In re Murray
62 Bankr. Ct. Dec. (CRR) 16, 543 B.R. 484, 2016 Bankr. LEXIS 105 (2016)
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Rule of Law:
An involuntary Chapter 7 bankruptcy petition filed by a single creditor, primarily as a judgment enforcement mechanism to secure remedies unavailable under non-bankruptcy law, constitutes "cause" for dismissal under Bankruptcy Code section 707(a) due to its misuse of the collective bankruptcy system.
Facts:
- Matthew N. Murray's former employer, Rodman & Renshaw (R & R), initiated a Financial Industry Regulatory Authority (FINRA) arbitration against him, alleging defamation and breach of contract.
- A FINRA panel issued an award in favor of R & R for $10.7 million, which later grew to $16 million with pre-judgment interest.
- The judgment against Mr. Murray further swelled to over $19 million with post-judgment interest, which he has not satisfied.
- R & R subsequently filed for voluntary Chapter 7 bankruptcy, and its Chapter 7 trustee assigned the judgment against Mr. Murray to Wilk Auslander LLP (the "Law Firm"), with the Law Firm sharing any recovery with R & R's estate.
- Mr. Murray has no income, and his only material asset is an interest, held as a tenancy by the entirety with his wife, in their cooperative apartment where they reside with their two children.
- Under New York non-bankruptcy law, the Law Firm, as a judgment creditor, can execute only on Mr. Murray's individual interest in the apartment, not force a sale of the entire property held jointly with his wife.
- The Law Firm admitted that it filed the involuntary bankruptcy petition against Mr. Murray specifically to utilize Bankruptcy Code section 363(h), which allows a bankruptcy trustee to sell jointly held property free and clear of both owners' interests, thereby potentially realizing a higher amount from the sale of the apartment.
- The Law Firm was the sole petitioning creditor and the only creditor of Mr. Murray in the involuntary bankruptcy case.
Procedural Posture:
- Rodman & Renshaw (R & R) commenced a FINRA arbitration against Matthew N. Murray.
- The FINRA panel issued an award in favor of R & R for damages.
- The New York State Supreme Court confirmed the FINRA arbitration award.
- The Appellate Division affirmed the New York State Supreme Court's determination.
- R & R filed a voluntary Chapter 7 bankruptcy case.
- R & R's Chapter 7 trustee assigned the judgment against Mr. Murray to Wilk Auslander LLP (the "Law Firm").
- The Law Firm filed an involuntary Chapter 7 bankruptcy petition against Matthew N. Murray in the U.S. Bankruptcy Court for the Southern District of New York.
- Matthew N. Murray filed a motion with the U.S. Bankruptcy Court for the Southern District of New York to dismiss the case for cause under Bankruptcy Code section 707(a) and for an award of sanctions.
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Issue:
Does an involuntary Chapter 7 bankruptcy petition, filed by a single creditor solely as a judgment enforcement mechanism to achieve a remedy unavailable under non-bankruptcy law, constitute "cause" for dismissal under Bankruptcy Code section 707(a)?
Opinions:
Majority - Robert E. Gerber
Yes, an involuntary Chapter 7 bankruptcy petition, filed by a single creditor solely as a judgment enforcement mechanism to achieve a remedy unavailable under non-bankruptcy law, constitutes "cause" for dismissal under Bankruptcy Code section 707(a). The court concluded that this filing represents an "inappropriate invocation — and exploitation — of the bankruptcy system." Bankruptcy was created as a collective remedy to achieve pari passu distribution amongst creditors, not as a single creditor's judgment enforcement device. The court identified several factors weighing in favor of dismissal, including that the case arises solely from a two-party dispute, was filed primarily as a judgment enforcement mechanism, seeks to achieve a result unavailable under nonbankruptcy law, has no other creditors to protect, and serves no other bankruptcy goals. While section 303 permits single-creditor involuntary petitions in certain instances, even a properly commenced case can be dismissed for cause, including "bad faith filing" or "unenumerated cause," as established by the Second Circuit's ruling in C-TC 9th Avenue Partnership v. Norton Comp. (1997). The court emphasized that cause for dismissal is not limited to enumerated factors and can be found in situations representing an inappropriate use of the Bankruptcy Code, such as filings arising from two-party disputes resolvable in non-bankruptcy forums or petitions serving as mere litigation tactics. The court specifically rejected the Law Firm's attempt to use Section 363(h) to force the sale of jointly-held property, as such a remedy is not available under state law and there are no other creditors whose collective interests would justify this action. The court distinguished this case from situations involving multiple creditors or where the debtor seeks to prevent asset dissipation or pursue an appeal, reiterating that "the bankruptcy court is not a collection agency." The court declined to make a specific finding of "bad faith" but stated that the filing was improper for "unenumerated cause," as the circumstances wholly lack the appropriate conditions for an involuntary petition and cause great harm to the debtor and his family without the countervailing needs of a creditor community.
Analysis:
This case significantly clarifies the limits of involuntary bankruptcy proceedings, particularly for single creditors. It reinforces the principle that bankruptcy is fundamentally a collective remedy aimed at equitable distribution among multiple creditors and debtor rehabilitation, rather than a tool for individual judgment enforcement or to bypass state law limitations on asset recovery. Future courts will likely cite this case when assessing "cause" for dismissal under Section 707(a) in similar two-party disputes, especially where a creditor seeks to gain a unique advantage through bankruptcy mechanisms without a broader creditor community benefiting. It emphasizes the judiciary's role in preventing the misuse and exploitation of the bankruptcy system for purposes unintended by Congress.
