David DiMatteo

Can You Fight a Corporate Bankruptcy Filing? On What Grounds?

A January 2021 decision by the U.S. Bankruptcy Court for the Western District of North Carolina (Charlotte Division) dismissed the March 2020 Chapter 11 reorganization bankruptcy filings by a corporation and a related limited liability company for the following reasons:

  1. Under both the LLC Operating Agreement and Georgia corporate law, only the directors of the LLC could authorize the bankruptcy filing.  Here, only the President (not a director) did so.  
  2. The filings were made in bad faith:  they were objectively futile and, based on specific legal factors, were subjectively futile.  The court mentioned that neither the LLC nor the corporation has any business, operations, employee, revenue, or asset value, and further, that a large portion of the unsecured debt was furnished by insiders.    

The bankruptcy court concluded that the evidence showed that the debtors’ sole purpose in the bankruptcy filings was to “disrupt and harm” the secured creditors’ position.  In reaching this conclusion, the court pointed out (1) on the same day of the bankruptcy filings, the debtors filed a lawsuit in the bankruptcy seeking to recharacterize all of the secured creditors’ debts and (2) the insider who authorized the filings, who claimed the debtors owed him $1.186 million, did so to try to recharacterize the secured creditors’ debts as equity, which under the Bankruptcy Code would prioritize his claim for payment above theirs.  The court also noted that the bankruptcy filing was the only way to stop the secured creditors who obtained the dismissal from pursuing foreclosure of their collateral.

Essex Richards represented the secured creditors in obtaining this ruling.  In March 2021, the court agreed to reconsider the ruling; Essex Richards anticipates that a subsequent ruling will include additional detail for an appellate court to consider, if appealed.  Every case is different, and the window to fight a bankruptcy filing is short, so if you have questions or concerns about a corporate bankruptcy filing, obtain a prompt review by an experienced bankruptcy attorney.