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Penalties for a Bad Faith Chapter 11 Bankruptcy Filing in Florida

gavelIn a dispute occurring as part of a South Florida bankruptcy case, a federal judge ruled against dismissing the case on account of the debtor’s bad faith in filing the Chapter 11 petition. The bankruptcy court decided, in refusing to dismiss, not that the debtor lacked bad faith but that dismissing the petition might possibly run contrary to the best interest of some of the debtor’s unsecured creditors, leaving dismissal as an unfair outcome for them.

The debtor who filed for bankruptcy in this case was a part-owner of commercial property in Miami. In 2010, the business filed a lawsuit against its bank, from which it had borrowed money repeatedly on a series of Small Business Administration loans. The bank later sued the business, and the bank won, receiving a damages award of $667,000 on Aug. 16, 2012. In a Feb. 2015 order, the court ordered the business to pay the bank $841,000 in attorney’s fees.

As part of this process, the business’ commercial property was ordered to be sold in a foreclosure sale. That sale was postponed twice. On the day before the third scheduled foreclosure sale, the business filed its petition for Chapter 11 bankruptcy. The debtor had a reorganization plan that involved renting space in its commercial property to a medical marijuana business.

In opposition, the bank filed a motion asking the bankruptcy court to dismiss the Chapter 11 case in accordance with 11 USC 1112(b)(1). Dismissal was proper, the bank argued, since the debtor filed the Chapter 11 petition in bad faith as a way of trying to block the foreclosure sale. The debtor noted the unfortunate coincidence in the timing but argued that the delay in filing was a result of “acting without advice of bankruptcy counsel when all those prior actions occurred.” This argument did not persuade the trial court, however, since the debtor’s principal was himself an attorney and the author of many of the debtor’s pleadings.

The bankruptcy court concluded that bad faith was present. There “is no doubt that the impending foreclosure sale, and the Debtor’s frustration at the lack of success of its other litigation strategies… is what precipitated the filing of this case.” Nevertheless, simply because a debtor filed in bad faith does not automatically mean that dismissal is the proper remedy. When deciding whether or not to dismiss a debtor’s filing when bad faith is present, the court must look at whether the debtor is capable of being reorganized. That means that the debtor must have a reorganization that is clearly feasible.

This debtor’s reorganization was founded upon the new tenant, the medical marijuana business. To be feasible, the court explained, “a bankruptcy plan that proposes to be funded through income generated by the sale of marijuana products” must involve a business that “is legal under both state law and federal law.” In this case, the medical marijuana business did not meet that criterion and would not do so “for the foreseeable future.” In other words, the plan was both speculative and based upon a business that was illegal under federal law.

Nevertheless, despite all of these factors, the court refused to dismiss. In this case, there was “significant non-insider unsecured debt,” and, since the judge was not persuaded that dismissal was in the best interest of those creditors, that made dismissal of the Chapter 11 petition improper.

For reliable advice and representation about a Chapter 11 case in which your interests are involved, talk to the skilled South Florida bankruptcy attorneys at Stok Folk + Kon. Our attorneys have been helping both debtors and creditors as they work to protect their interests.

Contact us online or by calling (305) 935-4440 to schedule your consultation and find out how this firm can help you protect your interests.

More blog posts:

South Florida Creditor Who Settled in Chapter 11 Case Forced to Pay Fees for Violating Agreement Terms, Florida Business Lawyers Blog, July 7, 2017

Exception to Automatic Stay Provision Allows Lawsuits to Proceed Despite Florida Medical Practice’s Chapter 11 Filing, Florida Business Lawyers Blog, Dec. 19, 2016