As mentioned in previous posts, filing an involuntary bankruptcy petition could subject a petitioning creditor to extensive attorneys’ fees and costs. In the final installment of the “Involuntary Bankruptcy 101” series, this post reviews a recent Eleventh Circuit decision posing major pitfalls for creditors hoping to collect on their debts.
Section 303(i)(1) of the Bankruptcy Code provides that if a Court dismisses an involuntary petition without consent and a debtor does not waive the right to judgment, then the Court may grant a judgment against the petitioning creditor(s) for costs and reasonable attorneys’ fees. In Rosenberg, [1] the Eleventh Circuit interpreted § 303(i)(1) to give the Court discretion to award attorneys’ fees and costs to a debtor upon dismissal of an involuntary petition. Thus, the court concluded that § 301(i)(1) does not require a finding that the filing of an involuntary petition was frivolous in order to trigger the attorneys’ fees provision. Furthermore, the Court found that nothing in 303(i)(1) precludes appellate fees or limits fees to only those incurred before the date of dismissal. Therefore, the Court awarded the debtor his attorney’s fees and costs as follows: (1) fees incurred to obtain the dismissal, (2) appellate fees, and (3) “fees on fees” for the adversary proceeding to recover its dismissal and appellate fees.
Creditors should also be aware that § 301(i)(2) allows a Court to grant a judgment against a petitioner who filed the involuntary petition in bad faith. The provision allows a Court to award damages proximately caused by the filing, as well as punitive damages.
Petitioning creditors should examine the risks associated with filing an involuntary petition as a collection tool. This is especially true given the Rosenberg decision, as damages could far outweigh any benefit from a petition if the petition is ultimately dismissed.
[1] In re Rosenberg, 779 F.3d 1254 (11th Cir. 2015).