In re Murray
In re Murray, 543 B.R. 484 (Bankr. S.D. N.Y. 2016), issued an opinion dismissing an involuntary bankruptcy case brought by a single creditor.
In Murray, this creditor, the Wilk Auslander LLP law firm, was the assignee of a judgment obtained from its client (after the client did not pay its fees). The law firm sought to enforce upon its the judgment. To that end, the firm, as Murray’s sole creditor, filed an involuntary chapter 7 bankruptcy proceeding. Shortly after, Murray, filed a motion to dismiss the case under section 707(a), alleging the firm brought the petition in bad faith. Murray also requested sanctions.
Murray had no income, and his sole material asset was an interest in a tenancy by the entirety with his wife in the apartment in which they resided. Under New York law, the creditor’s sole remedy was to execute on Murray’s interest in the apartment, but not the entire interest held by Murray and his non-debtor spouse. But the bankruptcy code, under Section 363, allows a forced sale of the entire apartment, providing Murray’s non-debtor spouse only with the right of first refusal to match the sale offer.
The court began by noting that the facts of the case represent a "common" and abused practice: the filing of a bankruptcy petition in a two-party dispute. Though most commonly, the court stated, the abuser is the debtor and not the creditor. The question the court addressed was whether a single creditor could bring an involuntary bankruptcy case, admittedly as a judgment enforcement tool. The petitioning creditor law firm, the court noted, brought the case to as a means to exploit Section 363, in an attempt to monetize the spousal interest in the property jointly held with Murray.
The court reviewed several factors used to determine whether bankruptcy petitions constitute bad-faith filings: whether the dispute involved two-parties, whether the dispute could be resolved in a non-bankruptcy forum, and whether filing the petition was a mere litigation tacit.
Relying on these factors, the court found that the involuntary filing was indeed inappropriate. The goal of the bankruptcy system, it noted, is to achieve societal goals as a collective remedy, and to achieve distributions for all creditors. But in this case, the filing arose from a two-party dispute, and the petitioning creditor used the bankruptcy system "solely as a judgment enforcement mechanism" to achieve a result unavailable under non-bankruptcy law, and where no other creditors existed that needed protection. The court found this to be a misuse of the bankruptcy code.
Considering that 11 USC 303(a)(2) states a single creditor can file an involuntary bankruptcy petition, if there are fewer than 12 total creditors, the fact a single creditor filed the involuntary petition against Murray was allowed by Section 303(a)(2).
While the court did not award sanctions to Murray, creditors should consider the risks of using involuntary petitions as a litigation strategy aimed at obtaining remedies under the bankruptcy code not otherwise available under state law. On the other hand, the whole point of filing an involuntary bankruptcy case (or a voluntary bankruptcy case) is to obtain remedies not available under non-bankruptcy law.