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Fourth Circuit Affirms Chapter 11 Dismissal

By Michael L. Cook
July 30, 2007

The Fourth Circuit, on June 15, 2007, affirmed the dismissal of a Chapter 11 reorganization petition filed by a tenant debtor in a commercial lease dispute. Maryland Port Administration v. Premier Automotive Services, Incorporated (In re Premier Automotive Services, Incorporated), ___ F.3d ___, 2007 WL 1721951 (4th Cir. 6/15/07). As the Court of Appeals explained, the tenant had filed its Chapter 11 petition 'in order to forestall eviction on an obviously expired lease ' to prevent the [lessor] from evicting the debtor from the [lessor's] property,' seeking to tie up the landlord 'in endless, fruitless litigation.' Id., at *1. According to the court, the Chapter 11 filing here 'demonstrate[s], unfortunately, how the good and useful ends of the bankruptcy process can be badly abused.' Id.

The Federal Courts' Growing Skepticism to Litigious Commercial Tenants

Federal courts have increasingly rejected extortionate litigation by commercial tenants in the bankruptcy context. In re Integrated Telecom Express, Inc., 384 F.3d 108 (3d Cir. 2004) (held, solvent debtor tenant filed Chapter 11 petition in bad faith; had no present need for bankruptcy relief; could not use Chapter 11 solely to cap commercial lessor's lease rejection damages); In re Liberate Technologies, Inc., 314 B.R. 206 (Bankr. N.D. Cal. 2004) (same; debtor had cash well in excess of liabilities). But see In re PPI Ent. (U.S.) Inc., 324 F. 3d 197 (3d Cir. 2003) (held, no cause for dismissal when insolvent debtor filed Chapter 11 petition to cap landlord's damage claim); Fields Station LLC v. Capitol Food Corp. of Fields Corner (In re Capitol Food Corp. of Fields Corner), ___ F.3d ___ 2007 WL 1616646, *3-5 (1st Cir. 6/6/07) held, because lessor failed to make 'prima facie showing' of bad faith filing, 'bankruptcy court did not abuse its discretion in denying ' motion to dismiss the Chapter 11 petition ” despite debtor's solvency, it was financially troubled; had been 'deprived of its principal source of cash flow'; 'non-monetary default' under lease 'threatened to extinguish its lucrative leasehold'; debtor 'had a present need for Chapter 11 protection to avoid business disruption and economic dismemberment.'; debtor's operation 'restored a reliable and adequate cash flow [to] pay its past and ongoing debts to unsecured creditors [and] continue its timely rental payments' to the lessor.).

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