A debtor with a contract to buy real estate does not file a chapter 11 petition in bad faith just to obtain a statutory, 60-day extension of an inflexible deadline for closing, according to Bankruptcy Judge Stuart M. Bernstein of Manhattan.
The debtor was under contract to purchase real property. The contract provided that time was of the essence. There was no financing contingency for the debtor’s obligations as the buyer.
If closing did not occur by the closing date specified in the contract, the contract did not terminate automatically. Rather, the contract gave the seller the option of giving notice to terminate the contract and retaining the deposit as liquidated damages.
The debtor could not secure financing by the closing date. The seller offered to adjourn the closing date on the condition that the debtor make additional deposits, but the debtor was unable to make a larger deposit.
The debtor filed a chapter 11 petition around 10:00 a.m. on the closing date. Prior to the filing, the seller had not terminated the contract. The debtor immediately filed a chapter 11 plan proposing to purchase the property with secured financing and pay all creditors in full.
The seller filed a motion for a declaration that the automatic stay did not prohibit it from terminating the contract, on the theory that the contract had already terminated. Alternatively, the seller sought a modification of the stay to permit termination or dismissal as a bad faith filing.
Judge Bernstein denied the seller’s motion.
In his November 12 opinion, Judge Bernstein concluded that the contract had not terminated because the seller had not given notice of termination before bankruptcy. At filing, the purchase and sale agreement was a “live, executory contract and did not terminate post-petition pursuant to its terms,” he said. Therefore, terminating the contract after bankruptcy would have violated the automatic stay.
Because the purchase and sale agreement was an executory contract, Judge Bernstein held that Section 108(b) extended the closing date by 60 days.
Judge Bernstein then turned to the question of whether he should grant relief from the automatic stay or dismiss the petition for “cause” as a bad faith filing under Section 1112(b)(1).
Judge Bernstein said there were several indicia of bad faith under the Second Circuit standards laid down in In re C-TC 9th Ave. Partnership, 113 F.3d 1304, 1311 (2d Cir. 1997). Nevertheless, the Second Circuit, he said, recognized a gap between delaying a creditor and abusing the judicial process.
The evidence convinced Judge Bernstein that the debtor had not filed the chapter 11 petition with no intention of reorganizing. Rather, he said, the debtor filed a plan where financing would underwrite the purchase and pay all creditors in full.
Under the “totality of the circumstances,” Judge Bernstein concluded that the debtor had not filed the petition in bad faith. The question, he said, “comes down to confirmability of the plan, not bad faith.”
Three days after Judge Bernstein denied the seller’s motion and within the 60-day closing extension afforded by Section 108(b), the docket indicates that the debtor confirmed its plan, purchased the property and paid creditors in full.
A debtor with a contract to buy real estate does not file a chapter 11 petition in bad faith just to obtain a statutory, 60-day extension of an inflexible deadline for closing, according to Bankruptcy Judge Stuart M. Bernstein of Manhattan.
The debtor was under contract to purchase real property. The contract provided that time was of the essence. There was no financing contingency for the debtor’s obligations as the buyer.
If closing did not occur by the closing date specified in the contract, the contract did not terminate automatically. Rather, the contract gave the seller the option of giving notice to terminate the contract and retaining the deposit as liquidated damages.
The debtor could not secure financing by the closing date. The seller offered to adjourn the closing date on the condition that the debtor make additional deposits, but the debtor was unable to make a larger deposit.
The debtor filed a chapter 11 petition around 10:00 a.m. on the closing date. Prior to the filing, the seller had not terminated the contract. The debtor immediately filed a chapter 11 plan proposing to purchase the property with secured financing and pay all creditors in full.