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Creditor's Rights Vindicated: Bad Faith Chapter 11 Dismissed By Appellate Court

BY Anthony Michael Sabino
September 27, 2007

The U.S. Supreme Court has often declared that the bankruptcy court is a place strictly reserved for 'honest debtors.' And while that connotes individuals, there is no escaping the implication that it is just as applicable to businesses that should only be seeking to advance legitimate ends via the bankruptcy process. Yet, an even more direct admonition to all who may file a bankruptcy case is the requirement of 'good faith,' a concept general enough to be adaptable, but strict enough to require entrants to come into the proceedings with the proverbial 'clean hands.'

Unfortunately, not every entity is as high-minded when it files for bankruptcy protection. These malefactors particularly usurp the reorganization process of Chapter 11, since its avowed goal of preserving an existing business provides an opportunity for the unscrupulous to remain in control and bend the law to their own less-than-honest ends.

Fortunately, the bankruptcy courts have the ability to ferret out such wrongdoing. Our subject today is a most recent example of some not-so-nice folks attempting to twist the Chapter 11 process to their own selfish ends, and how the prestigious U.S. Court of Appeals for the Fourth Circuit quite handily sent them packing.

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