IN RE: SGL CARBON CORPORATION, Debtor OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Appellant v. NUCOR CORPORATION; NUCOR-YAMATO STEEL COMPANY, Appellants
Nos. 99-5319 & 99-5382
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
December 29, 1999
200 F.3d 154
Before: SCIRICA and McKEE, Circuit Judges, and BROTMAN, District Judge*
* The Honorable Stanley S. Brotman, United States District Judge for the District of New Jersey, sitting by designation.
Opinions of the United States Court of Appeals for the Third Circuit
12-29-1999
In Re: SGL Carbon Corp, [Official Comm. of Unsec. Cred. vs. Nucor Corp]
Precedential or Non-Precedential:
Docket 99-5319
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1999
Recommended Citation
“In Re: SGL Carbon Corp, [Official Comm. of Unsec. Cred. vs. Nucor Corp]” (1999). 1999 Decisions. Paper 332. http://digitalcommons.law.villanova.edu/thirdcircuit_1999/332
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Filed December 29, 1999
On Appeal from the United States District Court for the District of Delaware
D.C. Civil Action No. 98-cv-02779
(Honorable Joseph J. Farnan, Jr.)
Argued July 29, 1999
PHILIP BENTLEY, ESQUIRE (ARGUED)
KENNETH H. ECKSTEIN, ESQUIRE
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
TERESA K.D. CURRIER, ESQUIRE
Duane, Morris & Heckscher
1201 Market Street, Suite 1500
P.O. Box 195
Wilmington, Delaware 19899
JAMES J. RODGERS, ESQUIRE (ARGUED)
Dilworth, Paxson, Kalish & Kauffman
1735 Market Street
3200 The Mellon Bank Center
Philadelphia, Pennsylvania 19103
MICHAEL D. RIDBERG, ESQUIRE
Ridberg, Press & Sherbill
Three Bethesda Metro Center, Suite 650
Bethesda, Maryland 20814
Attorneys for Appellants, Nucor Corporation; Nucor-Yamato Steel Company
GEORGE J. WADE, ESQUIRE (ARGUED)
Shearman & Sterling
598 Lexington Avenue
New York, New York 10022
LAURA D. JONES, ESQUIRE
Young, Conaway, Stargatt & Taylor
P.O. Box 391
Rodney Square North, 11th Floor
Wilmington, Delaware 19899-0391
Attorneys for Appellee, SGL Carbon Corporation
OPINION OF THE COURT
SCIRICA, Circuit Judge.
The issue on appeal is whether, on the facts of this case, a Chapter 11 bankruptcy petition filed by a financially healthy company in the face of potentially significant civil antitrust liability complies with the requirements of the Bankruptcy Code. In this case, the Official Committee of Unsecured Creditors of SGL Carbon Corporation appeals the District Court‘s order denying its motion to dismiss SGL Carbon‘s Chapter 11 bankruptcy petition on bad faith grounds.
This case also presents the threshold issue whether we will adopt a “good faith” requirement for Chapter 11 petitions. We will. After undertaking the fact intensive analysis inherent in the good faith determination, we conclude that SGL Carbon‘s Chapter 11 petition lacks a valid reorganizational purpose and, therefore, lacks the requisite good faith. We will reverse.
I.
SGL Carbon is a Delaware corporation that manufactures and sells graphite electrodes used in steel production.1 In 1997, the United States Department of Justice commenced an investigation of alleged price-fixing by graphite electrode manufacturers, including the SGL Carbon Group.2 Soon thereafter, various steel producers filed class action antitrust lawsuits in the United States District Court for the Eastern District of Pennsylvania against SGL
In June 1998, SGL Carbon‘s German parent SGL AG recorded a charge in Deutschmarks of approximately $240 million as its “best estimate” of the SGL Carbon Group‘s3 potential liability in the criminal and civil antitrust litigation.4
On December 16, 1998, at the direction of SGL AG, SGL Carbon filed a voluntary Chapter 11 bankruptcy petition in the United States District Court for Delaware. In SGL Carbon‘s Disclosure Statement, in a section addressing “Factors Leading to [the] Chapter 11 Filing,” SGL Carbon only discussed the antitrust litigation. The bankruptcy filing contained a proposed reorganization plan under which only one type of creditor would be required to accept less than full cash payment for its account, namely the antitrust plaintiffs who obtained judgments against SGL Carbon. Under the plan, potential antitrust judgment creditors would receive credits against future purchases of SGL Carbon‘s product valid for 30 months following the plan‘s confirmation. The proposed plan also bars any claimant from bringing an action against SGL Carbon‘s affiliates, including its parent SGL AG, “based on, relating to, arising out of, or in any way connected with” their claims against SGL Carbon.
