United States Court of Appeals
For the First Circuit
No. 06-2327
IN RE CAPITOL FOOD CORP. OF FIELDS CORNER,
Debtor,
FIELDS STATION LLC.,
Appellant,
v.
CAPITOL FOOD CORP. OF FIELDS CORNER,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Boudin, Chief Judge,
Cyr and Stahl, Senior Circuit Judges.
John C. La Liberte, with whom Pamela Zorn Adams and Sherin and
Lodgen LLP were on brief for appellant.
Andrew M. Osborne, with whom David J. Fonte and Osborne &
Fonte were on brief for appellee.
June 6, 2007
CYR, Senior Circuit Judge. The corporate owner of
commercial premises upon which its lessee sought to reorganize
under chapter 11 and reopen as a food market appeals from the
bankruptcy court judgment which denied the motion to dismiss the
chapter 11 petition on the ground that it was not filed in good
faith. We affirm.
I
In 1965, the Fields Station Realty Trust ("Fields
Station") leased a commercial retail property in Dorchester,
Massachusetts, to Supreme Fields Corner, Inc. Rentals under the
lease (“Lease”) were – and remain – well below prevailing market
rates. The Lease permitted Fields Station to terminate the
leasehold within thirty days should Supreme Fields cease operating
a business – viz., a food market – on the premises. In 1996,
Capitol Food Corporation of Fields Corner, Inc. (“Capitol Food”)
succeeded to Supreme Fields’ interests as lessee.
In 2005, Capitol Food ceased operating the food market
itself, and subleased the store to Ethnic and American Foods, Inc.
d/b/a America’s Food Basket (“AFB”). AFB operated a market on the
premises until December 26, 2005, when it closed its doors and
filed a chapter 7 petition. On December 27, Fields Station sent
Capitol Food a written notice, citing AFB’s closure of the market
as an event of default under the Lease, and inviting Capitol Food
to cure the default by January 26, 2006 or forfeit its leasehold.
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Capitol Food promptly decided to resume its own operation
of a market on the leased premises. During January 2006, it
purchased AFB’s sublease interests in the Property from the chapter
7 trustee in the AFB bankruptcy case, and agreed to purchase the
market’s existing equipment and inventory from one of AFB’s secured
creditors. Capitol Food also applied to the city for the necessary
operating and health permits. However, since it was unable to
reopen the market by the Fields Station January 26 deadline,
Capitol Food filed a voluntary chapter 11 reorganization proceeding
on January 27, expressly to avert forfeiture of its lucrative
leasehold. Capitol Food has continued to make timely rent payments
to Fields Station. Within two weeks of its chapter 11 filing,
Capitol Food obtained the operating and health permits, and
reopened the food market.
Fields Station promptly submitted a motion to dismiss the
Capitol Food chapter 11 petition, see 11 U.S.C. § 1112(b)
(authorizing dismissal of petitions for “cause”), or for relief
from the automatic stay, see id. § 362(d)(1) (same, “for cause”),
alleging that the Capitol Food petition had been filed in bad faith
and for an improper purpose.
After a non-evidentiary hearing, the bankruptcy court
denied both Capitol Food motions, holding, inter alia, that section
1112(b) contains no good faith filing requirement, and that Fields
Station failed to establish “cause” for relief from the automatic
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stay because Capitol Food did not utilize the chapter 11 filing for
any improper purpose. Fields Station appealed the bankruptcy court
orders denying its subsection 1112(b) and 362(d) motions to the
district court, which summarily affirmed.
II
A.
On appeal from an intermediate district court affirmance,
we review de novo the bankruptcy court’s legal conclusions, its
findings of fact for clear error, In re Watman, 458 F.3d 26, 31
(1st Cir. 2006), and its refusal to dismiss a bankruptcy petition
or to grant relief from the automatic stay only for abuse of
discretion, Howard v. Lexington Invs., Inc., 284 F.3d 320, 322 (1st
Cir. 2002); In re Soares, 107 F.3d 969, 977 (1st Cir. 1997).
B.
The Bankruptcy Code prescribes that the bankruptcy court
may dismiss a chapter 11 case for “cause.” 11 U.S.C. § 1112(b)(1).
Fields Station initially posits that a finding that Capitol Food
filed its chapter 11 petition in “bad faith” is sufficient “cause”
for a § 1112(b) dismissal. The courts are not in agreement as to
this legal proposition, compare, e.g., In re Integrated Telecom
Express, Inc., 384 F.3d 108, 118 (3d Cir. 2004) (embracing good
faith filing requirement), cert. denied, 545 U.S. 1110 (2005), with
In re Victoria Ltd. P’ship, 187 B.R. 54, 61-62 (Bankr. D. Mass.
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1995) (rejecting the proposition),1 and the issue remains one of
first impression in this circuit, cf. In re Coastal Cable T.V.,
Inc., 709 F.2d 762, 764-65 (1st Cir. 1983) (merely observing that
the Code imposes a generalized duty of good faith, and citing 11
U.S.C. § 1129(a)(3), which expressly requires that a
reorganization plan be “proposed in good faith”).
