Bankruptcy partner Oren Haker was a recent attendee at the American Bankruptcy Institute’s 26th Annual Southwest Bankruptcy Conference, where he participated in the panel “Be Careful What You Ask For: Risks and Benefits of Involuntary Bankruptcy Filings.” The other panelists included the Honorable Martin Barash, U.S. Bankruptcy Court, CD Cal.; Janet Chubb, Esq., Of Counsel, Kaempfer Crowell, Reno; and Jordan Kroop, partner, Perkins Coie, Phoenix.

The session provided an overview of (i) the statutory requirements that petitioning creditors must satisfy to file an involuntary bankruptcy petition against a business, (ii) the options that a business has in responding to an involuntary petition, and (iii) alternatives to dismissal of the petition or entry of an order for relief.  Key points from the presentation included:

  • When creditors file an involuntary petition against a corporate debtor, they should understand the potential ramifications if the debtor contests the filing, or alternatively, if other creditors of the corporate debtor move to dismiss the involuntary petition, which include suspension under 11 U.S.C. § 305.
  • Suspension is a bespoke alternative within the Bankruptcy Court’s discretion if the Court determines that abstention is in the best interests of the debtor and its creditors. However, suspension can invite significant litigation in non-bankruptcy courts and risk causing loss in value for the corporate debtor’s business due to uncertainty around the suspended case.
  • In addition, if the petitioning creditors do not satisfy the specific requirements of section 303, those creditors who filed the involuntary could be subjected to a damages claim by the corporate borrower caused by the filing, as well as punitive damages.
  • Moreover, while the motivation of unsecured creditors for the involuntary filing may be nonpayment on their valid claims, an involuntary petition is a litigation approach to debt collection. It is not a value-enhancing approach; it rarely, if ever, drives up the value of the debtor’s assets for distribution to creditors.  On the other hand, bankruptcy may provide unsecured creditors with potential recoveries from certain causes of action that may otherwise not exist or not be brought by individual creditors outside of a bankruptcy process.
  • Attorneys who agree to file a petition on behalf of more than one unsecured creditor should consider the ethical issues relating to representing more than one party in the petition filing.  If, for instance, one of the petitioning creditors is disqualified, does the attorney’s engagement with that creditor terminate automatically?  Does the attorney have advance consent from the disqualified creditor to continue representing the other petitioning creditors?
  • What exactly does it mean to have a non-contingent, undisputed claim as to amount?
  • Creditors should beware – filing an involuntary petition may seem simple, but once filed, it is very hard to dismiss the case, and the outcome is rarely in any one party’s control.

Oren Haker focuses on the representation of a wide range of parties in workouts, debt restructurings, receiverships and bankruptcy cases, including corporate debtors, trade and financial creditors, creditors’ committees, lessors, and strategic and financial investors acquiring assets of troubled companies.

The attorneys of Stoel Rives’ bankruptcy practice represent all sides and angles of an insolvency or distressed equation. They are trusted counsel to the firm’s corporate clients on their out-of-court financial or operational restructurings and court proceedings in Chapter 11. They also represent sponsors and strategic and financial investors in out-of-court financial restructurings and in-court bankruptcy cases; secured and unsecured creditors in large and small Chapter 11, 7 and 13 cases; and creditors’ committees and equity interests in Chapter 11 cases.