October 06, 2015 Practice Points

Third Circuit: Bad Faith Is Independent Ground to Dismiss Involuntary Petition

The case is In re Forever Green Athletic Fields, Inc.

By Brett M. Haywood

In In re Forever Green Athletic Fields, Inc., No. 14-3906 (3d Cir. Oct. 16, 2015), the Third Circuit Court of Appeals ruled that an involuntary petition may be dismissed for bad faith even when the statutory requirements for filing an involuntary petition are satisfied and the debtor is not paying its debts as they become due. Although creditors are presumed to act in good faith, the court concluded that a court may dismiss an involuntary petition if the debtor demonstrates by a preponderance of the evidence that a petitioning creditor acted in bad faith. The court adopted a “totality of the circumstances” standard for determining bad faith under 11 U.S.C. § 303. The court noted that this fact-intensive inquiry may consider a number of factors, including, but not limited to, whether

  • the creditors satisfied the statutory criteria for filing the petition; the involuntary petition was meritorious,

  • the creditors made a reasonable inquiry into the relevant facts and pertinent law before filing,

  • there was evidence of preferential payments to certain creditors or of dissipation of the debtor’s assets,

  • the filing was motivated by ill will or a desire to harass,

  • the petitioning creditors used the filing to obtain a disproportionate advantage for themselves rather than to protect against other creditors doing the same,

  • the filing was used as a tactical advantage in pending actions,

  • the filing was used as a substitute for customary debt-collection procedures, and

  • the filing had suspicious timing.

Perhaps significantly, the court credited evidence that suggested that the bad-faith petitioning creditor’s motive in filing the involuntary proceeding was in part to coerce the putative debtor to abandon a potentially significant estate asset; namely pending litigation by the debtor against that petitioning creditor. The Court left open the question of whether the joinder of a good-faith petitioning creditor prior to the petition’s dismissal could have saved the involuntary filing.

Brett M. Haywood – October 6, 2015