Although the bankruptcy court held that subsection
1112(b) imposes no good faith filing requirement, we need not
address this matter in the present case. Even the courts which
have found a good faith filing requirement would demand that Fields
Station first make a prima facie showing that Capitol Food filed
its petition in bad faith, see, e.g., In re Paolini, 312 B.R. 295,
1
The courts which endorse a good faith filing requirement
primarily observe that it comports with the equitable roots of
bankruptcy law, by ensuring, from the earliest stages of a
bankruptcy case, that the debtor’s genuine need for bankruptcy
protection outweighs the burden and delay to creditors occasioned
by the chapter 11 proceedings. See, e.g., Integrated Telecom, 384
F.3d at 119. The courts which reject the requirement observe,
inter alia, that: (i) § 1112(b) expressly provides adequate
alternate mechanisms for weeding out bad faith chapter 11 petitions
by expressly listing several criteria warranting dismissal for
“cause” (e.g., the debtor’s failure to propose a viable chapter 11
plan in good faith), 11 U.S.C. § 1112(b)(4)(A)-(P), yet
conspicuously omits mention of any good faith filing criterion; and
(ii) “good faith” is too vague and amorphous a term to justify
dismissal ab initio of a chapter 11 petition before the debtor has
had a fair opportunity to propose and argue for the bona fides of
its reorganization plan. See Victoria Ltd. P’ship, 187 B.R. at 61-
62. In the same vein, Capitol Food notes that the Bankruptcy Abuse
Prevention and Consumer Protection Act, Pub. L. 109-8, 119 Stat. 23
(2005), recently included in the Code an explicit “good faith”
definition in § 362(c)(3)(B), (C) (provisions to discourage
multiple bankruptcy filings by same debtor within one-year period),
but did not so amend § 1112(b).
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305 (Bankr. E.D. Va. 2004) (observing that the moving party must
make a prima facie showing of bad faith before the burden of
proving good faith shifts to debtor), and the appellate record
reveals that Fields Station has made no such preliminary
demonstration.
C.
Although Fields Station acknowledges the fact-intensive
nature of the good faith question, In re Marsch, 36 F.3d 825, 828
(9th Cir. 1994), it suggests that the two matters particularly
pertinent to its appeal are whether the Capitol Food petition
“serves a valid reorganizational purpose,” and whether the petition
was filed “merely to obtain tactical litigation advantages.” In re
SGL Carbon Corp., 200 F.3d 154, 163, 165 (3d Cir. 1999).
Even the case authority cited by Fields Station refutes
its allegation that Capitol Food submitted its chapter 11 petition
in bad faith. Fields Station relies primarily on the fact that
Capitol Food admitted that it was solvent at the time it filed its
chapter 11 petition, see 11 U.S.C. § 101(32) (providing definition
of “insolvent”), therefore had the ability to pay its unsecured
debts without liquidating its business assets, thus had no present
need for bankruptcy protection in January 2006.
“A debtor need not be insolvent before filing a
bankruptcy petition,” however, provided it is experiencing “some
type of financial distress.” Integrated Telecom, 384 F.3d at 122
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(“The absence of an insolvency requirement encourages companies to
file for Chapter 11 before they face a financially hopeless
situation.”) (emphasis added); SGL Carbon, 200 F.3d at 165-66
(“When financially troubled petitioners seek a chance to remain in
business, the exercise of those [bankruptcy] powers is
justified.”); In re Liberate Techs., 314 B.R. 206, 211-12 (Bankr.
N.D. Cal. 2004) (same); see also Coastal Cable, 709 F.2d at 765
(noting that a “good faith” plan of reorganization “must bear some
relation to the statutory objective of resuscitating a financially
troubled corporation”). Catastrophic business events, such as an
imminent or threatened foreclosure on the debtor’s interests in
real property essential to successful reorganization efforts, are
precisely the sort of imminent financial distress for which debtors
routinely seek chapter 11 protection. See Liberate Techs., 314
B.R. at 216 (citing In re Sylmar Plaza, L.P., 314 F.3d 1070, 1075
(9th Cir. 2002) (finding no “bad faith” filing where debtor filed
chapter 11 petition to avoid incurring prohibitive lease
penalties)). Two primary purposes of chapter 11 relief are the
preservation of businesses as going concerns, and the maximization
of the assets recoverable to satisfy unsecured claims. See Bank of
Am. Nat’l Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S.
434, 453 (1999). Upon the abrupt closure of the AFB market in
December 2005, Capitol Food was deprived of its principal source of
cash flow (viz., the sublease rental payments receivable),
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whereupon Capitol Food legitimately opted to reconvert itself –
from a non-operational sublessor to a market operator – thereby
preserving for the business the going concern value of both the
below-market-rate leasehold and the store’s existing equipment and
inventory. Since “‘going-concern value is likely to be higher than
liquidation value,’” Integrated Techs., 384 F.3d at 121 (citation
omitted), a successful reorganization in turn can maximize the
value of the assets available to settle the outstanding claims of
unsecured creditors. If the reorganization succeeds, and a steady
cash flow is restored, everyone wins: the debtor, creditors,
employees, and shareholders.
