Involuntary Bankruptcy

In Rosenberg v. DVI Receivables XVII, LLC, 2016 WL 4501675 (3d Cir. August 29, 2016), the United States Court of Appeals for the Third Circuit held that Section 303(i) of the United States Bankruptcy Code does not preempt state law claims by non-debtors for damages arising from the filing of an involuntary bankruptcy petition.

The Petitioning Entities filed involuntary bankruptcy petitions against Mr. Rosenberg and his affiliated entities.  The involuntary petitions were dismissed because the entities were not Rosenberg’s creditors.  Rosenberg subsequently recovered compensatory and punitive damages under Section 303(i).

Rosenberg’s wife and several affiliated entities (the “Rosenberg Affiliates”) then filed suit in the Eastern District of Pennsylvania against the Petitioning Entities for tortious interference with contracts and business relationships.  The Rosenberg Affiliates alleged that the Petitioning Entities filed the involuntary petitions with the intent of causing the Rosenberg Affiliates to default on their mortgages and lose their properties.

The District Court dismissed the complaint on the ground that the Rosenberg Affiliates’ state law tortious interference claim was preempted by the involuntary provisions of the Bankruptcy Code.  The Third Circuit reversed.

The Court explained that “[i]n deciding whether Congress has occupied a field for exclusive federal regulation, we begin, based on concerns of federalism, with a sturdy presumption against preemption.”

The Third Circuit noted that although section 303(i) provides a remedy to the debtor, it “is silent as to potential remedies for non-debtors harmed by an involuntary bankruptcy petition.  This suggests that when Congress passed the provision it either did not intend to disturb the existing framework of state law remedies for non-debtors or (more likely) was not thinking about non-debtor remedies at all.  In either case, field preemption does not apply.”

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

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 ruled that the tortious interference claim was preempted by § 303(i) of the Bankruptcy Code.  The Third Circuit reversed and remanded this case back to District Court.  While the background and history of the underlying conflict is extensive, this decision was issued to resolve a narrow question of preemption law.  Opinion at *4.

Prior to the instant conflict, Maury Rosenberg and several companies were the target of involuntary bankruptcy petitions.  Mr. Rosenberg succeeded in having the involuntary petitions dismissed as the purported creditors were determined not to be their creditors.  After a jury trial in Florida District Court, he was awarded compensatory and punative damages totaling $6.1 million.

In August, 2013, Mrs. Sara Rosenberg and several entities, related to those against whom involuntary petitions were filed, brought suit to recover damages stemming from the involuntary petitions.  Opinion at *6.  Mrs. Rosenberg and the related entities alleged that they suffered extensive losses due to the filing of the involuntary bankruptcy petitions.  The defendants argued that these suits were preempted, and the District Court for the Eastern District of Pennsylvania agreed, dismissing the complaint.  Thereupon, Mrs. Rosenberg and the related entities appealed to the Third Circuit.  After oral arguments, the Opinion was issued.

According to the plain language of Section 303(i), a debtor can recover against involuntary petitioners.  However, the litigants in this case were not debtors.  As the Third Circuit stated, “As they were not debtors, the Rosenberg Affiliates cannot recover damages from the Defendants under § 303(i).”  Opinion at *8.  The Third Circuit then examines in detail the principle of federal preemption, holding that preemption does not apply in this case.  As provided by the Third Circuit, “we do not lightly infer from congressional silence the intent to deprive some persons of a judicial remedy…”  Opinion at *10.

This Opinion creates a split in the Circuits – the Ninth Circuit applied preemption more broadly in the case In re Miles, 430 F.3d 1083 (9th Cir. 2005).  Opinion at *13-14.  The Third Circuit found that the Miles decision was not persuasive on the issue of preemption.  Opinion at *14.  The Third Circuit’s reasoning is summarized in the last statement of its analysis: “Absent evidence that Congress actually meant for § 303(i) to be an exclusive remedy, we do not make the same inference.”  Opinion at *15.

On August 12, 2016, petitioning creditors Beal Bank USA and CLMG Corp. filed an involuntary chapter 11 bankruptcy petition against Bennu Titan LLC (f/k/a ATP Titan LLC).  The involuntary debtor is affiliated with Bennu Oil & Gas, a deep water oil exploration firm based in Harris County, Texas.

For a link to a brief post discussing involuntary bankruptcies in general, click here.  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 has 12 or more creditors, an involuntary petition requires three or more creditors whose claims are not contingent as to liability or subject to a bona fide dispute as to either liability or amount to file the petition.

The involuntary bankruptcy petition was filed in the United States Bankruptcy Court for the District of Delaware, and has been assigned to Judge Laurie Selber Silverstein, Case No. 16-11870.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

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.

Continue Reading Diamondhead Casino Bankruptcy – Motion to Dismiss Involuntary Petition – Granted

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 has 12 or more creditors, an involuntary petition requires three or more creditors whose claims are not contingent as to liability or subject to a bona fide dispute as to either liability or amount to file the petition.

If the company timely objects to the involuntary filing, for the company to be placed in bankruptcy, the company also must: generally not be paying its debts as they become due unless those debts are subject to a bona fide dispute as to liability or amount, or have had a custodian appointed within the past 120 days to take possession or control of substantially all of its assets.

Stay tuned for additional posts regarding involuntary bankruptcy proceedings under Section 303 of the Bankruptcy Code.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.