court of Appeals for the Eighth Circuit.
bclplaw.com | A Global Law Firm 1
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EDWARD E. NEIGER
Edward E. Neiger is a managing Partner at ASK LLP. Prior to ASK LLP, Edward was the founding partner of Neiger LLP, a full service bankruptcy law firm. Prior to Neiger LLP, Edward was an attorney in the Business, Finance & Restructuring department of Weil, Gotshal & Manges LLP.
Edward’s practice focuses on representing unsecured trade creditors and prosecuting and defending preference and fraudulent conveyance actions. Over the years Edward prosecuted over 10,000 preference and/or fraudulent conveyance actions. He is involved in almost all large bankruptcies, particularly in the retail sector, usually on behalf of large unsecured trade creditors, but also on behalf of buyers, lenders, or other parties in interest. He represented over 50 fiduciaries tasked with recovering estate assets, and has recovered over $100 million for debtors, committees, secured creditors, post confirmation trusts, and chapter 7 trustees.
Edward regularly lectures on bankruptcy law and preference/avoidance actions. He authors numerous bankruptcy law articles, which are published in national publications including, among others, the American Bankruptcy Institute Journal, the Turnaround Management Association's Journal of Corporate Renewal, and the Bankruptcy Strategist. He also writes the Bankruptcy Update column for the New York Law Journal.
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162 Involuntary Bankruptcies:APrimer illustrations ofrelevant examples andcases. to abonafidedispute,etc.),including petitioning creditor, whenisaclaimsubject of involuntarybankruptcies(whomaybea In thisroundtable, discussthenutsandbolts A Primer Involuntary Bankruptcies: U.S. Bankruptcy Court (N.D.Ill.);Chicago Court U.S. Bankruptcy Hon. Deborah Thorne Owl CreekAssetManagement,L.P.; NewYork Steven Krause (N.D.Tex.); Court U.S. Bankruptcy Dallas Hon. Barbara J.Houser Shumaker, Loop&Kendrick, LLP;Tampa Steven M.Berman Reynolds, Reynolds&Little,LLC;Tuscaloosa Robert P. Reynolds,Moderator
2018 ABI ROUNDTABLES 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
164 AMERICAN BANKRUPTCY INSTITUTE
92nd Annual National Conference of Bankruptcy Judges October 28-31, 2018, San Antonio, TX
Involuntary Bankruptcy: A Primer Table of Contents
1. Involuntary Bankruptcy Panel. By Hon. Deborah Thorne (USBC, N.D. Ill.), Hon. Barbara Houser (USBC N.D. Tex.), Robert P. Reynolds (Reynolds, Reynolds & Little, LLC), Steven M. Berman (Shumaker, Loop & Kendrick, LLP), Steve Krause (Owl Creek Asset Management, L.P.……………………………….………………………...... 2
2. The Consequences of a Relic’s Codification: The Dubious Case for Bad Faith Dismissals of Involuntary Bankruptcy Petitions, ABI LAW REVIEW, Volume 26 No. 1, Winter 2018. By Amir Shachmurove (of Troutman Sanders LLP)…………………………………………….…33
Hon. Deborah Thorne, USBC, N.D. Ill. Hon. Barbara Houser, USBC, N.D. Tex. Robert P. Reynolds, Shareholder, Reynolds, Reynolds & Little, LLC Steve M. Berman, Partner, Shumaker, Loop & Kendrick, LLP Steve Krause, Investment Counsel/Analyst, Owl Creek Asset Management, L.P.1
1 A special thanks goes to Ian Follansbee, Law Clerk for Judge Deborah Thorne; Conor Burns, a 3L at Florida State University College of Law; and Jacob M. Salow, a 3L at the University of Alabama School of Law, whose assistance in researching and preparing these materials was invaluable.
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TABLE OF CONTENTS
1. STANDING TO FILE INVOLUNTARY PETITION ...... 3 A. Who may be a petitioning creditor? ...... 3 B. Can creditors be prohibited by a court order from commencing an involuntary proceeding? ...... 6
2. STRATEGIC USE OF INVOLUNTARY PROCEEDINGS FOR VENUE SELECTION, DEFENSES TO AN INVOLUNTARY AND THE ABILITY OF THE TARGET TO CONVERT TO A VOLUNTARY ...... 8
3. PROVING YOUR CLAIM IS NOT SUBJECT TO A BONA FIDE DISPUTE ...... 9 A. Use of affidavits and declarations ...... 10 B. Proofs of claim with support documentation ...... 11 C. Debtor’s prior admission or acknowledgment as to extent and validity of claims 11
4. TIMETABLE FOR OBTAINING AN ORDER OF RELIEF AND PETITION GAP ...... 13 A. Rights upon filing petition ...... 13 B. Gap prior to Order for Relief ...... 14 C. Effect of lengthy contest over petition ...... 14 D. Interim remedies ...... 15
5. CONFLICTS BETWEEN PETITIONING CREDITORS ...... 16 A. Secured, under-secured, and unsecured ...... 16 B. Impact of filing date prior to scheduled foreclosures, UCC sales and preference expiration date of judgment liens and consensual liens...... 19
6. REASONS TO FILE ...... 21 A. Benefits ...... 21 B. Proper motivations ...... 22 C. Centralize exercise of creditors’ rights ...... 24 D. Eliminates race to courthouse ...... 24
7. MOVING FOR THE IMMEDIATE APPOINTMENT OF A TRUSTEE FOR AN OPERATING ENTITY IN AN INVOLUNTARY CHAPTER 11 ...... 25 A. For “Cause” ...... 25
8. FILING AN INVOLUNTARY AND IMMEDIATELY MOVING TO TERMINATE EXCLUSIVITY TO FILE A CREDITOR PRE-PACK PLAN ...... 27
9. RISKS OF FILING AN INVOLUNTARY IN “BAD FAITH.” ...... 28 A. Scope of § 303(i) damages, fees and costs ...... 29 B. Continuing jurisdiction over post-dismissal damages/sanctions ...... 32
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1. STANDING TO FILE INVOLUNTARY PETITION
A. Who may be a petitioning creditor?
i. Entity. Must be an “entity,” § 101(15), which includes, see § 102(3), the following: “Person” = individual, partnership, corporation.2
ii. Must hold a “claim”3 Three children of the Debtor for whose benefit the Debtor owed child support to their mother could qualify as petitioning creditors, since they had a right to payment from the Debtor through their mother or through some other third party.4 If you’ve been assigned someone else’s claim, make sure you note that on the involuntary petition, otherwise you risk dismissal.5 Also, make sure you file a Rule 1003(a) statement stating that you did not acquire the claim for the purpose of commencing the case.6 If you transfer and/or split a claim with the intent to commence an involuntary case, both your claim and the claim of the person/entity to whom you transferred a claim will not count.7 If the corporate veil is pierced, the equity owner(s) and corporate entity(ies) will not have separate claims. Operational control, funneling of money from affiliate/subsidiary to parent, reference to the affiliates/subsidiaries as “dbas” in a prior bankruptcy case, and having the affiliates/subsidiaries file proofs of claim only when the number of petitioning creditors was directly at issue all supported a finding that the corporate veil should be pierced such that the filed claims of the allegedly separate entities did not qualify them as a separate petitioning creditors.8 Accrued but not-yet-due property taxes gave a governmental entity a claim such that they could qualify as a petitioning creditor.9
2 11 U.S.C. § 101(41).
3 11 U.S.C. §§ 101(5), 102(2) (nonrecourse liability suffices).
4 In re Hopkins, 177 B.R. 1, 1–2 (Bankr. D. Me. 1995).
5 In re Clignett, 567 B.R. 583, 586–87 (Bankr. C.D. Cal. 2017).
6 See 2 COLLIER ON BANKRUPTCY ¶ 303.12[1].
7 Id.
8 In re Glob. Waste Co., 207 B.R. 542, 547 (Bankr. N.D. Ohio 1997).
9 In re 35th & Morgan Dev. Corp., 510 B.R. 832, 851 (Bankr. N.D. Ill. 2014).
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An equity interest in the Debtor does not count as a claim and therefore equity interest holders do not qualify as petitioning creditors unless the equity interest holder is a general partner and otherwise qualifies separately under § 303(b)(3). An obligation payable under a note to two or more obliges/payees in the conjunctive creates a single claim only; neither payee has its own separate claim and the joint payees could not qualify as two petitioning creditors.10 This principle applies to judgment debts as well.11 But if substantive nonbankruptcy law indicates that the obligations owed to each obligee are separate and distinct, such as where an agreement sets out differing obligations to pay different sums to each obligee, then each obligee holds its own, separate claim.12 Or you can be an indenture trustee representing the holder of a claim. The joinder of an indenture trustee where the individual holders of debentures have already commenced an involuntary bankruptcy does not extinguish the separate claims held by the individual holders of the debentures.13
iii. Numerosity Requirement If the proposed Debtor has more than 12 qualified holders of claims, the petition must be filed by 3 or more holders of separate claims (or an indenture trustee representing such a holder); if the proposed Debtor has fewer than 12 qualified holders of claims (of the type described in section 303(b)(1) (see § 303(b)(2) –– “such holders”)), by contrast, only 1 claim holder is needed to file the petition.14 In determining whether there are fewer than 12 qualified holders of claims, employees, insiders, and transferees of transfers voidable under the Code are excluded. But small, de minimis holders are included,15 though there is authority contra.
iv. Qualifying Petitioning Creditor To constitute a qualifying petition creditor, the claim held by the creditor must not be in bona fide dispute as to liability or amount.16
10 In re McMeekin, 16 B.R. 805, 809 (Bankr. D. Mass. 1982).
11 Huszti v. Huszti, 451 B.R. 717, 721 (E.D. Mich. 2011) (“In the present case, the judgment is the functional equivalent of the promissory note in McMeekin. Like the payees of the promissory note in McMeekin, the judgment creditors in the present case are separate persons or entities, who are listed in the conjunctive and are collectively entitled to one, indivisible sum of money.”); In re Forster, 465 B.R. 97, 101 (Bankr. W.D. Va. 2012) (“However, if the separate obligations due to multiple payees are not articulated, and instead one lump sum is payable to two or more individuals, courts have consistently held that the individuals hold only one claim between them.”).
12 In re Richard A. Turner Co., Inc., 209 B.R. 177, 179 (Bankr. D. Mass. 1997).
13 In re Federated Grp., Inc., 107 F.3d 730, 733 (9th Cir. 1997).
14 11 U.S.C. § 303(b); In re Green Hills Dev. Co., 741 F.3d 651, 655 (5th Cir. 2014).
15 Matter of Rassi, 701 F.2d 627, 631–32 (7th Cir. 1983)
16 In re Reid, 773 F.2d 945, 947 (7th Cir. 1985) (noting that this requirement was added to the Code in 1984).
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“[I]n considering whether a claim is subject to a bona fide dispute, the bankruptcy court must determine whether there is an objective basis for either a factual or a legal dispute. Under this objective standard, the petitioning creditor has the burden to establish a prima facie case that no bona fide dispute exists, after which the debtor must present evidence sufficient to rebut the prima facie case. Neither the debtor's subjective intent nor his subjective belief is sufficient to meet this burden. Furthermore, although the court may be required to conduct a limited analysis of the legal issues and its determination will often depend upon an assessment of witnesses’ credibilities and other factual considerations, the court’s aim is to ascertain whether a dispute that is bona fide exists, not to actually resolve the dispute.”17 “When such a dispute exists, we do not allow the creditor to coerce the debtor's surrender by credibly threatening to use the claim as a basis for an involuntary petition.”18 An unstayed, non-default state court judgment on appeal may or may not be subject to a bona fide dispute. Majority rule: Not subject to bona fide dispute.19 Minority rule: Only establishes creditor’s prima facie case as to the claim not being the subject of a bona fide dispute; debtor is given opportunity to rebut the presumption.20
v. Requirements are not jurisdiction Section 303(b)’s requirements are not jurisdictional, so if no arguments are raised that the requirements are not met or there is otherwise no contest regarding the petition, a case can proceed and then continue even if later comes to light that the requirements had not, in fact, been met at the outset of the case.21
vi. Amount of Claims The amount of the claims must equal, in the aggregate, at least $15,775, and, if the claims are secured by a lien in or on property of the debtor, the amount of the claims must equal, in the aggregate, at least $15,775 more than the value of the lien(s).22 If a debtor has a counterclaim for recoupment against a petitioning creditor, or a counterclaim arising out of the same transaction giving rise to the creditor’s claim, the amount of the debtor’s recoupment claim may diminish or set-off the amount of the creditor’s claim.23
17 Green Hills, 741 F.3d at 658 (internal quotations and citations omitted) (emphasis added); see also Matter of Busick, 831 F.2d 745, 750 (7th Cir. 1987) (“[T]he bankruptcy court must determine whether there is an objective basis for either a factual or a legal dispute as to the validity of debt.”). 18 Fustolo v. 50 Thomas Patton Drive, LLC, 816 F.3d 1, 7 (1st Cir. 2016) (emphasis added); see also In re TPG Troy, LLC, 793 F.3d 228, 234 (2d Cir. 2015).
19 In re Marciano, 708 F.3d 1123, 1126 (9th Cir. 2013).
20 Id.
21 In re Trusted Net Media Holdings, LLC, 550 F.3d 1035 (11th Cir. 2008); In re Zarnel, 619 F.3d 156, 167–70 (2d Cir. 2010).
22 11 U.S.C. § 303(b)(1)–(2).
23 In re Seko Inv., Inc., 156 F.3d 1005, 1008–09 (9th Cir. 1998).
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Practice Pointer. The Bankruptcy Code invites joinder of additional creditors. If the petitioning creditors find others willing to join, the additional creditors may file joinders to the petition. This may protect the petition from being dismissed if one of the original creditors is disallowed. It is very important that the petitioning creditors find the other petitioning creditors so that the attorney filing is not found to be soliciting clients in way that may not be appropriate under various cannons of ethics.
vii. The claim must not be “contingent as to liability” [C]laims are contingent as to liability if the debt is one which the debtor will be called upon to pay only upon the occurrence or happening of an extrinsic event which will trigger the liability of the debtor to the alleged creditor and if such triggering event or occurrence was one reasonably contemplated by the debtor and creditor at the time the event giving rise to the claim occurred.24 Practice Pointer. Require petitioning creditors to provide copies of undisputed invoices and an affidavit as to the amount owed. Also, it is wise to have the petitioning creditors file proofs of claim as soon as the case is filed. Any disputed invoices should not be considered part of the claim for the purposes of filing the involuntary petition.
B. Can creditors be prohibited by a court order from commencing an involuntary proceeding?
An order in a state court receivership cannot take away the debtor’s right to bankruptcy relief; if the bankruptcy statute affords creditors the same right to bankruptcy relief (see § 303), it would seem as though a state court could not prohibit the creditors from filing an involuntary federal bankruptcy petition.25 One court has explicitly held that a state court injunction in a receivership proceeding purporting to bind “all other persons whomsoever” did not prohibit creditors from filing an involuntary petition.26 What about a federal court order?
i. Yes, creditors may be prohibited in certain circumstances.27
24 Matter of Ford, 967 F.2d 1047, 1051 (5th Cir. 1992) (internal citations and quotations omitted) (emphasis added).
25 In re Mt. Forest Fur Farms of Am., 103 F.2d 69, 71 (6th Cir. 1939) (“This restraining order was erroneously entered. It denied to the appellee, its directors, stockholders and attorneys, access to the federal courts, thus depriving them of their constitutional right to relief under Sec. 77B of the Bankruptcy Act.”); see also Matter of Cash Currency Exch., Inc., 762 F.2d 542, 552–53 (7th Cir. 1985); In re Prudence Co., 79 F.2d 77, 80 (2d Cir. 1935).
26 In re Great Lakes Rubber Prod. Co., 1 F. Supp. 609, 611 (N.D. Ohio 1932).
27 S.E.C. v. Byers, 609 F.3d 87, 91–92 (2d Cir. 2010).
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An anti-bankruptcy injunction is appropriate where there are hundreds of entities in a federal receivership with co-mingled assets spread over 2-3 continents.28 It may be appropriate where a liquidation under a federal receivership is “substantially underway.”29 But where it is the creditors of the entity in a federal receivership who wish to commence bankruptcy proceedings, and not the management of the debtor, the equities may weigh more heavily in favor of allowing a bankruptcy proceeding to commence despite a pending federal equity receivership than where it is the debtor’s management who wish to commence bankruptcy proceedings.30
28 Id. at 92–93.
29 United States v. Royal Bus. Funds Corp., 724 F.2d 12, 16 (2d Cir. 1983).
30 SEC v. Lincoln Thrift Ass’n, 577 F.2d 600, 607–08 (9th Cir. 1978) (noting the distinction); but see In re Yaryan Naval Stores Co., 214 F. 563, 565–66 (6th Cir. 1914)
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2. STRATEGIC USE OF INVOLUNTARY PROCEEDINGS FOR VENUE SELECTION, DEFENSES TO AN INVOLUNTARY AND THE ABILITY OF THE TARGET TO CONVERT TO A VOLUNTARY
While creditors generally approach involuntary filings relatively cautiously, an involuntary petition is a powerful tool in the hands of an aggrieved creditor. Example: Caesars, Case No. 15-10047 (KG) (Bankr. D.Del.) / Case No. 15-01145 (ABG) (Bankr. N.D. Ill.) Certain of Caesars’ creditors filed involuntary proceedings in Delaware on the eve of the company’s anticipated filing, which occurred as rumored in Chicago. On January 12, 2015, Jones Day as counsel to certain holders of the Caesars Entertainment Operating Company, Inc.’s second- priority senior secured notes due 2018 filed involuntary proceedings. On January 15, Judge Gross stayed proceedings in the Illinois case (In re Caesars Entertainment Operating Company, Inc., Case No. 15-01145(ABG) (Bankr. N.D. Ill.) pending resolution of the involuntary (Dkt. No. 47, Case 15-10047-KG). The court dealt with these issues on an expedited basis, and, on February 2, issued a 23-page opinion (Dkt. No. 227). In this opinion, Judge Gross found that as the judge in the first filed case, he could choose where and whether the involuntary cases should be heard (page 12). The court found that, pursuant to Section 1408 venue was appropriate in both Illinois and Delaware and that Section 1412 “provides that the Court ‘may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties,” and that Rule 1014 supports a similar result. (page 11). There, the court found, “that the interest of justice narrowly supports a determination that the Voluntary and Involuntary Cases should proceed before the Illinois Court.” See all significant filings here: https://www.drinkerbiddle.com/capabilities/services/bondholders/caesars-entertainment- opco-noteholders/involuntary-bankruptcy-case For a debtor in a foreign main proceeding, creditors should initiate US involuntary Chapter 11 proceeding during the pendency of a Chapter 15 process, before the court has entered a recognition order.
Example: SEC v. Byers, 609 F.3d 87 (2d Cir. 2010) Here, the SEC protected the assets of the fraudster with “an anti-litigation injunction contained in the [district court’s] order placing defendants’ assets into receivership.” (*89). The creditors argued that Section 303 of the Bankruptcy Code “grants them an absolute right, as creditors, to commence an involuntary bankruptcy proceeding against a debtor.” (*91). Both the Sixth and Ninth Circuits reach a similar result.31
Example: In re Ocean Rig UDW Inc., (17-10736-MG Bankr. D.Del. 2017)
31 SEC v. v. Wencke, 622 F.2d 1363, 1369 (9th Cir. 1980); Liberte Capital Grp., LLC v. Capwill, 462 F.3d 543 (6th Cir. 2006).
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Ocean Rig involved a Cayman main proceeding. The debtors were concerned that the out-of- the-money bondholder, Highland, would seek an involuntary before a US court would recognize the foreign proceeding. In fact, Highland Capital, a junior creditor, objected to the provisions of the provisional relief order that precluded involuntary filings. In a hearing on Aril 20, 2017 to consider an injunction preventing an involuntary filing, Judge Glenn -- Citing Ran, 607 F.3d 1017 (5th Cir 2010), Vitro, 455 B.R. 571 (Hale, J., Bankr. N.D.Tex. 2011), Pro-Fit Int’l Ltd., 391 B.R. 850 (Bufford, J., Bank. C.D. Cal. 2008) – determined that, under Section 1519, he could extend the stay in a chapter 15 to prevent creditors from doing so while the recognition hearing was pending. See also Supplement Brief of the Debtors at Dkt. No 47 (April 14, 2017).
3. PROVING YOUR CLAIM IS NOT SUBJECT TO A BONA FIDE DISPUTE
Pursuant to section 303(b)(1), a petitioning creditor lacks standing to file an involuntary petition if the creditor’s claim is “the subject of a bona fide dispute as to liability or amount.”32 The purpose of the bona fide dispute requirement both discourages creditors with questionable claims from threatening debtors with an involuntary petition filing and provides creditors with an alternative procedure for recovering undisputed claims.33 The burden of establishing a claim is not subject to bona fide dispute rests with the petitioning creditor(s).34 Generally, a bona fide dispute, regarding a petitioning creditor’s claim, exists only if the court finds an objective basis for questioning the factual or legal validity of the claim or debt.35 In other words, if either: (a) a genuine issue of material fact bearing upon the debtor’s liability or (b) a meritorious contention regarding the application of law to undisputed facts exists, then a bona fide dispute exists and the creditor lacks standing on that claim.36 These are considerations for a court in the absence of a prior final, non-appealable, adjudication of the claim by a court of competent jurisdiction. Once a creditor has established its claim is not subject to a bona fide dispute, the burden shifts to the involuntary debtor to present evidence that a bona fide dispute exists either as to liability or amount.37 The debtor’s personal or subjective disagreement about the validity of the creditor’s
32 11 U.S.C. § 303(b)(1) (2012) (as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (2005)).
33 Fustolo v. 50 Thomas Patton Dr., L.L.C., 816 F.3d 1, 7 (1st Cir. 2016) (discussing the “often conflicting” purposes served by the Bankruptcy Code, and section 303 in particular).
34 Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 944 (6th Cir. 2007) (“The burden rests on the petitioning creditors to establish that they are qualified under § 303(b)(1).”).
35 One S.p.A. v. TPG Troy, L.L.C. (In re TPG Troy, L.L.C.), 793 F.3d 228, 234 (2d Cir. 2015) (justifying objective test by reference to Congressional intent expressed in legislative history); Credit Union Liquidity Servs., L.L.C. v. Green Hills Dev. Co. (In re Green Hills Dev. Co.), 741 F.3d 651, 658 (5th Cir. 2014) (contrasting the different significance of the bona fide dispute analysis under sections 303(b) and 303(h)); In re Int’l Oil Trading Co., 545 B.R. 336, 349 (Bankr. S.D. Fla. 2016) (providing detailed survey of bona fide dispute analysis).
36 Metz v. Dilley (In re Dilley), 339 B.R. 1, 7 (1st Cir. 2006) (noting majority’s adoption of objective test).
37 Platinum Fin. Servs. Corp. v. Byrd (In re Byrd), 357 F.3d 433, 439 (4th Cir. 2004) (finding creditor’s three, un-stayed court judgments shifted burden regarding a bona fide dispute to the debtor); In re Bimini Island Air, 370 B.R. 408, 413 (Bankr. S.D. Fla. 2007) (finding debtor’s mere desire not to pay debts insufficient to create a bona fide dispute as to amount or liability).
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claim is not dispositive.38 While some courts have found a bona fide dispute exists when a debtor questions part of the creditor’s claim, other courts have required the debtor’s dispute, if successful, to reduce the creditor’s claim below the statutory threshold for qualified petitioning creditors in order to trigger a bona fide dispute.39 Because the bankruptcy court’s goal is to decide whether a dispute exists (not necessarily to resolve the dispute), the court may be required to analyze both legal and factual issues in order to determine whether the debtor has a legitimate or objective basis for challenging the creditor’s claim.40 A. Use of affidavits and declarations
Beyond the information required in Form 105, Rules 1018 and 7010 authorize parties in contested involuntary proceedings to supplement their pleadings with documentary evidence, including affidavits and other exhibits.41 Additionally, most courts have adopted their own local rules governing pleading requirements and motion practice.42 These rules often authorize or contemplate the use of affidavits and other documentary evidence when filing pleadings or motions, which indicates the permissibility of using such documents in a contest regarding whether a claim is subject to a bona fide dispute.43 For example, affidavits submitted by petitioning creditors, when considered with an involuntary debtor’s accounting of the debts it owes to the creditors, may be sufficient evidence to support a finding of the petitioners’ status as qualified creditors.44 When an involuntary debtor fails to specifically object to a petitioning creditor’s claim on the grounds of a bona fide dispute, by contesting the petition, an affidavit, asserting the existence of a creditor’s claim and the debtor’s failure to pay the debt for greater than thirty days, may be sufficient to establish the creditor’s entitlement to relief.45
38 In re Agrawal, 560 B.R. 566, 570 (Bankr. W.D. Okla. 2016) (“[T]he debtor’s subjective intent does not control whether a claim is considered to be subject to a bona fide dispute.”) (citations omitted).
39 See In re EM Equip., L.L.C., 504 B.R. 8, 16-17 (Bankr. D. Conn. 2013) (explaining disagreement among courts); In re Hentges, 351 B.R. 758, 775-77 (Bankr. N.D. Okla. 2006) (noting petitioning creditor may avoid this issue by simply asserting the amount that the debtor cannot dispute, i.e. the amount not subject to a bona fide dispute). 40 Mkt’g & Creative Sols., Inc. v. Scripps Howard Broad. Co. (In re Mkt’g & Creative Sols., Inc.), 338 B.R. 300, 305 (6th Cir. 2006) (finding debtor was bound on creditor’s claim, despite debtor not being a party to the contract, where state law imposed contract liability on agent for actions on behalf of undisclosed principal); Rimell v. Mark Twain Bank (In re Rimell), 946 F.2d 1363, 1365 (8th Cir. 1991) (recognizing bankruptcy court is permitted to engage in limited fact-finding and legal analysis, including weighing of evidence and testimony).
41 FED. R. BANKR. P. 1018, 7010 (noting the applicability of Fed. R. Civ. P. 10(c)).
42 Id. at R. 9029(a) (authorizing bankruptcy courts to adopt local procedural rules supplemental to the Fed. R. Bankr. P.).
43 See BANKR. M.D. FLA. R. P. 3007, 3012 (addressing motion practice for objecting to claims and approving use of affidavits); Bankr. N.D. TEX. R. P. 3001-1 (requiring proof of claim for all petitions), 7007-1 (expressly authorizing the use of affidavits and other documentary exhibits for all motions); BANKR. N.D. ILL. R. P. 9013-1 (authorizing the attachment of exhibits as evidence for motions).
44 In re N. Cty. Chrysler Plymouth, Inc., 13 B.R. 393, 396-97 (Bankr. W.D.Mo. 1981) (“While the petitioning affidavits lack careful draftsmanship, not utilizing the language of the state or prior decisions, those affidavits, taken with the listing of the debts by [the debtor] are sufficient to establish the claims of the petitioning creditors.”).
45 See In re Manchester Lakes Asscs., 47 B.R. 798, 800-02 (Bankr. E.D.Va. 1985) (finding petitioning creditors’ affidavits sufficient under Rule 7056 when debtor filed no counter-vailing evidence); cf. In re Cone, 6 F. Cas. 268 (S.D.N.Y. 1868) (finding petitioning creditor’s failure to attach affidavit to involuntary petition alleging debtor’s fraudulent failure to pay note when due was legally insufficient).
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B. Proofs of claim with support documentation
Because courts have used proofs of claim filed by additional creditors to establish that an involuntary debtor had greater than eleven creditors, thus triggering section 303(b)(1), rather than section 303(b)(2), petitioning creditors can use proofs of claim to support a finding that they are qualified creditors.46 After all, the execution and filing of a proof of claim, in accordance with the Rules by filing a completed Form 410 (or another of the Official Forms, depending on the claim type)47, constitutes prima facie evidence of the validity and amount of the claim.48
C. Debtor’s prior admission or acknowledgment as to extent and validity of claims
Generally, if an involuntary debtor has previously conceded the existence of a petitioning creditor’s claim, then courts usually find no bona fide dispute exists regarding the claim.49 For example, where an involuntary debtor admits to making a promissory note and then failing to repay the note when due, and fails to present evidence contradicting liability on the note, courts typically find no bona fide dispute exists regarding the indebtedness.50 Likewise, an involuntary debtor’s whole or partial post-petition payment on a petitioning creditor’s claim may qualify as evidence to support a finding that the claim is not subject to a bona fide dispute.51 Further, many courts interpret an un-stayed judgment, regardless of the appeal status of the underlying claim, as the debtor’s acknowledgement of liability on the claim; concluding such claims are not subject to a bona fide dispute.52
46 See In re Schiliro, 64 B.R. 422 (Bankr. E.D. Pa. 1986); see also B.D. Int’l Discount Corp. v. Chase Manhattan Bank, N.A. (In re B.D. Int’l Discount Corp.), 701 F.2d 1071, 1076 (2d Cir. 1983) (finding one petitioning creditor’s proof claim and the debtor’s concession of indebtedness to a second creditor was sufficient to establish a third creditor’s claim, even though third creditor was not certain as to amount owed).
47 11 U.S.C. § 501(a); Fed. R. Bankr. P. 3001, 3002.
48 FED. R. BANKR. P. 3001(f).
49 See In re Pacific Rollforming, L.L.C., 415 B.R. 750, 754-55 (Bankr. N.D. Cal. 2009).
50 Id. (“[Debtor] concedes that, as a co-borrower, it was a party to a $100,000 promissory note in [creditor’s] favor . . . that [creditor] advanced [debtor] the funds, and that [creditor] has not been repaid. . . . The court holds . . . that [creditor] is a qualified petitioner herein.”).
51 In re Faberge Restaurant of Fla., Inc., 222 B.R. 385, 388 (Bankr. S.D. Fla. 1997) (“[I]t is deemed by this Court that payment made postpetition will not permit a Debtor to dismiss an involuntary petition because of postpetition payment. Instead, the postpetition payment evidence that there is no bona fide dispute between the Debtor and petitioning creditor . . .”).
52 In re Byrd, 357 F.3d at 439; In re Manhattan Indus., Inc., 224 B.R. 195, 200 (Bankr. M.D. Fla. 1997). But see In re AMC Investors, L.L.C., 406 B.R. 478, 484-87 (Bankr. D. Del. 2009) (disagreeing with Byrd and finding that the un-stayed status of a judgment should not be the end of the court’s dispute inquiry); accord In re Starlite Houseboats Inc., 426 B.R. 375 (Bankr. D.
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Note, however, that an involuntary debtor’s bona fide dispute as to either liability or amount can be sufficient to disqualify a petitioning creditor’s claim.53 For example, even if an involuntary debtor admits to liability on a petitioning creditor’s claim, if the debtor disputes the claim amount reducing the claim below section 303(b)’s claim floor, then the claim may be subject to bona fide dispute.54 Moreover, while the fact that an involuntary debtor recently ceased paying on its obligations as they became due may be relevant to the court’s analysis under section 303(h), the acknowledgement of the petitioning creditor’s claims, implied by the payment, would not categorically preclude the court hearing evidence and making an ultimate finding of a bona fide dispute on the claim.55
Kan. 2010) (finding default judgment subject to bona fide dispute after debtor raised issue regarding the defaulting court’s jurisdictional capacity).
53 11 U.S.C. § 303(b)(1). 54 See generally Farmers & Merchants State Bank v. Turner (In re Turner), 518 B.R. 642, 650-54 (N.D. Fla. 2014) (discussing conflict among courts regarding extent to which a dispute on a portion of a claim can subject the entire claim to a bona fide dispute); In re ELRS Loss Mitigation, L.L.C., 325 B.R. 604, 628 (Bankr. N.D. Okla. 2005) (finding involuntary debtor’s pending counterclaim may offset petitioning creditor’s claim and create bona fide dispute).
55 See Bartmann v. Maverick Tube Corp. (In re Bartmann), 853 F.2d 1540, 1544 (10th Cir. 1988) (noting fact that debtor only resumed paying on debt post-petition does not preclude finding claim is subject to bona fide dispute).
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4. TIMETABLE FOR OBTAINING AN ORDER OF RELIEF AND PETITION GAP
Parts I and VII of the Rules establish the primary procedures for involuntary petition proceedings.56 Once a creditor files an involuntary petition and serves the debtor with the clerk’s summons, the debtor has twenty-one days to contest the involuntary petition, whether by filing an answer with affirmative defenses or by filing and serving a motion to dismiss (or a related motion).57 If the debtor fails to file a pleading or other defense within that time-period, then the court will consider the allegations in the petition admitted and issue the order for relief requested.58 If the debtor files an answer contesting the involuntary petition (or other motion for relief), then the court will typically proceed to trial (or a hearing) to determine the contested issues and, subsequently, issue appropriate relief.59 When an involuntary petition is contested in this manner, many of the Rules governing adversary proceedings are applied because of the controverted nature of the contested matter.60 For example, Rules 7005, 7007, 7010, 7012 and 7056 incorporate by reference the corresponding rules under the Federal Rules of Civil Procedure, which address service of pleadings; the type of pleadings that can be filed; whether additional exhibits may be attached to pleadings; the availability of the Rule 12(b) defenses and Rule 56 summary judgment.61
A. Rights upon filing petition
Given the contested nature of an involuntary petition, the Debtor generally has greater rights than does a creditor post-filing. Specifically, upon the filing of an involuntary petition, the Debtor is protected by the automatic stay (§ 362(a)) and has the right to the continuation of normal business operations (§ 303(f)), unless the automatic stay is dissolved by court (§ 362(d), FRBP 4001(a)) or court orders otherwise (§ 303(f)). Conversely, the Debtor need not comply with the strictures of: (i) section 363 on the use, sale or lease of assets, (ii) the preparation of monthly operating reports or (iii) the preparation of a plan and disclosure statement.
56 See FED. R. BANKR. P. 1003, 1004, 1010, 1011, 1013 & 1018 (2018).
57 Id. at R. 1011(a)-(c). As in the Federal Rules of Civil Procedure, the filing of a motion under Rule 12(b) tolls the time-period required for filing a pleading to contest the petition. Id. at R. 1011(c).
58 Id. at R. 1013(b). But see Id. at R. 9024 (authorizing relief from default judgment pursuant to Fed. R. Civ. P. 60); Wynn v. Eriksson (In re Wynn), 889 F.2d 644, 645-46 (5th Cir. 1989) (refusing to hold, as a matter of law, that a two-year delay in granting an involuntary petition violates the plain language of Rule 1013).
59 FED. R. BANKR. P. 1013(a).
60 Id. at R. 1018; In re Tobacco Rd. Ass’cs, Ltd. P’ship., 2007 WL 966507 *5-6 (E.D. Pa. 2007).
61 FED. R. BANKR. P. 1018 (listing those Rules that apply to contested involuntary proceedings), 7005, 7007, 7010, 7012 & 7056. Note that the Rules authorizing the use of documentary exhibits for involuntary proceedings apply only to “contested” involuntary proceedings; although involuntary proceedings are likely to be contested by the debtor, the question remains whether supplemental materials can be properly attached to involuntary petitions yet-to-be contested. See Id. Advisory Committee’s Note, 2010 Amendments (noting deletion of “relating to” language from Rule 1018).
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B. Gap prior to Order for Relief
Subject to the court’s discretion, and until the court enters an order for relief, section 303(f) authorizes an involuntary debtor to continue operating its business and controlling the disposition of its property, as if an involuntary petition had not been filed.62 Because an involuntary debtor can continue normal business operations, without being subject to section 363’s property disposition restrictions, the period of time, between the date of filing and entry of an order for relief, is typically referred to as the “Gap Period.”63 Conversely, section 362(a)’s automatic stay is effective on the date the involuntary petition is filed, which means pre-petition creditors are prevented from continuing collection efforts against the debtor even though the involuntary debtor is not bound by the Code’s other provisions.64 Section 303(f) preserves the court’s discretion in allowing an involuntary debtor to continue normal business operations by conditioning that right consistent with the provision “except to the extent that the court orders otherwise.”65 Section 303(g) specifically contemplates the court’s ability to order the appointment of an interim trustee, when necessary to preserve the property of or prevent continued loss to a Chapter 7 debtor’s estate.66 Case law also exists to support the court’s authority to make a similar appointment in a Chapter 11 case or to order other equitable relief, such as a temporary injunction, pursuant to the court’s section 105 equitable powers and section 1104(a).67
C. Effect of lengthy contest over petition
It may be difficult to weigh the risks of a prolonged fight on an involuntary petition. After all, the petition may be uncontested, either because the business knows it needs relief which can only
62 11 U.S.C. § 303(f). Scholars have reasoned that the section 303(f)’s authorization is intended to avoid the chilling effect of a voluntary bankruptcy proceeding from upsetting the orderly course of business for an involuntary debtor. See Consolidated Partners Inv. Co. v. Lake (In re Consolidated Partners Inv. Co.), 152 B.R. 485, 490-91 (Bankr. N.D. Ohio 1993). However, because section 362(a) applies an automatic stay to involuntary debtors, post-petition creditors may be unwilling to work with an involuntary debtor because of the difficulty in later lifting the stay. See COLLIER ON BANKRUPTCY ¶ 303.23
63 See generally Signature Apparel Grp., L.L.C. v. Laurita (In re Signature Apparel Grp., L.L.C.), 577 B.R. 54, 100 (Bankr. S.D.N.Y. 2017) (referring to the time between filing and relief as the “Gap Period”).
64 Id. at 87 (discussing applicability of § 362); 11 U.S.C. § 362(a)(1) (“[A] petition filed under section 301, 302 or 303 . . . operates as a stay . . .”); H.R. Rep. No. 95-595, at 340 (1977) reprinted in 1978 U.S.C.C.A.N. 5963, 6297 (discussing legislative intent behind automatic stay of proceedings).
65 11 U.S.C. § 303(f); In re Health Trio, Inc., 584 B.R. 342, 349 (Bankr. D. Colo. Jan. 24, 2018) (“Section 303(f) provides that any business of the debtor may continue to operate in the gap period.”).
66 Id. at § 303(g); In re Stainless Steel Corp., 583 B.R. 717, 730 n. 7 (Bankr. N.D. Ill. Mar. 30, 2018) (noting availability of interim trustee appointment in involuntary cases).
67 See In re Prof’l Accountants Referral Servs., Inc., 142 B.R. 424, 429-31 (Bankr. D. Colo. 1992) (noting that in appointing interim trustee in involuntary chapter 11 petition, court must determine whether “there is a reasonable likelihood, or probability, that this Debtor will eventually be found to be a proper involuntary debtor under [§ 303] and that an order for relief will enter.”); In re Alpine Lumber & Nursery, 13 B.R. 977, 979 (Bankr. S.D. Cal. 1981); COLLIER ON BANKRUPTCY ¶ 303.28.
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be awarded by the bankruptcy court or because the business no longer operates. On the other hand, a contested petition could be litigated over a matter of months (potentially longer than a year) whether based on eligibility or the petitioning creditors’ misuse of the involuntary provisions as a means to forum shop what is largely a collections remedy.
D. Interim remedies
During the Gap Period, petitioning creditors can avail themselves of at least two remedies: First, the creditors can petition the court for the appointment of an interim trustee to control the involuntary debtor’s estate, and second, the creditors can appeal for equitable relief pursuant to sections 303(f)’s “unless the court orders otherwise” governor on the debtor’s right to continue normal business operations.68 Moreover, prior to the entry of an order for relief, petitioning creditors can request a hearing and an order for an entitlement to attorney’s fees, costs and expenses.69 Before an order for relief is entered in a Chapter 7 case, any party in interest can request the appointment of an interim trustee, if the appointment is “necessary to preserve the property of the estate or to prevent loss to the estate.”70 After a hearing, the court has discretion to grant the requested relief; however, the debtor retains the right to post a bond and an accounting in order to regain control of the estate’s property, so long as the debtor does so before the order of relief is entered.71 As noted above, case law supports the proposition of extending interim trustee appointment to involuntary petitions filed under Chapter 11, despite section 303(g) being facially limited to Chapter 7 filings.72 Courts have interpreted section 303(f)’s “unless the court orders otherwise” proviso to allow the court to grant discretionary relief from section 303(f)’s authorization.73 For example, if the petitioning creditors present evidence at a hearing showing justifiable concern for the foreseeable disposition of the debtor’s property, pending a trial on involuntary relief, then the court may require
68 See 11 U.S.C. § 303(f)-(g). Moreover, if the involuntary debtor fails to contest the involuntary petition within the twenty-one day period (and subject to any additional conditions imposed by the court), then the involuntary debtors will be entitled to a default-like order of relief under section 303(h). Id. § 303(h).
69 See Id. § 503(b)(3) – (4) (subsection (3) authorizing reimbursement of actual, necessary expenses incurred by section 303 creditors and subsection (4) authorizing attorney’s fee recovery for the same).; In re HovdeBray Enter., 499 B.R. 333, 336-41 (Bankr. D. Minn. 2013) (explaining, in detail, analysis for allowing involuntary petitioning creditor to recover “actual, necessary” attorney’s fees in connection with section 303 filing). The HovdeBray court also noted that petitioning creditors must seek administrative expense cost recovery prior to entry of an order for relief. Id. at 339 (citing In re Hall, 373 B.R. 788, 795 (Bankr. S.D.Ga. 2006).
70 Id. § 303(g); In re Stainless Steel Corp., 583 B.R. at 730 n. 7.
71 11 U.S.C. § 303(g)
72 See Section 2.B., supra; COLLIER ON BANKRUPTCY ¶ 303.29 (discussing arguments for and against appointment of interim trustee in Chapter 11 cases). For a discussion on the interim trustee appointment process, see COLLIER ON BANKRUPTCY ¶ 2001.01-07.
73 Jenkins v. Hodes (In re Hodes), 402 F.3d 1005, 1009 (10th Cir. 2005) (illustrating creditors attempt to use 303(f)’s proviso for an injunction-like purpose against debtor); In re Dilley, 878 B.R. 1, 8 (Bankr. D.Me. 2007) (“[A]n order restricting debtor’s use of property under section 303(f) is, in effect, a preliminary injunction.”).
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the debtor to post a bond to indemnify the estate against any future loss.74 Likewise, where actions taken in the ordinary course of an involuntary debtor’s business operations are likely to reduce a potentially substantial asset of the estate, the court may issue a preliminary injunction against the debtor to protect those assets until an order for relief is fully determined.75 However, other courts have interpreted section 303(f)’s discretion as being limited to allowing the court to require the involuntary debtor’s compliance with section’s 363 mandate.76 On the flip side, section 303(e) allows the court to grant the involuntary debtor a potentially off-setting form of relief – the petitioning creditors may be required to post a bond to indemnify the debtor against any amounts the debtor may later recover under section 303(i).77
5. CONFLICTS BETWEEN PETITIONING CREDITORS
Creditors of a putative debtor are often as familiar with each other as they are with the debtor; and because filing an involuntary petition generally calls for multiple creditors to join the petition,78 familiar creditors will solicit each other in the filing. Those creditors are often situated differently depending on (1) whether they hold security interests in the debtor’s assets and, if so, (3) how much that collateral is worth, and (3) how often they conduct business with the debtor.
A. Secured, under-secured, and unsecured
Secured, undersecured, and unsecured creditors will all have different incentives to file or not file an involuntary petition. Creditors holding collateral are better able to protect that collateral once a bankruptcy proceeding begins. Whereas unsecured creditors are stayed from any sort of collection actions and can find themselves in a worse position than when the involuntary petition was filed. Yet, unsecured claims aggregating at least $15,775 are required to file an involuntary bankruptcy petition.79 While it is not always in the best interest of differently situated creditors to file an involuntary petition, that is not to say that their interests never align.80 When interests do
74 In re Rush, 7 B.R. 579, 580 (Bankr. N.D. Ala. 1980) (ordering debtor to post a $200,000 bond with the court, on creditors’ request for a $3,000,000 bond).
75 In re OGA Charters, L.L.C., 554 B.R. 415, 431-32 (Bankr. S.D. Tex. 2016) (issuing preliminary injunction prohibiting debtor’s insurer from settling claims arising out of events that triggered involuntary bankruptcy, on creditors’ theory that insurance policy was a valuable asset of the debtor’s estate).
76 In re Texas Rangers Baseball Partners, 434 B.R. 393, 404-05 (Bankr. N.D. Tex. 2010) (finding that section 303(f)’s grant of authority could be curtailed by the court’s discretionary order and requiring debtors’ principals to act as trustee and fiduciaries of debtors’ property during Gap Period).
77 11 U.S.C. § 303(e); Susman v. Schmid (In re Reid), 854 F.2d 156, 160-61 (7th Cir. 1988) (illustrating bond counter-weight to interim trustee appointment); Cf. In re Reed, 11 B.R. 755, 757-58 (Bankr. S.D.W.Va. 1981) (“The Court is of the opinion that a bond should not routinely be required of petitioners on request of a debtor. The Bankruptcy Code does not impose a mandatory bond requirement.”).
78 11 U.S.C. § 303(b)(1), (2).
79 Id. § 303(b)(1)
80 See Paradise Hotel Corp. v. Bank of Nova Scotia, 842 F.2d 47, 49 (3d Cir. 1988) (fully secured creditor could join involuntary petition with two creditors whose unsecured claims in the aggregate exceeded the statutory threshold); see also 3 BANKRUPTCY
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align and secured creditors join unsecured creditors in filing an involuntary petition, the potential for unforeseen conflicts among them can entirely derail the involuntary petition.
i. Priority Claims for Petitioning Creditors’ Fees In large, complicated involuntary bankruptcies, the combined costs of litigation, including attorneys’ fees, can total well over $250,000,000. In smaller, less complicated cases, attorneys’ fees still typically amount to $50,000 at the least and will often exceed $200,000. If the order for relief is ultimately granted under § 303, the necessary and reasonable fees “incurred by a creditor that files a petition under section 303 of this title” are treated as priority administrative expenses in the ensuing bankruptcy.81 While creditors owed larger amounts are content with the expenses of carrying out the involuntary bankruptcy, creditors owed smaller amounts may feel that the potential costs and risks involved outweigh the probability of an order for relief and any recovery.82 Therefore, each creditor will cover the costs and attorneys’ fees that are proportionate to their respective claims. It is essential to specify, among other things, the plan for fee-sharing, how payments will be made, and how often billing statements will be reviewed. These specifications should be laid out in an inter-creditor contract acknowledged and signed by all petitioning creditors.83
ii. Paying Out Damages and Fees Just as petitioning creditors receive priority claims for costs and attorneys’ fees if the order for relief is entered, they must also pay out fees and expenses in certain circumstances. Because of the ability of certain creditors to absorb more costs than others – and sometimes because certain creditors are directly at fault – it is necessary to put in writing which creditors will cover which costs in those situations.84 Examples of these potential expenses include attorneys’ fees, court costs, expert witness fees, and, arguably most importantly, damages payouts. Without an agreement regarding these issues, an involuntary proceeding could quickly result in the petitioning creditors becoming divisive at the least and hostile at the most.85
iii. Recipients of Preferences Filing an involuntary bankruptcy petition gives rise to a cause of action to set aside judgments, perfections of security interests, and payments made to certain creditors as preferential transfers
PRACTICE HANDBOOK § 17:2 (2d ed. 2018) (suggesting that “most involuntary proceedings end, not in settlement of the petitioning creditor’s debts, but in a voluntary conversion by the alleged debtor to one or another of the existing Chapters of the Code.”).
81 11 U.S.C. § 503(b)(3)(A) (emphasis added); see also 11 U.S.C. § 503(b)(4).
82 See Section 9.A., supra
83 See 3 BANKRUPTCY PRACTICE HANDBOOK § 17:2 (2d ed. 2018) (discussing “housekeeping matters of a collective action”).
84 Id. at § 17:21 (discussing petitioning creditor’s contracts).
85 Id.
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when such actions occur within ninety (90) days of the filing.86 While avoiding pre-petition preferential transfers is a common reason – and sometimes the sole reason – for filing involuntary petitions, petitioning creditors receiving preferential transfers are not excepted from avoidance powers. In reality, a debtor making preferentially transfers is only a concern to unsecured creditors. If a petitioning creditor’s preferential transfer is avoided, the recipient pays back whatever is exacted from them in judgments or a settlement; but the amount that goes back into the creditor pool once avoided is whatever the preference payment was, less the costs of litigating the issue. The costs, delays, and risks of involuntary bankruptcy, namely the potential for dismissal, all must be weighed against the amount of the preferential transfer. And unless rare circumstances exist, creditors receiving preferences have no reason to join an involuntary petition,87 secured creditors have no reason to stop the transfers, and unsecured creditors are stuck with the loss unless the transfer is avoided. Due to this potential for conflict, all petitioning creditors should generally be in agreement regarding whether or not appointing a trustee to avoid the transfers is a good idea.88 An inter- creditor contract covering this issue is essential to a smooth involuntary proceeding, especially when petitioning creditors suspect that the debtor is preferring certain creditors over others.89
iv. Appointing a Trustee As a corollary to conflicts involving the recipients of preferences, conflicts may also arise between petitioning creditors regarding whether to appoint a trustee at all. In an involuntary Chapter 7, the trustee will generally act in ways to maximize creditor payout. However, in an involuntary Chapter 11, the DIP’s decision to pursue a preference action is discretionary.90 Unlike a Chapter 7 trustee, the DIP is motivated to act in ways that will preserve his or her business and help the business emerge from bankruptcy in a better financial position. These motivations coupled with creditors’ ability to leverage their influence affect decisions regarding appointing a trustee. Creditors’ votes are necessary to confirm Chapter 11 plans.91 Creditors may use their respective votes as leverage to persuade DIP’s to look the other way regarding preferential transfers.92 Although other creditors and the court may oversee these transactions,93 if the DIP can
86 See 11 U.S.C. § 547.
87 See, e.g., In re Skye Mktg. Corp., 11 B.R. 891, 891 (Bankr. E.D.N.Y. 1981) (“[A] creditor who is being paid lacks an incentive to join [or file] an involuntary proceeding because of the risk that a portion of his claim would be sought as a preference by the trustee while the balance of his claim would be discharged in bankruptcy.”).