Importantly, Fields Station has not contended that the
Capitol Food reorganization would have been viable even if Capitol
Food were forced to pay prevailing market rates on the Lease.
Where the Capitol Food non-monetary default under the Lease
threatened to extinguish its lucrative leasehold, and the loss of
that leasehold would have doomed its bona fide reorganization
efforts, it had a present need for chapter 11 protection to avoid
business disruption and economic dismemberment. See id. at 129
(noting that a “good faith” petition “must seek to create or
preserve some value that would otherwise be lost . . . outside of
bankruptcy”); In re James Wilson Assocs., 965 F.2d 160, 170 (7th
Cir. 1992) (“It is not bad faith to seek to gain an advantage from
declaring bankruptcy – why else would one declare it?”).
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“The [§ 1112(b) good faith filing] inquiry often centers
around the debtor's bona fide need for a breathing spell to
reorganize.” In re Original IFPC S'holders, Inc., 317 B.R. 738,
750 (Bankr. N.D. Ill. 2004). Congress intended that the filing of
a chapter 11 petition and the coincident triggering of the
automatic stay would afford debtors a “breathing spell” from “all
collection efforts, all harassment, and all foreclosure actions.”
H.R. Rep. No. 95-595, at 340 (1978), reprinted in 1978 U.S.C.C.A.N.
5787, at 6296-97 (emphasis added); 11 U.S.C. § 362(a)(6); In re
Jamo, 283 F.3d 392, 398 (1st Cir. 2002); Soares, 107 F.3d at 975.
As in the instant case, the "time-out" typically delimits a
creditor’s contractual rights against the debtor in order to
advance the prospects for a successful reorganization:
Filing a bankruptcy petition with the intent
to frustrate creditors does not by itself
“establish an absence of intent to seek
rehabilitation.” Indeed, because a major
purpose behind our bankruptcy laws is to
afford a debtor some breathing room from
creditors, it is almost inevitable that
creditors will, in some sense, be “frustrated”
when their debtor files a bankruptcy petition.
In reality, there is “a considerable gap
between delaying creditors, on the eve of
foreclosure, and the concept of abuse of
judicial purpose.”
In re Cohoes Indus. Terminal, Inc., 931 F.2d 222, 228 (2d Cir.
1991) (citations omitted).
In this regard, none of Fields Stations’ case authorities
prove to be factually apposite. Unlike Capitol Food, the debtors
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in Integrated Telecom and Liberate Technologies did not file their
chapter 11 petitions with intent to reorganize a financially
distressed company as an operational business, but rather, with the
declared intention to sell a fully solvent company, viz., a
business fully able to pay its unsecured claims as they came due.
See Integrated Telecom, 384 F.3d at 120 (“Integrated is
unquestionably ‘out of business,’ and therefore has no going
concern value to preserve in Chapter 11 through reorganization or
liquidation under the Bankruptcy Code.”); Liberate Techs., 314 B.R.
at 217. In order to maximize the businesses’ sales value, hence
the financial return their shareholders would realize from their
anticipated sales, the debtors sought to invoke a Bankruptcy Code
provision that caps the amount a lessor may recover in future rents
for the debtor’s default under a lease, thereby making the leases’
terms more valuable and attractive to prospective purchasers of the
businesses. 11 U.S.C. § 506(b)(6); Integrated Telecom, 384 F.3d at
128 (noting that the establishment of a valid reorganizational
purpose is a question “antecedent” to the right to invoke the §
506(b)(6) cap).
By contrast, the Capitol Food unsecured creditors are
likely to benefit from the now-successful reorganization, since
Capitol Food’s operation of the food market has restored a reliable
and adequate cash flow from which it can pay its past and ongoing
debts to unsecured creditors, as well as continue its timely rental
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payments to Fields Station under the Lease.2 Far from an unworthy
purpose, this type of bona fide rehabilitative effort is among the
most fundamental aims attendant upon chapter 11 protection.
As Fields Station has made no prima facie showing that
Capitol Food submitted its chapter 11 petition in bad faith, we
conclude that the bankruptcy court did not abuse its discretion in
denying the Fields Station motion to dismiss the chapter 11
petition or relief from the automatic stay.
Affirmed.
2
Fields Station predicated its bankruptcy court motions, at
least in part, on allegations, based on media reports, that Capitol
Food had a long history of mismanaging and neglecting the leased
property (e.g., repeated health violations). Given that many
companies suffer financial distress precisely because of
mismanagement, we do not perceive what relevance these allegations
have to the question as to whether Capitol Food filed its chapter
11 petition in bad faith. Rather, these allegations pertain
principally to the prospects vel non that the plan proposed by
Capitol Food would effect a successful rehabilitation.
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