The Second Circuit will not permit a judgment creditor in a two-party dispute to use an involuntary bankruptcy just because enforcement remedies might be superior to those available under state law.
Unable to collect a $19 million judgment, the judgment creditor filed an involuntary petition against the individual debtor. The debtor responded with a motion to dismiss or abstain under Sections 303(i) and 305(a).
Before he retired, Bankruptcy Judge Robert E. Gerber of New York dismissed the petition sua sponte for cause under Section 707(a). See In re Murray, 543 B.R. 484 (Bankr. S.D.N.Y. 2016).
In its August 14 opinion, the Second Circuit paraphrased Judge Gerber as finding cause for dismissal when the involuntary bankruptcy “was simply a judgment enforcement tactic for a two-party dispute where there were adequate remedies under state law and that continuing the case would not serve any bankruptcy purposes such as ensuring equal distribution among creditors or otherwise protecting assets from depletion.”
Finding no abuse of discretion in dismissing the petition, the district court had affirmed.
Upholding the lower courts, Circuit Judge John M. Walker, Jr. said that the debtor had no income and had paid none of the judgment. Before the judgment, the debtor had sold his yacht, helicopter and car and transferred money to an offshore asset-protection trust.
The debtor’s only identifiable asset was a $5 million apartment, which he owned with his wife as tenants by the entireties. Under state law, Judge Walker explained that that judgment creditor could sell the debtor’s interest in the apartment at an execution sale, but could not force a partition or sale or “inhabit the apartment.” If the debtor were to predecease his wife, she would own the apartment free and clear of the judgment lien.
The judgment creditor admitted that the purpose of the involuntary bankruptcy was to invoke Section 363(h) and force a sale of the apartment, including the wife’s interest.
Judge Walker described Judge Gerber as founding nine reasons contributing to “cause” for dismissal under Section 707(a), including no competing creditors, no creditor community to protect, no need for pari passu distribution, and the attempt to use an enforcement remedy not available under state law.
The creditor argued in the Second Circuit that dismissing the petition was an abuse of discretion because, allegedly, “New York’s remedies for enforcing a judgment on property owned in a tenancy by the entirety do not adequately protect its interests.” Judge Walker said, “We disagree, and therefore affirm.”
There was no abuse of discretion, Judge Walker said, “because dismissal better advances [the debtor’s] interests as a debtor, furthers the interests of the bankruptcy courts and the public, and does not substantially prejudice [the judgment creditor’s] interests as a creditor.” He added that “judgment enforcement remedies under New York law sufficiently protect [the judgment creditor’s] interests as a sole creditor” because it was “by no means certain” that the bankruptcy court would authorize a sale under Section 363(h).
Dismissal promoted the interest of “the bankruptcy system a whole,” Judge Walker said, because allowing the involuntary case to proceed “would likely see an increase of new bankruptcy filings in cases that are more appropriately handled in state court.”
The judgment creditor argued that dismissal was improper because the bankruptcy judge did not find bad faith in the involuntary filing. Judge Walker responded by saying that misuse of the Bankruptcy Code need not rise to the level of bad faith before amounting to “cause” justifying dismissal.