88 In re QDN, LLC, 363 Fed. App’x 873 (3d Cir. 2010) (preferred creditor unsuccessfully attempted to challenge involuntary petition).
89 See 3 BANKRUPTCY PRACTICE HANDBOOK § 17:21 (2d ed. 2018) (discussing the benefits of petitioning creditor’s contracts).
90 11 U.S.C. § 547(b) (“[T]he trustee may avoid any transfer of an interest of the debtor….”) (emphasis added). 91 See 11 U.S.C. § 1129.
92 See Benjamin R. Norris, Bankruptcy Preference Actions, 121 BANKING L.J. 483, 512 (2004) (suggesting that DIPs may be willing to compromise on preference claims when hoping to maintain a relationship with the targeted creditor or creditors).
93 See 11 U.S.C. §§ 1123, 1125(a); Harstad v. First Am. Bank, 39 F.3d 898, 903 (8th Cir. 1994).
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convince the court that not pursuing a preference action is necessary for a successful Chapter 11, preferences may be permitted to stand.94 Creditors hoping to recover the preferential transfers also have tools to persuade DIPs to take action. Some courts allow creditors to pursue derivative actions against the DIP if the DIP refuses to pursue a preference action.95 Also, just as preferred creditors may use their votes as leverage, so too may creditors seeking recovery. With all of this in mind, creditors joining – or thinking of joining – an involuntary petition must carefully consider whether all of their motivations are in line. Otherwise, conflicts emerging after the filing may lead to significant difficulties in the following bankruptcy proceedings that could result in the court altogether dismissing the petition.
B. Impact of filing date prior to scheduled foreclosures, UCC sales and preference expiration date of judgment liens and consensual liens.
Filing an involuntary petition triggers several important provisions in the Code. Specifically, the filing immediately initiates the automatic stay under § 362.96 Section 362 stays almost all actions,97 prohibiting (1) the continuation or commencement of any proceedings against the debtor, (2) acts to exercise control over property of the bankruptcy estate, (3) the enforcement and collection of a judgment against the debtor, (4) and any acts to collect or recover a claim against the debtor, including scheduled foreclosure proceedings and UCC sales.98 Petitioning creditors can and do use the stay to delay any scheduled foreclosures and stop further sales. However, petitioning creditors filing an involuntary petition to delay foreclosures or sales must keep several things in mind: 1. The petition must be filed before a foreclosure takes place. Once the foreclosure has occurred, as long as it is non-collusive and not avoidable,99 the foreclosure will very rarely be undone.100
94 See Norris, Bankruptcy Preference Actions, 121 BANKING L.J. 483, 512-13 (2004), note 92, supra
95 See, e.g., Canadian Pac. Forest Prods. Ltd. v. J.D. Irving, Ltd., (In re Gibson Grp., Inc.), 66 F.3d 1436, 1438-39 (6th Cir. 1995).
96 See 11 U.S.C. § 362.
97 See 11 U.S.C. § 362(b) (exceptions to the automatic stay).
98 11 U.S.C. § 362(a); see, e.g., In re Gaskin, 120 B.R. 13 (Bankr. D.N.J. 1990) (stay did not dismiss, withdraw, or terminate foreclosure, but did suspend foreclosure action).
99 See Kevin F. Kilty, Bankruptcy Law – BFP v Imperial Savings and Loan Association: Resolving the “Reasonably Equivalent Value” Standard in Avoiding Foreclosure Sales, G24 GOLDEN GATE U.L. REV. (1994) (defining “collusive foreclosures” as a sale in which the purchaser and debtor and in concert to defraud the debtor’s creditors); and Gen. Trading Inc. v. Yale Materials Handling Corp., 119 F.3d 1485 (11th Cir. 1997). but cf. In re BFP, 974 F.2d, 1144, 1146 (no avoidance under § 548(a)(2)(A) because “a reasonably equivalent value was received in exchange for the transfer, [and] the nonjudicial foreclosure sale was non- collusive and regularly conducted.”).
100 See, e.g., In re Detter, 141 B.R. 221 (Bankr. M.D. Ala. 1991) (upholding foreclosure that occured two hours before bankruptcy petition was filed); Piccolo v. Dime Sav. Bank of N.Y., 145 B.R. 753 (Bankr. N.D.N.Y. 1992) (bankruptcy court
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2. Once the automatic stay is in place, judgment creditors may lose any equity in the non- exempt assets of the debtor and will face significant expenses to obtain returns on a judgment claim.101
3. The automatic stay can be lifted upon request.102 However, if a secured creditor joins an involuntary Chapter 11 petition, bankruptcy courts may be reluctant to grant the secured creditor relief from the automatic stay since it may frustrate any potential reorganization and may be inequitable to other petitioning creditors.103 Before filing, petitioning creditors should make sure that a petitioning secured creditor does not have plans to later lift the stay.
4. The automatic stay generally does not apply co-defendants or co-tortfeasors.104
5. Filing an involuntary petition on the eve of a scheduled foreclosure, for the sole purpose of delaying the foreclosure, may lead to a bad faith dismissal and even sanctions for the creditors’ counsel.105
The preference expiration date of judgment liens and consensual liens is also affected upon the filing of an involuntary bankruptcy petition.106 Bankruptcy preference claims expire after the later of (1) two years after the bankruptcy filing; or (2) one year after the appointment of a trustee.107 So, petitioning creditors may use the filing date to preserve avoidance actions.108 With these provisions and pragmatic concerns in mind, petitioning creditors may disagree on the appropriate filing date. For example, it would rarely make sense for a creditor holding collateral to commence an involuntary bankruptcy case against a defaulting borrower because the filing date stays the very exercise of state law remedies providing the most beneficial returns.109 In fact, such creditors often would like to postpone the filing date in order to prevent pre-petition collection
erred in reimposing automatic stay after debtor’s residence had been foreclosed on under state law since foreclosure removed residence from bankruptcy estate).
101 Vicki M. Skaggs, Symposium: A Practical Guide to Obtaining, Enforcing and Avoiding Judgments: Navigating Bankruptcy After Judgment: Post Judgment Bankruptcy Blunders to Beware, 64 THE ADVOCATE 74, 77 (2013).
102 See 11 U.S.C. § 362(d).
103 Matter of Beaucrest Realty Assocs., 4 B.R. 166 (Bankr. E.D.N.Y. 1980).
104 See Enron Can, Corp., 349 F.3d 816, 825 (5th Cir. 2003); GATX Aircraft Corp. v. M/V Courtney Leigh, 768 F.2d 711, 716 (5th Cir. 1985).
105 See In re Fox Island Square P’ship, 106 B.R. 962 (Bankr. N.D. Ill. 1989).
106 See 11 U.S.C. § 546(a)
107 Id.
108 See infra text accompanying notes [__-__].
109 See Brad E. Godshall & Peter M. Giluhy, The Involuntary Bankruptcy Petition: The World’s Worst Debt Collection Device?, 53 BUS. LAW. 1315, 1341 (1988).
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efforts being undone once the involuntary bankruptcy proceeding is commenced. On the other hand, when it is in the interest of general unsecured creditors to file an involuntary petition, unsecured creditors would rather file the involuntary petition immediately to preserve assets and keep their distribution-pool from shrinking. With these competing interests in mind, differently- situated petitioning creditors would be wise to discuss these concerns, preferably before the petition is filed, in order to avoid later conflict and risk a dismissal.
6. REASONS TO FILE
Some debtors will not walk freely into bankruptcy until it is absolutely necessary – and by then it may be too late to recover any amounts owed or effectuate a viable reorganization. When confronted with such situation, creditors must either pursue state court remedies or force the debtor into an involuntary bankruptcy. While state court remedies are sometimes preferable,110 forcing a debtor into an involuntary bankruptcy provides numerous benefits for certain creditors. A. Benefits
i. Striking First Debtors voluntarily filing for bankruptcy obtain several strategic advantages in doing so.111 For example, debtors can strategically time the filing around certain operative dates to preserve or purposely lose avoidance powers,112 preserve or purposely lose priority claims for employees’ wages,113 or position itself to negotiate for post-petition financing.114 By filing an involuntary petition first, creditors can strike first and cut off the debtor’s ability to strategically file voluntarily.
ii. Preserve Going Concern Value115 For some creditors, state court remedies are clearly the better option. For instance, an undersecured creditor will almost always prefer foreclosing on its collateral over filing an involuntary petition. However, that same undersecured creditor could face a situation where the collateral’s going-concern value is substantially greater than the collateral’s liquidation value. In the latter situation, the undersecured creditor may look to bankruptcy hoping that the debtor’s
110 Id. (suggesting that creditors holding collateral should rarely file involuntary an petition). But cf. id. (suggesting that the involuntary petition would help secured creditors holding letters of credit conditioned upon the debtor entering a bankruptcy proceeding).
111 Susan Block-Lieb, Article: Why Creditors File so Few Involuntary Petitions and Why the Number is Not Too Small, 57 BROOKLYN L. REV. 803, 804 (1991).
112 See generally 11 U.S.C. §§ 544-553.
113 11 U.S.C. §§ 507(a)(3), (4).
114 11 U.S.C. §§ 363, 364.
115 See generally FOTEINI TELONI, PRESERVING VALUE IN THE POST-BAPCPA ERA – AN EMPIRICAL STUDY (2015).
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assets will be sold on a going-concern basis. The same justifications can apply to an unsecured creditor hopeful to avoid the chaos of the state-court attachment process.
iii. Turning Nothing Into Something Similar to the situation in which a creditor hopes to preserve value, creditors may file an involuntary petition when the creditor feels that an involuntary bankruptcy is the only way to recover anything at all from the debtor. When no state court remedy can be meaningful or effective, whether because of a senior secured debt or some other reason, involuntary bankruptcies provide a way for creditors potentially receiving nothing from a putative debtor to potentially receive more than nothing. A prime example, and a common reason for filing an involuntary petition is when a creditor fears that the debtor is rapidly depleting resources available to pay its debts either purposely or inadvertently. Filing the bankruptcy petition acts as a check on the debtor’s actions. Once the petition is filed, the putative debtor becomes subject to potential court orders regarding continued operations.116
iv. Obtain Disclosure of Important Financial Information Filing an involuntary petition also allows a creditor to obtain information that may be difficult – or impossible to obtain otherwise. Once the court enters an order for relief, the debtor becomes subject to a number of bankruptcy rules, including reporting requirements, that increase the transparency of the debtor’s operations.117 For instance, a debtor in an involuntary bankruptcy proceeding must file a schedule of assets and liabilities and a “statement of financial affairs” that lists the debtor’s sources of income and may potentially uncover avoidable transfers.118 The debtor in an involuntary bankruptcy proceeding must also file monthly operating reports with the United States Trustee.119 These requirements in a bankruptcy proceeding provide information that would normally take months or years to obtain otherwise.
B. Proper motivations
While involuntary bankruptcy is a creditor’s remedy,120 it is well-settled that involuntary bankruptcy petitions should not be used as a debt-collection device.121 With that, the Code, and
116 11 U.S.C. § 303(f).
117 See, e.g., FED. R. BANKR. P. 2004(b); Fed. R. Bankr. P. 1007; FED. R. BANKR. P. 1008.
118 FED. R. BANKR. P. 2004(b).
119 See FED. R. BANKR. P. 2015.
120 See David B. Wheeler, Involuntary Bankruptcy Petitions: Is § 303 Still a Viable Creditor Alternative?, 29 Am Bankr. Inst. J. 36 (2010) (discussing advantages of involuntary petitions).
121 See, e.g., Atlas Mach. & Iron Works, Inc. v. Bethlehem Steel Corp., 986 F.2d 709 (4th Cir. 1993); In re Dino’s, 183 B.R. 779 (Bankr. S.D. Ohio 1995).
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the implications of an involuntary bankruptcy in mind, courts have outlined the boundaries of what are proper and improper motivations for filing an involuntary petition.122 In the context of Chapter 11 bankruptcies, the Supreme Court has identified two of the basic purposes of a reorganization: (1) “preserving going concerns” and (2) “maximizing property available to satisfy creditors.”123 These basic purposes of reorganization help frame proper and improper motivations for filing involuntary petitions.
i. Avoiding Preferential Transfers and Fraudulent Conveyances
Creditors filing an involuntary petition to preserve and invoke a trustee’s avoidance powers is a proper purpose.124 Similar to preferential transfers, courts consider creditors filing an involuntary petition to avoid fraudulent conveyances as a proper motivation.125 While it may be more beneficial to pursue fraudulent conveyance actions under state law, creditors may find use in the Code’s avoidance provisions.126
ii. Replacing Incompetent Management
Creditor’s seeking to rehabilitate a business with future earning power but incompetent management is a proper motivation for filing an involuntary petition.127 Petitioning creditors can file the petition and request the appointment of a Chapter 11 trustee to oust incompetent management and take over the business’s operations.128
iii. Stopping Liquidation or Reorganization in State Court
Creditors filing an involuntary petition to stop a state court liquidation or reorganization is a legitimate use of § 303.129 For instance, trade creditors in such a situation have little to lose because
122 See Carolin Corp. v. Miller, 886 F.2d 693, 698 (4th Cir. 1989) (requirement of creditor’s proper motivation is “indispensable to proper accomplishment of the basic purposes of Chapter 11 protection”).
123 Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 453 (1999); accord Toibb v. Radloff, 501 U.S. 157, 163-64 (noting that a reorganization is designed with “the congressional purpose of deriving as much value as possible from the debtor’s estate”).
124 See In re 801 S. Wells St. Ltd. P’ship, 192 B.R. 718, 725 (Bankr. N.D. Ill. 1996) (stating that preventing preferential payments to favored creditors is an appropriate reason to file an involuntary petition); In re Key Auto Liquidation Ctr., Inc., 372 B.R. 74 (Bankr. N.D. Fla. 2007) (same).
125 See, e.g., In re C & C Jewelry Mfg., Inc., 373 Fed. App’x 775 (9th Cir. 2010) (no bad faith found where creditors filed involuntary petition in order to recover fraudulently transferred assets); In re QDN, LLC, 363 Fed. App’x 873 (3d Cir. 2010); Velde v. Reinhardt, 294 Fed. App’x 242 (8th Cir. 2008).
126 See 11 U.S.C. § 544(b).
127 See 3 BANKRUPTCY PRACTICE HANDBOOK § 17:2 (2d ed. 2018).
128 See Section 7, supra and text accompanying notes 142-165 (discussing appointing a Chapter 11 trustee).
129 See 3 BANKRUPTCY PRACTICE HANDBOOK § 17:2 (2d ed. 2018).
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they may receive nothing if a foreclosure occurs. Once in bankruptcy, such creditors are often guaranteed certain protections.130 Further, bankruptcy trustees have broader authority than assignees including national jurisdiction over the debtor and debtor’s property,131 certain avoiding powers132, and the ability to assume, reject, or assign executory contracts.133
C. Centralize exercise of creditors’ rights
Involuntary bankruptcies also centralize the exercise of creditors’ rights in order to prevent the “piecemeal dismemberment which would deprive the debtor of assets essential to continued operation.”134 More specifically, the filing of an involuntary petition allow creditors to collectively, rather than individually: (1) Preserve and invoke avoidance actions;135 (2) oversee and influence the debtor’s operations in a way that may not be available otherwise;136 and (3) proceed under court supervision.137
D. Eliminates race to courthouse
Filing an involuntary petition also eliminates the “race to the courthouse.” When a debtor shows signs of not being able to pay back debts, creditors will seek to protect their own interests; and when the common pool of the debtor’s assets is shrinking, creditors competing for dwindling assets will begin the “race to the courthouse.”138 Filing an involuntary bankruptcy petition triggers the automatic stay under § 362.139 With the automatic stay in place, the race to the courthouse becomes futile as efforts to obtain liens against the debtor will result in not only a voided (or
130 See 11 U.S.C. § 362(a).
131 See 11 U.S.C. §§ 541(a), 1334(d), 1471(e); see also FED. R. BANKR. P. 7004.
132 See 11 U.S.C. §§ 547, 548.
133 See 11 U.S.C. § 365.
134 John C. McCoid II, Article: The Occasion for Involuntary Bankruptcy, 61 AM. BANKR. L.J. 195 (1987).
135 See 11 U.S.C. §548(a)(1).
136 See Restatement (Second) of Agency, §14O (constructive agency); see also A. Gay Jenson Farms Co. v. Cargill, Inc., 209 N.W.2d 285 (1981) (finding agency relationship where creditor acted on debtor’s behalf in operating the business).
137 See FED. R. BANKR. P. 2004(b), (c); see also FED. R. BANKR. P. 2017(b)-(d); FED. R. BANKR. 1008. 138 Michael A. Fagone, Involuntary Individual Chapter 11 Post-BAPCPA as a Collection Device?, AM. BANKR. INST. J. 28 (Jan. 2007).
139 11 U.S.C. § 362(a).
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voidable) action,140 but also subject creditors to a damages award if the creditor knowingly violated the stay.141
7. MOVING FOR THE IMMEDIATE APPOINTMENT OF A TRUSTEE FOR AN OPERATING ENTITY IN AN INVOLUNTARY CHAPTER 11
After filing a Chapter 11 involuntary bankruptcy petition, a creditor may seek to replace debtor’s management with a trustee.142 A Chapter 11 trustee may be appointed for “cause” or if the appointment is in the best interest of the estate and its creditors.143 Upon a showing of any of the causes listed in § 1104, a court may appoint a trustee “at any time after the commencement of the case.”144 Because an involuntary case is commenced upon the filing of the petition,145 bankruptcy courts may appoint a Chapter 11 trustee immediately after the filing and pending hearing on the involuntary petition.146 But, because of the long-standing presumption against appointing a Chapter 11 trustee, a creditor attempting to convince a bankruptcy court to do so faces a difficult task.147 Fortunately for creditors, immediately appointing a Chapter 11 trustee includes situations where such appointment “is in the interest of creditors and any other interests of the estate,”148 a relatively lax standard compared to a “for cause” appointment.
A. For “Cause”
Under § 1104(a), “cause” includes “fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management, either before or after the commencement of the case.”149 Successfully appointing a Chapter 11 trustee for cause is often difficult for both legal and
140 Id.
141 11 U.S.C. § 362(k).
142 See 11 U.S.C. § 1104.
143 Id.; see also In re Intercat, Inc., 247 B.R. 911 (Bankr. D. Mo. 2000).
144 11 U.S.C. § 1104(a) (emphasis added).
145 See 11 U.S.C. § 303.
146 See In re Prof’l Accountants Referral Servs., Inc., 142 B.R. 424 (Bankr. D. Colo. 1992); see also In re PRS Ins. Grp., Inc., 274 B.R. 381 (Bankr. D. Del. 2001); In re C.W. Mining Co., 2008 WL 3539795 (Bankr. D. Utah 2008). 147 See, e.g., In re Rush, 10 B.R. 518, 524 (Bankr. N.D. Ala. 1980) (noting that the appointment of an interim trustee could so adversely affect the debtor as to leave the debtor “scarred and crippled beyond any real chance for recovery[.]”).
148 11 U.S.C. § 1104(a)(2).
149 11 U.S.C. § 1104(a)(1).
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pragmatic reasons.150 However, if sufficient cause is shown, some courts hold that the court must appoint a trustee.151
i. Fraud and Dishonesty Even if the entity is in operation, a debtor’s actual fraud or dishonesty, if proven, almost always justifies the appointment of a chapter 11 trustee.152 Failing to disclose material information,153 failure to file monthly operating reports and general non-compliance with bankruptcy court orders,154 and unexplained diversion of assets,155 while not exhaustive,156 are often reasons that bankruptcy courts appoint a chapter 11 trustee of an operating entity.
ii. Gross Mismanagement A debtor’s simple mismanagement generally will not justify appointment of a Chapter 11 trustee.157 Gross mismanagement is the proper standard and mismanagement both before and after the filing can justify an appointment.158 Like simple mismanagement, predictions about the debtor’s future gross mismanagement will not justify appointing a Chapter 11 trustee.159
iii. In the Interests of Creditors or the Estate Even if “cause” does not exist, courts may appoint a Chapter 11 trustee when it is in the interests of the estate or its creditors.160 Unlike appointing a Chapter 11 trustee for “cause,” a
150 See, e.g., In re Marvel Entm’t Grp., Inc., 140 F.3d 463, 472-73 (3d Cir. 1998) (extremely hostile relationship between debtor and its creditor’s committee); In re Cajun Elec. Power Coop., Inc., 191 B.R. 659 (Bankr. M.D. La. 1995) (conflict of interest); In re Colby Const. Corp., 51 B.R. 113 (Bankr. S.D.N.Y 1985) (depletion of assets); In re V. Savino Oil & Heating Co., Inc., 99 B.R. 518 (Bankr. E.D.N.Y. 1989) (debtor’s efforts to transform and reduce first corporation to a subsidiary of a new, second corporation selling same product to former customers of first corporation).
151 See In re Oklahoma Refining Co., 838 F.2d 1133, 1136 (10th Cir. 1988); In re Bonded Mailings, Inc., 20 B.R. 781, 786 (Bankr. E.D.N.Y 1982).
152 See In re Plaza de Retiro, Inc., 417 B.R. 632 (Bankr. D.N.M. 2009); see also In re Altman, 230 B.R. 6 (Bankr. D. Conn. 1999) (appointing chapter 11 trustee even under “clear and convincing standard”).
153 See Tradex Corp. v. Morse, 339 B.R. 823 (Bankr. D. Mass. 2006).
154 See In re AG Serv. Ctrs., L.C., 239 B.R. 545 (Bankr. W.D. Mo. 1999).
155 See In re PRS Ins. Grp., Inc., 274 B.R. 381 (Bankr. D. Del. 2001)
157 See Matter of Anchorage Boat Sales, Inc., 4 B.R. 635, 645 (Bankr. E.D.N.Y. 1980) (“Since one would expect to find some degree of incompetence or mismanagement in most businesses which have been forced to seek the protections of chapter 11, the [c]ourt must find something more aggravated than simple mismanagement in order to appoint a trustee.”).
158 11 U.S.C. § 1104(a)(1); See In re Sharon Steel Corp., 871 F.2d 1217, 1228-29 (3d Cir. 1989); In re Main Line Motors, Inc., 9 B.R. 782, 784-85 (Bankr. E.D. Pa. 1981);
159 See In re Klein/Ray Broadcasting, 100 B.R. 509, 511 (B.A.P. 9th Cir. 1987).
160 11 U.S.C. § 1104(a)(2).
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bankruptcy court’s determination of appointing a Chapter 11 trustee in the interests of the creditors or estate allows the court to employ broad discretionary authority and equitable considerations.161 While many justifications of “for cause” appointments overlap with the justifications for appointments in the interests of creditors and the estate,162 justifications for the latter often include the DIP’s inability to operate the business,163 the DIP’s conflicts of interest,164 and rapid depletion of the debtor’s assets.165
8. FILING AN INVOLUNTARY AND IMMEDIATELY MOVING TO TERMINATE EXCLUSIVITY TO FILE A CREDITOR PRE-PACK PLAN
Example: Seward & Kissel Client Alert on Zohar, where CLO filed involuntary against its own issuer, and Zais, where the CLO creditors filed an involuntary together with a Motion to Terminate Exclusivity to file a plan
Example: In re Zais Inv. Grade Ltd. VII, 455 B.R. 839 (Bankr. D.N.J. 2011), where the CLO creditors filed an involuntary together with a motion to terminate exclusivity to file a plan Surprising circumstances make for interesting cases. CLOs are not generally debtors. Though not relevant here, the Zais case stands for the proposition that a CLO can be a debtor. In Zais senior creditors wanted to take control of the insolvent CLO to force an immediate liquidation. Similarly, in Zohar, Patriarch Partners, who had formed and managed the failing CLO, wanted to take control back from MBIA, which took control when it became responsible for paying on its insured payment streams. Patriarch filed the involuntary, arguing that MBIA was oversecured and had acted in bad faith, thus should not be allowed to manage the CLO. Instead, Patriarch argued that involuntary bankruptcy and termination of the debtor’s exclusivity was the best solution and that, since the CLO has no management or interest in the bankruptcy case, the Patriarch restructuring plan should be implementing immediately. However, these cases have still not been ultimately resolved, and the Zohar Funds filed for chapter 11 again in 2018.
161 See Petit v. New England Mortg. Servs., Inc., 182 B.R. 64 (Bankr. D. Me. 1995) (requiring a case-by-case determination for appointing a Chapter 11 trustee in the interests of the creditors and the estate).
162 See In re Marvel Entm’t Grp., Inc., 140 F.3d 463, 472-73 (3d Cir. 1998); In re Cajun Elec. Power Coop., Inc., 191 B.R. 659 (Bankr. M.D. La. 1995).
163 See Matter of Parker Grande Dev., Inc., 64 B.R. 557 (Bankr. S.D. Ind. 1986); In re Horn & Hardart Baking Co., 22 B.R. 668 (Bankr. E.D. Pa. 1982).
164 See In re BLX Grp., Inc., 419 B.R. 457 (Bankr. D. Mont. 2009); Matter of Cajun Elec. Power Coop., Inc., 74 F.3d 599 (5th Cir. 1996), cert. denied, 519 U.S. 808. But see In re Lopez-Munoz, 866 F.3d 487 (1st Cir. 2017) (denying motion for appointment because of lack of evidence proving conflict of interest).
165 See In re Vaughan, 429 B.R. 14 (Bankr. D.N.M. 2010); In re William A. Smith Const. Co., Inc., 77 B.R. 124 (Bankr. N.D. Ohio 1987); In re Humphreys Pest Control Franchises, Inc., 40 B.R. 174 (Bankr. E.D. Pa. 1984).
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9. RISKS OF FILING AN INVOLUNTARY IN “BAD FAITH.”
One might say the risks of the filing of an involuntary petition are a bit of a minefield. Sometimes, you have no choice but to make your way through it but, if creditors have any alternatives to avoid the minefield, they should find another approach to debt collection.166 Courts have warned that the “filing of an involuntary petition is an extreme remedy with serious consequences to the alleged debtor, such as loss of credit standing, inability to transfer assets and carry on business affairs, and public embarrassment….”167 Recognizing those consequences, both the drafters of the Code and courts have attempted to curb improper involuntary petitions by fashioning significant financial penalties for petitioning creditors found filing improper involuntary petitions.168 Therefore both putative debtors and petitioning creditors face substantial risks when deciding to file.169 Chief among those is the risk of filing an involuntary petition in bad faith.170 Under § 303(i): “[i]f the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment – (1) against the petitioners and in favor of the debtor, for – (A) costs; or (B) a reasonable attorney’s fee; or (2) against any petitioner that filed the petition in bad faith, for – (A) any damages proximately caused by such filing; or (B) punitive damages.”171 In other words, if a court dismisses an involuntary petition, the petitioning creditors generally cover the debtor’s costs and attorney’s fees.172 This is true regardless of the petitioning creditors’ motivations for filing.173 However, petitioning creditors found filing in bad faith expose themselves to not only covering the debtor’s costs and attorneys’ fees, but also both compensatory and punitive damages.174 After dismissal of an involuntary petition, courts may grant judgment
166 See Scott K. Brown, Rolling in the Involuntary, AM. BANKR. INST. J. 54 (Nov. 2012) (discussing an extensive list of creditors’ requirements to proceed safely with an involuntary petition).
167 In re Reid, 773 F.2d 945, 946 (7th Cir. 1985).
168 11 U.S.C. § 303(i)(1), (2); see also Rosenberg v. DVI Receivables, XVII, LLC, 835 F.3d 414 (3d Cir. 2016).
169 See In re ELRS Loss Mitigation, LLC, 325 B.R. 604, 623 (Bankr. N.D. Okla. 2005) (“The sparing use of involuntary bankruptcy by unhappy creditors is not surprising, given the dire consequences that the debtor and creditors may suffer[.]”).
170 11 U.S.C. § 303(i).
171 Id.
172 11 U.S.C. § 303(i)(1).
173 In re Prof’l Accountants Referral Servs., Inc., 142 B.R. 424 (Bankr. D. Colo. 1992).
174 11 U.S.C. § 303(i)(2).
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under § 303(i)(2) against any petitioner that the debtor proves filed in bad faith.175 In some circuits, this may also include attorneys’ fees and costs at the appellate level if such action is taken.176 Courts give petitioning creditors the benefit of the doubt when a debtor challenges an involuntary petition as filed in “bad faith.”177 However, debtors can and do successfully challenge bad faith involuntary petition filings.178 Because the Code does not define “bad faith” and because courts generally analyze bad faith under the totality of the circumstances,179 compensatory and punitive damages can be awarded for any number of reasons. Bankruptcy courts generally analyze both the petitioning creditor’s conduct in, and motives for, filing the petition and have developed two perspectives in deciding whether an involuntary petition was filed in bad faith: (1) when the filing is motivated by ill will, frivolousness, or in an attempt to embarrass and harass the debtor;180 and (2) when the creditor’s actions in filing were an improper use of the Bankruptcy Code as a substitute for customary collection procedures.181
A. Scope of § 303(i) damages, fees and costs
While § 303(i) uses the disjunctive language “or,” it is well-settled that courts may grant multiple remedies if bad faith is shown.182 Among those remedies are compensatory and punitive damage awards.183 Ostensibly, an involuntary debtor could recover for damages arising from emotional distress, damaged customer goodwill or harassment, provided the debtor has evidence to show the causation and quantity elements of section 303(i).184 However, bankruptcy courts have
175 11 U.S.C. § 303(i)(2); see also In re Petralex Stainless, Ltd., 78 B.R. 738 (Bankr. E.D. Pa. 1987).
176 See In re Rosenberg, 779 F.3d 1254 (11th Cir. 2015) (allowing award for attorneys’ fees and costs in appellate litigation); see also Glannon v. Carpenter (In re Glannon), 245 B.R. 882, 894-95 (Bankr. D. Kan. 2000) (same); but see Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 708-09 (9th Cir. 2004) (“[Section] 303(i)(1), which expressly grants discretionary authority to award fees at the trial level, should not be construed to grant similar authority to award fees at the appellate level.”).
177 In re John Richards Homes Bldg. Co., LLC, 439 F.3d 248, 254 (6th Cir. 2006) (noting that courts presume that petitioning creditor acted in good faith in filing an involuntary petition and that alleged debtor bears burden of demonstrating that creditor acted in bad faith).
178 Id.; see also In re S. Ca. Sunbelt Devs., Inc., 608 F.3d 456 (9th Cir. 2010); In re Ed Jansen’s Patio, Inc., 183 B.R. 643, 644 (Bankr. M.D. Fla. 1995); In re Advance Press & Litho, Inc., 46 B.R. 703 (Bankr. Colo. 1984).
179 In re John Richards Homes Bldg. Co., LLC, 312 B.R. 849 (Bankr. E.D. Mich. 2004).
180 Id., aff’d, In re John Richards Homes Bldg. Co., LLC, 439 F.3d 248 (6th Cir.), cert. denied, Adell v. John Richards Homes Bldg. Co., LLC, 549 U.S. 818 (2006).
181 In re SBA Factors of Miami, Inc., 13 B.R. 99 (Bankr. S.D. Fla. 1981)
182 In re Silverman, 230 B.R. 46, 53 (Bankr. D.N.J. 1998); see also In re Exchange Network Corp., 85 B.R. 128 (Bankr. Colo.), aff’d, In re Exchange Network Corp., 92 B.R. 479 (D. Colo. 1988).
183 11 U.S.C. § 303(i)(2).
184 See In re Landmark Distrs., Inc., 189 B.R. at 295 (finding debtor entitled to compensatory damages award for decline of debtor’s business caused by involuntary filing); In re Whiteside, 240 B.R. 762 (Bankr. W.D. Mo. 1999) (refusing to award compensatory damages for lost employment and emotional distress where debtor could not establish evidence of petitioner’s bad faith).
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rejected claims under section 303(i) for injuries or damages suffered by individuals other than the involuntary debtor.185
i. Compensatory Damages Compensatory, or actual damages, are any damages proximately caused by the bad faith filing. These damages can include not only fees and costs incurred in obtaining dismissal of the involuntary petition, but also post-dismissal fees that the debtor incurs while litigating the claim for damages.186 Bankruptcy courts generally use a common-law damage analysis to determine compensatory bad faith damages.187 These damages can range from zero to several million dollars depending on the case at hand.188
ii. Punitive Damages Like most damages, fees and costs awards, punitive damages awards are discretionary; however, as the name suggests, punitive damages are based on the court’s justifiable interest in punishing and deterring malicious or vengeful conduct in filing illegitimate involuntary petitions, rather than providing compensation for violations of rights.189 Bankruptcy courts have adopted the Supreme Court’s multi-factor approach for determining both the need for and the appropriate level of punitive damages to be awarded relative to the sanctioned party’s conduct.190 Once a bankruptcy court has found bad faith in the filing of an involuntary petition, it may also decide whether punitive damages are appropriate, and, if so, in what amount.191 Punitive damages may be awarded
185 Miles v. Okun (In re Miles), 430 F.3d 1083, 1093-94 (9th Cir. 2005); In re VII Hldgs. Co., 362 B.R. 663, 668-69 (Bankr. D. Del. 2007). But see Rosenberg, 835 F.3d at 419-22 (finding § 303(i) did not preempt non-debtor’s state law claim for damages based on involuntary petition).
186 In re S. Ca. Sunbelt Devs., Inc., 608 F.3d 456, 463-464 (9th Cir. 2010); see also In re Advance Press & Litho., Inc., 46 B.R. 700, 703 (Bankr. D. Colo. 1984) (“I find nothing in the Code or case authority limiting an award to the date of dismissal[.]”).
187 See In re Ed Jansen’s Patio, Inc., 183 B.R. 643, 644 (Bankr. M.D. Fla. 1995); see also In re Landmark Distributors, Inc., 189 B.R. 290, 315-16 (Bankr. D. N.J. 1995).
188 In re Ed Jansen’s Patio, Inc., 183 B.R. 643, 644 (Bankr. M.D. Fla. 1995) (finding bad faith but awarding no compensatory damages); see also In re McDonald Trucking Co., 76 B.R. 513, 517 (Bankr. W.D. Pa. 1977) (stating damages that are speculative or remote are not recoverable even if filing is in bad faith); cf. In re Landmark Distribs., Inc., 189 B.R. 290, 316 (Bankr. D. N.J. 1995) (finding bad faith and awarding $3,200,000 in compensatory damages).
189 See General Trading Inc. v. Yale Materials Handling Corp., 119 F.3d 1485, 1505 (11th Cir. 1997); In re Meltzer, 535 B.R. at 815-20.
190 In re Meltzer, 535 B.R. at 818-20 (citing State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 418 (2003) and BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 575-84 (1996)); See also In re John Richards Homes Bldg. Co., 439 F.3d 265-66 (noting $ 2 million punitive damages award was not unconstitutional relative to petitioner’s reprehensible conduct and fell within Supreme Court’s due process limitations analysis).
191 In re John Richards Homes Bldg. Co., LLC, 312 B.R. 849 (Bankr. E.D. Mich. 2004).
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even if compensatory damages are not.192 Like compensatory damages, non-zero punitive damages can range anywhere from several hundred dollars to millions of dollars.193
192 See In S. Ca. Sunbelt Devs., Inc., 608 F.3d 456 (9th Cir. 2010)
193 See, e.g., In re Fox Island Square P’ship, 106 B.R. 962, 969 (Bankr. N.D. Ill. 1989) (awarding $500 in punitive damages); Jaffe v. Wavelength, Inc. (In re Wavelength, Inc.), 61 B.R. 614, 620-21 (B.A.P. 9th Cir. 1986 (awarding $10,000 in aggregate punitive damages against two individuals); Siostedt v. Salmon (In re Salmon), 128 B.R. 313, 318-19 (Bankr. M.D. Fla. 1991) (awarding $250,000 in punitive damages); In re John Richards Homes Bldg. Co., LLC, 313 B.R. 849 (Bankr. E.D. Mich. 2004) (awarding $2,000,000 in punitive damages).
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B. Continuing jurisdiction over post-dismissal damages/sanctions
A petitioning creditor’s liability under § 303(i) is not ripe unless and until the petition is dismissed.194 Therefore, a court cannot entertain the debtor’s claim for damages until the case-in- chief is finished.195 However, courts have consistently and uniformly held that if a court dismisses and involuntary petition due to a creditor’s bad faith, the court dismissing such petition has continuing jurisdiction over the litigation regarding post-dismissal damages and sanctions.196 The court in National Medical Imaging held that claims under § 303(i) were not subject to a statute of limitations as long as they are brought “within a reasonable amount of time that does not prejudice [d]efendants.”197 Therefore, absent a waiver by the debtor,198 the bankruptcy court retains jurisdiction to determine whether an award is appropriate and, if so, the amount.199 In recent years, federal circuits have split over two interrelated issues involving section 303(i): (1) whether bankruptcy courts retain jurisdiction to award recovery for post-dismissal damages such as the cost of litigating the bad faith dispute or subsequent appeals,200 and (2), whether bankruptcy law preempts state law remedies for debtors seeking relief supplemental or alternatively to section 303(i).201
194 Rosenberg v. DVI Receivables XIV, LLC, 818 F.3d 1283, 1285-86 (11th Cir. 2016).
195 Id.
196 In re Nat’l Med. Imaging, LLC, 570 B.R. 147, 156 (Bankr. E.D. Pa. 2017) (“[B]ankruptcy courts clearly retain jurisdiction to consider awarding a putative debtor § 303(i) damages after the court dismisses the involuntary petition.”)
197 Id. at 157.
198 See FED. R. BANKR. P. 1011(d).
199 See In re Exch. Network Corp., 85 B.R. 128 (Bankr. D. Colo. 1988), aff’d, 92 B.R. 479 (D. Colo. 1988); and In re Godroy Wholesale Co., Inc., 37 B.R. 496 (Bankr. D. Mass. 1984); see also S. Rep. No. 95-989, reprinted in 1978 U.S.C.C.A.N. 5787, 5820; and H.R. Rep. No. 95-595, reprinted in 1978 U.S.C.C.A.N. 5963, 6280.
200 Compare In re John Richards Bldg. Co., 552 Fed. Appx. at 406-09 with In re Vortex Fishing Sys., Inc., 379 F.3d at 708-09 (“Thus . . . § 303(i), which expressly grants discretionary authority to award fees at the trial level, should not be construed to grant similar authority to award fees at the appellate level.”).
201 Compare In re VII Hldgs. Co., 362 B.R. at 668-69 (finding state law claims preempted) with Rosenberg, 835 F.3d at 419-22 (contra).
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THE CONSEQUENCES OF A RELIC’S CODIFICATION: THE DUBIOUS CASE FOR BAD FAITH DISMISSALS OF INVOLUNTARY BANKRUPTCY PETITIONS
* AMIR SHACHMUROVE
"Existing uncertainty is much like mist just too thin to be fog; one sees a little and forgets how infinitely more is hidden."1
TABLE OF CONTENTS
Introduction ...... 116 I. Current Law: History and Text ...... 118 A. History of § 303 ...... 118 B. Statutory Scheme ...... 126 1. Threshold Requirements ...... 126 2. Target Debtor's Statutory Prerogatives ...... 130 3. Dismissal: Standard and Consequences ...... 134 II. Problems and Divisions: Text and Cases ...... 137 A. Statutory Ambiguities ...... 137 1. Eligibility: Indeterminate—but Noncontroversial—Terms in § 303(b) and (h) ...... 138 2. Eligibility: Indeterminate and Contested Terms in § 303(b) and (h) ...... 139 3. Damages: Imprecisions in § 303(i) ...... 144 B. Divided Case Law ...... 146 1. Supporters' Reasons ...... 146 2. Opposition's Counters ...... 149 III. Resolution ...... 151 A. Principles of Interpretation ...... 151 B. Application ...... 157 1. Section 303's Specific Text and Structure ...... 158 2. Statutory Architecture: Intimations from Other Sections ...... 162 3. Specific Context: History's Limited Guidance ...... 166 4. Broader Context: Statutorily Relevant Asymmetries ...... 169 5. One Final Objection: Overemphasis on Rule 9011 ...... 172 C. Two Proposed Fixes: Amendment and Interpretation ...... 173
* Amir Shachmurove is an associate at the Washington, DC, office of Troutman Sanders LLP and a former clerk at two United States Bankruptcy Courts. This article is dedicated to the Honorable Catherine Peek McEwen, a steadfast friend, as well as the six skilled and amiable lawyers—Messrs. Todd Cole, John C. Lynch, Jordan M. Rubinstein, and John West and Mses. Jennifer Flurry, Sharie Brown, and Megan Burns— to whom the author owes the opportunity of a lifetime. As always, no word could have been written but for the beloved Lindsey L. Dunn, and all the views expressed and mistakes made herein are the author's idiosyncratic own. 1 KARL N. LLEWELLYN, THE COMMON LAW TRADITION: DECIDING APPEALS 302 n.294 (1960). 115
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1. One Section's Amendment ...... 174 2. One Phrase's Construction ...... 175 Conclusion ...... 177
INTRODUCTION
From the very beginning, two concepts have coursed in the "gloomy"2 world of debt and credit patrolled by bankruptcy law.3 In centuries passing, the first, the doctrine of good faith,4 has lost little potency, its endurance secured by its very mutability. In the meantime, the second notion, involuntary bankruptcy, has lost so much that it nowadays occasions ample disfavor.5 Indeed, although the Bankruptcy Code ("Code") retains it,6 it appears in truncated form within § 303, the involuntary proceedings once synonymous with bankruptcy itself demoted to this single section, and infrequent use has dulled the furor that it once elicited. Today, with its star having so waned, for the sake of promoting the Code's known ends, 7 dismissals of involuntary petitions due to petitioning creditors' bad faith have proliferated, a result depicted as consistent with the judiciary's treatment of similarly tainted voluntary petitions.8 In the process, a textual oddity has not gone entirely unnoticed: even as "bad faith" is denominated as the basis for an award of punitive damages after an involuntary petition's dismissal, nowhere in § 303 is "bad faith" or its converse, lack
2 See CHARLES WARREN, BANKRUPTCY IN THE UNITED STATES 3 (1935) (describing bankruptcy as "a gloomy and depressing subject"); see also H.H. Shelton, Bankruptcy Law, Its History and Purpose, 44 AM. L. REV. 394, 394 (1910) (describing bankruptcy law as unpopular and "neither a cheerful nor a pleasing theme, because it deals with financial disaster, and we dislike the gloom attending ruin"). 3 See Charles Jordan Tabb, The History of the Bankruptcy Laws of the United States, 3 AM. BANKR. INST. L. REV. 5, 5 (1995) [hereinafter Tabb, History] (observing that "[n]o corner of our society seems immune from the ubiquitous reach of bankruptcy"); see also Shelton, supra note 2, at 394 ("Bankruptcy law . . . is a distinct and an important branch of our system of jurisprudence. In its administration it is far-reaching."). 4 See In re Landmark Distrib., 189 B.R. 290, 309 n.19 (Bankr. D.N.J. 1995) (quoting In re Elsub Corp., 66 B.R. 189, 193 (Bankr. D.N.J. 1986) (quoting BLACK'S LAW DICTIONARY 127 (5th ed. 1979))). Colloquially and traditionally, "good faith" serves as a synonym for "lack of bad faith," and "bad faith" equates to "lack of good faith." In this article, the terms "good faith" and "bad faith" are used interchangeably with "lack of bad faith" and "lack of good faith," respectively. 5 See Isabella C. Lacayo, After the Dismissal of an Involuntary Bankruptcy Petition: Attorney's Fees Awards to Alleged Debtors, 27 CARDOZO L. REV. 1949, 1949 (2006) ("An involuntary bankruptcy petition under section 303 of the [Code] allows a creditor to force an unwilling debtor into [bankruptcy]."); see also Brad R. Godshall & Peter M. Gilhuly, The Involuntary Bankruptcy Petition: The World's Worst Debt Collection Device?, 53 BUS. LAW. 1315, 1316 (stating that involuntary bankruptcy is an ineffective debt collection device, and should be used sparingly) (citing In re Broshcar, 122 B.R. 705, 707–08 (Bankr. S.D. Ohio 1991)). 6 The specific provisions of the Code, set forth in 11 U.S.C. §§ 101–1532, inclusive, are referred to in this article as "section _" or "§ _," unless otherwise noted. 7 For these policies, see infra Part III.A. 8 See, e.g., In re Forever Green Athletic Fields, Inc., 804 F.3d 328, 334 (3d Cir. 2015) (holding that dismissal and damages are appropriate consequences for bad faith filings); see also In re Manhattan Indus., 224 B.R. 195, 201 (Bankr. M.D. Fla. 1997) ("Involuntary filings must be made in good faith and consequences flow if they are not. Dismissal is one possible consequence.").
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of good faith, classified as a basis for such a termination.9 To many, such an omission bears no dispositive relevance. Resting on history, logic, and § 105, this coterie detaches bad faith from § 303's damages provision and recasts it as a general requirement implicit in § 303's jurisdictional criteria.10 A smaller number question the cogency of these arguments. For buttress, they point to § 303's silence as to this issue and § 105's narrow reach and stress a different history.11 In more than two decades, no agreement has been forged, and discord predominates even now. In three substantive parts, this Article clarifies the relevant principles, resolves this dispute, and offers possible solutions. As a prefatory matter, Part I details the history behind and the overall design of § 303. Part II thereupon pinpoints this section's weighty ambiguities and the sides' divergent approaches to the absence of bad faith from the relevant provisions. Part III begins with a summary of the relevant principles of interpretation. In its second part, it shows that the utilization of bad faith to dismiss involuntary petitions cannot cohere with the text and context of § 303. Nonetheless, recognizing the important role served by the concept of bad faith, the third section of Part III tentatively proposes two approaches which would ensure the validity of applying the concept of bad faith in the future. The first method would require congressional action; the second relies on creative interpretation. For now, so long as § 303 remains unaltered and short of a new twist on a familiar term, one or more petitioning creditors' bad faith in filing an involuntary petition should never prompt its dismissal. As to this smoldering issue, courts and scholars may still quibble, but § 303, accurately explicated, commands as much. While much once reckoned prevails no more, traces of wizened truths can often linger and compel acquiescence.12 Stripped of its encrustation, § 303 is one such artifact.
9 See In re Forever Green Athletic Fields, Inc., 804 F.3d at 333 (noting that the Code does not explicitly provide for bad faith as grounds for dismissal). 10 See In re WLB-RSK Venture, 296 B.R. 509, 513 (Bankr. C.D. Cal. 2003) (explaining that Congress likely contemplated bad faith as grounds for dismissal, despite not explicitly providing for this remedy in § 303). 11 See In re Basil St. Partners, LLC, 477 B.R. 846, 849 (Bankr. M.D. Fla. 2012) (arguing that § 303(b) does not require creditors to file involuntary petitions in good faith). 12 Cf. MARTIN HEIDEGGER, What Are Poets For?, in POETRY, LANGUAGE, THOUGHT 92 (Albert Hofstadter trans., Harper Perennial ed. 2013) (1946) ("To be a poet in a destitute time means: to attend, singing, to the trace of the fugitive gods.").
