Shareholder Can’t Claim Damages in Involuntary Bankruptcy

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By Daniel Gill

A shareholder that opposed an involuntary bankruptcy proceeding against a corporation didn’t have standing to seek statutory damages for the unsuccessful filing, a Nevada federal court ruled May 22 ( Vibe Micro, Inc. v. SIG Capital, LLC , 2017 BL 170330, D. Nev., No. 2:14-cv-01618-RFB, 5/22/17 ).

Only the purported debtor has standing to seek payment of damages under Section 303(i) of the Bankruptcy Code, Judge Richard F. Boulware II of the U.S. District Court for the District of Nevada wrote. A shareholder claiming to act on the debtor’s behalf lacks such standing, the court said.

8Speed8 Inc. was a closely held corporation that developed payment services kiosk systems. A dispute arose between two of its shareholders, SIG Capital Inc. and Vibe Micro Inc., and Vibe Micro initiated arbitration proceedings against SIG, the court said.

In 2013, SIG filed an involuntary Chapter 7 petition to have 8Speed8 determined to be a debtor in bankruptcy. In Chapter 7, the company’s assets would be liquidated by a trustee for the benefit of its creditors.

Vibe Micro contested the bankruptcy petition, filing a motion to dismiss it. Ultimately even SIG agreed that dismissal was appropriate, and it filed its own motion to dismiss. The bankruptcy court dismissed the Chapter 7 case.

Vibe Micro then sought to recover fees, costs, and damages from SIG pursuant to 11 U.S.C. §303(i). If an involuntary case is dismissed “other than on consent of all petitioners and the debtor,” that section allows “the debtor” to recover fees and costs, or fees, costs, and damages if the filing was in bad faith.

But only a debtor can recover under Section 303(i), the court said, relying on a Ninth Circuit case decided in 2005, In re Miles. The bankruptcy court had implicitly determined that Vibe Micro was not the debtor, and therefore it wasn’t entitled to recover any fees, costs, or damages.

Vibe Micro was represented by Torrence E.S. Lewis, Pisttsburgh. SIG Capital was represented by David A. Stephens, Las Vegas.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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