Document Type
Research Memorandum
Publication Date
2018
Abstract
(Excerpt)
Section 303 of the Bankruptcy Code allows creditors to initiate an involuntary case against a debtor by filing a petition with the court. Although the provisions applied to an involuntary case and a voluntary case are largely the same, one major difference surfaces in an involuntary case—the existence of what is commonly referred to as the “gap period.” The gap period is the period between the filing of an involuntary petition and a Judge’s entry of an order for relief.
Pursuant to § 303(f) of the Bankruptcy Code, the debtor may continue to operate during the gap period as if the involuntary case concerning its debt does not exist. This continued operation is permissible because there has been no adjudication as to whether the entity satisfies the requirements to be a debtor under the Bankruptcy Code. Therefore, the debtor is commonly referred to as an “alleged debtor” until an order for relief is entered. Given the alleged debtor’s continued operation, the alleged debtor will likely incur debt. Creditors to whom that gap period debt is owed may assert priority claims under § 502(f) of the Bankruptcy Code. In order to assert such a claim, a creditor must show that the debt arose: (1) during the gap period, and (2) in the ordinary course of business.
A creditor’s right to a priority § 502(f) claim is frequently the subject of litigation. This memorandum will analyze a few of the hurdles a creditor must clear to ensure repayment. Section I analyzes the strict requirement that gap period debt arises in the ordinary course of business. Next, Section II illustrates the dangers associated with violating the automatic stay. Section III explains the trustee’s power to avoid or recover post-petition transfers made within the gap period. Last, Section IV asserts that contracts remain effective after the filing of an involuntary petition and, in certain scenarios, have the ability to negate otherwise valid gap period claims.