The next day, on December 17, in a press release, SGL Carbon explained it had filed for bankruptcy “to protect itself against excessive demands made by plaintiffs in civil antitrust litigation and in order to achieve an expeditious resolution of the claims against it.” The press release also stated:
SGL CARBON Corporation believes that in its case Chapter 11 protection provides the most effective and efficient means for resolving the civil antitrust claims.
. . . .
. . . .
“SGL CARBON Corporation is financially healthy,” said Wayne T. Burgess, SGL CARBON Corporation‘s president. “If we did not face [antitrust] claims for such excessive amounts, we would not have had to file for Chapter 11. We expect to continue our normal business operations.”
. . . .
However, because certain plaintiffs continue to make excessive and unreasonable demands, SGL CARBON Corporation believes the prospects of ever reaching a
commercially practicable settlement with them are remote. After much consideration, SGL CARBON Corporation determined that the most appropriate course of action to address
. . . .
Contemporaneous with the press release, SGL AG Chairman Robert Koehler conducted a telephone conference call with securities analysts, stating that SGL Carbon was “financially healthier” than before and denying the antitrust litigation was “starting to have a material impact on [SGL Carbon‘s] ongoing operations in the sense that [it was] starting to lose market share.” He also stated that SGL Carbon‘s Chapter 11 petition was “fairly innovative [and] creative” because “usually Chapter 11 is used as protection against serious insolvency or credit problems, which is not the case [with SGL Carbon‘s petition].”
Two weeks after SGL Carbon filed its petition and issued the press release, the United States Trustee formed a nine member Official Committee of Unsecured Creditors. Eight of the committee members are antitrust plaintiffs; two of the eight serve as class representatives and the other six have opted out of the class.5 In January 1999, the Committee filed a motion to dismiss SGL Carbon‘s bankruptcy petition on the grounds that it was a “litigation tactic designed to frustrate the prosecution of the civil antitrust claims pending against [SGL Carbon] and preserve[SGL Carbon‘s] equity from these claims.” In re SGL Carbon Corp., 233 B.R. 285, 287 (D. Del. 1999).
The District Court held a hearing on the motion on February 17, 1999.6 Neither side presented witnesses. The evidence was entirely documentary or deposition testimony, including the deposition of SGL Carbon‘s Vice President Theodore Breyer, who directs the company‘s graphite electrode business in the United States. In his deposition, Breyer testified that SGL Carbon was financially healthy,
having no overdue debts when it filed its Chapter 11 petition. Breyer stated that he recommended filing for bankruptcy because he believed SGL Carbon “could not expeditiously settle with the [antitrust] plaintiffs” absent Chapter 11 protection. Acknowledging that bankruptcy protection was the “sole reason” SGL AG‘s Executive Committee had authorized the Chapter 11 petition, Breyer testified that he believed filing for Chapter 11 would “change the negotiating platform” with plaintiffs and “increase the pressure on . . . plaintiffs to settle.”
The District Court denied the Committee‘s motion to dismiss on April 23, 1999 assuming, without deciding, that
[t]he distractions of the litigation pose a serious threat to the continued successful operations of [SGL Carbon]. Further, the potential liability faced by [SGL Carbon] could very well force it out of business. Consistent with the policies and purposes of Chapter 11 which encourage early filing so as to
increase the possibility of successful reorganization, the Court will not allow [SGL Carbon] to wait idly by for impending financial and operational ruin, when [SGL Carbon] can take action now to avoid such a consequence.
SGL Carbon Corp., 233 B.R. at 291.
The Committee has appealed.
II.
The District Court had jurisdiction over this bankruptcy case under
We have not yet had occasion to decide what standard of review to apply to a dismissal of a Chapter 11 petition. Consistent with the other courts of appeals to consider the issue, we believe this decision is committed to the sound discretion of the bankruptcy or district court and will review for abuse of discretion. See, e.g., Leavitt v. Soto (In re Leavitt), 171 F.3d 1219 (9th Cir. 1999) (reviewing for abuse of discretion);7 In re Abijoe Realty Corp., 943 F.2d 121, 128 (1st Cir. 1991) (same). Mindful that “an abuse of discretion exists where the district court‘s decision rests upon a clearly erroneous finding of fact, an errant conclusion of law, or an improper application of law to fact,” ACLU v. Black Horse Pike Reg‘l Bd. of Ed., 84 F.3d 1471, 1476 (3d Cir. 1996) (internal quotations omitted), we review the findings of fact leading to the decision for clear error and exercise plenary review over the court‘s conclusions of law. See First Jersey Nat‘l Bank v. Brown (In re Brown), 951 F.2d 564, 567 (3d Cir. 1991). See also Leavitt, 171 F.3d at 1222 (applying differing standards of review to different components of good faith/bad faith determination); Abijoe Realty Corp., 943 F.2d at 128 (same).