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I. CURRENT LAW: HISTORY AND TEXT
A. History of § 303
Enacted in 1542, 13 the first formal British bankruptcy law sanctioned only involuntary bankruptcy proceedings. 14 A lengthy preamble 15 betrayed the moral strain girding this conceit: while a debtor rarely deserved any reprieve, the mere existence of unpayable obligations indicative of amorality and criminality, creditors warranted some recompense for another's profligacy.16 In this first statute originated the two great traits of all modern bankruptcy laws: the summary collection (or realization) of a debtor's assets and the distribution (or administration) of those assets for the benefit of the entire creditor body.17 Only later would the third familiar element—the discharge and rehabilitation of the honest but unfortunate debtor, the latter no longer tarred—emerge18 and attain near preeminence.19 Still, in spite of centuries' worth of tinkering and experimentation dedicated to this gentler vision's
13 See Thomas E. Plank, Bankruptcy and Federalism, 71 FORDHAM L. REV. 1063, 1079–80 n.63 (2002) (laying out the timeline of the first British bankruptcy laws). Some doubt this date's verisimilitude. See also Jay Cohen, The History of Imprisonment for Debt and its Relation to the Development of Discharge in Bankruptcy, 3 J. LEGAL HIST. 153, 154–55 (1982) (pointing to the Statute of Merchants from 1285 that may have been an earlier iteration of involuntary bankruptcy). 14 See Vern Countryman, A History of American Bankruptcy Law, 81 COM. L.J. 226, 227 (1976) (explaining that early British bankruptcy law allowed creditors to bring debtors to bankruptcy proceedings without the latter's consent). 15 See Charles Jordan Tabb, The Historical Evolution of the Bankruptcy Discharge, 65 AM. BANKR. L.J. 325, 330 n.24 (1991) [hereinafter Tabb, Evolution] (quoting this prefatory sentence, which reads "[D]ivers and sundry persons craftily obtaining into their hands great substance of other mens goods, do suddenly flee to parts unknown, or keep their houses, not minding to pay or restore to any of their creditors, their debts or duties, but at their own wills and pleasures consume the substance obtained by the credit of other men, for their own pleasure and delicate living, against all reason, equity and good conscience . . . .") 16 See, e.g., Sandor E. Schick, Globalization, Bankruptcy and the Myth of the Broken Bench, 80 AM. BANKR. L.J. 219, 255 n.190 (2006) (describing original English bankruptcy laws as "quasi-criminal"); see also, e.g., Craig Peyton Gaumer, Bankruptcy Fraud: Crime and Punishment, 43 S.D. L. REV. 527, 528–29 (1998) (noting that early English bankruptcy laws were "punitive in nature"); Israel Treiman, Acts of Bankruptcy: A Medieval Concept in Modern Bankruptcy Law, 52 HARV. L. REV. 189, 190 (1938) (noting that the purpose of original English bankruptcy laws was to punish a "narrow class of fraudulent debtors"); Louis E. Levinthal, The Early History of English Bankruptcy, 67 U. PA. L. REV. 1, 1 (1919) (finding Henry VIII's original bankruptcy laws were little more than criminal statutes for debtors). 17 See Levinthal, supra note 16, at 14 ("The fundamental principle of the [English statute] was that . . . there should be a compulsory administration and distribution . . . among all the creditors."); see also JOSEPH STORY, COMMENTARIES ON THE CONSTITUTION §§ 1101, 1103, 1108 (1833) (describing the historical context of summary collection and administration). 18 See, e.g., United States v. Whiting Pools, Inc., 462 U.S. 198, 203 (1983) ("Congress presumed that the assets of the debtor would be more valuable if used in a rehabilitated business than if 'sold for scrap.'"); cf. Louis E. Levinthal, The Early History of Bankruptcy Law, 66 U. PA. L. REV. 223, 225 (1918) (characterizing this notion as "by no means a fundamental feature of . . . [bankruptcy] law"). 19 See, e.g., Doug R. Rendleman, The Bankruptcy Discharge: Toward a Fresher Start, 58 N.C. L. REV. 723, 724 (1980) (discussing the rise of discharge proceedings during the 20th century); Frank R. Kennedy, Reflections on the Bankruptcy Laws of the United States: The Debtor's Fresh Start, 76 W. VA. L. REV. 427, 434 (1974) (discussing how discharge provided relief for honest debtors).
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incorporation,20 British bankruptcy retained its coercive cast, refined for criminals' derogation and victims' satisfaction, into the eighteenth and nineteenth centuries.21 The post-revolutionary United States initially embraced this asperity.22 As its proponents acknowledged,23 Congress modeled the short-lived Bankruptcy Act of 180024 on these British predecessors.25 Supported by the Federalists,26 this act sought
20 See John C. McCoid, II, Discharge: The Most Important Development in Bankruptcy History, 70 AM. BANKR. L.J. 163, 165–67 (1996) [hereinafter McCoid, Discharge]. In 1732, chapter 30 of the Statute of George II finally replaced this regime, previously amended in 1570, 1604, 1623, 1662, 1704, and 1711. Levinthal, supra note 16, at 16–18 (tracing history). 21 See, e.g., Jason Kilborn & Adrian Walters, Involuntary Bankruptcy as Debt Collection: Multi- Jurisdictional Lessons in Choosing the Right Tool for the Job, 87 AM. BANKR. L.J. 123, 127–28 (2013) (discussing historical changes bankruptcy law has undergone); Tabb, Evolution, supra note 15, at 328 (discussing various changes to collection mechanisms); see also Albert K. Stebbins, Constitutionality of the Recent Amendment to the Bankruptcy Law, 17 MARQ. L. REV. 163, 165 (1933) (analyzing early and subsequent changes in England). But opposition, even in that era, flared and lingered. For instance, in 1697, Daniel Defoe attacked involuntary bankruptcy for possessing "something in it of Barbarity" and "giv[ing] loose to the Malice and Revenge of the Creditor, as well as a Power to right himself, while . . . leav[ing] the Debtor no way to show himself honest: . . . contriv[ing] all the ways possible to drive the Debtor to despair, and encourag[ing] no new Industry." Robert Weisberg, Commercial Morality, the Merchant Character, and the History of the Voidable Preference, 39 STAN. L. REV. 3, 6 (1986). 22 See Kilborn & Walters, supra note 21, at 128; cf. THE FEDERALIST NO. 42 (James Madison) ("The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question."). 23 See 9 ANNALS OF CONG. 2669 (1799) ("[T]he main principles of the bankrupt system are to avoid the extension of fraud . . . . Under this law, a man's effects would be fairly looked into, and equally divided amongst all his creditors, without exception."). 24 Bankruptcy Act of 1800, § 14, 2 Stat. 25 (repealed 1803). 25 See, e.g., Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 373 (2006) (stating that "[t]he Bankruptcy Act of 1800 was in many respects a copy of the English bankruptcy statute . . . ."); In re Murray, 543 B.R. 484, 496 n.60 (Bankr. S.D.N.Y. 2016) (commenting on the similarities between the Bankruptcy Act of 1800 and the 1732 English Act); Thomas E. Plank, The Constitutional Limits of Bankruptcy, 63 TENN. L. REV. 487, 533 (1996) (discussing further the similarities between the English Act and the Bankruptcy Act of 1800). 26 Passed during the administration of John Adams, this first act was repealed in 1803 by the then dominant Democratic-Republican Party. See Lifetime Cmtys., Inc. v. Admin. Office of U.S. Cts. (In re Fidelity Mortg. Investors), 690 F.2d 35, 37 (2d Cir. 1982) (the Bankruptcy Act of 1800 was repealed in 1803); 9 ANNALS OF CONG. 2653–54 (1799) (in which Representative Albert Gallatin, of the latter party, expressed his opposition to any bankruptcy law). Thomas Jefferson, the latter party's founder, readily acknowledged his distaste for this commercial measure: "Is Commerce so much the basis of the existence of the U.S. as to call for a bankrupt law? On the contrary are we not almost agricultural? Should not all laws be made with a view essentially to the poor husbandman?" THOMAS JEFFERSON, THE WORKS OF THOMAS JEFFERSON, vol. VII, CORRESPONDENCE 1792–93 at 194 (Paul Leicester Ford ed. 2010) (1792), available at http:// oll.libertyfund. org/titles/jefferson-the-works-vol-7-correspondence-1792-1793?q=Is+Commerce+so+much+the+basis+# Jefferson_0054-07_387; cf. ANDREW BURSTEIN & NANCY ISENBERG, MADISON AND JEFFERSON 237 (2010) (quoting James Madison, Jefferson's ally, who attacked as enemies of the union "those who favor measures, which by pampering the spirit of speculation within and without the government, disgust the best friends of the Union"). Yet, much doubt can be raised about the veracity of Jefferson's expressed motives. See BURSTEIN & ISENBERG, supra note 26, at 528. Furthermore, even Gallatin acknowledged a bankruptcy system's advantages. BRUCE H. MANN, REPUBLIC OF DEBTORS: BANKRUPTCY IN THE AGE OF AMERICAN INDEPENDENCE 209 (2002). Finally, many Federalists favored bankruptcy for the same reason Jefferson opposed such legislation. For example, Chief Justice John Marshall, a Federalist, later wrote: "To punish honest insolvency, by imprisonment for life, and to make this a constitutional principle, would be an excess of inhumanity, which will not readily be imputed to the illustrious patriots who framed our constitution, nor to the people who adopted it." Sturges v. Crowninshield, 17 U.S. 122, 200 (1819). In fact, party alliances
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to aid mostly creditors,27 allowing for the "discharge [of the debtor's] property" on their behalf.28 In general, it confined eligible debtors to the merchant and trader class, including bankers, brokers, factors, underwriters, and marine insurers, 29 and authorized involuntary bankruptcy proceedings.30 To assure creditors "a fair share of debtors' assets," 31 this law allowed mandatory liquidation be initiated upon a creditors' filing of the requisite petition in federal district court and proof of one or more "act[s] of bankruptcy" by a debtor owing a minimum of $1,000.32 Passed by a narrow margin, legislative history exposed this statute's targets: to benefit "honest merchant[s]" laboring under "unforeseen misfortunes" traceable to fraudulent debtors, those "leviathans of speculation" whose failure for millions impoverished "the widows and orphans, the fair merchants, industrious tradesmen, and credulous friends, . . . involved in the same whirlpool."33 According to one supporter, the law's "great principle" was that "its energies" could not "be called into operation, except in cases of fraud," against the "men going on in speculative schemes, by means of fictitious credit, imposing upon the community, and massing property by contracting debts to an immense amount, without an intention to pay, and ultimately failing, to the ruin of thousands of individuals."34 In this portrayal, creditors loomed not as villains but as victims of debtors prone to hazarding "enterprise" and "speculation" under the influence of "a spirit of over-trading;" creditors, not debtors, suffered "great inconveniences" and "real misfortune" worthy of legal succor, these true consequences of the common debtor's shenanigans frequently overlooked due to
cannot explain every vote, as some Federalists rebuked their party's broad support for any such legislation. MANN, supra note 26, at 214. 27 See, e.g., 5 ANNALS OF CONG. 2650 (1798) (describing this first law's object as "persons only who follow the business of buying and selling"); Cont'l Ill. Nat'l Bank & Tr. Co. v. Chi., Rock Island & Pac. Ry. Co., 294 U.S. 648, 668 (1935) ("The English law of bankruptcy, as it existed at the time of the adoption of the Constitution, was conceived wholly in the interest of the creditor."). 28 5 ANNALS OF CONG. 2661–62. 29 See Tabb, Evolution, supra note 15, at 346 n.144; cf In re Bliemeister, 251 B.R. 383, 390 n.7 (Bankr. D. Ariz. 2000) (observing that the discharge first appeared in the Statute of 4 Anne, adopted in 1705, which made it available only to traders and merchants and in involuntary proceedings). 30 See EDWARD J. BALLEISEN, NAVIGATING FAILURE: BANKRUPTCY AND COMMERCIAL SOCIETY IN ANTEBELLUM AMERICA 103 (2001). 31 DAVID A. SKEEL, JR., DEBT'S DOMINION: A HISTORY OF BANKRUPTCY LAW IN AMERICA 42 (2001); cf. GORDON S. WOOD, THE RADICALISM OF THE AMERICAN REVOLUTION 248 (1991) (contending that "the enormous amounts of debts that . . . inland entrepreneurs, traders, shopkeepers, and market farmers" accumulated during the United States' revolutionary years were not "the consequences . . . of poverty nor of anti-commercial behavior" but symbolized "expansion and enterprise"). 32 See Countryman, supra note 14, at 228; see also BALLEISEN, supra note 30, at 101; cf. Ralph Brubaker, One Hundred Years of Federal Bankruptcy Law and Still Clinging to an In Rem Model of Bankruptcy Jurisdiction, 15 BANKR. DEV. J. 261, 263 (1999) ("American bankruptcy jurisdiction, of course, developed from an English system."). This law's mandatory quiddity should not obscure an undernoted verity, as bankruptcy proceedings were consistently utilized by debtors themselves through a friendly creditor's helping hand. CHARLES WARREN, BANKRUPTCY IN THE UNITED STATES HISTORY 1, 20 (1935); see also MANN, supra note 26, at 223 (noting that, except for Charles Warren, few scholars acknowledged the reality of this manipulation). 33 9 ANNALS OF CONG. 2676 (1799). 34 Id. at 2660.
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these victims' numerosity.35 For all its supporters' attempts to evade the appearance of a politically perilous foreign taint, few British proponents of a bankruptcy regime would have objected to these sentiments, "the disgrace that should attach to fraudulent bankruptcy" too often "relieved by the influence of the delinquents."36 In a nation quickly consumed by debates over federalism and centralization,37 these same reasons even emboldened some of this bankruptcy law's most steadfast opponents.38 In the United States, Daniel Defoe's iconoclastic vision—a system of voluntary bankruptcy39—received its first codification in the Bankruptcy Act of 1841 ("1841 Act"),40 and garnered reaffirmation in the Bankruptcy Act of 1867 ("1867 Act").41 Each progressively more liberal in its treatment of the unfortunate debtor,42 the historical record surrounding the latter act's repeal revealed the advent of a new constitutional consensus: a presumption of constitutionality now attached to any proposal for legislation enshrining a right to voluntary bankruptcy and an unencumbered discharge for a certain subset of debtors.43 Apart from this embryonic accord, however, the debate over the propriety of voluntary bankruptcy continued to fester. 44 In near unanimity, congressmen from the United States' Eastern states grudgingly conceded the wisdom of voluntary bankruptcy yet doggedly refused to
35 Id. at 2676. 36 Id. 37 Tellingly, the parties' arguments evidence this change: whereas debates had once focused on the commercial or agrarian nature of the American republic, the ones leading to the act's adoption dealt with questions of power and national authority. 38 MANN, supra note 26, at 210–20, 248–50. Yet, no single cause explained the statute's repeal in 1803, as congressmen opted for cryptic references to its "existing evils" and "injurious provisions." 39 Daniel Defoe first proposed such a system in 1697. See, e.g., John C. McCoid, II, The Origins of Voluntary Bankruptcy, 5 BANKR. DEV. J. 361, 362 (1988) [hereinafter McCoid, Origins]; Emily Kadens, The Last Bankrupt Hanged: Balancing Incentives in the Development of Bankruptcy Law, 59 DUKE L.J. 1229, 1255 (2010) ("Daniel Defoe recommended that any merchant or trader demonstrating fraudulent intent either by absconding upon becoming insolvent or by failing to cooperate with the bankruptcy process should 'be guilty of Felony, and upon Conviction of the same, shall suffer as a Felon, without Benefit of Clergy.'") (internal citations omitted). 40 See Act of August 19, 1841, ch. 9, 5 Stat. 440, repealed by Act of Mar. 3, 1843, ch. 82, 5 Stat. 614; see Ali v. CIT Tech. Fin. Servs., 981 A.2d 759, 765 (Md. Ct. Spec. App. 2009) (recounting this history); cf. MICHAEL F. HOLT, THE RISE AND FALL OF THE AMERICAN WHIG PARTY: JACKSONIAN POLITICS AND THE ONSET OF THE CIVIL WAR 129, 135 (2003) (explaining the Whig Party's support for a national bankruptcy statute). For more on this law and its inspiration, see CARL B. SWISHER, HISTORY OF THE SUPREME COURT OF THE UNITED STATES: VOLUME 5, THE TANEY PERIOD, 1836–64 129, 133–35 (Paul A. Freund ed. 1974). 41 Act of March 2, 1867, ch. 176, 14 Stat. 517, repealed by Act of June 7, 1878, ch. 160, 20 Stat. 99. 42 See Tabb, Evolution, supra note 15, at 349–50, 355; cf. Cont'l Ill. Nat'l Bank & Tr. Co. v. Chi., Rock Island & Pac. Ry. Co., 294 U.S. 648, 668 (1935) ("[T]he tendency of legislation and of judicial interpretation has been uniformly in the direction of progressive liberalization in respect of the operation of the bankruptcy power."). 43 See Rhett Frimet, The Birth of Bankruptcy in the United States, 96 COM. L.J. 160, 184 (1991); cf. Shelton, supra note 2, at 404 (praising the Bankruptcy Act, as amended, for "throw[ing] sufficient safeguards around the granting of a discharge to prevent frauds" by the "debtor who has not honestly complied with the law by surrendering to his creditors all of his unexempt property, or who has withheld from them anything they have a right to know; who has not, in fact, dealt in absolute fairness with his creditors and the court"). 44 See LAWRENCE M. FRIEDMAN, A HISTORY OF AMERICAN LAW 549 (2d ed. 1985); see also McCoid, Origins, supra note 39, at 377–78 (summarizing these concerns).
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endorse a voluntary bill unaccompanied by features, characteristic of an involuntary system, directed at ensuring the equitable distribution of a bankrupt's assets. 45 Conversely, as the citizens of Southern and Western states were hard-hit by a sharp collapse in land prices, their representatives and senators fought against the inclusion of these forceful tools in any bankruptcy bill.46 The image of the United States as purely an agrarian society uncongenial to bankruptcy, formerly assumed as true in orations both majestic and pedantic, passed into practical oblivion and tenacious myth, yet the same fears of lost masculinity, dependence, enslavement, and speculation haunted the land.47 Examples abound. In a message to Congress dated December 1, 1873, President Ulysses S. Grant pushed for the repeal of the 1867 Act for debtors' sake, as "obstinate creditors" seemingly used it "to frighten or force debtors into a compliance with their wishes and into acts of injustice to other creditors and to themselves." 48 Nearly thirty years later, a representative pleaded for a voluntary bankruptcy bill on behalf of the "man who that follows the plow, the man that works in the factory from day to day, that he may produce, that he may live," each essential to "the business of the country" and "burdened down with debt and misfortune which ordinary wisdom did not enable them to avoid." 49 Similarly inclined, one unsuccessful reformist perceived "the only legitimate object" of bankruptcy legislation as "the relief of insolvent debtors" in 1896.50 Two years later, on the cusp of a new era, another described voluntary bankruptcy as "the means of the redemption of the unsuccessful and fallen debtor" and denounced involuntary bankruptcy as nothing less than "a weapon in the hands of the creditor to press collections of debt harshly, to intimidate, and to destroy" and a source of "litigation and agitation." 51 In defense of the perpetration of some form of involuntary bankruptcy, its supporters co-opted these same notions—"The involuntary law is necessary to enable the creditors of a dishonest and fraudulent debtor to compel him to do as an honest debtor voluntarily does"52—to the anger and bewilderment of their opponents. 53 Above all, the perceptibly increasing liberality of these laws and recurrent debates, as well as the persistence of such themes through cycles of boom and bust, intimated that the United States' later systems would likely depart from the English-inspired and creditor-controlled ones so haphazardly erected and swiftly abandoned by the antebellum republic.54
45 See In the Matter of Gibraltor Amusements, Ltd. (In re Gibraltor Amusements, Ltd.), 291 F.2d 22, 27 (2d Cir. 1961) (Friendly, J., dissenting). 46 See Frimet, supra note 43, at 186. 47 MANN, supra note 26, at 255. 48 26 CONG. REC. 104 (1894) (quoting message of President Grant from 1972). 49 Id. at 122 (statement of Rep. Cannon). 50 28 CONG. REC. 4607 (1896) (statement of Sen. Albaugh de Armond). 51 31 CONG. REC. 1869, 1908–09 (1898) (statement of Rep. Lewis). 52 28 CONG. REC. 4582 (1896) (statement of Rep. Connolly). 53 Id. at 4616 (statement of Rep. Graff). 54 See Stephen J. Lubben, A New Understanding of the Bankruptcy Clause, 64 CASE W. RES. L. REV. 319, 387 (2013) ("The 1898 Act also represented a clear break from the English-inspired, creditor-controlled federal systems of earlier years.").
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Upon passage of the National Bankruptcy Act of 1898 ("Bankruptcy Act"),55 "the modern era of liberal debtor treatment" launched,56 as once venerable precepts fell.57 Revolutionary in its solicitude for "debtors' interests,"58 as later modified by the Bankruptcy Act of 1938 ("Chandler Act"), 59 the Bankruptcy Act allowed an involuntary case to be commenced in one of two situations. 60 If liquidation constituted their goal, three petitioning creditors whose provable claims were fixed as to liability and liquidated as to amount, aggregated $500 or more in excess of the value of the liens held by them, could file such a petition against an eligible debtor.61 Whenever the debtor challenged the petition, the law obliged these creditors to prove the commission of an "act of bankruptcy" within four months of its filing.62 To
55See An Act to establish a uniform system of bankruptcy throughout the United States, Pub. L. No. 55-541, 30 Stat. 544 (1898) [hereinafter Bankruptcy Act] (repealed 1978). 56 Tabb, History, supra note 3, at 24. Perhaps fittingly, the debate over the Bankruptcy Act seemingly represented the tipping point; the precise moment in time when bankruptcy, viewed so consistently for centuries, mutated into something else entirely. 31 CONG. REC. 1916–18 (1898). One defender maintained— "All men who come within that definition [--'the great business class, the active, energetic class, the class that gives life and energy and character to the American people'] are clamoring for a law upon the subject of bankruptcy"—and riposted: "Every provision has been made for the speedy, the cheap, and the economical administration of the estates of bankrupts." Id. at 1915–16. But another conceded—"Vast numbers of our people are unquestionably bankrupt, and a law should be passed that would relieve the honest but unfortunate businessman who is laboring under burdens and disabilities caused by conditions over which he has no immediate control"—and riposted:
But . . . I could never give my consent or vote to a measure containing so many drastic provisions as I find here; . . . whereby any debtor owing them a sum of $1,000 knows not at what time he may be seized upon, dragged before a court, and left at the mercy of a Federal judge to determine whether he shall be held in custody or not.
Id. at 1917. 57 See Ashton v. Cameron Cty. Water Improvement Dist., 298 U.S. 513, 535 (1936) (observing that voluntary proceedings were "resisted" for a century with "debates in Congress bear[ing] witness to the intensity of the feeling aroused by its proposal") (Cardozo, J., dissenting); see also Ali v. CIT Tech. Fin. Servs., 981 A.2d 759, 766 (Md. Ct. Spec. App. 2009) ("The 1898 statute applied to all classes of debtors, and provided for voluntary and involuntary bankruptcy."); cf. In re Pillow, 8 B.R. 404, 408 (Bankr. D. Utah 1981) (touching upon the differences between modern bankruptcy law and its eighteenth and seventeenth century progenitors). 58 See, e.g., David A. Skeel, Jr., The Genius of the 1898 Bankruptcy Act, 15 BANKR. DEV. J. 321, 322 (1999) ("In contrast to the pro-creditor, administrative English approach, the 1898 Act favored debtors' interests in many respects."). 59 Pub. L. No. 75-696, 52 Stat. 840 (1938). "An Act to amend an Act entitled 'An Act to establish a uniform system of bankruptcy throughout the United States', approved July 1, 1898, and Acts amendatory thereof and supplementary thereto; and to repeal section 76 thereof and all Acts and parts of Acts inconsistent therewith." Id. 60 See Susan Block-Lieb, Why Creditors File So Few Involuntary Petitions and Why the Number is Not Too Small, 57 BROOK. L. REV. 803, 807–09 (1991). 61 Bankruptcy Act § 59; see Pirie v. Chi. Title & Tr. Co., 182 U.S. 438, 445 n.1 (1901) (citing section 59 of the Bankruptcy Act and its acts of bankruptcy); see also Nw. Pulp & Paper Co. v. Finish Luth Book Concern, 51 F.2d 340, 342 (9th Cir. 1931) (citing statute); Theard v. Fid. & Deposit Co. of Md., 202 F.2d 880, 883 (5th Cir. 1953) (holding that it is immaterial whether the three qualified creditors joined in the petition originally or by intervention). Notably, whereas the Bankruptcy Act once required that a debtor be insolvent for this provision's purposes, this element was later deleted. See Bookey v. King, 236 F.2d 871, 876 (9th Cir. 1956) (calling "[t]he omission of the clause 'who is insolvent' . . . significant"). 62 Bankruptcy Act §§ 3–4.
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effectuate a reorganization under chapter X against a corporate debtor, petitioning creditors needed to establish that (1) the debtor had committed one such "act of bankruptcy," (2) a receiver or trustee had taken possession of the greater portion of the debtor's property, (3) a proceeding to foreclose a lien against the greater portion of the debtor had been brought, or (4) the debtor had been adjudged a bankrupt in a case pending under one of the Bankruptcy Act's other chapters.63 These provisions embraced some innovations, including the adoption of the modified balance sheet test presently encoded in § 101(32)(A)64 to define "insolvency," but ultimately predicated involuntary relief on a debtor's misconduct, conforming, rather than departing, from past American and British practice in its cynosure, if nothing else.65 So understood, with its rigid rules, the Bankruptcy Act's involuntary formula embodied a provisional compromise between two largely conflicting goals: "[T]he need for an effective remedy for creditors to insure equal distribution of a debtor's assets" and "the need to protect debtors from being forced into bankruptcy without sufficient justification."66 In time, this diligently wrought framework engendered an unforeseen conundrum. In practice, many debtors manifested an extreme "reluctan[ce] to file voluntary petition until after the situation [had] become hopeless," 67 thereby engaging in costly misbehavior redolent of "the ingenuity of fraud and stratagem" loathed and targeted by the mercantile supporters of America's earlier involuntary schemes.68 By 1975, these business debtors' craftiness in "delay[ing] or frustrat[ing] indefinitely all efforts at bringing their financial problems under the supervision and protection of the federal bankruptcy courts for early diagnosis and correction of their financial difficulties" struck many observes as an uncontroversial yet disturbing truth.69 Creditors, meanwhile, struggled "to allege and prove the commission of one . . . act[] of bankruptcy."70 The cause proved easy to pinpoint: as timely insolvency comprised an essential element shared by four of those five statutorily-defined "acts of bankruptcy," and as debtors tended to jealously guard the relevant financial data
63 Id.; see also, e.g., Block-Lieb, supra note 60, at 808–09 (citing provision). 64 See 11 U.S.C. § 101(32)(A) (2012); see also, e.g., Am. Nat'l Bank & Tr. Co. v. Bone, 333 F.2d 984, 986– 87 (8th Cir. 1964) (utilizing a balance sheet test to show insolvency); see also Syracuse Eng'g Co. v. Haight, 110 F.2d 468, 471 (2d Cir. 1940) (holding that under the balance sheet test, the valuation of an asset is its fair market price). 65 See Tabb, History, supra note 3, at 8 ("The premise of debtor misconduct as the basis for involuntary bankruptcy, rather than financial status, remained in place until the Bankruptcy Reform Act of 1978."). 66 HON. JOAN FEENEY ET AL., BANKRUPTCY LAW MANUAL § 14.1 (5th ed. 2014); see Charles Jordan Tabb, A Century of Regress or Progress? A Political History of Bankruptcy Legislation in 1898 and 1998, 15 BANKR. DEV. J. 343, 364, 367 (1999) (describing an antecedent bill proposed by Representative Joseph Bailey, a Texas Democrat, as "radical" for embracing "the concept of allowing only voluntary bankruptcy" and contrasting it with a second, devised by Jay L. Torrey, a St. Louis attorney, which "permitted involuntary bankruptcy to be filed by creditors against debtors") (emphasis in original). 67 COMM'N ON THE BANKR. LAWS OF THE UNITED STATES, REPORT OF THE COMM'N ON THE BANKR. LAWS OF THE UNITED STATES (1973), reprinted in Report of the Commission on the Bankruptcy Laws of the United States, 29 BUS. LAW. 75, 98 (1973) [hereinafter COMM'N REPORT]. 68 9 ANNALS OF CONG. 2674 (1799) (statement of Rep. Otis). 69 Conrad K. Cyr, Setting the Record Straight for a Comprehensive Revision of the Bankruptcy Act of 1898, 49 AM. BANKR. L.J. 99, 163 (1975). 70 COMM'N REPORT, supra note 67, at 98.
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for reasons noble and foul, nearly insurmountable evidentiary difficulties stymied even determined creditors.71 As a result, "delay in the institution of proceedings for liquidation until assets . . . [were] largely depleted" grew commonplace,72 principally "explaining the smallness of distributions in . . . business bankruptcies."73 Cognizant of these ills, § 303's drafters attempted "to make the . . . [Code] more effective as an instrumentality for relief at the instance of creditors."74 Thus, this section originally struck a new balance between a debtor's renascence and creditors' return,75 one explicitly designed to be different from that imposed by the Code's debtor-focused voluntary provisions. 76 Protection of the threatened depletion of assets and prevention of the unequal treatment of similarly situated creditors, the themes central to bankruptcy law's more coercive past, became the central policies behind the Code's involuntary petitions; other policies associated with the Code's voluntary provisions, including the honest debtor's "fresh start," receded in relative importance. 77 With care, § 303's architects honed it into, first and foremost, an extreme78 "remedy for creditors, not debtors,"79 sharply contrasting with the modern
71 See COMM'N REPORT, supra note 67, at 98 (noting that "insolvency" is "defined in the Act as insufficiency of the debtor's property at a fair valuation to pay his debts" and acknowledging that it is "frequently difficult for a debtor's creditors" to establish that the debtor is insolvent and the debtor is entitled to a jury trial to establish whether he committed an act of bankruptcy); see Bankruptcy Act § 3; see also, e.g., West Co. v. Lea, 174 U.S. 590, 592 n.1, (1899) (citing Section 3 of the Acts of Bankruptcy statute and its five acts); In the Matter of Marshall, III (In re Marshall), 721 F.3d 1032, 1060–61 (9th Cir. 2013) (recounting the history of the 1898 Bankruptcy Act and the issues of "insolvency" with an involuntary petition); cf. Treiman, supra note 16, at 210 (pegging "the underlying evil of the present situation" as the fact that "insolvency is recognized as the fundamental reason for bringing a debtor into a bankruptcy court, yet the law insists on coupling this primary ground with an artificial act to be committed by a debtor") (internal quotation marks omitted). To be fair, insolvency had first appeared in the 1867 Act as an element of one of its nine statutory acts of bankruptcy. See John C. McCoid, II, The Occasion for Involuntary Bankruptcy, 61 AM. BANKR. L.J. 195, 196 (1987) [hereinafter McCoid, The Occasion]. 72 COMM'N REPORT, supra note 67, at 98, cited in In re Marciano, 446 B.R. 407, 419 (Bankr. C.D. Cal. 2010); Cyr, supra note 69, at 163–64 73 In re Marciano, 446 B.R. at 419. 74 COMM'N REPORT, supra note 67, at 99. 75 See, e.g., In re Dino's, Inc., 183 B.R. 779, 783–84 (S.D. Ohio 1995) (adopting an "objective-subjective analysis standard" for determining bad faith in the filing of an involuntary petition); see also Susman v. Schmid (In re Reid), 773 F.2d 945, 946 (7th Cir. 1985) (discussing § 303(b)(1) of the Bankruptcy Act, amended in 1984, providing that "an involuntary case may be commenced against a debtor by three or more creditors, 'each of which is a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute'"). 76 See Amir Shachmurove, Purchasing Claims and Changing Votes: Establishing "Cause" under Rule 3018(a), 89 AM. BANKR. L.J. 511, 546–47 (2015) [hereinafter Shachmurove, Claims]. Pro-debtor, of course, does not mean anti-creditor, as the Code attempts to roughly balance the rights of debtors with the prerogatives of creditors. Id. 77 See, e.g., In re Manhattan Indus., Inc., 224 B.R. 195, 200 (Bankr. M.D. Fla. 1997); In re Letourneau, 422 B.R. 132, 138 (Bankr. N.D. Ill. 2010); In re Hentges, 351 B.R. 758, 772 (Bankr. N.D. Okla. 2006) (quoting In re Better Care, Ltd., 97 B.R. 405, 411 (Bankr. N.D. Ill. 1989)); In re Tichy Elec. Co., 332 B.R. 364, 372 (Bankr. N.D. Iowa 2005). 78 See In re Tichy Elec. Co., 332 B.R. at 372 (stressing the danger of involuntary bankruptcy and how it cannot be overlooked by the courts). 79 In re Letourneau, 422 B.R. at 138 (stating there is no circumstance where a debtor's filing of involuntary bankruptcy can be proper).
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era's greater progressivism.80 The byproduct of this quirk—a heightening of the "uneasy tension" already produced by the Code's protection of both creditors and debtors in its voluntary chapters81—has played out in this section's explication.
B. Statutory Scheme
1. Threshold Requirements
Permissible in two circumstances82—when either liquidation under chapter 7 or reorganization pursuant to chapter 11 83 is pursued—for reasons of undisguised policy,84 an involuntary case may be commenced "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 under which such case is commenced."85 As such, prior to an involuntary matter's initiation, the target debtor must meet the minimal86 and malleable 87 eligibility criteria to be classified as a
80 See, e.g., Huszti v. Huszti, 451 B.R. 717, 719 (Bankr. E.D. Mich. 2011) (quoting In re McMeekin, 18 B.R. 177, 177–78 (Bankr. D. Mass. 1982)). To countless jurists, a simple reason, embedded in the Code entirely and sanctioned by precedent, compelled such watchfulness. In re McMeekin, 18 B.R. at 177–78. The "harsh effects" of such an unsuccessful filing, including "the loss of credit-standing, inability to transfer assets and carry on business affairs, and the public embarrassment," too often rendered an involuntary petition's dismissal into a hollow abyss for a person already terminally wounded by a petition's mere docketing. Id.; see also, e.g., In re Lai Di Zhu, No. 10–19901PM, 2010 WL 4259553, at *3 (Bankr. D. Md. Oct. 21, 2010) (holding an alleged debtor can recover from a creditor in an involuntary bankruptcy filing); In re Cates, 62 B.R. 179, 180 (Bankr. S.D. Tex. 1986) (quoting In re Reid, 773 F.2d at 946, that "the filing of involuntary petition is an extreme remedy with serious consequences to the alleged debtor, such as loss of credit standing, inability to transfer assets and carry on business affairs, and public embarrassment," thus, the courts will scrutinize the creditor's filing carefully). 81 See In re Am. Res. & Energy, LLC, 513 B.R. 371, 382 (Bankr. D. Minn. 2014) (characterizing the meaning of "bona fide dispute as to liability or amount" in 11 U.S.C. § 303 as "but one example of this tension"). 82 11 U.S.C. § 303(a) (2012) (referring to chapter 7 or 11 of this title); see Toibb v. Radloff, 501 U.S. 157, 169 (1991) (Stevens, J., dissenting). 83 See, e.g., Fla. Dep't of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 37 n.2 (2008); see also CHS, Inc. v. Plaquemines Holdings, L.L.C., 735 F.3d 231, 239 (5th Cir. 2013); cf. Beeman v. BGI Creditors' Liquidating Tr. (In re BGI, Inc.), 772 F.3d 102, 107 (2d Cir. 2014) (observing that the doctrine of equitable mootness governs "appeals arising from Chapter 11 liquidation proceedings, as well as appeals from Chapter 11 reorganization proceedings"). In some sense, this distinction is mere sophistry, as a chapter 11 plan can effectuate a debtor's liquidation as surely as a classic chapter 7 case. See Fla. Dep't of Revenue, 554 U.S. at 37 n.2. 84 H.R. REP. NO. 95-595 (1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 321–22 (Alan M. Resnick and Eugene M. Wypyski eds., vol. 13 1979) ("An involuntary case may be commenced only under chapter 7, Liquidation, or chapter 11, Reorganization."). 85 11 U.S.C. § 303(a); Prof'l Bus. Servs., Inc. v. Young (In re Young), 207 F. App'x 735, 735 n.2 (8th Cir. 2006) (quoting § 303(a)); Marlar v. Williams (In re Marlar), 432 F.3d 813, 815 (8th Cir. 2005) (also quoting § 303(a)). 86 See In re Purpura, 170 B.R. 202, 206 (Bankr. E.D.N.Y. 1994) (describing chapter 11 as a "powerful tool . . . which can be initiated with virtual impunity," as "[a]ny person who meets the minimal eligibility requirements contained in 11 U.S.C. § 109(d) may file a chapter 11 petition"); see also In re Nichols, 223 B.R. 353, 359 (Bankr. N.D. Okla. 1998) (quoting In re Purpura, 170 B.R. at 206). 87 See In re 4 Whip, LLC, 332 B.R. 670, 672 (Bankr. D. Conn. 2005) (concluding the "Code's qualification criteria are sufficiently liberal to permit an inchoate or de facto limited liability company . . . to be a debtor,
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chapter 7 or a chapter 11 bankrupt laid down in § 109(a), (b), and (d).88 Per these provisions, the target debtor must be a "person," whether natural89 (and neither a farmer nor a family farmer, as painstakingly defined in § 10190) or a "moneyed, business, or commercial corporation."91 These prerequisites met, an involuntary case starts once a petition is filed by: (1) "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, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $15,325 more than the value of any lien on property of the debtor securing such claims held by the holders of such claim;"92 (2) "if there are fewer than 12 such holders, excluding any employee or insider . . . and any transferee of a transfer that is voidable under [the Code], by one or more of such holders that hold in the aggregate at least $11,625 of such claims;"93 (3) "if such person is partnership," either "by fewer than all of the general partners" or "by any general partner . . ., the trustee of such a general partner, or a holder of a claim against such a partnership" if relief was ordered "with respect to all of the general partners in such a partnership;" 94 or (4) "by a foreign representative of the estate in a foreign proceeding concerning such person." 95 Distilled, § 303(b) permits three categories of persons to file a petition: (1) unsecured creditors with undisputed, noncontingent claims, (2) general partners of a partnership debtor, and (3) foreign representatives of a debtor in a foreign proceeding.96 so long as that entity had a bona fide business existence prior to the Petition Date"). 88 11 U.S.C. §§ 101(41), 109(a)–(b), 109(d); see In re Bank of Am., N.A., No. 11-24503 MER, 2011 WL 2493056, at *5 (Bankr. D. Colo. June 21, 2011) (citing § 109(b) and 109(d)). 89 11 U.S.C. § 101(41) (defining "person" for the Code's general purposes to "include[] individual, partnership, and corporation, but . . . not include governmental unit"); see Goerg v. Parungao (In re Goerg), 844 F.2d 1562, 1566 (11th Cir. 1988) (citing § 101(41)). 90 11 U.S.C. § 101(18), 101(20); see In the Matter of Bernard Armstrong (In re Armstrong), 812 F.2d 1024, 1025 (7th Cir. 1987) (citing § 101(18)). 91 11 U.S.C. § 303(a). The phrase "moneyed, business, or commercial corporation" dates to the Bankruptcy Act of 1867. See Merrill v. Nat'l Bank of Jacksonville, 173 U.S. 131, 176, (1899). Prior to the Code, it had seemingly acquired a fixed meaning as referring purely to "corporations organized for profit." See In the Matter of Allen University (In re Allen Univ.), 497 F.2d 346, 348 (4th Cir. 1974); cf. Highway & City Freight Drivers, v. Gordon Transps., Inc., 576 F.2d 1285, 1291 (8th Cir. 1978) (emphasizing the paucity of illuminating case law). Courts continue to adhere to this definition. See, e.g., In re Residential Capital, LLC, No. 12-12020 (MG), 2013 Bankr. LEXIS 5683, at *31 (Bankr. S.D.N.Y. Dec. 11, 2013) (distinguishing between "moneyed, business, or commercial corporations or trusts" and "nonprofit entities" for purposes of § 1129(a)(14)–(16)). However, the modern test "for whether a debtor is a moneyed, business, or commercial corporation is determined by a consideration of the classification of the corporation by the state; the powers conferred upon it; and the character and extent of its main activities." In re Yehud-Monosson USA, Inc., 458 B.R. 750, 755 (B.A.P. 8th Cir. 2011) (internal quotation marks omitted). 92 11 U.S.C. § 303(b)(1); Mitchell v. Weinman (In re Mitchell), 554 F. App'x 756, 759 (10th Cir. 2014). 93 11 U.S.C. § 303(b)(2); Trusted Net Media Holdings, LLC v. Morrison Agency, Inc. (In re Trusted Net Media Holdings), 550 F.3d 1035, 1040 (11th Cir. 2008) (quoting § 303(b)) (emphasis in original omitted). 94 11 U.S.C. § 303(b)(3); In re Quality Laser Works, 211 B.R. 936, 940–41 (B.A.P. 9th Cir. 1997) (quoting § 303(b)(3)(A) and (B)); In re Roxy Roller Rink Joint Venture, 67 B.R. 479, 482 (Bankr. S.D.N.Y. 1986) (citing § 303(b)(3)(A)). 95 11 U.S.C. § 303(b)(4); Jefferson Tr. & Sav. Bank of Peoria v. Rassi (In re Rassi), 701 F.2d 627, 628 n.1 (7th Cir. 1983) (quoting § 303(b)). 96 11 U.S.C. § 303(b); see In re McMillan, 543 B.R. 808, 811 (Bankr. N.D. Tex. 2016) (holding that only
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Once these facts have been established, the Code's standard for an order for relief in an involuntary case, specified in § 303(h), depends upon the target debtor's response.97 If the petition is not "timely controverted," i.e. contested, the bankruptcy court "shall order relief against the debtor . . . under the chapter under which the petition was filed."98 Otherwise, though only after a trial, relief will follow in one of two situations.99 First, "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,"100 "the most significant departure from . . . [pre-Code] law concerning the grounds for involuntary bankruptcy.101 Second, "within 120 days before the date of the filing of the petition, a custodian, other than a trustee, receiver, or agent appointed or authorized to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property, was appointed or
"petitioning creditors" are parties to the contested matter); see also In re Moss, 249 B.R. 411, 418 (Bankr. N.D. Tex. 2000) (quoting §303(b)); McMillan v. Schmidt (In re McMillan), 614 F. App'x 206, 209 (5th Cir. 2015) (finding that more creditors may subsequently join the first set under § 303(c)). "The sole statutory qualification for joining is that the creditor must hold a nonexempt unsecured claim." In re Kidwell, 158 B.R. 203, 210 (Bankr. E.D. Cal. 1993) (construing 11 U.S.C. § 303(c)). Upon such congregation, the "joining creditor" gains the same rights as the "petitioning creditor(s);" thus, the term "petitioning creditor" in § 303 is equivalent to "an entity that files a petition under § 303(b) or one who joins the petition under § 303(c)." In re McMillan, 614 F. App'x at 209; see also In re Rosenberg, 779 F.3d 1254, 1268–69 (11th Cir. 2015) (affirming the bankruptcy court's award of fees from an entity it concluded was the "de facto petitioning creditor" though not a signatory to the original involuntary petition). The Code's legislative history stresses this equality, H.R. REP. NO. 95-595 (1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 322 (Alan M. Resnick and Eugene M. Wypyski eds., vol. 13 1979), seemingly intended to maximize the chances for some joint efforts between discrete creditors. See In re Iowa Coal Mining Co., 242 B.R. 661, 699 (Bankr. S.D. Iowa 1999) (contending that "the legislative purpose of § 303 would be frustrated by allowing [a small subset of a debtors' creditors] to launch [an] involuntary proceeding without some joint effort with other creditors"). 97 See, e.g., In re Runaway II, Inc., 168 B.R. 193, 196 (Bankr. W.D. Mo. 1994). That these requirements can be described as "jurisdictional" does not mean they are necessary to the bankruptcy court's subject matter jurisdiction. See, e.g., In re Mitchell, 554 F. App'x at 760 (discussing that there is no explicit reference to § 303(b)'s requirement being jurisdictional in nature); Adams v. Zarnel (In re Zarnel), 619 F.3d 156, 169 n.6 (2d Cir. 2010); In re Trusted Net Media Holdings, LLC, 550 F.3d at 1041 (discussing § 303(b) and jurisdictional issues). 98 11 U.S.C. § 303(h); J.B. Lovell Corp. v. Carlisle Corp. (In re J.B. Lovell Corp.), 876 F.2d 96, 98 n.4 (11th Cir. 1989). While the Code technically refers to "court," every district court in the United States has adopted a standing order of reference which devolves bankruptcy adjudication unto that district's bankruptcy court. 99 11 U.S.C. § 303(h); McCloy v. Silverthorne (In re McCloy), 296 F.3d 370, 375 (5th Cir. 2002) (quoting § 303(h)); McCoid, The Occasion, supra note 71, at 195, 208–09. The Code calls for an order for relief in an involuntary petition when the "debtor is generally not paying such debtor's debts as such debts become due" and where "within 120 days before the date of the filing of the petition, a custodian . . . was appointed or took possession." Id. at 195. 100 11 U.S.C. § 303(h)(1); see, e.g., In re Zapas, 530 B.R. 560, 567 (Bankr. E.D.N.Y. 2015) (quoting § 303(h)(1)); Ferguson v. Baron (In re Baron), 593 F. App'x 356, 360 (5th Cir. 2014) ("[Section] 303(h) provides that, whenever an involuntary bankruptcy petition is filed and then timely controverted, the court, after a trial, shall order relief against the debtor in the involuntary proceeding only if, inter alia, '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.'") (quoting § 303(h)); In re Speer, 522 B.R. 1, 5 (Bankr. D. Conn. 2014) (quoting § 303(h)(1)). 101 H.R. REP. NO. 95-595, reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 323. Pre-code law required both balance sheet insolvency and an act of bankruptcy.
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took possession."102 Read together,103 in the absence of a custodian's appointment, § 303(b) and (h) impose five obligations on the petitioning creditors, a quintet that must be promptly shown to a judge's satisfaction.104 In particular, the bankruptcy court must determine whether: (1) either three or more creditors (where the total number of creditors exceeds twelve)105 or at least one (where the total number falls below twelve),106 once certain exclusions are made, exist; (2) the creditor(s) hold claim(s) against the target debtor that are not contingent as to liability; (3) the claim(s) are not the subject of a bona fide dispute as to liability and amount; and (4) the claim(s) total at least $15,325.107 Finally, the court must ascertain (5) that the alleged debtor is generally not paying debts, except those subject to a bona fide dispute as to liability or amount, as they come due.108 Articulating a "liberal approach to the commencement of an
102 11 U.S.C. § 303(h)(2); see, e.g., Concrete Pumping Serv., Inc. v. King Constr. Co. (In re Concrete Pumping Serv. Inc.), 943 F.2d 627, 629 (6th Cir. 1991) ("11 U.S.C. § 303(h) governs the issue of how and when an involuntary bankruptcy case can be commenced."); B.D. Int'l Discount Corp. v. Chase Manhattan Bank, N.A. (In re B.D. Int'l Discount Corp.), 701 F.2d 1071, 1073 n.4 (2d Cir. 1983); see also H.R. REP. NO. 95-595, reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 324 (the custodian test was deemed to be "more easily provable" than the equity insolvency test). 103 See, e.g., Roberts v. Sea-Land Servs. Inc., 132 S. Ct. 1350, 1357 (2012) ("It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.") (quoting Davis v. Mich. Dep't of Treasury, 489 U.S. 803, 809 (1989)). For more on canons of interpretation, see infra Part III.A. 104 See, e.g., In re Brooklyn Resource Recovery, 216 B.R. 470, 478 (Bankr. E.D.N.Y. 1997); In re Better Care, Ltd., 97 B.R. 405, 418 (Bankr. N.D. Ill. 1989) ("The burden is upon the petitioning creditors to prove each and every element of their case . . . ."); Subway Equip. Leasing Corp. v. Sims (In re Sims), 994 F.2d 210, 221 (5th Cir. 1993) ("[T]he petitioning creditor must establish a prima facie case that no bona fide dispute exists.") (internal quotation marks omitted); Susman v. Schmid (In re Reid), 773 F.2d 945, 946 (7th Cir. 1985). Once the petitioning creditors satisfy § 303(b) and (h), the burden to prove a defense shifts to the debtor. See In re Mktg. & Creative Sol., Inc., 338 B.R. 300, 305 (B.A.P. 6th Cir. 2005). The creditors must do so by a preponderance of the evidence. See, e.g., In re Moss, 249 B.R. 411, 418 (Bankr. N.D. Tex. 2000) (citing cases); In re Gills Creek Parkway Assocs., L.P., 194 B.R. 59, 63 (Bankr. D.S.C. 1995) ("[T]he petitioning creditors have the burden of proving by a preponderance of evidence that the statutory requirements of § 303 have been met.") (internal quotation marks omitted). 105 See Godshall & Gilhuly, supra note 5, at 1322. Up until 1998, the majority of involuntary cases were apparently filed by three or more creditors. 106 See Godshall & Gilhuly, supra note 5, at 1322. 107 See, e.g., In re Diamondhead Casino Corp., 540 B.R. 499, 505–06 (Bankr. D. Del. 2015); see also In re Marciano, 446 B.R. 407, 420 (Bankr. C.D. Cal. 2010) (although in this case, the court ruled the claims need to amount to at least $13,475). 108 See, e.g., In re Diamondhead Casino Corp., 540 B.R. at 505–06; see also In re Marciano, 446 B.R. at 420.
