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Bankruptcy Court Dismisses Single Asset Case For Cause, Possibility of Refiling Left Open
In re PEM Thistle Landing TIC 23, LLC, Case No. 13-13273 (KG), 2014 WL 1319183 (Bankr. D. Del. Apr. 2, 2014)
In this Memorandum Opinion, Judge Gross dismissed the single asset chapter 11 bankruptcy case of PEM Thistle Landing TIC 23 (the “Debtor”) for cause, but did not make a finding of bad faith because the Debtor’s commencement of its proceeding to preserve its sole asset from foreclosure constituted a valid business purpose underlying the filing.
On December 17, 2013, the Debtor filed its voluntary chapter 11 petition to stop the foreclosure sale of commercial property (the “Property”) in which it owns less than a one percent interest. The remainder of the Property is owned by thirty non-debtor entities (the “Tenants-in-Common”). Prepetition, DOF IV Reit Holdings, LLC (the “DOF IV”) commenced a foreclosure proceeding following the failure of the Debtor and the Tenants-in-Common to make required monthly installment payments to DOF IV under a promissory note secured by the Property. Following the petition date, DOF IV moved to dismiss the Debtor’s case for cause and bad faith. In support of dismissal, DOF IV argued that the Debtor’s bankruptcy could serve no valid business purpose (i.e. to preserve a going concern or maximize value), and was filed only to gain a tactical litigation advantage (i.e. to stop the foreclosure proceeding).
In rendering its ruling, the Court evaluated a variety of factors considered by courts when determining if a case is valid or filed in bad faith – namely, whether the case at issue is or has: (1) single asset case; (2) few unsecured creditors; (3) no operating business or employees; (4) petition filed on eve of foreclosure; (5) two party dispute which a state court action can resolve; (6) no cash or income; (7) no possibility of reorganization; and (8) filing solely to create automatic stay. The Court stated that the Debtor satisfied most of these factors, but focused the crux of its ruling on the Debtor’s inability to confirm a plan of reorganization. The plan on file with the Court contemplated the reorganization of the debt owed to DOF IV. However, such reorganization required the consent of DOF IV as well as the modification of the debt owed by the Tenants-in-Common to DOF IV. As the Court observed, the Debtor could neither force DOF IV to consent nor bind the Tenants-in-Common to a modified loan agreement. Accordingly, the Debtor was unable to convince the Court that it possessed a “reasonable possibility of a successful reorganization within a reasonable time,” and the case was dismissed. United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375-76 (1988). The Court, however, did so without prejudice to the Debtor to refile so long as all of the Tenants-in-Common commenced proceedings. Notwithstanding the dismissal, the Court refused to hold that the case was filed in bad faith, finding that the Debtor commenced its proceedings “for a valid business purpose, i.e., to preserve its sole asset under pressure of foreclosure.” As the Court noted, “bad faith findings should be reserved for cases of clear abuse.”