III.
[T]he court may convert a case under [Chapter 11] to a case under Chapter 7 . . . or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause . . . .
The statute provides for dismissal for cause, if it is in the best interest of the creditors and the estate. Conversion is not an option here.8 We will determine whether there is cause for dismissal.
A.
The threshold issue is whether Chapter 11 petitions may be dismissed for
Brown--Chapter 11 bankruptcy petitions are subject to dismissal under
Four factors guide our adoption of a good faith standard--the permissive language of § 1112(b), viewed in light of its legislative history; the decisions of our sister courts of appeals; the equitable nature of bankruptcy; and the purposes underpinning Chapter 11.
We begin with
- continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;
- inability to effectuate a plan;
- unreasonable delay by the debtor that is prejudicial to the creditors;
- failure to propose a plan [of reorganization] within any time fixed by the court;
- denial of confirmation of every proposed plan and denial of a request made for additional time for filing another plan or a modification of a plan;
- revocation of an order of confirmation under section 1144 of this title, and denial of confirmation of another plan or a modified plan under section 1129 of this title;
- inability to effectuate substantial consummation of a confirmed plan;
- material default by the debtor with respect to a confirmed plan;
- termination of a plan by reason of the occurrence of a condition specified in the plan; or
- nonpayment of any fees or charges required under chapter 123 of title 28.
imposition of a “good faith” requirement on Chapter 11 petitions. But we have noted the provision that “cause” “includ[es]” the ten enumerated factors strongly suggests those factors are not exhaustive and that a court may consider whether other facts and circumstances qualify as “cause.” See Brown, 951 F.2d at 572; 7 Collier on Bankruptcy at 1112-20. That interpretation of § 1112(b) is strengthened by the statute‘s legislative history, which provides in part:
[The] list [contained in § 1112(b)] is not exhaustive. The court will be able to consider other factors as they arise, and to use its equitable powers to reach an appropriate result in individual cases.
H.R. Rep. No. 595, at 405, reprinted in 1978 U.S.C.C.A.N. 5963, 6362. The Bankruptcy Code‘s rules of construction, which provide that “include” and “including” are not limiting terms, also support an expansive reading of § 1112(b). See
We also note the courts of appeals that have considered the issue have held that the absence of good faith constitutes “cause” to dismiss a Chapter 11 petition under § 1112(b). See, e.g., Trident Assocs. Ltd. Partnership v. Metropolitan Life Ins. Co. (In re Trident Assocs. Ltd. Partnership), 52 F.3d 127, 130 (6th Cir. 1995); Marsch v. Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994); Humble Place Joint Ventures v. Foray (In re Humble Place Joint Venture), 936 F.2d 814, 816 (5th Cir. 1991); First Nat‘l Bank of Sioux City v. Kerr (In re Kerr), 908 F.2d 400, 404 (8th Cir. 1990); Phoenix Piccadilly, Ltd. v. Life Ins. Co. (In re Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1394 (11th Cir. 1988). In addition, several other courts of appeals have concluded that Chapter 11 imposes a general good faith requirement under which petitions can be dismissed for bad faith. See, e.g., C-TC 9th Ave. Partnership v. Norton Co. (In re C-TC 9th Ave. Partnership), 113 F.3d 1304 (2d Cir. 1997); Carolin Corp. v. Miller, 886 F.2d 693, 698 (4th Cir. 1989); Connell v. Coastal Cable T.V., Inc. (In re Coastal Cable T.V., Inc.), 709 F.2d 762, 764 (1st Cir. 1983) (Breyer, J.). Numerous district and bankruptcy courts have reached
the same conclusion under either or both approaches. See Carlos J. Cuevas, Good Faith and Chapter 11: Standard that Should Be Employed to Dismiss Bad Faith Chapter 11 Cases, 60 Tenn. L. Rev. 525 (1993).9
The “good faith” requirement for Chapter 11 petitioners has strong roots in equity. The court in In re Victory Construction Co., Inc., in first articulating the good faith requirement under the current Bankruptcy Code, highlighted the equitable nature of the doctrine when it explained:
Review and analysis of [the bankruptcy laws and relevant cases] disclose a common theme and objective [underlying the reorganization provisions]: avoidance of the consequences of economic dismemberment and liquidation, and the preservation of ongoing values in a manner which does equity and is fair to rights and interests of the parties affected. But the perimeters of this potential mark the borderline between fulfillment and perversion; between accomplishing the objectives of rehabilitation and reorganization, and the use of these statutory provisions to destroy and undermine the legitimate rights and interests of those intended to benefit by this statutory policy. That borderline is patrolled by courts of equity, armed with the doctrine of “good faith” . . . .