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involuntary case,"109 an affirmative answer to these jurisdictional110 questions leads to the entering of an order for relief per § 303's explicit text.111
2. Target Debtor's Statutory Prerogatives
Before that pivotal point is reached, however, the target debtor enjoys uniquely extensive prerogatives. 112 Empowered to answer,113 he, she, or it may raise any number of defenses to the petition, including: (1) lack of eligibility to be a debtor under the creditor's selected chapter under the Code; (2) status as a farmer, family farmer, or nonprofit organization; (3) number of petitioning creditors; (4) nature and/or amount of each petitioning creditor's claim; (4) contingent nature of relevant claims; (5) claims subject to a bona fide dispute; (5) aggregate amount of the debts of the petitioning creditors is less than $14,425 over the amount of any security for the claim; (6) generally not paying debts as they become due; and (7) pre-petition custodian appointed.114 For the sake of his, her, or its financial security, the target debtor may also request that the bankruptcy court require "the petitioner under this section to file a bond to indemnify the debtor for such amount as the court may later allow under subsection (i) of this section" after "notice and a hearing" and "for
109 In re Rebeor, 93 B.R. 16, 20 (Bankr. N.D.N.Y. 1988). 110 See Key Mech. Inc. v. BDC 56 LLC (In re BDC 56 LLC), 330 F.3d 111, 118 (2d Cir. 2003) abrogated by Zarnel v. Zarnel (In re Zarnel), 619 F.3d 156, 167 (2d Cir. 2010) (finding for a "subject matter jurisdictional" requirement). But see Rubin v. Belo Broad. Corp. (In re Rubin), 769 F.2d 611, 614 n.3 (9th Cir. 1985) (describing the requirements in § 303 as "not jurisdictional in the technical sense of subject matter jurisdiction" but rather as "substantive matters which must be proved or waived for petitioning creditors to prevail in involuntary proceedings"); see also, e.g., In re Smith, 415 B.R. 222, 238 (Bankr. N.D. Tex. 2009) (affirming that "§ 303(b)'s requirements are not jurisdictional"); In re Trusted Net Media Holdings, LLC, 550 F.3d at 1043 (concluding that "that the language of § 303(b) does not evince a congressional intent to implicate the bankruptcy courts' subject matter jurisdiction"); In re Everett, 178 B.R. 132, 144 (Bankr. N.D. Ohio 1994) (quoting In re Rubin, 769 F.2d at 614 n.3). Quite simply, "[t]he filing of an involuntary petition, even when the alleged debtor challenges whether the petitioning creditor's claim is valid, creates a 'case under title 11' and falls within the subject matter jurisdiction of [the] Court." In re AMC Investors, LLC, 406 B.R. 478, 482 (Bankr. D. Del. 2009); see also, e.g., In re Coppertone Commc'ns, Inc., 96 B.R. 233, 235 (Bankr. W.D. Mo. 1989) (relying on In re Earl's Tire Serv., Inc., 6 B.R. 1019, 1022 (Bankr. D. Del. 1980)). 111 11 U.S.C. § 303(h) (2012) (outlining the required relief); cf. Source Search Techs., LLC v. Lending Tree, LLC, No. 04-4420, 2007 WL 1302443, at *8 (D.N.J. May 2, 2007) (contrasting permissive "may" and "can" with mandatory "must"); Sabow v. United States, 93 F.3d 1445, 1452 (9th Cir. 1996) (distinguishing between "suggestive ('should')" and "mandatory ('must') terms"). 112 Cf. In re McMillan, 543 B.R. 808, 815 (Bankr. N.D. Tex. 2016) ("Section 303 of the Bankruptcy Code is structured as a self-contained statute to deal with all aspects of an involuntary bankruptcy."). 113 11 U.S.C. § 303(d) (empowering a "debtor, or a general partner in a partnership debtor that did not join the petition, [to] file an answer to a petition under this section"); see In re CorrLine Int'l, LLC, 516 B.R. 106, 138 (Bankr. S.D. Tex. 2014) (recognizing the right of a debtor to oppose an involuntary petition by filing an answer); see also H.R. REP. NO. 95-595 (1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 322 (Alan M. Resnick and Eugene M. Wypyski eds., vol. 13 1979). Unlike (e), (f), and (g), this subsection refers to both a debtor and "a general partner in a partnership debtor that did not join in the petition." 11 U.S.C. § 303(d). 114 See In re Colon, 474 B.R. 330, 361–62 (Bankr. D.P.R. 2012) (citing David S. Kennedy, James E. Bailey III & R. Spencer Clift, III, The Involuntary Bankruptcy Process: A Study of the Relevant Statutory and Procedural Provisions and Related Matters, 31 U. MEM. L. REV. 1, 6–7 (2000)).
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cause."115 While an interim trustee may be appointed upon the request of a party in interest, the target debtor may always "regain possession" upon filing "such bond as the court requires . . . ."116 And rather helpfully, the Code has been read to necessitate no more than a minimally "sufficient bond."117 The Code bestows yet other statutory privileges upon the target debtor in the hope of redressing once formidable menaces. 118 Perhaps most significantly, "[n]otwithstanding [S]ection 363 . . . except to the extent that the court orders otherwise, and until an order for relief in the case, any business of the debtor may continue to operate . . . ."119 During this so-called "gap period,"120 "a clarification and a change from existing law" when enacted in 1978,121 "the debtor may continue to use, acquire, or dispose of property as if an involuntary case concerning the debtor
115 11 U.S.C. § 303(e); see In re Savannah Yacht Corp., No. 03-41547, 2003 WL26099689, at *1 (Bankr. S.D. Ga. Nov. 25, 2003) (concluding "bad faith is a determining factor in ordering a petitioning creditor to post a bond under §303(e)"). One purpose—to "discourage frivolous petitions as well as the more dangerous spiteful petitions," ones "based on a desire to embarrass the debtor . . . or to put the debtor out of business without good cause"—prompted this requirement's enactment, as "an involuntary petition may put a debtor out of business even if it is without foundation and is later dismissed." See also H.R. REP. NO. 95-595, reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 323 (citations omitted); see also, e.g., In re Apollo Health St., Inc., No. 11-22970 (NLW), 2011 WL 2118230, at *2 (Bankr. D.N.J. May 23, 2011) (citing legislative history); In re Kidwell, 158 B.R. 203, 218 (Bankr. E.D. Cal. 1993) (reasoning "[a] bond can have a sobering effect in a case that is off to a shaky start and that is fraught with controversy about the bona fides of the petitioners"). 116 11 U.S.C. § 303(g); see In re Audio Visual Workshop, 211 B.R. 154, 157 n.2 (Bankr. S.D.N.Y. 1997) (citing §303(g)). 117 See H.R. REP. NO. 95-595, reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 322. Such a debtor bond is "conditioned on the debtor's accounting for and delivering to the trustee, if there is an order for relief in the case, such property, or the value, as of the date the debtor regains possession, of such property." 11 U.S.C. § 303(g); see In re Audio Visual Workshop, 211 B.R. at 157 n.2 (citing §303(g)). 118 See, e.g., Mueller v. Nugent, 184 U.S. 1, 14, (1902); Wilkinson v. Goodfellow-Brooks Shoe Co., 141 F. 218, 220 (C.C.E.D. Mo. 1905) (citing Mueller v. Nugent, 184 U.S. at 14, "[t]he filing of the petition is a caveat to the world, and in effect an attachment and injunction."). Rather poetically, Judge Gustavus Adolphus Finklenburg observed:
Whether accompanied by actual seizure of the bankrupt's property or not, it places an embargo on his right to dispose of his property and of his business generally. No prudent person will buy from him, and no prudent person will sell anything to him on credit, even if security is offered, because all transactions between the bankrupt and third persons after the petition in bankruptcy has been filed are liable to be investigated, reviewed, set aside, or controlled as to their validity and effect in case of an adjudication.
Wilkinson v. Goodfellow-Brooks Shoe Co., 141 F. at 220. 119 11 U.S.C. § 303(f); See Hamilton v. Lumsden (In re Geothermal Res. Int'l), 93 F.3d 648, 651 n.1 (9th Cir. 1996) (quoting § 303(f)). 120 See In re C.W. Mining Co., 440 B.R. 878, 885 n.12 (Bankr. D. Utah 2010) (defining this term); see also, e.g., Jenkins v. Hodes (In re Hodes), 402 F.3d 1005, 1009 (10th Cir. 2005) (indicating that the "'gap-period'" is the time "between the filing of the involuntary petition and the entry of an order for relief"); In re Clark, 543 B.R. 16, 22 (Bankr. D. Idaho 2015) ("[P]roviding that, unless the court orders otherwise, the business of the debtor may operate following the filing of an involuntary petition and before entry of an order for relief . . . ."). 121 See H.R. REP. NO. 95-595, reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 323; see also In re Gaudreault, 315 B.R. 1, 6 n.5 (Bankr. D. Mass. 2004) (citing legislative history).
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had not been commenced."122 Augmenting this relative autonomy by insulating such "contemporaneous exchanges for value"123 and other "ordinary course expenses"124 from future invalidation,125 the Code expressly forbids any later appointed trustee from avoiding such transfers.126 So as to improve a target debtor's chances for revival, whether or not dismissal ever occurs, "[u]pon the expiration of the statute of limitations" set forth in 18 U.S.C. § 3282127 for a violation of two sections of this title—§ 152128 or § 157129—an individual or corporate debtor may ask a bankruptcy court to "expunge any records relating to a[n involuntary] petition" upon proof of "good cause."130 Lastly, the target debtor not only enjoys the protection of § 362's
122 11. U.S.C. § 303(f); see In re Meltzer, 516 B.R. 504, 510 (Bankr. N.D. Ill. 2014) (citing §303(f)). 123 In re Fort Dodge Creamery Co., 121 B.R. 831, 835 (Bank. N.D. Iowa 1990). 124 In re Commonwealth Sprinkler Co., 295 B.R. 852, 853 (Bankr. E.D. Va. 2003); see also, e.g., In re Broadview Lumber Co., 168 B.R. 941, 962 (Bankr. W.D. Mo. 1994) (determining §303(f) includes transfers made "in exchange for services necessary to continue the operation of the debtor"); see also, e.g., In re Interco Sys., 202 B.R. 188, 192 (Bankr. W.D.N.Y. 1996). 125 But see Scott K. Brown, Rolling in the Involuntary, AM. BANKR. INST. J., Nov. 2012 at 54, 73 (describing the "gap period" as a "vicious animal" from which the debtor must try to "swim to safety"). 126 11 U.S.C. § 549(b). If the transaction does not fall within the ambit of § 549(b), it can be avoided pursuant to § 549(a). 11 U.S.C. § 549(a); see In re Harvey Goldman & Co., 489 B.R. 657, 662 (Bankr. E.D. Mich. 2013) (citing §549(a)). 127 18 U.S.C. § 3282 (providing a five-year statute of limitations after the offense has occurred); see United States v. Marion, 404 U.S. 307, 324 n.15 (1971). This section establishes statutes of limitations for non-capital offenses. See, e.g., United States v. Atiyeh, 402 F.3d 354, 367 (3d Cir. 2005) ("[C]riminal limitation statutes are to be liberally interpreted in favor of repose.") (quoting United States v. Midgley, 142 F.3d 174, 180 (3d Cir. 1998)); Benes v. United States, 276 F.2d 99, 108–09 (6th Cir. 1960) (observing that statutes of limitations in criminal actions "are construed, in contradistinction to statutes applicable to civil actions, not as statutes of repose going to the remedy only, but as creating a bar to the right of prosecution"). 128 18 U.S.C. § 152 (punishing transfer and concealment of property belonging to the estate); see also Gaumer, supra note 16, at 531–33 (describing the history behind § 152, "[t]he most well-established bankruptcy crime statute"). 129 18 U.S.C. § 157 (punishing bankruptcy fraud); see also United States v. Milwitt, 475 F.3d 1150, 1155 (9th Cir. 2007) (describing this section as "[t]he centerpiece of . . . new criminal provisions," passed in as part of the Bankruptcy Reform Act of 1994, one "intended to deter[] a person from using the bankruptcy process to further [] fraudulent schemes") (alterations in original) (internal citation omitted) (internal quotation marks omitted). 130 11 U.S.C. § 303(k)(3).
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automatic stay,131 one of the Code's greatest debtor devices,132 but also may resort to § 305,133 a potential power rarely exercised with success in other situations.134 Devolving unto the target debtor before any order for relief has been entered— and while a court remains statutorily focused on the petitioning creditors' eligibility and standing—the foregoing protections inlaid in and incorporated by § 303 eclipse the initial arsenal of the voluntary bankrupt.135 True, a target debtor's position first appears fragile, and during the gap period, he, she, or it may even be bound to fulfill the fiduciary responsibilities of a debtor-in-possession. 136 Nonetheless, this assortment ameliorates some of the perils posed by such an involuntary filing. In fact, over the last four decades, as these offended debtors have exercised these abilities and creditors have wandered through the thicket of § 303(b) and (h), a complaint once trumpeted before the Code's enactment—creditors hampered and debtors' ability to conduct affairs in a "business-as-usual manner" unimpaired137—
131 11 U.S.C. § 362(a)–(b) (applying an automatic stay to § 303 unless exempt under § 362(b)); see In re Barkats, No. 14-00053, 2014 WL 6461884, at *2 (Bankr. D.D.C. Nov. 17, 2014) ("[A]utomatic stay of 11 U.S.C. § 362(a)(1) . . . arose automatically upon the filing of an involuntary petition."). But see In re Acelor, 169 B.R. 764, 765, 765 n.4 (Bankr. S.D. Fla. 1994) (challenging that an automatic stay is afforded immediately upon filing of an involuntary case). 132 See Nat'l Bank v. Panther Mountain Land Dev., LLC (In re Panther Mountain Land Dev., LLC), 686 F.3d 916, 927 (8th Cir. 2012) (relying on H.R. REP. NO. 95-595 (1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 340 (Alan M. Resnick and Eugene M. Wypyski eds., vol. 13 1979) (discussing how debtors and not third parties are afforded protection under § 362(a)); see also, e.g., Halo Wireless, Inc. v. Alenco Commc'ns, Inc. (In re Halo Wireless, Inc.), 684 F.3d 581, 586 (5th Cir. 2012) ("Congress considered the automatic stay 'one of the fundamental debtor protections provided by the bankruptcy laws.") (internal citation omitted); Reedsburg Util. Comm'n v. Grede Foundries, Inc. (In re Grede Foundries, Inc.), 651 F.3d 786, 790 (7th Cir. 2011) (the stay "prevent[s] a chaotic and uncontrolled scramble for the debtor's assets") (quoting Holtkamp v. Littlefield (In re Holtkamp), 669 F.2d 505, 508 (7th Cir. 1982)). The oft-quoted legislative history makes clear that the automatic stay serves two equal purposes: "debtor protection" and "creditor protection." H.R. REP. NO. 95-595, reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 340. 133 11 U.S.C. § 305(a)(1). The court has discretion to dismiss the case after notice and hearing depending on the scenario. 134 See Godshall & Gilhuly, supra note 5, at 1332. There is a higher probability of granting an abstention motion in an involuntary bankruptcy case than in a voluntary bankruptcy case. 135 See Joseph Mullin, Bridging the Gap: Defining the Debtor's Status During the Involuntary Gap Period, 61 U. CHI. L. REV. 1091, 1095–97 (1994) ("Despite disagreement over the scope of the exemption [in § 303(f)], however, the intent to relieve the gap debtor from burdensome restrictions is unmistakably clear. . . . [A] gap debtor should arguably be able to transfer property . . . notwithstanding the limitations in § 362."). 136 Compare In re C.W. Mining Co., 440 B.R. 878, 885–86 (Bankr. D. Utah 2010) ("Treating a debtor in an involuntary chapter 11 case during the 'gap' as a debtor in possession is not demonstrably at odds with the legislative intent, is not absurd, and does no violence to the Bankruptcy Code."), with In re Amerigraph, LLC, 456 B.R. 349, 356 n.13 (Bankr. S.D. Ohio 2011) ("According to other courts, the Chapter 11 involuntary debtor is not a debtor-in-possession, and does not have the powers of a trustee, until the order for relief is entered."). This restriction, one court explains, "is entirely consistent with the purpose of an involuntary case," as "[a]llowing the alleged debtor to have the stay lifted would 'frustrate the very purpose of arming creditors with the right to file an involuntary petition.'" See In re Sweports, Ltd., 476 B.R. 540, 545 (Bankr. N.D. Ill. 2012) (quoting In re E.D. Wilkins Grain Co., 235 B.R. 647, 650 (Bankr. E.D. Cal 2012)). 137 See Godshall & Gilhuly, supra note 5, at 1336–37; see also Elijah M. Alper, Note, Opportunistic Informal Bankruptcy: How BAPCPA May Fail to Make Wealthy Debtors Pay Up, 107 COLUM. L. REV. 1908, 1934–37 (2007) (summarizing these and other critiques). For one example of the worst that may befall a creditor, see
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has been aired once more, the Bankruptcy Act's deficiencies seemingly revived.138
3. Dismissal: Standard and Consequences
Three subparagraphs govern an involuntary petition's dismissal. "Only after notice to all creditors and a hearing," a court "may" dismiss "on the motion of a petitioner," 139 "on consent of all petitioners and the debtor," 140 or "for want of prosecution." 141 Upon dismissal, an individual debtor may request that a court prohibit all consumer reporting agencies "from making any consumer report . . . that contains any information relating to such petition or to the case commenced by the filing of such petition."142 Additionally, if the petition contained "any false, fictitious, or fraudulent statement," a debtor may entreat the bankruptcy court to "seal all the records of the court relating to such petition, and all references to such petition" upon his or her motion.143 Upon proof of these deficiencies, such quarantining ensues automatically.144 Section 303(i) catalogues the criteria for awarding and calculating a vindicated debtor's damages.145 If a petition is dismissed not "on consent of all petitioner and the debtor" and the latter has not "waive[d] the right to judgment under" § 303(i), the only two safe-harbors from this section's remedies, a bankruptcy court may grant judgment "against the petitioners and in favor of the debtor" for "costs" or "a reasonable attorney's fee."146 Although all fees and costs awarded under § 303(i)(1)
Crest One Spa v. TPG Troy, LLC (In re TPG Troy, LLC), 793 F.3d 228, 235–36 (2d Cir. 2015) (creditor lost and had to pay attorney's fees). 138 See supra Part I.A. 139 11 U.S.C. § 303(j)(1) (2012); see R. Eric Peterson Constr. Co. v. Quintek, Inc. (In re R. Eric Peterson Constr. Co. Inc.), 951 F.2d 1175, 1177 n.3 (10th Cir. 1991) (quoting § 303(j)(1)). 140 11 U.S.C. § 303(j)(2); see Treaty Energy Corp. v. Hallin (In re Treaty Energy Corp.), 619 F. App'x 443, 444 (5th Cir. 2015); see also In re Taylor & Assocs., L.P., 191 B.R. 374, 378 (Bankr. E.D. Tenn. 1996). 141 11 U.S.C. § 303(j)(3); Greene v. Glazer, 10 B.R. 1013, 1016 (Bankr. S.D.N.Y. 1981) (quoting § 303(j)(3)). The purpose of this subsection appears in the legislative history: "[T]o prevent collusive settlements among the debtor and the petitioning creditors while other creditors, that wish to see relief ordered with respect to the debtor but that did not participate in the case, are left without sufficient protection." H.R. REP. NO. 95- 595 (1977), reprinted in BANKRUTPCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 324 (Alan M. Resnick and Eugene M. Wypyski eds., vol. 13 1979). See, e.g., In re Broshear, 122 B.R. 705, 708 (Bankr. S.D. Ohio 1991); In re MacFarlane Webster Assocs., 121 B.R. 694, 700 n.7 (Bankr. S.D.N.Y. 1990); In re Wayne's Sport Haus, Ltd., 27 B.R. 521, 522 (Bankr. E.D. Mich. 1983). 142 11 U.S.C. § 303(k)(2). Unlike the one afforded by § 303(k)(1), this remedy is discretionary. See also In re Meltzer, 516 B.R. 504, 519 (Bankr. N.D. Ill. 2014) ("Since the court 'may' enter such an order, . . . relief is also discretionary."). 143 11 U.S.C. § 303(k)(1); see also, e.g., In re McMillan, 543 B.R. 808, 815–16 (Bankr. N.D. Tex. 2016) (describing this right as one of four specific protections for debtors provided in § 303); In re Meltzer, 516 B.R. at 518–19 (limning this subsection's requirements). 144 See In re Meltzer, 516 B.R. at 518–519 (relying on Exelon Generation Co., LLC v. Local 15, Int'l Bhd. of Elec. Workers, 676 F.3d 566, 571 (7th Cir. 2012)). 145 See In re Landmark Distrib., Inc., 195 B.R. 837, 848 (Bankr. D. N.J. 1996) (holding the court may grant costs and reasonable attorney's fees to an alleged debtor and against petitioning creditors when an involuntary bankruptcy petition pursuant § 303(i) is dismissed). 146 11 U.S.C. § 303(i)(1); see In re John Richards Homes Bldg. Co., 405 B.R. 192, 215 (Bankr. E.D. Mich. 2009). A less than certain criterion, "the most useful starting point for determining the amount of a reasonable
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are technically discretionary,147 the expectation that the petitioning creditor(s) must pay the debtors' attorney's fees and costs upon an involuntary case's dismissal148 has been steadily transformed into a rebuttable presumption,149 and no creditor, even one added post-filing, is exempt from this risk and responsibility.150 Usually, the damages awarded pursuant to this subsection include any costs possibly "caused by the taking of the possession of the debtor's property under subsection (g) of [S]ection 1101"151 and those reasonable fees incurred as a necessity for defending against the dismissed petition.152 "Preparation for and attendance at the hearing on attorney's fees, costs and damages are . . . part of the matters which are occasioned as a result of an [i]nvoluntary [p]etition," one bankruptcy court expounded, and "nothing in the Code
fee is the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate." See also Rode v. Dellarciprete, 892 F.2d 1177, 1183 (3d Cir. 1990) (citing Hensley v. Eckerhart, 461 U.S. 424, 433 (1983)). 147 See, e.g., DVI Receivables XIV, LLC v. Rosenberg, 500 B.R. 174, 185–86 (Bankr. S.D. Fla. 2013), vacated in part, 779 F.3d 1254 (11th Cir. 2015) (affirming bankruptcy courts have discretion in granting reasonable attorney's fees and costs and remanding part of the award for being premature in not considering "litigation as a whole"); In re Macke Int'l Trade Inc., 370 B.R. 236, 252 (B.A.P. 9th Cir. 2007) (confirming a bankruptcy court "may, in its discretion, award attorney's fees and costs" for § 305(a)(1) dismissals of an involuntary petition pursuant to § 303(i)(1)); In re Leach, 102 B.R. 805, 808 (Bankr. D. Kan. 1989) (stating courts, in their discretion, can grant debtors attorney's fees and costs when petitions are dismissed under § 303(i)(1)). 148 See Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 707 (9th Cir. 2004) (adopting the totality of circumstances test and reaffirming this premise). 149 See id.; see also In re DSC, Ltd., 387 B.R. 174, 182 (Bankr. E.D. Mich. 2008) (acknowledging when involuntary petitions are dismissed on "ground[s] other than consent of the parties," rebuttal presumptions are raised authorizing reasonable fees and costs); In re Scrap Metal Buyers of Tampa, Inc., 233 B.R. 162, 166 (Bankr. M.D. Fla. 1999) (reaffirming rebuttal presumptions are raised when involuntary petitions are dismissed). This presumption may be overcome if the petitioning creditors can demonstrate that an award of attorney's fees and costs is inappropriate given the totality of the circumstances. See Sofris v. Maple- Whitworth, Inc. (In re Maple-Whitworth, Inc.), 556 F.3d 742, 746 (9th Cir. 2009). Factors considered include: (1) the relative culpability among the petitioners; (2) the motives or objectives of individual petitioners in joining the involuntary petition; (3) the reasonableness of the respective conduct of the debtors and petitioners; and (4) other individualized factors. Higgins, 379 F.3d at 707–08; see also, e.g., In re Imani Fe, LP, No. CC- 12-1111-HHaMk, 2012 WL 5418983, at *7 (B.A.P. 9th Cir. Nov. 7, 2012); In re Denv. Cmty. Dev. Credit Union, No. 04-23761, 2004 WL 2274961, at *2 (Bankr. D. Colo. Oct. 5, 2004); In re Squillante, 259 B.R. 548, 554 (Bankr. D. Conn. 2001). Notably, a divide exists over whether a debtor bears the full burden of proof or whether this presumption should be applied. See In re Diloreto, 388 B.R. 637, 647–48 (Bankr. E.D. Pa. 2008) (discussing this division of authority). A harmonized approach, seemingly in the majority, utilized the presumption, but allows it to be rebutted by such a circumstantial showing. In re Clean Fuel Tech. II, LLC, 544 B.R. 591, 601 (Bankr. W.D. Tex. 2016). 150 Nat'l Med. Imaging, LLC v. U.S. Bank, N.A. (In re Nat'l Med. Imaging, LLC), 570 B.R. 147, 162 (Bankr. E.D. Pa. 2017); In re ELRS Loss Mitigation, LLC, 325 B.R. 604, 630, 630 n.82 (Bankr. N.D. Okla. 2005). 151 H.R. REP. NO. 95-595 (1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 324 (Alan M. Resnick and Eugene M. Wypyski eds., vol. 13 1979). 152 See, e.g., In re Paczesny, 282 B.R. 646, 650 (Bankr. N.D. Ill. 2002) (asserting only reasonable and necessary attorney's fees under § 303(i)(1) will be awarded); In re Atlas Mach. & Iron Works, Inc., 190 B.R. 796, 803 (Bankr. E.D. Va. 1995) (explaining such awards are necessary in relation to "work performed in defending against the involuntary petition" and reasonable "under all the circumstances"); In re Val W. Poterek & Sons, Inc., 169 B.R. 896, 906–07 (Bankr. N.D. Ill. 1994) (suggesting such fees "should be" necessary and reasonable).
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or case authority limits such an award to the date of dismissal." 153 To the "amorphous" calculation of costs and fees authorized by § 303(i)(1),154 neither ill motive nor insufficient justification stands as a prerequisite, 155 these costs' reimbursement intended "to keep the putative estate whole" and "to discourage the filing of involuntary petitions to force debtors to pay on disputed debt[s]." 156 Codifying a concept dating to 1898,157 and seen as a fee-shifting statute,158 "the operative principle [behind § 303(i)(1) is] that one who swats at the hornet had best kill it."159 It is § 303(i)(2) that affords punishment for the more malign misdeeds of one or more petitioning creditors. Per its explicit language, "against any petitioner that filed the petition in bad faith," "any damages proximately caused by" the dismissed filing or "punitive damages" more generally may be assessed.160 The damages allowed under this subsection may "be alternatively or cumulatively" assessed as to the sums tabulated for purposes of § 303(i)(1), the costs and reasonable attorney's fees listed in the latter "clearly included" within the former as "damages proximately caused by
153 In re Advance Press & Litho, Inc., 46 B.R. 700, 703 (Bankr. D. Colo. 1984); see also, e.g., Orange Blossom Ltd. P'ship v. S. Cal. Sunbelt Developers, Inc. (In re S. Cal. Sunbelt Developers, Inc.), 608 F.3d 456, 463–64 (9th Cir. 2010) ("If the court finds that the debtor is eligible for an award of fees, then . . . the fee award presumptively encompasses all aspects of the §303 action, including proceedings on claims under §303(i)(2)."); Glannon v. Carpenter (In re Glannon), 245 B.R. 882, 894–95 (D. Kan. 2000) (relying on, among others, In re Advance Press & Litho, Inc., 46 B.R. at 703, and In re Landmark Distributing, Inc., 195 B.R. 837, 846 (Bankr. D. N.J. 1996), for support). 154 E.g., Higgins, 379 F.3d at 707 (noting the totality of circumstances test is vague); see In re Ross, 135 B.R. 230, 237 (Bankr. E.D. Pa. 1991) (suggesting that although the totality of circumstances test is vague, Congress nonetheless intended this standard to be used in conjunction with § 303(i)(1) issues). 155 See, e.g., In re Clean Fuel Tech. II, LLC, 544 B.R. 591, 606 (Bankr. W.D. Tex. 2016) (recognizing bad faith is not required to determine awards for attorney's fees and costs under § 303(i)(1)); see also DVI Receivables XIV, L.L.C. v. Rosenberg (In re Rosenberg), 779 F.3d 1254, 1265 (11th Cir. 2015) (finding nothing in § 303(i)(1) requiring debtors to prove appeals from dismissed involuntary petitions are frivolous or to prove petitioners' bad faith to recover attorney's fees and costs); see also In re Johnston Hawks, Ltd., 72 B.R. 361, 365 (Bankr. D. Haw. 1987) (confirming attorney's fees and costs are available without proving involuntary petitions are frivolous and where bad faith is lacking). These factors may nonetheless be considered. See, e.g., In re Diloreto, 388 B.R. 637, 648 (Bankr. E.D. Pa. 2008) ("[W]e believe that the presence or absence of bad faith will inform the exercise of the district court's discretion under § 303(i)."); In re Cadillac by DeLorean & Delorean Cadillac, Inc., 265 B.R. 574, 582 (Bankr. N.D. Ohio 2001) (noting that bad faith is not a requirement to an award of fees, but is still a relevant consideration); In re Atlas Mach., 190 B.R. at 803 (finding that bad faith may be taken into account when determining whether to award an attorney's fees and costs); Susman v. Schmid (In re Reid), 854 F.2d 156, 160 (7th Cir. 1988) (noting the use of bad faith on part of creditor in filing the involuntary petition). 156 See Crest One Spa v. TPG Troy, LLC (In re TPG Troy, LLC), 793 F.3d 228, 235 (2d Cir. 2015). In contrast, dismissal in the best interests of creditors under § 305(a)(1) does not give rise to a claim for damages. See H.R. REP. NO. 95-595, reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 324; see also Koffman v. Osteoimplant Tech., 182 B.R. 115, 127 (Bankr. D. Md. 1995). 157 In re Kidwell, 158 B.R. 203, 213 n.13 (Bankr. E.D. Cal. 1993). 158 E.g., In re Cadillac by DeLorean & Delorean Cadillac, Inc., 265 B.R. at 581; Keiter v. Stracka, 192 B.R. 150, 160 (S.D. Tex. 1996). 159 In re Kidwell, 158 B.R. at 213. 160 11 U.S.C. § 303(i)(2) (2012).
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the filing, and, equally clearly, . . . punitive damages may be added thereto."161 Mathematically, because damages pursuant to § 303(i)(2) must be "calculable with a reasonable degree of certainty," 162 any monetized harms need be certain and proximate, not uncertain, contingent or speculative; "if punitive damages are warranted," moreover, "the award must be carefully tailored in light of other damages and fees awarded in the case, so that the result implements bankruptcy policy, but is not 'unduly harsh.'"163 Such an award may recompense for, among other injuries, "loss of business during and after the pendency of the case, and so on," § 303(i)(2)'s use of "or" designated as "not exclusive" for purposes of "this paragraph" in the legislative record.164 Consequently, a plaintiff may recover for any financial loss resulting to him, her, or it directly from the involuntary petition's prosecution and for any injuries suffered in respect of his, her, or its business.165 Unlike § 303(i)(1), § 303(i)(2) is a punitive statute, devised and construed so as "to discourage unprincipled creditors from invoking the use of involuntary bankruptcy to serve a purpose at odds with core bankruptcy polic[ies]"166: two policies in particular, "[T]o protect the threatened depletion of assets" and "to prevent the unequal treatment of similarly situat[ed] creditors."167
II. PROBLEMS AND DIVISIONS: TEXT AND CASES
A. Statutory Ambiguities
A smattering of open-ended and undefined terms pepper § 303.168 In contrast with other similarly plagued Code sections,169 this section's legislative history aids little in
161 In re Ramsden, 17 B.R. 59, 61 (Bankr. N.D. Ga. 1981); see also, e.g., In re John Richards Homes Bldg. Co., L.L.C., 291 B.R. 727, 735 (Bankr. E.D. Mich. 2003); Glannon v. Carpenter, 245 B.R. 882, 894 (Bankr. D. Kan. 2000). 162 In re John Richards Homes Bldg. Co., L.L.C., 291 B.R. at 735. 163 In re Atlas Mach. & Iron Works, Inc., 190 B.R. 796, 805 (Bankr. E.D. Va. 1995). 164 H.R. REP. NO. 95-595 (1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 324 (Alan M. Resnick and Eugene M. Wypyski eds., vol. 13 1979); In re RMAA Real Estate Holdings, LLC, No. 10–15244–RGM, 2010 WL 5128647, at *6 (Bankr. E.D. Va. Dec. 10, 2010). 165 In re Salmon, 128 B.R. 313, 316 (Bankr. M.D. Fla. 1991) (construing § 303(i)(2) as allowing for the kind of damages permitted in a malicious prosecution case). 166 In re Atlas Mach., 190 B.R. at 804 (as to punitive damages under § 303(i)(2)(B)). 167 Marciano v. Chapnick (In re Marciano), 708 F.3d 1123, 1128 (9th Cir. 2013). 168 See, e.g., In re Murrin, 477 B.R. 99, 106 (Bankr. D. Minn. 2012) (referring to the phrase "generally not paying such debtor's debts"); see also In re Tucker, No. 5:09-bk-914, 2010 WL 4823917, at *3 (Bankr. N.D. W. Va. Nov. 21, 2010) (highlighting the phrase "contingent as to liability or amount"); In re Food Gallery, 222 B.R. 480, 486 (Bankr. W.D. Pa. 1998) (emphasizing the phrase "generally not paying such debtor's debts"); In re Norris, 183 B.R. 437, 455 (Bankr. W.D. La. 1995) (referring to the phrase "generally not paying such debtor's debts"); see also Rimell v. Mark Twain Bank (In re Rimell), 946 F.2d 1363, 1365 (8th Cir. 1991), cert. denied, 504 U.S. 941 (1992) (regarding "bona fide dispute"). See Steven J. Winkleman, A Dispute over Bona Fide Disputes in Involuntary Bankruptcy Proceedings, 81 U. CHI. L. REV. 1341, 1341 (2014) (referencing "bona fide dispute"); see also Michael J. Grindstaff & Thomas M. Hackel, Comment, Involuntary Bankruptcy: The Generally Not Paying Standard, 33 MERCER L. REV. 903, 903 (1982) (stressing the phrase "generally not paying such debtor's debts"). 169 11 U.S.C. §§ 707(a), 1112(b)(1), 1208(c), 1307(c) (2012). Each of these sections uses the term "for
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the resolution of these ambiguities, for barely four pages of largely opaque summation muse upon § 303.170 With scholars and courts denied such a normally useful, albeit questionable, 171 source of guidance, frustration has grown, and interpretive uniformity simply does not typify the juridical approach to § 303.172 Instead, more than three decades after its enactment, much nebulousness still enshrouds this one section.
1. Eligibility: Indeterminate—but Noncontroversial—Terms in § 303(b) and (h)
Two terms in utilized in § 303(b) and (h), ill-defined but at least consistently construed, underscore the nature and magnitude of this problem. First, as to the adumbration of potential "entities" under § 303(b)(1) and (2), the Code "is silent whether, or under what circumstances, the separate identity of a corporate creditor should be disregarded for § 303(b)(1) purposes." 173 Even so, in the few cases addressing this issue, corporate law's hoary rules as to agency and piercing have supplied a consistent answer. To wit, creditors with "significant interrelatedness" get separate treatment unless ordinary principles of corporation law dictate their legal conflation.174 Second, one of the two unilluminated creditor qualifications criteria in § 303(b)—that the petitioning creditors hold claims "not contingent" as to liability175—has been reduced to a single widely accepted formulation:176 claims are contingent as to liability if both (1) "the debt is one which the debtor will be called upon to pay only upon the occurrence or happening of an extrinsic event which will trigger the liability of the debtor to the alleged creditor," and (2) "if such triggering event or occurrence was one reasonably contemplated by the debtor at the time the event giving rise to the claim occurred."177 Pursuant to this construction, "where the
cause," an unqualified grant of discretionary power expressly intended as such. 170 See H.R. REP. NO. 95-595 (1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 321–24 (Alan M. Resnick and Eugene M. Wypyski eds., vol. 13 1979). 171 See infra Part III.A. 172 See Steven W. Rhodes, Eight Statutory Causes of Delay and Expense in Chapter 11 Bankruptcy Cases, 67 AM. BANKR. L.J. 287, 294 (1993) (emphasizing the time and costs litigants suffer from a lack of judicial authority on these ambiguities). Within the Code, such an occurrence is by no means unusual. Id. 173 In re Roselli, No. 12-32461, 2013 WL 828304, at *6 (Bankr. W.D.N.C. Mar. 6, 2013) (emphasizing very few courts have addressed this ambiguity). 174 Subway Equip. Leasing Corp. v. Sims (In re Sims), 994 F.2d 210, 216–17 (5th Cir. 1993) (collecting cases). 175 11 U.S.C. § 303(b)(1) (2012); see In re Vasu Fabrics, Inc., 39 B.R. 513, 518 (Bankr. S.D.N.Y. 1984) ("[T]he holders of contingent claims are not eligible to be petitioning creditors in an involuntary petition under Code § 303(b)."). The term also appears in § 303(c). 11 U.S.C. § 303(c). 176 See H.R. REP. NO. 95-595 (1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 309 (Alan M. Resnick and Eugene M. Wypyski eds., vol. 13 1979) (defining "creditor . . . to include only holders of prepetition claims against the debtor."); see also Hemingway Transp., Inc. v. Kahn (In re Hemingway Transp., Inc.), 954 F.2d 1, 8 (1st Cir. 1992) (discussing that the word "claim" is broad). 177 In re All Media Props., Inc., 5 B.R. 126, 133 (Bankr. S.D. Tex. 1980), aff'd, 646 F.2d 193 (5th Cir. 1981); see also, e.g., In re Tamarack Resort, LLC, No. 09-03911-TLM, 2010 WL 1049955, at *2 (Bankr. D. Idaho Mar. 17, 2010) (quoting In re Dill, 30 B.R. 546, 549 (B.A.P. 9th Cir. 1983)); In re Gills Creek Parkway Assocs., L.P., 194 B.R. 59, 62–63 (Bankr. D.S.C. 1995); In re Galaxy Boat Mfg. Co., Inc., 72 B.R. 200, 202– 03 (Bankr. D.S.C. 1986); cf. Reyes v. Standard Parking Corp., 461 B.R. 153, 158 (Bankr. D.R.I. 2011).
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issues concerning defenses to a claim of a petitioning creditor are not clear and require adjudication of either substantial factual or legal questions, . . . [a] creditor should be recognized as qualified to join in the bringing of an involuntary bankruptcy petition."178 While these two requirements have long been liberally understood,179 case law, not statutory direction, has been crucial, the Code's silence often troublingly noted.180 As shown below, the doubts partly manufactured by such reticence as to other terms' connotations have not been as easily dispelled.
2. Eligibility: Indeterminate and Contested Terms in § 303(b) and (h)
Determined as of the involuntary petition's filing date,181 and applicable only upon satisfaction of § 303(b)'s standing requirements,182 § 303(h)(1) first predicates the ordering of relief upon whether "the debtor is generally not paying such debtor's debts."183 Hampered by the Code's predictable silence, "[c]ourts have struggled to reduce" it to "a workable judicial standard."184 As a result, with the judicial majority having opted for a flexible approach riveted upon a prospective debtor's financial circumstances,185 inconsistencies afflict the apposite jurisprudence.
178 In re All Media Props., Inc., 5 B.R. at 134 (rationalizing a creditor should not be permitted to participate in the involuntary petition where the debtor has raised the defense that the claim is clearly barred); see also Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1544 (10th Cir. 1988). This position is defended as consistent with § 303's well-known and obvious objectives. See In re North Cty. Chrysler-Plymouth, Inc., 13 B.R. 393, 398–99 (Bankr. W.D. Mo. 1981); see also, e.g., In re Elsub Corp., 70 B.R. 797, 813 (Bankr. D.N.J. 1987). 179 See In re First Energy Leasing Corp., 38 B.R. 577, 584 (Bankr. E.D.N.Y. 1984) (arguing the liberal meaning of § 303(b) was intended to expedite the examination of the "issue of the debtor's solvency"). 180 See United States v. Bestfoods, 524 U.S. 51, 62 (1998); see also Mobil Oil Corp. v. Higginbotham, 436 U.S. 618, 625 (1978) ("There is a basic difference between filling a gap left by Congress' silence and rewriting rules that Congress has affirmatively and specifically enacted."). 181 See Bartmann v. Maverick Tube Corp., 853 F.2d at 1546 (finding that the bankruptcy court must determine whether creditors met their burden of proving that the debtor was failing to pay his debts once due, and such determination must be made as of the date the involuntary petition was filed); see also, e.g., In re Harmsen, 320 B.R. 188, 197 (B.A.P. 10th Cir. 2005); In re Caucus Distribs., Inc., 83 B.R. 921, 932 (Bankr. E.D. Va. 1988) (noting that the "generally not paying test" must be applied "as of the date of filing of the involuntary petition"). 182 See In re VitaminSpice, 472 B.R. 282, 289 (Bankr. E.D. Pa. 2012) (indicating the petitioning creditors' standing must be determined before the court examines "whether the filing of an involuntary petition is valid"). 183 11 U.S.C. § 303(h)(1) (2012); In re Quinto & Wilks, P.C., 531 B.R. 594, 609 (Bankr. E.D. Va. 2015) (discussing § 303(h)(1)). 184 In re Smith, 243 B.R. 169, 189 (Bankr. N.D. Ga. 1999) (noting the Code does not define the term "generally not paying"). 185 See, e.g., In the Matter of Bishop, Baldwin, Rewald, Dillingham & Wong, Inc., (In re Bishop, Baldwin, Rewald, Dillingham & Wong, Inc.), 779 F.2d 471, 475 (9th Cir. 1985). As one bankruptcy court famously maintained, "[t]he term 'generally' was not defined in order to avoid the result suggested by the mechanical test put forth by the alleged debtors and to give the bankruptcy courts enough leeway to be able to deal with the variety of situations that will arise." See In re All Media Partners Inc., 5 B.R. 126, 143 (Bankr. S.D. Tex., 1980); see also In re Feinberg, 238 B.R. 781, 783 (B.A.P. 8th Cir. 1999); see also, e.g., In re Tucker, No. 5:09-bk-914, 2010 WL 4823917, at *10 (Bankr. N.D. W. Va. Nov. 21, 2010); In re Smith, 243 B.R. at 190 (summarizing and applying these four factors); Gen. Trading v. Yale Materials Handling Corp., 119 F.3d 1485, 1504 n.41 (11th Cir. 1997) (identifying the same factors (citing In re Leek Corp., 52 B.R. 311, 314 (Bankr. M.D. Fla. 1985))); In re H.I.J.R. Props. Denver, 115 B.R. 275, 277 (Bankr. D. Colo. 1990). Occasionally,
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Typically, this analysis looks to four protean factors: (1) the number of debts unpaid each month relative to those paid, (2) the amount of delinquency, (3) the materiality of nonpayment, and (4) the nature of the debtor's conduct regarding his, her, or its financial affairs.186 As to the first, "even though an alleged debtor may owe only one debt, or very few debts, an order for relief may be granted where such debt or debts are sufficiently substantial to establish the generality of the alleged debtor's default."187 Courts have split on the use of a fifty percent standard in analyzing the first two factors,188 and most appear to "rely heavily on the number and amount of the unpaid claims and compare those values with the debts the debtor is paying" in utilizing this totality test,189 effectively engaging in "a mechanical analysis."190 In this murky precedent, the only certainty has been a magisterial refusal to treat the mere failure of a creditor to demand payment of a debt as sufficient to excuse a debtor's failure to pay it for purposes of § 303(h)(1).191 More fluid than the first three, the final element turns on an itinerant query: whether the debtor's financial affairs are being conducted "in a manner inconsistent with good faith and outside the ordinary course
these four factors are split into five. See In re Knoth, 168 B.R. 311, 317 (Bankr. D.S.C. 1994); see also, e.g., In re Seventh Ave. Props., No. 312-08678, 2013 WL 655871, at *4–5 (Bankr. M.D. Tenn. Feb. 22, 2013) (citing both the four and five factor variants); In re Tucker, 2010 WL 4823917, at *10–11 (finding same). 186 In re Reed, 11 B.R. 755, 759–60 (Bankr. S.D. W. Va. 1981). 187 In re Fischer, 202 B.R. 341, 350–51 (Bankr. E.D.N.Y. 1996). 188 Compare In re Amanat, 321 B.R. 30, 40 (Bankr. S.D.N.Y. 2005) (holding that a debtor who is paying less than half of his total debts is generally not paying his debts as they become due), In re J.B. Lovell Corp., 80 B.R. 254, 255 (Bankr. N.D. Ga. 1987) (affirming that since the debt owed to creditor amounted to well over eighty percent of debtor's outstanding liabilities, the debtor was not generally paying its debts as they became due), and In re Garland Coal & Mining Co., 67 B.R. 514, 522 (Bankr. W.D. Ark. 1986) (noting that although the debtor pre-petition was paying most of its creditors in number, the total debt which it was not paying as the debts became due was well over fifty percent of the outstanding liabilities), with In re Hill, 5 B.R. 79, 83 (Bankr. D. Minn. 1980) (holding that although debtor was paying all but three of his debts, the three not being paid constituted such an overwhelming portion of the total that the failure to pay those alone constituted "generally not paying"). 189 In re Murrin, 477 B.R. 99, 107 (Bankr. D. Minn. 2012). 190 In re Food Gallery, 222 B.R. 480, 486 (Bankr. W.D. Pa. 1998). While a prohibition on involuntary petitions in single creditor cases once held great sway, see, e.g., Nordbrock v. Brodbrock (In re Nordbrock), 772 F.2d 397, 399 (8th Cir. 1985) and In re Smith, 123 B.R. 423, 425 (Bankr. M.D. Fla. 1990), it has been steadily weakened, and much authority now exists for "the proposition that even though an alleged debtor may owe only one debt, or very few debts, an order for relief may be granted where such debt or debts are sufficiently substantial to establish the generality of the alleged debtor's default." In re Fischer, 202 B.R. at 350–51; see also, e.g., In re Roselli, No. 12-32461, 2013 WL 828304, at *10 (Bankr. W.D.N.C. Mar. 6, 2013); In re Food Gallery, 222 B.R. at 487–88. Logic girds this relaxation, as "[a]n alleged debtor may not be paying its debts as they become due, even if the alleged debtor is not paying only one or two creditors, when those creditors hold the overwhelming majority of debt," thereby satisfying the plain language of § 303(h)(1). In re Am. Cotton Suppliers, Int'l, Inc., Nos. 02-50003-7, 02-50004-7, 02-5005-7, 2002 Bankr. LEXIS 1972, at *67– 68 (Bankr. N.D. Tex. Sept. 30, 2002); accord, e.g., Concrete Pumping Serv., Inc. v. King Constr. Co., (In re Concrete Pumping Serv. Inc.), 943 F.2d 627, 630 (6th Cir. 1991). 191 See, e.g., In re Tucker, No. 5:11CV38, 2011 WL 5192801, at *5 (N.D. W. Va. Oct. 31, 2011); In re Everett, 178 B.R. 132, 139 (Bankr. N.D. Ohio 1994) (quoting In re West Side Cmty. Hosp., Inc., 112 B.R. 243, 256 (Bankr. N.D. Ill. 1990)); In re Better Care Ltd., 97 B.R. 405, 407–08 (Bankr. N.D. Ill. 1989) (discussing that § 303(h)(1)'s test for granting an involuntary petition is that "the debtor is generally not paying the debtor's debts as such debts become due").
