By: John Amato
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Under title 11 of the United States Code (the “Bankruptcy Code”), a creditor may file an involuntary petition against a debtor that has less than twelve creditors.[1] A bankruptcy court, however, has broad discretion to dismiss involuntary bankruptcy petitions for cause.[2] The United States Court of Appeals for the Second Circuit considered this discretionary power in In re Murray when it affirmed dismissal of a sole creditor’s involuntary petition for cause.[3]
Wilk Auslander LLP (“Wilk”), the creditor of a more than $19 million judgment against Matthew Murray (“Murray”), filed an involuntary bankruptcy petition with the United States Bankruptcy Court for the Southern District of New York.[4] Although subject to dispute,[5] Murray’s sole asset was a $4.6 million Manhattan cooperative apartment that he and his wife owned as tenants by the entirety.[6] Wilk wanted to take advantage of the Bankruptcy Code, specifically Section 363(h), to capitalize on Murray’s interest in the apartment free and clear of Murray’s wife’s interest.[7] Under Section 363(h), the trustee is permitted to sell both the debtor’s interest and the interest of any spouse or other co-owner in the property, “including in a tenancy by the entirety.”[8]
The Bankruptcy Court for the Southern District of New York dismissed Wilk’s involuntary bankruptcy petition sua sponte for cause pursuant to Section 707(a).[9] That court articulated nine factors, including that there was no need for pari passu distribution, supporting the conclusion that Wilk’s petition should be dismissed as an improper use of the bankruptcy system.[10] Distilling those factors, the bankruptcy court concluded Wilk’s petition was a judgment enforcement tactic for a two-party dispute for which there were adequate remedies under state law.[11] As a judgment creditor under New York law, Wilk had the right to execute on Murray’s shares in the apartment and to cause those shares to be sold in a judgment execution sale.[12] However, “neither Wilk nor any third-party purchaser of those shares would have the right to execute on Murray’s wife’s interest in the apartment, to force a partition or sale of the apartment, or to inhabit the apartment.”[13] Murray’s wife would maintain her right of survivorship and she would own the property free and clear of any third party’s interest if Murray predeceased her.[14] Wilk appealed to the district court, arguing the bankruptcy court erred in dismissing the petition for cause.[15] The district court affirmed, concluding the bankruptcy court did not abuse its discretion by dismissing Wilk’s petition for cause.[16] The Second Circuit also affirmed and highlighted two key factors that supported dismissal.[17]
First, the court emphasized that Wilk could not show it would be substantially prejudiced by relying on New York’s judgment enforcement remedies because of the speculative nature of any Section 363 sale of Murray’s apartment.[18] A Section 363(h) sale is permissible only if, inter alia, the benefit of that sale outweighs the detriment to the other co-owners and the sale of the estate’s undivided interest in such property would realize significantly less for the estate than the sale of such property free of the interests of such co-owners.[19] The Second Circuit resolved that the detriment to Murray’s wife may have outweighed the value to the estate. Additionally, it was unclear that any Section 363 sale would value Murray’s interest any higher than would a sale under New York law.[20] For these reasons, the court concluded the dismissal did not substantially prejudice Wilk.[21]
Second, the court considered the interests of both the debtor and the bankruptcy system and concluded that policy considerations weighed in favor of dismissal. [22] In regards to the former, “involuntary bankruptcy proceedings are serious measures with drastic repercussions for the debtor.”[23] In regards to the latter, there would likely be “an increase of new bankruptcy filings in cases that are more appropriately handled in state court.”[24] This increase would “divert the valuable resources and attention of specialized bankruptcy courts to matters intended to be addressed in state court–a result that is antithetical to the purpose of having a separate bankruptcy system in the first place.”[25]
In re Murray highlights that a creditor’s preference for bankruptcy remedies cannot outweigh the lack of any other bankruptcy related purpose.[26] A creditor’s utilization of the bankruptcy system in a fashion that amounts to exploitation will not be viewed kindly by the courts. The bankruptcy courts will not serve as a “rented battlefield” or a “collection agency” when another forum exists to resolve an issue.[27] A creditor that fears it may be substantially prejudiced by relying on state law remedies should consider whether it can prove such prejudice before subjecting a party to the bankruptcy process by filing an involuntary petition. Further, creditors should heed the nine-factor test outlined by the Bankruptcy Court for the Southern District of New York–and echoed by the Second Circuit–when deciding whether to file an involuntary petition.[28]
[1] See 11 U.S.C. § 303(b)(2) (2012) (providing a mechanism for a sole creditor to commence an involuntary case when that creditor holds one or more claims in the aggregate of at least $10,000).
[2] See § 707(a); In re Murray, 900 F.3d 53 (2d Cir. 2018) (“Section 707(a) authorizes a bankruptcy court to dismiss a case for cause, with the determination of whether cause exists left to the discretion of the bankruptcy court.”).
[3] 900 F.3d 53.
[4] See id. at 56.
[5] See id. at 56 (discussing potential fraudulent transfers by Murray, but also its insignificance for the case at bar).
[6] Id. at 57.
[7] Id.
[8] See § 363(h).
[9] In re Murray, 900 F.3d at 57-58.
[10] See id. at 57 (“The bankruptcy court identified nine factors supporting its conclusion that the petition should be dismissed as an improper use of the bankruptcy system: (1) the bankruptcy court was the most recent battlefield
in a long-running, two-party dispute; (2) Wilk Auslander brought the case solely to enforce a judgment; (3) there were no competing creditors; (4) there was no need for pari passu distribution; (5) assuming there were fraudulent transfers to be avoided, Wilk Auslander could do so in another forum; (6) Wilk Auslander had adequate remedies to enforce its judgment under non-bankruptcy law; (7) Wilk Auslander invoked the bankruptcy laws solely to secure a benefit—the ability to execute on both Murray and his wife’s interests in their apartment under 11 U.S.C. § 363(h)—that it does not have under non bankruptcy law and without a creditor community to protect; (8) no assets would be lost or dissipated in the event that the bankruptcy case did not continue; and (9) Murray did not want or need a bankruptcy discharge.”).
[11] Id. at 56.
[12] Id. at 61.
[13] Id.
[14] Id.
[15] Id. at 58.
[16] Id.
[17] See id. at 61 (narrowly affirming the bankruptcy court’s nine-factors supporting dismissal for this case and focusing on two key factors).
[18] See id. at 61-62.
[19] See § 363(h) (listing four requirements that must be satisfied for the trustee to proceed with a sale of this type).
[20] In re Murray, 900 F.3d at 62.
[21] Id.
[22] Id. at 62-63.
[23] Id. at 62-63, n. 7.
[24] Id. at 63.
[25] Id.
[26] Id. at 62 (“Wilk Auslander’s preference for bankruptcy remedies to solve a two-party dispute cannot outweigh the lack of any other bankruptcy-related purpose.”).
[27] In re Murray, 900 F.3d at 63.
[28] See supra note 10.