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Bankruptcy

Fed–up creditors forcing developers into bankruptcy

By: Polyana da Costa

 

October 08, 2009 – Andrew Scott, the owner of a security consulting company in Boca Raton, knew it was a long shot when he decided to go after $8,400 he says he was owed by the developer of a West Palm Beach office building.

 

The project, Courthouse Commons, was facing a $30 million foreclosure suit filed by Great Florida Bank, and Scott would also have to compete with more than 20 other creditors of the developer.

 

Scott joined forces with two other unsecured creditors and forced developer Courthouse Commons LLC into involuntary Chapter 11 bankruptcy. The three creditors were owed about $27,000.

 

As the real estate market struggles and more foreclosures loom, owners of distressed properties are increasingly being threatened by secured and unsecured lenders with involuntary bankruptcy.

 

While it can be a good strategy for creditors desperate to recover some money, it also poses risks and can backfire on creditors, said Craig Kelley, the attorney for three creditors that pursued Courthouse Commons.

 

“There is more talk over involuntary bankruptcies than ever before,” said Kelley with Kelley & Fulton in West Palm Beach. “Creditors who are getting fed up are certainly considering it as an option before they are further depleted by a debtor, but when it comes to pulling the trigger, they are being cautious.” Attorneys and creditors can be sanctioned and hit with costly punitive damages if the court determines the bankruptcy petition was filed without merit or in bad faith, Kelley said.

 

And “you can do real damage to a debtor by forcing them into bankruptcy,” he said. “So creditors have to be very sure their claims are bona fide and undisputed before filing; otherwise, they can end up shooting their own foot.”

 

Of more than 18,000 petitions filed in the U.S. Bankruptcy Court for the Southern District of Florida during the fiscal year that ended Sept. 30, only 829 were involuntary petitions. Data for the recently completed fiscal year are not yet available.

 

Attorneys say filings could increase as more creditors considering involuntary bankr