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of business," 192 with a few courts giving some weight to whether a debtor has involuntarily closed down.193 Even though this probabilistic four-factor test offers some valuable guidance,194 it treats no factor as "necessarily determinative"195 and varies with "any unique circumstances attendant to a particular proceeding." 196 Consequently, much uncertainty hangs over its prospective application. Two facts and a trend compound the instability propagated by this unpredictability. As common experience attests, a debtor's "total financial picture"197 is rarely crystal clear, and stakeholders' interests invariably diverge.198 Courts, in turn, have crafted two exceptions to the once-potent imperative that "[a] debtor must neglect more than one debt for the nonpayment to be general."199 The first exception arises in the "exceptional case" in which "the sole creditor shows that he[she, or it] cannot possibly obtain adequate relief in the ordinary courts without resorting to the Bankruptcy Court . . . ."200 The second applies where there is "a showing of special circumstances amounting to fraud, trick, artifice or scam;"201 some courts have more narrowly construed this as an exception to § 303(b)(1)'s three creditor requirement.202
192 In re Reed, 11 B.R. 755, 760 (Bankr. S.D. W.Va. 1981). 193 See In re Covey, 650 F.2d 877, 882–84 (7th Cir. 1981) (nothing that "a debtor should not be forced to pay disputed debts in order to avoid an involuntary bankruptcy"); see also In re 7H Land & Cattle Co., 6 B.R. 29, 31 (Bankr. D. Nev. 1980). 194 See In re Concrete Pumping Serv., Inc., 943 F.2d at 630 ("The concept of generality is comparative; it has to do not with an absolute number of some kind of event but rather with the number as a proportion of possible outcomes."). 195 In re CLE Corp., 59 B.R. 579, 586 (Bankr. N.D. Ga. 1986). 196 In re Dakota Lay'd Eggs, 57 B.R. 648, 657 (Bankr. D.N.D. 1986); accord In re Tucker, No. 5:09-bk-914, 2010 WL 4823917, at *11 (Bankr. N.D. W. Va. Nov. 21, 2010) (quoting In re Knoth, 168 B.R. 311, 316 (Bankr. D.S.C. 1994)). 197 In re Quinto & Wilks, P.C., 531 B.R. 594, 609–10 (Bankr. E.D. Va. 2015) (quoting In re Fischer, 202 B.R. 341, 350 (Bankr. E.D.N.Y. 1996)). 198 See In re Harmsen, 320 B.R. 188, 198 (B.A.P. 10th Cir. 2005). Invariably, the presumed purposes of an involuntary petition factor into its fact-intensive application. As such filings may not be employed "as a forum for the trial and collection of an isolated disputed claim," this requirement must be construed so as to "protect the interests and desires of the creditors as a whole." In re Saunders, 379 B.R. 847, 857 (Bankr. D. Minn. 2007); In re Harmsen, 320 B.R. at 198; Crum & Forster Managers Corp. of N.Y. v. Basin Elec. Power Coop., 911 F.2d 155, 156 (8th Cir. 1990). 199 In re Reed, 11 B.R. 755, 760 (Bankr. S.D. W.Va. 1981); see also, e.g., Boston Beverage Corp. v. Turner, 81 B.R. 738, 749 (Bankr. D. Mass. 1987) ("In fact, a debtor's failure to pay one debt will not usually justify finding that the debtor is generally not paying his or her debts."); Bankers Tr. Co. v. Nordbrock (In re Nordbrock), 772 F.2d 397, 399 (8th Cir. 1985) ("This case reflects efforts by a single creditor to use the Bankruptcy Court as a forum for the trial and collection of an isolated disputed claim, a practice condemned in prior decisions." (quoting In re Nordbrock, 52 B.R. at 372)); In re Axl Indus., Inc., 127 B.R. 482, 484 (Bankr. S.D. Fla. 1991) ("Generally, a court should not take jurisdiction over a two-party dispute, unless special circumstances ['amounting to fraud, trick, artifice, or scam'] exist."). 200 In re 7H Land & Cattle Corp., 6 B.R. 29, 32 (Bankr. D. Nev. 1980). 201 In re Fischer, 202 B.R. at 347 (citing In re 7H Land & Cattle Corp., 6 B.R. at 34); cf. In re Moss, 249 B.R. 411, 424 (Bankr. N.D. Tex. 2000) (acknowledging, but not endorsing, the possible existence of this exception). 202 See In re Norriss Bros. Lumber Co., Inc., 133 B.R. 599, 608–09 (Bankr. N.D. Tex. 1991) (collecting cases "suggest[ing] that the three creditor requirement may not be applicable in the event of trick, artifice, scam, or fraud"). However, as this early case recognized in a footnote, "[o]ne court has questioned whether the alleged exception is applicable to the "three creditor requirement" as opposed to being applicable on the issue of whether the debtor is generally not paying its debts pursuant to § 303(h)(1)." Id. at 609 n.4. The latter
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In light of the flexibility and popularity of these modern exclusions, the existence of a per se rule against single creditor initiated proceedings no longer enjoys decisive support, instead enduring withering scorn for its apparent inconsistency with the Code's text.203 Oft-mingled,204 these exceptions' continued viability,205 on top of a stereotypical debtor's financial tergiversations and the oft-disparate objectives of entities who must unite to pursue a more cohesive enemy by statutory edict, now lengthens and complicates the threshold adjudication of a creditor's eligibility under § 303(b) and (h). The product of post-1978 amendments, 206 the second standing requirement shared by these subsections' first numbered paragraphs—that the petitioning creditors hold claims that are not "the subject of a bona fide dispute as to liability or amount,"207 and that the debtor is not generally paying "debts as they come due unless such debts are the subject of a bona fide dispute as to liability or amount"208—has been engulfed in debate since its codification, resulting in similar attendant delays. Without direction from the Code or its history,209 most courts utilize the so-called Lough standard fashioned by one bankruptcy court:210 "[I]f there is either a genuine issue of material fact that bears upon the debtor's liability, or a meritorious contention as to the application of law to undisputed facts, then the petition must be dismissed."211 Naturally, some endorse this touchstone's subsequent refinements by the United States Court of Appeals for the Seventh Circuit: "Under [the Lough] standard, the bankruptcy court must determine whether there is an objective basis for either a factual or a legal dispute as to the validity of debt," a court required to do no more
approach seems to have gained majority support since 1991. See also In re Colon, 474 B.R. 330, 385 (Bankr. D.P.R. 2012) (discussing the three creditor requirement and "special exception" under § 303(b)). 203 See Concrete Pumping Serv., Inc. v. King Constr. Co., (In re Concrete Pumping Serv., Inc.), 943 F.2d 627, 630 (6th Cir. 1991). 204 Courts do not always neatly distinguish between these exceptions. See Paradise Hotel Corp. v. Bank of Nova Scotia, 842 F.2d 47, 51 n.7 (3d Cir. 1988) (referring to "truly extraordinary circumstances" only). 205 Bruce H. White, Exceptions to Involuntary Petition Requirements: Are You Pushing Your Luck?, AM. BANKR. INST. J., Oct. 2001 at 32, 33. 206 Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub. L. No. 98-353, § 426(b), 98 Stat. 333, 369, 392 (1984). In 1978, § 303 did not exclude creditors' claim that were the subject of bona fide disputes. See Key Mech. Inc. v. BDC 56 LLC (In re BDC 56 LLC), 330 F.3d 111, 117 (2d Cir. 2003); see also In re Marciano, 446 B.R. 407, 422–25 (Bankr. C.D. Cal. 2010) (tracing the meager history of this requirement). 207 11 U.S.C. § 303(b)(1) (2012). Under the normal rules of statutory interpretation, "or" in the text of § 303(b)(1) would be read as disjunctive. See ANTONIN SCALIA & BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF LEGAL TEXTS 116–25 (2012). If so, the petitioning creditor would need to hold either a non-contingent claim or a claim not subject to a bona fide dispute. Here, however, scarce legislative history compels reading § 303(b)(1) to require a petitioning creditor's claim to be both non-contingent and indisputable. See 130 CONG. REC. 17,069, 17,151 (1984) (statement of Senator Baucus). Certainly, it has so been understood, as this precept, like all canons, readily yields to context. See, e.g., In re BDC 56 LLC, 330 F.3d at 115; Chi. Title Ins. Co. v. Seko Invs., Inc. (In re Seko Invs., Inc.), 156 F.3d 1005, 1007 (9th Cir. 1998); In re Tampa Chain Co., Inc., 35 B.R. 568, 577 (Bankr. S.D.N.Y. 1983). 208 11 U.S.C. § 303(h)(1); In re Edwards, 501 B.R. 666, 674 (Bankr. N.D. Tex. 2013). 209 See Rimell v. Mark Twain Bank (In re Rimell), 946 F.2d 1363, 1365 (8th Cir. 1991), cert. denied, 504 U.S. 941 (1992). 210 See In re Smith, 243 B.R. 169, 180 (Bankr. N.D. Ga. 1999). 211 In re Lough, 57 B.R. 993, 997 (Bankr. E.D. Mich. 1986).
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than ascertain the "presence or absence" of any dispute."212 Under this test's most common iterations, a debtor's refusal to concede the validity or amount of creditor's claim, without more, never suffices to defeat a creditor's standing,213 and the debtor's subjective intent clines to no iota of relevance.214 Similarly, extensive litigation will not, in and of itself, establish the existence of a bona fide dispute, 215 however suggestive it may be,216 and "[a] dispute as to the amount of a claim does not negate its existence if the legal obligation to pay is present."217 In employing this test,218 many circuits have adopted a burden-shifting framework, first requiring that the petitioning creditor establish a prima facie case that no bona fide dispute exists and, once such a case has been established, compelling the debtor to demonstrate otherwise.219 Tailored "to prevent a creditor from using the involuntary petition as a club to coerce a debtor to pay debts even when the debtor's reason for not paying is a legitimate dispute as to its liability,"220 the Lough standard has won a firm foothold,221 but its prominence cannot conceal the persistence of certain dubiety as to Congress' intended mandate and any specific case's likely course.222
212 In the Matter of Busick (In re Busick), 831 F.2d 745, 750 (7th Cir. 1987) (emphasis added); accord, e.g., In re BDC 56 LLC, 330 F.3d at 117–18; Atlas Mach. & Iron Works, Inc. v. Bethlehem Steel Corp., 986 F.2d 709, 715 (4th Cir. 1993); B.D.W. Assocs. Inc. v. Busy Beaver Bldg. Ctrs., Inc., 865 F.2d 65, 66–67 (3d Cir. 1989); see also In re Marciana, 459 B.R. 27, 36 (B.A.P. 9th Cir. 2011) ("[W]hether there is a bona fide dispute for purposes of § 303, [a] bankruptcy court is not asked to evaluate the potential outcome of a dispute, but merely to determine whether there are facts that give rise to a legitimate disagreement over whether money is owed, or, in certain cases, how much.") (alteration in original) (internal quotation marks omitted); see also Winkleman, supra note 168, at 1351. 213 See In re Tampa Chain Co., Inc., 35 B.R. 568, 576–77 (Bankr. S.D.N.Y. 1983). 214 See Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1544 (10th Cir. 1988) (quoting In re Tikijian, 76 B.R. 304, 314 (Bankr. S.D.N.Y. 1987), stating that a debtor must present proof of a bona fide dispute once the burden shifts or else any debtor could defeat an involuntary petition merely by claiming a bona fide dispute exists); see also In re Red Rock Rig 101, Ltd., No. WO–07–073, 07–10477, 2008 WL 205732, at *2 (B.A.P. 10th Cir. May 10, 2008); Subway Equip. Leasing Corp. v. Sims (In re Sims), 994 F.2d 210, 221 (5th Cir. 1993) (quoting In re Rimell, 946 F.2d at 1365). 215 See In re Mavellia, 149 B.R. 301, 305 (Bankr. E.D.N.Y. 1991) (discussing that courts will not view the existence of ongoing litigation alone as establishing an existence of a bona fide dispute). 216 See In re Red Rock Rig 101, Ltd., 2008 WL 2052732, at *2 (finding that the mere existence of pending litigation is insufficient to establish the existence of a bona fide dispute). 217 In re Braten, 74 B.R. 1021, 1023 (Bankr. S.D.N.Y. 1987). 218 See, e.g., In re Sims, 994 F.2d at 221 (though it may not actually resolve the underlying dispute, the bankruptcy court may still be compelled to conduct a limited analysis of the legal issues to ascertain whether an objective legal basis for the dispute exists). 219 See, e.g., Platinum Fin. Servs. Corp. v. Byrd (In re Byrd), 357 F.3d 433, 438 (4th Cir. 2004); see also In re BDC 56 LLC, 330 F.3d at 111, 118 (adopting the 7th Circuit's "objective test" and "burden-shifting framework"). 220 In re Tamarack Resort, LLC, No. 09-03911-TLM, 2010 WL 1049955, at *2 (Bankr. D. Idaho Mar. 17, 2010). 221 See Bailey III & Clift III, supra note 114, at 13. A fascinating divide exists over whether an unstayed, unpaid final judgment on appeal satisfies § 303(b). Compare In re Drezler, 56 B.R. 960, 967 (Bankr. S.D.N.Y. 1986), with In re Byrd, 357 F.3d at 438. 222 See Lawrence Ponoroff, Involuntary Bankruptcy and the Bona Fides of a Bona Fide Dispute, 65 IND. L.J. 315, 317 (1990) [hereinafter Ponoroff, Involuntary] ("[A]n unfortunate and ironic by-product of the 1984 Act's amendments to section 303 has been the replacement of prior judicial disagreement over the treatment of disputed debts with an even greater divergence of opinion over the guidelines for identifying the presence or absence of a bona fide dispute.").
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3. Damages: Imprecisions in § 303(i)
Section 303(i) offers up its own ambiguous trio of features. The first is structural. While § 303(i)(1) authorizes damages for "costs" or "attorney's fees" upon an involuntary petition's nonconsensual dismissal,223 the term "bad faith" appears in § 303(i)(2), which allows for "any damages proximately caused by such a filing" or "punitive damages" against "any petitioner that filed the petition in bad faith."224 To many, by virtue of this obvious placement, "bad faith is not a prerequisite to awarding attorney's fees and costs under § 303(i)(1)." 225 As a corollary, this subsection arguably "authorizes a standalone award of punitive damages," with a court enabled to "award actual or punitive damages, without limitation," including attorney's fees, upon "a showing of bad faith," its "sole precondition."226 Lacking a definitive statutory anchor, however, not all courts concur with this exegesis.227 Second, the ever-malleable totality of the circumstances test governs the arithmetic required by § 303(i)(1)—and invites dissimilar results. Often treated like "a fee-shifting provision rather than a sanctions statute,"228 in deciding whether to award fees pursuant to this paragraph, courts presume the debtor's entitlement to reasonable fees and costs.229 They thereupon consider the expenses associated with
223 11 U.S.C. § 303(i)(1) (2012); see also DVI Receivables XIV, LLC v. Rosenberg (In re Rosenberg), 779 F.3d 1254, 1260 (11th Cir. 2015). 224 11 U.S.C. § 303(i)(2); Treaty Energy Corp. v. Hallin (In re Treaty Energy Corp.), 619 F. App'x 443, 444 (5th Cir. 2015); Adell v. John Richards Homes Bldg. Co., L.L.C. (In re John Richards Homes Bldg. Co., L.L.C.), 552 F. App'x 401, 405 (6th Cir. 2013). As used in § 303(i)(1) and (2), "or" is not exclusive. See H.R. REP. NO. 95-595 (1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 324 (Alan M. Resnick and Eugene M. Wypyski eds., vol. 13 1979); see also In re Meltzer, 516 B.R. 504, 514 (Bankr. N.D. Ill. 2014) ("Although the statute uses the disjunctive 'or' . . . the statutory remedies are not mutually exclusive."). 225 Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 706 (9th Cir. 2004); accord, e.g., Lubow Mach. Co. v. Bayshore Wire Prods. Corp. (In re Bayshore Wire Prods. Corp.), 209 F.3d 100, 105 (2d Cir. 2000). 226 Orange Blossom Ltd. P'ship v. S. Cal. Sunbelt Developers, Inc. (In re S. Cal. Sunbelt Developers, Inc.), 608 F.3d 456, 465 (9th Cir. 2010); see also, e.g., In re Macke Int'l Trade, Inc., 370 B.R. 236, 256 (B.A.P. 9th Cir. 2007); In re Wavelength, Inc., 61 B.R. 614, 621 (B.A.P. 9th Cir. 1986). 227 Cf. Walden v. Bright Products, Inc. (In re Walden), 781 F.2d 1121, 1123 (5th Cir. 1986) (acknowledging that § 303(i)(2) "might be read to authorize judgment under the statute only against offending petitioner"); In re Merrifield Town Ctr. Ltd. P'ship, No. 09-18119, 2010 WL 5015006, at *5 (Bankr. E.D. Va. Dec. 3, 2010) (same). This discord prefigures the one over the propriety of bad-faith dismissals. Compare In re Forever Green Athletic Fields, Inc., 804 F.3d 328, 334 (3d Cir. 2015) (holding that bad faith petition may be dismissed), with In re Basil St. Partners, LLC, 477 B.R. 846, 849 (Bankr. M.D. Fla. 2012) ("[A] petitioning creditor's good or bad faith . . . is not a basis for dismissal."). 228 In re S. Cal. Sunbelt Developers, Inc., 608 F.3d at 462. Not universally adopted as to § 303(i)(1), the distinction between such provisions and sanctions statutes dates to Business Guides, Inc. v. Chromatic Commc'n Enters., Inc., 498 U.S. 533 (1991). In classifying Rule 11 as a sanctions law, the Court emphasized two considerations: first, Rule 11 sanctions were not tied to the litigation's outcome, and second, they shifted the costs of only a "discrete" portion of the litigation. Bus. Guides, Inc. v. Chromatic Comm'n Enters., 498 U.S. 533, 553 (1991); see also Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 409 (1990). 229 In re Kidwell, 158 B.R. 203, 217 (Bankr. E.D. Cal. 1993); see also, e.g., In re Skyworks Ventures, Inc., 431 B.R. 573, 576 (Bankr. D.N.J. 2010) (awarding attorney's fees and costs is the majority rule). Courts have hastened to add that a mini-trial is not required. See, e.g., In re Scrap Metal Buyers of Tampa, Inc., 233 B.R.
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the litigation as a whole, including proceedings under § 303(i)(1).230 Four factors commonly dominate this analysis: (1) "the merits of the involuntary petition," (2) "the role of any improper conduct on the part of the alleged debtor," (3) "the reasonableness of the actions taken by the petitioning creditors," and (4) "the motivation and objectives behind filing the petition."231 Unsurprisingly, this yardstick has been derided as an unstructured one.232 Finally, § 303(i)(2)'s bad faith criterion has been buffeted by varied constructions. 233 Some courts have discerned bad faith "where the filing was motivated by an improper purpose, such as ill will, malice, embarrassment, or harassment."234 Others have equated this term with "improper purpose," defined as "when a petitioning creditor uses involuntary bankruptcy procedures in an attempt to obtain a disproportionate advantage for itself, rather than to protect against other creditors obtaining disproportionate advantages, particularly when the petitioner could have advanced its own interests in a different forum."235 And still more import the standard set forth in Rule 9011, read to require both an objective analysis—"An analysis under Rule 9011 inquiries into a significant objective requirement bearing on the legal justification of a claim or defense: a reasonable inquiry into the facts and the law"—and a subjective one—"[T]he bankruptcy proceeding cannot have been interposed for an improper purpose, such as to harass, to cause delay, or to increase the cost of litigation."236 Merits aside, with courts prone to the use of "an expansive definition of bad faith"237 and due to the concoction of at least four tests for its ascertainment, 238 this concept's very existence invites hesitation and consequent
162, 166 (Bankr. M.D. Fla. 1999). 230 See In re S. Cal. Sunbelt Developers, Inc., 608 F.3d at 462 (discussing that eligibility for fees turns on the merits of litigation as a whole, rather than on whether a "specific filing" is well founded). 231 Higgins v. Vortex Fishing Sys. (In re Vortex Fishing Sys.), 379 F.3d 701, 707 (9th Cir. 2004); see also, e.g., Crest One Spa v. TPG Troy, LLC (In re TPG Troy, LLC), 793 F.3d 228, 235 (2d Cir. 2015) (citing In re Taub, 438 B.R. 761, 775 (Bankr. E.D.N.Y. 2010)). A further ambiguity exists as to whether the statute permits awards of post-dismissal costs and fees. Adell v. John Richards Homes Bldg. Co. (In re John Richards Homes Bldg. Co.), 552 F. App'x 401, 406 (6th Cir. 2013). As to the issue of the reasonableness of requested fees, the debtor bears the burden of proof. See, e.g., In re Express Car & Truck Rental, Inc., 440 B.R. 422, 432 (Bankr. E.D. Pa. 2010). 232 See In re Vortex Fishing Sys., 379 F.3d at 707 (acknowledging that such a test can be "somewhat amorphous"). 233 See In re Smith, 243 B.R. 169, 194 (Bankr. N.D. Ga. 1999) (noting that courts have created a variety of standards to ascertain bad faith). 234 Id.; see In re Camelot, Inc., 25 B.R. 861, 864 (Bankr. E.D. Tenn. 1982); see also, e.g., In re Salmon, 128 B.R. 313, 315 (Bankr. M.D. Fla. 1991). 235 In re K.P. Enter., 135 B.R. 174, 179 n.14 (Bankr. D. Me. 1992); General Trading v. Yale Materials Handling Corp., 119 F.3d 1485, 1501 (11th Cir. 1997). 236 In re Smith, 243 B.R. at 195 (internal quotation marks omitted). For the former, a court is expected to divine what a reasonable person would have believed. In re Wavelength, Inc., 61 B.R. 614, 620 (B.A.P. 9th Cir. 1986); see also, e.g., In re Reynolds, No. 9:14-bk-10690-PC, 2014 WL 5325749, at *4 (Bankr. C.D. Cal. Oct. 20, 2014) (quoting In re Wavelength, Inc., 61 B.R. at 619); In re Mollen Drilling Co., 68 B.R. 840, 843 (Bankr. D. Mont. 1987) (quoting In re Wavelength, Inc., 61 B.R. at 620). 237 In re MicroStructure Techs. Inc., No. 08-44074, 2009 Bankr. LEXIS 3744, at *10 (Bankr. W.D. Wash. July 17, 2009) (internal quotation marks omitted) (citing In re Wavelength, Inc., 61 B.R. at 620). 238 See, e.g., In re Walsh, 306 B.R. 738, 742 (Bankr. W.D.N.Y. 2004) (listing four factors); In re Ballato, 252 B.R. 553, 558 (Bankr. M.D. Fla. 2000) (canvassing five factors). While at least two districts within the
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delay.239
B. Divided Case Law
At first perusal, in its contour and its terminology, § 303 provokes little doubt. Partnered, § 303(b) and (h) demarcate a creditor's eligibility and standing, and § 303(i) authorizes damages and enthrones a standard for fees and costs. 240 This ostensible simplicity, however, has failed to beget a consensus as to the crucial relationship between § 303(i)(2)'s bad faith norm and § 303(b)'s and (h)'s jurisdictional minimums.241 Instead, opposing parties have drawn support from the Code's sundry provisions, and a divergence has emerged242 as to the extent to which "bad faith," mentioned in § 303(i)(2) alone,243 can serve as a supplemental ground for dismissal in accordance with provision, policy, and precedent.244
1. Supporters' Reasons
In the minds of many, this result makes perfect sense, three justifications often adduced.
state of Florida use the five-factor variant, the Eleventh Circuit has specifically recognized just three. See In re Antonini, No. 09-16850-AJC, 2012 WL 112978, at *8 (Bankr. S.D. Fla. Jan. 10, 2012). 239 See Shachmurove, Claims, supra note 76, at 546–47; see also, e.g., Phoenix Piccadilly, Ltd. v. Life Ins. Co. (In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1394–95 (11th Cir. 1988) (listing six factors); Little Creek Dev. Co. v. Commonwealth Mortg. Co. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1072–73 (5th Cir. 1986) (listing six factors); In re Grieshop, 63 B.R. 657, 663 (Bankr. N.D. Ind. 1986) (listing fourteen factors); In re Victory Constr. Co., 9 B.R. 549, 563–64 (Bankr. C.D. Cal. 1981) (listing three factors), vacated on other grounds, 37 B.R. 222, 228–29 (B.A.P. 9th Cir. 1984). Indeed, historically, this omnipresent term has always generated conflicting interpretations. In re Cannon Express Corp., 280 B.R. 450, 453 (Bankr. W.D. Ark. 20002); In re Apache Trading Grp., 229 B.R. 891, 892–93 (Bankr. S.D. Fla. 1999). 240 11 U.S.C. § 303(b), (h), (i) (2012). 241 See In re Nat'l Med. Imaging, L.L.C., No. 05-12714DWS, 2005 WL 3299712, at *2 (Bankr. E.D. Pa. Oct. 31, 2005) (pointing out that divergent opinions exist regarding the relationship between § 303(i)(2) and § 303(b)). 242 See id. 243 See In re Forever Green Athletic Fields, Inc., 804 F.3d 328, 333 (3d Cir. 2015); see also, e.g., Godshall & Gilhuly, supra note 5, at 1322 (arguing that the structural foundation of § 303(i) implicitly requires good faith when filing petitions). 244 See, e.g., In re WLB-RSK Venture, 296 B.R. 509, 513 (Bankr. C.D. Cal. 2003) ("[T]here is no statute or controlling decision establishing that bad faith is an independent ground for dismissing an involuntary [petition]."); In re Ballato, 252 B.R. 553, 558 (Bankr. M.D. Fla. 2000). But see Basin Elec. Power Coop. v. Midwest Processing Co., 769 F.2d 483, 486 (8th Cir. 1985) ("An essential prerequisite for allowing joinder of additional creditors to cure a defective petition is that the petition was filed in good faith. If the original petition was a sham, prepared with a view of being later supported by intervention of other creditors, joinder should be denied." (quoting In re Rite-Cap, Inc., 1 B.R. 740, 741 (Bankr. D.R.I. 1979) (relying on In re Crown Sportswear, Inc., 575 F.2d 991, 993 (1st Cir. 1978) ("Intervention [as a joining creditor in an involuntary petition pursuant to former Rule 104(a)] is a matter of right unless the bankruptcy court finds the petition was made in bad faith for the purpose of improperly invoking its jurisdiction.") and Guterman v. C. D. Parker & Co., 86 F.2d 546, 548 (1st Cir. 1936) ("As to the charge of bad faith and bad motives of the petitioning creditors, the special master held that bad faith on the part of the creditors was not shown and that bad motives of petitioning creditors were not a defense, unless, perchance, it amounted to fraud on the court, which did not exist in this case."))).
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First, they point to the text. Section 303(i)(2) "specifically provides that sanctions can be awarded if an involuntary [petition] is filed in bad faith." 245 Extrapolating from this reference, "it would seem to follow that Congress, in enacting § 303, contemplated the possibility of dismissal of an involuntary petition based upon bad faith."246 Logically, there could be "no reason why the Code would permit the imposition of damages (including punitive damages) for bad-faith filings but now allow the same conduct—such as suing involuntary bankruptcy as a litigation tactic in pending proceedings—to provide a basis for dismissing the petition." 247 So depicted, this construction simply renders § 303 more coherent, its subsections more harmonious, with a minor discrepancy resolved via anodyne reasoning. Second, as precedent across the Code's four chapters stresses, "bankruptcy petitions of any kind should not be employed for an improper purpose."248 The bad faith doctrine penalizes no more than such inherently baleful objectives,249 and it has always been invoked to dismiss voluntary petitions under chapter 7, 11, and 13 despite an absence of explicit statutory authorization.250 As such, its application would not appear to run afoul of modern law's constricted understanding of the bankruptcy court's equitable powers.251 Reasonably enough, the never extirpated "equitable nature of bankruptcy," embodied in § 105(a),252 serves as a secondary buttress for this construal,253 "bankruptcy courts . . . equipped with the doctrine of
245 In re WLB-RSK Venture, 296 B.R. at 513. 246 Id. 247 In re Forever Green Athletic Fields, Inc., 804 F.3d at 334; see also Porter v. United States (In re United States), No. 6:06-bk-00515-ABB, 2006 WL 2346467, at *2 (Bankr. M.D. Fla. June 1, 2006) ("Section 303 implicitly requires a petitioning creditor to act in good faith."). 248In re WLB-RSK Venture, 296 B.R. at 513 (emphasis added) (holding that a general partner filed an involuntary chapter 11 bankruptcy in bad faith, and therefore for an improper purpose, because the company had no real assets, no ongoing business to re-organize, no unsecured creditors, no cash flow to pay bills, no employees and because litigation in other courts was unavailing). 249 See, e.g., Marrama v. Citizens Bank of Mass., 549 U.S. 365, 373 (2007) (stating that the nonexclusive list of causes justifying dismissal under § 1307(c) does not mention bad faith, but recognizing that dismissal for bad faith is implicitly authorized by the words "for cause" in that section); In re Century/ML Cable Venture, 294 B.R. 9, 34 (Bankr. S.D.N.Y. 2003) ("While section 1112(b) states that the authority it provides—dismissal or conversion—may be granted for 'cause,' and lists one or more examples of cause, it precedes the list with the word 'includes,' and the list is not exhaustive. Cause for dismissal may be found based on unenumerated factors, including 'bad faith . . . .'"); Indus. Ins. Servs., Inc. v. Zick (In re Zick), 931 F.2d 1124, 1126–27 (6th Cir. 1991) ("T]he word 'including' [in § 707(a)] is not meant to be a limiting word. . . . A lack of good faith, furthermore, has been recognized in a number of bankruptcy cases as a valid cause of dismissal under § 707(a)."). 250 11 U.S.C. §§ 707(a) 930, 1112(b), 1307(c) (2012). As an involuntary case can only be commenced under chapter 7 or chapter 11, the "for cause" standard in § 1112 and § 707 is more directly relevant to this article. Nonetheless, the same liberality characterizes its application under chapters 9 and 12, as a familiar canon regardless intimates. 251 See In re WLB-RSK Venture, 296 B.R. at 513 (stating, since § 303(i)(2) seems to imply that an involuntary petition can be dismissed for bad faith, and numerous cases support the proposition, that bankruptcy petitions of any kind should not be employed for improper purposes). 252 11 U.S.C. § 105(a); Coie v. Sadkin (In re Sadkin), 36 F.3d 473, 478–79 (5th Cir. 1994) (stating the court did not abuse its discretion under § 105(a) when the court did not find any fraud on the debtor's part). 253 See In re WLB-RSK Venture, 296 B.R. at 513; cf. Adell v. John Richards Bldg. Co. (In re John Richards Homes Bldg. Co.), 552 F. App'x 401, 412 (6th Cir. 2013) ("Federal courts have held that . . . [§ 105(a)]
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good faith so that they can patrol the border between good- and bad-faith filings."254 To these adherents, because the Code imputes the prerequisite of good faith into every voluntary petition,255 their "better view" modestly extends a hallowed doctrine to all involuntary ones,256 the filing party in an involuntary case now subjugated to the same constraints thrust upon the tendering entity in a voluntary one.257 Finally, supporters appeal to considerations of vital policy.258 The filing of an involuntary petition is an extraordinary remedy, both history and reason insinuate; its consequences are great and baleful, often uncorrectable, as Congress itself accredited;259 and "[a]llowing for the dismissal of bad-faith filings will encourage creditors to file petitions for proper reasons such as to protect against the preferential treatment of other creditors or the dissipation of the debtor's assets."260 "By giving creditors the ability to bring a debtor into bankruptcy, Congress created a power that could be abused."261 Given this risk, it generates little violence to bankruptcy law's quiddity to borrow another remedy, one steadily blessed by history and already wedged within the Code, so as to discourage precisely such malediction. Within this paradigm, even if § 303(b) and (h) make no mention of bad faith, this omission becomes akin to the fabled scrivener's error, and its correction is compelled by the
authorizes bankruptcy courts to impose a variety of sanctions, including punitive damages, against litigants in response to their wrongful conduct before the court."); In re Mylotte, David & Fitzpatrick, No. 07-11861bif, 2007 WL 2033812, at *9 (Bankr. E.D. Pa. July 12, 2007) ("There is no principled basis to permit a bad faith involuntary bankruptcy filing."). 254 In re Forever Green Athletic Fields, Inc., 804 F.3d 328, 334 (3d Cir. 2015) (holding that an involuntary chapter 7 bankruptcy was filed in bad faith and based this determination on a "totality of the circumstances" test.). 255 See, e.g., In re Bock Transp., Inc., 327 B.R. 378, 381 (B.A.P. 8th Cir. 2005) (relying on the Eighth Circuit and their finding that the Code contains an implicit good faith requirement); Cedar Shore Resort, Inc. v. Mueller (In re Cedar Shore Resort, Inc.), 235 F.3d 375, 379 (8th Cir. 2000) ("Other circuits have similarly held that the Code contains an implicit good faith requirement."); see also Little Creek Dev. Co. v. Commonwealth Mortg. Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1071 (5th Cir. 1986) (nothing that judicial interpretation has provided for a good faith standard for the commencement of bankruptcy proceedings). 256 See In re Forever Green Athletic Fields, Inc., 804 F.3d at 334 (remarking that the court, in assessing involuntary petitions, will still use a general "good faith" filing requirement); see also In re Tichy Elec. Co. Inc., 332 B.R. 364, 373 (Bankr. N.D. Iowa 2005) (discussing that even though there is no explicit mention of "good faith" as a filing requirement, it is an implicit requirement and an involuntary filing must be used for proper bankruptcy purposes). 257 See In re Global Ship Sys., LLC, 391 B.R. 193, 201 (Bankr. S.D. Ga. 2007) ("Instead, the traditional good faith/bad faith analysis which is equally applicable to involuntary cases as it is to voluntary cases is the basis for this ruling."). 258 See KENNETH N. KLEE & WHITMAN L. HOLT, BANKRUPTCY AND THE SUPREME COURT 193–95 (2008). 259 See Susman v. Schmid (In re Reid), 773 F.2d 945, 946 (7th Cir. 1985) (concluding that the creditors did not have standing to bring an involuntary proceeding because there was no evidence of commingling of assets). 260 In re Forever Green Athletic Fields, Inc., 804 F.3d at 335 (determining that creditors may force a debtor into an involuntary filing without considering the consequences faced by the debtor); see, e.g., In re Quinto & Wilks, P.C., 531 B.R. 594, 607–08 (Bankr. E.D. Va. 2015); (stating that for a court to dismiss a claim for bad- faith, they need to also look at the subjective motivations of the petitioner); In re Global Ship Sys., LLC, 391 B.R. at 201–02. 261 Rosenberg v. DVI Receivables XVII, LLC, 835 F.3d 414, 419 (3d Cir. 2016); see also In re Diloreto, 388 B.R. 637, 655 (Bankr. E.D. Pa. 2008) (noting the potential negative effects involuntary petitions can have on debtors, such as significant legal fees).
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Code's embedded spirit and bankruptcy law's general tenor. Motivated by these interconnected ratiocinations, a sizable juridical block has felt free to dismiss an involuntary petition filed in bad faith despite § 303(i) and (b)'s silence.262
2. Opposition's Counters
Citing two related reasons, others deviate from this popular technique. First, these courts note that § 303(b) and (h) exhaustively specify how a creditor's eligibility is to be determined and when an involuntary case can be commenced.263 They then stress the obvious: "Nowhere in the eligibility requirements of § 303(b) is there any reference to the motivation of the petitioning creditor(s), or any requirement that the petitioning creditor(s) demonstrate either good faith or the absence of bad faith in filing the petition."264 In light of this linguistic structure, "bad faith" may lead to an imposition of more than actual damages, but it cannot rightly be imported into § 303(b) and (h) and thereby transformed into a basis for dismissal without expanding upon a "comprehensive remedial scheme that [already] addresses a full range of specific remedies to protect an alleged debtor."265 Axiomatically, of course, such a statutory rewrite amounts to a task that no court may undertake, a legislative maneuver not commensurate with a judge's more modest providence.266 Wedded purely to pendent canons of interpretation, this minority hence reads the absence of
262 See In re Forever Green Athletic Fields, Inc., 804 F.3d at 334 (disagreeing with petitioner's argument that Congress intended something specific by excluding an explicit reference to bad faith dismissals in § 303, but including it in other provisions); In re Bock Transp., Inc., 327 B.R. 378, 381 (B.A.P. 8th Cir. 2005) (recognizing that even though § 303 does not explicitly mention bad faith, the Eighth Circuit has found a good faith requirement); In re Tichy Elec. Co., 332 B.R. 364, 373 (Bankr. N.D. Iowa 2005) (recognizing a good faith presumption in § 303); In re Alexander, No. 00-10500CAB, 2000 WL 33951465, at *3 (D. Vt. Aug. 29, 2000) (acknowledging that although § 303(b) does not say "good faith," bankruptcy filings need to be done in good faith); In re Manhattan Indus., Inc., 224 B.R. 195, 201 (Bankr. M.D. Fla. 1997) (noting that dismissal is a possible consequence of not filing a bankruptcy proceeding in good faith); In re U.S. Optical, Inc., No. 92- 1496, 1993 WL 93931, at *3–4 (4th Cir. Apr. 1, 1993) (recognizing that some courts use an objective standard to define bad faith and others use a subjective approach); Atlas Mach. & Iron Works, Inc. v. Bethlehem Steel Corp., 986 F.2d 709, 716 (4th Cir. 1993) (finding a petition was filed in subjective bad faith because it was filed for an improper purpose). Unsurprisingly, such courts simultaneously grant this remedy, thus implying it is found in the Code, and an award of punitive damages, as authorized by § 303(i)(2) is granted. See, e.g., Treaty Energy Corp. v. Hallin (In re Treaty Energy Corp.), 619 F. App'x 443, 444 (5th Cir. 2015); In re Cent. Park Estates, LLC, 485 B.R. 72, 75–76 (Bankr. S.D.N.Y. 2013) (citing In re WLB-RSK Venture, 296 B.R. 509, 515 (Bankr. C.D. Cal. 2003), and In re Manhattan Indus., Inc., 224 B.R. at 201). 263 See In re Basil St. Partners, LLC, 477 B.R. 846, 849–50 (Bankr. M.D. Fla. 2012) (stating there is no reference to a petitioner's motivating factors in the filing of an involuntary petition; instead, bad faith should only be analyzed after an involuntary petition has been dismissed). 11 U.S.C. § 303(b), (h) (2012). 264 In re Basil St. Partners, LLC, 477 B.R. at 849. 265 In re McMillan, 543 B.R. 808, 815 (Bankr. N.D. Tex. 2016) (discussing the specific remedies § 303 provides to protect debtors). 266 See Planned Parenthood Gulf Coast, Inc. v. Kliebert, 141 F. Supp. 3d 604, 641 (M.D. La. 2015) ("[T]o rewrite a plain statute . . . [is] a task at odds with . . . [a court's] duty to ascertain—neither to add nor to subtract, neither to delete nor to distort an enactment's final terms." (internal quotation marks omitted)); see also, e.g., United States v. Louisiana, No. 3:11-cv-00470-JWD-RLB, 2016 WL 4055648, at *42 (M.D. La. July 26, 2016) (rejecting defendant's "attempt to affix an omitted phrase onto clear statutory language borrowed from other subsections").
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any reference to "good faith or lack of good faith" in § 303's enumeration of an involuntary case's jurisdictional minimums and prerequisites to dismissal as establishing this doctrine's "immaterial[ity]" 267 and "irrelevan[ce]" 268 outside the confines of § 303(i)(2).269 While the debate over whether the precise relationship between § 303(i)(2) and (i)(1) may be joined in good faith, and though § 303 fails to specify expressly the criteria for involuntary petition's dismissal, its text expressly enumerates the jurisdictional postulates and thereby implicitly delineates the sole universe of acceptable bases. Among this series, fatally and conclusively, not a whisper of those magic words, no reference to good faith's need or bad faith's weight, recurs. Second, this coterie fixates on § 303(i)'s grammatical structure. As it highlights, this paragraph begins: "If the court dismisses a petition under this section other than on consent of all petitioners and the debtor . . . ."270 Grammatically, within a full conditional sentence, "if" tends to introduce a dependent clause expressing a condition, called the protasis, either preceded or follow by a main clause in which the consequence is broadcast, the so-called apodosis. 271 Based on § 303(i)'s chosen conjunction, therefore, "a prerequisite for a claim of bad faith is that the court must have dismissed the petition";272 dismissal must come first.273 By this side's reckoning, this seeming disconnect—that, as a statutory matter, dismissal need precede any bad faith evaluation, and that a creditor's good faith cannot therefore be implicit in § 303(b) and (h)—in a carefully calibrated statutory subsection impliedly consigns bad faith into irrelevance in the jurisdictional analysis focused upon the propriety of a
267 See In re Mavellia, 149 B.R. 301, 303 (Bankr. E.D.N.Y. 1991) (noting that good faith or a lack thereof is immaterial for a "creditor to force a debtor with three or more creditors into involuntary bankruptcy"). 268 See In re WLB-RSK Venture, No. BAP CC–03–1526–MOPMA, BK LA–01–16604–TD, 2004 WL 3119789, at *6 n.13 (B.A.P. 9th Cir. Nov. 24, 2004) (affirming In re WLB-RSK Venture, 296 B.R. 509 (2003) on another basis while rejecting bad faith as an independent basis for dismissal). 269 See In re Kennedy, 504 B.R. 815, 823–24 (Bankr. S.D. Miss. 2014) (noting that the plain language of § 303(i) only contemplates bad faith after the dismissal of an involuntary petition is dismissed to determine if a recovery for actual or punitive damages is warranted). 270 11 U.S.C. § 303(i) (2012) (emphasis added). 271 RODNEY HUDDLESTON & GEOFFREY K. PULLUM, CAMBRIDGE GRAMMAR OF THE ENGLISH LANGUAGE 736–37, 736 n.23 (2002); see also, e.g., State v. Parduhn, 283 P.3d 464, 480 (Utah 2011) (confirming its understanding by relying upon this grammatical rule). Of course, "[o]nly if the consequences specified in the apodosis of . . . [a] rule [or statute] are as accessible and noncontroversial as the coverage specified in the protasis can a rule [or statute] produce significant predictability of application." Frederic Schauer, Formalism, 97 YALE L.J. 509, 540 (1988). 272 In re Knoth, 168 B.R. 311, 315 (Bankr. D.S.C. 1994); accord In re Basil St. Partners, LLC, 477 B.R. 846, 849 (Bankr. M.D. Fla. 2012) (noting that dismissal of a petition is a pre-requisite to an inquiry into the creditor's bad faith). 273 See Gen. Trading, Inc. v. Yale Materials Handling Corp., 119 F.3d 1485, 1505 (11th Cir. 1997) (observing that "if the petition was not dismissed, . . . [the petitioning creditor] could not under the Bankruptcy Code have been subject to the bad faith inquiry"). Naturally, therefore, most bankruptcy courts have analyzed bad faith only after the involuntary petition has been dismissed. See, e.g., In re Antonini, No. 09-16850-AJC, 2012 WL 112978, at *7–8 (Bankr. S.D. Fla. Jan. 10, 2012) (awarding damages only after dismissing the involuntary petition); see also In re Lee, 252 B.R. 565, 565 (Bankr. M.D. Fla. 2000) (awarding damages only after dismissing the involuntary petition); In re Kearney, 121 B.R. 642, 643 (Bankr. M.D. Fla. 1990) (awarding damages only after dismissing the involuntary petition).
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dismissal.274 Stated more colloquially, bad faith cannot be a basis for dismissal if a claim based upon it does not ripen until this event occurs.275 In sum, "[t]he express, unambiguous language of § 303(i),"276 when pored over in conjunction with § 303(a), (b), and (h),277 yields one conclusion, this assemblage insists: "[A] petitioning creditor's good or bad faith in filing an involuntary petition is not a basis for dismissal."278
III. RESOLUTION
A. Principles of Interpretation
Whereas equity once reigned,279 much changed on October 1, 1979.280 On that fall date, the Code "standardize[d] an expansive (and sometimes unruly) area of law."281 Thereafter, a new duty "to interpret the Code clearly and predictably using well established principles of statutory construction" arose. 282 Bound by this obligation, over the next thirty years, a peculiar textualism came to dictate
274 See In re Basil St. Partners, LLC, 477 B.R. at 849 (stating that the bad faith of a creditor is only relevant in determining damages after dismissal of the involuntary petition—bad faith is irrelevant in the Court's analysis on whether or not to dismiss an involuntary petition). 275 See, e.g., In re Jacques, No. 09-22027 (ASD), 2010 WL 2940866, at *9 (Bankr D. Conn. July 23, 2010) (declaring that claims for bad faith are not ripe until an involuntary petition is dismissed); see also In re Palace Oriental Rugs, Inc., 193 B.R. 126, 129–30 (Bankr. D. Conn. 1996) ("A claim in favor of an alleged debtor for costs, attorney's fees and/or damages under section 303(i) ripens upon the dismissal of the involuntary petition."). 276 In re Basil St. Partners, LLC, 477 B.R. at 850. 277 See 11 U.S.C. § 303(a)–(b), (h); see also Farmers & Merchants State Bank v. Turner, 518 B.R. 642, 648– 49 (Bankr. N.D. Fla. 2014) (denoting that bad faith is not part of the test courts use to analyze contested involuntary petitions). 278 In re Basil St. Partners, LLC, 477 B.R. at 851; see also, e.g., In re Kennedy, 504 B.R. 815, 823–24 (Bankr. S.D. Miss. 2014) ("[T]he plain language of § 303(i)—where bad faith is mentioned—contemplates bad faith only as a requirement for the recovery of actual or punitive damages after the involuntary petition is dismissed." (emphasis in original)). Indeed, Collier on Bankruptcy, bankruptcy law's preeminent commentary, has endorsed this textual fact. See 2 COLLIER ON BANKRUPTCY ¶ 303.16 (16th ed. 2013). The Ninth Circuit's Bankruptcy Appellate Panel, meanwhile, has twice questioned the propriety of such dismissals. See In re Marciano, 459 B.R. 27, 44 (B.A.P. 9th Cir. 2011); see also In re WLB-RSK Venture, No. BAP CC–03–1526– MOPMA, BK LA–01–16604–TD, 2004 WL 3119789 at *6 n.13 (B.A.P. 9th Cir. Nov. 24, 2004). 279 See SEC v. United States Realty & Improvement Co., 310 U.S. 434, 455 (1940) ("A bankruptcy court is a court of equity . . . and is guided by equitable doctrines and principles except in so far as they are inconsistent with the Act."); see also Adam J. Levitin, Toward a Federal Common Law of Bankruptcy: Judicial Lawmaking in a Statutory Regime, 80 AM. BANKR. L.J. 1, 6–7 (2006) (discussing the origins of "the court of equity maxim"). 280 The Code became effective on this day. See Maiorino v. Branford Sav. Bank, 691 F.2d 89, 89 n.2 (2d Cir. 1982) (indicating that during the transition period, between October 1, 1974 and April 1, 1984, the Code would be effective); see also Stewart v. Kutner (In re Kutner), 656 F.2d 1107, 1111–12 (5th Cir. 1981), cert. denied, 455 U.S. 945 (1982); Callister v. Ingersoll-Rand Fin. Corp., 673 F.2d 305, 306 (10th Cir. 1982). 281 RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 649 (2012). 282 See id.; see also, e.g., Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988) ("[W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.").
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interpretation of the Code's manifold sections,283 its strictness tempered by older filaments of thought less openly acknowledged.284 As always, the analysis of a Code section commences with the explicit terms of the relevant provision.285 In fealty to the basic principles of English grammar,286 the familiar semantic rules287 and the common syntactic canons288 rate utilization at this
283 See, e.g., Ralph Brubaker, A "Summary" Statutory and Constitutional Theory of Bankruptcy Judges' Core Jurisdiction after Stern v. Marshall, 86 AM. BANKR. L.J. 121, 144 (2012) (noting "the Court's penchant for strict textualism"); see also John Hennigan, Rousey and the New Retirement Funds Exemption, 13 AM. BANKR. INST. L. REV. 777, 793 (2005) (describing Rousey v. Jacoway, 544 U.S. 320 (2005), as an example of the Court's "strict textualism"). 284 See, e.g., Amir Shachmurove, Sherlock's Admonition: Vindicatory Contempts as Criminal Actions for Purposes of Bankruptcy Code § 362, 13 DEPAUL BUS. & COMM. L.J. 67, 75–78 (2014) [hereinafter Shachmurove, Sherlock] (explaining a modified plain meaning approach to Code interpretation through canons of construction); cf., e.g., Jonathan C. Lipson, Understanding Failure: Examiners and the Bankruptcy Reorganization of Large Public Companies, 84 AM. BANKR. L.J. 1, 5 (2010) (noting that bankruptcy courts appear to be "guided (perhaps burdened) by a legacy of strict textualism"). 285 See, e.g., Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 235, 243, 245–46 (2010); see also Holloway v. United States, 526 U.S. 1, 6 (1999); United States v. Turkette, 452 U.S. 576, 593 (1981); Samson v. Western Capital Partners, LLC (In re Blixseth), 684 F.3d 865, 870 (9th Cir. 2012); Satterfield v. Simon & Schuster, Inc., 569 F.3d 946, 953 (9th Cir. 2009) (all displaying that the analysis of a Code section always starts with the explicit terms within the provision at issue). 286 Cf. United States v. Ron Pair Enters., 489 U.S. 235, 241–42 (1989) (finding support for a particular reading in the statute's "grammatical structure"); DiFiore v. Am. Airlines, Inc., 561 F. Supp. 2d 131, 135 (D. Mass. 2008) (applying basic rules of grammar); United States v. Reynoso, 239 F.3d 143, 151 (2d Cir. 2000) (Calabresi, J., dissenting) (faulting the majority for ignoring a statute's "grammatical structure"). 287 See, e.g., Florida v. C.M., 154 So. 3d 1177, 1180 (Fla. Dist. Ct. App. 2015) (defining the "omitted-case canon" as "meaning nothing is to be added to what the text states or reasonably implies") (internal quotations omitted); Int'l Bhd. of Elec. Workers, Local #111 v. Pub. Serv. Co. of Colo., 773 F.3d 1100, 1108 (10th Cir. 2014) ("Under . . . [the ordinary-meaning] canon, if context indicates that words bear a technical legal meaning, they are to be understood in that sense."); United States v. Porter, 745 F.3d 1035, 1042 (10th Cir. 2014) (referring to "the so-called general-terms canon that holds that [g]eneral terms are to be given their general meaning") (alteration in original) (internal quotations omitted); United States v. Curbelo, 726 F.3d 1260, 1277 (11th Cir. 2013) ("[T]he negative implication canon, often expressed in the Latin phrase expressio unius est exlusio alterius, . . . applies where items expressed are members of an associated group or series, justifying the inference that items not mentioned were excluded by deliberate choice, not inadvertence.") (internal quotations omitted); In re Partin, 517 B.R. 770, 773–74 (Bankr. E.D. Ky. 2014) ("When encountered in a statute, 'and' is typically construed in its ordinary conjunctive sense. . . . Deviation from this rule (i.e., changing 'and' to 'or'), only occurs when required to effectuate the obvious intention of the Legislature and to accomplish the purpose or object of the statute.") (internal quotations omitted); United States v. Phillip Morris USA Inc., 566 F.3d 1095, 1115 (D.C. Cir. 2009) (explaining that the word "includes" is usually considered "non- exhaustive"). 288 See, e.g., City. of Yakima v. Confederated Tribes & Bands of Yakima Indian Nation, 502 U.S. 251, 262 (1992) ("[A] proviso can only operate within the reach of the principal provision it modifies," encapsulating the proviso canon); Lary v. Trinity Physician Fin. & Ins. Servs., 780 F.3d 1101, 1105–06 (11th Cir. 2015) ("Ordinarily, the scope of a subpart is limited to that subpart."); United States v. Laraneta, 700 F.3d 983, 989 (7th Cir. 2012) (defining the "last-antecedent" canon as "say[ing] that a qualification in the last term of a series should be confined to that term" and the "series modifier canon" as "provid[ing] that a modifier at the beginning or end of a series of terms modifies all the terms"); Carroll v. Sanders, 551 F.3d 397, 399 (6th Cir. 2008) (describing the nearest reasonable referent canon, closely related to the last antecedent canon, as requiring that "[w]hen a word such as a pronoun points back to an antecedent or some other referent, the true referent should generally be the closest appropriate word") (internal quotations omitted); William N. Eskridge, Jr., The New Textualism, 37 UCLA L. REV. 621, 664 (1990) (bemoaning the "mini-revival of the long- eschewed punctuation canon, which presumes that Congress follows ordinary rules of punctuation and that the placement of every punctuation mark is potentially significant"). Many of these "technical, grammatical
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vocation's outset, the language of the relevant provision and the terms and the structure of the pertinent section and statute first parsed.289 The salience of these linguistic canons, however, always fluctuates, their particular pertinence demarcated by a series of related contextual tenets,290 most especially the whole text canon from which so many others spring.291 In this first stage of a most "holistic endeavor,"292 these varied tools furnish the sole means of dispelling ambiguity and unearthing plainness,293 reference made "to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole."294 Consequently, canons of construction" had once been disfavored. See id. at 664; Vassal Kesavan & Michael S. Paulsen, Is West Virginia Unconstitutional?, 90 CAL. L. REV. 291, 350 (2002) (noting that the punctuation canon has been renounced in statutory interpretation). With the passage of time, they may once more be eclipsed. Indeed, their invocation may, in fact, already obscure too much. Robert M. Lawless, Legisprudence Through a Bankruptcy Lens: A Study in the Supreme Court's Bankruptcy Cases, 47 SYRACUSE L. REV. 1, 107 (1996) ("[T]he Court's commitment to textualism in bankruptcy cases is quite inconsistent."). 289 See, e.g., Ron Pair Enters., 489 U.S. at 241–42 (noting that the reading of a statute is mandated by its grammatical structure). 290 See, e.g., United States v. Castleman, 134 S. Ct. 1405, 1417 (2014) (Scalia, J., concurring in part and concurring in judgment) ("[Per] the presumption of consistent usage, . . . a term generally means the same thing each time it is used."); RadLax Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645 (2012) ("[I]t is a commonplace of statutory construction that the specific governs the general.") (internal quotations omitted); Ali v. Fed. Bureau of Prisons, 552 U.S. 214, 231 (2008) ("The ejusdem generis canon provides that, where a seemingly broad clause constitutes a residual phrase, it must be controlled by, and defined with reference to, the 'enumerated categories . . . which are recited just before it,' so that the clause encompasses only objects similar in nature.") (internal quotations omitted); District of Columbia v. Heller, 554 U.S. 570, 577 (2008) ("[A] prefatory clause [may be used] to resolve an ambiguity in the operative clause."); Fla. Dep't of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 47 (2008) ("[S]tatutory titles and section headings are tools available for the resolution of a doubt about the meaning of a statute.") (internal quotations omitted); Kwai Fun Wong v. Beebe, 732 F.3d 1030, 1062 n.7 (9th Cir. 2013) (Bea, J., dissenting) ("[T]he whole-text canon . . . calls on the judicial interpreter to consider the entire text, in view of its structure and of the physical and logical relation of its many parts.") (internal quotations omitted); Sachs v. Rep. of Austria, 737 F.3d 584, 598 n.13 (9th Cir. 2013) (citing for support to "the harmonious reading canon," "the provisions of a text should be interpreted in a way that renders them compatible, not contradictory," and "the associated words canon," "associated words bear on one another's meaning") (internal quotations omitted); Amoco Prod. Co. v. Watson, 410 F.3d 722, 733 (D.C. Cir. 2005) (noting that courts should consider statutory and regulatory text as a whole); Hawthorne v. Mac Adjustment, Inc., 140 F.3d 1367, 1371 (11th Cir. 1998) ("A fundamental canon of statutory construction directs us to interpret words according to their ordinary meaning."). 291 See SCALIA & GARNER, supra note 207, at 167 (noting that the whole body of a text should be considered when interpreting one section of it). 292 United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 371 (1988). Frequently quoted, this phrase's precise import is less than clear. See Morell E. Mullins, Tools, Not Rules: The Heuristic Nature of Statutory Interpretation, 30 J. LEG. 1, 11 n.39 (2003) (acknowledging that the combining of factors in a text to be interpreted is difficult but not as incoherent as some people have stated). 293 These attributes are related yet distinct. See, e.g., Shachmurove, Sherlock, supra note 284, at 75 ("Analytically, plainness and ambiguity are thus disparate, albeit closely-related, concepts, and it is context that determines which of many plain denotations most impeccably fits the statutory scheme, the text thereby shown to be both plain and unambiguous."); Shachmurove, Claims, supra note 76, at 530 n.142 (explicating the distinction between connotation and denotation and ambiguity and plainness in the context of the Federal Rules of Bankruptcy Procedure). Such subtlety inheres in language itself. See Richard S. Kay, Adherence to the Original Intentions in Constitutional Adjudication: Three Objections and Responses, 82 NW. U. L. REV. 226, 230 (1988) ("Words are only meaningless marks on paper or random sounds in the air until we posit an intelligence which selected and arranged them."). 294 Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997) (citing Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 477 (1992); McCarthy v. Bronson, 500 U.S. 136, 139 (1991)); see, e.g., L.S. Starrett Co. v. Fed.
