## Facts

- John Richards Homes Building Company, L.L.C. (JRH) built and sold high-end custom homes and contracted to sell Kevin Adell land and a newly constructed residence for about $3 million.
- A dispute arose over construction and contract performance; Adell sued JRH in state court and JRH countersued, leaving the merits unresolved.
- While the state-court case was pending, Adell filed an involuntary Chapter 11 petition against JRH asserting an approximately $800,000 claim for alleged fraud and breach of contract.
- JRH moved to dismiss, arguing Adell’s claim was subject to a bona fide dispute and thus could not support an involuntary petition under 11 U.S.C. § 303(b).
- The bankruptcy court dismissed the involuntary petition, finding Adell knew or should have known his claim was subject to a bona fide dispute.
- JRH then sought relief under 11 U.S.C. § 303(i), requesting costs, attorney’s fees, compensatory damages, and punitive damages for an alleged bad-faith filing.
- Evidence showed Adell pursued a publicity campaign about the bankruptcy filing intended to harm JRH’s business reputation, including hiring a public-relations firm.
- The court found Adell used pressure tactics, including threats of criminal prosecution, and made misleading statements to other creditors to induce them to join the petition.
- The court found Adell withheld important information from his bankruptcy counsel and did not withdraw the petition after it became apparent that JRH disputed the claim and the petition lacked a proper basis.
- After an evidentiary hearing on damages, the court evaluated JRH’s claimed business and reputational harms attributable to the filing and its dissemination.

## Issues

1. Whether the involuntary petition was filed in bad faith for purposes of 11 U.S.C. § 303(i)(2), given the bona fide dispute and the petitioning creditor’s conduct and motives.
2. If bad faith existed, what costs, attorney’s fees, compensatory damages, and punitive damages were warranted under 11 U.S.C. § 303(i)(1)–(2), and what causal limits applied.

## Decision

- The court held Adell filed the involuntary petition in bad faith within the meaning of § 303(i)(2).
- The court awarded JRH costs and attorney’s fees under § 303(i)(1) in the amount of approximately $313,230.68.
- The court awarded JRH compensatory damages under § 303(i)(2) of $4,100,000 for harm proximately caused by the filing.
- The court awarded JRH punitive damages under § 303(i)(2) of $2,000,000 to punish and deter misuse of the involuntary bankruptcy process.
- The court rejected a reliance-on-counsel defense where the petitioning creditor had not provided complete and truthful information to counsel.

## Legal Principles

- A creditor may not sustain an involuntary bankruptcy case under 11 U.S.C. § 303(b) based on a claim subject to a bona fide dispute.
- Upon dismissal of an involuntary petition, 11 U.S.C. § 303(i)(1) permits an award of costs and reasonable attorney’s fees to the alleged debtor.
- If the court finds the petition was filed in bad faith, 11 U.S.C. § 303(i)(2) permits an award of damages proximately caused by the filing and punitive damages.
- Bad faith under § 303(i) is evaluated under a totality-of-the-circumstances approach that considers the creditor’s motive, the reasonableness of the filing position, and the creditor’s conduct before, during, and after filing.
- Using an involuntary petition as a tool to gain leverage in a two-party dispute, to inflict reputational harm, or to coerce payment can support a bad-faith finding.
- A petitioning creditor cannot avoid liability by claiming reliance on counsel when the creditor withheld material facts from counsel.
- Punitive damages must be tied to the seriousness of the misconduct and may consider reprehensibility, proportionality to compensatory damages, and deterrence.

## Conclusion

The bankruptcy court concluded that an involuntary petition filed on a claim the creditor knew (or should have known) was bona fide disputed, coupled with conduct aimed at harming the debtor’s business and coercing advantage in related litigation, constituted bad faith under § 303(i), justifying substantial compensatory damages, punitive damages, and an award of fees and costs.


In re John Richards Homes Bldg. Co., L.L.C., 291 B.R. 727 (Bankr. E.D. Mich. 2003)