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Keywords

fiduciarytrustforeclosurebankruptcybad faith
bankruptcybad faith

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In re Kingston Square Associates, 214 B.R. 713, 31 Bankr.Ct.Dec. 615

Facts

The eleven debtors, controlled by Morton L. Ginsberg, faced foreclosure proceedings initiated by their mortgagees, Chase and REFG. To avoid losing their properties, Ginsberg paid a law firm to solicit creditors to file involuntary Chapter 11 petitions. The petitions were filed by a mix of trade creditors and professionals associated with the debtors. The mortgagees argued that this constituted collusion and sought dismissal of the petitions as bad faith filings.

Each of the eleven debtors (the “Debtors”) is or was controlled by Morton L. Ginsberg. The Debtors represent less than one-third of the thirty-eight Ginsberg-controlled entities that were restructured in 1991 or 1993 in transactions financed by The Chase Manhattan Bank, N.A. (“Chase”) and REFG Investor Two, Inc. (“REFG”) (the “Movants”).

Issue

Whether the involuntary Chapter 11 petitions filed by the debtors were made in bad faith due to alleged collusion with petitioning creditors.

At issue is whether the petitions ought therefore be dismissed as bad faith filings, relief which the mortgagees seek.

Rule

The court applied the standard for bad faith filings under section 1112(b) of the Bankruptcy Code, which allows for dismissal of a bankruptcy case if it is found that the petition was filed in bad faith.

The Movants argue that each of the eleven involuntary petitions was filed in bad faith and should be dismissed pursuant to section 1112(b) of the Bankruptcy Code.

Analysis

The court analyzed the circumstances surrounding the filing of the involuntary petitions, noting that while the debtors had orchestrated the filings, they believed reorganization was possible. The court found no evidence of objective futility in the reorganization process, which led to the conclusion that the petitions should not be dismissed. However, the court expressed concern over the debtors' boards of directors failing to fulfill their fiduciary duties, prompting the appointment of Chapter 11 trustees.

I conclude that although the debtors plainly orchestrated the filing of the involuntary petitions, they had reason to believe that reorganization was possible and did not circumvent any court-ordered or statutory restrictions on bankruptcy filings such that, absent any evidence of objective futility of the reorganization process, the cases ought not be dismissed now.

Conclusion

The court concluded that the involuntary petitions should not be dismissed for bad faith, but appointed Chapter 11 trustees to oversee the cases due to the boards' abdication of their responsibilities.

So ordered.

Who won?

The debtors prevailed in the sense that their Chapter 11 cases were not dismissed; however, the court's appointment of trustees indicated a loss of control over their cases.

The court found that while the debtors orchestrated the filings, they had reason to believe reorganization was possible and did not circumvent any court-ordered or statutory restrictions.

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