15375 Memorial Corp. v. BEPCO, L.P.15375 Memorial Corp. v. BEPCO, L.P.
OPINION
This appeal asks us to determine whether Chapter 11 bankruptcy petitions filed by Santa Fe Minerals, Inc. and 15375 Memorial Corporation (together, the “Debtors”) were filed in good faith. There
The Debtors raise two issues in this appeal. First, they argue that the District Court incorrectly exercised plenary review, instead of review for an abuse of discretion, of the good faith inquiry. Second, they argue that the District Court erred in concluding that they did not file their bankruptcy petitions in good faith.
I.
The historical and narrative facts in this case are not disputed. The District Court, finding no clear error in the Bankruptcy Court’s findings of fact, adopted those facts for the purposes of its decision, BEPCO, L.P. v. 15375 Mem’l Corp. (In re 15375 Mem’l Corp. III),
The Parties
The parties in this case are all companies involved in oil and gas exploration. The Debtors, 15375 Memorial Corporation (“Memorial”) and Santa Fe Minerals, Inc. (“Santa Fe”), are both subsidiaries of Glo-balSantaFe Corporation (“GSF”). Id. at 660. Both subsidiaries list the address of the U.S. headquarters for GSF, 15375 Memorial Drive, Houston, Texas, as their address. Id. Neither company, however, actually has offices at that address or at any other location. Id.
Memorial is a holding company incorporated in Delaware and is the immediate parent of Santa Fe. Id. It has no employees and engages in no business other than acting as the sole shareholder of Santa Fe. Id. In June 2001, Memorial voluntarily dissolved, but that dissolution was revoked in June 2004 “under the advice of counsel[J” Id.
Santa Fe was an oil and gas exploration company incorporated in Wyoming. Id. On December 8, 2000, id. at 663, it filed for dissolution under Wyoming law, id. at 660. At that time, “Santa Fe’s assets were up-streamed to [GSF and related entities] or other of the Debtors’ affiliates[.]” Id. at 662. “Santa Fe’s dissolution [permits] it ... to act only through its sole sharehold
GSF is a Cayman Islands corporation that indirectly owns Memorial and Santa Fe. In re 15375 Mem’l Corp. I,
EHI is a wholly owned, direct subsidiary of GSF. Id. It is the parent and sole shareholder of Memorial, id. at 660-61, and it also owns several other subsidiaries, id. at 661. EHI is a holding company and has no employees. Id.
GSFCSI is a wholly owned, indirect subsidiary of GSF. Id. It provides corporate services to Memorial, Santa Fe, and the GSF Entities. Id. GSFCSI, among other things, maintains the Debtors’ books and records. Id.
David E. Faure, the vice president and assistant secretary of Memorial, was charged with marshaling the Debtors’ as
As part of Faure’s effort to marshal the Debtors’ assets, he oversaw the recovery of funds from the GSF Entities for the benefit of the Debtors’ estates. Id. This included seeking recovery of funds that were “upstreamed to EHI and Memorial after Santa Fe’s dissolution.” Id. After an initial investigation, though, Faure determined that the Debtors’ potential claims against the GSF Entities were not viable. Id. Faure’s determination is unsurprising considering that he also testified that “he [did] not think [the claims against the GSF Entities] ‘[we]re very good claims.’” Id. “Faure further testified that filing a lawsuit against [GSF] on behalf of the Debtors to facilitate the return of upstreamed funds would jeopardize his job.” Id.
The Tebow Litigation
On April 18, 2005, individuals affected by the contamination of the Tebow Property (the “Tebow Plaintiffs”) filed suit in Louisiana state court naming Santa Fe, BEPCO, and others as defendants, seeking $320 million for the contamination (the “Tebow Action”). Id. at 663-64. The Te-bow Plaintiffs alleged that “water produced from oil wells [on the Tebow Property] was disposed of in unlined earthen pits on their property!;] this water contained salt and dangerous minerals, metals, and radioactive materials, and the contamination migrated both horizontally and vertically into the surrounding soil and ground water.” Id. Some of the pollutants entered and contaminated a drinking water aquifer. Id. at 663-64.
