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Case Study: Dismissing A Single-Asset Real Estate Debtor’s Chapter 11 Bankruptcy Case

What if, as a secured lender, your single-asset real estate entity borrower seeks refuge from your mortgage foreclosure action in bankruptcy court?  You might be able to obtain an expedited dismissal of the case, as we were able to do for our client in Uptown Business Center, LLC, 2013 Bankr. LEXIS 4324.

Generalities.  Following a two-day trial, our client prevailed on a motion to dismiss the bankruptcy filing “for cause” under 111 U.S.C. § 1112(b).  The Court’s opinion (.pdf) provides a road map for the pursuit of dismissal when there is no reasonable likelihood that a debtor’s bankruptcy plan will be confirmed within any reasonable time.  Our side essentially contended that the debtor’s filing was made in bad faith purely to delay the state court foreclosure.  In response, the debtor claimed that reorganization was feasible. 

For cause.  A creditor may move for a dismissal of a Chapter 11 case “for cause” under 11 U.S.C. § 1112(b).  Section 1112(b)(4) contains an illustrative but non-exhaustive list of scenarios that constitute “cause.”  Section 1112(b)(2) states that courts may not enter a dismissal if the debtor rebuts the showing made by the creditor by establishing “that there is a reasonable likelihood that a plan will be confirmed within applicable time frames and that acts or omissions that are the cause for dismissal were reasonably justified and will be cured within a reasonable amount of time fixed by the court.” 

SARE and bad faith.  The Court’s opinion discussed single-asset real estate (“SARE) entities and why they get special treatment.  In Re Castleton Associates Limited Partnership, 109 B.R. 347 (S.D. Ind. 1989) spelled out the “totality of the circumstances” test applicable to determining bad faith in the filing of SARE cases.  There are fourteen different factors that courts can consider:

  1. the debtor has few or no unsecured creditors;
  2. there has been a previous bankruptcy petition by the debtor or a related entity;
  3. the debtor has engaged in improper pre-petition conduct;
  4. the petition allows the debtor to evade court orders;
  5. there are few debts to non-moving creditors;
  6. the petition was filed on the eve of foreclosure;
  7. the foreclosed property is the sole or major asset of the debtor;
  8. the debtor has no ongoing business or employees;
  9. there is no possibility of reorganization;
  10. the debtor’s income is not sufficient to operate;
  11. there was no pressure (to dismiss the case) from non-moving creditors;
  12. the debtor’s reorganization essentially would involve the resolution of  a two-party dispute;
  13. a corporate debtor was formed and received title to its major assets immediately before the petition; and
  14. the debtor has filed the Chapter 11 case solely to invoke the automatic stay.

Our case for dismissal.  We put on evidence showing that there was no hope for the debtor to reorganize.  (Very early in the dispute, our client and the debtor entered into a forbearance agreement giving the debtor time to refinance the debt at a discount, which the debtor was unable to do.)  The debtor’s sole asset was a commercial, mixed-use building leased out to tenants.  The real estate had been fully leased at the time of the debtor’s payment default.  Among other things, we established that the net income was insufficient to meet the operating expenses, to service the debt and to bring the interest arrearage current.  The debtor had no employees.  The debtor was the subject of our mortgage foreclosure action and filed bankruptcy about an hour before the hearing on our motion for summary judgment.  The debtor delayed a resolution of the state court litigation for months and never asserted a viable defense.  We asserted that the debtor’s financial problem was a dispute between it and our client, a so-called “two-party dispute” that did not fit the profile of a Chapter 11 case.  We argued that the debtor was abusing the purpose of bankruptcy reorganization solely to prevent our client from exercising its contractual rights to collect its debt and foreclose on its mortgage. 

Dismissed.  The Court found that the debtor was not likely to be rehabilitated through the Chapter 11 process and did not have the economic wherewithal to reorganize.  The debtor’s proposed plan was not feasible. The debtor could not obtain alternative financing to secure infusion of capital in the near future.  The Court said:

[i]t was mismanagement of the Debtor that prompted the Debtor’s financial woes with [creditor].  The Court finds that this is essentially a two party dispute that should be adjudicated in State Court.  [Creditor] has borne its burden of showing that ‘cause’ exists to dismiss the case under § 1112(b) and the Debtor has not come forward with credible evidence to establish there is a reasonable likelihood that a plan will be confirmed with a reasonable amount of time. 

Following dismissal, we were able to obtain summary judgment in state court and proceed to a sheriff’s sale.  Our client, which purchases distressed debt, currently owns and operates the property.  (Note:  The Indianapolis Business Journal followed this case, so for more, click here.)