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March 2015

  

Petitioning Creditor Concerns in Involuntary Chapter 11

  

  

 
 

  

     

  

 
 

For more information about this e-Alert, please contact:

  

Christopher A. Ward

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Jarrett K. Vine

302.252.0935

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In DVI Receivables XIV, LLC, et al. v. Rosenberg, the United States Court of Appeals for the Eleventh Circuit recently affirmed a bankruptcy court's award of approximately $1 million in compensation for the debtor's attorneys' fees against the petitioning creditors. Specifically, the Eleventh Circuit held that the plain language of section 303 of the Bankruptcy Code does not limit a debtor from obtaining payment of its attorneys' fees from the petitioning creditors for fees and expenses incurred in the dismissal of the bankruptcy petition. In fact, the debtor may recover from the petitioning creditors its attorneys' fees incurred in obtaining dismissal of the involuntary petition, fees sustained in defending an appeal of the order dismissing the petition, and fees for prosecuting an action to recover attorneys' fee, i.e. fees on fees.

The underlying issue the Eleventh Circuit addressed was the extent of fees a putative debtor may recover in defeating an involuntary petition filed against it. Section 303(i) of the Bankruptcy Code authorizes the court to award a debtor its attorneys' fees if the debtor obtains dismissal of the bankruptcy and does not waive its right to attorneys' fees. This section further authorizes the court to impose damages against the petitioning creditors, including punitive damages, for a bad faith bankruptcy filing. The Eleventh Circuit's decision awarding appellate fees is important because it goes against the only other relevant decision from the Ninth Circuit, which precluded a debtor's recovery of appellate fees against the petitioning creditors in successfully defending an appeal of the order dismissing the involuntary bankruptcy petition. If petitioning creditors desire to appeal a bankruptcy court's dismissal of the involuntary petition, the Eleventh Circuit's decision expands the potential liability the petitioning creditors face by potentially placing them on the hook for the debtor's appellate fees, as well as the fees incurred in the underlying bankruptcy.

This case illustrates that creditors contemplating filing an involuntary bankruptcy against a defaulting debtor should conduct a thorough factual investigation of their relationship with the debtor, including the conduct of the parties prior to the petition filing and the nature of the debtor's obligations to the creditors. As should have always been the case, serious thought must be given to the contemplation of using an involuntary bankruptcy filing as a litigation tactic. The petitioning creditors must ensure that they have a sound basis in the facts to warrant an involuntary petition filing against the debtor and can provide the court with a sound business justification for the involuntary filing. Otherwise, the disgruntled creditors could face the risk of paying for the debtors' attorneys' fees and expenses incurred in dismissing the petition and, possibly, damages (including punitive damages) for a bad faith filing. Further, if the petitioning creditors find their involuntary petition dismissed yet wish to appeal that dismissal, the creditors must consider their potential further liability for not only their appellate fees but also the debtor's appellate fees if the creditors' appeal is ultimately unsuccessful. In some instances, the financial risk of an adverse appeal may militate against filing an appeal of the involuntary dismissal. This recent decision is further reinforcement that an involuntary bankruptcy filing should not be undertaken lightly and all potential risks and pitfalls must be considered by creditors and their counsel before undertaking this potential costly strategy.

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* Law360, March 2014
** The American Lawyer 2013 and 2014 reports

  

 
 

  

     

  

 
 

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