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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Can a Debtor That Has No Ongoing Business Operations Reorganize Under Chapter 11 In Good Faith?

By Lawrence J. Kotler and Roxanne J. Indelicato
March 01, 2023

Under Section 1112(b)(1) of the Bankruptcy Code (the code), a bankruptcy court may convert or dismiss a Chapter 11 case for "cause," including, for example, when a debtor files a bankruptcy petition in bad faith. In a recent decision, In re HONX, No 22-90035 (Bankr. S.D. Tex. Dec. 28, 2022), the U.S. Bankruptcy Court for the Southern District of Texas (the court) addressed whether a debtor that has no independent assets or ongoing business operations can reorganize under Chapter 11 in good faith.

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Background

From 1965 to 1998, HONX, Inc. — a wholly owned subsidiary of the Hess Corp. — operated a petroleum refinery on the island of St. Croix, U.S. Virgin Islands. Since the 1980s, more than 1,500 plaintiffs filed personal injury suits against HONX and its predecessors alleging that they were exposed to asbestos at HONX's refinery.

In April 2022, in response to an influx of asbestos-related lawsuits, HONX filed a voluntary petition for bankruptcy relief under Chapter 11. Although HONX (the debtor) has yet to file a proposed plan of reorganization, it indicated that it is going to file a plan and, as part of the plan, seek to resolve its asbestos liabilities through the establishment of a Section 524(g) trust. The proposed trust, which would be wholly funded by the debtor's parent company, would be used to pay present and future asbestos claimants.

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