Appointment of Interim Trustees In Involuntary Bankruptcy Cases

Involuntary bankruptcy filings are rare. This fact reflects the current understanding that the principal purpose of the Bankruptcy Code is to grant a fresh start to the honest, but unfortunate debtor. Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 367 (2007). An involuntary petition is an “extreme remedy with serious consequences to the alleged debtor.” In re Forever Green Athletic Fields, Inc., 2015 WL 6080665, at *5 (3d Cir. Oct. 16, 2015).As such, a court should not lightly enter an order for relief. An even more extreme remedy—the appointment of an interim trustee—is permitted by section 303(g) of the United States Bankruptcy Code, “if necessary to preserve the property of the estate or to prevent loss to the estate.” 11 U.S.C. § 303(g). An interim trustee takes possession of property of the estate and operates the debtor’s business.
There is limited case law applying section 303(g), no doubt because the request for such relief is rare. The case law that does exist counsels that a request for an interim trustee should be denied in “the absence of an exceptionally strong need for doing so” In re Levin, 2011 WL 1469004, at *2 (Bankr. S.D. Fla. Apr. 15, 2011) (citing In re R.S. Grist Co., 16 B.R. 872, 873 (Bankr. Fla. 1982) or “where no facts are alleged showing a necessity for the appointment.” Id. (citing In re Reed, 11 B.R. 755, 757 (Bankr. S.D.W. Va. 1981). In order to appoint a trustee, a movant must show “a substantial risk of loss to the estate.” In re Barkats, 2014 WL 6461884, at *2 (Bankr. D.D.C. Nov. 17, 2014). Further, in order to avoid the appointment of an interim trustee in an involuntary case that may be dismissed, the court must determine, as a preliminary matter, that there is a reasonable likelihood that an order for relief will be entered. In re The Centre for Management and Technology, Inc., 2007 WL 3197221, at *3 (Bankr. D. Md. Oct. 26, 2007) (citing In re Professionals Accountants Referral Services, Inc., 142 B.R. 424 (Bankr. D. Colo. 1992)).
Section 303(b)(1) provides that an involuntary case may be commenced by “three or more entities” each of which holds a claim that “is not contingent as to liability or the subject of a bona fide dispute as to liability or to amount . . . if such claims aggregate at least $15,325 more than the value of any lien on property of the debtor securing such claims. . . .” 11 U.S.C. § 303(b)(1). If there are fewer than 12 creditors (excluding employees, insiders, and transferees of a voidable transfer), then only one petitioning creditor is required. See 11 U.S.C. § 303(b)(2). Further, section 303(h) provides that if a petition is timely controverted, the court shall enter an order for relief only if “the debtor is generally not paying such debtor’s debt as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount.” 11 U.S.C. § 303(h). The petitioning creditors also have the burden of proving …that the debtor is generally not paying its bills on time.” In re A&J Quality Diamonds, Inc., 377 B.R. 460, 463 (Bankr. S.D.N.Y. 2007). Although there is no exact formula for determining when a debtor is “generally not paying its debts,” courts will “compare the number of debts unpaid each month to those paid, the amount of the delinquency, the materiality of the non-payment and the nature of the debtors’ conduct of its financial affairs.” See In re Mylotte, 2007 WL 2033812, at *5. The courts have a great deal of flexibility, but it seems reasonable to consider both the amount of the debt not being paid and the number of creditors not being paid in determining the answer. See In re All Media Properties, Inc., 5 B.R. 126, 142 (Bankr. S.D. Tex. 1980) aff’d 646 F.2d 193 (5th Cir. 1981) (the Court states that generally not paying debts includes regularly missing a significant number of payments to creditors or regularly missing payments which are significant in amount in relation to the size of the debtor’s operations).

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