In our prior client alert, "Be Wary of Using Involuntary Bankruptcy as a Collection Tool," we were reminded to use the involuntary bankruptcy petition as a collection tool only after careful consideration of both the language and the spirit of the law. A recent case emphasizes that rule: In re TV Azteca, S.A.B. de C.V., 23-10385 (Bankr. S.D.N.Y. Nov. 20, 2023).
Five years ago we discussed the case State of Montana Department of Revenue v. Blixseth, 581 B.R. 882 (D. Nevada 2017), where four creditors ran afoul of this advice when trying to collect taxes owed by a debtor.1
11 U.S.C. Section 303 lays out the basic requirements to file an involuntary petition, forcing a debtor into bankruptcy court. Among those requirements are that:
- Three or more petitioners are needed if the debtor has 12 or more creditors (otherwise only 1 petitioner is required).
- The debtor must generally be failing to pay its debts as they become due.
- The debts owed to the petitioners must not be subject to a bona fide dispute.
Beyond the "letter of the law," the "spirit" underlying its presence in the Bankruptcy Code is to provide a...