9 B.R. 549, 558 (Bankr. C.D. Calif. 1981) order stayed Hadley v. Victory Construction Co., Inc. (In re Victory Construction Co., Inc.), 9 B.R. 570 (Bankr. C.D. Calif. 1981). A debtor who attempts to garner shelter under the Bankruptcy Code, therefore, must act in conformity with the Code‘s underlying principles. See Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1076 (5th Cir. 1986) (“[A] good faith standard protects the jurisdictional integrity of the bankruptcy courts by rendering their equitable weapons
available only to those debtors and creditors with ‘clean hands.’ “); see also 7 Collier on Bankruptcy at 1112-68 (“Another basic underpinning of the good faith doctrine is the equitable concept of ‘clean hands.’ As a general matter, bankruptcy relief is equitable in nature, and, as a general rule, equitable remedies are not available to any party who fails to act in an equitable fashion.“).
Finally, we believe a good faith requirement is supported by the purposes underlying Chapter 11. As the Court of Appeals for the Fifth Circuit noted,
[A good faith standard] furthers the balancing process between the interests of debtors and creditors which characterizes so many provisions of the bankruptcy laws and is necessary to legitimize the delay and costs imposed upon parties to a bankruptcy. Requirement of good faith prevents abuse of the
bankruptcy process by debtors whose overriding motive is to delay creditors without benefitting them in any way . . . .
In re Little Creek, 779 F.2d at 1072; see also Carolin, 886 F.2d at 698 (stating that court‘s ability to impose good faith requirement is “indispensable to proper accomplishment of the basic purposes of Chapter 11 protection“).
After considering the language of § 1112(b), its legislative history, the decisions of other courts of appeals, the equitable nature of bankruptcy proceedings, and the purposes behind Chapter 11, we conclude a Chapter 11 petition is subject to dismissal for “cause” under
B.
Having determined that § 1112(b) imposes a good-faith requirement on Chapter 11 petitions, we consider whether SGL Carbon‘s Chapter 11 petition was filed in good faith.10
The requisite fact intensive inquiry requires determining where SGL Carbon‘s petition falls along the spectrum ranging from the clearly acceptable to the patently abusive. We first review the District Court‘s findings of fact and then examine the totality of facts and circumstances to determine whether they support a finding of good faith. See In re Trident, 52 F.3d at 131; In re Marsch, 36 F.3d at 829; In re Laguna, 30 F.3d 738.
i.
As discussed in part I, the District Court found SGL Carbon‘s Chapter 11 petition was filed in good faith for two reasons: first, because the distractions caused by the antitrust litigation “posed a serious threat to [SGL Carbon‘s] continued successful operations,” and second, because the litigation might result in a judgment that could cause the company “financial and operational ruin,” SGL was required to file when it did. SGL Carbon Corp., 233 B.R. at 291. Although mindful of the careful consideration given by the able District Court, we believe each of these findings of fact was clearly erroneous.11
Although there is some evidence that defending against the antitrust litigation occupied some officers’ time, there is no evidence this “distraction” posed a “serious threat” to the company‘s operational well being. At his deposition, Theodore Breyer12 testified the antitrust litigation consumed a significant portion of his time. But Breyer also noted the Carbon/Graphite Business Unit had met all of its financial targets during the nine months preceding filing. Additionally, Breyer testified that only his business unit was heavily involved in the antitrust litigation, recognizing that any management distraction effecting the rest of SGL Carbon resulted from the bankruptcy filing and not the antitrust litigation. As noted, SGL AG and SGL Carbon
officers insisted the company was financially healthy despite the litigation. In addition, SGL AG‘s Chairman denied that the litigation was having a “material negative impact on [SGL Carbon‘s] operations.” In light of all the evidence, we believe the District Court‘s finding to the contrary is mistaken. See United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948).
We
Whether or not SGL Carbon faces a potentially crippling antitrust judgment, it is incorrect to conclude it had to file when it did. As noted, SGL Carbon faces no immediate financial difficulty. All the evidence shows that management repeatedly asserted the company was financially healthy at the time of the filing. Although the District Court believed the litigation might result in a judgment causing “financial
and operational ruin” we believe that on the facts here, that assessment was premature. A Chapter 11 petition would impose an automatic stay on all efforts to collect the judgment and would allow the company the exclusive right to formulate a reorganization plan under which the amount of the judgment could be adjusted to allow the company to reorganize. SGL Carbon has offered no evidence it could not effectively use those protections as the prospect of such a judgment became imminent.13 The District Court‘s finding that the petition had to be filed at that particular time to avoid financial ruin and therefore was made in good faith is clearly contradicted by the evidence.
