Unpublished Disposition, 899 F.2d 18 (9th Cir. 1989)

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US Court of Appeals for the Ninth Circuit - 899 F.2d 18 (9th Cir. 1989)

In re LAUGHLIN DEVELOPMENT CORPORATION, Debtor.LAUGHLIN DEVELOPMENT CORPORATION, Plaintiff-Appellant,v.MARK TWAIN INDUSTRIES, INC., Defendant-Appellee.

No. 89-15145.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 14, 1990.Decided April 5, 1990.

Before SNEED, FARRIS and FERNANDEZ, Circuit Judges.


MEMORANDUM* 

Laughlin Development Corp. ("LDC"), debtor, appeals the district court's order affirming the bankruptcy court's termination of the automatic stay. The bankruptcy court terminated the automatic stay after denying LDC's motion to assume its contract with Mark Twain Industries ("MTI"). The district court affirmed on the alternative ground that the bankruptcy filing was in bad faith. We affirm the district court's dismissal of LDC's Chapter 11 petition.

BACKGROUND FACTS

On October 30, 1986, Irwin and Nettie Soper ("the Sopers") entered into an agreement with MIT to purchase Crystal Palace Casino ("Contract") in Laughlin, Texas. The Contract required the Sopers to make a nonrefundable downpayment of $900,000,1  and to close on or before 1:00 p.m. February 1, 1987. The balance of $8,100,000 was due at closing. The Contract specifically made time of the essence, and stated that the closing date could not be "extended or postponed, except by written agreement." In addition, it required the Sopers to make monthly interest payments on the purchase price prior to closing.

The Sopers made the first two interest payments. However, they ran into financial difficulties. So, on January 30, 1987, the Sopers incorporated LDC, for the express purpose of obtaining financing for the Contract. The Sopers then assigned all of their rights in the Contract to LDC. On that same day, LDC filed for bankruptcy under Chapter 11. LDC was a shell corporation with no employees, no ongoing business, no assets other than the Contract, and only one creditor, MTI.

LDC neither made the final interest payment nor paid the balance of the principal on or before February 1, 1987. The stay triggered by LDC's filing of the bankruptcy petition delayed the operation of the sections terminating the Contract upon default by the debtor.

On April 14, 1987, MTI filed a motion to lift the stay or in the alternative to dismiss the petition for bad faith filing. LDC opposed the motion. The bankruptcy court denied MTI's motion to lift the stay, conditioned upon LDC's payment of interest and assumption or rejection of the contract within 60 days. The court did not rule on the issue of bad faith.

Although LDC made only one monthly interest payment in the interim,2  on June 30, 1987, it filed a motion to assume the Contract or to extend time for assuming the Contract. The bankruptcy court held two hearings on the question of assumption. The court ultimately denied LDC's motion to assume the Contract and terminated the automatic stay.

LDC appealed the decision of the bankruptcy court on August 17, 1987. On January 11, 1989, the district court heard LDC's appeal. The district court affirmed the bankruptcy court's termination of the stay, but on the alternative ground of bad faith. LDC filed a timely appeal of the district court's decision on January 23, 1989.

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction pursuant to 28 U.S.C. § 158(a). We have jurisdiction pursuant to 28 U.S.C. § 158(d).

The court of appeals applies the same standard as the district court in reviewing a bankruptcy court decision. In re Arnold, 806 F.2d 937, 938 (9th Cir. 1986). The bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo. In re Herbert, 806 F.2d 889, 891 (9th Cir. 1986). A decision that a debtor's petition has been filed in bad faith is reviewed for clear error. In re Can-Alta Prop., Ltd., 87 B.R. 89, 91 (9th Cir. BAP 1988).

DISCUSSION

Section 1112(b) of the Bankruptcy Code provides that "on request of a party in interest ... and after notice and a hearing, the court may dismiss a case under this chapter ... for cause...." (emphasis added). Although bad faith is not expressly mentioned, it has been incorporated into the section by judicial interpretation. See In re Thirtieth Place, Inc., 30 B.R. 503, 505 (9th Cir. BAP 1983); Petition of Little Creek Dev. Co., 779 F.2d 1068, 1071 (5th Cir. 1986); In re HBA East, Inc., 87 B.R. 248, 258 (Bankr.E.D.N.Y. 1988). The requesting party is not required to show malice in a challenge for bad faith. In re Southern Cal. Sound Sys., Inc., 69 B.R. 893, 901 n. 2 (Bankr.S.D. Cal. 1987). The party is merely required to show that the case was filed "for a purpose other than that sanctioned by the Bankruptcy Code." Id.

