June Edition 2023

86 borrower. Involuntary bankruptcy petitions are governed by section 303 of the Bankruptcy Code, which provides that an involuntary case may be commenced under chapter 7 or chapter 11 of the Bankruptcy Code. If the debtor has more than twelve creditors, the petition must be filed by three or more entities, each holding at least $18,600 of unsecured claims against the debtor. If the debtor has fewer than twelve creditors, only one creditor need file the petition. In both cases, the petitioning creditors’ unsecured claims cannot be contingent as to liability or the subject of a bona fide dispute. An involuntary bankruptcy may provide an efficient forum to deal with all of the debtor’s creditors, including the secured and unsecured debt, mechanic’s lien claims, lease-related claims and provide for a mechanism to either refinance the existing debt or sell the debtor’s property in a transparent, value-maximizing sale process. A recent case in the Bankruptcy Court for the Southern District of New York sheds light on the requirements to successfully commence an involuntary bankruptcy and challenges that may be raised. On October 6, 2022 (the “Petition Date”), Mishmeret Trust Company Limited (“Mishmeret”), as trustee for certain bond claims secured by a mortgage and as holder of an unsecured guaranty claim on those same bonds, and three bondholders (together with Mishmeret, the “Petitioning Creditors”) filed an involuntary chapter 11 petition against Wythe Berry Fee Owner LLC (the “Debtor”), the entity that owns and leases the popular William Vale Hotel in Brooklyn, New York. Prior to the Petition Date, the Debtor had defaulted on both its mortgage and its guaranty of the bonds as a direct result of the failure by the lessee, an entity controlled by Zelig Weiss, a Brooklyn-based real estate developer and the operator of the William Vale, to make annual rent payments of $15 million since February 2020, which rent payments were used by the Debtor to pay its mortgage and guaranty obligations. At the time of the filing of the petition, the Debtor owed $188,739,000 on its guaranty of the bonds, which, as unsecured claims, entitled the Petitioning Creditors to file the involuntary case against the Debtor. Owing to certain restrictions in the Debtor’s organizational documents, the Debtor could not consent to the involuntary petition, but it did not object. Indeed, the Debtor filed a response to the involuntary petition explaining that though it was prevented from consenting, the Debtor’s position was that a chapter 11 case was the correct forum to resolve the various claims of its creditors and other stakeholders.