Eleventh Circuit Decision Reaffirms Bad-faith Precedent in Single-asset Cases

Eleventh Circuit Decision Reaffirms Bad-faith Precedent in Single-asset Cases

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In State Street Houses Inc., 356 F.3d 1345 (11th Cir. 2004), the Eleventh Circuit revisited the issue of what constitutes bad faith by a debtor whose sole asset is real estate, and affirmed its prior decisions in this area. Settling a split in lower court cases within the circuit, the court rejected the contention made by the debtor (also advanced by other debtors) that the 1994 Bankruptcy Reform Act essentially repealed prior case law imposing a "good faith" requirement in chapter 11 petitions filed by single-asset real estate debtors. This is the first circuit decision to review the issue.

The 1994 Reforms

We all recall the single-asset real estate filings in the late 1980s, which, in the view of some judges, "clogged" the dockets of many bankruptcy courts. This wave of filings, and the delay (from the perspective of secured lenders) in resolution of failed loans, gave rise to amendments to the Bankruptcy Code in 1994 that were intended to hasten the pace of single-asset cases. Among other things, Congress enacted a definition of "single-asset real estate," meaning a single real estate property, encumbered with less than $4 million in secured debt, that generates substantially all of a debtor's gross income and is the debtor's sole business. 11 U.S.C. §101(51B).

Congress envisioned that single-asset cases would be prodded along more quickly if stay relief were more readily available against debtors who failed to make progress in filing a plan or making payments within 90 days after filing. In a single-asset real estate case, the Bankruptcy Code now provides that the bankruptcy court shall grant relief from the stay unless within 90 days from the filing date (or as extended within that period for cause) the debtor has (a) filed a plan that has a reasonable possibility of being confirmed within a reasonable time or (b) has commenced monthly market rate interest payments to each secured creditor of the property based on that creditor's fair-market interest in the property. 11 U.S.C. §362(d)(3). The legislative history indicates that Congress intended to "modify the automatic stay in response to abuses involving some single-asset real estate entities that file under chapter 11 solely for purposes of delay without any expectation of reorganizing successfully." 140 Cong. Rec. H. 10,772 (103rd Cong., 2nd Sess., Oct. 4, 1994) (statement of Rep. Fish). As discussed below, the Eleventh Circuit's decisions on good faith prior to the Reform Act were directed at precisely this same type of problem debtor. Importantly, there is nothing in the statute or in the legislative history to indicate that Congress intended to overrule that body of law in the Eleventh and other circuits.

The sponsors of the Reform Act would probably be surprised at how this statutory revision has been used by single-asset debtors. Congress's legislative attempt to streamline single-asset cases in fact has been cited by debtors to contend that such cases are now not subject to the "good faith" requirements imposed by leading decisions (in virtually every circuit)2 and as evidence that Congress actually overruled that body of law by passage of the Reform Act. Ironically, debtors have successfully cited these single-asset provisions of the Reform Act as a basis to maintain chapter 11 cases that otherwise would have been subject not just to a lifting of the stay, but to outright dismissal.

Interpretations Favorable to Debtors

In the Eleventh Circuit specifically, debtors contended that the leading cases of In re Phoenix Piccadilly Ltd., 849 F.2d 1393, 1394 (11th Cir. 1988), and In re Albany Partners Ltd., 749 F.2d 670, 674 (11th Cir. 1984), were legislatively overruled by the Reform Act. Phoenix Piccadilly and Albany Partners make it difficult as a threshold matter for single-asset real estate debtors (whether or not they meet the definition in §101 of the Code) to invoke Bankruptcy Code protection if (1) the debtor has only one asset—the property at issue, (2) the debtor has few unsecured creditors whose claims are small in relation to the claims of the secured creditors, (3) the debtor has few employees, (4) the property is the subject of a foreclosure action as a result of arrearages on the debt, (5) the debtor's financial problems involve essentially a dispute between the debtor and the secured creditors that can be resolved in the pending state court action, and (6) the timing of the debtor's filing evidences an intent to delay or frustrate the legitimate efforts of the debtor's secured creditors to enforce their rights. Phoenix Piccadilly and its progeny find these factual indicia (which are not exclusive) to generally be evidence of a "bad faith" filing by a single-asset real estate debtor, subject to rebuttal evidence that the debtor is actually in need of and is in fact reorganizing.3

In essence, the debtors' post-Reform Act argument is that, by providing a definition of single-asset real estate in the Reform Act, Congress intended to permit chapter 11 filings by single-asset real estate debtors notwithstanding that they exhibited these bad-faith elements. This creative legislative repeal position was successful in a number of cases, particularly in the Middle District of Florida.4

Conflicting Rulings

However, other courts in the Eleventh Circuit, prior to the recent decision in State Street, did not agree with this analysis of the Reform Act. One case held as follows:

Section 218 of the Act, creating new §§101(51B) and 362(d)(3), therefore essentially operates as a limit on the automatic stay. This limitation tends to favor creditors, particularly the secured creditor with the largest interest in the single-asset real estate. Support for this assertion is reflected in Rep. Brooks's (D-Texas) statement that creditors should find "comfort" in their "new rights" under the Act and because there are a number of provisions designed to curtail bankruptcy fraud and abuse and reduce the "unnecessary costs and delay of the bankruptcy process." 140 Cong. Rec. H. 10,771 (daily ed. Oct. 4, 1994).
This stated purpose is consistent with the spirit of Phoenix Piccadilly and its progeny. Arguably, Phoenix Piccadilly stands for the proposition that for a single-asset debtor to enjoy protection under the automatic stay, the debtor must have clean hands. That is, the debtor must have filed the petition in good faith.

