The new
bankruptcy law (The Bankruptcy Reform Act) makes bankruptcy court
an inhospitable environment for Florida debtors. The new bankruptcy
law deprives Florida debtors of many powerful asset protections previous
available in bankruptcy including much of their important homestead
protection. The new bankruptcy law only affects debtors who are under
jurisdiction of the bankruptcy court. Outside of bankruptcy Florida
debtors retain their full homestead protection and other Florida exemptions
from creditors. The new bankruptcy law creates a substantial divergence
between liberal asset protections, including homestead, in Florida’s
state court collection proceedings and a federal bankruptcy system
which is much more creditor oriented. Because of creditor’s
advantages created in the Bankruptcy Reform Act, many debtors are
worried about their creditors forcing them into an involuntary bankruptcy.
Many debtors understand that single creditor with a claim of more
than approximately $12,000 can file a petition for involuntary bankruptcy,
and when a debtor has 12 or more creditors, any three creditors together
may petition for involuntary bankruptcy. Alone, these requirements
make an involuntary bankruptcy filing seem easy for unsatisfied creditors.
In fact, involuntary bankruptcy is uncommon, and the reason is that
there are other legal requirements which make it difficult and risky
for a creditor to pursue forcing a debtor into bankruptcy involuntarily.
Congress imposed several requirements to compel an involuntary bankruptcy.
First, each filing creditor must prove that their claim is not subject
of a bona fide dispute. If the debtor can allege any legitimate defense,
whether or not the defense is meritorious, the debtor can disqualify
the claim as a basis for involuntary bankruptcy. Most courts adopt
the test of whether there is a a genuine issue of material fact that
bears upon the debtor’s liability as the criteria of a bona
fide dispute. A debtor's challenge to liability or the amount of damages
may constitute a bona fide dispute. The purpose of the bona fide dispute
criteria is to prevent creditors from forcing bankruptcy upon debtors
who have legitimate defenses.
A second filing requirement is that the debtor must be shown to be
not paying his non-disputed debts as they become due. That a debtor
is not paying one or two creditors, regardless of how upset these
creditors may be, does in itself not mean that the debtor generally
is not paying his debts. Courts have used several factors to evaluate
“generally not paying” test such as the amount of debts
long overdue, the debtor’s liquidity, the amount of debt not
being paid, the length of time of the debtor’s non-payment,
and the debtor’s liquidity. Some courts have defined “generally
not paying” to mean that the debtor is regularly missing a significant
number of payments that are significant in relation to the debtor’s
overall financial situation. The creditor has the burden of proving
the debtor is generally not paying debts.
Another basis for involuntary bankruptcy is the debtor’s transfer
of substantially all of its assets to a third party such as a trustee
or receiver. A voluntary assignment of assets for the benefit of creditors
in a state court proceeding or in an out-of-court settlement triggers
the right to involuntary bankruptcy if filed within 120 days of the
debtor’s transfer. A debtor who makes as assignment for creditors
under Florida Statute 727 invites a petition for involuntary bankruptcy.
Perhaps the most important requirement for a creditor’s involuntary
bankruptcy petition is that the petition be filed in good faith. A
court will dismiss a petition upon determination that the creditor’s
motives were in bad faith. The historical purpose of involuntary bankruptcy
to prevent unfairness to creditors as a group caused by ensuring fair
and proportionate distribution of a debtor’s non-exempt assets.
Involuntary bankruptcy properly should be imposed to prevent a debtor
from fraudulently conveying assets or from giving preferential payments
to favored creditors. Courts will dismiss involuntary bankruptcy petitions
filed fore improper purpose such as malice, harassment, or other improper
use of bankruptcy procedures.
Applying this standard courts have dismissed involuntary bankruptcy
petitions which were designed to shut down a debtor corporation’s
business, to gain settlement leverage, or which were used as a substitute
for customary state court collection. Most bankruptcy courts will
not allow involuntary bankruptcy to be used as a creditor collection
tool employed by an aggressive creditor. The appropriate use of involuntary
bankruptcy is preserving assets and enforcement of fairness among
a group of creditors.
The main reason involuntary bankruptcy petitions are rare is the creditor’s
liability for filing an unsuccessful petition. It is usually difficult
for a creditor to determine prior to filing an involuntary petition
whether claims are subject to a debtor’s bona fide dispute and
therefore unable to support the petition, or whether a court will
find that the petition was not filed in good faith in furtherance
of a valid bankruptcy purpose. If a court dismisses an involuntary
bankruptcy petition the filing creditor the court may sanction the
petitioner with a judgment for the debtor’s costs, attorneys
fees, compensatory damages, and where appropriate, punitive damages.
In most cases damages and fees may be awarded even the absence of
bad faith.
