The “good-faith filing” doctrine has generated recent precedent and more than a little controversy. A recently published decision from the Georgia bankruptcy court shows that the doctrine has also become a weapon used by courts, that are so inclined, to battle the filing of “chapter 22” (serial chapter 11) cases. The rationale of the court suggests that most chapter 22 cases—other than liquidations—may be susceptible to dismissal for an absence of good faith.
In In the Matter of Motel Properties, 314 B.R. 889 (Bankr. S.D. Ga. 2004), the debtor owned and operated two resort hotels. It filed its first chapter 11 case and confirmed a plan that, among other things, modified the debt of its principal secured lender. That plan was modified six months after confirmation. When the debtor defaulted on its obligations under the plan as modified, including defaulting on the secured debt, and the lender would not forbear, the debtor filed a second chapter 11, the second petition being filed within one year of the entry of the confirmation order in the first case. The purpose of the second filing was to reorganize the secured debt, including by refinancing or restructuring, through a new plan. The secured lender and another creditor moved to dismiss the case on two grounds: (1) continued loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation under §1112(b)(1); and (2) failure to file in good faith.
The court denied the motion to dismiss on the first ground, finding that the lender had failed to prove that the debtor was unable to reorganize, despite evidence of continued losses. The court conceded that it might be possible for the debtor to confirm a plan in the second case. The court did, however, grant the motion to dismiss on the basis that the filing was not made in good faith.
Citing its earlier decision, Sec. Pac. Credit Corp v. Savannah Ltd. (In re Savannah Ltd.), 162 B.R. 912 (Bankr. S.D. Ga. 1993), the court noted that “although there is no per se rule against successive filings, a debtor should not be permitted to go forward with a successive chapter 11 reorganization case where it has defaulted on a confirmed, substantially consummated plan of reorganization, because such an effort would, in effect, constitute an impermissible attempt to modify a substantially consummated plan.” Id. at 915. Noting other recent precedent in the same court, the court said that “the salient question is whether the subsequent chapter 11 case is so related in time or substance to the earlier case that it represents a collateral attack on the initial order of confirmation. If so…the result is a bad-faith filing.” See Lincoln Nat’l Life Ins. Co. v. Bouy, Hall & Howard and Assoc. (In re Bouy, Hall & Howard and Assoc.), 208 B.R. 737, 744 (Bankr. S.D. Ga. 1995). Noting that good faith is a condition to all chapter 11 filings, the Motel Properties court held that in the case of successive chapter 11 filings, the debtor must not only show the same good faith as every debtor, but must also demonstrate that “the second petition is not an attempt to thwart the initial bankruptcy proceedings.” 314 B.R. at 896. Accordingly, the good-faith filing doctrine in a successive chapter 11 case is stated as a “simple” test:
Therefore, the subsequent case is permissible only if it is filed in good faith and as a result of substantial, unforeseen changed circumstances…. When a debtor is able to anticipate the changed circumstances prior to confirmation of the first plan, yet it files a second petition to relieve itself from the requirements of the prior plan, then bad faith may be inferred.
Id. Referring again to its decision in Bouy, Hall, the court cited five factors to consider in determining the presence or absence of good faith in a successive filing:
- The length of time between the two cases;
- The forseeability and substantiality of events that ultimately caused the subsequent filing;
- Whether the new plan contemplates liquidation or reorganization;
- The degree to which creditors consent to the filing of the subsequent reorganization;
- The extent to which an objecting creditor’s rights were modified in the initial reorganization and its treatment in the subsequent case. Id.
Applying these factors to the case at hand, the court found an absence of good faith and dismissed the case. The court noted that the debtor was attempting to reorganize: “A liquidation, in contrast to a reorganization, appears less like an attempt to evade the responsibilities of the old reorganization plan.” Id. at 897. Thus, a chapter 22 where the second filing is intended to allow for a structured liquidation in the wake of an aborted reorganization might survive a motion to dismiss.
More on 22s and 33s and…
Attendees at the Winter Leadership Conference in Scottsdale, Ariz. December 2–4, 2004, will have an excellent opportunity to follow up on this discussion of chapter 22s. The problems illustrated by Motel Properties and other cutting-edge issues generated by successive filings will be the subject of a panel at the WLC entitled “Here We Go Again: The Complexities of Serial Chapter 11 Cases.” The panel is from 2:15–3:30 pm on Friday, Dec. 3, 2004.