Trident Associates and Bad Faith Dismissals of Chapter 11 Petitions in the Sixth Circuit
Trident Associates Limited Partnership (“Trident”) is a limited partnership in Michigan. Metropolitan Life Insurance Company (“Metropolitan”) attempted to foreclose on a mortgage in an office building in Farmington Hills, Michigan. The original mortgage was between Metropolitan and Tri Atria Company (“Tri Atria”). Tri Atria underwent a series of reorganizations and transfers which ultimately resulted in the Metropolitan mortgage being transferred to Beztak of Tri Atria Limited Partnership (“Beztak”). Beztak ultimately failed to make certain tax payments which was considered a default under the mortgage contract and consistent with an acceleration provision in the mortgage, accelerated the debt. Ultimately, Metropolitan foreclosed on the property and a sale was scheduled for June 15, 1993, however, Metropolitan also filed a lawsuit in the District Court for the Eastern District of Michigan. This filing postponed the foreclosure sale. The day before a hearing scheduled to address the lawsuit, a Chapter 11 petition was filed for a debtor referred to as “Trident Associates Limited Partnership.”
In this case, Trident is appealing from the district court’s judgment affirming the bankruptcy court’s dismissal of Trident’s petition under Chapter 11. The argument on appeal is that the bankruptcy court abused its discretion when it lifted the automatic stay and dismissed the bankruptcy petition on the ground that the petition was filed in bad faith.
The Court reiterates the standard that appellate courts directly review the decision of the bankruptcy court and not the lower district court’s review of the bankruptcy court decision. Since the bankruptcy court lifted the automatic stay, the court applies an abuse of discretion standard but notes that the findings of fact themselves are only reversed if clearly erroneous. Other matters of law are reviewed de novo.
A bankruptcy court can dismiss a Chapter 11 petition “for cause” under 11. U.S.C. 1112(b). This is also part of many long standing court precedents in the sixth circuit such as In re Laguna Associates, 30 F.3d 734; In re Charfoos, 979 F.2d 390 (6th Cir.1992); and In re Caldwell (Hardin v. Caldwell), 851 F.2d 852 (6th Cir.1988). While the Supreme Court had recently held that words should not be “read into” the bankruptcy code, the Court here is parsing what that really means in practice. That’s to say the words “good faith” themselves do not appear in the code in this context. Despite that, the Court clarifies that 11 U.S.C. 362(d)(1) allows the automatic stay to be lifted “for cause.” Combined with that, 11 U.S.C. 1112(b) allows a Chapter 11 petition to be dismissed “for cause.” As such, the court did not add any additional words or interpretations into this language. Courts have held that debtor bad faith can constitute cause under both provisions. Ultimately, the court attempts to include a totality of the circumstances test for determining whether cause has been shown to dismiss a bankruptcy petition. Among these factors are the following:
- The debtor has one asset;
- The pre-petition conduct of the debtor has been improper;
- There are only a few unsecured creditors;
- The debtor’s property has been posted for foreclosure, and the debtor has been unsuccessful in;
- Defending against the foreclosure in state court;
- The debtor and one creditor have proceeded to a standstill in state court litigation, and the debtor has;
- Lost or has been required to post a bond which it cannot afford;
- The filing of the petition effectively allows the debtor to evade court orders;
- The debtor has no ongoing business or employees; and
- The lack of possibility of reorganization.
Trident was found to be a one-asset debtor and, as the court stated, “was created on the eve of foreclosure to isolate the property from the rest of Beztak’s real estate operations.” The court found this pre-petition conduct to be improper for several reasons. Furthermore, the restructuring of Beztak itself was unauthorized for an improper purpose – namely to remove general partners from general liability and provide them limited liability. This was found to have violated the agreement and constituted an entirely separate default.
The holding of the sixth circuit court of appeal is that a Chapter 11 filing may be dismissed for bad faith and in this specific instance, Trident’s petition was filed in bad faith and, therefore, the bankruptcy court’s dismissal was appropriate.
Chris Sawan holds a JD, MBA and is a CPA with a background that yields itself to some of the most complex legal challenges facing businesses, families, and individuals.
Dennis E. Sawan is licensed to practice law in the States of Florida and Ohio. His experience as a transactional attorney makes him a tremendous ally to have for all types of transactions.
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