However, a finding that the factors are insufficient for purposes of dismissal does not mean that they are insufficient for purposes of stay relief. § 1112(b) may also be used to determine whether there is cause to lift the stay. The same standard of bad faith that is applied to determine whether a case should be dismissed under U.S.C. § 362(d)(1) to terminate or lift the stay to permit a party to conclude litigation or the exercise of remedies in a non-bankruptcy court.
The filing of a bankruptcy in bad faith also constitutes “cause” pursuant to 11 U.S.C.A. 2013) (“he power to dismiss ‘for cause’ in §707(a) includes the power to involuntarily dismiss a Chapter 7 case based on prepetition bad faith.”). 2002) (bankruptcy court may dismiss Chapter 13 bankruptcy filed in bad faith) In re Buis, 337 B.R. Bankruptcy courts may likewise dismiss bankruptcies filed under other chapters of the Bankruptcy Code where the bankruptcy process is being abused and the petition has been filed in bad faith. 1987).įiling a Chapter 11 petition merely to obtain a tactical litigation advantage is not within “the legitimate scope of the bankruptcy laws.” In only to those Debtors and creditors with ‘clean hands.’” Id.
One court has found that a bankruptcy case should be dismissed when it “involves nothing more than a two-party dispute.” Matter of Indian Rocks Landscaping of Indian Rocks Beach, Inc., 77 B.R. at 362 citing In re HBA E., Inc., 87 B.R. Chapter 11 was never intended to be used as a fist in a two-party bout. The courts do not generally condone the use of Chapter 11 to resolve two-party disputes in the bankruptcy court when such litigation is still pending in a non-bankruptcy forum prior to the commencement of the case. 1993) In re Punta Gorda Associates, 143 B.R. 2004) (same).Ĭourts have also recognized as indicia of bad faith, lack of financial distress of the debtor, few non-insider unsecured creditors, use of Chapter 11 to resolve pre-petition two-party disputes in state court and timing of a petition that evidences its primary use as a litigation tactic. 1988) (affirming dismissal of chapter 11 case filed by owner of apartment complex that was subject to foreclosure action filed by secured creditors prior to bankruptcy filing). of Virginia (In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1394 (11th Cir. “A good faith standard protects the jurisdictional integrity of the bankruptcy courts by rendering their equitable weapons…available 14 | IN THE NOW “to delay or frustrate the legitimate efforts of secured creditors to enforce their rights.” See Phoenix Piccadilly, Ltd. This good faith requirement is rooted in equity and intended to prevent abuse of the Chapter 11 process. § 1112 if “not filed in good faith.” In re Phoenix Piccadilly, Ltd., 849 F.2d 1393, 1394 (11th Cir.
It may also be argued that a bankruptcy court also has broad authority to provide relief where a debtor inappropriately files a suggestion of bankruptcy in non-bankruptcy court litigation involving a matter not stayed by the bankruptcy, for example, by using its inherent power to sanction the debtor or its bankruptcy attorney.Ī voluntarily filed chapter 11 petition is subject to dismissal under 11 U.S.C.A. Where a bankruptcy has been filed in bad faith, a court may dismiss the bankruptcy, grant stay relief to permit the secured creditor to finalize its foreclosure or to permit creditors and other parties to conclude their litigation, or it may deny confirmation of a proposed bankruptcy plan. The Bankruptcy Code and case law interpreting it provides powerful tool in combatting “bad faith” bankruptcies. Other parties can get caught up in these unscrupulous bankruptcies when pursuing foreclosures, eviction proceedings, enforcement proceedings, and other litigation inappropriately delayed, or where the bankruptcy is used solely as a litigation tactic to get a leg up. However, there are unscrupulous debtors use the bankruptcy process in bad faith, which can occur in a myriad of ways. However, mortgagees, landlords, as well as other creditors and parties-in-interest have a powerful weapon in their arsenal – a motion to dismiss or for stay relief based on the bankruptcy having been filed in bad faith.īACKGROUND: Bankruptcy can help the honest but unfortunate debtor. KK TAKEAWAY: A “bad faith” bankruptcy filing can be a powerful weapon in the hands of an unscrupulous debtor. AugShare Combatting “Bad Faith” Bankruptcy Filings