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Creditor Punished After Filing Bad Faith Involuntary Bankruptcy

Posted By admin || 1-Aug-2010

Creditor Punished After Filing Bad Faith Involuntary Bankruptcy

Scarola Ellis, a law firm that claims that Skyworks Ventures Inc. owes them $200,000 in legal fees filed an involuntary bankruptcy petition against the company in bad faith according to Bankruptcy Judge Raymond Lyons. In a recent ruling, bankruptcy judge Lyons said that Scarola Ellis filed the involuntary bankruptcy petition in an effort to pressure Skyworks into settling another lawsuit against the law firm for overbilling and legal malpractice.

This "use of the bankruptcy process for an improper purpose" constituted bad faith that warranted punitive damages, and, while the bankruptcy law is intended to benefit creditors as a group, Scarola Ellis's actions were intended to benefit only itself, Lyons wrote.

Filing the petition "was a tactical maneuver to avoid prosecuting the second suit in the District Court that [Scarola Ellis] had filed, but never served," Lyons wrote. "They knew that Ventures intended to vigorously defend that suit and would file counterclaims that Ventures asserted would exceed any amounts due to Scarola Ellis. By filing the involuntary petition, Scarola Ellis hoped to pressure Ventures into settling and abandoning its affirmative claims."

By filing an involuntary bankruptcy against Skyworks, Scarola Ellis created a catch 22 situation for the company. If the law firm had been able to successfully pursue the involuntary bankruptcy, it may have negatively impacted the company's business standing by making investors and partners question the financial stability of the company or even the company's viability.  Also, the involuntary bankruptcy filing caused Skyworks to expend money for attorney's fees and energy on defending themselves from being forced into a bankruptcy which was obviously not needed for this company. Recognizing the negative impact of the bad faith involuntary bankruptcy filing the bankruptcy judge granted both punitive damages and attorney fees to Skyworks, the exact dollar amount will be determined in September.

Categories: Bankruptcy
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