Filing an involuntary bankruptcy petition is fraught with risk. If the court dismisses the involuntary petition, the creditors who filed the petition (referred to as the petitioning creditors) may be liable for damages caused by the filing and even punitive damages. A recent opinion from the District Court for the District of Nevada in State of Montana Department of Revenue v. Blixseth increases the risk for petitioning creditors and may have the effect of decreasing the number of involuntary filings.
In Blixseth, four creditors filed an involuntary Chapter 7 petition against Timothy Blixseth. Three of the creditors were the taxing authorities for the states of Montana, Idaho and California, and the fourth creditor was the liquidating trustee of the Yellowstone Club Liquidating Trust. Blixseth, as the alleged debtor, moved to dismiss the involuntary petition, arguing that the involuntary petition did not meet the Bankruptcy Code’s requirement that at least three qualified creditors join in the petition. Continue Reading