The District Court was correct in noting that the Bankruptcy Code encourages early filing. See SGL Carbon Corp., 233 B.R. at 291. It is well established that a debtor need not be insolvent before filing for bankruptcy protection. See, e.g., In re The Bible Speaks, 65 B.R. 415, 424 (Bankr. D. Mass. 1986); In re Talladega Steaks, Inc., 50 B.R. 42, 44 (Bankr. N.D. Ala. 1985). See also Daniel R. Cowans, Bankruptcy Law and Practice (7th ed. 1998) 232. It also is clear that the drafters of the Bankruptcy Code understood the need for early access to bankruptcy relief to allow a debtor to rehabilitate its business before it is faced with a hopeless situation.14 Such encouragement, however, does not open the door to premature filing, nor does it allow for the filing of a bankruptcy petition that lacks a valid reorganizational purpose. See, e.g., In re Marsch, 36 F.3d at 838; In re Coastal Cable, 709 F.2d at 764; In re Ravick Corp., 106 B.R. 834, 843 (Bankr. D.N.J. 1989).
SGL Carbon, therefore, is correct that the Bankruptcy Code does not require specific evidence of insolvency for a
voluntary Chapter 11 filing. But SGL Carbon cites no case holding that petitions filed by financially healthy companies cannot be subject to dismissal for cause. At any rate, as we explain more fully, SGL Carbon‘s ability to meet its debts is but one of many factors compelling the conclusion it did not enter Chapter 11 with a valid reorganizational purpose.
We do not hold that a company cannot file a valid Chapter 11 petition until after a massive judgment has been entered against it. Courts have allowed companies to seek the protections of bankruptcy when faced with pending litigation that posed a serious threat to the companies’ long term viability. See, e.g., Baker v. Latham Sparrowbush Assocs. (In re Cohoes Indus. Terminal Inc.), 931 F.2d 222 (2d Cir. 1991); In re The Bible Speaks, 65 B.R. 415 (Bankr. D. Mass. 1986); In re Johns-Manville, 36 B.R. 727 (Bankr. S.D.N.Y. 1984). In those cases, however, debtors experienced serious financial and/or managerial difficulties at the time of filing. In Cohoes, the Court of Appeals for the Second Circuit found a good faith filing, in part, because “it [was] clear that Cohoes [the debtor] was encountering financial stress at the time it filed its petition . . . .” 931 F.2d at 228. In Bible Speaks, pending litigation had already had an adverse effect on the debtor‘s financial well being as it was experiencing “a cash flow problem which prevent[ed] it from meeting its current obligations,” compounded by an inability to obtain financing. 65 B.R. at 426. In Johns-Manville, the debtor was facing significant financial difficulties. A growing wave of asbestos-related claims forced the debtor to either book a $1.9 billion reserve thereby triggering potential default on a $450 million debt which, in turn, could have forced partial liquidation, or file a Chapter 11 petition. See In re Johns-Manville, 36 B.R. at 730. Large judgments had already been entered against Johns-Manville and the prospect loomed of tens of thousands of asbestos health-related suits over the course of 20-30 years.15 See id. at 729. See also Sandrea
Friedman, Note, Manville: Good Faith Reorganization or “Insulated” Bankruptcy, 12 Hofstra L. Rev. 121 (1983).
For these reasons, SGL Carbon‘s reliance on those cases is misplaced. The mere possibility of a future need to file, without more, does not establish that a petition was filed in “good faith.” See, e.g., In re Cohoes Indus. Terminal Inc., 931 F.2d at 228 (“Although a debtor need not be in extremis in order to file [a Chapter 11] petition, it must, at least, face such financial difficulty that, if it did not file at that time, it could anticipate the need to file in the future.“). SGL Carbon, by its own account, and by all objective indicia, experienced no financial difficulty at the time of filing nor any significant managerial distraction. Although SGL Carbon may have to file for bankruptcy in the future, such an attenuated possibility standing alone is not sufficient to establish the good faith of its present petition.
ii.
