La Trinidad Elderly, LP, SE v. Loiza Ponce Holdings LLC, 627 B.R. 779

Background

Debtor La Trinidad Elderly LP acquired a 130-unit subsidized-apartment property subject to a mortgage; original loan problems led to a state-court foreclosure judgment in favor of CPG (later assigned to Loíza Ponce).
Loíza Ponce obtained a final foreclosure judgment (2016) and execution orders; public sales were scheduled for Sept. 26, 2018 and Apr. 3, 2019.
Debtor filed chapter 11 petitions twice—each on the day before scheduled sales; the first was dismissed because it was filed by an unauthorized partner/agent after evidentiary hearings.
In the second case Debtor proposed a plan treating Loíza Ponce as a disputed unsecured creditor and reserved challenges to Loíza Ponce’s claim for adversary litigation; Loíza Ponce moved to dismiss the petition for bad faith under § 1112(b).
The bankruptcy court (and on review the Panel) found cause to dismiss: timing (eve-of-sale filings), undersecured secured claim larger than property value, Debtor’s lack of employees and access to rents, failure to file claim objection or adversary proceeding, and no reasonable likelihood of reorganization; Reconsideration was denied and the property was auctioned during the pendency.
The Bankruptcy Appellate Panel affirmed both the dismissal and denial of reconsideration, holding (1) lack of good faith can be "cause" under § 1112(b), and (2) the record supports the bankruptcy court’s bad-faith and no-rehabilitation findings.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether lack of good faith is "cause" under 11 U.S.C. § 1112(b) to dismiss a chapter 11	Debtor: Bad-faith dismissal is not established; filings were legitimate efforts to reorganize and protect tenants; catastrophic events justify relief	Loíza Ponce: Lack of good faith is an established ground to dismiss; most courts so hold and the filing was opportunistic to delay foreclosure	Panel: Agreeing with prevailing authority, lack of good faith may constitute "cause" and bankruptcy court did not err in treating it as such
Whether the petition was filed in bad faith (totality of circumstances)	Debtor: Filing was to preserve subsidized housing and pursue appeal of foreclosure; Debtor had other assets and intended to address plan objections at confirmation	Loíza Ponce: Filing was a two-party, single-asset tactic filed on the eve of sales to frustrate enforcement; Debtor lacked cash flow, employees, and a viable plan	Held: The bankruptcy court’s fact findings (timing, undersecured claim, no access to rents, lack of plan to address secured claim) were not clearly erroneous; totality supports bad faith finding
Whether dismissal was premature or conversion should have been ordered instead	Debtor: Dismissal before the scheduled confirmation hearing was premature; conversion could preserve estate value	Loíza Ponce: Court had already heard evidence; dismissal is permissible; debtor never argued conversion was preferable	Held: Court may dismiss at any time; debtor waived conversion argument and bankruptcy court did not abuse discretion in dismissing rather than converting
Whether the court erred in denying reconsideration after new developments (foreclosure sale)	Debtor: Reconsideration should be granted—some factual findings were wrong and the sale was not final; Debtor had other assets to reorganize around	Loíza Ponce: Alleged factual errors were immaterial; sale confirmed foreclosure outcome; denial was proper	Held: Reconsideration under Rule 59(e) requires manifest error or new convincing facts; debtor failed to meet that standard and the denial was not an abuse of discretion (any omission about the sale was harmless)

Key Cases Cited

Phoenix-Piccadilly, Ltd. v. Life Ins. Co. of Va., 849 F.2d 1393 (11th Cir. 1988) (sets forth factors used to evaluate bad-faith chapter 11 filings)
Integrated Telecom Express, Inc. v. NMSBPCSLDHB, L.P. (In re Integrated Telecom Express, Inc.), 384 F.3d 108 (3d Cir. 2004) (recognizes bad faith as cause to dismiss under § 1112(b))
SGL Carbon Corp. v. SGL Carbon (In re SGL Carbon Corp.), 200 F.3d 154 (3d Cir. 1999) (explains legislative history and equitable basis for considering good-faith in § 1112(b) analysis)
C-TC 9th Ave. P’ship v. Norton Co. (In re C-TC 9th Ave. P’ship), 113 F.3d 1304 (2d Cir. 1997) (articulates multi-factor test for bad-faith filings in single-asset cases)
Gonic Realty Trust v. Greater Andover Sav. Bank (In re Gonic Realty Tr.), 909 F.2d 624 (1st Cir. 1990) (permits consideration of equitable factors beyond statutory list in § 1112(b))
Capitol Food Corp. of Fields Corner v. Fields Station LLC (In re Capitol Food Corp. of Fields Corner), 490 F.3d 21 (1st Cir. 2007) (recognizes that filings to address imminent foreclosure can be legitimate chapter 11 purposes)
Albany Partners, Ltd. v. Westbrook (In re Albany Partners, Ltd.), 749 F.2d 670 (11th Cir. 1984) (supports dismissal for lack of good faith where filing abuses equitable nature of chapter 11)