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even in the most stringent forms of textual interpretation, statutory milieu matters, for "[a] provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme—because the same terminology is used elsewhere in a context that makes its meaning clear . . . or because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law."295 Overall, reflecting an interpretive ethic anchored to linguistic concords, 296 this schematic relies on such contextual and textual evidence297 and leans on the statute's overarching architecture for clarification and circumstantial reference. 298 If this process yields a single denotation and connotation, 299 the provision in question is unambiguous and plain, 300 controlling unless one of five exceptions applies. 301 Practically speaking, therefore, the Court's purportedly (and inconsistent)302 textualist
Energy Reg. Comm'n, 650 F.3d 19, 25 (1st Cir. 2011) (if we conclude that the plain language of the statute, standing alone, is ambiguous, the next step is to ask whether this ambiguity can be resolved by looking to "the specific context in which [the] language is used, and the broader context of the statute as a whole") (internal quotations omitted). 295 United Sav. Ass'n of Tex., 484 U.S. at 371 (internal citation omitted); see also, e.g., Roberts v. Sea-Land Servs. Inc., 132 S. Ct. 1350, 1357 (2012) ("'It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.'") (citing Davis v. Mich. Dep't of Treasury, 489 U.S. 803, 809 (1989)). 296 See, e.g., United States v. Schurtz, 510 F.3d 1242, 1244 (10th Cir. 2007) (favoring "straightforward interpretation of the provision [that] makes sense of the language" despite the fact that "the linguistic conventions of the regulation are not entirely consistent"); United States v. Jackson, 480 F.3d 1014, 1019 (9th Cir. 2007) (relying on more than "our linguistic conventions to understand Congress's intentions"); In re Sinclair, 870 F.2d 1340, 1342 (7th Cir. 1989) (rejecting the use of "[a]n unadorned 'plain meaning' approach to interpretation [that] supposes that words have meanings divorced from their contexts–linguistic, structural, functional, social, historical."). 297 See, e.g., United States v. Campbell, 798 F. Supp. 2d 293, 302 (D.D.C. 2011) (noting that courts should take into account contextual and textual evidence when interpreting the text of a statute). 298 See, e.g., United States v. McLemore, 28 F.3d 1160, 1162 (11th Cir. 1994) (explaining that to interpret statutory language the court looks at the statutory scheme and not just one word or provision); see also, e.g., K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988) ("In ascertaining the plain meaning of the statute, the court must look to the particular statutory language at issue, as well as the language and design of the statute as a whole."). 299 See, e.g., In re Asher, 488 B.R. 58, 64 (Bankr. E.D.N.Y. 2013) ("Ambiguity only exists so long as several plausible interpretations of the same statutory text, specific and different in substance, can be advanced."). 300 See, e.g., Yates v. United States, 135 S. Ct. 1074, 1097 (2015) (concluding that cannons of construction should not be used when the statutory language has a clear definition and it is supported by the context); United States v. Ron Pair Enters., 489 U.S. 235, 241 (1989) (noting that when interpreting the meaning of a statute, the inquiry should begin and end with the statutory language itself when the language is plain); see also, e.g., Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438 (1999) (stating that statutory construction begins and ends with the language of the statute where the language provides a clear answer); Jian Le Lin v. United States Attorney Gn., 681 F.3d 1236, 1239 (11th Cir. 2012) (explaining that Congress's intent is clear when the language of the statute itself is unambiguous); Vanderbrook v. Unitrin Preferred Ins. Co. (In re Katrina Canal Breaches Litig.), 495 F.3d 191, 219 (5th Cir. 2007) (declining to employ the foregoing canons where the court would thereby be "injecting ambiguity into an otherwise unambiguous term"). 301 See Shachmurove, Claims, supra note 76, at 530–31 (courts do not have to follow the plain and unambiguous meaning of a statute or rule "if (1) an absurd result would follow; (2) there is clear evidence of contrary intent in reliable extrinsic sources (3) no plausible purpose would be attained; (4) an unanticipated clerical or typographical error is at fault; or (5) a conflict with a constitutional provision would result.") (internal quotations omitted). 302 Compare Marrama v. Citizens Bank of Mass., 549 U.S. 365, 370–76 (2007) (employing both traditional textualism and a form of purposivism), with Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549
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approach to the Code has often incorporated more than "the recitation of plain meaning mantras and conclusory canons of interpretation," 303 and its nuances dependably moderate the occasionally unforgiving formalism of syntax.304 In the end, putting aside catchy slogans and hortatory claims, plain and unambiguous meaning arises from more than just the enacted text contextually illuminated,305 courts relying on "ordinary, contemporary, common meanings," 306 a statute's "obvious and dominating general purpose,"307 and a term's exact "placement."308 Due to the unique history of bankruptcy law, its jurisprudence treats certain additional principles as interpretive lodestars. First, out of respect for the existence of an extensive body of pre-Code bankruptcy law, courts exhibit a marked reluctance to invalidate the applicability of certain doctrines with identifiable historical prestige in the absence of unambiguous Code text.309 As the Court itself explained, where "the intent to override" such "prior practice" is "doubtful" based on the Code's explication, 310 "pre-Code practice" that "reflects policy considerations of great longevity and importance" will not be superseded.311 Second, this deference extends to long-established traditions of state regulation, partly weakened by the
U.S. 443, 448–53 (2007) (opting for a more stringent textualism). 303 Thomas F. Waldron & Neil M. Berman, Principles of Statutory Interpretation: A Judicial Perspective After Two Years of BAPCPA, 81 AM. BANKR. L.J. 195, 210 (2007). 304 See, e.g., Limited, Inc. v. Comm'r, 286 F.3d 324, 333–34 (6th Cir. 2002) (contrasting "a plain language interpretation" with a disfavored "hypertechnical analysis"); United States v. DBB, Inc., 180 F.3d 1277, 1281 (11th Cir. 1999) ("We do not look at one word or term in isolation, but instead we look to the entire statutory context."); In re Friesenhahn, 169 B.R. 615, 637–38 (Bankr. W.D. Tex. 1994) ("Courts are not to forge ahead under the plain meaning dogma, in '[b]lind nullification of Congressional intent.'"). 305 See, e.g., King v. St. Vincent's Hosp., 502 U.S. 215, 221 (1991) ("[T]he meaning of statutory language, plain or not, depends on context."); United States v. Hartwell, 73 U.S. 385, 396 (1867) ("The proper course in all cases is to adopt that sense of the words which best harmonizes with the context, and promotes in the fullest manner the policy and objects of the legislature. . . . [T]he words should be taken in such a sense, bent neither one way nor the other, as will best manifest the legislative intent."); New Castle Cty. v. Hartford Acc. & Indem. Co., 970 F.2d 1267, 1270 (3d Cir. 1992) ("The question is not whether there is an ambiguity in the metaphysical sense, but whether the language has only one reasonable meaning when construed, not in a hypertechnical fashion, but in an ordinary, common sense manner."). 306 See Perrin v. United States, 444 U.S. 37, 42 (1979); see also, e.g., United States v. Haun, 494 F.3d 1006, 1009 (11th Cir. 2007) (quoting Perrin, 444 U.S. at 42). 307 Miller v. Amusement Enters., Inc., 394 F.2d 342, 350 (5th Cir. 1968) ("[E]jusdem generis . . . do[es] not . . . compel[] us to accord words and phrases embodied in the statute a definition or interpretation different from their common and ordinary meaning; or that the rule requires us to interpret the statute in such a narrow fashion as to defeat what we conceive to be its obvious and dominating purpose."), cited in United States v. DuBose, 598 F.3d 726, 731 (11th Cir. 2010). 308 Bailey v. United States, 516 U.S. 137, 145 (1995) ("We consider not only the bare meaning of the word but also its placement and purpose in the statutory scheme."). 309 See In re Applegate Prop., Ltd., 133 B.R. 827, 835 n.6 (Bankr. W.D. Tex. 1991) (relying on Kelly v. Robinson, 479 U.S. 36, 49–50 (1986), and Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Prot., 474 U.S. 494, 501 (1986)). 310 BFP v. Resolution Tr. Corp., 511 U.S. 531, 546–47 (1994) (stating that where Congress does not explicitly overrule pre-Code practice, adherence to the "plain meaning" doctrine is not absolute); Shachmurove, Sherlock, supra note 284, at 77–80. 311 United States v. Ron Pair Enters., 489 U.S. 235, 244–45 (1989); see also, e.g., In re Jack Greenberg, Inc., 189 B.R. 906, 911 (Bankr. E.D. Pa. 1995) (invoking this axiom); In re Luker, 148 B.R. 946, 952 (Bankr. N.D. Okla. 1992) (invoking the same axiom).
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constitutional supremacy automatically imparted to federal bankruptcy law. 312 Finally, the Code should generally not be construed in such a manner as to
expand the rights of debtors or their creditors beyond those necessary to adjust their relationship or otherwise diminish either (i) the rights or prerogatives of parties outside of the debtor-creditor relationship ("Third Parties") for the benefit of the debtor or the creditors or (ii) the nonbankruptcy rights of the debtor or the creditors for the benefit of these Third Parties.313
Whether explicitly admitted or implicitly undertaken, his third preference often legitimizes consideration of yet other policies entrenched in the Code or pre-Code practice, including: (1) equality of distribution; (2) facilitation of an estate's speedy disposition; (3) discouragement of a race to diligence amongst creditors; (4) disfavoring of secret liens; (5) enablement of an honest debtor's fresh start; (6) preference for effective reorganizations of businesses, farmers, railroads, and cities; and (7) and general preclusion of allowance of post-petition interest on pre-petition unsecured claims.314 Not formal canons, these principles can tip the scale whenever an initial exegesis of a Code text yields multiple possible denotations, the language unquestionably plain yet inescapably ambiguous. 315 Thus, although not one can override the Code's plain terms,316 whenever "plausible interpretations of the same statutory text, specific and different in substance [that] can be advanced," they help
312 Shachmurove, Sherlock, supra note 284, at 78–79 (discussing how the Code defers to "a number of 'topics and fields of law as [such] traditional areas of state concern,' including regulation of local gas franchises and hospital billing, domestic relations, and real property"). 313 Plank, supra note 13, at 1067. 314 See KLEE & HOLT, supra note 258. In a most telling example, one of these policy predilections—to respect, as much as possible, the property interests created and defined by non-bankruptcy law—traces its common name ("Butner rule") to the pre-Code opinion in Butner v. United States. See Butner v. United States, 440 U.S. 48, 55 (1979), cited in Ford v. Ford Motor Credit Corp. (In re Ford), 574 F.3d 1279, 1286 (10th Cir. 2009) (Tymkovich, J., dissenting); see also, e.g., Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 20 (2000) ("The basic federal rule in bankruptcy is that state law governs the substance of claim . . . .") (internal quotation marks omitted); In re Marciano, 459 B.R. 27, 53 (B.A.P. 9th Cir. 2011) (summarizing the Butner principle). 315 See Ron Pair Enters., 489 U.S. at 244–45 ("[L]ook[] to pre-Code practice for interpretive assistance, [when] it appear[s] that a literal application of the statute would be demonstrably at odds with the intentions of its drafters." (internal quotations marks omitted)); see also, e.g., In re Asher, 488 B.R. 58, 67 (Bankr. E.D. N.Y. 2013). 316 BFP v. Resolution Tr. Corp., 511 U.S. 531, 546 (1994) ("That where the meaning of the Bankruptcy Code's text is itself clear . . . its operation is unimpeded by contrary state law or prior practice." (internal quotation marks omitted)); cf. Barnhill v. Johnson, 503 U.S. 393, 397–98 (1992) (emphasizing that the definition of "transfer" under § 547 is a question of federal law despite the fact that state law delimits predicate concepts of property and interests in property); In re Pepmeyer, 275 B.R. 539, 543 (Bankr. N.D. Iowa 2002) ("The concept of transfer is controlled by [f]ederal law.").
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divine the most appropriate.317 By such means, a single meaning can be chosen,318 "[c]ongruence among the [Code's] various provisions and bankruptcy policy" achieved.319
B. Application
Since 1978, a substantial number of courts have coalesced around the transfiguration of bad faith into a ground for an involuntary petition's dismissal,320 and a smaller bloc has issued qualified declarations to the contrary.321 For all the ink spilled, however, rules of grammar and syntax and the patent implications of the plainest terms bolsters the latter's interpretation. At the same time, the former's crucial underpinnings cannot survive similar scrutiny, as neither the apparent themes and purposes of bankruptcy law 322 nor a plain meaning's harsh or impractical results 323 can supersede unambiguous terms. 324 Ignoring these basic principles, without Congress' silence having provided the majority with the requisite
317 In re Asher, 488 B.R. at 64 ("[C]ourt[s] should consider the specific context in which that language appears and the statutory scheme's broader framework, striving to preserve the coherence and consistency of a statutory scheme."); accord In re Stoner, 487 B.R. 410, 418–19 (Bankr. D. N.J. 2013). 318 In re Asher, 488 B.R. at 64 ("In determining its degree of ambiguity or clarity, courts are obliged not to examine statutory language in isolation."; cf. United States v. Rodriguez, 460 F. Supp. 2d 902, 910 (S.D. Ind. 2006) ("If the meaning of a statutory provision is ambiguous on its face . . . , and either rejecting the absurd alternate interpretations or examining the statutory context and structure as a whole does not result in a clarified meaning, then legislative history and intent may be consulted to inform the meaning of statutory language."); United States v. Ranum, 96 F.3d 1020, 1030 (7th Cir. 1996) ("[N]or do we believe that ambiguity may be found . . . whenever a creative appellant is able to posit possible alternative meanings for statutory language, no matter how tenuous or improbable."). 319 Steven R. Nuener, Chapter 20 and Debt Limitations: Does A Strip-Off of Junior Mortgages Resurrect the Discharged Junior Mortgage Note Obligation as an Unsecured Debt?, AM. BANKR. INST. J., July 2012 at 20, 74. 320 See supra Part II.B.1 (showing the number of circuits that have dismissed an involuntary petition filed in bad faith despite § 303(i) and (b)'s silence). 321 See supra Part II.B.2 (showing a circuit split in regard to the dismissal of an involuntary petition filed in bad faith). 322 See Freeman v. Quicken Loans, Inc., 566 U.S. 624, 637–38 (2012); see also RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 649 (2012) ("Nor is there any merit to the petitioner's related contention that §2607(b) should not be given its natural meaning . . . ."); Peterson v. Somers Dublin Ltd., 729 F.3d 741, 749 (7th Cir. 2013); In re Bourne, 262 B.R. 745, 757 (Bankr. E.D. Tenn. 2001) (citing In re Alibatya, 178 B.R. 335, 337 (Bankr. E.D.N.Y. 1995)). 323 See Lamie v. United States Tr., 540 U.S. 526, 538 (2004) ("Our unwillingness to soften the import of Congress' chosen words even if we believe the words lead to a harsh outcome is longstanding."); see also Cent. Tr. Co. v. Official Creditors' Comm. of Geiger Enters., Inc., 454 U.S. 354, 360 (1982) ("While the Court of Appeals may have reached a practical result, it was a result inconsistent with the unambiguous language used by Congress."). 324 See RadLAX Gateway Hotel, LLC, 566 U.S. at 649; see also, e.g., In re Stewart, 544 B.R. 859, 863 (Bankr. N.D. Miss. Nov. 17, 2015) (citing RadLAX Gateway Hotel, LLC, 566 U.S. 639 (2012)). Arguably, the Court has not always followed this tenet, often for the reasons cited above. See supra Part III.A; see also Dewsnup v. Tim, 502 U.S. 410, 420–22 (1992) (Scalia, J., dissenting).
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justification,325 § 303 has been rewritten, a verboten practice,326 by the conversion of bad faith into a basis for both damages and dismissal.327
1. Section 303's Specific Text and Structure
In four paragraphs, § 303 sets forth a multistep procedure for the instigation of an involuntary case.328 In accordance with this mostly self-contained section, as long as the elements in § 303(b) are checked and the target debtor falls within § 303(a)'s class, "[a]n involuntary case against a person is commenced."329 No "may" or an equally flexible signifier, such as "in its discretion,"330 crops up in § 303(b);331 no other predicate conditions are set by implication or incorporation;332 and no proviso adds any other peculiar limitation on the consequences of a creditor's compliance with these subsections.333 Textually, therefore, once one or more of the petitioning creditors satisfy the qualifications with which it is exclusively concerned, an involuntary case should automatically begin. If the debtor professes opposition, "an order [of] relief against the debtor in an involuntary case under the chapter which the
325 See Mobil Oil Corp. v. Higginbotham, 436 U.S. 618, 625 (1978) ("There is a basic difference between filling a gap left by Congress' silence and rewriting rules that Congress has affirmatively and specifically enacted."). 326 See Rep. of Arg. v. Weltover, Inc., 504 U.S. 607, 617 (1992) ("The question, however, is not what Congress 'would have wanted' but what Congress enacted . . . ."); see also United States. v. LSL Biotechnologies, 379 F.3d 672, 679 (9th Cir. 2004) ("We are not willing to rewrite a statute under the pre- tense of interpreting it."); Stiffler v. Lutheran Hosp., 965 F.2d 137, 140 (7th Cir. 1992) ("It is a well-established principle of statutory construction that silence is not an invitation to embark on a path of judicial lawmaking."). 327 See Ardestani v. United States, 502 U.S. 129, 135–36 (1991) (stating that "[t]he strong presumption that the plain language of the statute expresses congressional intent is rebutted only in rare and exceptional circumstances) (internal quotations omitted); United States v. Balint, 201 F.3d 928, 932 (7th Cir. 2000); Monterey Coal Co. v. Fed. Mine Safety & Health Review Comm'n, 743 F.2d 589, 595–96 (7th Cir. 1984). 328 Cf. McMillan v. Schmidt (In re McMillan), 614 F. App'x 206, 209 (5th Cir. 2015) (per curium) ("Section 303 of the Bankruptcy Code governs petitions for involuntary bankruptcy."). 329 11 U.S.C. § 303(b) (2012) ("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 . . . ."); Crest One Spa v. TPG Troy, LLC (In re TPG Troy, LLC), 793 F.3d 228, 233–34 (2d Cir. 2015). 330 42 U.S.C. § 12205 ("In any action or administrative proceeding commenced pursuant to this chapter, the court or agency, in its discretion, may allow the prevailing party other than the United States, a reasonable attorney's fee . . . ."); Banks v. Hit or Miss, Inc., 949 F. Supp. 569, 572 (N.D. Ill. 1996) (discussing § 12205). 331 See, e.g., United States v. Rodgers, 461 U.S. 677, 706 (1983); Sarei v. Rio Tinto, PLC, 625 F.3d 561, 565 (9th Cir. 2010); Pichler v. UNITE, 646 F. Supp. 2d 759, 768 (E.D. Pa. 2009). But see Cortez Byrd Chips, Inc. v. Bill Harbert Constr. Co., 529 U.S. 193, 198 (2000) ("Although 'may' could be read as permissive in each section, as Cortez Byrd argues, the mere use of 'may' is not necessarily conclusive of congressional intent to provide for a permissive or discretionary authority."). 332 Cf., e.g., Gaffney v. Bd. Of Trs., 969 N.E.2d 359, 372 (Ill. 2012) ("We will not depart from the plain statutory language by reading into it exceptions, limitations, or conditions that conflict with the expressed intent of the legislature."); Demaria v. Andersen, 318 F.3d 170, 174–75 (2d Cir. 2003) (rejecting plaintiffs' argument that two subsections were interdependent and instead holding that the duo "operate independently," as "nothing in the rule" made "compliance" with one "a predicate condition" for the other's activation); City of L.A. v. United States Dep't of Commerce, 307 F.3d 859, 870–71 (9th Cir. 2002) (refusing to engraft an additional presumption unto a statute beyond the predicate conditions already expressly encoded). 333 See SCALIA & GARNER, supra note 207, at 154–55 (discussing the proviso canon).
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petition was filed" must be issued upon a creditor's propitiation of § 303(h)(1) or § 303(h)(2).334 With the mandatory "shall"335 written into both § 303(b) and (h), the enacted statute's explicit terms afford no discretion if the petitioning creditor satisfies these interrelated demands.336 In contrast, based on equally unambiguous text, the filing of a petition in "bad faith" triggers liability only "[i]f the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection."337 Unlike § 303(h) and (b), this subsection employs the telling "may,"338 fully classifying the power to award damages as a bankruptcy court's discretionary prerogative. In its design, § 303 appears elegantly simple. Electing blunt prose, Congress predicated the right to a punitive award on a creditor's bad faith, but, by virtue of the explicit language that it enacted, it too chose neither to make that prerogative compulsory nor essential for an award of fees and costs. It similarly decided to subject this particular entitlement's ripening to a precise condition precedent: the dismissal of the petition. However, in the paragraphs establishing the means for adjudicating a creditor's standing, § 303's jurisdictional heart, and the grounds for any involuntary petition's dismissal, no mention of bad faith appears.339 The overt text of § 303, the starting point of all interpretation, says this much and nothing else, expressly setting forth only this "strict criteria for qualification to file and for allowance of involuntary petitions."340
334 11 U.S.C. § 303(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."). 335 In re Duty Free Shops Corp., 6 B.R. 38, 40 (Bankr. S.D. Fla. 1980) ("[T]he Code does not make relief discretionary and it cannot be denied on this account."). 336 See In re Nabilsi, No. CC-09-1207-MkJaD, 2010 WL 6259980, at *9 (B.A.P. 9th Cir. Nov. 16, 2010) (contending that "the direction in § 303(h)" is "that the bankruptcy court may consider the merits of the petition only if the petition has been timely contested"); In re Key, 209 B.R. 737, 739 (B.A.P. 10th Cir. 1997) (because the alleged debtor did not respond or answer timely, the bankruptcy court was obligated to enter order of relief); cf. In re Ceiling Fan Distrib., Inc., 37 B.R. 701, 702 (Bankr. M.D. La. 1983) (concluding "that the debtor must be adjudicated and relief ordered unless the petition is timely controverted" pursuant to § 303(h)). Two rules bolster this construction. See In re Seventh Ave. Props., No. 312-08678, 2013 WL 655871, at *2 (Bankr. M.D. Tenn. Feb. 22, 2013). First, Rule 1011(b) provides: "Defenses and objections to the petition shall be presented in the manner prescribed by Rule 12 . . . and shall be filed and served within 21 days after service of the summons . . . ." FED. R. BANKR. P. 1011(b) (2016). Second, Rule 1013(b) reads: "If no pleading or other defense to a petition is filed within the time provided by Rule 1011, the court, on the next day, or as soon thereafter as practicable, shall enter an order for the relief requested in the petition." FED. R. BANKR. P. 1013(b). 337 11 U.S.C. § 303(i)(2) ("If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment . . . against any petitioner that filed the petition in bad faith . . . ."). 338 See, e.g., In re Clean Fuel Techs. II, LLC, 544 B.R. 591, 601 (Bankr. W.D. Tex. 2016) ("[T]he use of the discretionary term 'may' in §303(i) has resulted in different analytical approaches being used . . . ."); In re Law Ctr., 304 B.R. 136, 138 (Bankr. M.D. Pa. 2003) (finding that any award under § 303(i) is discretionary). 339 In re Forever Green Athletic Fields, Inc., 804 F.3d 328, 333 (3d Cir. 2015) ("[B]ecause the only mention of bad faith is in 303(i)(2) and deals with post-dismissal charges, the vast majority of litigation concerning bad faith centers on that provision."). 340 See Huszti v. Huszti, 451 B.R. 717, 719 (Bankr. E.D. Mich. 2011) (quoting In re McMeekin, 18 B.R. 177, 178 (Bankr. D. Mass. 1982)); see also In re Ross, 63 B.R. 951, 961 (Bankr. S.D.N.Y. 1986) ("Undue weight cannot be placed on the nature of the claims held by the petitioners as the debtor's true protection
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Several allied canons apply whenever similar discrepancies surface within a statutory section. Presumptively, Congress "act[s] intentionally and purposefully when it includes particular language in one section of a statute but omits it in another."341 Any other construction denudes a particular phrase of some significance and, by thus relegating enacted language into superfluity, flouts the judiciary's duty to accord any possible and reasonable weight to a statute's every word.342 Undeniably, "redundancies across [or within] statutes are not unusual events in drafting," and if such periphrasis results despite scrupulous adherence to modernity's principal interpretive dogma, only "positive repugnance" will foreclose even such mistaken echoes' simultaneous employment. 343 And "[w]hen a thought could have been expressed more concisely, one does not always have to cast about for some additional meaning to the word or phrase that could have been dispensed with."344 Yet, grafting absent language onto a statutory subsection effectuates an impermissible enlargement, not an authorized extrapolation 345 or excusal of those "obvious instances of iteration to which lawyers . . . are particularly addicted."346 Section 303's exhaustiveness,347 as evidenced by the inclusion of multiple predicates in nearly every subsection, strengthens the case for these maxims' utilization, as "[t]he particularization and detail with which the scope of . . . [a] provision" is "specified" should more powerfully "preclude an extension of any provision by implication."348
against an improvident involuntary petition lies in the independent requirement of Code § 303(h) that it be established that the debtor is generally not paying its debts as they become due."); cf. In re Forster, 465 B.R. 97, 99 (Bankr. W.D. Va. 2012) ("Involuntary petitions 'should be scrutinized carefully by the courts so as to avoid injustice.'" (quoting Huszti, 451 B.R. at 719)); Sweetwater v. Robison (In re Sweetwater), 884 F.2d 1323, 1328 (10th Cir. 1989) ("[T]he Bankruptcy Code is a statutory set of rules and Congress can change those rules."). 341 BFP v. Resolution Tr. Corp., 511 U.S. 531, 537 (1994); see also In re Lanning, 380 B.R. 17, 22 (B.A.P. 10th Cir. 2007) (quoting Chic. v. Envtl. Def. Fund, 511 U.S. 328, 338 (1994)). 342 See Negonsott v. Samuels, 507 U.S. 99, 104 (1993) (referring to the court's duty to "give effect to the will of Congress, and where its will has been expressed in reasonably plain terms, that language must ordinarily be regarded as conclusive"); see, e.g., Hibbs v. Winn, 542 U.S. 88, 101 (2004) (asserting that the court must follow "the cardinal rule that statutory language must be read in context [since] a phrase gathers meaning from the words around it"); Astoria Fed. Sav. & Loan Ass'n v. Solimino, 501 U.S. 104, 112 (1991) ("But of course we construe statutes, where possible, so as to avoid rendering superfluous any parts thereof."); Sprietsma v. Mercury Marine, 537 U.S. 51, 62–63 (2003) (the court's "task of statutory construction must in the first instance focus on the plain wording of the clause, which necessarily contains the best evidence of Congress' pre-emptive intent"). 343 Conn. Nat'l Bank v. Germain, 503 U.S. 249, 253 (1992) (quoting Woods v. United States, 19 Pet. 342, 363 (1842)). 344 Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 81 (2011) (Scalia, J., dissenting). 345 See Iselin v. United States, 270 U.S. 245, 251 (1926) (refusing to interpret a statute in a way that includes within the statute's scope something that Congress presumably meant to omit, which would impermissibly transcend the judicial function); cf. Lamie v. United States Tr., 540 U.S. 526, 538 (2004) ("There is a basic difference between filling a gap left by Congress' silence and rewriting rules that Congress has affirmatively and specifically enacted.") (quoting Mobil Oil Corp. v. Higginbotham, 436 U.S. 618, 625 (1978)). 346 Moskal v. United States, 498 U.S. 103, 120 (1990) (Scalia, J., dissenting). 347 In re McMillan, 543 B.R. 808, 815 (Bankr. N.D. Tex. 2016) ("Section 303 of the Bankruptcy Code is structured as a self-contained statute to deal with all aspects of an involuntary bankruptcy."). 348 Iselin v. United States, 270 U.S. at 250; see also, e.g., Koretoff v. Vilsack, 841 F. Supp. 2d 1, 15 (D.D.C. 2012) (citing Iselin, 270 U.S. at 250); cf. Logan v. United States, 552 U.S. 23, 35 (2007) (indulging, for the
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One more canon reinforces these tenets' authority. Just as the explicit enumeration of certain exceptions bars a court from implying others,349 the specifics of a subparagraph may not be transposed into the larger paragraph and the broader statute; otherwise, the specific has subsumed the general, defying logic and grammar alike.350 Undoubtedly, the specific can rightly override the general's import within its precisely delineated radius, but its supremacy perseveres only within that range.351 Reflecting a particular belief regarding "the judicial function," 352 these canons essentially prohibit supplying omissions by projection or importation whenever a provision possesses a plain and unambiguous meaning.353 Applied to § 303, these precepts support only one interpretation. Because this section requires that an order of relief follow if the conditions in paragraphs (a), (b), and (h) are met, a good-faith filing requirement cannot be fairly imported from § 303(i)(2) into § 303(i) and into § 303 entirely. Such importation may be logical, even shrewd.354 However, by definition, it augments the statute's painstakingly delineated statutory requirements, as no more than fulfilment of the criteria set forth in § 303's first, second, and eighth paragraphs is required before relief is entered accordance to its bare words. In "hold[ing] that bad faith provides an independent basis for dismissing an involuntary petition,"355 a prohibited penchant has thus been indulged, sake of argument, "the further assumption that courts may repair such a congressional oversight or mistake"). 349 See, e.g., TRW Inc. v. Andrews, 534 U.S. 19, 28 (2001) ("Where Congress explicitly enumerates certain exceptions to a general prohibition, additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent."); Edmond v. United States, 520 U.S. 651, 657 (1997) ("Ordinarily, where a specific provision conflicts with a general one, the specific governs."); Waldron & Berman, supra note 303, at 212 n.82 ("An [sic] maxim of statutory interpretation meaning that the expression of one thing is the exclusion of another.") (quoting BLACK'S LAW DICTIONARY 403 (6th ed. abridged)). 350 See United States v. Porter, 745 F.3d 1035, 1049 (10th Cir. 2014) (citing SCALIA & GARNER, supra note 207, at 184 ("[T]he general/specific canon does not mean that the existence of a contradictory specific provision voids the general provision. Only its application to cases covered by the specific provision is suspended; it continues to govern all cases.")); see also, e.g., In re Rivera, 490 B.R. 130, 137 n.7 (B.A.P. 1st Cir. 2013) (quoting RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012) ("The general/specific canon is perhaps the most frequently applied to statutes in which a general permission or prohibition is contradicted by a specific prohibition of permission. To eliminate the contradiction, the specific provision is construed as an exception to the general one.")). Psychology may explain the ease with which many conclude differently: "Subjects' willingness to deduce the particular from the general" is typically "matched only by their willingness to infer the general from the particular." DANIEL KAHHNEMAN, THINKING FAST AND SLOW 174 (2011). 351 See, e.g., Gozlon-Peretz v. United States, 498 U.S. 395, 407 (1991) ("[A] specific provision controls over one of more general application."); Landmark Land Co. v. Office of Thrift Supervision, 948 F.2d 910, 912 (5th Cir. 1991) ("[W]e apply the basic principles of statutory construction that '[a] specific provision controls over one of more general application.'"). 352 Haitian Ctrs. Council v. McNary, 969 F.2d 1350, 1359 (2d Cir. 1991) (quoting Iselin, 270 U.S. at 250). 353 See, e.g., Gregory v. Ashcroft, 501 U.S. 452, 452, 475–76 (1991) (stating that a plain statement from Congress is the most efficient way to determine the implications of a statute); West Virginia Univ. Hosps., Inc. v. Casey, 499 U.S. 83, 101 (1991) ("[I]t is not our function to eliminate clearly expressed inconsistency of policy and to treat alike subjects that different Congresses have chosen to treat differently. The facile attribution of congressional 'forgetfulness' cannot justify such a usurpation."). 354 See In re WLB-RSK Venture, 296 B.R. 509, 513 (Bankr. C.D. Cal. 2003) ("Since §303(i)(2) seems to imply that an involuntary petition can be dismissed for bad faith . . . §105(a) would seem to authorize the court to dismiss an involuntary based on a finding of bad faith."). 355 In re Forever Green Athletic Fields, Inc., 804 F.3d 328, 330 (3d Cir. 2015).
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for no court may rewrite a statute, enlarging its definite domain, to achieve a result consistent with its inlaid purposes.356 If Congress' language is to be honored, as it should,357 § 303(a), (b), and (h) must alone determine this threshold issue.358 Because not one of these three subsections alludes to bad faith, only a statutory redraft allows for another end, an essential truth only legerdemain can bedim. More than enlargement follows from fealty to a contrary route, however, for to rule differently divests other terms and phrases of their meaning. The failure to mention "bad faith" or "lack of good faith" in § 303 as a predicate for the filing of a petition or the entering of an order, as it is for the tendering of a reorganization plan,359 would stumble into irrelevance, and the failure to classify "bad faith" as a ground for exemplary damages and for the dismissal of a petition would lose its materiality. Upon dislodging "bad faith" from § 303(i)(2), all these decisions—in fact, all statutory perches where these phrases and standards sit—would forfeit some, if not quite all, their import. As these references suggest, with Congress having written the requisite expression—"filed the petition in bad faith"—into subparagraph (i)(2), and sprinkled those pivotal two syllables (or equivalent) as conditions in other Code locations, nothing but intent foreclosed that same phrase's insertion into § 303's other subparagraphs.360 Regardless of whether foresight actually underlay that decision, because "a[n] interpretation [which] gives effect to every clause and word of a statute" must be chosen,361 modern precedent authorizes no other understanding,362 and "bad faith" can have no proper role in the jurisdictional calculus relevant to the adjudication of an involuntary petition's dismissal.
2. Statutory Architecture: Intimations from Other Sections
Two other statutory features militate against an opposing construction. In direct contrast with §§ 727, 1112(b), 1208, and 1307(c), 363 no overarching provision prescribing the elements for dismissal, such as "cause" or "bad faith," graces § 303.364
356 See In re WLB-RSK Venture, 296 B.R. at 513 (there exists a principle that the court cannot enlarge its authority under the application of §105(a)). 357 See Duncan v. Walker, 533 U.S. 167, 174 (2001) ("It is our duty to give effect, if possible, to every clause and word of a statute.") (internal quotation marks omitted); United States v. Nordic Vill., 503 U.S. 30, 36 (1992) (it is a settled rule that a "statute must, if possible, be construed in such fashion that every word has some operative effect"); Cushman v. Trans Union Corp., 115 F.3d 220, 225 (3d Cir. 1997) ("We strive to avoid a result that would render statutory language superfluous, meaningless, or irrelevant."). 358 See In re Forever Green Athletic Fields, Inc., 804 F.3d at 333. 359 11 U.S.C. §§ 1129(a)(3), 1325(a)(3) (2012); see infra Part III.B.2. 360 See supra Part III.A. 361 Microsoft Corp. v. i4i Ltd. P'ship, 564 U.S. 91 (2011) (quoting United States v. Menasche, 348 U.S. 528, 538–39 (1955) (internal quotations omitted)). 362 Cf. N.L.R.B. v. Jones & Laughlin Steel Corp., 301 U.S. 1, 30 (1937) ("The cardinal principle of statutory construction is to save and not to destroy."). 363 11 U.S.C. §§ 707(a), 1112(b), 1208(c), 1307(c) (discussing the elements for dismissal, such as for cause or bad faith). 364 See id. Instead, its lone reference to these other chapter's sections appears in § 303(a), which requires the target debtor be eligible for relief pursuant to either chapter 7 or chapter 11. Id. § 303(a). Logic can explain
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As such, even as it places several restraints upon the debtor's behavior,365 § 303 does not encode the most stringent remedy—dismissal for non-exhaustive "cause"— provided in the Code's every chapter as to § 303's filing entity, the case's one or more petitioning creditors. 366 Furthermore, though every other chapter includes a subsection stating the criteria for dismissal of a case, § 303 does not.367 These two distinct elements trigger two interpretive conclusions. First, even if to a lesser degree than the absence of bad faith in § 303(b) and (h), discounting these obvious differences by importing "bad faith" from §§ 707, 1112, 1208, and 1307368 into § 303 not only treats these clauses as superfluous, but also ignores its express incorporation of several other subsections' requirements in its first two paragraphs.369 By a sleight of hand, the explicit existence of other unreferenced sections has been rendered extraneous.370 Whatever its justifications as a matter of policy, such an interpretive maneuver violates one of those "cardinal rule[s] of statutory construction" 371 and cannot be squared with the judicial obligation to interpret the Code "clearly" and "predictably."372 The reading of an exception to the mandatory duty to compel relief established by § 303(h) once the prerequisites of paragraphs (b) and (h) have been clearly met, this tactic lacks validity in the face of the modern era's stricter textualism.373 this omission, as the Code's other dismissal provisions establish the relevant standard for denying a discharge, the Code's greatest relief, to the filing party, i.e. the debtor. 365 See supra Part I.B.2. 366 11 U.S.C. § 303 (including no remedy for dismissal for non-exhaustive "cause"). 367 See id. (containing no subsection describing the criteria for a case's dismissal). 368 11 U.S.C. §§ 707(a), 930(a), 1112(b), 1208(c), 1307(c) (highlighting language of bad faith and for cause); see In re Murray, 543 B.R. 484, 489 & n.26 (Bankr. S.D.N.Y. 2016) (discussing various provisions in the Code enabling a party to move to dismiss a case filed under its particular chapter "for cause"). 369 11 U.S.C. § 303(a), (b). 370 See, e.g., Babbit v. Sweet Home Chapter Cmtys. for Greater Or., 515 U.S. 687, 698 (1995); Ratzlaf v. United States, 510 U.S. 135, 140–41 (1994); United States v. Menasche, 348 U.S. 528, 538–39 (1955) (expressing the duty to give effect to every word in a statute). 371 Williams v. Taylor, 529 U.S. 362, 404 (2000); see also, e.g., New Process Steel, L.P. v. N.L.R.B. 560 U.S. 674, 680 (2010) (favoring an interpretation that "[f]irst, and most fundamentally" was "the only way to harmonize and give meaningful effect to all of the provisions" in a single section); Montclair v. Ramsdell, 107 U.S. 147, 152 (1883) ("It is the duty of the court to give effect, if possible, to every clause and word of a statute, avoiding, if it may be, any construction which implies that the legislature was ignorant of the meaning of the language it employed."); Mkt. Co. v. Hoffmann, 101 U.S. 112, 116 (1879) ("[E]very part of a statute must be construed in connection with the whole, so as to make all the parts harmonize, if possible, and give meaning to each."). 372 RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 649 (2012); see also, e.g., Sunbeam Prods., Inc. v. Chi. Am. Mfg., LLC, 686 F.3d 372, 375–76 (7th Cir. 2012) (citing RadLAX Gateway Hotel, LLC, 566 U.S. at 649, as standing for the proposition "that arguments based on views about the purpose behind the Code, and wise public policy, cannot be used to supersede the Code's provisions"); In re Wilkinson, 507 B.R. 742, 751 n.44 (Bankr. D. Kan. 2014) (citing RadLAX Gateway Hotel, LLC, 566 U.S. at 649); Mouton v. Toyota Motors Credit Corp. (In re Mouton), 479 B.R. 55, 66 (Bankr. E.D. Ark. 2012) (citing both RadLAX Gateway Hotel, LLC, 566 U.S. at 649, and Sunbeam, 686 F.3d at 375–76). 373 See Peterson v. Somers Dublin Ltd., 729 F.3d 741, 749 (7th Cir. 2013) (quoting RadLAX, and declining to look beyond the plain statutory text of the safe harbor provision, encoded in § 546(e), by reading a fraud exception into the Code); see also, e.g., In re MCK Millennium Ctr. Parking, LLC, 532 B.R. 716, 730 (Bankr. N.D. Ill. 2015) (contrasting Peterson, 729 F.3d at 749, with decisions that "have held that the provision was written expansively").
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Second, the role that the good faith doctrine plays in these other sections undercuts any case for its expansion into § 303. Under § 109, little is mandatory for a debtor to obtain an order for relief in a voluntary chapter 7 or 11 case.374 In actuality, this order follows automatically, with the Code having "virtually no eligibility standards regulating who is able to seek and obtain relief."375 So as to curtail improper filings, courts crafted the good faith standard, necessarily applicable only after an order for relief has already been entered; accordingly, the "bad faith" cudgel chastens an entity after it has experienced access to the Code's droits. Contrarily, § 303 contains "detailed rules governing the circumstances under which a petition may be granted" apart from and in addition to embracing the eligibility criteria specified in § 109 for the target debtor.376 Significantly, moreover, a debtor's choice to contest the filing triggers an adversary confrontation, in which the creditor bears a high burden of proof.377 As such, the invocation of the good faith standard so as to dismiss an involuntary petition prior to the entering of an order for relief necessarily ignores the order for this issue's fact-intensive adjudication explicitly set in the actual sections in which this right is implanted. There, as a matter of unambiguous prose, the order for relief comes first, the doctrine of "bad faith" weaponized only post-petition.378 Thus, nothing but a preference for debtors over creditors, inconsistent with the Code's more equitable inclinations and § 303's enacted text and spare background,379 can justify the use of "bad faith" to achieve dismissal before that pivotal event, essential wherever else "good faith" is implied. Such practice simultaneously ignores one more telling fact: in involuntary cases, creditors, unlike debtors, must pass a number of hurdles prior to such an order's docketing.380 Accordingly, the underlying justification for the good faith doctrine— to ensure that a discharge of all nonexempt debt, the Code's great privilege, is given to only those persons who have filed a petition with a valid purpose, persons who otherwise satisfy the minimal eligibility criteria for obtaining an order for relief in a
374 See 11 U.S.C. § 109 (showing the ease by which a debtor can obtain an order of relief in a voluntary chapter 7 or 11 case); see also, e.g., In re Shea & Gould, 214 B.R. 739, 748 (Bankr. S.D.N.Y. 1997) ("An order for relief in a voluntary bankruptcy case is entered automatically . . . ."). 375 Lawrence Ponoroff, The Limits of Good Faith Analyses: Unraveling and Redefining Bad Faith in Involuntary Bankruptcy Proceedings, 71 NEB. L. REV. 209, 268 (1992) [hereinafter Ponoroff, Limits]. 376 See id. 377 11 U.S.C. § 303(d) (showing that a debtor may file an answer to a petition, even though the debtor did not join in the petition); FED. R. BANKR. P. 1011(b)–(c), 1013, 1018, 7012(a) (2016). 378 FED. R. BANKR. P. 1013 (emphasizing that the order for relief comes first in an involuntary case). 379 See, e.g., In re Letourneau, 422 B.R. 132, 138 (Bankr. N.D. Ill. 2010) ("An involuntary bankruptcy is a remedy for creditors, not debtors. Its purpose is 'to protect the threatened depletion of assets or to prevent the unequal treatment of similarly situate[ed] creditors.'" (quoting In re Manhattan Indus., Inc., 224 B.R. 195, 200 (Bankr. M.D. Fla. 1997))); see also In re Macke Int'l Trade, Inc., 370 B.R. 236, 245 (9th Cir. BAP 2007) ("[T]he Bankruptcy Code is not exclusively a remedy for debtors."); In re Tichy Elec. Co., Inc., 332 B.R. 364, 372 (Bankr. N.D. Iowa 2005) ("The goal or purpose of an involuntary filing should be the equal distribution of assets among creditors." (citing In re Smith, 243 B.R. 169, 174 (Bankr. N.D. Ga. 1999))). 380 See discussion supra Part I.B.2 (describing the multiple protections available to a debtor, which a creditor must overcome to have a successful action against such individual).
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chapter 7 or 11 case—is either wholly absent or severely weakened.381 The discharge is not sought by the target debtor in an involuntary proceeding, nor is his, her, or its benefit this principal concern of the section. In fact, the opposite is true.382 Unlike voluntary debtors, the petitioning creditors in involuntary proceedings must master a detailed statutory schematic prior to obtaining an order for relief.383 As already noted, the Code's exhaustiveness in this regard compels exclusivity. Less frequently realized, however, is that this same system forecloses the automatic and preliminary granting of the Code's sundry protections to the petitioning party, the creditor (one or more), while uniquely empowering the target debtor.384 By artful and deliberate conception, unlike the petitioner in a voluntary case, any petitioner in an involuntary one always lacks access to any of the Code's privileges until he, she, or it has satisfied an arduous array of requirements. In addition to supplementing § 303's plain text, the transfiguration of bad faith into a basis for an involuntary petition's dismissal therefore mangles its roots, refashioning this equitable tool into a sword against parties whose procedural posture, i.e. creditors statutorily subject to an exhaustive eligibility system, differs from the projected targets of the original doctrine, i.e. dishonest debtors. Put another way, by their wholesale migration of "bad faith" from other sections, courts ignore this doctrine's principal rationale.385 For these reasons, when the nature of the Code's good-faith dismissal provisions is closely examined, this ground's incorporation into § 303 becomes increasingly questionable. For the best of motives, procedural and denotational distinctions have been disregarded. While a bad faith criterion may be a wise addition, § 303 does not contain one, and its language and structure is incongruous with §§ 707, 1112, 1208, and 1307.