We also consider whether other evidence establishes the good faith of SGL Carbon‘s petition, that is, whether the totality of facts and circumstances support a finding of good faith. Courts have not been unanimous about what constitutes “good faith” in the Chapter 11 filing context. See, e.g., In re Trident, 52 F.3d at 131 (setting forth eight factors for courts to consider); In re Marsch, 36 F.3d at 828-29 (describing different approaches); In re Kerr, 908 F.2d at 404 (defining “bad faith” as “a pattern of concealment, evasion, and direct violations of the Code or court order which clearly establishes an improper motive . . . .“); Carolin, 886 F.2d at 700-02 (examining approaches of other courts and holding a petition lacks good faith if
over five thousand pending cases in state and federal court.” In re A.H. Robins, 89 B.R. 555, 557 (Bankr. E.D. Va. 1988). Similarly, at the time it filed for bankruptcy Dow Corning Corporation faced 440,000 potential claimants which had resulted in the filing of more than “19,000 individual silicone-gel breast implant lawsuits and at least 45 putative silicone-gel breast implant class actions.” In re Dow Corning Corp., 211 B.R. 545, 553 (Bankr. E.D. Mich. 1997). See also Richard L. Marcus & Edward F. Sherman, Complex Litigation (3d ed. 1998) 205-07.
reorganization is objectively futile and if petitioner displays subjective bad faith); In re Phoenix Piccadilly, 849 F.2d at 1394 (noting that courts may consider “any factors which evidence ‘an intent to abuse the judicial process and the purposes of the reorganization provisions’ or . . . factors which evidence that the petition was filed ‘to delay or frustrate the legitimate efforts of secured creditors to enforce their rights’ ” (citations omitted)); In re Little Creek Dev. Co., 779 F.2d at 1072-73 (instructing bankruptcy courts to consider “the debtor‘s financial condition, motives, and the local financial realities“). See also Cuevas, supra, at 529 (noting different approaches).
Despite those differing approaches, several cases hold that a Chapter 11 petition is not filed in good faith unless it serves a valid reorganizational purpose. See, e.g., In re Marsch, 36 F.3d at 828; In re Coastal Cable, 709 F.2d at 764 (stating that there must be “some relation” between filing and the “reorganization-related purposes that [Chapter 11] was designed to serve“); In re Ravick Corp., 106 B.R. 834, 843 (Bankr. D.N.J. 1989). Similarly, because filing a Chapter 11 petition merely to obtain tactical litigation advantages is not within “the legitimate scope of the bankruptcy laws,” In re Marsch, 36 F.3d at 828, courts have typically dismissed Chapter 11 petitions under these circumstances as well. See id.; In re Argus Group 1700, Inc., 206 B.R. 757, 765-66 (E.D. Pa. 1997); Furness v. Lilienfield, 35 B.R. 1006, 1013 (D. Md. 1983) (“The Bankruptcy provisions are intended to benefit those in genuine financial distress. They are not intended to be used as a mechanism to orchestrate pending litigation.“); In re HBA East, Inc., 87 B.R. 248, 259-60 (Bankr. E.D.N.Y. 1988) (“As a general rule where, as here, the timing of the filing of a Chapter 11 petition is such that there can be no doubt that the primary, if not sole, purpose
The term “good faith” is somewhat misleading. Though it suggests that the debtor‘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. Pursuant to
11 U.S.C. § 1112(b) , courts have dismissed cases filed for a variety of tactical reasons unrelated to reorganization.
In re Marsch, 36 F.3d at 828 (citations omitted).
It is easy to see why courts have required Chapter 11 petitioners to act within the scope of the bankruptcy laws to further a valid reorganizational purpose. Chapter 11 vests petitioners with considerable powers--the automatic stay, the exclusive right to propose a reorganization plan, the discharge of debts, etc.--that can impose significant hardship on particular creditors. When financially troubled petitioners
Courts, therefore, have consistently dismissed Chapter 11 petitions filed by financially healthy companies with no need to reorganize under the protection of Chapter 11. See In re Marsch, 36 F.3d at 828-29; In re Argus Group 1700, 206 B.R. at 765-66; Furness, 35 B.R. at 1011-13; In re Talladega Steaks, Inc., 50 B.R. 42, 44 (Bankr. N.D. Ala. 1985). Those courts have recognized that if a petitioner has no need to rehabilitate or reorganize, its petition cannot serve the rehabilitative purpose for which Chapter 11 was designed. See In re Winshall Settlor‘s Trust, 758 F.2d 1136, 1137 (6th Cir. 1985) (“The purpose of Chapter 11 reorganization is to assist financially distressed business enterprises by providing them with breathing space in which to return to a viable state.“); see also S. Rep. No. 95-989, at 9 reprinted in 1978 U.S.C.C.A.N. 5787, 5795 (noting that “Chapter 11 deals with the reorganization of a financially distressed enterprise . . . .“).