As a result of trial preparation, the Debtors learned that the Tebow Plaintiffs’ “[e]xpert [r]eports indicated that[ ] the worst contamination on the Tebow Property occurred in the East Pit area — an area located on the 1938[m]ineral [l]ease for which both BEPCO and Santa Fe were in the chain of title.” Id. at 664. They also learned from the work of their own expert and that of the Tebow Plaintiffs’ expert, that the East Pit was probably constructed after 1965 and that BEPCO assigned the 1938 mineral lease to a different company in 1964. Id. Thus, Santa Fe ascertained that BEPCO’s liability for contamination caused by the East Pit was likely to be less than companies like it, i.e., companies that used the Tebow Property after 1964. Id. In short, Santa Fe “knew that the [e]xpert [r]eports showed that it, not BEP-CO, was to blame for pollution around the East Pit.” Id. Santa Fe also learned that the contamination caused to the drinking water aquifer by the East Pit would cost approximately $189 million to clean. Id.
The Debtors were also aware that filing for bankruptcy would permit them to avoid liability in the Tebow Action. Id. at 665. The Tebow Plaintiffs’ complaint stated that “if a party ... has or intends to file for bankruptcy concerning any of the claims alleged ..., it is the express intention of Plaintiffs not to pursue those claims or party or parties in this action, even if such party or parties has been inadvertently named as a defendant.” Id.
The Tebow Action was scheduled for trial on October 11, 2006. Id. Leading up to the trial, BEPCO and Santa Fe participated in depositions, hired experts, and engaged in fact and expert discovery. Id. Santa Fe hoped that its dissolution under Wyoming law would be a defense to the Tebow Action, but it was concerned that its failure to publish notice until 2006 would undermine the defense. Id. at 667 (“[The] Debtors determined in the Summer of 2006 that the failure to give proper notice in connection with Santa Fe’s dissolution created a risk to Santa Fe’s shareholders for its liabilities in litigations, including the Tebow Action.”). In June 2006, the Tebow Plaintiffs and BEPCO informed Santa Fe that they would pursue the GSF Entities under an alter ego theo
The Demand Note
On August 8, 2006, eight days before the Debtors filed for bankruptcy, Memorial, through Faure, executed a demand note issued by EHI. Id. at 667. The demand note provided a revolving credit line of $500,000 in exchange for, among other things, Memorial (i) “accepting] all liabilities existing or arising from the activities of [Santa Fe]” and agreeing that “(ii) it is not a single business enterprise with [GSF] or any affiliate of [GSF]” and that “(iii) it will defend and indemnify [GSF] from any claims, whether based on an alter-ego, single business enterprise or other principle, relating to [Santa Fe’s] operations.” Id. at 668. A few days later, Memorial obtained $100,000 from EHI under the note to pay bankruptcy costs. Id.
Faure testified at trial that clause (i) of the demand note was intended to protect EHI and other GSF Entities from liability arising from Santa Fe’s activities, including the Tebow Action.
The Bankruptcy Filings and their Effect on the Tebow Action
On August 16, 2006, eight days after executing the demand note, the Debtors filed Chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware. The next day, the Tebow Plaintiffs dismissed Santa Fe from the Tebow Action. Id. at 665.
On August 22, 2006, BEPCO filed a third party complaint in the Tebow Action seeking relief from the GSF Entities under an alter ego theory. Id. That complaint was dismissed without prejudice on the same day for procedural reasons. Id. On August 25, 2006, BEPCO refiled its third
Four months later, on February 19, 2007, BEPCO proceeded to trial in the Tebow Action and settled with the Tebow Plaintiffs before a judgment was rendered. Id. In the settlement, BEPCO agreed to pay the Tebow Plaintiffs $20 million and assist in cleaning the Tebow Property in exchange for an assignment to BEPCO of the Tebow Plaintiffs’ property damage claims. Id. On April 27, 2007, BEPCO filed a proof of claim in the Bankruptcy Court against the Debtors based on Santa Fe’s liabilities in the Tebow Action. Id. BEPCO asserted claims against Santa Fe for assignment, contribution, indemnity, and for the contamination of the Tebow Property. Id. BEPCO also asserted claims against Memorial and the GSF Entities based on Wyoming law “authorizing the recovery of distributions made at dissolution and alter ego (and other related) theories.” Id.