381 See Ponoroff, Limits, supra note 375, at 269 (discussing the emerging and changing definition of bad faith by the bankruptcy courts and the need for such a definition); see also Linda J. Rusch, Bankruptcy as a Revolutionary Concept: Good Faith Filing and a Theory of Obligation, 57 MONT. L. REV. 49, 95 (1996) (stating that "[t]he search for [the] worthy debtor is at the heart of the good faith inquiry"). 382 See Ponoroff, Limits, supra note 375, at 255 (stating that "[t]he goal is to increase the wealth of the creditor body . . . . It is not as if nothing else matters necessarily, it is just that those other things are not the concern of the bankruptcy law."). But see Godshall & Gilhuly, supra note 5, at 1315 (describing the difficulties a creditor may face in obtaining a judgment against a debtor, thus putting the creditor in a "defensive role of justifying the validity of the involuntary petition"). 383See Ponoroff, Limits, supra note 375, at 268 (stating that "unlike voluntary filings . . . section 303 contains detailed rules governing the circumstances under which a petition may be granted"). 384 See supra Part III.B.1 (explaining how the exhaustive text and structure of § 303 actually limits the statute's application, thus protecting the debtor and making it more difficult for the creditor to have a successful cause of action). 385 See Rusch, supra note 381, at 55–56. Generally, these tests define "the lack of good faith" as a "cause," often relying on the non-exhaustive and non-exclusive meaning of the preposition "including." The former term, however, is not synonymous with the term actually used in § 303(i)(2), "bad faith," either lexicographically or legally. Id. at 56. Accordingly, reliance on these tests always requires an interpretive leap, the conflating of two distinct, if closely related phrases with presumptively different legal import.
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3. Specific Context: History's Limited Guidance
Originally adopted so as to make it easier for creditors to commence involuntary cases,386 § 303 has been amended twice with a verifiable end in mind.387 True, legislative history cannot override the starkest text.388 Still, "unambiguous, clear, uncontradicted, and specific legislative history" can sometimes "serve as a reliable interpretive guide."389 While little can be decisively gleaned from § 303's opaque past, hints which confirm the plain meaning can be detected.390 In 1984, "[r]ecognizing that involuntary bankruptcy is a particularly severe remedy, Congress limited the circumstances in which creditors may force a debtor into such a proceeding" by tinkering with § 303(b) and (h).391 In its first incarnation, § 303(b)(1) allowed a case to be commenced "by three or more entities, each of which is . . . a holder of a claim against such person that is not contingent as to liability;" mirroring § 303(b)(1), § 303(h)(1) required relief be ordered "if . . . the debtor is generally not paying such debtor's debts as such debts become due."392 In 1984, the phrase "the subject of a bona fide dispute as to liability or amount" was explicitly introduced into both subsections.393 Afterward, a petitioning creditor lacked standing to file a petition under § 303(b) if his, her, or its claim was "the subject of a bona fide dispute," and a creditor could defeat a petition under § 303(h)(1) by purging from his
386 See H.R. REP. NO. 95-595(1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 321–24 (Alan M. Resnick and Eugene M. Wypyski eds., vol. 13 1979) (explaining the substantive meaning behind the procedural changes of § 303). 387 Cf. United States v. DuBose, 598 F.3d 726, 731 (11th Cir. 2010) ("[W]e are not required to interpret a statute 'in such a narrow fashion as to defeat what we conceive to be its obvious and dominating general purpose.'" (quoting Miller v. Amusement Enters., Inc., 394 F.2d 342, 350 (5th Cir. 1968))). 388 See Carcieri v. Salazar, 555 U.S. 379, 388 (2009) (looking first to the ordinary meaning of the word "now" found within the dictionary and using this meaning to determine the secondary factor of legislative intent); see also, e.g., Koenig Sporting Goods, Inc. v. Morse Rd. Co. (In re Koenig Sporting Goods), 203 F.3d 986, 988 (6th Cir. 2000) ("When a statute is unambiguous, resort to legislative history and policy considerations is improper."). 389 McDow v. Smith, 295 B.R. 69, 78 n.18 (Bankr. E.D. Va., 2003); cf. Dewsnup v. Timm, 502 U.S. 410, 419 (1992) ("When Congress amends the bankruptcy laws, it does not write on a clean slate . . . [t]his Court has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history."); United States v. Rodriguez, 460 F. Supp. 2d 902, 910 (S.D. Ind. 2006) ("The standard for favoring legislative intent over the plain meaning of a statute is a high one: the plainer the statutory language, the more explicit, convincing and reliable the contrary legislative history must be to persuade a court to follow the indications in the legislative history.") (internal quotation marks omitted). 390 See Torres v. Chase Bank USA, N.A. (In re Torres), 367 B.R. 478, 484–85 (Bankr. S.D.N.Y. 2007) (citing to legislative history for support despite the fact that the statute's plain terms "obviate consideration of its legislative history"). 391 See Credit Union Liquidity Serv., L.L.C. v. Green Hills Dev. Co., L.L.C. (In re Green Hills Dev. Co., L.L.C.), 741 F.3d 651, 655 (5th Cir. 2014). 392 See BANKRUPTCY AMENDMENTS AND FEDERAL JUDGESHIP ACT OF 1984, PUB. L. NO. 98-353, § 426(a), 98 Stat. 333, 369 (1984); see also Ponoroff, Involuntary, supra note 222, at 333–34 (discussing the disqualifications of a bona fide dispute under the 1984 amendments). 393 See BANKRUPTCY AMENDMENTS AND FEDERAL JUDGESHIP ACT OF 1984, PUB. L. NO. 98-353 at 369 (1984).
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ledger any such debts, i.e. obligations "subject of a bona fide dispute."394 Within a sparse legislative account, 395 only the statements of these emendations' sponsor, Senator Maxwell Sieben Baucus, allude to their intended purpose: "I believe this amendment . . . is necessary to protect the rights of debtors and to prevent misuse of the bankruptcy system as a tool of coercion," directly "correct[ing] a judicial misinterpretation of existing law and congressional intent" that had led to the granting of involuntary relief "even when the debtor's reasons for not paying is a legitimate and good-faith dispute over his or her liability."396 "For the most part, section 303 has proved to be both workable and fair in practice," the Missoulian waxed, but the "existing inequities" prompted by this misuse cried for his "simpl[e]" rectification.397 In 2005, § 303(b)(1) and (h)(1) again underwent amendment. Now, the phrase inputted in 1984—"subject to a bona fide dispute"—was augmented by the addition of the phrase "as to liability or amount."398 Echoing his prior stance, Montana's senior senator explained this revision's purpose in words reminiscent of his earlier peroration:
[A]n involuntary bankruptcy action should not be employed by litigants seeking to gain more leverage than they would have if they disputed contract performance in the proper judicial forum. The respondent in a bona fide dispute over liability for a claim or the amount thereof should not be disadvantaged by the stigma and expense of an involuntary bankruptcy proceeding.399
Based on these few statements, in order to protect the target debtor from devastation induced by colluding creditors eager to gain an undue advantage, the claimed policy justification for the bad-faith standard's invocation, Congress tinkered with § 303(b) and (h) on two occasions by adding two different phrases to different subsections and keeping § 303 otherwise unbothered. But, having repeatedly chosen to make § 303(b)
394 11 U.S.C. § 303(b)(1), (h)(1) (2012). 395 See Block-Lieb, supra note 60, at 818 n.75; cf. In re Henry S. Miller Commercial, LLC, 418 B.R. 912, 923 (Bankr. N.D. Tex. 2009) (concluding that, while "the [2005] amendment to Section 303(b)(1) has minimal relevance in the context of a final, unstayed judgment[,] . . . the amendment cannot be ignored"). 396 130 CONG. REC. S7618 (daily ed. June 19, 1984) (statement of Sen. Baucus); see also Ponoroff, Involuntary, supra note 222, at 334–35 (summarizing and explicating the import of the senator's remarks); Block-Lieb, supra note 60, at 853 (same). 397 130 CONG. REC. S7618 (daily ed. July 26, 2000). 398 BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005, PUB. L. NO. 109-8, § 1234(a), 119 Stat. 23, 204 (2005). 399 148 CONG. REC. S11,728 (daily ed. Nov. 20, 2002) (statement of Sen. Baucus), cited in In re Marciano, 446 B.R. 407, 423–24 (Bankr. C.D. Cal. 2010). Suggestively, other congressional actors argued for the extension of the "bona fide" standard in § 303 on these same grounds in later years: as codified in 1984, and as intended thereafter, "[t]he purpose of the bona fide dispute standard is to prevent . . . overcrowded bankruptcy courts from being burdened with ordinary contract performance disputes filed as involuntary cases by forum-shopping litigants," its codification essential for assuaging "the tremendous pressure to settle . . . disputed matter[s] on plaintiffs' terms, regardless of merits," placed on "compan[ies] pushed into involuntary bankruptcy." 149 CONG. REC. H7305 (daily ed. Mar. 21, 2003) (statement of Rep. Gutierrez).
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and (h) alike with each such endeavor, Congress never appended a good faith filing requirement to either subsection or affixed a subsection like § 707 into § 303. By virtue of a principle often tied to the superfluity canon,400 two implications follow from this account.401 First, so as to ensure § 303(b) and (h) achieved specific and narrow objectives, these paragraphs were twice explicitly amended. Due to these changes, the grounds for the dismissal of an involuntary petition were twice augmented, and more predicate conditions were added so as to permit a debtor to attack a creditor's standing, both defeating the petition and winning greater damages. Neither time, however, was a creditor's bad faith, a requirement designed to serve the same ends cited by Senator Baucus in 1984 and 2005 to explain Congress' amendments to § 303, added to the eligibility and standing criteria enumerated in § 303(b) and (h). Second, in both those years, § 303's new drafters made certain to add the identical language to both subsections. They did not pin it onto one and imply it into the other, awaiting judicial construction to perform this feat; silence held no discernible appeal when § 303's jurisdictional measures evoked concern. Rather, they inscribed the relevant changes into each paragraphs' explicit text. As this history instructs, so as to strengthen the debtor's hands, § 303 endured two specific changes in its text and structure in its first twenty-five years, Congress neither shy nor subtle in its fiddling in the interest of a debtor's defense. Detaching bad faith from § 303(i)(2) discounts this admittedly slim past. By so doing, the courts practically amend two statutory subsections by implication that Congress changed twice expressly to include a single shared standard. Rarely dispositive in and of itself,402 statutory silence in the face of such a consistent pattern cannot be ignored,403 and the willingness to amend § 303 and to repeat a shared requirement in this section's every relevant paragraph is wholly inconsistent with the continued mustering of bad faith as a basis for more than damages. What Congress has not twice done in the hopes of securing a well-known end, bankruptcy courts have done by using § 105 to unfasten "bad faith" from § 303(i)(2) or transport "bad faith"
400 See Stone v. INS, 514 U.S. 386, 397 (1995) ("When Congress acts to amend a statute, we presume it intends its amendment to have real and substantial effect."), quoted in United States v. Quality Stores, Inc., 134 S. Ct. 1395, 1401 (2014). 401 Caveats are in order. See, e.g., United States v. Kouevi, 698 F.3d 126, 133 (3d Cir. 2012) ("Legislative history is only an appropriate aid to statutory interpretation when the disputed statute is ambiguous.") (internal citations omitted); see also Vill. of Oconomowoc Lake v. Dayton Hudson Corp., 24 F.3d 962, 965 (7th Cir. 1994) ("Decisions not to enact proposed legislation are not conclusive on the meaning of the text actually enacted."). 402 See Burns v. United States, 501 U.S. 129, 136 (1991) ("As one court has aptly put it, '[n]ot every silence is pregnant.'") (quoting Ill. Dep't of Public Aid v. Schweiker, 707 F.2d 273, 277 (7th Cir. 1983)). 403 See, e.g., Meyer v. Holley, 537 U.S. 280, 286–87 (2003) (in the face of congressional silence on civil rights statutes, "the Court has drawn the inference that it intended ordinary rules to apply.") (internal citations omitted); United States v. Bestfoods, 524 U.S. 51, 62 (1998) (despite contrary literature and with a supporting common law backdrop, "[c]ongressional silence is audible") (internal citations omitted); Elkins v. Moreno, 435 U.S. 647, 666 (1978) (Congressional restrictions on only some nonimmigrant classes indicates congressional "silence is therefore, pregnant," allowing the Court to draw inferences regarding its intent); cf. Whitman v. Am. Trucking Ass'ns, Inc., 531 U.S. 457, 468 (2001) ("Congress, we have held, does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions—it does not, one might say, hide elephants in mouseholes.").
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from § 707 and its kin. Although it pales in importance to text and structure in modern jurisprudence, 404 § 303's paltry history further evinces this ambition's tenuous foundation.405
4. Broader Context: Statutorily Relevant Asymmetries
Apart from § 303's language and specific context, the inevitable asymmetry between a creditor's purview and a debtor's knowledge, a recognition underlaying § 303,406 raises final questions about this juridical predilection's justifiability. In the decades prior to the Code's enactment, creditors had been repeatedly hamstrung by the evidentiary difficulties to be surmounted in proving a requisite "act of bankruptcy" under the Bankruptcy Act and had rarely made use of its involuntary bankruptcy provisions. 407 Hoping to improve creditors' anemic return, the Code "abolishe[d] the concept of acts of bankruptcy;" thereafter, "[t]he only basis for an involuntary case will be the inability of the debtor to meet its debts."408 Ineluctably, two distinct purposes animate the Code in its entirety: "a debtor's interest in . . . restructuring its debts" and winning a fresh start, and "the creditors' interest in maximizing the value of the bankruptcy estate."409 In concocting § 303, however, its drafters placed their emphasis upon the latter,410 its central policy, "to protect the threatened depletion of assets or to prevent the unequal treatment of similarly situat[ed] creditors."411 In the years since 1898, "the smallness of distribution in business bankruptcies" continued to be blamed upon "the delay in the institution of
404 See supra Part II.B. 405 See Ponoroff, Involuntary, supra note 222, at 345 (By one scholar's dated account, the 1984 amendments did effectively discourage involuntary filings, through "complicating the petitioners' proof and adding to the statutory bases upon which a debtor might controvert and defend a petition."). 406 See supra Part I.A. 407 COMM'N REPORT, supra note 67, at 98. 408 H.R. REP. No. 95-595 (1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 323 (Alan N. Resnick & Eugene M. Wypyski eds. vol. 13 1979). 409 See In re Better Care, Ltd., 97 B.R. 405, 411 (Bankr. N.D. Ill. 1989); see also In re Cent. Hobron Assocs., 41 B.R. 444, 451 (D. Haw. 1984) ("Creditors' interests are generally measured by whether the creditors can get adequate relief elsewhere."); David A. Skeel, Jr., An Evolutionary Theory of Corporate Law and Corporate Bankruptcy, 51 VAND. L. REV. 1325, 1341, 1377 (1998) ("The Code's most important effect was to dramatically streamline bankruptcy's reorganization option," which implicates the interests of both creditors and debtors). 410 See In re Better Care, Ltd., 97 B.R. at 411 ("[A]n involuntary bankruptcy can be expected to be directed primarily at the second enumerated purpose, the orderly ranking of creditor claims, without much concern for the first [, a debtor's fresh start]."); see also, e.g., In re Tichy Elec. Co. Inc., 332 B.R. 364, 372 (Bankr. N.D. Iowa 2005) ("The goal or purpose of an involuntary filing should be the equal distribution of assets among creditors.") (internal citations omitted). 411 In re Manhattan Indus., Inc., 224 B.R 195, 200 (Bankr. M.D. Fla. 1997); accord In re Letourneau, 422 B.R. 132, 138 (Bankr. N.D. Ill. 2010) ("An involuntary bankruptcy is a remedy for creditors, not debtors."); see also, e.g., In re Hentges, 351 B.R. 758, 772 (Bankr. N.D. Okla. 2006) ("Creditors are justified in filing an involuntary bankruptcy against a debtor where exclusive bankruptcy powers and remedies may be usefully invoked to recover transferred assets, to 'insur[e] an orderly ranking of creditors' claims' and 'to protect against other creditors obtaining a disproportionate share of [a] debtor's assets.'" (quoting In re Better Care, Ltd., 97 B.R. at 411)).
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proceedings for liquidation until assets are largely depleted."412 Only with a more relaxed, but still stringent, involuntary system, manufactured to be an "expedit[ed] process,"413 could a debtor's estate be "protected from the risk of depletion and determination," any "further diminution in value during the interim between the filing of the petition and the ultimate resolution of the issues raised by the petition and answer thereto" thwarted.414 A certain practical realization prompted this conscious choice to favor one purpose rather than another as to a whole class of proceedings in an express statutory framework. As the debtor habitually possesses more intimate knowledge of his, her, or its own financial condition, most especially its ledger of assets and debts, petitioning creditors often labor under a distinct informational disadvantage. 415 Today, as in 1978 and 1898, they always bear the greater costs and risks associated with seeking bankruptcy relief due to such difficulties of proof.416 Of potentially questionable accuracy, this conclusion carries the patina of a congressionally- ascertained verity.417 Cognizant of this fact, yet still scrambling to minimize abuse, a balance was carefully struck by the Code's drafters in 1978 and refashioned in 1984 and 2005 at others' behest. Thus, § 303 forces creditors to satisfy comprehensive eligibility and standing requirements, and it leaves them liable to damages not otherwise explicitly allowed by the Code.418 Concurrently, via various subsections, § 303 affords the target debtor with a plethora of protections,419 including a grant of relative freedom
412 COMM'N REPORT, supra note 67, at 98; see McCoid, Discharge, supra note 20, at 213, 215, 217 ("The practical problems of delay and creditor access to information, perhaps coupled with the difficulties of valuation bases, provide further justification for allowing proof of such circumstances to trigger involuntary bankruptcy."). 413 See In re Marciano, 446 B.R. 407, 419 (Bankr. C.D. Cal. 2010) (The inability to begin involuntary proceedings quickly interfered with the central purpose of federal bankruptcy legislation – "equitable treatment of creditors."). 414 See COMM'N REPORT, supra note 67, at 98; see also Benjamin Weintraub & Alan N. Resnick, Involuntary Petitions Under the New Bankruptcy Code, 97 BANKING L.J. 292, 295 (1980) ("The purpose of filing an involuntary petition for liquidation is to achieve an equal distribution of the debtor's property among each class of creditors without preferential treatment. Also, an involuntary petition should result in the maximization of the debtor's estate by the accumulation of property."); cf. Treiman, supra note 16, at 214–15 (bemoaning that the abolishment of "acts of bankruptcy," which "tends to postpone involuntary bankruptcy adjudication," was "impractical at present" due to the law's "strong pro-debtor attitude"). 415 See Block-Lieb, supra note 60, at 837–39 (a petitioning creditor must be able to prove that a debtor is not paying its debts at the due date. This proof requires access to various pieces of information, which is often not readily accessible to creditors, and thus puts them at an informational disadvantage in the commencement of the suit). 416 See Ponoroff, Involuntary, supra note 222, at 351–52 (the benefits of the involuntary bankruptcy remedy are largely negated due to the complicated process creditors must engage in to provide proof for the action, resulting in increased risk and cost); Weintraub & Resnick, supra note 414, at 309–11 (the inaccessibility to evidence such as debtor's books and records – which typically require a court order for access — frustrate the creditor's ability to successfully allege and prove an act of bankruptcy). 417 See, e.g., COMM'N REPORT, supra note 67, at 98. 418 See 11 U.S.C. § 303(b)–(c) (2012). 419 See generally supra Part I.B.2 (providing the prerogatives, statutory privileges, and protections afforded to debtors by the Code).
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during the gap-period,420 a § 303(e) bond requirement,421 and a right to costs and fees as a matter of course and punitive damages for a petition filed in bad faith. 422 Unmistakably focused on peculiar hobgoblins, these sundry sections "reflect[] an intent to protect an alleged debtor from actual petitioning creditors."423 For example, the bond requirement, Congress expected, "will discourage frivolous petitions as well as more dangerous spiteful petitions."424 This extraordinary bequest lays bare § 303's equipoised character: having empowered creditors to coerce a debtor into bankruptcy, this section both subjects them to exhaustive standing requirements and bestows upon offended debtors prerogatives not conferred by the Code's other sections. 425 So compel § 303's strictures, products not of an artist's first sketch, but of an architect's final vision. Using little more than equity as a cry, the rise of good faith threatens the efficient functionality of this intricate design. As the aforementioned historical record attests, certain presumed truths animated § 303's eventual contours, including creditors' often incomplete knowledge of debtors' true finances and their susceptibility to dangerous delay in initiating involuntary proceedings in the pre-Code era. Attempting to allay these problems, § 303 departed from then extant law's byzantine desiderata and streamlined the process for the filing of the necessary petition. As a consequence of this deliberate decision, the voluntary system erected by the Code embodies a balance between the Code's paramount goals, but the involuntary one favors a prompt and efficient pro rata distribution of a debtor's estate.426 By definition capacious and indefinite, the concept of bad faith complicates, not simplifies, adjudication of a
420 11 U.S.C. § 303(f) (providing that during the gap period, "any business of the debtor may continue to operate, and the debtor may continue to use, acquire, or dispose of property as if an involuntary case concerning the debtor had not been commenced"); Jenkins v. Hodes (In re Hodes), 402 F.3d 1005, 1009 (10th Cir. 2005) (demonstrating a debtor's ability to continue with construction of his home during the "gap period" between the filing of the involuntary petition and the entry of an order for relief, despite the debtors' attempts to stop and restrict the construction); Hamilton v. Lumsden (In re Geothermal Res. Int'l), 93 F.3d 648, 651 n.1 (9th Cir. 1996) (defining the "gap period" and presenting the debtor's ability to control his property and assets during such period). 421 11 U.S.C. § 303(e) (codifying the requirement to "file a bond to indemnify the debtor for such amounts as the court may later allow"); In re Funnel Sci. Internet Mktg. LLC, 551 B.R. 262, 272–73 (Bankr. E.D. Tex. 2016) (compiling the basic requirements of a bond under 11 U.S.C. § 303(e)); In re Antar, No. 12-13288-AJC, 2012 WL 6200366, at *2 (Bankr. S.D. Fla. Dec. 12, 2012) (highlighting that the Code provides that "the Court 'may' require the petitioning creditors to post a bond upon the Court's finding of 'cause'"). 422 11 U.S.C. § 303(i) (positing the potential costs and punitive damages that a court may grant in favor of the debtor). 423 In re McMillan, 543 B.R. 808, 818 (Bankr. N.D. Tex. 2016). 424 H.R. REP. No. 95-595 (1977), reprinted in BANKRUPTCY REFORM ACT OF 1978: A LEGISLATIVE HISTORY 323 (Alan N. Resnick & Eugene M. Wypyski eds., vol. 13 1979). 425 See Shachmurove, Claims, supra note 76, at 547–49 (summarizing a chapter 11 debtor's array of statutory prerogatives). Of course, if an order for relief is ever entered, the debtor will soon also gain access to the full range of rights bequeathed by the Code. Id. 426 See, e.g., In re Quinto & Wilks, P.C., 531 B.R. 594, 609 (Bankr. E.D. Va. 2015) (presenting an example of an involuntary petition filed without evidence of any spite, ill will, or maliciousness in its filing); In re Meltzer, 516 B.R. 504, 514 (Bankr. N.D. Ill. 2014) (quoting In re Letourneau, 422 B.R. 132, 138 (Bankr. N.D. Ill. 2010)) ("The purpose of an involuntary bankruptcy case is 'to protect [against] the threatened depletion of assets or to prevent the unequal treatment of similarly situated creditors.'").
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debtor's bankruptcy. The difficulties once involved in proving an act of bankruptcy under the Act have now been replaced with the complications implicated in addressing every possible permutation of bad faith, even as the target debtor's assets dissipate. Certainly, as a statutory matter, a bad faith filing has always exposed a creditor to liability for damages under § 303(i)(2), but the near certainty of an imminent trial on such a ground prior to any order of relief ensures the eventual path will be not be promptly crossed, a result contrary to § 303's fixed purpose. Due to an old doctrine's transfusion, therefore, creditors now find themselves reliant on a process more cumbersome than first intended, while the target debtor retains numerous powers prior to the ordering of any relief. In this regard, it is no insignificant happenstance that the Committee's concerns about the unsatisfactory dilatoriness and miserly ends of such cases427 have reechoed in recent years.428 As good faith has spread beyond the confines of § 303(i)(2), § 303's original statutory balance, enacted to mollify these ills, no longer endures, unstruck by juridical export,429 as the debtor once more assumes the position reserved for bankruptcy's more favored entity due to an unratified policy.430
5. One Final Objection: Overemphasis on Rule 9011
Though rarely seen, one more flaw in the pro-bad faith approach traces to this standard's occasional derivation from Rule 9011(b)(1). 431 Most obviously, this reliance ignores the distinction between "bad faith" and "improper purpose," Rule 9011's actual criterion.432 More fundamentally, such importation arguably violates
427 See COMM'N REPORT, supra note 67, at 98 (discussing the delay in the proceedings of a liquidation); see also supra Part I.A (reporting the history of 11 U.S.C. § 303 and demonstrating the problems encountered as a result of its "wrought framework"). 428 See Godshall & Gilhuly, supra note 5, at 1336–37 (stressing the shocking nature of how alleged debtors may conduct their affairs after the filing of an involuntary petition). 429 See, e.g., Block-Lieb, supra note 60, at 827–28 ("Congress sought to balance competing interests by repealing the 'litigation-producing' acts of bankruptcy as the grounds for initiating an involuntary case."); see also Ponoroff, Involuntary, supra note 222, at 336–37 (explaining the expansion of creditors' access to bankruptcy relief). 430 See, e.g., In the Matter of Covey (In re Covey), 650 F.2d 877, 882–83 (7th Cir. 1981) ("Creditors are entitled to a prompt resolution of the 'generally paying debts' question in order to prevent wasting of assets and in order to ensure that they receive all of their rights to the debtor's property afforded by the Code."). One scholar has even recommended that the standard for the commencement of an involuntary case should be expanded. See Block-Lieb, supra note 60, at 854 (declaring that the expansion of the standard is an "easy solution" to creditors' problems of proof). 431 FED. R. BANKR. P. 9011(b)(1) (2010) (rejecting any representations made to the court for any improper purpose); Thomas M. Byrne, Sanctions for Wrongful Bankruptcy Litigation, 62 AM. BANKR. L.J. 109, 109 (1988) (explaining the purpose of the amended rule in eliminating ambiguities). 432 See Byrne, supra note 431, at 115 ("A document's purpose, however, is evaluated objectively; a finding of subjective bad faith is not a prerequisite to a finding of an improper purpose.").
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the Rules Enabling Act ("REA"),433 which bars a rule's text or construction434 from "abridg[ing], enlarg[ing], or modify[ing] any substantive right."435 Already, § 303(a), (b), and (h) compel creditors to satisfy certain standards before an order for relief "must" be entered.436 If one treats these requirements as exhaustive, then, the insertion of a self-evidently non-textual good faith requirement necessarily abridges a creditor's right to commence an involuntary case against the target debtor by forcing to satisfy a non-statutory obligation. So viewed, bad faith's use violates the REA, as a creditor's substantive right to obtain an order of relief against a certain debtor upon satisfaction of § 303's prerequisites has been curtailed via a rule's implicit introduction. This doctrine's fuzziness, 437 in turn, further threatens these same statutory prerogatives, for it invites courts to exercise discretion inimical to the planned scheme enacted and approved by Congress in 1978, 1984, and 2005.438 In this sense, the good faith basis for dismissal can be perceived as akin to the effective modification of a plain statutory schematic by means of introducing a rule-based standard. Regardless of § 105's uncertain parameters,439 such a conclusion would dictate the abandonment of this construction.440
C. Two Proposed Fixes: Amendment and Interpretation
Putting aside the weak case for its expansion within § 303's settled framework, the bad faith doctrine boasts a lengthy history as one of bankruptcy law's most cherished safety valves. Long before its codification, bankruptcy law assigned an honored place to this equitable concept; after all, a record marred by bad faith conduct could not but disqualify a person from membership in "the class of 'honest but
433 28 U.S.C. § 2075 (2012) ("Such rules shall not abridge, enlarge, or modify any substantive right."); see Smart World Techs., LLC v. Juno Online Servs. (In re Smart World Techs. LLC), 423 F.3d 166, 181 (2d Cir. 2005) (demonstrating a lack of a conflict between a rule and statutory provision, and accordingly, applying the rule); see also Hicks, Muse & Co., Inc. v. Brandt (In re Healthco Int'l, Inc.), 136 F.3d 45, 50 n.4 (1st Cir. 1998) (applying 28 U.S.C. § 2075 in a case in which a bankruptcy court is purportedly empowered to approve settlements pursuant to Bankruptcy Rule 9019). 434 See Shachmurove, Claims, supra note 76, at 540 ("[T]his section bars any construction of a rule's text that, either in theory or in practice, endangers a party's procedural or substantive bankruptcy rights, whether conferred by the Code or the Rules."). 435 28 U.S.C. § 2075. 436 See supra Part I.B (highlighting the standing requirements and the Code's standard for an order for relief in sections 303(b) and (h)). 437 See In re Victoria Ltd. P'ship, 187 B.R. 54, 62 (Bankr. D. Mass. 1995) (tracing the history of the good faith doctrine and concluding that it "is an amorphous gestalt, devoid of reasoning and impenetrable to understanding"). 438 See Ponoroff, Limits, supra note 375, at 282 n.263 ("The problem is that as the number of tests or definitions of bad faith multiplies, the exercise of judicial discretion becomes increasingly less predictable."). 439 See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 198 (1988) ("[W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code."); see also, e.g., In the Matter of Chicago, Milwaukee, St. Paul and Pac. R.R. Co. (In re Chicago), M. S. P. & P.R.R., 791 F.2d 524, 528 (7th Cir. 1986) ("The fact that a proceeding is equitable does not give the judge a free-floating discretion to redistribute rights in accordance with his personal views of justice and fairness, however enlightened those views may be."). 440 See Shachmurove, Claims, supra note 76, at 538–41.
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unfortunate debtor[s]' that the bankruptcy laws were enacted to protect."441 The fact that the side esteeming its inclusion overlooks certain fragilities should not obscure its utility, especially since creditors are as prone as debtors to engage in the kind of misbehavior that it seeks to castigate. This supposition, indeed, may explain the judicial willingness to unhook bad faith from § 303(i)(2), recasting an unseemly act of prestidigitation into an understandable response to an unexplained omission. To correct this gap and to comply with the modern era's regnant interpretive scheme, two routes may prove fruitful, either more defensible than today's favored approach.
1. One Section's Amendment
The simplest method442 would be to insert a provision akin to §§ 707(a), 1112, 1208, and 1307 into the main text of § 303. Such an alteration would provide statutory legitimacy to the courts' abiding penchant to invoke bad faith; no longer would undue weight be placed on a constricted § 105, or deduction unsupported by this section's bare text. Tentatively proposed, the following amendments to § 303(h) may suffice:
Current Version of § 303(h) Proposed Addition (h) If the petition is not timely (h) If the petition is not timely controverted, the court shall order controverted, the court shall order relief relief against the debtor in an against the debtor in an involuntary case involuntary case under the chapter under the chapter under which the under which the petition was filed. petition was filed. Otherwise, after trial, Otherwise, after trial, the court shall the court shall order relief against the order relief against the debtor in an debtor in an involuntary case under the involuntary case under the chapter chapter under which the petition was under which the petition was filed, only filed, only if . . . if . . . (1) prior to any such trial, after notice (1) the debtor is generally not paying and a hearing, the petition has not been such debtor's debts as such debts dismissed for cause; and become due unless such debts are the (i) For purposes of paragraph subject of a bona fide dispute as to (h)(1), "cause" includes: liability or amount; or
441 Marrama v. Citizens Bank, 549 U.S. 365, 373–74 (2007) (citing to Grogan v. Garner, 498 U.S. 279, 286– 87 (1991)). As the Court has noted, the notion dates to the nineteenth century. Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). 442 As the legislative history of the Code's most recent overhaul hints, this method would not be the easiest, just the most legally and constitutionally sound. See generally Susan Jensen, A Legislative History of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 AM. BANKR. L.J. 485 (2005) (discussing this law's tortured history); cf. Alper, supra note 137, at 1911 (noting that most critiques of this law have described it as the product of "shoddy legislative drafting").
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(a) unreasonable delay by the (2) within 120 days before the date of petitioning creditors that is the filing of the petition, a custodian, unfairly prejudicial to the other than a trustee, receiver, or agent creditors as a whole; appointed or authorized to take charge (b) failure to comply with an of less than substantially all of the order of the court; or property of the debtor for the purpose (c) a petitioning creditor's of enforcing a lien against such objective and subjective bad property, was appointed or took faith. possession. (ii) The petitioning creditor may avoid dismissal pursuant to paragraph (h)(1) by showing a substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.
(2) 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; or
(3) within 120 days before the date of the filing of the petition, a custodian, other than a trustee, receiver, or agent appointed or authorized to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property, was appointed or took possession.
2. One Phrase's Construction
Alternatively, an expansive interpretation of the "bona fide dispute as to liability or amount" requirement in § 303(b) and (h) may provide a reasonable ballast upon which to base a "bad faith" dismissal of an involuntary petition. Predictably, the Code does not define this term,443 and the legislative history indicates its sponsor's desire to prevent "litigants seeking to gain more leverage than they would have if they
443 See supra Part II.A.1.
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disputed contract performance in the proper judicial forum" from exploiting § 303.444 Arguably, if one or more petitioning creditors launches an involuntary case without being able to adequately articulate and minimally prove a cognizable purpose within the Code, such as the target debtor's fresh start and a pro rata distribution of any emergent estate, the dispute has no place within the bankruptcy court. Stated differently, the dispute may be real and recognizable as such by other courts, but because its resolution cannot advance a single Code-sanctioned end, it is not actionable within its domain. In this sense, this dispute does not involve "an assertion of a right, claim, or demand on one side, met by contrary claims or allegations on the other," the Code recognizing no such right, and it is neither "real" nor "actual."445 Outside the bankruptcy court, when only non-bankruptcy law is implicated, the conflict may be honest and true. Within its jurisdiction, however, no "good faith controversy" or "honest conflict" can be said to exist if the Code regards one side's motivations as inconsistent with any form of bankruptcy relief,446 wanting in "any genuine and objectively determinable legal merits" in the particular forum whose authority they have freely chosen to invoke.447 Of course, much doubt can be raised about the defensibility of this approach. Above all, it demands a broader construction of a single term than has yet been endorsed by a single court. Even so, unlike the application of a doctrine of good faith unanchored to § 303's enacted language, it relies on no more than a reading of the relevant phrase within the context of the statutory scheme. Employing the plain meanings of the germane terms, this approach does no more than construe the agglomerated phrase by reference to the "obvious and dominating general purpose"448 of the larger statute of which it is but a part. Practical breadth aside, it looks solely "to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole"449 by virtue of its mooring to a phrase
444 148 CONG. REC. 23289, 23354 (2002), cited in In re Marciano, 446 B.R. 407, 423–24 (Bankr. C.D. Cal. 2010); see also supra Part I.B.3. 445 Dispute, Bona Fide, A LAW DICTIONARY (2d ed. 1910). 446 Cf. In re Ross, 63 B.R. 951, 959−60 (Bankr. S.D.N.Y. 1986) (combining the definitions of "bona fide," "claim," and "dispute" to "suggest that the phrase 'bona fide dispute' can be defined as 'honest conflict' or 'good faith controversy'"). 447 See id. at 960. 448 United States v. DuBose, 598 F.3d 726, 731 (11th Cir. 2010); see also, e.g., Moore v. Walker Coke, Inc., No. 2:11−cv−1391−SLB, 2012 WL 4731255, at *1, *13 (N.D. Ala. Sept. 28, 2012) (quoting United States v. DuBose, 598 F.3d at 731); People v. Kelly, 66 Cal. Rptr. 3d 104, 108 (2007) ("[T]he doctrine of ejusdem generis is but a rule of construction to aid in ascertaining the meaning of the Legislature, and may be used to carry out, but not to defeat the legislative intent.") (internal quotation marks omitted); Yorkshire Vill. Cmty. Ass'n v. Sweasy, 524 N.E.2d 237, 240 (Ill. App. Ct. 1988) ("In construing language, the object of the provision must be borne in mind, and language susceptible of more than one construction should receive that which will effect its purpose rather than defeat it."). 449 Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997); see also United States v. Rainey, 757 F.3d 234, 241 (5th Cir. 2014) (quoting Robinson, 519 U.S. at 341); Bosamia v. Comm'r, 661 F.3d 250, 254–56 (5th Cir. 2011) (analyzing a statute's purpose as part of its specific context); United States v. Ramos, 537 F.3d 439, 462–63 (5th Cir. 2008) (same).
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actually enacted. 450 So viewed, this approach at least adheres to modern jurisprudence's interpretive dogma.
CONCLUSION
A weather-beaten relic, § 303 houses the entirety of the Code's involuntary bankruptcy system. In its paragraphs, the concept of bad faith appears only once, confined to a sentence dedicated to post-dismissal awards of punitive damages. Nonetheless, aware but indifferent to this dearth, court after court has dismissed involuntary petitions on the basis of bad faith and defend this extrapolation as consonant with reason, history, and policy. Sorely missing yet sorely needed, a properly holistic analysis of § 303 lays bare the logical debility of this approach, showing it to be untethered to the terms and purposes of this section. If an old safety valve is to be extended, a new interpretation must be pursued, or a new statute must be passed. For now, though, § 303 still dutifully honors an elder creed, acutely battered but not altogether banished from bankruptcy's well-trod halls, whatever the Code's broader ends may be. Here, as elsewhere, "the past is always with you" and "may as well be present"—and "future" too.451
450 See, e.g., Hamdan v. Rumsfeld, 548 U.S. 557, 668 (2006) (Scalia, J., dissenting) (noting that "the language of the statute that was actually passed by both Houses of Congress and signed by the President is our only authoritative and only reliable guidepost" as to statutory meaning); Owner-Operator Indep. Drivers Ass'n v. Mayflower Transit, LLC, 615 F.3d 790, 792 (7th Cir. 2010) ("A judge's belief that Congress planned to do something different but bollixed the job does not alter what the enacted statute provides. The Constitution gives the force of law only to what is actually passed by both houses of Congress and signed by the President. What Congress meant to do, but didn't, is not the law."); United States v. Fields, 500 F.3d 1327, 1334 (11th Cir. 2007) (Carnes, J., concurring) ("We should never forget that the law is what the statute itself says after it is approved by both houses of the legislature and signed by the President."); In re Sinclair, 870 F.2d 1340, 1341 (7th Cir. 1989) ("The statute was enacted, the report just the staff's explanation. Congress votes on the text of the bill, and the President sign[s] that text."). 451 Jack Womack, Afterword to WILLIAM GIBSON, NEUROMANCER 273 (Penguin Publ'g Grp. 2000). In more famous words, "[t]he past is never dead. It's not even past." WILLIAM FAULKNER, REQUIEM FOR A NUN 85 (Chatto & Windus 1919).
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260 All ThingsForeign U.S. Bankruptcy Court (D.Del.);Wilmington Court U.S. Bankruptcy Hon. Kevin Carey Clifford Chance;NewYork Douglas E.Deutsch,Moderator foreign debtors. appears tobeapreferred choicefor explain whyU.S.chapter11 increasingly filings offoreign companies—aswell the waysinwhichchapter11 affectsthe important chapter15 issuesandhighlight This panelwillprovide anoverviewof All ThingsForeign Hogans LovellsUS LLP;NewYork Ronald Silverman Latham &Watkins LLP;LosAngeles Kimberly A.Posin
2018 ABI ROUNDTABLES 2018 NATIONAL CONFERENCE OF BANKRUPTCY JUDGES
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92nd Annual National Conference of Bankruptcy Judges October 28-31, 2018, San Antonio, TX
All Things Foreign
Douglas Deutsch, Moderator, Partner, Clifford Chance Hon. Kevin Carey, USBC, D. Del. Kimberly Posin, Partner, Latham & Watkins, LLP Ronald Silverman, Partner, Hogans Lovell
______
This presentation summarizes certain cases and developments and is for educational purposes only. It is not, and should not be attributed as, the views of the authors, of the panel members, of their respective courts or offices, or of their respective firms or clients.
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Chapter 15 Overview
• Location of Filing and Statutory Requirements
o Location of Filing (28 U.S.C. § 1410) § Chapter 15 petition for recognition must be filed in the district:
• In which the debtor has its principal place or business or principal assets in the United States
• If the debtor does not have a place of business in the United States, in which there is pending against the debtor an action or proceeding in Federal or State court
• In other cases, where venue would be consistent with the interests of justice and the convenience of the parties, having regard for the relief sought by the foreign representative
o Statutory Requirements § Section 109 requirement
• Some courts have found that to commence a Chapter 15 filing, the court must also consider the statutory requirements of Title 11, including Section 109. This view has been questioned by other courts (see infra) and commentators. See Collier on Bankruptcy ¶1501.03[3] (Alan N. Resnick and Henry J. Sommer eds., 16th ed. 2014).
§ Decisions concluding that Section 109 applies to Chapter 15:
• Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d. Cir. 2013) (leading case concluding that all of Chapter 1, including Section 109(a), applies to Chapter 15 proceedings and, therefore, foreign proceedings will only be recognized if a foreign debtor is domiciled, has a business or assets in the United States)
§ Decisions questioning applicability of Section 109 to Chapter 15:
• In re Bemarmara Consulting A.S., Case No. 13-13037 (Bankr. D. Del. Dec. 17, 2013) (court does not agree with Second Circuit on issue and believes there is a "strong likelihood that the Third Circuit, likewise, would not agree with that decision") (from transcript)
§ Methods of satisfying Barnet/109 property requirement:
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• Retainer
o In re Octaviar Admin. Pty Ltd, 511 B.R. 361, 372-73 (Bankr. S.D.N.Y. 2014) (court finds that a Chapter 15 debtor may transfer a retainer or other property to the United States to satisfy debtor property requirement)
o In re Glob. Ocean Carriers, Ltd., 251 B.R. 31, 39 (Bankr. D. Del. 2000) (unearned portion of retainer paid to the debtor's U.S. bankruptcy counsel was sufficient property to satisfy Section 109)
o In re Forge Group Power Pty. Ltd., 2018 WL 827913 (N.D. Cal. Feb. 12, 2018) (after bankruptcy court denied recognition of Australian liquidation proceeding on the basis that an undrawn legal retainer held in a California bank account was not sufficient to satisfy Section 109, district court vacated the order denying the petition and remanded the case to determine whether the retainer was property of the debtor's estate)
• Choice of US law provision:
o In re Berau Cap. Resources Pte. Ltd., 540 B.R. 80, 83-84 (Bankr. S.D.N.Y. 2015) (debt indentures with New York choice of law provision and forum selection clauses are intangible property sufficient to support debtor property requirement)
o In re Avanti Communications Group PLC, 582 B.R. 603, 613 (Bankr. S.D.N.Y. 2018) (concluding that a retainer and an indenture governed by New York law both satisfy the "property in the United States" requirement for 109(a) eligibility)
• Chapter 15 Filing Requirements
o Chapter 15 Requirements to Obtain Order Granting Recognition (§§ 1515 and 1517(a))
§ Requirement 1: Foreign proceeding for which relief sought is foreign main or foreign nonmain proceeding (§1517(a)(1))
• "Foreign proceeding" means a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control
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or supervision by a foreign court, for the purposes of reorganization or liquidation (§101(23))
o Courts have broken the "foreign proceeding" into seven elements: "(i) a proceeding; (ii) that is either judicial or administrative; (iii) that is collective in nature; (iv) that is in a foreign country; (v) that is authorized or conducted under a law related to insolvency or the adjustment of debts; (vi) in which the debtor's assets and affairs are subject to the control or supervision of a foreign court; and (vii) which proceeding is for the purpose of reorganization or liquidation." See, e.g., In re ABC Learning Centres Ltd., 728 F.3d 301, 308 (3d Cir. 2013)
o Many of the elements have been analyzed by courts, including in the following decisions:
§ In re ABC Learning Centres Ltd., 728 F.3d 301, 310- 311 (3d. Cir. 2014) (collective proceeding existed even though Australian cases was likely only to benefit secured creditors)
§ In re Ashapura Minechem Ltd., 480 B.R. 129, 142- 143 (S.D.N.Y. 2012) (finding that India's board of reconstruction qualified as a "foreign court")
§ In re Manley Toys, 580 B.R. 632, 637-43 (Bankr. D.N.J. 2018) (analyzing each element of "foreign proceeding" definitional requirements in depth including (i) proceeding, (ii) judicial or administrative, and (iii) collective in nature)
• "Foreign main proceeding" means a foreign proceeding in a country where debtor has center of its main interest (§1502(4))
o Section 1516(c) provides that absent evidence to the contrary, the debtor's registered office, or habitual residence in the case of an individual, is presumed to be the center of the debtor's main interest
o To rebut presumption, US courts will frequently consider a list of factors to determine center of main interest or "COMI":
§ "the location of the debtor's headquarters; the location of those of those who actually manage the debtor (which conceivable could be the headquarters of a holding company); the location of the debtor's
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primary assets; the location of the majority of the creditors who would be affected by the case; and or the jurisdiction whose law would apply most to the disputes." See SPhinX, Ltd., 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006) (first court to articulate factors; cited by numerous courts thereafter)
o COMI determination is often analyzed for a debtor as of the date of that debtor's Chapter 15 filing (1517(b))
§ Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry, Ltd.), 714 F.3d 127, 133-34 (2d. Cir. 2013) (following use of present tense in 1517(b), court found that center of main interest ("COMI") determined on date of US filing, not on earlier date on which foreign insolvency case commenced)
• "Foreign nonmain proceeding" means a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment (§1502(5))
o An establishment is defined as any place of operations where the debtor carries out a nontransitory economic activity (§1502(2))
§ Requirement 2: Foreign representative applying for recognition is a person or body (§1517(a)(2))
• "Foreign representative" means a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act a representative of such foreign proceeding. (§101(24))
§ Requirement 3: Petition satisfied the pre-requisites set forth in Section 1515 (§1517(a)(3))
• Petition for recognition of a foreign proceeding is made by foreign representative (§1515(a))
• Accompanying materials including a certification or other evidence acceptable to court of the existence of such foreign proceeding and the appointment of a foreign representative (§1515(b))
• Other procedural/ministerial requirements are satisfied (§1515(c) and (d))
o Court Analysis of Recognition Requirements
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§ Recognition is not a "rubber stamp exercise" See In re Ran, 607 F.3d 1017, 1021 (5th Cir. 2010) (citing cases)
• H.R. REP. No. 109-31, pt. 1, at 112-13 (2005) ("The ultimate burden as to each element is on the foreign representative, although the court is entitled to shift the burden …. [The statutory language] has been changed … to make it clearer using United States terminology that the ultimate burden is on the foreign representative.")
§ However, standard relief is typically considered formulaic if requirements of Section 1517 are satisfied
• In re Rede Energia S.A., 515 B.R. 69, 91-92 (Bankr. S.D.N.Y. 2014) (foreign debtor's plan of reorganization will be recognized when scheme is generally consistent with U.S. and provided just treatment; foreign bankruptcy law need not mirror U.S. law)
• In re ABC Learning Centres Ltd., 728 F.3d 301, 308 (3d Cir. 2013). ("Subject to the public policy exception, Chapter 15 recognition must be ordered when a court finds the requisite criteria are met.")
• Types of Relief Granted in Chapter 15
o Types of relief available during a Chapter 15 case § No automatic immediate relief after Chapter 15 filing
§ Provisional relief available upon request
§ Relief upon recognition
• Automatic relief
• Additional relief
o Provisional relief (§1519) § Requirements to obtain such relief
• Provisional relief available where "urgently needed to protect the assets of the debtor or the interests of the creditor" (§1519(a))
§ Specific types of relief include
• staying actions against the debtor's assets (§1519(a)(1))
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• entrusting all or part of the debtor's assets located in the United States to the foreign representative or another person authorized by the court (§1519(a)(2))
• certain other specific relief enumerated in Section 1521 (§1519(a)(3))
§ Limitations on relief
• Provisional relief terminates when the petition for recognition is granted (§1519(b))
• Provisional relief is to be granted only if in the interests of the creditors and other interested parties (§1522; see discussion infra)
• Provisional relief cannot be granted if it interferes with a police or regulatory action (§1519(d))
§ Procedures that must be followed to obtain provisional relief
• Generally
o There is some dispute whether all requests for provisional relief must follow the standards, procedures and limitations applicable to an injunction (§1519(e))
• Caselaw
o In re Worldwide Educ. Serv., 494 B.R. 494, 497-98 (Bankr. C.D.Cal. 2013) (to obtain stay relief under section 1519, must use same standard as evaluating injunctive relief request)
o In re Pro-Fit Holdings Ltd., 391 B.R. 850, 862-64 (Bankr. C.D. Cal. 2008) (injunctive relief only required for motions that seek injunctive relief and not to motions that seek imposition of the automatic stay)
o Standard relief upon recognition (§1520) § Requirements to obtain such relief
• Only granted to foreign main cases
§ Specific types of relief include
• Section 362's automatic stay as to property within the United States (§1520(a)(1))
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o The automatic stay is not worldwide. See, e.g., In re JSC BTA Bank, 434 B.R. 334, 342-46 (Bankr. S.D.N.Y. 2010) ("In the chapter 15 context, … a bankruptcy court's limited in rem jurisdiction requires only that the court possess the power to stay actions against a debtor that could impact property located within the United States.")
