Involuntary bankruptcy is a legal proceeding in which a person or business is forced to go into bankruptcy by creditors. Involuntary bankruptcy is most often used when unsecured creditors suspect fraud on the part of a company, such as when a Ponzi scheme is discovered, or for some other extraordinary reason. Section 303 of the Bankruptcy Code is entitled “Involuntary cases.” It sets forth the requirements for filing an involuntary bankruptcy case.
If a company has 12 or more creditors, an involuntary bankruptcy petition requires (a) three or more creditors whose claims are not contingent as to liability or subject to a bona fide dispute as to either liability or amount to file the petition, and (b) those qualifying claims must total, in the aggregate, at least $14,425 if unsecured or $14,425 more than the value of any liens securing those claims if any are secured.
If the company has fewer than 12 creditors, it only takes one qualifying creditor to file an involuntary petition.
Additional creditors can join the petition later, and if only one creditor files and it turns out that the company has more than 12 creditors, the bankruptcy court will give other creditors an opportunity to join.
If the company timely objects to the involuntary filing, for the company to be placed in bankruptcy, the company also must generally not be paying its debts as they become due unless those debts are subject to a bona fide dispute as to liability or amount, or have had a custodian appointed within the past 120 days to take possession or control of substantially all of its assets.
An example of a recent involuntary bankruptcy proceeding that I handled is In re Video Symphony Entertraining, Inc., case no. 2:15-bk-14744-BB, a bankruptcy for a video training school. My clients were teachers and administrators at the school who had not been paid and who suspected that funds had been diverted by its President and owner Michael Flanagan.
When the petitioning creditors first came to me, the case had already been dismissed. I successfully moved to have dismissal vacated, and filed an Emergency Motion for Order Appointing Interim Trustee Pursuant to 11 U.S.C. Section 303(g) The Court granted my motion over the opposition of the debtor and its President Michael Flanagan and ordered the appointment of Richard Diamond as Chapter 7 Trustee. The Trustee is currently prosecuting multiple adversary proceeding cases in an effort to recover money for the benefit of the creditors in this case, including an adversary proceedings against Michael Flanagan and his Trust, against Mt. Sierra College, against UMPQUA Bank, against Homestreet, Inc., against CIT Credit Group, USA, Inc. And against Financial Partners Credit Union, Inc.
Contact the Law Offices of Michael Jay Berger
Call the Law Offices of Michael Jay Berger at 310-271-6223 or contact me online to schedule a free consultation.