The purpose of Chapter 11 is "the rehabilitation or reorganization of entities entitled by statute to its relief." Thirtieth Place, 30 B.R. at 505. " [E]vidence of an intent to abuse the reorganization process has been held to be sufficient 'cause' upon which a case can be dismissed." Id.

"The transfer of one's assets to a new debtor on the eve of a Chapter 11 filing may be evidence of such an improper state of mind and such transfers will be scrutinized with great care." Id. See also Little Creek, 779 F.2d at 1073 (The "new debtor syndrome" ... exemplifies ... bad faith cases").

However, an eleventh hour filing is not determinative of the question of bad faith. " [T]he factual issue to be determined is whether the debtor was created for the predominant purpose of filing in bankruptcy." Thirtieth Place, 30 B.R. at 505. In making this determination, the court uses an objective standard, and examines the totality of the circumstances instead of the subjective intentions of the debtor. HBA East, 87 B.R. at 261-62.

In Thirtieth Place, the bankruptcy appellate panel dismissed the debtor's Chapter 11 petition for bad faith filing where the corporation had been created the day before the petition was filed. The court noted that

there was no plan contemplated for the infusion of capital, no gain in managerial expertise, no history of past business conduct, no employees and indeed, no current business activity on the date of the commencement of the case nor [were] there any reasonable prospects for the conduct of future business. In short, the debtor was created for the sole purpose of obtaining protection under the automatic stay by filing bankruptcy.

Id. at 505-06; See also Little Creek, 779 F.2d at 1073 (cited with approval in Arnold, 806 F.2d at 939).

Similarly, in Southern Cal. Sound Sys. Inc., 69 B.R. at 899-900, the court dismissed the corporate debtor's Chapter 11 petition where the debtor had no employees except the principal, no cash flow or available source of income, nine creditors, and its petition was filed for the purpose of avoiding a state court action and the costs associated therewith.

We see the Sopers' conduct in this case as highly analogous to that of the plaintiffs in both Thirtieth Place, and Southern Cal. Sound Sys. Inc.. The Sopers incorporated LDC, transferred the ailing Contract3  to it and filed for bankruptcy all on the same day. LDC was a shell corporation which had no employees, no ongoing business, no other assets on which to base a plan of reorganization, one creditor, and one debt. LDC concedes that it was incorporated for the express purpose of securing financing for the Contract. Financing should have been secured long before the date of LDC's incorporation, the very eve of the date that payment was due under the Contract. Without that financing, the principals, the Sopers, stood to forfeit their investment. LDC, of course, had nothing to lose--it existed to take advantage of the bankruptcy stay.

LDC contends that its whole purpose for filing was to reorganize an ongoing concern. It cites extensively Judge George's dissent in Thirtieth Place and argues that all the debtor is required to show in a Chapter 11 case is the ability to reorganize. See Thirtieth Place, 30 B.R. at 507. However, contrary to Judge George's dissent, Chapter 11 is intended for use by an entity whose predominant purpose is its own reorganization. Chapter 11 is not intended to foster the creation of a shell organization like LDC, whose purpose is to prevent the loss of a contract in the hope that somehow it will be able to perform that contract someday. As the majority in Thirtieth Place pointed out, the delay that is an incident of the bankruptcy process is itself harmful to the creditor. Id. at 506. This case is a fine example of that--the Sopers were to perform within ninety days of their entry into the agreement. By their manuevers, that time was extended by at least six months.

LDC also claims that this case is analogous to Can-Alta. In Can-Alta, 87 B.R. at 92, the bankruptcy appellate panel reversed the bankruptcy court's finding of bad faith on the basis that the debtor was not given an adequate amount of time to propose a confirmable plan. The facts, while similar, are easily distinguished. The Can-Alta court found it important that the debtor was not formed on the eve of bankruptcy. Id.

CONCLUSION

The Sopers promised to purchase a parcel of property within 90 days. When they were unable to live up to their agreement, they attempted to unilaterally extend the time for performance by using the bankruptcy laws in a way that was never intended. Ultimately that attempt was otiose. Properly so. Since we hold that LDC filed its Chapter 11 petition in bad faith, we need not discuss the other issues which have been presented to us.

AFFIRMED.

 *

This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3

 1

The nonrefundable downpayment was made a condition of the Contract since MTI had already suffered financial losses by keeping its property off the market while the Sopers considered an option during a prevous attempt to purchase the property

 2

LDC also made one interest payment after the filing of its motion to assume

 3

The Contract was destined to become valueless in about two days. It was only the bankruptcy proceeding that could give it any value