Filing an involuntary bankruptcy petition is a serious legal action that creditors must approach with caution. The requirements for such filings are strictly construed and applied, meaning that any misstep can lead to significant consequences. Creditors must meet specific statutory requirements, such as having a minimum number of petitioning creditors and holding a certain amount of eligible unsecured claims. Failure to meet these requirements can result in the dismissal of the petition, potentially leading to the creditor being ordered to pay the debtor’s reasonable attorney’s fees.

Beyond the statutory requirements, courts also scrutinize the intent behind the filing. If a court determines that the petition was filed in “bad faith,” the consequences can be even more severe. Bad faith filings can include actions motivated by ill will, a desire to harass the debtor, or an attempt to gain a disproportionate advantage. In such cases, the court may not only dismiss the petition but also award additional monetary damages to the debtor, including punitive damages. This underscores the importance of ensuring that the petition is filed in “good faith” and for legitimate reasons, such as preventing the dissipation of assets or avoiding the preference of certain creditors.

Given the potential risks and severe consequences, creditors should consider alternatives to filing an involuntary bankruptcy petition and view it as a last resort. It is crucial for creditors to conduct a thorough inquiry into the relevant facts and pertinent law before proceeding. By doing so, they can mitigate the risks associated with filing and avoid the financial and legal repercussions that may arise from a dismissed petition. Read full article here.

Photo of David Fournier David Fournier

David represents various interests in complex bankruptcy proceedings in the District of Delaware and other jurisdictions. His clients include corporate debtors, secured and unsecured creditors, official creditors’ committees, foreign representatives, and others. David also has extensive experience as a mediator in bankruptcy litigation.

Photo of Evelyn Meltzer Evelyn Meltzer

Evelyn focuses her practice on corporate bankruptcy, insolvency, distressed M&A, and creditors’ rights. With more than 20 years of experience, Evelyn understands all facets of a problem or opportunity, strategically devising insightful, innovative, and practical solutions that protect and advance her clients’ interests.

Photo of Kenneth Listwak Kenneth Listwak

Ken has broad experience in bankruptcy and reorganization matters, including adversary proceedings and contested matters in complex bankruptcy cases, and advising and guiding clients through complex issues involving bankruptcy law and Delaware legal practice.

Photo of Tori Lynn Remington Tori Lynn Remington

Tori is an associate in the firm’s Finance and Financial Restructuring + Insolvency practice groups. She has been involved in complex chapter 11 proceedings and litigation matters, representing various parties in interest, including debtors-in-possession, DIP lenders, stalking horse purchasers, and creditors. Tori also…

Tori is an associate in the firm’s Finance and Financial Restructuring + Insolvency practice groups. She has been involved in complex chapter 11 proceedings and litigation matters, representing various parties in interest, including debtors-in-possession, DIP lenders, stalking horse purchasers, and creditors. Tori also has experience in the Court of Chancery representing assignees in Delaware ABCs.