Bankruptcy: Eleventh Circuit Rules That Petitioning Creditors Face Fee Exposure For Debtor’s Fees To Obtain Dismissal Of Involuntary Bankruptcy Case, To Obtain Appellate Affirmance Of Dismissal Order, And To Prosecute Bad Faith Damage Claims Against

 

11^th Circuit Disagrees With 9^th Circuit Ruling On Appellate Fee Availability For Dismissal Order.

     Petitioning creditors in involuntary bankruptcy filings need to be aware that they can be subject to having to pay a debtor’s attorney’s fees for obtaining a dismissal of the case and also may have to pay bad faith damages (both compensatory and punitive) as well as debtor’s fees for prosecuting the bad faith damages case against petitioning creditors.

     A de facto petitioning creditor (an individual who signed on behalf of certain claimed creditors) found that out the hard way in DVI Receivables XIV, LLC v. Rosenberg, No. 13-14781 (11^th Cir. Feb. 27, 2015) (published). What happened was that a debtor in an involuntary bankruptcy successfully obtained dismissal of the case brought by certain petitioning creditors, with debtor also being able to prove that the individual signing was the real de facto petitioning creditor and the “front” entities were only “pass through vehicles.” The dismissal was appealed, but affirmed. Debtor then brought bad faith damages claims against petitioning creditors, with the fee claims sent to the bankruptcy judge and the damages claims to a jury trial. Eventually, the bankruptcy court awarded dismissal fees, appellate fees for sustaining the dismissal, “fees on fees,” and fees incurred to prosecute the bad faith claims in an amount of $1,034,295.45 (along with $39,015.37 in costs). A jury found for debtor, awarding $1.12 million in compensatory and $5 million in punitive damages, with the district judge eventually lowering the total tally to $360,000 for emotional distress.

     Petitioning creditors challenged some of the fee awards, with the Eleventh Circuit determining fee entitlement was indeed existent under 11 U.S.C. § 303(i)(1). Creditors did not challenge the dismissal fees. The federal appeals court found that the appellate fees awarded for sustaining the dismissal were recoverable under this statute, parting company from a contrary ruling in Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 708-709 (9^th Cir. 2004). It also determined that fees to prosecute the bad faith damages claims were recoverable, but remanded for a recalculation.