11 U.S.C. Section 303 - Involuntary Cases

What Is Section 303?

Section 303 is the involuntary-bankruptcy statute. It authorizes creditors, in narrowly defined circumstances, to force a debtor into a Chapter 7 or Chapter 11 case. Voluntary cases account for the overwhelming majority of bankruptcy filings; involuntary cases under Section 303 are relatively rare, but their availability provides important leverage for creditors dealing with a debtor that is hiding assets, paying favorites, or otherwise dissipating value pre-bankruptcy.

What Cases Can Be Involuntary: Section 303(a)

Section 303(a) limits involuntary petitions to Chapter 7 and Chapter 11. They may not be filed against farmers, family farmers, or non-moneyed business corporations. Individual debtors, corporations, and partnerships are otherwise eligible respondents. Involuntary Chapter 12, 13, and 15 cases are not authorized.

Who Must Sign the Petition: Section 303(b)

Section 303(b) defines petitioning-creditor requirements:

• (b)(1): If the debtor has 12 or more creditors (excluding insiders, employees, and transferees of voidable transfers), an involuntary petition requires at least three petitioning creditors holding non-contingent, undisputed claims aggregating at least the statutory threshold (currently $18,600 as of the most recent indexed adjustment).
• (b)(2): If the debtor has fewer than 12 such creditors, a single petitioning creditor holding non-contingent, undisputed claims of at least the threshold amount is sufficient.
• (b)(3): In partnership cases, less than all general partners may join, with separate provisions for foreign partnerships.
• (b)(4): A foreign representative of an estate in a foreign proceeding may commence an involuntary case.

The non-contingent, undisputed-claim requirement is jurisdictional in many circuits: if any petitioning creditor's claim is the subject of a bona fide dispute "as to liability or amount," that creditor cannot serve as a petitioning creditor and the petition fails for lack of numerosity or amount.

Grounds for Relief: Section 303(h)

If the debtor controverts the petition, the court must enter an order for relief only if one of two grounds is established under Section 303(h):

• (h)(1): The debtor is "generally not paying" its debts as such debts become due, unless the debts are the subject of a bona fide dispute as to liability or amount.
• (h)(2): Within 120 days before the date of the filing of the petition, a custodian (other than a custodian of less than substantially all of the debtor's property) was appointed or took possession.

The "generally not paying" standard is fact-intensive. Courts look at the number, amount, and materiality of unpaid debts; the duration of nonpayment; the totality of the debtor's financial conduct; and whether nonpayment reflects a global inability to pay rather than isolated disputes.

The Gap Period: Section 303(f)

Between the filing of the involuntary petition and the entry of an order for relief, the debtor may continue to operate its business and use property as if an involuntary case had not been commenced (Section 303(f)). Transfers and obligations incurred during this "gap period" receive priority under Section 507(a)(3) if the case proceeds to an order for relief.

This rule preserves business continuity during the contested gap, but also limits the petitioning creditors' practical leverage: filing an involuntary petition does not, by itself, freeze the debtor's operations.

Bad-Faith Damages: Section 303(i)

Section 303(i) is the teeth of the involuntary regime. If the court dismisses an involuntary petition other than on the debtor's consent, and no order for relief has been entered, the court may grant judgment against the petitioning creditors and in favor of the debtor for:

• 303(i)(1)(A): Costs.
• 303(i)(1)(B): Reasonable attorney's fees.
• 303(i)(2)(A): Compensatory damages, if the petition was filed in bad faith.
• 303(i)(2)(B): Punitive damages, if the petition was filed in bad faith.

Courts have not hesitated to impose substantial damages awards against petitioning creditors who file involuntary petitions for ulterior purposes, to gain leverage in unrelated litigation, or without adequate factual investigation of the "generally not paying" standard.

Major Doctrinal Cases

• Maine Family Federal Credit Union v. Sun Life Assurance Co. of Canada, 423 F.3d 198 (2d Cir. 2005) - Discussed the bona-fide-dispute requirement for petitioning-creditor claims.
• In re Reid, 773 F.2d 945 (7th Cir. 1985) - Foundational discussion of what constitutes "generally not paying" debts as they come due.
• In re Sims, 994 F.2d 210 (5th Cir. 1993) - Articulated factor-based approach to the generally-not-paying analysis.
• In re Bayshore Wire Products Corp., 209 F.3d 100 (2d Cir. 2000) - Bona-fide-dispute standard applies to amount as well as liability.
• In re Vortex Fishing Systems, Inc., 277 F.3d 1057 (9th Cir. 2002) - Substantial bad-faith damages and attorney's fees awarded against petitioning creditors.
• In re Sof-Lite Bulb Co., 859 F.2d 446 (7th Cir. 1988) - Bad-faith inquiry under Section 303(i)(2) is objective and subjective.
• In re Forever Green Athletic Fields, Inc., 804 F.3d 328 (3d Cir. 2015) - Discussed totality-of-circumstances bad-faith standard.

Related Bankruptcy Code Sections

• Section 301 - Voluntary cases
• Section 302 - Joint cases
• Section 305 - Abstention by the court
• Section 507 - Priority of expenses and claims (including gap-period claims)
• Section 541 - Property of the estate
• Section 549 - Postpetition transactions (gap-period transfers)