US Bankruptcy Judge David S. Jones highlights the importance of good faith in the decision to seek protection under the Bankruptcy Code’s Chapter 11, in In re St Mark’s Property Acquisition LLC.

The court held there was cause for dismissal or conversion of the case under the Bankruptcy Code essentially because the timing of the Chapter 11 filing revealed the debtor was only trying to block the foreclosure sale of its only asset, real estate, which foreclosure sale was the culmination of years of state-court litigation following maturation of the loan pertaining to the property years ago. Applying a multifactor test stemming from a 1992 Kentucky bankruptcy litigation called C-TC, the judge found that St Mark’s Property Acquisitions LLC, as debtor, failed almost every aspect of the multifactor test and, most crucially, lacked good faith in filing the motion. Of note, the fact that there was “no material disputes with or obligation to other creditors to be resolved through the bankruptcy case” carried significant weight with the court. The court thus viewed the filing of the bankruptcy case on the eve of the state court-mandated foreclosure sale as gamesmanship by the debtor, which had no other purpose than to delay and impede the enforcement of the creditors’ rights. In deciding to convert the case to Chapter 7 rather than dismiss it, the court noted that the movant needed “the structure and regularity that bankruptcy proceedings offer” in order to get paid, and that the possibility of preferential or avoidable payments to non-debtor affiliates that could be pursued by the Chapter 7 trustee was substantial.  The court also expressed wariness at the possibility of purportedly related entities with purported possessory interests to file for additional bankruptcy protection should this case initially be dismissed, thereby further impeding the creditor’s rights to have its rights enforced.

This case highlights the need for bankruptcy filings to be made in good faith, so as to inoculate bankruptcy court’s power to impose remedies favorable to enforcement of creditors’ rights if this requirement is not met. It also highlights the need to correctly time the bankruptcy filings to weaken the possibility of claims of gamesmanship.