If Party A files an involuntary bankruptcy case against Party B that is contested by Party B, and if Party A fails to convince a bankruptcy court that Party B should be a debtor in such involuntary bankruptcy case, the general rule is that Party A must pay the reasonable attorneys’ fees incurred by Party B in successfully obtaining dismissal of the involuntary filing.
According to a recent decision by the Eleventh Circuit Court of Appeals in DVI Receivables XIV, LLC v. Rosenberg, Party A’s liability for pay the reasonable attorneys’ fees incurred by Party B also includes those fees incurred by Party B in successfully defending on appeal the order of the bankruptcy court dismissing the involuntary filing. (In re Rosenberg) Whether these appellate-level attorneys’ fees are properly included as recoverable is an issue the United States Supreme Court is now being asked to consider by U.S. Bank, N.A. which believes the Eleventh Circuit erred in Rosenberg. (US Bank National Association v. Rosenberg)
Section 303(i)(1) of the Bankruptcy Code provides for an award of reasonable attorneys’ fees to an alleged debtor where an involuntary petition is filed against it and later dismissed and such dismissal was not a voluntary act by the petitioning creditor, and the alleged debtor also did not waive its right to seek such fees in seeking dismissal of the involuntary petition. However, section 303(i) says nothing about fees for successfully defending an order dismissing an involuntary petition before an appellate court, which in the bankruptcy world, can include defense of an appeal before at least two appellate courts — a U.S. District Court and a U.S. Court of Appeals — since a litigant has the statutory right to appeal an order of a bankruptcy court initially to the District Court, and then to the Circuit Court.
Using the above example, if Party A which, for various strategic reasons, is considering initiating an involuntary bankruptcy case against Party B in any of the bankruptcy courts located in Florida, Georgia and Alabama (which are required to follow Eleventh Circuit case law), then Party A must not only consider that it might have to pay an award of attorneys’ fees incurred by Party B at the bankruptcy court level if Party A loses in its attempt to have Party B declared bankrupt; but if Party A then appeals that adverse ruling to both the District Court and Court of Appeals, then Party A may also be on the hook to pay the additional attorneys’ fees that will necessarily be incurred by Party B if Party A’s appeal(s) challenging the ruling(s) dismissing the involuntary case against Party B fail(s), too.
As appeals from the Circuit Courts to the Supreme Court are discretionary on the part of the Supreme Court, the ruling in Rosenberg is now binding law in the Eleventh Circuit. However, the Eleventh Circuit’s decision is directly contrary to a prior decision by the Ninth Circuit Court of Appeals,(Higgins v Vortex Fishing Systems Inc), and so the probability that the Supreme Court may hear U.S Bank N.A.’s appeal is somewhat greater because the Supreme Court often seeks to resolve conflicts amongst the Circuit Courts.