Ninth Circuit Bars Third Parties from Seeking Damages for Dismissal of an ‘Involuntary’
Over a dissent, the Ninth Circuit held on April 29 that a 50% shareholder of an involuntary debtor cannot seek damages for dismissal of the involuntary petition, even if the debtor itself was deadlocked and unable to act in response to the petition.
The involuntary corporate debtor had two 50% shareholders. A vote of two-thirds of the board or of the shareholders was required for the company to act.
According to the dissent by Circuit Judge Mark J. Bennett, one 50% shareholder wanted to liquidate the debtor over the objection of the other. A creditor, who was a contingent shareholder, filed an involuntary petition.
The debtor corporation was deadlocked and unable to respond to the involuntary petition. The 50% shareholder who opposed liquidation filed a motion to dismiss the petition. According to the dissenter, the opposing shareholder also sought attorneys’ fees and damages on behalf of the involuntary debtor.
According to the majority opinion by Fourth Circuit Judge Stephanie Dawn Thacker, sitting by designation, the petitioning creditor conceded at the hearing on the motion to dismiss that dismissal was proper. However, the bankruptcy court ruled that the opposing shareholder who won dismissal lacked standing to seek damages and attorneys’ fees.
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