461 B.R. 293
Bankr. D. Del.2011Background
- Mezz II, an entity in a multi-layered hotel-ownership structure, filed a Chapter 11 petition on the eve of an anticipated foreclosure sale by Colony on Mezz II’s collateral.
- Colony and Gramercy are senior creditors at other levels; Colony seeks dismissal of Mezz II and relief from stay, while Mezz II and affiliates seek to reorganize.
- Mezz II’s petition targets preservation of enterprise value and potential restructuring across related debtors, despite Mezz II having only one asset and one creditor (Colony) at stake.
- An Inter-creditor Agreement governs Mezz II, Mezz I, and related Mezzanine lenders; Gramercy can direct actions and has funded directors for Mezz II and others.
- Colony argues the filing was a bad-faith tactic to stay foreclosure, aided by Gramercy-directed board control and pre-petition funding; Debtors argue a holistic, enterprise-wide reorganization is possible.
- The court accepts a holistic view of the enterprise but finds no realistic path to a confirmable plan for Mezz II absent consolidation; the case is deemed filed in bad faith.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Was the Mezz II petition filed in bad faith under §1112(b)? | Colony urges bad faith based on Primestone factors and litigation tactic. | Mezz II contends good-faith restructuring possible; holistic enterprise focus. | Yes; petition dismissed for bad faith, with prejudice. |
| Should relief from the automatic stay be granted under §362(d)? | Colony asserts lack of adequate protection and continuation of interest accrual; no equity cushion. | Debtors claim adequate protection offset by enterprise cash flow; possible reorganization. | Relief from stay granted under §362(d)(1) for lack of adequate protection; §362(d)(2) relief also supported. |
Key Cases Cited
- In re SGL Carbon Corp., 200 F.3d 154 (3d Cir. 1999) (adopts totality-of-the-circumstances approach to good-faith determinations in §1112 cases)
- In re 15375 Memorial Corp., 589 F.3d 605 (3d Cir. 2009) (endorses holistic, enterprise-focused considerations for good faith)
- In re Integrated Telecom Express, Inc., 384 F.3d 108 (3d Cir. 2004) (good-faith inquiry focused on legitimate reorg purpose, not mere litigation advantage)
- In re Marsch, 36 F.3d 827 (9th Cir. 1994) (bad-faith filing where objective and pre-petition conduct show improper purpose)
- Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007) (recognizes good-faith eligibility as predicate to bankruptcy relief)
- Indian Palms Assocs., Ltd. v. Kavelman, 61 F.3d 197 (3d Cir. 1995) (equity cushion concept in adequate protection analysis under §362(d)(1))