Is subjective bad faith by itself enough to justify dismissal for cause, or must there also be objective futility in the reorganization?
That was the question confronting District Judge Michael P. Shea of Hartford, Conn., because, he said, the Second Circuit “has not clearly” laid down the test for bad faith dismissal for “cause” under Section 1112(b)(1).
In his Feb. 1 opinion, Judge Shea sided with the Eleventh Circuit, where subjective bad faith by itself is sufficient grounds for dismissal. The Fourth Circuit, on the other hand, also requires objective futility.
Eliminating bad faith as sufficient in itself for justifying dismissal “would run counter to the equitable nature of bankruptcy proceedings,” Judge Shea said. He added that the objective probability of a successful reorganization “may provide one indication of the debtor’s subjective intent in filing.”
Judge Shea’s analysis of the proper standard is probably dicta because he ultimately found both subjective bad faith and objective futility in the case before him.