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Supreme Court Skirts Defining ‘Bad Faith’ Involuntary Bankruptcy

March 22, 2021, 1:36 PM

The U.S. Supreme Court declined to take up a case seeking to establish what type of “bad faith” allows a court to award punitive damages against a creditor that improperly files an involuntary bankruptcy case.

The justices March 22 turned down an appeal from National Medical Imaging LLC, which also pursued the high court’s determination on whether the Seventh Amendment requires a jury trial for damages when there’s a dispute over facts surrounding an involuntary bankruptcy.

U.S. Bank NA and other creditors of National Medical filed three identical involuntary bankruptcy petitions against the imaging company. National Medical unsuccessfully sought punitive damages after a lower court dismissed the cases.

The U.S. Court of Appeals for the Third Circuit said a punitive damages award requires some kind of egregious or malicious conduct, not just bad faith, according to National Medical’s petition for Supreme Court review.

The company also said the Seventh Amendment provides debtors a right to have a jury decide the bad faith issue.

A group of retired bankruptcy judges and bankruptcy law professors supported National Medical’s request for review, arguing that the law is unsettled. The lower courts use “at least seven different tests for bad faith,” they said.

U.S. Bank and the other creditors declined to file responses to National Medical’s Supreme Court petition.

Erwin Chemerinsky of the University of California, Berkeley School of Law is counsel of record for National Medical.

The case is Nat’l Medical Imaging, LLC v. U.S. Bank, NA, U.S., No. 20-1177, cert. denied 3/22/21.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com

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