On February 15, 2008, the Bankruptcy Court granted BEPCO relief from the automatic stay to pursue its action against Santa Fe and Santa Fe’s insurers in Louisiana state court. Id. at 686-92. The Bankruptcy Court also held that BEPCO’s assertion of alter ego claims against Memorial and the GSF Entities did not violate the automatic stay. Id. at 692. The Bankruptcy Court did not, however, permit BEPCO to proceed with its alter ego claims in Louisiana state court at that time. Id. at 695. It left open the issue of whether Memorial and the GSF Entities could be held liable under an alter ego theory, requesting further briefing on the issue by the parties. Id. It did so in part because the Debtors insisted that any alter ego claim against the GSF Entities was property of their estates and, thus, could not be asserted by BEPCO. See id. at 677.
In sum, after the Debtors filed for bankruptcy, the Tebow Plaintiffs dismissed Santa Fe from the Tebow Action and settled with BEPCO. As part of that settlement, BEPCO was assigned the Tebow Plaintiffs’ claims for property damage. BEPCO asserted those claims against Santa Fe, Santa Fe’s insurers, Memorial, and the GSF Entities in Louisiana state court. The Bankruptcy Court granted BEPCO relief from the automatic stay for the claims against Santa Fe and its insurers, but it did not permit BEPCO to proceed with its alter ego claims against Memorial and the GSF Entities.
The Litigations Pending at the Time of the Debtors’ Bankruptcy Petitions
At the time the Debtors filed their bankruptcy petitions, they were on notice of three pending lawsuits against them: the Tebow Action, an Oklahoma state court action for property damage (the “Ellison Action”), and a California state court personal injury action (the “Harris Action”). Id. at 669-70.
The Ellison Action was filed in 2001 and principally targeted a disposal company, FPC Disposal, Inc., for damage to land caused by its “construction, operation and maintenance of a commercial disposal facility.” Id. at 669. Santa Fe was named as a defendant because it was “one of many parties who disposed of materials at the facility.” Id. “BP Amoco Corporation, a co-defendant of Santa Fe’s in the Ellison Action against which Santa Fe asserted a right of indemnity, [defended] the Ellison Action on Santa Fe’s behalf.” Id. As a
The Harris Action was filed in California state court and “relat[ed] to [Memorial’s] past ownership of an allegedly contaminated site, located in Alhambra, Californiaf.]” Id. The current status of this action is unclear, but at the time the Debtors’ filed their bankruptcy petitions they had not “hired counsel or incurred material expenses” to defend the action. Id. at 670.
In addition to these three lawsuits, the Debtors had notice of three others that they believed could affect their interests. Id. Two asbestos-related lawsuits in California state court were pending against a predecessor of Memorial (the “Sinz and Troia Actions”). Id. Debtors were also concerned about a so-called oilfield legacy suit in Louisiana for which they had received a request for non-party discovery (the “Dore Action”). Id.
The Insurance Review Project
Faure and GSFCSI conducted an extensive insurance review between October 2006 and May 2007 to determine the extent of Santa Fe’s insurance coverage. Id. at 673. They discovered that the Debtors had policies that covered the claims asserted in the Tebow Action and other policies that could possibly cover the Sinz and Troia Actions. Id. at 673-74. “The [insurance [r]eview ... was undertaken for the benefit of the entire GlobalSantaFe corporate family.” Id. at 673. “The overall goal ... was to compile a database of policies that could be reviewed as claims came up against any [GSF-related entity], whether it be the Debtors or others.” Id.
The Debtors’ Assets
Aside from the insurance policies, Debtors have few assets. Id. at 676-78. Memorial, at the time of filing for bankruptcy, had the $100,000 advanced by EHI under the demand note. Id. at 676. Presumably this cash has been spent on litigation and accounting fees related to the bankruptcy. Santa Fe had no cash when it filed for bankruptcy. Id. Neither company holds any real property. Id.