The absence of a valid reorganizational purpose16 and the consequent lack of good faith by SGL Carbon is evident here. SGL Carbon‘s financial disclosure documents give no indication the company needed to reorganize under Chapter 11 protection. Prior to filing, SGL Carbon had assets of $400 million and liabilities of only $276 million, or a net worth of $124 million. In addition, there is no evidence that SGL Carbon had difficulty meeting its debts as they came due, that it had any overdue debts, or that it had defaulted on any debts. Nor is there any evidence that SGL had any difficulty raising or borrowing money, or otherwise had impaired access to the capital markets.
Statements by SGL Carbon and its officials confirm the company did not need to reorganize under Chapter 11. As discussed, in a press release issued when SGL Carbon filed its petition, the company‘s president insisted SGL Carbon was “financially healthy” and that its “normal business operations” would continue despite bankruptcy. In addition, SGL AG‘s Chairman Robert Koehler stated in a conference call with securities analysts that SGL Carbon was experiencing “healthy and growing success” and denied that the class action antitrust litigation was materially interfering with SGL Carbon‘s operations or its customer
relationships. Koehler added that unlike most Chapter 11 cases, SGL Carbon‘s petition did not involve “serious insolvency or credit problems.” SGL Carbon Vice President Theodore Breyer acknowledged in his deposition that SGL Carbon had no defaults nor any financial distress when it filed for Chapter 11.
Comments made by SGL Carbon and SGL AG officers support that view of SGL Carbon‘s motives for filing for Chapter 11. Those officers expressly and repeatedly acknowledged Chapter 11 petition was filed solely to gain tactical litigation advantages. See, e.g., December 17, 1998 Press Release; Koehler Conference Call of December 17, 1998 (“We are [filing] merely . . . because of the excessive demands [of litigants].“); Breyer Deposition (filing for Chapter 11 would “change the negotiating platform” and “increase the pressure on . . . plaintiffs to settle“). In addition, under the heading “Factors Leading to the Chapter 11 Filing,” SGL Carbon‘s bankruptcy Disclosure Statement discusses only the civil antitrust litigation and the difficulties it was having in reaching a settlement with the remaining plaintiffs.
On appeal, SGL Carbon plays down the litigation tactics behind its Chapter 11 petition and instead claims it was forced into Chapter 11 by serious economic difficulty stemming from the litigation. The company alleges this difficulty came in three forms: harmful distraction of its management, the possibility that the litigation would result in a judgment that “could very well force [SGL Carbon] out of business,” and harm to its customer relationships with plaintiffs. Because we have already concluded the first two arguments are not supported by the facts, we will address only the third.
We are not convinced by SGL Carbon‘s claim that a Chapter 11 filing was necessary because we see no evidence the antitrust litigation was significantly harming its business relationships with the antitrust plaintiffs. For example, none of SGL Carbon‘s officers stated that any customer terminated its purchases from the company
bankruptcy petition properly belongs before the bankruptcy court. In a case, such as this one, where a debtor attempts to abuse the bankruptcy process, proceedings should end well before formal consideration of the plan. Cf. In re Metropolitan Realty Corp., 433 F.2d 676, 679 (5th Cir. 1970) (“As soon as the lack of good faith affirmatively appeared, the district court acted properly in dismissing the petition even though the plan stage had not been reached.“).
because of the litigation.20 As noted, SGL AG Chairman Koehler denied the litigation was having a material impact on SGL Carbon‘s customer relationships. We note that SGL Carbon offered no evidence (testamentary or otherwise) from any customer on this issue. It is also significant that SGL Carbon‘s Disclosure Statement, which accompanied its petition, does not mention harm to customer relationships. Nor did SGL Carbon attempt to explain how filing for Chapter 11 would improve its customer relationships. As noted, many of those customers are plaintiffs in the antitrust litigation. Moreover, the evidence before the
SGL Carbon places great emphasis on In re The Bible Speaks, 65 B.R. 415 (Bankr. D. Mass. 1986), and In re Johns-Manville, 36 B.R. 727 (Bankr. S.D.N.Y. 1984), two bankruptcy court cases relied on by the District Court.21 After considering those cases, we conclude they are not dispositive.
