Too Early to Dismiss? BAP Overturns Order Dismissing Chapter 11 Case as Bad Faith Filing

In Sullivan v. Harnisch (In re Sullivan), CC-14-1225-TaDKi (9th Cir. BAP December 9, 2014), the Bankruptcy Appellate Panel of the United States Court of Appeals for the Ninth Circuit (the "BAP") reversed a bankruptcy court order dismissing a chapter 11 bankruptcy case as having been filed in bad faith. 

The case was commenced by filing a skeletal bankruptcy petition.  The debtor filed a status report eight days later.  Six days later, the debtor filed schedules and a statement of financial affairs.  The next day, the creditor (who held judgments and judgment liens) moved to dismiss the case as a bad faith filing, contending that the bankruptcy case amounted to a two-party dispute and was filed solely to delay collection attempts.  The creditor further contended that confirmation of a chapter 11 plan was unlikely because the creditor would vote against it.  

The hearing on dismissal was scheduled simultaneously with a scheduling conference as well as the debtor’s motions to employ counsel and approve a budget.  The bankruptcy court called the motion to dismiss first.  After argument, but without testimony or other evidence, the court took the motion under submission and continued the remaining hearings. Thereafter, the court dismissed the case, finding bad faith and no possibility of confirming a plan.  The debtor appealed.

The BAP ruled that the bankruptcy court abused its discretion by considering to consider the interests of the creditor who moved for dismissal and not the best interests of creditors in general.  It is also important to note the speed of the proceedings and the fact that dismissal came before the first steps of the case.  

Creditors and bankruptcy judges favor early dismissal if a case was clearly files in bad faith as delay causes harm.  However, in future cases, bankruptcy judges and attorneys may ask themselves:  "Is it too soon for dismissal?"