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Involuntary Bankruptcy: Determining When a Claim is Subject to a Bona Fide Dispute

With respect to federal bankruptcy law, there are generally two types of proceedings: voluntary bankruptcy and involuntary bankruptcy. The overwhelming majority of cases that are filed in the United States are voluntary bankruptcies where the debtor chooses to seek relief under the U.S. Bankruptcy Code. Although much rarer, involuntary bankruptcies are also an extremely important aspect of the bankruptcy system, since they serve as a tool for creditors to try to force a debtor to liquidate its assets.

Pursuant to § 303 of the Bankruptcy Code, for the creditor of a debtor to place the debtor into involuntary bankruptcy, they must hold claims aggregating at least $14,475 that are neither contingent, unliquidated, nor subject to a bona fide dispute. This chapter analyzes the “not subject to a bona fide dispute” provision that has been the subject of substantial litigation over the years and which was the subject of a recent 9th Circuit ruling, holding that if state court judgment creditors had claims on appeal that were not stayed by means of a court order or supersedeas bond, they were sufficiently non-contingent, liquidated, and therefore not subject to bona fide dispute so as to allow them to proceed with the involuntary bankruptcy proceeding against the debtor.

The attached PDF of the chapter “Involuntary Bankruptcy: Determining When a Claim is Subject to a Bona Fide Dispute,” by Bernard R. Given, II, from Inside the Minds: Chapter 11 Bankruptcy and Restructuring Strategies, is reprinted with permission. Copyright ©2014 Thomson Reuters/Aspatore.

Bernard R. Given II, is a partner at Loeb & Loeb LLP where he concentrates his practice in bankruptcy and commercial litigation, with an emphasis on business reorganizations and creditors’ rights. Mr. Given has represented debtors, creditors, and creditors’ committees in cases throughout the United States.