Contributed by Melissa Siegel
Involuntary Petitions as Nefarious Weapons
As we’ve covered in prior blog posts, No Bad Blood in the Bankruptcy Court: Third Circuit Holds That Bad Faith Is a Basis for Dismissing Involuntary Petitions, Bankruptcy Court Reinforces the Notion That Counting the Number of Eligible Creditors Commencing an Involuntary Case Really Counts, and Three’s a Crowd: Payoffs, Numerosity, and Involuntary Petitions, creditors can file involuntary petitions against alleged debtors if they meet certain statutory requirements and file the petitions in good faith.
Earlier this year, the Bankruptcy Court in the Western District of New York denied involuntary bankruptcy petitions because they were filed “in an effort to exact retribution” and “have revenge” on the alleged debtors. Although the remedy typically sought by an involuntary petition is repayment, the involuntary petitions at issue in In re Timothy Renee Thomas sought release from incarceration.
Involuntary Petitions as a “Dangerous Entrée”
The handwritten proposed involuntary petitions were filed by a New York State inmate and named, as alleged debtors, the district attorney, police officials, private attorneys, judges, the Governor, the Attorney General, and entire governmental bodies, including the federal and state government and certain state courts.
To protect the financial good standing and personal reputations of the alleged debtors (because, “[a]s advertisements repeatedly remind us, FICO Scores matter”), the court opened the proceeding in the name of the petitioner and did not disclose the names of the alleged debtors. The court explained that the petitions appeared to be submitted solely to harass, injure, damage, or destroy the financial good standing and personal reputation of each alleged debtor and, therefore, directed the clerk to reject and not file the petitions.
The court noted that in circumstances such as this, where proposed involuntary petitions are “without merit, vexatious, [and] frivolous,” involuntary petitions “can make for a very dangerous entrée . . . served up to damage or destroy the target’s financial good standing and personal reputation.” Therefore, to prevent future abusive petitions that could be used “as a nefarious weapon intended to harass,” the court prohibited and enjoined the petitioner from attempting to file any involuntary petitions in the bankruptcy court unless signed by a New York licensed attorney who is admitted to practice before the Federal Courts for the Western District of New York.
Valuing the “Wasting Asset” and the Requirements of Section 303
Section 303 of the Bankruptcy Code allows a creditor to file an involuntary petition against an alleged debtor as long as certain criteria are met regarding the number of creditors and the claim amount. Here, the court found the petitions to being deficient in several technical respects, including that the purported claim did not meet the requirements of section 303(b)(2), because the claim was subject to a bona fide dispute as to liability or amount.
The petitioner asserted that the alleged debtors owed him over 12 million dollars in compensatory and punitive damages and demanded immediate release from prison in lieu of payment. The petitioner claimed to be a secured creditor of the proposed debtors, asserting that he held a UCC financing statement for the “property” that the proposed debtors were holding in custody – his body. In order to continue holding him in custody, the petitioner demanded that the proposed debtors supply proof of a valid security interest in his “property.” The court explained that because the amount of the petitioner’s asserted claim was based on his personal estimation of the value of his body as a “wasting asset” as a result of his incarceration, the asserted amount was “without doubt” subject to a bona fide dispute. Therefore, the requirements of section 303 were not met.
The Paralyzing Dread of Digitalization and the Decision to Seal the Identities
The court also considered the implications of the federal courts’ internet-based case management system, which made court including the names of debtors, publicly available. Although certainly offering improved convenience and enhanced disclosure, digital publication also comes with the potential for abuse. The court quoted The Count of Monte Cristo saying, “I have always had more dread of a pen, bottle of ink, and a sheet of paper than a sword or pistol,” writing that “might the Count of Monte Cristo have had a paralyzing dread were that sheet of paper to be digitalized and then launched into cyber space for all the world to read instantly? Certainly, he would.”
It is true that the “instantaneous access to court documents can provide a portal for those intent on doing harm to the reputation, dignity, or credit of ‘targets,’ if not carefully handled.” The court denied the proposed petitions, explaining that the mere docketing of the proposed petitions on the electronic case management system could negatively affect the alleged debtors’ financial credit standing or personal reputation. The court relied on the exception in section 107(c) of the Bankruptcy Code to the general rule that the clerk must ordinarily accept and make publicly available bankruptcy petitions submitted for filing. Under section 107(c), a bankruptcy court may protect an individual from disclosure if such information “would create undue risk of identity theft or other unlawful injury.” Here, the court explained that disclosure of the proposed debtors’ identifies could negatively affect their credit ratings, cause embarrassment, and create a financial burden in having to retain counsel to attempt to repair that damage. The court wanted to avoid creating any unnecessary financial and personal harm to the proposed debtors and therefore kept their identities sealed.
Keep that Genie in the Bottle
As we’ve previously discussed in our post, No Bad Blood in the Bankruptcy Court: Third Circuit Holds That Bad Faith Is a Basis for Dismissing Involuntary Petitions, involuntary petitions can have serious consequences for an alleged debtor that can be difficult, if not impossible, to reverse. The goal behind involuntary petitions is to provide creditors with a remedy to collect on debts owed when collection is sought in good faith. Here, because the petitioner was attempting an “indirect identity hijacking” and because it “is simply not possible for a Court to un-ring the bell or for a victim to put the genie back in the bottle,” the bankruptcy court directed the clerk to reject the petitions and place the petitions under seal. Time will tell if the petitioner will try again, this time with an attorney filing the petitions.
More from the Bankruptcy Blog
Copyright © 2019 Weil, Gotshal & Manges LLP, All Rights Reserved. The contents of this website may contain attorney advertising under the laws of various states. Prior results do not guarantee a similar outcome. Weil, Gotshal & Manges LLP is headquartered in New York and has office locations in Beijing, Boston, Dallas, Frankfurt, Hong Kong, Houston, London, Miami, Munich, New York, Paris, Princeton, Shanghai, Silicon Valley, Warsaw, and Washington, D.C.