The Debtors asserted a handful of claims for cash as assets in their bankruptcy petitions. Id. at 676-78. Santa Fe claimed a right to $60,000 from a class action settlement arising from a suit against Conoco. Id. at 676. It also claimed approximately $21,000 in escheat-ed funds held by the state of Texas, id., and approximately $500,000 from Memorial for assets that were upstreamed to Memorial upon its liquidation, id. at 677. Memorial listed an intercompany tax refund claim against an affiliate for $5,722. Id. at 676. The Debtors also claimed a right to indemnity in the Tebow Action “to reduce the extent of [their] exposure were someone else to be successful in recovering on a claim against [them] within [the] scope of the matters for which [they] are entitled to indemnity and/or contribution.” Id. Finally, the “Debtors ... assertfed] that all claims that BEPCO seeks to assert against the GSF Entities arising out of or related to the Tebow Action on the basis of alter ego, veil piercing or single business enterprise or similar theories ... [we]re property of their estates.” Id. at 677.
The Debtors’ Reasons for Filing for Bankruptcy
The Debtors filed their Chapter 11 bankruptcy petitions because they were concerned about their ongoing and pending litigations. In particular, they “considered the wearing effect of piecemeal litiga
The Procedural History Leading to this Appeal
On February 15, 2008, the Bankruptcy Court denied BEPCO’s motion to dismiss the Debtors’ petitions for lack of good faith and on April 16, 2008, denied BEPCO’s motion for reconsideration. On April 28, 2008, BEPCO appealed to the United States District Court for the District of Delaware. On January 27, 2009, the District Court reversed and remanded the case, concluding that the Debtors’ petitions should be dismissed for lack of good faith. On February 9, 2009, the Debtors filed their timely notice of appeal to this Court.
II.
The Bankruptcy Court’s refusal to dismiss a Chapter 11 bankruptcy petition for want of good faith is reviewed for an abuse of discretion. NMSBPCSLDHB, L.P. v. Integrated Telecom Express, Inc. (In re Integrated Telecom Express, Inc.),
The issue in this appeal, whether the undisputed facts support the Bankruptcy Court’s determination that the Debtors filed their bankruptcy petitions in good faith, calls for reviewing the Bankruptcy Court’s application of law to the facts of this case. Such review requires analyzing not only basic and inferred facts, which are subject to clearly erroneous review, but also ultimate fad® — facts that are “usually expressed in the language of a standard enunciated by case-law rule or by statute, e.g., an actor’s conduct was negligent; the injury occurred in the course of employment; the rate is reasonable; the company has refused to bargain collectively.” Universal Minerals, Inc. v. C.A. Hughes & Co.,
The District Court correctly exercised plenary review, but it misread authority in reaching its conclusion that plenary review
The Debtors raise three objections to plenary review of the good faith inquiry. First, they assert that the District Court improperly departed from the Bankruptcy Court’s findings of fact without concluding that those facts were clearly erroneous. Thus, according to the Debtors, the District Court’s conclusion that the Debtors’ lacked good faith cannot stand. Because we disagree with the Debtors’ premise, we must reject their conclusion. Aside from finding no clear error in the Bankruptcy Court’s findings of fact, In re 13575 Mem’l Corp. III,
Second, the Debtors claim that an abuse of discretion can occur only when no reasonable person would adopt the Bankruptcy Court’s determination of the good faith inquiry. In support of their view, the Debtors rely on Solow v. PPI Enterprises (U.S.), Inc. (In re PPI Enterprises (U.S.), Inc.),
Third, the Debtors make much of the District Court’s failure to explicitly declare that “the Bankruptcy Court improperly applied the law to the facts,” using those precise words. We fail to see the significance of the Debtors’ argument. Regardless of whether the District Court used those exact words, its reasoning compels the conclusion that the Bankruptcy Court improperly applied the law to the facts. After “[examining the facts in totality,” In re 13575 Mem.’l Corp. III,
In sum, while the District Court cited the wrong authority, it correctly determined the standard of review. Its mistake was harmless error. The proper standard of review for the ultimate determination of good faith is plenary where the review pertains to whether the Bankruptcy Court made an improper application of law to fact.
III.