• Section 363, 549 and 552 apply to property transfers within the territory of the United States (§1520(a)(2))
• Foreign representative can operate the debtor's business and exercise all rights and powers of a trustee (§1520(a)(3))
• Foreign representative also obtains certain rights with regard to direct access to courts including (a) capacity to sue and be sued in the United States and (b) right to apply directly to a court in the United States for appropriate relief in that court. A court of the United States may also then shall grant comity or cooperation to the foreign representative. (§1509)
o Additional relief upon recognition (§§ 1507 and 1521) § Type of Section 1507 relief
• Section 1507 was added to allow a court to provide "additional assistance" because Congress recognized that Chapter 15 may not anticipate all relief that a foreign representative may require. In re Vitro S.A.B. de C.V., 701 F3d 1031, 1055 (5th Cir. 2012) (citing to 8 Collier on Bankruptcy ¶1507.1 (16th ed. 2012))
§ Types of relief under Section 1521
• Staying the commencement or continuation of an action or proceeding concerning the debtor's assets, rights, obligations, or liabilities to the extent not already stayed (§1521(a)(1))
• Staying execution against the debtor's assets to the extent not already stayed (§1521(a)(2))
• Suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor (§1521(a)(3))
• Providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor's assets, affairs, rights, obligations or liabilities (§1521(a)(4))
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• Entrusting the administration or realization of all or part of the debtor's assets with the United States to the foreign representative or another person authorized by the court (§1521(a)(5))
• Extending the provisional relief granted under section 1519(a) (§1521(a)(6))
• Granting any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548 550 and 724(a) (§1521(a)(7))
§ How Sections 1507 and 1521 are to work together
• Generally, the relationship between the provisions is not clear. Courts have sought to provide guidance on this analysis.
• The Fifth Circuit concluded that as Section 1521 provides specific forms of relief, a court should first consider whether the relief requested is available under (a)(1)-(a)(6) and then, if not, determine if the relief requested might fall within the (a)(7) catchall (which is to include all relief that was previously granted under former section 304). If the relief is not encompassed in the first two categories, a court should than analyze the request under Section 1507. See In re Vitro S.A.B. de C.V., 701 F.3d 1031, 1054-55 (5th Cir. 2012); see also In re Rede Energia S.A., 515 B.R. 69 (after noting Vitro approach, court analyzes "appropriate relief" request by first examining Section 1521(a) and finds that former section 304 included the type of relief requested; court also finds relief would be proper under Section 1507)
§ Requirements to obtain Section 1507 and 1521 relief
• Generally
o May be granted to foreign main and foreign non-main cases • 1507(b) relief requirements
o In order to determine whether to provide additional assistance under this title or under other laws of the United States, courts are to consider whether additional assistance, consistent with principles of comity, will reasonably ensure
§ Just treatment of all holders of claims or interests in the debtor's property;
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§ Protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding;
§ Prevention of preferential or fraudulent dispositions of property of the debtor;
§ Distribution of proceeds of the debtor's property substantially in accordance with the order prescribed by this title; and
§ If appropriate, the provisions of any opportunity for a fresh start for the individual that such foreign proceeding concerns
• 1521(a) relief requirements
o At the request of the foreign representative, the court may grant specific relief (see supra) where necessary to effectuate the purpose of Chapter 15 and protect the assets of the debtor or the interests of the creditors,
§ Limitations on relief under section 1521
• Relief under section 1521 is to be granted only if in the interests of the creditors and other interested parties, including the debtor are protected (§1522; see discussion infra)
• Relief under 1521 cannot be granted if it interferes with a police or regulatory action (§1521(d))
• The standards, procedures and limitations applicable to an injunction apply in requests under Section 1521(a)(1), (2), (3) and (6) (§1519(e))
§ Cases
• In re Vitro S.A.B. de C.V., 701 F3d 1031, (5th Cir. 2012) (in context of debtor seeking recognition of Mexican concurso that extinguished non-debtor guarantees, circuit could not find fault with bankruptcy court's determination that denying relief requested under sections 1507 and 1521 would not be proper where the request for such relief would not generally be granted in the US and did not balance the interests of creditors and the debtors)
• Limitations on Relief Granted in Chapter 15 Cases
o Contrary to public policy (§ 1506)
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§ Statutory limitation
• Section 1506 provides that nothing prevents a court from taking an action governed by the chapter if the action would be manifestly contrary to the public policy of the United States
§ Accepted interpretation
• Courts have concluded that use of the word "manifestly" substantially limits Section 1506's scope to the most fundamental policies of the United States. Thus, court have "have uniformly read it narrowly and applied it sparingly." In re Toft, 453 B.R. 186, 195- 96 (Bankr. S.D.N.Y. 2011); see also Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 139 (2d. Cir. 2013) (public policy exception "requires a narrow reading"); In re ABC Learning Centres Ltd., 728 F.3d. 301, 309 (3d. Cir. 2013) (public policy to be narrowly construed and invoked only when most fundamental public policies are at issue)
§ Case concluding public policy at issue
• In re Toft, 453 B.R. 186 (Bankr. S.D.N.Y. 2011) (involuntary German proceeding brought against citizen in which court permitted physical and electronic mail to be intercepted, including electronic mail stored in US; German administrator sought assistance from US court in Chapter 15 to obtain electronic mail; US court found that protecting mail was fundamental and only authorized in criminal investigation upon a "heighted showing of necessity" and, as such, granting the request would be manifestly contrary to US public policy)
§ Case concluding public policy not invoked
• Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 139-40 (2d. Cir. 2013) (although public access to BVI liquidation proceeding court records was restricted, US court found that public policy exception should not be invoked; US court noted that unfettered public access to court documents is not an exceptional and fundamental value but is a qualified right, noting that many US proceedings move forward with some documents under seal)
o On motion to protect creditors and others (§1522) § Section 1522 provides, in relevant part, that upon request of the foreign representative, an affected party or by its own motion, the court may modify or terminate relief granted under 1519 or 1521 only if the interests of the
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creditors and other interested parties, including the debtor, are sufficiently protected
• Jaffe v. Samsung Electronics, Ltd., 737 F.3d 14 (4th Cir. 2013) (court found that foreign law permitted intellectual property licensee's rights to be rejected; court recognized request from foreign representative for relief under Section 1521(a)(5) but conditioned the grant of relief on the representative providing licensees with the option to retain their license rights as required by Section 365(n), which the court found necessary to ensure the licensees were adequately protected as required by Section 1522)
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Chapter 15 Quarterly Filings (2005 – 2017)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
2005 6 6
2006 22 11 29 13 75
2007 3 7 26 6 42
2008 3 15 19 28 76
2009 38 59 15 24 136
2010 35 17 19 53 124
2011 24 19 8 6 58
2012 83 21 11 6 121
2013 26 20 19 22 88
2014 18 15 15 10 58
2015 31 17 14 28 91
2016 44 54 25 55 179
2017 17 35 9 24 86
Notes: (1) Data obtained from the Administrative Office of the U.S. Courts. (2) As set forth in original: If the sum of the quarterly filings is slightly lower than the annual total, it is because of joint cases that are split during a later quarter, and because a small number of cases are processed after the end of a reporting quarter.
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276 Biographies Biographies
2018 ABI ROUNDTABLES HON. JANET S. BAER Hon. Janet S. Baer is a U.S. Bankruptcy Judge for the Northern District of Illinois in Chicago, appointed on March 5, 2012. She also acts on a regular basis as the presiding judge in the Northern District of Illinois for naturalization ceremonies. Previously, Judge Baer was a restructuring lawyer for more than 25 years and was involved in some of the most significant chapter 11 bankruptcy cases in the country. The majority of her practice focused on the representation of large, publicly held debtors in both restructuring and chapter 11 matters, and she also represented companies in commercial litigation matters, including lender liability, fraud, breach of contract and breach of fiduciary duty. Prior to forming her own firm in 2009, Judge Baer was a partner at Kirkland & Ellis LLP, Winston & Strawn and Schwartz, Cooper, Greenberger & Krauss. She is currently judicial chair of ABI’s Seventh Circuit Eugene R. Wedoff Consumer Bankruptcy Conference, a member of the National Conference of Bankruptcy Judges’ Membership Services BUSINESS and Marketing Committees, a Seventh Circuit representative-elect Update on Fraudulent of the NCBJ Board of Governors, a board member of the Chicago Transfer Law chapter of the International Women’s Insolvency & Restructuring Confederation, chair of the Northern District of Illinois Bankruptcy Court’s Local Rules Committee, a board member of Chicago CARE Join our panel as they discuss (Credit Abuse Resistance Education) and a member of the Chicago the most important fraudulent Bankruptcy Court Liaison Committee. She is also a frequent transfer case developments, speaker for ABI, ABA, the Chicago Bar Association, IWIRC and including the teachings of the Turnaround Management Association. Judge Baer earned her Merit Management, Madoff B.A. from the University of Wisconsin - Madison and her J.D. from and Tribune. DePaul College of Law.
Speaker Bios | 278 STEVEN M. BERMAN Steven M. Berman is a partner in the Tampa, Fla., office of Shumaker, Loop & Kendrick, LLP, specializing in the firm’s bankruptcy and creditors’ rights practice group. He has more than 27 years of bankruptcy experience and focuses his practice on business bankruptcy litigation, representing creditors, investors, distressed- debt lenders, trustees, committees and business entities litigating disputes in bankruptcy court. Mr. Berman is Board Certified by the American Board of Certification in both Creditors’ Rights Law and Business Bankruptcy Law, and he is a member of the Florida, California, District of Columbia and Puerto Rico (Federal) bars. He serves on the board of directors of the American Board of Certification and is a member of its Faculty Committee. Healso serves on ABI’s Board of Directors, works on several committees and task forces, and routinely volunteers and speaks at seminars. On a local level, Mr. Berman is a member of the Tampa Bay Bankruptcy Bar Association, the Bankruptcy Bar Association of the Southern BUSINESS District of Florida, the Southwest Florida Bankruptcy Professionals Involuntary Bankruptcies: Association and the San Diego Bankruptcy Forum. He also guest A Primer lectures for the University of Florida’s Levin College of Law. Mr. Berman serves as the Judge Advocate to the Coronado Yacht Club in Coronado, Calif., and volunteers in providing pro bono bankruptcy In this roundtable, discuss the and insolvency services and training for U.S. Navy Judge Advocate nuts and bolts of involuntary General officers and staff, along with enlisted service families in bankruptcies (who may be a need. He received his B.S. in multinational business operations from petitioning creditor, when is Florida State University and his J.D. from the University of Florida a claim subject to a bona fide Levin College of Law. dispute, etc.), including illus- trations of relevant examples and cases.
Speaker Bios | 279 ROBERT B. BRANSON Robert B. Branson is an attorney with Branson Law in Orlando, Fla., who has focused on consumer and small business bankruptcy rights for over 28 years. Since 1990, he has been a mediator in the U.S. Bankruptcy Court, Middle District of Florida’s Orlando Division and became a Florida Circuit Mediator in 2014. In 2010, he participated in the working group to assist in the implementation of the Residential Mortgage Modification Program in the Middle District of Florida’s Orlando Division. As a mediator, Mr. Branson has performed countless adversary and sanction mediations and over 800 residential mortgage mediations. As debtor’s counsel, he has completed more than 600 mortgage modifications since the program’s inception. A leader in the area of mortgage modification mediation through bankruptcy, Mr. Branson has been teaching attorneys and their staff throughout Florida and other states around the country to understand the various Federal mortgage modification programs, and how to effectively obtain these modifications CONSUMER through Residential Mortgage Modification Mediation, since 2011. For Whom the Throughout his career, he has provided pro bono legal services to Statute Tolls those in need, and his firm has frequently interceded on behalf of pro se debtors at the request of the bench and chapter 13 trustee’s office. His firm also assisted with the formation of the Middle District of Find out when statutes of Florida, Orlando Division Pro Se Clinic. Mr. Branson served in the limitations are tolled and how U.S. Army from 1978-83. He recevied his B.A. from the University § 108 helps and/or hinders a of Central Florida in 1985 and his J.D. from the University of Florida tolling argument. College of Law in 1988.
Speaker Bios | 280 HON. KEVIN J. CAREY Hon. Kevin J. Carey is a U.S. Bankruptcy Judge for the District of Delaware in Wilmington, first appointed in 2005 and serving as Chief Judge from 2008-11. He previously served as a U.S. bankruptcy judge for the Eastern District of Pennsylvania, appointed on Jan. 25, 2001. Judge Carey serves on ABI’s Executive Committee as Vice President-Membership and is a past global chairman of the Turnaround Management Association. He is a member of the National Conference of Bankruptcy Judges and also serves as an associate editor for the American Bankruptcy Law Journal. Judge Carey is the Third Circuit representative on the Administrative Office’s Bankruptcy Judges Advisory Group and is a member of the Third Circuit Judicial Council’s Facilities and Security Committee. He is also a contributing author to Collier on Bankruptcy and Collier Forms Manual. Judge Carey is a part-time adjunct professor in the LL.M. in Bankruptcy program at St. John’s University School of Law in New York and at Temple University’s Beasley School of BUSINESS Law in Philadelphia. He began his legal career in 1979 as law clerk All Things Foreign to Bankruptcy Judge Thomas M. Twardowski, then clerked for the U.S. Bankruptcy Court for the Eastern District of Pennsylvania. Judge Carey received his B.A. in 1976 from Pennsylvania State This panel will provide an University and his J.D. in 1979 from Villanova University School overview of important chap- of Law. ter 15 issues and highlight the ways in which chapter 11 affects the filings of -for eign companies — as well as explain why U.S. chapter 11 increasingly appears to be a preferred choice for foreign debtors.
Speaker Bios | 281 RUDY J. CERONE Rudy J. Cerone is a member of McGlinchey Stafford PLLC in New Orleans and a former chair and president of the American Board of Certification. A frequent lecturer on both business and complex consumer bankruptcy issues for more than 20 years, he also served as on ABI’s Executive Committee as Secretary, co-chaired ABI’s Bankruptcy Litigation Committee from 2005-06 and chaired its Hospitality, Entertainment Venues and Gaming Subcommittee from 2001-05. Mr. Cerone serves as a commissioner on the ABI Commission on Consumer Bankruptcy (2017–present) and as a co- chair of its Caribbean Insolvency Symposium (2015–present). He also is former chair, president and board member of the American Board of Certification. Mr. Cerone currently is a member ofthe State Bar of California, the Louisiana State Bar Association (for which he chaired its Consumer Protection and Bankruptcy Section from 1994-97), the Bankruptcy Law Advisory Commission of the Board of Legal Specialization, the Bar Association of the Federal CONSUMER Fifth Circuit and the American Bar Association. An author and Shall I “Stay” or Shall I lecturer on both business and complex consumer bankruptcy issues, Pay? The Price You Pay he is Board Certified in Business Bankruptcy Law by the American Board of Certification (1993) and by the Louisiana Board of Legal for Discharge Violations Specialization (1997), and is also a Fellow of the American College of Bankruptcy. Mr. Cerone received his B.A. summa cum laude This panel will discuss au- from the University of California at San Diego and his J.D. cum tomatic stay and discharge laude from Boston College Law School, where he was a member violations, and the sanctions of the Order of the Coif and received a “Best Law Review Editor” or punitive damages that award as executive editor of the Boston College International & Comparative Law Review. may be assessed in the event of violations.
Speaker Bios | 282 HON. DANIEL P. COLLINS Hon. Daniel P. Collins is Chief Bankruptcy Judge for the U.S. Bankruptcy Court for the District of Arizona in Phoenix, appointed as bankruptcy judge on Jan. 18, 2013, and as chief judge on March 17, 2014. Previously, he was a shareholder with the law firm of Collins, May, Potenza, Baran & Gillespie, P.C., in downtown Phoenix, practicing primarily in the areas of bankruptcy, commercial litigation and commercial transactions. Judge Collins served on the State Bar of Arizona’s Subcommittee on the Uniform Fraudulent Transfer Act. He also served as chairman of the Bankruptcy Section of the State of Arizona and was a lawyer representative to the Ninth Circuit Court of Appeals. He was granted the St. Thomas More Award in 2017. Judge Collins is presently an At Large Governor of the National Conference of Bankruptcy Judges, a member of ABI’s Board of Directors, on the board of the Phoenix Chapter of the Federal Bar Association and a member of the University of Arizona Law School’s Board of Visitors. He is also a member of the Arizona Bankruptcy CONSUMER American Inn of Court, State Bar of Arizona and Maricopa County For Whom the Bar. Judge Collins received both his B.S. in finance and accounting Statute Tolls in 1980 and his J.D. in 1983 from the University of Arizona.
Find out when statutes of limitations are tolled and how § 108 helps and/or hinders a tolling argument.
Speaker Bios | 283 DOUGLAS E. DEUTSCH Douglas E. Deutsch is a partner with Clifford Chance US LLP in New York and has represented creditors’ committees, secured and unsecured creditors and indenture trustees. He also represents U.S. and non-U.S. business entities in complex commercial disputes. Mr. Deutsch is a regular speaker and writer on bankruptcy law topics and is recommended for corporate restructuring in The Legal 500. He currently serves as ABI’s Vice President-Education. Mr. Deutsch previously co-chaired the ABI/FCBA Conference, the ABI/ Bloomberg Distressed Lending Conference and ABI’s Mid-Level Professional Development Program. He received his B.S. from Drew University and his J.D. from St. John’s University School of Law, where he was editor-in-chief of the ABI Law Review. After graduation, he clerked for the Western District of Texas and then worked as an associate at a Texas law firm. He subsequently returned to St. John’s to obtain his LL.M. and was awarded the first American Bankruptcy Institute Scholarship. BUSINESS All Things Foreign
This panel will provide an overview of important chap- ter 15 issues and highlight the ways in which chapter 11 affects the filings of -for eign companies — as well as explain why U.S. chapter 11 increasingly appears to be a preferred choice for foreign debtors.
Speaker Bios | 284 HON. DENNIS R. DOW Hon. Dennis R. Dow is a U.S. Bankruptcy Judge for the Western District of Missouri in Kansas City, appointed on Nov. 10, 2003, by the Eighth Circuit Court of Appeals. Prior to taking the bench, he was a partner with the firm of Shook, Hardy & Bacon LLP, where he represented trustees in chapter 7 cases involving significant assets, individual and corporate debtors in proceedings under chapters 7 and 11, and secured, unsecured and priority creditors and lessors in chapter 7, 11, 12 and 13 cases, and had been listed in The Best Lawyers in America in the area of bankruptcy law every year since 1995. He also tried numerous adversary proceedings and contested matters, including preference actions, objections to discharge, dischargeability complaints and objections to confirmation of chapter 11 plans. Judge Dow is a member of the Bankruptcy Appellate Panel. He also serves on the Judicial Conference Advisory Committee on Bankruptcy Rules and chairs its subcommittee on forms. Judge Dow is a Fellow of the American College of Bankruptcy, inducted BUSINESS in March 2013, and was selected in November 2014 to become a Pitfalls of a Midsize conferee of the National Bankruptcy Conference. He is a member of Chapter 11 the Board of Governors of the National Conference of Bankruptcy Judges and serves as a member of the faculty of the Advanced Consumer Bankruptcy Practice Institute. Judge Dow is a member of the Missouri and Kansas City Metropolitan Bar Associations, and serves as ABI’s Secretary. He received his B.A. with honors from the University of Wyoming and his J.D. from Washburn University School of Law, where he was notes editor of the Washburn Law Journal.
Speaker Bios | 285 O. MAX GARDNER, III O. Max Gardner is a consumer bankruptcy attorney with Max Gardner Law PLLC in Shelby, N.C., and his work against predatory lenders and mortgage servicers has been featured in ABC News’s “Nightline,” PBS’s “Frontline,” CNN, BusinessWeek, The New York Times, The Washington Post, Forbes and many other news outlets across the country. He has also taken the lead in pursuing the attempts of many creditors to collect debts legally discharged in bankruptcy cases, and has trained hundreds of lawyers at his “Consumer Bankruptcy Boot Camps” for more than 12 years. The National Association of Consumer Bankruptcy Lawyers (NACBA) named Mr. Gardner a Champion of Consumer Rights in 2003, named him the Outstanding Consumer Lawyer of 2004 and awarded him The Distinguished Service Award in April 2013. Mr. Gardner was elected a member of the North Carolina Legal Elite by Business North Carolina from 2004-07. He was also recognized as a “Super Lawyer” in North Carolina by Charlotte Magazine and by Law & CONSUMER Politics from 2006-10 in the field of Consumer Bankruptcy Law, Shall I “Stay” or Shall I and is rated AV-Preeminent by Martindale-Hubbell. Previously, Mr. Pay? The Price You Pay Gardner was a senior law clerk to Hon. William H. Bobbitt, the late Chief Justice of the North Carolina Supreme Court, and to Hon. for Discharge Violations William Copeland, an Associate Justice of that court. He also worked as an associate with the law firm of Smith, Moore, Smith, Schell & This panel will discuss au- Hunter until 1977, when he opened a consumer-based law practice tomatic stay and discharge in Shelby, N.C. In addition, he served as Treasurer for McNeill violations, and the sanctions Smith’s 1978 Campaign for the U.S. Senate, was Of Counsel for or punitive damages that Sims, Walker & Steinfeld of Washington, D.C., from 1983-94, and served as general counsel to the Democratic Party of North Carolina may be assessed in the event from 1993-97. Mr. Gardner received his undergraduate degree from of violations. the University of North Carolina at Chapel Hill in 1969 and his J.D. with high honors from the UNC School of Law in 1974, where he was a member of the North Carolina Law Review, president of the Student Bar Foundation, named the Outstanding Law School Graduate of 1974 and elected to the Order of the Coif.
Speaker Bios | 286 WILLIAM H. HENRICH William H. Henrich, CPA is co-chair of Getzler Henrich & Associates LLC in New York and has 35 years of experience in turnaround and crisis management, loan workout, bankruptcy consulting and performance improvement covering more than 400 engagements. His specific areas of expertise include operational restructuring, improving business operations, management practices, cash flow and profitability; financial restructuring, negotiating and implementing corporate finance solutions including debt restructuring, refinancing, and distressed mergers and acquisitions; evaluating/crafting company operations, business plans and financial projections; guiding companies through workout, turnaround and chapter 11 processes and maximizing their value and recovery for stakeholders, including as CRO or interim CEO; and advising secured and unsecured creditors during chapter 11 bankruptcy proceedings, including developing plans of reorganization and providing bankruptcy forensic analysis to support litigation. Prior to joining BUSINESS Getzler Henrich, Mr. Henrich was managing director and founder Pitfalls of a Midsize of the New York practice of a prominent middle-market corporate Chapter 11 restructuring firm. He also served in Arthur Andersen’s corporate recovery services group. In 1982, Mr. Henrich started Andersen’s New York bankruptcy and restructuring practice and was a member of the core partner group responsible for establishing policy and directing the practice nationwide. He also held senior executive finance, operational and sales/marketing positions with Arrow Electronics, the world’s largest electronics distribution company. His efforts helped the company significantly reduce operating costs, improve market penetration and increase profitability. Named by Turnarounds & Workouts magazine in its feature “People to Watch - Business Professionals Making Their Mark,” Mr. Henrich is a former president and current advisory board member of the Turnaround Management Association’s New York chapter, a current TMA Global board member, an ABI Board member and a member of the Association of Corporate Growth. He frequently lectures and writes on turnaround and bankruptcy issues, and served as co-chair of ABI’s Chapter 11 Reform Commission’s Governance Committee. Mr. Henrich holds a B.B.A. from Baruch College, City University of New York, and an M.B.A. from Harvard Business School.
Speaker Bios | 287 HON. BARBARA J. HOUSER Hon. Barbara J. Houser is the Chief U.S. Bankruptcy Judge for the Northern District of Texas in Dallas. She serves on the Judicial Conference Committee on the Administration of the Bankruptcy System and is a member of the Federal Judicial Center faculty that teaches new bankruptcy judges. In March 2017, Judge Houser was appointed by Chief Justice John G. Roberts, Jr. to the board of directors of the Federal Judicial Center. Judge Houser, who lectures and publishes frequently on corporate restructuring and insolvency law, is a past chairman of the Dallas Bar Association’s Committee on Bankruptcy and Corporate Reorganization, is a member of the Dallas and American Bar Associations, and is a fellow of the Texas and American Bar Foundations. She has been a contributing author to Collier on Bankruptcy and has taught creditors’ rights as a visiting professor at the SMU Dedman School of Law. Before becoming a U.S. Bankruptcy Judge on January 20, 2000, Judge Houser was in private practice, where she represented BUSINESS clients in a variety of significant chapter 11 cases across the country, Involuntary Bankruptcies: including serving as lead debtor’s counsel for Dow Corning Corp. A Primer Judge Houser was elected a Fellow of the American College of Bankruptcy in 1994, served as an officer and member of its board of directors, and remains active in the College. In 1996, she was In this roundtable, discuss the elected a conferee of the National Bankruptcy Conference, and after nuts and bolts of involuntary becoming a bankruptcy judge, she joined the National Conference bankruptcies (who may be a of Bankruptcy Judges, served as its president in 2009-10, and petitioning creditor, when is continues to serve the organization in various capacities. Prior to her a claim subject to a bona fide appointment, Judge Houser was with Locke, Purnell, Boren, Laney dispute, etc.), including illus- & Neely and Sheinfeld, Maley & Kay, P.C., both in Dallas. She trations of relevant examples currently serves as ABI’s Vice President-Research Grants. In June and cases. 2017, she was appointed to serve as the leader of a five federal judge mediation teach in the Title III proceedings under PROMESA for the Commonwealth of Puerto Rico and four related governmental instrumentalities. Judge Houser received her undergraduate degree with high distinction from the University of Nebraska and her J.D. from Southern Methodist University Law School, where she was editor of its law review.
Speaker Bios | 288 STEVEN C. KRAUSE Steven C. Krause is a partner at Owl Creek Asset Management, L.P. in New York, which he joined in August 2013 and where he focuses primarily on process-driven distressed and special-situation opportunities. Previously, he was with Davis Polk, where he was an attorney in the firm’s Corporate Department in New York. Prior to that, he was with White & Case as a bankruptcy associate. Mr. Krause is experienced in a broad range of corporate matters, with a focus on restructurings and bankruptcies. He has represented corpo- rations, banks, hedge funds and other financial institutions and other strategic parties in connection with pre-packaged and traditional bankruptcies, out-of-court workouts, DIP and exit financings, bank- ruptcy litigation and acquisitions of bankrupt and troubled compa- nies. Mr. Krause is an invited member of the Bankruptcy Committee for the Association of the Bar of the City of New York, a member of the Distressed Investor Roundtable, a former co-chair of ABI’s Business Reorganization Committee and a board member on The BUSINESS Columbia Law School Journal of Law and Social Problems, and he Involuntary Bankruptcies: served for many years on the Pro Bono Advisory Council for New A Primer York Lawyers for the Public Interest. Mr. Krause is a regularly pub- lished author and has written numerous articles for a variety of pub- lications. He was editor and lead author for ABI’s A Practitioner’s In this roundtable, discuss the Guide to Prepackaged Bankruptcy and an editor/contributing author nuts and bolts of involuntary for Debtor-In-Possession Financing. He is also a regular contribut- bankruptcies (who may be a ing author for The Norton Annual Survey of Bankruptcy Law. Mr. petitioning creditor, when is Krause is admitted to practice before the U.S. Supreme Court, the a claim subject to a bona fide U.S. Court of Appeals for the Second Circuit, and the U.S. District dispute, etc.), including illus- and Bankruptcy Courts for the Southern and Eastern Districts of trations of relevant examples New York. Previously, he was COO of a toy company, in business and cases. development at a San Francisco-based dot-com, in commercial fi- nance at GE Capital, and a business re-engineering consultant for Accenture. Mr. Krause received his A.B. from Harvard University, where he was a Harvard College Scholar; his M.B.A. from UCLA Anderson School of Management, where he was a member of the Anderson Honor Society; and his J.D. from Columbia Law School, where he was a Harlan Fiske Stone Scholar, Moot Court editor and finance editor for The Columbia Law School Journal of Law and Social Problems.
Speaker Bios | 289 KIM MARTIN LEWIS Kim Martin Lewis chairs Dinsmore & Shohl LLP’s Bankruptcy and Restructuring Practice Group in Cincinnati, where her practice focuses primarily on corporate reorganization, insolvency, financing, workout and bankruptcy law. She represents debtors, purchasers, creditors’ committees, unsecured creditors, secured creditors and equity-holders, and frequently provides advice regarding out-of-court corporate reorganizations, corporate and finance matters, and acquiring assets out of bankruptcy. Ms. Lewis has served as restructuring counsel in the chapter 11 bankruptcies of Ormet Corporation, Milacron Inc., The Wornick Co. and Huffy Corp., among others. She is a Fellow in the American College of Bankruptcy and is Board Certified in Business Bankruptcy Law by the American Board of Certification.Ms. Lewis is a member of ABI, the Cincinnati and Ohio State Bar Associations, and the Executive Committee of the Midwest Regional Bankruptcy Seminar. She successfully argued a case before the U.S. Supreme Court in Central BUSINESS Virginia Community College, et al. v. Bernard Katz (Case No. 04- Pitfalls of a Midsize 885). Ms. Lewis has been listed in Chambers USA as a Chambers’ Chapter 11 Band 1 top bankruptcy lawyer in Ohio since 2004, is listed in Ohio Super Lawyers and “Ohio Super Lawyers Top 50 Women” by Law & Politics, and is listed in The Best Lawyers in America. Ms. Lewis received her B.S. from Ball State University in 1984 and her J.D. from Southwestern University School of Law in 1987.
Speaker Bios | 290 DEBRA L. MILLER Debra L. Miller is the appointed standing chapter 13 bankruptcy trustee for the Northern District of Indiana in the Fort Wayne and South Bend Divisions. She is active in the National Association of Chapter Thirteen Trustees, and is a former president of the NACTT and chair of the NACTT’s Mortgage Committee. In that role, she worked with the mortgage servicers, their attorneys and members of NACBA to draft the Best Practices that were approved by the NACTT, NACBA and AFN. Additionally, she worked with the Bankruptcy Rules Committee on changes to the Federal Rules of Bankruptcy Procedure, including Rules 3001 and 3002.1, and revising the mortgage attachment (Form B410A) and director’s form for the Notice of Final Cure and Response to the Notice of Final Cure (Form 4100R and 4100N). Ms. Miller testified before the Subcommittee on Administrative Oversight and the Courts of the Committee on the Judiciary, U.S. Senate, on May 6, 2008, on the subject of “Policing Lenders and Protecting Home-Owners: Is CONSUMER Misconduct in Bankruptcy Fueling the Foreclosure Crisis?” Prior to For Whom the her appointment in 2000, she served as the staff attorney for Gary D. Statute Tolls Boyn, chapter 7 panel trustee at Warrick and Boyn LLP in Elkhart, Ind., and as a law clerk for Hon. Sanford Brook. She also served as a special agent for the U.S. Secret Service in the Cleveland Field Find out when statutes of Office, where she specialized in credit card and white collar fraud. limitations are tolled and how Ms. Miller regularly teaches nationally on mortgage issues including § 108 helps and/or hinders a the calculation of escrow, pre-petition arrearages and calculation tolling argument. of ongoing mortgage payments in a chapter 13 bankruptcy. She received her B.S. in political science from Baldwin Wallace College and her J.D. from Cleveland Marshall College of Law.
Speaker Bios | 291 EDWARD E. NEIGER Edward E. Neiger is a co-managing partner at ASK LLP in New York, where his practice focuses on representing unsecured trade creditors in complex bankruptcy cases and prosecuting and defend- ing large preferences and fraudulent conveyance actions. Prior to joining ASK, he founded Neiger LLP, where he represented clients in the bankruptcy cases of Lehman Brothers, American Airlines and General Motors, among others. Previously, Mr. Neiger was in the bankruptcy group of Weil, Gotshal & Manges LLP, where he worked on behalf of such debtors as Enron, Worldcom and Global Crossing. He received his J.D. in 2004 from Fordham University.
BUSINESS Update on Fraudulent Transfer Law
Join our panel as they discuss the most important fraudulent transfer case developments, including the teachings of Merit Management, Madoff and Tribune.
Speaker Bios | 292 RICHARD D. NELSON Richard D. Nelson is an attorney and member of the law firm of Cohen, Todd, Kite & Stanford, LLC in Cincinnati. He was admitted to practice before the U.S. District and Bankruptcy Courts in 1974. Mr. Nelson has been a chapter 7 panel trustee since 1989 and he has served as a chapter 11 trustee operating and liquidating businesses in over 100 separate cases. He currently chairs the Attorney Advisory Committee of the U.S. Bankruptcy Court for the Southern District of Ohio, he has been a board member of the National Association of Bankruptcy Trustees since 2008 (including a term as its president from 2015-16), is currently a member of the ABI’s Central States Bankruptcy Workshop Advisory Board, and has been a previous presenter for the ABI at the National Conference of Bankruptcy Judges. He has been listed in Ohio Super Lawyers and is a frequent speaker at a number of seminars on bankruptcy and reorganization topics. Mr. Nelson received his B.A. from Miami University of Ohio in 1971 and his J.D. in 1974 from the University of Cincinnati CONSUMER College of Law. For Whom the Statute Tolls
Find out when statutes of limitations are tolled and how § 108 helps and/or hinders a tolling argument.
Speaker Bios | 293 NINA PARKER Nina M. Parker is the founder of the firm of Parker & Associates in Winchester, Mass., and has been a member of the bar since 1981 practicing in the areas of personal and corporate bankruptcy. She has been Board Certified in Consumer Bankruptcy Law since 2002, and in 2016, she was inducted as a Fellow of the American College of Bankruptcy. Ms. Parker concentrates in the areas of consumer and corporate bankruptcies, specializing in small business and individual chapter 11 plans of reorganization, chapter 13 wage-earner plans and other insolvency options. She is a member of ABI’s Board of Directors and serves on its Education Committee, and she is an advisory board member of ABI’s Northeast Bankruptcy Conference. Ms. Parker has also served as a member of ABI’s Civility Task Force and on ABI’s Individual Chapter 11 Task Force, and as co-chair of ABI’s Consumer Committee, co-chair of ABI’s Winter Northeast Consumer and Litigation Skills Forum, and as co-chair of the ABI’s Northeast Consumer Bankruptcy Forum. In addition, she has served CONSUMER as the Bankruptcy Section co-chair of the Boston Bar Association Shall I “Stay” or Shall I and co-chair of the Bankruptcy Section’s Diversity and Inclusion Pay? The Price You Pay Committee. Ms. Parker is a member of the U..S. Bankruptcy Court for the District of Massachusetts’ Attorney Advisory Committee for for Discharge Violations the Local Rules and the Bankruptcy Court Diversity Initiative Task Force. She is admitted to practice in Massachusetts, the U.S. District This panel will discuss au- Court of Massachusetts, the U.S. Appeals Court for the First Circuit tomatic stay and discharge and the U.S. Supreme Court. Ms. Parker received her B.A. from violations, and the sanctions Washington University in St. Louis and her J.D. from New England or punitive damages that Law School in Boston. may be assessed in the event of violations.
Speaker Bios | 294 KATHY BAZOIAN PHELPS Kathy Bazoian Phelps is a partner in the Los Angeles office of law firm Diamond McCarthy, LLP and has been practicing law since 1991. She focuses on bankruptcy law and fraud litigation. Her practice includes representing bankruptcy trustees and equity receivers, defendants and investors in Ponzi scheme cases. Ms. Phelps practices in the U.S. District Court, U.S. Bankruptcy Court and the Superior Court of the State of California. She has spoken and written widely on a broad range of fraud and bankruptcy-related matters, and co-authored The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (LexisNexis® 2012) with Hon. Steven W. Rhodes (ret.). Her other recent publications include Fraud and Forensics: Piercing Through the Deception in a Commercial Fraud Case (American Bankruptcy Institute 2015), Ponzi-Proof Your Investments: An Investor’s Guide to Avoiding Ponzi Schemes and Other Fraudulent Scams (IRR Publishing 2013), The Depths of Deepening Insolvency: Damage Exposure for Officers, Directors BUSINESS and Others (American Bankruptcy Institute 2013) with Jack Update on Fraudulent Williams, and “Equity Receivers and the In Pari Delicto Defense,” Transfer Law The Business Lawyer (American Bar Association, May 2014). Ms. Phelps is a mediator on the Bankruptcy Mediation Panel for the Central District of California. She is also a frequent speaker at both Join our panel as they discuss national and international events, and is frequently called upon to the most important fraudulent provide quotes and insights in Ponzi scheme and fraud cases for print transfer case developments, publications such as The Wall Street Journal, Dow Jones and the including the teachings of New York Times. Ms. Phelps regularly posts on The Ponzi Scheme Merit Management, Madoff Blog, found at www.theponzischemeblog.com, on newsworthy and and Tribune. legal issues relating to Ponzi schemes. She is also editor-in-chief of Receivership News, and serves on the boards of directors for the California Receivers Forum’s Los Angeles/Orange County Chapter, the National Association of Federal Equity Receivers and ABI. Ms. Phelps received her B.A. in international relations from Pomona College and her J.D. from University of California, Los Angeles in 1991.
Speaker Bios | 295 KIMBERLY A. POSIN Kimberly A. Posin is a partner with Latham & Watkins in Los Angeles and a Lecturer in Law at UCLA School of Law, where she co-teaches Introduction to the Lawyer/Client Relationship. She is a member of Latham’s Finance Department and its Restructuring, Insolvency & Workouts Practice, and she specializes in representing corporate debtors, secured lenders, creditors and other interested parties in all aspects of chapter 11 bankruptcy proceedings, out-of- court restructurings, foreclosures, and assignments for the benefit of creditors. Ms. Posin previously served on the firm’s Associates and Pro Bono Committees, and she currently serves as vice president of the board of directors of the Los Angeles Center for Law & Justice. She is admitted to practice in California. Ms. Posin received her B.S. in 1999 from the University of Southern California and her J.D. in 2002 from the University of California, Berkeley School of Law (Boalt Hall). BUSINESS All Things Foreign
This panel will provide an overview of important chap- ter 15 issues and highlight the ways in which chapter 11 affects the filings of -for eign companies — as well as explain why U.S. chapter 11 increasingly appears to be a preferred choice for foreign debtors.
Speaker Bios | 296 ROBERT P. REYNOLDS Robert P. Reynolds is a senior partner with Reynolds, Reynolds & Little, LLC in Montgomery, Ala., where he focuses his practice on bankruptcy law, participation loan resolutions and workouts, banking law, commercial litigation and lender-liability defense. He is admitted to the Alabama Bar Association and the U.S. District Courts for the Northern, Middle and Southern Districts of Alabama, the Northern District of Florida, the Fifth and Eleventh Circuit Courts of Appeals, and the U.S. Supreme Court. Mr. Reynolds is ABI’s Vice President-Research and Development and is Board Certified in both Business and Consumer Bankruptcy Law by the American Board of Certification. He is also a member of the Alabama State Bar’s Board of Legal Specialization and the Tuscaloosa Bar Association, and he is a past chair of the Alabama State Bar’s Bankruptcy and Commercial Law Section and of ABI’s Southeast Bankruptcy Workshop advisory board. Mr. Reynolds received his B.S. from Auburn University in 1975 and his M.P.A. in 1976 and J.D. in 1979 from the University of BUSINESS Alabama, where he was a member of Omicron Delta Kappa. Involuntary Bankruptcies: A Primer
In this roundtable, discuss the nuts and bolts of involuntary bankruptcies (who may be a petitioning creditor, when is a claim subject to a bona fide dispute, etc.), including illus- trations of relevant examples and cases.
Speaker Bios | 297 JAMES PATRICK SHEA James Patrick Shea is chair of the Creditors’ Rights Practice Group of Kolesar & Leatham in Las Vegas and has more than 35 years of experience advising financial institutions, landlords, vendors, creditors’ committees, debtors, bankruptcy trustees and other parties in business bankruptcy proceedings. He also advises clients in commercial litigation relating to other aspects of the debtor/creditor relationship, including the enforcement of their rights in liquidations, receiverships, litigation, and informal out-of- court workouts. Mr. Shea is nationally recognized in the field of commercial insolvency and reorganization. He is a former president of ABI and its current chairman. An ABI member since 1988, Mr. Shea has also served as ABI’s Vice-President-Communication and Information Technology and was a founding chair of ABI’s Subcommittee on Gaming Insolvencies and Reorganizations. He chairs ABI’s Civility Task Force and is a former program chair of ABI’s Southwest Bankruptcy Conference. Mr. Shea is the founding BUSINESS chairman of the State Bar of Nevada’s Bankruptcy Law Section Pitfalls of a Midsize and served as co-chair of the Ninth Circuit Lawyer Representatives Chapter 11 for the District of Nevada, and he was elected to the Ninth Circuit Judicial Conference Executive Committee. He has represented clients in significant hotel/casino bankruptcies, including those filed by Landmark, Marina, Riviera, Bally’s, Gold River, Stratosphere, Arizona Charlie’s, Debbie Reynolds, Aladdin Hotel & Casino, Hooters Hotel & Casino, Stations Casinos, and Lucky Dragon Hotel and Casino. He has also handled high-profile bankruptcies in other industries involving such companies such as National Airlines, Sunworld Airlines, AgriBioTech, Mego Financial, Amerco (U-Haul), USA Capital, Pegasus Mining, Veris Gold, Vegas TV and Lake Las Vegas. Mr. Shea is AV-rated by Martindale-Hubbell and is consistently listed in The Best Lawyers in America and Mountain West Super Lawyers. He received both his undergraduate degree and his J.D. from the University of Arizona, where he received the chairmanship to the Moot Court Board and the Mitchell C. Nelson Award for legal scholarship.
Speaker Bios | 298 RONALD J. SILVERMAN Ronald J. Silverman is a partner with Hogan Lovells US LLP in New York, where his practice focuses on the representation of represents banks and financial institutions, hedge and private equity funds, and other sophisticated investors involved in restructurings, rescue financings, distressed M&As and insolvencies. He hasa broad background in international restructurings, having completed restructurings in dozens of countries across the globe, and has led some of the most significant chapter 15 cases in connection with cross-border restructurings, also writing the chapter 15 primer for a leading treatise. Mr. Silverman is experienced in energy restructurings involving the power, oil and gas, solar, wind and mining industries. He is also involved in restructurings related to China and lef ABI’s International Insolvency & Restructuring Symposium in Beijing. Mr. Silverman served as ABI’s Vice President-International Affairs and currently serves on the board of directors of INSOL International. Previously, he served as an adjunct professor at the University of BUSINESS Connecticut School of Law, teaching a seminar on international All Things Foreign insolvency while maintaining his private practice. Mr. Silverman has been listed in The Best Lawyers in America from 2006-18, Chambers USA from 2010-11, Chambers Global in 2012 as a This panel will provide an leading lawyer in bankruptcy/restructuring, Who’s Who Legal from overview of important chap- 2017-18 and Super Lawyers from 2006-14. In addition, he has been ter 15 issues and highlight included in the Expert Guides to the World’s Leading Insolvency & the ways in which chapter Restructuring Lawyers from 2007-14. Mr. Silverman is a member 11 affects the filings of -for of INSOL International, as well as the Connecticut, New York and eign companies — as well as District of Columbia Bar Associations. He received his B.A. with explain why U.S. chapter 11 honors from Trinity College in 1988 and his J.D. from the University increasingly appears to be a of Connecticut School of Law in 1991. preferred choice for foreign debtors.
Speaker Bios | 299 J. KATE STICKLES J. Kate Stickles is a member of Cole Schotz P.C.’s Bankruptcy and Corporate Restructuring Department in its Wilmington, Del., office and is experienced in the areas of corporate bankruptcy, insolvency and creditors’ rights, having represented debtors, official committees, creditors, examiners and trustees in chapter 11 cases. She has been named in Chambers USA: America’s Leading Lawyers for Business since 2010 and has also been listed in The Best Lawyers in America and in Delaware Super Lawyers in the area of Bankruptcy and Creditor-Debtor Rights Law. Ms. Stickles has served as counsel to chapter 11 debtors in a variety of industries, including manufacturing and distribution, telecommunications, health care and media, in some of Delaware’s most significant bankruptcy cases. She has published in, and served as a contributing editor for, the American Bankruptcy Institute Journal and has also published in The Americas Restructuring and Insolvency Guide, the ABI Bankruptcy Litigation Committee eNewsletter and the ABI Commercial Fraud Committee BUSINESS eNewsletter. Ms. Stickles is active in the Bankruptcy Section of Pitfalls of a Midsize the Delaware State Bar Association, having served as the Section’s Chapter 11 chair (2010-11), vice chair Commercial Bankruptcy (2009-10) and secretary (2008-09). She is also a member of the Delaware Views from the Bench Advisory Board. She is a member of the International Women’s Insolvency & Restructuring Confederation (IWIRC) and is a past director-at-large, 2010-2011. Ms. Stickles has served as the chair (2009-10), vice chair (2008-09) and secretary (2007-08) of the IWIRC Delaware Network and currently serves on its Community Service, Events and Newsletter Committees. She is also a member of ABI and the Delaware Bankruptcy American Inn of Court. Ms. Stickles earned her B.A. in political science and communications from Western Maryland College and her J.D. from Temple University School of Law.
Speaker Bios | 300 HON. DEBORAH L. THORNE Hon. Deborah L. Thorne is a U.S. Bankruptcy Judge for the Northern District of Illinois in Chicago, appointed on Oct. 22, 2015. She is a Fellow of the American College of Bankruptcy and a member of the Board of Governors for the Seventh Circuit Bar Association, and sits on ABI’s Board of Directors, having previously served as ABI’s Vice President-Communication and Information Technology. Previously, Judge Thorne was a partner with Barnes & Thornburg LLP in Chicago. Her practice included the representation of creditors and other parties in insolvency proceedings, and she frequently served as a federal equity receiver in commodity fraud cases brought by the Commodity Futures Trading Commission. In addition, she served as co-chair of the Women’s Initiative for the firm and as a federal equity receiver in cases involving commodity fraud in the Northern District of Illinois. Judge Thorne is a past chair of both the Chicago Bar Association’s Bankruptcy Committee and the Seventh Circuit Bar Association’s Bankruptcy Committee. She authored ABI’s BUSINESS Preference Defense Handbook, The Circuits Compared and is one Involuntary Bankruptcies: of the authors of ABI’s Interrupted! Understanding Bankruptcy’s A Primer Effects on Manufacturing Supply Chains. In addition, she has been included in The Best Lawyers in America in the area of bankruptcy and creditor-debtor rights law, was recognized as a Leading Lawyer In this roundtable, discuss the in Illinois and has been recognized by Illinois Super Lawyers every nuts and bolts of involuntary year since 2003. Judge Thorne received her B.A. from Macalester bankruptcies (who may be a College, her M.A.T. from Duke University and her J.D. with honors petitioning creditor, when is from Illinois Institute of Technology Chicago-Kent College of Law. a claim subject to a bona fide dispute, etc.), including illus- trations of relevant examples and cases.
Speaker Bios | 301 BRIAN WALSH Brian K. Walsh is the leader of the restructuring and insolvency practice at Bryan Cave Leighton Paisner LLP in St. Louis and also practices out of the firm’s Atlanta offices. He represents debtors, secured lenders and other interested parties in chapter 11 bankruptcy cases, receiverships, workouts and distressed transactions. He also regularly advises borrowers, lenders and corporate officers and directors about their alternatives and duties in situations involving insolvency or financial distress. Mr. Walsh is a Fellow of the American College of Bankruptcy and an experienced appellate advocate. He argued before the U.S. Supreme Court in the Merit Management case during the October 2017 term, and he acts regularly as lead counsel in other appeals throughout the U.S., many of which involve debtor/ creditor issues. In addition, he teaches as an adjunct professor in the Appellate Clinic at Washington University Law School, and he is a past president of the Eighth Circuit Bar Association. Mr. Walsh received his undergraduate degree from Duke University and his BUSINESS J.D. from Harvard Law School. Following law school, he clerked Update on Fraudulent for Hon. Pasco M. Bowman of the U.S. Court of Appeals for the Transfer Law Eighth Circuit.
Join our panel as they discuss the most important fraudulent transfer case developments, including the teachings of Merit Management, Madoff and Tribune.
Speaker Bios | 302 HON. EUGENE R. WEDOFF (RET.) Hon. Eugene R. Wedoff served as a U.S. Bankruptcy Judge for the Northern District of Illinois in Chicago from 1987-2015 and as chief judge from 2002-07. He is ABI’s immediate past president and sits on the 15-member expert panel for ABI’s Commission on Consumer Bankruptcy. Judge Wedoff presided over the chapter 11 reorganization of United Air Lines, was a member of the Advisory Committee on Bankruptcy Rules from 2004-14 and served as its chair after 2010. He was the president of the National Conference of Bankruptcy Judges from 2013-14 and also served as a member of the NCBJ’s Board of Governors, as its secretary, and as chair of its education committee. Judge Wedoff is a Fellow in the American College of Bankruptcy, as well as a member of the National Bankruptcy Conference. He is the author of the chapter on professional employment in Queenan, Hendel and Hillinger, Chapter 11 Theory and Practice (LRP Publications 1994), has been an associate editor of the American Bankruptcy Law Journal and CONSUMER currently serves as a contributing editor of the Thomson Reuters Shall I “Stay” or Shall I Bankruptcy Law Letter. Judge Wedoff is a frequent lecturer and has Pay? The Price You Pay served as a member of the Federal Judicial Center’s Committee on Bankruptcy Judge Education. In 2016, he received the Judge William for Discharge Violations L. Norton Jr. Judicial Excellence Award; in 2009, he received the Lawrence P. King Award from the Commercial Law League; and This panel will discuss au- in 1995, he received the Excellence in Education Award from the tomatic stay and discharge NCBJ. Judge Wedoff graduated from the college and law school of violations, and the sanctions the University of Chicago. or punitive damages that may be assessed in the event of violations.
Speaker Bios | 303