In re Midway Investments Ltd., 187 B.R. 382, 389 (Bankr. S.D. Fla. 1995). Even in the Middle District of Florida, the decisions were divided. In re Star Trust, 237 B.R. 827, 833 (M.D. Fla. 1999), examined the history of the good-faith requirement in bankruptcy cases, and determined that "[a] review of the development of 'bad faith' as cause for dismissal leads quickly to the conclusion that §362(d)(3) does not preempt this body of law." The court held that "a review of the provisions of §362(d)(3) also requires the same conclusion" because it does not provide a safe harbor. The section provides that the court shall grant relief from the stay unless the debtor complies with its provisions. The section does not preempt any other basis for relief or modification of the stay.

Star Trust, 237 B.R. at 833, n. 2 (citing In re Midway Investments Ltd., 187 B.R. at 388-89); see, also, In re Park Forest Development Corp., 197 B.R. 388 (Bankr. N.D. Ga. 1996).

Eleventh Circuit Holding

In State Street, the bankruptcy court found that the Phoenix Piccadilly factors were met: The debtor was an entity that held title to a regulated housing project in Utica, N.Y., and had no other assets; had only one unsecured non-insider creditor; had no employees; would have been in foreclosure but for having pre-emptively sought injunctive relief in state court after its lenders gave notice of default; had no need to reorganize but was simply in a two-party dispute; and had filed chapter 11 more than 1,000 miles away from the location of the asset and the secured creditors. These factors were evidence of bad faith warranting dismissal of the petition. In re State Street Houses Inc., 305 B.R. 726 (Bankr. S.D. Fla. 2002). The district court affirmed, In re State Street Houses Inc., 305 B.R. 738 (S.D. Fla. 2003), and the Eleventh Circuit likewise affirmed and overruled the contrary cases in the Circuit, holding that

[T]he district court properly followed the line of cases holding that the Phoenix Piccadilly factors are appropriate guidelines for consideration when evaluating whether a chapter 11 petition in a single-asset real estate case was filed in bad faith. We therefore, in order to settle the dispute found in prior bankruptcy court cases, hold that the guidelines set forth by this court in In re Phoenix Piccadilly Ltd., 849 F.2d 1393 (11th Cir. 1988) and In re Albany Partners Ltd., 749 F.2d 670 (11th Cir. 1984) have not been modified by the Bankruptcy Reform Act of 1994.
In re State Street Houses Inc., 356 F.3d 1345 (11th Cir. 2004).

Now that a decade has passed since the Reform Act, whether this argument by debtors will continue to surface remains to be seen, but clearly in the Eleventh Circuit single-asset real estate debtors will no longer be able to argue that the Reform Act overruled these decisions imposing the requirement of good faith in chapter 11 filings.


Footnotes

1 The author is a partner in Nixon Peabody LLP, New York, and was counsel to the lenders in State Street Houses Inc. Return to article

2 The appeals courts that have considered the issue have held that the absence of good faith constitutes "cause" to dismiss a chapter 11 petition under §1112(b). See, e.g., Official Comm. of Unsecured Creditors v. Nucor Corp. (In re SGL Carbon Corp.), 200 F.3d 154, 162 (3d Cir. 1999); Trident Assocs. Ltd. Partnership v. Metropolitan Life Ins. Co. (In re Trident Assocs. Ltd. Partnership), 52 F.3d 127, 130 (6th Cir. 1995); Marsch v. Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994); Humble Place Joint Venture v. Foray (In re Humble Place Joint Venture), 936 F.2d 814, 816 (5th Cir. 1991); First Nat'l. Bank of Sioux City v. Kerr (In re Kerr), 908 F.2d 400, 404 (8th Cir. 1990); Phoenix Piccadilly Ltd. v. Life Ins. Co. (In re Phoenix Piccadilly Ltd.), 849 F.2d 1393, 1394 (11th Cir. 1988). In addition, several other appeals courts have concluded that chapter 11 imposes a general good-faith requirement under which petitions can be dismissed for bad faith. See, e.g., C-TC 9th Ave. Partnership v. Norton Co. (In re C-TC 9th Ave. Partnership), 113 F.3d 1304 (2d Cir. 1997); Carolin Corp. v. Miller, 886 F.2d 693, 698 (4th Cir. 1989); Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1072 (5th Cir. 1986); Connell v. Coastal Cable T.V. Inc. (In re Coastal Cable T.V. Inc.), 709 F.2d 762, 764 (1st Cir. 1983) (Breyer, J.). Return to article

3 Phoenix Piccadilly, 849 F.2d at 1394-95; In re Star Trust, 237 B.R. 827, 833 (M.D. Fla. 1999); In re A.Z. Servs., 208 B.R. 578, 581 (Bankr. S.D. Fla. 1997); In re Investors Fla. Aggressive Growth Fund, 168 B.R. 760, 767 (Bankr. N.D. Fla. 1994). Return to article

4 See In re Jacksonville Riverfront Development Ltd., 215 B.R. 239 (Bankr. M.D. Fla. 1997); In re Wells, 227 B.R. 553 (Bankr. M.D. Fla. 1998); In re Villamont-Oxford Assoc. L.P., 230 B.R. 457 (Bankr. M.D. Fla. 1998); In re Venice-Oxford Assoc. L.P., 236 B.R. 805 (Bankr. M.D. Fla. 1998). Other courts likewise found the reasoning in these decisions persuasive. See, e.g., In re Victoria L.P., 187 B.R. 54 (Bankr. D. Mass. 1995); In re Rouse, 301 B.R. 86 (Bankr. D. Colo. 2003). Return to article

Journal Date: 
Tuesday, February 1, 2005