Dismissal of a bankruptcy—for bad faith filing—is a rarity.

So, how a bankruptcy court grapples with the bad faith issue . . . and ends up dismissing the bankruptcy . . . can provide a lesson for us all.

What follows is a summary of how a Chapter 11 bankruptcy is dismissed when the Court is convinced that the bankruptcy is intended for the benefit of a non-debtor . . . and not for the benefit of the debtor or its creditors.

Johnson & Johnson filed bankruptcy back in 2021 (In re LTL Management, Case No. 21-30589, New Jersey Bankruptcy Court).

That bankruptcy is now dismissed—on order of the U.S. Third Circuit Court of Appeals.

So, Johnson & Johnson refiles its bankruptcy (In re LTL Management, Case No. 23-12825, New Jersey Bankruptcy Court).

New and Improved

Here’s what’s new and improved about the second bankruptcy[fn. 1]:

“The trustee may avoid . . . any obligation . . . incurred by the debtor, that was madeor incurred“ with actual fraudulent intent or as constructive fraud.

–From § 548 of Bankruptcy Code (emphasis added).

Similar language is contained in the Uniform Voidable Transactions Act—and in its predecessor acts—for 100+ years. [Fn. 1]

But actions to avoid debts as fraudulent transfers are rare—and largely unknown, it seems.

A Bad Experience

Boy Scouts of American achieved a confirmed plan of reorganization in its bankruptcy.

That confirmation is now affirmed on appeal by the U.S. District Court in Delaware[fn. 1]—and is heading to the Third Circuit Court of Appeals for further review.

The District Court’s affirming opinion is 155 pages long and highly detailed. This article tries to summarizes the opinion’s highlights—attempting to make the complex clear.

100% Payment Plan

The core of the opinion, around which most everything else revolves, is this:

Question: Can a creditor prevent its debtor from filing bankruptcy by pre-petition contract terms?

Answer: No . . . according to In re Roberson Cartridge Co., LLC, Case No. 22-20192 in the Northern Texas Bankruptcy Court (03/07/2023, opinion at Doc. 77).

Facts

Say what?!.

“Hypothetical jurisdiction” for a bankruptcy appeal?!

Who knew? I sure didn’t.

But it is, apparently, a thing . . . and it may even be real.

At U.S. Supreme Court

A newly filed Petition in the U.S. Supreme Court is Waleski v. Montgomery, McCraken, Walker & Rhodes, LLP, Case No. 22-914 (Petition filed 3/16/2023).

–The Question

The Question Presented to the U.S. Supreme Court in Waleski v Montgomery is this:

“Creative destruction” occurs when something new kills off whatever existed before it.

IPhone Example

Just think, for example, of all the creative destruction that the iPhone has wrought! It has destroyed businesses that provided telephones and phone books, cameras and film, audio recordings and players, newspapers and newsstands, and related services.

City of Chester is the oldest city in Pennsylvania, incorporated as a borough in 1701 and as a city in 1866, and is located on the Delaware River between Philadelphia and Wilmington.

Unfortunately, the City is also in Chapter 9—having filed bankruptcy on November 10, 2022.

The City’s bankruptcy filing causes a ruckus because:

The U.S. Supreme Court does not like bankruptcy benefits for individual debtors. It really doesn’t.

An example from a couple years ago is Fulton v. City of Chicago, where the U.S. Supreme Court finds a way to declare:

Can a corporate debtor be denied a Subchapter V discharge under § 523(a), despite this § 523(a) language (emphasis added):

• “A discharge under section . . . 1192 [Subchapter V] . . . does not discharge an individual debtor from . . . ”?

A recent Bankruptcy Court opinion (in Avion Funding) says, essentially, this: “No! You can’t paint over explicit statutory language.”[Fn. 1]

Such recent opinion: