Amicus Brief Urges Third Circuit to Permit Punitive Damages for Bad Faith Involuntary Bankruptcy Petition

In our amicus brief, filed on behalf of  former U.S. Bankruptcy Judges Wedoff, Markell and Fitzgerald (all retired) and 15 law school professors, we supported the petition for rehearing en banc filed by National Medical Imaging. The overarching issues is whether “malice” or “egregious conduct” is a required condition in order for a bankruptcy court to impose punitive damages as a sanction when an involuntary petition is dismissed for bad faith under 11 U.S.C. § 303(i)(2). 

We argue that malice is not required. 

 The District Court ruled that “punitive damages requires more than bad faith.”[1] The Panel affirmed the ruling, holding that, even assuming U.S. Bank’s conduct was in bad faith—the only textual requirement of § 303(i)(2)—the bank’s misconduct did not “constitute malicious, vengeful or egregious behavior,” and hence did not “permit punitive damages.”[2] The Panel effectively ruled, as a matter of law, that “more than” bad faith is required for an award of punitive damages. By so doing, the Panel deviated from the text of the Code. 

We argue that the Panel’s decision was not correct as a matter of law. Section 303(i)(2)’s legal standard for an award of punitive damages is plain and simple: “bad faith.” Forever Green established both the tests of and factors for bad faith. A bankruptcy court has discretion to award punitive damages based on any of the bad faith factors. The ruling by the District Court and the Panel constricted that discretion and imposed a non-statutory test that is antithetical to the protections undergirding the involuntary bankruptcy scheme. Once bad faith is shown, Congress has determined that there is no further legal barrier to the imposition of either punitive or compensatory damages. The notion that malice is required is nowhere to be found in the statute and is wholly at odds with Forever Green.

The legal standard adopted by the Panel will have serious repercussions and can easily lead to creditor abuse. The ability to award punitive damages for bad faith filings is critical to maintain a deterrence against the abuse of the involuntary bankruptcy petition. The involuntary petition is correctly “perceived as one of the most extreme remedies available to a creditor.”[3] The legal standard required by the Panel will almost certainly make this most extreme remedy an everyday occurrence, to the detriment of many. Accordingly, because the Panel applied the incorrect legal standard, we urged the Third Circuit to grant en banc review.

[1] National Medical Imaging, LLC, v. U.S. Bank, N.A. No. 16-5044, 2019 WL 4076768 at *8 (E.D. Pa. Aug. 28, 2019).

[2] National Medical Imaging, LLC v U.S. Bank, N.A., (In re National Medical Imaging, LLC), No. 19-3058, slip op. at 9 (3rd Cir, June 11, 2020)(hereafter “Op.”)

[3] Isabella C. Lacayo, After the Dismissal of an Involuntary Bankruptcy Petition: Attorney's Fees Awards to Alleged Debtors, 27 Cardozo L. Rev. 1949, 1949–50 (2006).