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II. Further Delay by Filing a Chapter 11 Bankruptcy Petition

A Last Ditch Effort to Avoid the Foreclosure Sale.
  • Questions to Consider
    • Is there a continuing loss to or diminution of the estate and no reasonable likelihood of rehabilitation?
    • Will the Debtor be able to effectuate a plan?
    • Is this a single asset bankruptcy and a two party dispute?
    • Is the Debtor in this position due to its own mismanagement?
    • Has the Debtor established a pattern of abuse, delay, or lack of candor?
    • Has the Debtor at any point ever produced a bona fide commitment letter to pay off the debt?
    • Does the Debtor have any money to pay its claims?
  • Section 1112(b) of the Bankruptcy Code sets forth certain standards to determine whether a Debtor’s Chapter 11 case should be dismissed.
    • Section 1112(b) of the Bankruptcy Code provides, in pertinent part: “[O]n request of a party in interest . . . the court . . . may dismiss a cause under this chapter . . . for cause, including . . . [specific causes enumerated].”
    • The phrase “including” is specifically recognized by the statue as a term which is not limiting. See In re HBA East, Inc., 87 B.R. 248, 258 (Bankr. E.D.N.Y. 1988) (citing 11 U.S.C. § 102(3)).
    • A Chapter 11 case may be dismissed if there is a “continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation.
      • continuing loss to or diminution of the estate
        • Is the Debtor mismanaging the property?
        • Is rental income being collected?
        • Is property wasting away?
    • A Chapter 11 case may be dismissed if there is a “continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation.
      • reasonable likelihood of rehabilitation
        • How long has the Debtor attempted to secure replacement financing?
        • Has the Debtor’s financial position gotten better or worse during this time period?
        • Has the Debtor ever presented a bona fide funding commitment?
    • A Chapter 11 case may be dismissed because of the Debtor’s “inability to effectuate a plan.”
    • Signs of Inability to Effectuate a plan.
      • What is the Debtor's function/business?
      • Has the Debtor filed its tax returns?
      • Does the Debtor have bank accounts?
      • Does the Debtor have financial statements, journals, or ledgers?
      • Does the Debtor have equipment, inventory, or vehicles?
      • Does the Debtor have any receivables?
      • Does the Debtor have any employees?
  • The bankruptcy petition must be filed in good faith.
    • Courts impose a good faith requirement upon a Chapter 11 Debtor at the time of filing and throughout the course of the case. See Phoenix Piccadilly Ltd. V. Life Ins. Co. of Va. (In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393 (11th Cir. 1988); Albany Partners, Ltd. v. Westbrook (In re Albany Partners, Ltd.), 749 f.2d 670 (11th Cir. 1984).
    • “[I]n finding a lack of good faith, courts have emphasized an intent to abuse the judicial process and the reorganization provisions. Particularly when there is no realistic possibility of an effective reorganization and it is evident that the Debtor seeks merely to delay or frustrate the legitimate efforts of secured creditors to enforce their rights, dismissal of the petition for lack of good faith is appropriate.” Albany Partners, 749 F.2d at 674.
  • In Phoenix Piccadilly, the Eleventh Circuit Court of appeals set forth a list of “factors which evidence ‘an intent to abuse the judicial process and the purposes of the reorganization provisions, . . .’” Phoenix Piccadilly, 849 F.2d at 1394. Those factors are . . .
    1. The Debtor only has one asset;
    2. The Debtor has few unsecured creditors whose claims are small in relation to the claims of the secured creditors;
    3. The Debtor has few employees;
    4. The property is the subject of a foreclosure action as a result of arrearages on the debt;
    5. The Debtor’s financial problems involve essentially a dispute between the Debtor and the secured creditors, which can be resolved in the pending state court action; and,
    6. The timing of the Debtor’s filing evidences an intent to delay or frustrate the secured creditors’ legitimate efforts to enforce their rights.
  • Phoenix Piccadilly Factors
    • The Phoenix Piccadilly factors are non-rigid and non exhaustive. In re State Street Houses, Inc., 356 F.3d 1345, 1347 (11th Cir. 2004).
    • The “overriding consideration” when analyzing the Phoenix Piccadilly factors is the intent to abuse the judicial process and to abuse the purposes of the reorganization process. In re Lezdey, 332 B.R. 217, 222 (Bankr. M.D. Fla. 2005) (internal citations omitted) (dismissing chapter 11 cases for cause under Section 1112(b)).
  • Factors such (i) as the state court foreclosure litigation relating to the Debtor’s single asset, (ii) the Debtor’s default on its mortgage obligations, and (iii) the fact that the Debtor faces no imminent threat from any its other purported creditors constitute “compelling evidence that this Chapter 11 filing is a mere two-party dispute relating to real property with Movants, as the mortgagees, trying to foreclose, and the Debtor seeking to avoid foreclosure.” State Street, 305 B.R. at 737.
  • A lack of candor in dealing with the Court, through nondisclosure or misrepresentation is yet another consideration, in addition to the Phoenix Piccadilly standards, that courts weigh heavily when considering a dismissal under Section 1112(b) for bad faith. See, e.g., In re Rognstad, 121 B.R. 45 (Bankr. D. Hawaii 1990)(finding of bad faith may rest on nondisclosure or misrepresentation to the court).
  • Furthermore, “[a] good faith condition permeates virtually every aspect of a bankruptcy case,” from the filing of the petition, to conversion of a case, to the filing of a plan of reorganization. In re Kollar,357 BR 657 (Bankr. M.D. Fla. 2006) (citing Albany Partners, 749 F.2d 670, 674 (11th Cir. 1984)). “The protections and forgiveness inherent in the bankruptcy laws surely require conduct consistent with the concepts of basic honesty.” Id. (quoting In re Waldron, 785 F.2d 936, 940 (11th Cir. 1986)).
  • The Sixth Circuit Court of Appeals has also weighed improper pre-petition conduct in its analysis of bad faith filing. See In re Trident Assoc. Limited Ptshp, 52 F.3d 127, 131-32 (6th Cir. 1995) (dismissing chapter 11 case for having been filed in bad faith for, among other reasons, the fact that the Debtor misled the district court).