557 B.R. 671
8th Cir. BAP2016Background
- Debtor Michael Robert Wigley personally guaranteed a lease for an LLC; Lariat obtained a state-court judgment against both for > $2.2 million, affirmed on appeal.
- State court entered an Assets Order permitting Lariat to seize and liquidate Debtor’s nonexempt assets and to divert receivables to satisfy the judgment.
- Ten days after the Assets Order, the Debtor filed a Chapter 11 petition; schedules listed assets exceeding liabilities and Lariat’s claim was subject to a § 502(b)(6) cap.
- Lariat moved to dismiss or convert the case to Chapter 7 for bad faith and objected to the Debtor’s Second Modified Plan; the bankruptcy court denied dismissal/conversion and refused confirmation of that plan (Nov. 18, 2015).
- The bankruptcy court later confirmed the Debtor’s Fourth Modified Plan (Feb. 18, 2016); Lariat appealed both the denial of dismissal/conversion and the confirmation order.
- The bankruptcy court found the Debtor filed in good faith to maximize asset value and protect creditors from a forced liquidation, credited the Debtor’s testimony, and concluded the case was not a two‑party litigation tactic.
Issues
| Issue | Lariat's Argument | Debtor's Argument | Held |
|---|---|---|---|
| Whether Debtor’s Chapter 11 filing was in bad faith such that the case should be dismissed or converted under 11 U.S.C. § 1112(b) | Filing was a bad‑faith, two‑party litigation tactic to evade state‑court judgments; Debtor not in financial distress | Filing was in good faith to preserve business value, protect other creditors, and use Bankruptcy Code protections (including § 502(b)(6) cap) | Bankruptcy court credited Debtor’s testimony, found financial distress and legitimate bankruptcy purpose, and denied dismissal/conversion; appellate court affirmed |
| Whether the case was merely a collateral attack on the state guarantee judgment (two‑party dispute) | The bankruptcy was a collateral attack aimed at Lariat; thus should be dismissed | Bankruptcy served multiple creditors and preserved estate value; not limited to a two‑party dispute | Court found multiple meaningful creditors and that the filing served broader creditor interests; not a two‑party dispute |
| Whether the fraudulent‑transfer judgment against Debtor’s wife shows evasive conduct supporting dismissal | The fraudulent‑transfer judgment demonstrates evasiveness and bad faith | Transfers and judgment were prepetition and Debtor proposed to address them in plan; not evasive filing | Court found transfers were prepetition, compromise was proper confirmation issue, and no evasive conduct shown |
| Whether the record supported factual findings of financial distress and risk of forced liquidation | Debtor could liquidate assets to satisfy Lariat; thus not insolvent and filing was tactical | Assets would lose substantial value in a forced liquidation; bankruptcy would better maximize value for all creditors | Court credited Debtor’s liquidation analysis and belief Lariat would force a detrimental liquidation; findings not clearly erroneous |
Key Cases Cited
- Loop Corp. v. U.S. Trustee (In re Loop Corp.), 379 F.3d 511 (8th Cir. 2004) (standard of review for bankruptcy factual and legal conclusions)
- Cedar Shore Resort, Inc. v. Mueller (In re Cedar Shore Resort, Inc.), 235 F.3d 375 (8th Cir. 2000) (bad‑faith filing can be cause for dismissal; totality‑of‑circumstances test)
- First Nat’l Bank of Sioux City v. Kerr (In re Kerr), 908 F.2d 400 (8th Cir. 1990) (requiring pattern of concealment/evasion or improper motive to dismiss for bad faith)
- SGL Carbon Corp. v. [Debtor], 200 F.3d 154 (3d Cir. 1999) (example of dismissal where debtor financially healthy and filed solely as litigation tactic)
- Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068 (5th Cir. 1986) (totality‑of‑circumstances framework for bad‑faith determination)