Chapter 11 bankruptcy petitions are “subject to dismissal under 11 U.S.C. § 1112(b) unless filed in good faith and the burden is on the bankruptcy petitioner to establish [good faith].” In re Integrated Telecom Express, Inc.,
A.
A party filing for Chapter 11 bankruptcy may prove that its petition served a valid bankruptcy purpose by showing that the petition “preserved] a going concern or maximiz[ed] the value of the debtor’s estate[.]” In re Integrated Telecom Express, Inc.,
“To say that liquidation under Chapter 11 maximizes the value of an entity is to say that there is some value that otherwise would be lost outside of bankruptcy.” In re Integrated Telecom Express, Inc.,
(a) assert[] the automatic stay in connection with the Tebow, Ellison[,] Harris, Sinz, Troia, Boudreaux Actions, and other matters, to limit the estate’s involvement in litigation other than in this Bankruptcy Court;
(b) facilitate!] dismissal of Debtors as defendants from the Ellison, Harris, Te-bow, Sinz and Troia Actions and, again, to centralize these claims in the Bankruptcy Court forum;
(c) establish!] a bar date to set the number of claims [and] fix[] the notice problem that existed with respect to Santa Fe’s dissolution;
(d) ... create[ ] a known universe of claims;
(e) analyze[] the BEPCO claims to be able to file a motion contesting whether BEPCO ha[d] any legally cognizable claim at all against Debtors;
(f) take[] advantage of the breathing spell afforded by bankruptcy to inventory and analyze potentially applicable insurance policies and related information;
(g) pursuant to the Insurance Review Projeet[,] discovert ] the London Market Policies, which appear to provide coverage for legacy cases (including the Te-bow related claims) and other insurance policies that may respond to otherclaims in the Bankruptcy Cases (Sinz and Troia);
(h) commence[ ] and continue[ ] substantive communications with insurers, including those identified in connection with the Tebow Action and those subsequently identified pursuant to the Insurance Review Project;
(i) negotiate!] and propose!] a settlement of issues with the GlobalSantaFe Entities under which, inter alia, they will continue to cooperate in the pursuit of insurance rights and will contribute well over $1,000,000 in cash and other value so that substantial value can be delivered to all the creditors of the estates on their claims;
(j) formulate! ] the [Liquidation] Plan; and
(k) continue to manage and search for assets.
In re 15375 Mem’l Corp. I,
The first purported benefit amounts to nothing more than the Debtors availing themselves of the automatic stay of litigation outside of bankruptcy. “The protection of the automatic stay,” however, “is not per se a valid justification for a Chapter 11 filing; rather, it is a consequential benefit of an otherwise good faith filing.” In re Integrated Telecom Express, Inc.,
The second purported benefit was the centralization of claims and the consolidation of litigations into a single forum. According to the Bankruptcy Court, the Debtors’ petitions served a valid bankruptcy purpose by “facilitat[ing] an orderly liquidation of claims and assets of [the Debtors’ estates] in a central forum.” In re 15375 Mem’l Corp. I,
Furthermore, looking at all the proofs of claim filed at the time of the Bankruptcy Court’s decision on February 15, 2008, it appears that the vast majority of them, minus the six tax claims filed by the state of Texas that the Debtors claim are not their obligations, are somehow related to the Sinz, Troia, and Tebow Actions, id., and may be covered by insurance, further mitigating the need for bankruptcy. Two proofs of claim were filed in connection with the Sinz and Troia Actions, and the balance of the proofs of claim appear to relate to the Tebow Action: three were filed by attorneys and expert witnesses for services provided in connection with Santa Fe’s defense in the Tebow Action; six were filed by the GSF Entities for funds provided to file for bankruptcy, id. at 671, which was primarily motivated by the Te-bow Action, id. at 678, and indemnity rights for, among other things, protection from alter ego claims in the Tebow Action, id. at 671; and two were filed by BEPCO in connection with the Tebow Action, id. at 670.
