President Donald J. Trump knows a little something about bankruptcy. At least four of his casinos and hotels have filed voluntary reorganization petitions, but could his presidential campaign be placed into involuntary bankruptcy over unpaid security bills to cities? This hypothetical provides a great vehicle for discussing the mechanics of how an involuntary petition gets filed and the consequences arising from it.
Some Background
The President's campaign is a corporation named Donald J. Trump for President, Inc. When the President has campaign rallies, people show up. Some of those people don't like each other which requires that security be hired. According to published accounts, the President's campaign has failed to pay at least $1.8 million to fourteen cities for costs related to his rallies. Could those cities put the campaign into an involuntary bankruptcy?
Involuntary Bankruptcy 101
The requirements for an involuntary bankruptcy petition are set forth in 11 U.S.C. Sec. 303(b) which provides:
(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title—(1)by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $10,000 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;
To initiate an involuntary petition, there must be at least three petitioning creditors if there are more at least twelve creditors. Since there are at least fourteen cities claiming unreimbursed costs, there would need to be three petitioning creditors.
Next,the claims must not be the subject of a "bona fide dispute." This is a problem for our petitioning cities. According to the link I included above, the campaign denies all liability on the basis that it was the Secret Service that arranged for security. In order for a petitioning creditor to get past this, it would either need to have a signed contract with the Trump campaign or have had the campaign acknowledge liability.
Assuming that three undisputed creditors can be found, the next step is to serve the debtor with a summons. Section 303(h) sets out the test in the event the petition is timely controverted:
(h) If the petition is not timely controverted, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed. Otherwise, after trial, the court shall order relief against the debtor in an involuntary case under the chapter under which the petition was filed, only if—(1)the debtor is generally not paying such debtor’s debts as such debts become due unless such debts are the subject of a bona fide dispute as to liability or amount; or(2)within 120 days before the date of the filing of the petition, a custodian, other than a trustee, receiver, or agent appointed or authorized to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property, was appointed or took possession.
Thus, there will be two issues at trial: whether there are three qualified petitioning creditors and whether the debtor is "generally not paying such debtor's debts as such debts become due unless such debts are the subject of a bona fide dispute." In our hypothetical, the campaign could reply that it is paying all of its nondisputed debts as they come due and provide campaign finance reports showing expenditures. They could also respond that the cities are losers who should have paid the President to visit them.
Consequences of an Unsuccessful Petition
Under our hypothetical, the Trump campaign would no doubt contest the petition and would stand a good chance of defeating it if it could show that it had not contracted for security with the cities and was paying lots of money out to consultants and for media buys and to stay at various Trump properties. Assuming that the Trump campaign defeats the petition, what are the consequences?
This is covered by 11 U.S.C. Sec. 303(i) which states:
(i) If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment—
There are three options for remedies here. The first is an award of costs, which is the least severe. The second would be an award of attorneys' fees, which could be painful because according to a podcast I listened to the Trump campaign has already spent $14 million on attorneys and would likely pour a lot of money into defeating an involuntary petition. Finally, if the court found bad faith, it could award actual damage and punitive damages. In our hypothetical, the campaign accuses the cities of being losers and therefore anything they do must be in bad faith.
Conclusion
In this hypothetical case, pursuing an involuntary petition against Donald J. Trump for President, Inc. could turn out very badly for the petitioning creditors. However, because they are municipalities, they could always file Chapter 9 to pay off the damages.
The bottom line is that there are brightline tests to be met for filing an involuntary petition: three undisputed debts and a debtor not generally paying its undisputed debts as they come due. Attempting to file an involuntary petition can be expensive if it is not successful.
Hat-tip: My partner Manny Newburger suggested this post to me.
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