Involuntary Bankruptcy

Creditors, in certain circumstances, can seek to put a debtor into an involuntary bankruptcy case. This is a serious and powerful remedy. And, if successful, an involuntary bankruptcy subjects the debtor to be overseen by the federal court system and laws. A threshold issue, however, is that the creditor’s claim must not be subject to a bona fide dispute. On February 3, 2014, the Court of Appeals for the Fifth Circuit in In re Green Hills Development Co., L.L.C., — F.3d —, 2014 WL 380386 (5th Cir. 2014) affirmed a dismissal of an involuntary bankruptcy case. The Court discussed the no bona fide dispute requirement. Notwithstanding that the involuntary bankruptcy was dismissed because the creditor’s claim was held subject to a bona fide dispute and was being litigated extensively in state court prior to the involuntary bankruptcy petition, the creditor avoided sanctions. The full opinion is available here.