Chapter 11 Case Dismissed As Bad Faith Filing
Chapter 11 Case Dismissed As Bad Faith Filing
Judge Godoy of the U.S. Bankruptcy Court for the District of Puerto Rico dimissed a petition under chapter 11 after finding that it did not serve a valid bankruptcy purpose and was thus not filed in good faith.
The court based its decision on the following:
- pending litigation between the debtor and the sole non-contingent, non-insider, creditor;
- the debtor had no employees, no bank account, no money, and no real assets of value other than a lease agreement which the creditor claimed was lawfully terminated several years before the bankruptcy filing;
- most creditors' claims were contingent upon the debtor completing a land development;
- at the time of the bankruptcy filing, there was no danger of any asset of the debtor being attached, repossessed, or garnished and there was likewise no legal action threatened or filed against the debtor other than the referenced lawsuit filed by the creditor in state court;
- the real and only purpose of the bankruptcy filing was to stay the
state court proceeding and then remove it to the bankruptcy court. In the alternative, the court also found that abstention and dismissal was appropriate under 11 U.S.C. sec. 305 because the case was a two-party dispute for which there was no need for a federal forum to reach a just and equitable result.
For an additional discussion on dismissal of a chapter 11 case due to the absence of a valid bankruptcy purpose see the most recent decision out of the U.S. Bankruptcy Court for the District of New Jersey related to the massive liabilities faced by a subsidiary of Johnson & Johnson due to allegations that its talc products caused ovarian cancer.
After the Third Circuit found that J&J subsidiary’s first bankruptcy filing did not serve a valid bankruptcy purpose because there was no imminent financial distress, the subsidiary immediately re-filed after reaching an agreement with some of the claimants. However, since the financial distress was still not imminent or immediate, the court also dismissed the second filing due to the absence of good faith. See LTL Management, LLC, Case No. 23-12825 (Bankr.
D. N.J. July 28, 2023).