The benefits afforded debtors in bankruptcy are so compelling that businesses have initiated bankruptcy proceedings without experiencing insolvency or imminent financial distress. But do such businesses have the right to do so?
With no express guidance under the Bankruptcy Code, and no bright line ruling from the courts, the door is open for creditors to challenge bankruptcy cases filed in these circumstances.
While some bankruptcy courts have frowned upon and dismissed such petitions as filed prematurely or in bad faith, others have permitted them to proceed. Recent bankruptcy cases filed to resolve mass tort claims through the use of “channeling injunctions,” which direct all claims to a funded trust created under a plan of reorganization, provide broad guidance.