– Involuntary bankruptcy is rarely used by creditors, as it carries risks such as liability for costs, attorney’s fees, and damages.
– Involuntary bankruptcy is mostly used when unsecured creditors suspect fraud by a company.
– If an involuntary petition fails, the petitioning creditors can be liable for costs and attorney’s fees of the company.
– If a court finds that the petition was filed in bad faith, the petitioning creditors can be liable for damages and punitive damages.
– The possibility of pursuing state law claims for damages in Florida state court in cases of bad faith filings in bankruptcy is examined. – If a debtor has 12 or more creditors, at least three creditors holding unsecured claims totaling at a minimum of $15,325 that are not contingent or the subject of a bona fide dispute as to liability or amount must join in the filing of an involuntary bankruptcy petition.
– If the debtor has fewer than 12 otherwise eligible unsecured creditors, then one such unsecured creditor with a claim of at least $15,325 that is not contingent or the subject of a bona fide dispute as to liability or amount can file an involuntary bankruptcy petition.
– The petitioning creditors must prove that the debtor is generally not paying its debts that are not otherwise subject to a bona fide dispute as to liability or amount as such debts become due, considering factors such as the number of debts, degree of delinquency, materiality of non-payment, total debt compared to annual income, whether the debtor is not paying only the petitioning creditors’ claims, and whether the debtor has terminated its business and started liquidating assets. 1. Upon dismissal of an involuntary bankruptcy petition, the debtor may be granted judgment against the petitioning creditors for costs and attorney’s fees incurred in fighting the petition.
2. There is a split among states and federal courts regarding whether state law claims, such as abuse of process and malicious prosecution, are preempted by the Bankruptcy Code.
3. The majority of cases hold that the Bankruptcy Code preempts state law claims, but in Florida, two Fourth District Court of Appeal cases hold that the remedies provided in the Bankruptcy Code are not exclusive, and the debtor may pursue state law claims if they choose not to collect under the Code. 1. The bankruptcy court did not have exclusive jurisdiction over state tort actions in the case of R.L. LaRoche v. Barnett Bank of South Florida.
2. The United States District Courts have exclusive jurisdiction over a title 11 case, which it may cede to a bankruptcy judge.
3. The debtor’s claims do not constitute a case under title 11 because that case had been dismissed by the bankruptcy judge.
4. The debtor’s claims do not “arise under or in” title 11 because these actions are based on the common law of Florida.
5. The claims might be said to relate to a case under title 11. 1. The Supreme Court in Celtotex Corp. determined that bankruptcy courts have no jurisdiction over proceedings that have no effect on the debtor.
2. The court in LaRoche concluded that Congress may have intended to make the tribunal’s jurisdiction available to parties who consent to it but allow those who do not consent to resort to state courts for bankruptcy monetary awards against creditors who file in bad faith.
3. The court acknowledged that the Supreme Court has long applied a rebuttable presumption that state courts have concurrent jurisdiction of claims arising under federal laws, even if all claims for bad faith filing of an involuntary bankruptcy petition constituted a federal question. 1. The court determined that there is no need for interpretive uniformity of state law tort claims and that the claims asserted do not appear difficult.
2. The court held that there is no express grant of exclusive jurisdiction for the claims to the bankruptcy court and no strong reason to suppose that Congress gave such power by implication.
3. The Fourth District Court of Appeals reversed a summary judgment in favor of the creditors and concluded that the state court had jurisdiction to hear the debtor’s state law claims for malicious prosecution and intentional infliction of emotional distress. – Judge Gross suggested that the Fourth Circuit abandon LaRoche and adopt the Ninth Circuit Court of Appeals reasoning in MSR Exploration, Ltd. V. Meridian Oil, Inc., 74 F.3d 910 (9th Cir. 1996).
– The court held that the Bankruptcy code preempted state tort actions related to bankruptcy matters, as Congress intended bankruptcy matters to be handled in federal courts.
– Judge Gross concluded that allowing the debtor to pursue her claims in state court would infringe on the uniformity envisioned by the Bankruptcy Code.
– In both LaRoche and Mullin, the key factor for both courts was that neither debtor had sought relief in the bankruptcy court under 11 U.S.C. 303(i).
– Judge Gross’s concurrence in Mullin suggests that the state court has jurisdiction only if the debtor chooses not to pursue federal claims, only pursuing state tort claims in state court. – Involuntary petitions can cause severe financial and reputational harm to the debtor.
– Wrongful filing of an involuntary petition has serious consequences.
– Debtors in Florida have the ability to choose between state and federal court remedies.
– It is important to carefully consider the pros and cons of each option before making a decision.
https://www.jimersonfirm.com/blog/2017/02/choose-your-adventure-florida-claims-wrongful-filing-involuntary-bankruptcy/
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