Involuntary Bankruptcy

On August 29, 2016, the Third Circuit released a precedential opinion (the “Opinion”) which opined on whether filing an involuntary bankruptcy petition could qualify as tortious interference under state law.  The Third Circuit’s Opinion is available here.  This Opinion was issued in Rosenberg v. DVI Receivables XVII, LLC, Case No. 15-2622.  The District Court had

On June 7, 2016, Judge Laurie Selber Silverstein of the Delaware Bankruptcy Court ruled on a motion to dismiss Diamondhead’s involuntary bankruptcy petition.  The Creditors who filed the bankruptcy admitted to the Court that their intent in filing for bankruptcy was to remove management and to obtain a recovery for their equity investments.  The “Opinion” is available here.  This is the second recent opinion issued in this case.  The prior opinion was discussed in this blog post: Diamondhead Casino Bankruptcy – and the Challenge to Trustee Appointments.

While the parties involved in Diamondhead’s bankruptcy proceeding agreed to have the Court address the motion to appoint a trustee prior to addressing the Debtor’s motion to dismiss the involuntary petition, claiming it was filed in bad faith and that there is a bona fide dispute as to the debt held by the petitioning creditors.  Opinion at *2.

As became clear at trial, “the petitioning creditors’ primary purpose in filing this case was to effect a change in management, and their secondary purpose was to collect a debt. On the facts of this case, neither of these goals serves a proper bankruptcy purpose.”  Opinion at *1.


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Can a financially distressed be “forced” into bankruptcy by its creditors?  In other words, is it possible for creditors to subject a distressed entity into an involuntary bankruptcy proceeding?

The answer is yes.  Under Section 303 of the Bankruptcy Code, a debtor can be “forced” into an involuntary bankruptcy.  11 U.S.C.§ 303(b)(1).  If a company