In re Mense
509 B.R. 269
Bankr. C.D. Cal.2014Background
- Kayne, a creditor, sought relief from stay under §362(d)(1) and dismissal under §1112(b) of two Chapter 11 petitions: Cottonsmith, LLC and Mense, filed Jan 22, 2014.
- State court judgment against Mense and Cottonsmith awarded Kayne nearly $3.0M plus prejudgment interest; post-judgment, debtors filed bankruptcy petitions.
- Debtors lack ongoing business; Cottonsmith has no employees or income, Mense has substantial assets but no business operations.
- Debtors admitted they filed to stay enforcement of the judgment and to delay posting a California appeal bond; Kayne argued bad faith and misuse of bankruptcy.
- Court granted stay relief to pursue appeal and issued dismissal for cause under §1112(b), finding lack of good faith and ongoing diminution of estates.
- Proceedings included debates on bond adequacy, viability of reorganization, and whether dismissal or conversion best serves creditors’ interests.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether lack of good faith justifies dismissal and stay relief | Kayne contends bad faith; petitions filed to avoid bond and delay judgment | Debtors claim reorganization potential and need for stay Pending appeal | Yes; bad faith found and stay relief and dismissal granted |
| Whether Cottonsmith lacked good faith in filing Chapter 11 | Cottonsmith had no business to reorganize and used bankruptcy to preserve cash | Cottonsmith sought to restructure assets and fund appeal | Yes; dismissal for lack of good faith appropriate |
| Whether Mense lacked good faith in filing Chapter 11 | Mense used bankruptcy to avoid posting appeal bond despite assets | Mense claimed potential reorganization and bond viability | Yes; dismissal for lack of good faith appropriate |
| Whether dismissal is in the best interests of creditors and the estate | Dismissal yields greater value outside bankruptcy given asset depletion | Possible conversion or continued Chapter 11 could benefit creditors | Yes; dismissal chosen as best interest of creditors and estate |
Key Cases Cited
- Little Creek Development Co. v. Commonwealth Mortgage Corp., 779 F.2d 1068 (5th Cir. 1986) (good faith standard central to stay and dismissal analyses)
- Marsch v. Marsch (In re Marsch), 36 F.3d 825 (9th Cir. 1994) (good faith factors and purpose of Chapter 11)
- In re Albany Partners, Ltd., 749 F.2d 670 (11th Cir. 1984) (bad faith as grounds for dismissal; ‘best interests’ balancing)
- In re Kronemyer, 405 B.R. 915 (9th Cir. BAP 2009) (case-by-case determination of ‘cause’ for stay relief)
- In re Plumberex Specialty Prods., Inc., 311 B.R. 551 (Bankr. C.D. Cal. 2004) (standards for granting stay relief and assessing cause)