In addition, the insurance policies are and have always been available outside of bankruptcy without detrimentally impacting any creditor’s recovery. Thus, like the petitioner in In re Integrated Telecom Express, Inc., the Debtors cannot identify “assets that [were] threatened outside of bankruptcy ... but that could be preserved or maximized in an orderly
The third and fourth purported benefits identified by the Bankruptcy Court, that filing for bankruptcy “established a bar date to set the number of claims[,] fixed the notice problem that existed with respect to Santa Fe’s dissolution[,]” and “created a known universe of claims,” In re 15375 Mem.’l Corp. I,
Next, the Bankruptcy Court claimed that bankruptcy enabled the Debtors to analyze BEPCO’s claims and “file a motion contesting whether BEPCO has any legally cognizable claim ... against [them.]” In re 15375 Mem’l Corp. I,
Three other purported benefits pertained to the insurance policy review. The Debtors purportedly availed themselves “of the breathing spell afforded by bankruptcy to inventory and analyze potentially applicable insurance policies and related information,” discovered insurance policies that appear to cover the Tebow, Sinz, and Troia Actions, and “commenced and continued substantive communications with insurers[.]” In re 15375 Mem’l Corp. I,
Next, the Bankruptcy Court reasoned that bankruptcy permitted the Debtors to negotiate a settlement of issues with the GSF Entities in which the GSF Entities would cooperate in pursuit of insurance rights and would contribute over $1,000,000 so that substantial value could be delivered to the Debtors’ creditors. Id. at 685. First, considering that GSFCSI conducted the insurance review for the benefit of all the GSF Entities, not just the Debtors, id. at 673, it is difficult to consider cooperation in pursuit of insurance rights as a benefit of bankruptcy. The GSF Entities acted out of self interest. They knew of the risks they faced from alter ego claims and realized that the Debtors’ insurance policies could aid them in protecting themselves, so they had an incentive to cooperate on insurance rights wholly independent of bankruptcy. Assuming, hypothetically, that the Debtors never filed for bankruptcy, the GSF Entities would still have had an incentive to cooperate on insurance rights because of the risk of alter ego liability in Louisiana state court. Second, the Bankruptcy Court, in granting BEPCO relief from the automatic stay to bring claims against Santa Fe and Santa Fe’s insurers in Louisiana state court, conceded that the Debtors did not have “the necessary incentive to pursue [their] insurers[.]” Id. at 692. In conceding that point, it negated the purported benefit gained by cooperation between the GSF Entities and the Debtors on insurance rights. If the Debtors lacked the incentive to pursue their insurers, the cooperation of the GSF Entities in that inaction hardly seems beneficial to the
The next purported benefit, the formulation of a liquidation plan, did not maximize the Debtors’ estates. The Debtors must show that the liquidation plan served a valid bankruptcy purpose — the mere creation of a liquidation plan, standing alone, is not enough. In re Integrated Telecom,
Having considered each of the purported benefits identified by the Bankruptcy Court as justifying the Chapter 11 filings, we turn to an issue that the Bankruptcy Court failed to consider in its good faith analysis: the Debtors’ representative was primarily concerned with protecting the GSF Entities, not the Debtors.
In sum, the Debtors’ filing for bankruptcy did not maximize the value of their estates. Indeed, it would be exceedingly difficult to do so where neither Santa Fe nor Memorial had any real assets to preserve besides various insurance policies. The purported benefits to the Debtors’ estates identified by the Bankruptcy Court either had no causal connection to filing for bankruptcy, ie., they were events that could have occurred outside of bankruptcy, or were based on procedural benefits gained from bankruptcy that cannot be said to have maximized the value of the Debtors’ estates. As such, we conclude that the Debtors’ petitions failed to serve a valid bankruptcy purpose.
B.
