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UPDATE – Scarborough-St. James Corp. Case Dismissed For Cause, Substantive Rulings Survive Dismissal

In re Scarborough-St. James Corp., No. 15-10625 (LSS), 2015 WL 5672628 (Bankr. D. Del. Sept. 24, 2015)

With the Landlord* receiving Bankruptcy Court approval to continue its previously stayed litigation against the Debtor in Michigan state court, the Debtor moved to dismiss its bankruptcy case for cause under Bankruptcy Code § 1112(b)(1), alleging no remaining purpose existed by having the Debtor remain in bankruptcy.  The Court granted dismissal, finding that this two-party dispute is properly litigated in state court and it is unlikely that the Debtor will be able to rehabilitate under the Bankruptcy Code.  Op. at 3.  Importantly, the Court recognized the Landlord’s valid concern that it not be disadvantaged by the Debtor’s dismissal, which could have the effect of nullifying some of the Court’s rulings benefitting the Landlord.  Under section 349(b), unless the Court for cause orders otherwise, “a dismissal of a case…revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.”  11 U.S.C. § 349(b).  The Landlord previously won favorable rulings under the Rejection/Surrender Order and Stay Relief/Adequate Protection Order (as defined in the Court’s Opinion, and together the “Orders”), and sought a Court ruling that those Orders would survive the bankruptcy case dismissal.  The Court agreed.  Dismissal under 349 only reinstates (and therefore, implicates) rulings under certain enumerated Bankruptcy Code provisions (e.g., sections 552, 543, 544, 545, 547, 548 549, and 724).  The Court found that the Orders did not implicate any of the specifically enumerated provisions, and therefore, held that the order dismissing the case should specifically provide that the Orders survive and be in full force and effect after dismissal.

The Court also ruled that the Debtor is prohibited from filing a future bankruptcy petition for a period of four months from the entry of the order dismissing the case under Bankruptcy Code section 549(a) so that the Landlord has the opportunity to have its matter heard before the Michigan state court.

*All capitalized terms used in this post but not otherwise defined are defined in the previous Scarborough-St. James blog post, found here.