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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Evolution of Pre-Bankruptcy Planning Raises Questions of Good Faith

By Andrew C. Kassner and Joseph N. Argentina Jr.
August 01, 2023

Ever since the enactment of the Bankruptcy Code decades ago, bankruptcy courts have had to address the threshold question of whether the debtor should be allowed to utilize the provisions of the Bankruptcy Code. In the early years, this issue of whether the bankruptcy case was filed in "good faith" usually involved a solvent or insolvent debtor that was embroiled in a two-party dispute and filed the case as a litigation tactic to stop the litigation. Later cases often involved a solvent debtor with many parties in litigation, and courts reviewed whether the debtor had a legitimate bankruptcy purpose or was under financial distress other than the present ability to pay bills as they matured or balance statement insolvency.

In recent years, as extensive pre-bankruptcy planning has evolved, bankruptcy filings frequently involve affiliates of larger companies, engineered with a structuring of liabilities in mind. This is especially relevant in the area of mass tort litigation. The question of whether these targeted filings are for a legitimate bankruptcy purpose or should be dismissed has been the subject of significant high-profile litigation.

Recently, in the case of In re AIG Financial Products, (Case No. 22-11309 (MFW)), which did not involve mass tort litigation, Judge Mary Walrath of the U.S. Bankruptcy Court for the District of Delaware considered a motion to dismiss a Chapter 11 case filed by former executives of the debtor who claimed the debtor was not facing financial distress that justified a bankruptcy filing, and the purpose of the case was to shift the value of the company to the debtor's parent, American International Group, Inc. (AIG). Walrath denied the motion, and found the debtor faced appropriate financial circumstances and had the appropriate purpose to warrant the filing.

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