In addition to failing to serve a valid bankruptcy purpose, the timing of the Debtors’ bankruptcy petitions shows that they were filed primarily as a litigation tactic to avoid liability in the Tebow Action. “[F]iling a Chapter 11 petition merely to obtain tactical litigation advantages is not within the legitimate scope of the bankruptcy laws[.]” In re SGL Carbon Corp.,
In this case, the Bankruptcy Court found that the “Tebow Action was the principal factor ” in the Debtors’ filing for bankruptcy. In re 15375 Mem’l Corp. I,
Considering the results of the Debtors’ bankruptcy filings, the tactical advantages gained by the Debtors and the GSF Entities against BEPCO are obvious. The Debtors’ bankruptcy filings protected the GSF Entities from liability for the damage to the Tebow Property. Indeed, the Debtors continue to argue that any alter ego claims against the GSF Entities are part of their estates and cannot be asserted by BEPCO, while simultaneously, and incongruously, stating that they believe that any such claims would have no value. See id. at 677. If the Debtors and the GSF Entities had their way, BEPCO would be left without any opportunity to litigate its alter ego claims against the GSF Entities and, conveniently for the GSF Entities, the Debtors would not bring the claims because they do not believe the claims have value. Even if the Bankruptcy Court later permits BEPCO to bring its alter ego claims against the GSF Entities in Louisiana state court, BEPCO will have already been prejudiced “to the extent of the lost time value of money for the settlement funds it has already paid out to resolve its liability in the Tebow Action.” Id. at 690. “More critically, BEPCO [will be] prejudiced by the lapse of time in terms of its ability to effectively prosecute its claims” because “[witnesses and documents may become unavailable.” Id.
Taking into account the lack of a valid bankruptcy purpose, the timing of the filings of the petitions, and the tactical advantages gained from the bankruptcy filings by the Debtors and the GSF Entities, we agree with the District Court’s conclusion that the Debtors filed their petitions primarily as a litigation tactic to frustrate BEPCO’s claims against the Debtors and the GSF Entities.
IV.
The Debtors have failed to show that their Chapter 11 bankruptcy petitions served valid bankruptcy purposes because the bankruptcies did not maximize the Debtors’ estates. Moreover, the timing of the Debtors’ filings, two months prior to a trial in which they and the GSF Entities faced substantial liability, show that the bankruptcy petitions were filed primarily as a litigation tactic. Accordingly, we will affirm the District Court’s order to dismiss the Debtors’ bankruptcy petitions for lack of good faith.
Notes
. The District Court had subject matter jurisdiction over this bankruptcy appeal under 28 U.S.C. § 158(a), and we exercise jurisdiction under 28 U.S.C. § 158(d). "Because the District Court sat below as an appellate court, [we] conduct[ ] the same review of the Bankruptcy Court’s order as did the District Court.” Baroda Hill Invs., Ltd. v. Telegroup, Inc. (In re Telegroup, Inc.),
. Bass Enterprises Production Co., the appel-lee for the purpose of the good faith issue, argues that the Debtors’ bankruptcy petitions should be dismissed for "cause” under 11 U.S.C. § 1112(b), and that Chapter 11 was unavailable to Santa Fe Minerals, Inc. because it was dissolved before its petition was filed. Those issues need not be addressed in light of our decision to affirm the District Court’s conclusion that the Debtors’ bankruptcy petitions were not filed in good faith.
. The relevant Wyoming statute describing claims permitted against dissolved corporations states:
(a) A dissolved corporation may also publish notice of its dissolution and request that persons with claims against the corporation present them in accordance with the notice.
(b) The notice shall:
(i) Be published one (1) time in a newspaper of general circulation in the county where the dissolved corporation's principal office, or, if none in this state, its registered office, is or was last located;
(ii) Describe the information that shall be included in a claim and provide a mailing address where the claim may be sent; and
(iii) State that a claim against the corporation will be barred unless a proceeding to enforce the claim is commenced within three (3) years or the applicable statute of limitations, whichever is less, after the publication of the notice.
(c) If the dissolved corporation publishes a newspaper notice in accordance with subsection (b) of this section, the claim of each of the following claimants is barred unless the claimant commences a proceeding to enforce the claim against the dissolved corporation within three (3) years after the publication date of the newspaper notice:
(i) A claimant who did not receive written notice under W.S. 17-16-1406;
(ii) A claimant whose claim was timely sent to the dissolved corporation but not acted on; or
(iii) A claimant whose claim is contingent or based on an event occurring after the effective date of dissolution.
(d)A claim that is not barred by W.S. 17-16-1406(c) or subsection (c) of this section may be enforced:
(i) Against the dissolved corporation, to the extent of its undistributed assets; or
(ii) Except as provided in W.S. 17-16-1408(d), if the assets have been distributed in liquidation, against a shareholder of the dissolved corporation to the extent of his pro rata share of the claim or the corporate assets distributed to him in liquidation, whichever is less, but a shareholder’s total liability for all claims under this section may not exceed the total amount of assets distributed to the shareholder.
