Prometheus Health Imaging, Inc v. Ust - United States Trustee
705 F. App'x 626
| 9th Cir. | 2017Background
- Prometheus Health Imaging, Inc. (Debtor) filed a Chapter 11 petition; the BAP dismissed it for bad faith and Prometheus appealed to the Ninth Circuit.
- Debtor asserted the Chapter 11 was needed so it could continue litigation against General Electric Medical Systems Europe (GEM) in French courts.
- The bankruptcy court and BAP found Prometheus lacked standing to pursue the GEM claims because those claims were part of Prometheus’s prior Chapter 7 estate and controlled by the Chapter 7 trustee.
- Prometheus continued litigating in France even after its Chapter 11 petition was dismissed and did not show it notified the French court or GEM of the dismissal.
- The bankruptcy court found Prometheus had no ongoing business, minimal assets beyond the GEM claims, no cash flow to fund a reorganization, and could have used a certificate of insolvency instead of Chapter 11.
- The court concluded the petition was a litigation tactic to pursue nonbankruptcy objectives rather than a bona fide reorganization effort and affirmed dismissal for bad faith.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Debtor’s Chapter 11 petition was filed in bad faith under 11 U.S.C. § 1112(b) | Prometheus: needed Chapter 11 to continue GEM litigation in France | Bankruptcy/BAP: Prometheus lacked standing; GEM claims belonged to prior Chapter 7 estate and trustee | Petition filed in bad faith; dismissal affirmed |
| Whether the GEM claims were property of the Chapter 7 estate | Prometheus: implicitly argued it could pursue GEM claims | Trustee/BAP: claims remained estate property because not administered or excluded from Chapter 7 | GEM claims remained estate property; Prometheus lacked standing |
| Whether continued foreign litigation after dismissal undermines Debtor’s justification for filing | Prometheus: continued litigation was consistent with need for bankruptcy protection | BAP: continued litigation after dismissal showed petition was not necessary for GEM litigation | Continued litigation after dismissal undercuts Prometheus’s claim that Chapter 11 was necessary |
| Whether Debtor had reorganization indicia (assets, business, cash flow) supporting good-faith filing | Prometheus: asserted need to reorganize to pursue claims | BAP: Debtor had no ongoing business, little assets aside from GEM claims, no cash flow; could have used certificate of insolvency | Lack of reorganization indicia supports finding of bad faith |
Key Cases Cited
- In re Marsch, 36 F.3d 825 (9th Cir. 1994) (standard of review and totality-of-circumstances approach to bad-faith dismissal)
- In re Marshall, 721 F.3d 1032 (9th Cir. 2013) (§ 1112(b) bad-faith dismissal and burden on debtor to show good faith)
- In re Lopez, 283 B.R. 22 (9th Cir. B.A.P. 2002) (property not abandoned or administered remains estate property)
- In re WLB-RSK Venture, 296 B.R. 509 (Bankr. C.D. Cal. 2003) (bad-faith determination examines totality of circumstances)
- In re St. Paul Self Storage Ltd., 185 B.R. 580 (9th Cir. B.A.P. 1995) (Chapter 11 filed as litigation tactic can be dismissed for bad faith)