SGL Carbon cites In re The Bible Speaks to support its argument that the prospect of a significant litigation judgment by itself establishes the good faith of a Chapter 11 petition. But the litigation in Bible Speaks posed substantially different problems than does the antitrust litigation here. In Bible Speaks, the bankruptcy court found
the litigation had “already produced a significant effect” on the debtor; because of the uncertainty surrounding the litigation, the debtor was “unable to obtain financing.” 65 B.R. at 426. SGL Carbon has not alleged the antitrust litigation has had a similar effect and such evidence is absent from the record. In addition, the court in Bible Speaks found that a significant judgment in the litigation would “probably terminate [the debtor‘s] existence.” Id. There is no evidence SGL Carbon could not effectively use Chapter 11 following a judgment in the antitrust litigation. Also, the court found the litigation prevented the debtor in Bible Speaks from making “financing [arrangements] or any type of long range plans.” Id. at 427. SGL Carbon has not alleged the antitrust litigation has impeded its financing or planning activities; instead, the petitioner has repeatedly insisted the litigation has had no material effect on its operations. Finally, the court in Bible Speaks found that dismissal was not warranted because Chapter 11 was in the best interests of the debtor and its creditor. See id. at 429. There is no such finding in this case.
We also believe reliance on In re Johns-Manville is misplaced. As an initial matter, the Johns-Manville Court had a narrow view of what constitutes “good faith.” After expressing doubt that § 1112(b) imposes a good-faith requirement in all Chapter 11 cases, see 36 B.R. at 737, the court suggested that a Chapter 11 petition lacks good faith only if filed by a creditor-less company formed as a sham solely for the purpose of filing a bankruptcy petition, by a company that never operated legitimately, or by a company wishing to forestall tax liability or deed of trust powers. See id. at 737-38. As noted, most of the
Johns-Manville is also factually distinguishable. In Johns-Manville, the bankruptcy court found the company had a “compelling” and “pressing” need to reorganize. Id. at 730. As we have explained, SGL Carbon has no such need.22
Prior to the Chapter 11 filing, the Johns-Manville plaintiffs had recovered nearly $4 million in punitive damages against the company. See In re Johns-Manville, 36 B.R. 743, 746 (Bankr. S.D. N.Y. 1984). The litigation effected by SGL‘s Chapter 11 petition, in contrast, is in its nascent stages. Johns-Manville faced “approximately 16,000 lawsuits pending as of the filing date” with the prospect of the “filing of an even more staggering number of suits” over the course of 20-30 years. Johns-Manville, 36 B.R. at 729. By contrast, SGL Carbon faces a known and finite number of suits. In addition, the Johns-Manville Court made clear that its decision was based on factors other than the debtor‘s financial health. Unlike this case, the Johns-Manville creditors pursued their motion only after sixteen months of bargaining over an acceptable reorganization plan resulted in a deadlock. In denying the creditors’ motion to dismiss, the court stated it would “bear in mind the strategical motivations underlying [creditors‘] pursuit of these motions at this time” and would recognize “the progress toward a successful, perhaps consensual, reorganization that has already taken place.” Id. at 731. The Official Committee of Unsecured Creditors here did not delay in filing the motion to dismiss SGL Carbon‘s Chapter 11 petition; nor does SGL Carbon allege the creditors’ motion was spurred by an intent to extract concessions in stalled negotiations. This case, therefore, involves neither the creditors’ “strategical motivations” nor the “progress towards a successful . . . reorganization” that colored the Johns-Manville Court‘s opinion. Id.
Based on the facts and circumstances of this case, we conclude SGL Carbon‘s Chapter 11 petition lacks a valid reorganizational purpose and consequently lacks good faith making it subject to dismissal “for cause” under
C.
In reaching our conclusion, we are cognizant that it is growing increasingly difficult to settle large scale litigation. See, e.g., Ortiz v. Fibreboard Corp., 119 S.Ct. 2295 (1999); Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997). We recognize that companies that face massive potential liability and litigation costs continue to seek ways to rapidly conclude litigation to enable a continuation of their business and to maintain access to the capital markets. As evidenced by SGL Carbon‘s actions in this case, the Bankruptcy Code presents an inviting safe harbor for such companies. But this lure creates the possibility of abuse which must be guarded against to protect the integrity of the bankruptcy system and the rights of all involved in such proceedings. Allowing SGL Carbon‘s bankruptcy under these circumstances seems to us a significant departure from the use of Chapter 11 to validly reorganize financially troubled businesses.
IV.
For the reasons stated, we will reverse the judgment of the District Court and
A True Copy:
Teste:
Clerk of the United States Court of Appeals for the Third Circuit
Notes
Much of the case law on good faith draws heavily upon the time-honored method of analyzing and establishing a nexus between cause and effect. Long a modus habilis not only in bankruptcy but in criminal and tort law and in virtually any legal inquiry where intent is an issue, this sort of posteriori inquiry permits courts to work backwards from effect to cause--to reason, that is, that if the probable effect of a reorganization plan is to treat unfairly of creditors, then the probable cause of the filing was bad faith.