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.
SGL Carbon is a Delaware corporation that manufactures and sells graphite electrodes used in steel production.
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's
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:
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.
The District Court held a hearing on the motion on February 17, 1999.
The District Court denied the Committee's motion to dismiss on April 23, 1999 assuming, without deciding, that 11 U.S.C. § 1112(b) imposes a duty of good faith upon bankruptcy petitioners. It further assumed this duty requires the proposed reorganization to further what it characterized as Chapter 11's purpose: "`to restructure a business's finances so that it may continue to operate, provide its employees with jobs, pay its creditors and produce a return for its stockholders.'" SGL Carbon Corp., 233 B.R. at 288 (quoting H.R.Rep. No. 595 (1977) reprinted in 1978 U.S.C.C.A.N. 6179). The court made no findings that SGL Carbon filed for bankruptcy for reasons other than to improve its negotiating position with plaintiffs. But the court concluded the petition furthered the purpose of Chapter 11 because plaintiffs' litigation was imperiling SGL Carbon's operation by distracting its management, was potentially ruinous and could eventually force the company out of business. The court explained that
SGL Carbon Corp., 233 B.R. at 291.
The Committee has appealed.
The District Court had jurisdiction over this bankruptcy case under 28 U.S.C. § 1334(a). We have jurisdiction under 28 U.S.C. § 1291. See In re Brown, 916 F.2d 120, 124 (3d Cir.1990) (holding that order denying motion to dismiss a bankruptcy petition is "final" under 28 U.S.C. § 1291).
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);
11 U.S.C. § 1112(b) governs the dismissal or conversion of Chapter 11 petitions. It provides in part:
11 U.S.C. § 1112(b).
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.
The threshold issue is whether Chapter 11 petitions may be dismissed for
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 11 U.S.C. § 1112(b), which allows the court to dismiss or convert a Chapter 11 petition for cause
11 U.S.C. § 1112(b). As many courts and commentators have noted, this language neither requires nor prohibits 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:
H.R.Rep. No. 595, at 406, reprinted in 1978 U.S.S.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 11 U.S.C. § 102(3). Section 1112(b), by its terms, therefore, does not preclude consideration of unenumerated factors in determining "cause."
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),
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:
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, 1072 (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,
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 11 U.S.C. § 1112(b) unless it is filed in good faith.
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.
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, 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.
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 Breyer
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.
The District Court was correct in noting that the Bankruptcy Code encourages early filing. See SGL Carbon, 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.
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.
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.
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 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 (5th Cir.1986) (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 of the filing was a litigation tactic, the petition may be dismissed as not being filed in good faith."); In re Martin, 51 B.R. 490, 495 (Bankr.M.D.Fla.1985). The In re Marsch Court articulated the relationship between the good faith determination and the dismissal of petitions filed merely for tactical advantage:
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 purpose
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
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.
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.
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 11 U.S.C. § 1112(b).
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., 527 U.S. 815, 119 S.Ct. 2295, 144 L.Ed.2d 715 (1999); Amchem Products, Inc. v. Windsor, 521 U.S. 591, 117 S.Ct. 2231, 138 L.Ed.2d 689 (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.
For the reasons stated, we will reverse the judgment of the District Court and
In re Khan, 34 B.R. 574, 575 (Bankr.W.D.Ky. 1983).