A judgment creditor in a two-party case cannot file an involuntary petition to glom onto assets that are out of reach under state law, according to a Jan. 13 opinion by Bankruptcy Judge Robert E. Gerber from Manhattan.
A creditor with a $19 million judgment filed an involuntary chapter 7 petition against an individual who had no other creditors. Judge Gerber dismissed the petition for “cause,” although for none of the reasons listed in Section 707(a).
The putative debtor owned a home together with his wife as tenants by the entireties. Judge Gerber described how the creditor could have foreclosed the debtor’s interest in the home outside of bankruptcy, although the value would have been smaller because state law does not permit forcing a sale of a home over a spouse’s objection.
The Bankruptcy Code, by contrast, could make the debtor’s interest more valuable because a trustee would have power to sell the entire home free and clear of the wife’s interest under Section 363(h), although the trustee would pay the wife her share of the proceeds.
Judge Gerber said that the existence of a two-party dispute by itself did not warrant dismissal. But since there were no other “legitimate bankruptcy objectives to achieve,” he would not allow the bankruptcy court to become a “rented battlefield” used as “a collection agency.”
Consequently, Judge Gerber dismissed the involuntary petition because bankruptcy cannot be used “to exploit mechanisms to monetize a spousal interest in property jointly held with a debtor that are available only in a bankruptcy case.”
The opinion indicates that the filing would have been in bad faith had the creditor known that bankruptcy would ostensibly result in a greater recovery than utilizing state law. Judge Gerber did not reach the question of bad faith and did not impose sanctions because no court had previously forbidden the creditor’s conduct.
The opinion is In re Matthew, 14-10271 (Bankr. S.D.N.Y. Jan. 13, 2016).