Creditors are empowered under certain circumstances to force an individual or entity into bankruptcy. If an order for relief is entered and an alleged debtor is forced to reorganized or liquidate under court supervision. In his article “Involuntary Exposure – Do a Petitioning Creditor’s Losses End in the Bankruptcy Court?” Member David Goodrich discusses the consequences of a dismissal of an involuntary petition in the Third and Ninth Circuits.
Under the Third Circuit approach, a petitioning creditor’s liability to third parties are not confined to the remedies enumerated under Section 303(i) (which only the debtor is empowered to pursue). Instead, an aggrieved party may seek additional damages against a petitioning creditor in a civil action filed in a state court.
In the Ninth Circuit, however, all potential damages for a failed involuntary petition are limited to the remedies provided in Section 303(i). Mr. Goodrich believes the Ninth Circuit may have incorrectly found that Congress intentionally eliminated a third party’s right to seek damages under state law because there is no evidence of a Congressional intent to preempt state law. If correct, then third parties harmed by a failed involuntary bankruptcy case may be able to pursue civil claims against a petitioning creditor. In his article, Mr. Goodrich analyzes the Third and Ninth Circuit cases on this issue and explains why the Third Circuit’s analysis may be correct.