Recent U.S. Bankruptcy Court Decision Outlines the Standard for Determining When Creditors, Including Hedge Funds, Will Be Liable for Attorney’s Fees and Punitive Damages When They File Unsuccessful Involuntary Chapter 7 Bankruptcy Petitions

The U.S. Bankruptcy Court for the Southern District of New York recently decided a debtor’s motion for attorney’s fees and punitive damages following the dismissal of involuntary Chapter 7 bankruptcy petitions filed by petitioning creditors, who are affiliates of a hedge fund firm.  Section 303(i) of the U.S. Bankruptcy Code authorizes a court to award debtors such amounts upon dismissal of an involuntary Chapter 7 bankruptcy petition.  The decision is instructive for hedge funds and other creditors in evaluating whether to file such petitions and how to approach the petitioning process in light of the potential for such awards.  This article summarizes the factual background and the Court’s analysis in this case.

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