UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
JACK THOMPSON PAGE CASE NO. 92-70149
This matter comes before the Court upon the threshold Motion to Dismiss Bankruptcy Proceedings filed by creditors Gene A. Dauer, Donald Houston Duke and Richard Carey, d/b/a Dauer, Duke and Associates ("creditor").
The debtor in this proceeding is an attorney who has practiced law in Pikeville, Kentucky. He has enjoyed considerable success and has an annual income of approximately $200,000. On November 22, 1991 creditor obtained a judgment in state court against Canada Coal Company, debtor and K. B. Mims (the latter two in personal and representative capacities) for compensatory damages of $2.25 million and punitive damages of $1.5 million based upon allegations of fraudulent misrepresentations made by the defendants. Creditor filed notices of judgment liens following entry of the judgment. On March 9, 1992 an amended judgment was entered allowing for prejudgment interest on creditor's claims and, by estimation of creditor's counsel, the judgment amount due now exceeds $6.5 million.
Debtor filed his voluntary petition under Chapter 11 on March 23, 1992 listing assets of $915,472 and liabilities of $3.75 million. The assets are unencumbered (save possibly for creditor's execution lien) and creditor, listed as Dauer, Duke and Associates, is the only creditor listed. The amount of the debt listed apparently does not include the prejudgment interest allowed by the trial court. The listed assets include eight real property interests and numerous items of personal property including stocks, partnership interests and the debtors office equipment and receivables.
On May 19, 1992 creditor filed its motion to dismiss the Chapter 11 proceeding on the ground that the proceeding was filed in bad faith. The substance of the bad faith allegation made by creditor is that the debtor filed only to obtain the stay and effectively prosecute his appeal of the judgment against him without posting a supersedeas bond while holding the creditor at bay. Creditor further relies on the fact that it is the only creditor of debtor and cites case law suggesting that one creditor cases are not an appropriate use of the provisions of Chapter 11.
Debtor responds that he intends to reorganize and that his income from the practice of law evidences an ongoing business to reorganize.
Canada Coal Company has also filed a proceeding under Chapter 11 in this Court. Because this question is addressed at the threshold of the case, it is not known whether the codefendants Canada Coal Company and Mims have substantial assets with which to satisfy part or all of the judgment against the three defendants and what, if any, claims the defendants will have against each other.
Threshold good faith, while not expressly set forth in the text of the provisions of the Bankruptcy Code, is an implicit requirement for any Chapter 11 proceeding. Matter of Winshall Settlor's Trust, 758 F.2d 1136 (6th Cir. 1986), Matter of Little Creek Development Company, 779 F.2d 1068 (5th Cir. 1986).
Factors which have been enumerated to determine the good faith of the debtor include whether the debtor has any assets, whether the debtor has an ongoing business to reorganize, and whether there is a reasonable probability of a plan being proposed and confirmed. Matter of Winshall Settlor's Trust, at page 1137. It is clear that the debtor in the present case has numerous valuable assets which may, depending upon the validity of creditor's execution lien, be unencumbered. It is also clear that the debtor has an ongoing business to reorganize, his law practice. It would appear that if the creditor was allowed to proceed that the assets which the debtor owns and uses in his law practice would be subject to sale under execution with little claim of exemption available to debtor. The Court is troubled, however, by the requirement that there be a reasonable probability of a plan being proposed and confirmed. The source of the Court's consternation in this regard is the requirement of Bankruptcy Code' 1129(a)(10) that if any class of claims is impaired under the plan at least one class of claims that is impaired under the plan must accept the plan. Obviously, if there is only one creditor, there will be only one class of creditors who may be impaired and, if impaired, the vote of that one creditor will be required for confirmation under either subsection of ' 1129. The unknown element at this stage of the proceeding is the ability of the other two judgment debtors to pay any sum toward satisfaction of the judgment and thus make it feasible that this debtor could file a plan that did not impair this creditor. Additionally, the possibility of other claims by the other judgment debtors against this debtor seems real with those claims possibly being in different classes (at least to the extent that this creditor may be secured by its execution lien).
The movant has the burden of proof on the issue of "cause" (here an alleged lack of good faith in the filing of this proceeding) for dismissal of a Chapter 11 proceeding pursuant to Bankruptcy Code Section 1112. In re Ravick, 106 B.R. 834 (Bankr. D.N.J. 1989. This Court cannot conclude that the movant has met the burden of proof on the matter of the lack of a reasonable probability of a plan being proposed and confirmed. Clearly, substantial problems exist. The fact that these proceedings are still in early stages leaves this question open.
The movant cites substantial authority for the proposition that, where a dispute involves only two parties and is resolvable in state court, the bankruptcy court should dismiss and allow the matter to be resolved there. No binding authority in this District or Circuit is cited for this proposition although the merit of this assertion, in the proper case, is evident. However, no one factor is controlling in weighing a motion to dismiss at the threshold of a case and the court is required to look at all of the facts and circumstances involved. In re Marion Street Partnership, 108 B.R. 218 (Bankr.D.Minn. 1989), Matter of Little Creek Development Company, supra.
The creditor finally argues that the debtor's failure to seek a reduction of the amount of the supersedeas bond shows a lack of good faith. In re Harvey, 101 B.R. 250 (Bankr.D.Nev. 1989). This Court rejects the application of that doctrine to the extent that it is urged as grounds alone, without more, for dismissal. The court rather will use this fact as one factor to consider in the totality of the circumstances involved. When this factor is considered in conjunction with the other factors present in this case, this Court still cannot conclude that the debtor lacks good faith in filing this proceeding.
For the foregoing reasons, an order overruling the motion to dismiss will be entered of record.
Dated this _______ day of July, 1992.
By the Court:
Bruce Levy, Esq.
Jeffrey D. Damron, Esq.
United States Trustee