Wyo. Stat. Ann. § 17-16-1407.
. Other individuals holding positions with the Debtors have also held positions in the GSF Entities. In re 15375 Mem.’l Corp. I,
. Faure explained McCullough’s role in the operation of EHI, Memorial, and Santa Fe during his cross examination at trial:
Q: And [McCullough is] someone that you typically report to in the course of your duties, isn’t [he]?
A: Correct.
Q: And do you also take direction from him from time to time?
A: From time to time, yes.
Q: Do you take direction from him in connection with matters related to Memorial?
A: I’ve taken legal advice from him, especially pre-petition. But post-petition we’ve had separate counsels for Memorial and the GSF entities.
Q: So it's your testimony that since the filing of the bankruptcy cases he has never given you any manner of direction as to what Memorial should or should not be doing?
A: Correct.
Q: And you were also reporting and taking direction from him during the pendency of the [Tebow] litigation. Is that the case?
A: Correct.
Q: And when you were preparing for these bankruptcy cases and the filing of these cases did you also have occasion to consult with [McCullough]?
A: Yes, I did.
Q: And did he provide direction on matters relating to the anticipated filing of the bankruptcy cases?
A: Well, he approved the filing. I needed his approval to file.
Q: He authorized it, right?
A: Correct.
. During cross-examination, Faure testified as follows:
Q: [I]s your understanding of the meaning of romanette (i): “If valid, that Memorial has agreed to assume responsibility for all the liabilities of Santa Fe Minerals”?
A: Says: “As consideration for the issuance of this note, maker agrees that, one, it accepts all liabilities existing or arising from activities of Santa Fe Minerals, Inc., a dissolved subsidiary of maker.” So whatever liabilities remained and existed were kept on the Memorial side of this transaction.
Q: Assumed by Memorial, were they not?
A: Hmm?
Q: Under the terms of this note, assumed by Memorial?
A: Correct, and not transferred to [EHI],
. Almost every federal Court of Appeals follows some variation of this approach to the good faith filing requirement for Chapter 11 petitions. See, e.g., Trident Assocs. Ltd. P'ship v. Metro. Life Ins. Co. (In re Trident Assocs. Ltd. P’ship),
. Notably, these inquiries are based more on objective analysis of whether the debtor has sought to step outside the "equitable limitations” of Chapter 11 than the subjective intent of the debtor:
The term "good faith” is somewhat misleading. Though it suggests that the debt- or’s subjective intent is determinative, this is not the case. Instead, the "good faith” filing requirement encompasses several, distinct equitable limitations that courts have placed on Chapter 11 filings. Courts have implied such limitations to deter filings that seek to achieve objectives outside the legitimate scope of the bankruptcy laws.
In re SGL Carbon Corp.,
. The Sinz and Troia plaintiffs both filed proofs of claims for $5 million, In re 15375 Mem’l Corp. I,
. The other proofs of claim consist of: (1) six tax claims by the state of Texas which the Debtors assert are not their obligations; (2) three claims, totaling $60,163.03, for services rendered in connection with defending Santa Fe in the Tebow Action; and (3) six claims by the GSF Entities for approximately $455,000 and the right to indemnity should they be held liable for the Debtors' liabilities under an alter ego theory. In re 15375 Mem'l Corp. I,
. We exclude the Dore Action because the Debtors were not named as defendants and the Ellison Action because it was dismissed for reasons unrelated to the Debtors’ bankruptcy filings. In re 15375 Mem’l Corp. I,
. The Debtors' claim that conducting the insurance review in-house was less expensive than hiring an outside consultant, thereby benefitting their creditors, fails for the same reason — there was no causal connection between the bankruptcy and the insurance policy review.
. See In re Little Creek Dev. Co.,
. While this appeal does not involve a breach of fiduciary duty claim against the debtor in possession, In re Insilco Tech., Inc.,
. See In re C-TC 9th Ave. P'ship,