Real Estate Company’s Chapter 11 Held to be Bad Faith Filing

Samuel Becker

Pitcairn Properties Holdings Inc. is a Real Estate development and management company. The Company had sold preferred stock to PPH Investments LLC. Pitcairn was unable to comply with the terms of the preferred stock and the preferred stockholder attempted to exercise its rights including the right to take control of Pitcairn’s Board of Directors. Pitcairn filed an injunction proceeding in the Delaware Court of Chancery to thwart PPH’s attempt to exercise its board stacking rights. Prior to the Chancery Court entering an order, Pitcairn filed a chapter 11 petition (Case No. 10-12764).

The Bankruptcy Case was assigned to Judge Peter J. Walsh, but due to Judge Walsh’s unavailability Judge Christopher S. Sontchi presided at the first day hearing on September 2, 2010. At the hearing, Judge Sontchi expressed concern over whether the debtor’s chapter 11 petition had been filed in good faith and directed the Debtor to show cause why the case should not be dismissed as a bad faith filing.

At a hearing the next day, Judge Sontchi stated that the Chancery Court action was not a debtor versus creditor fight as much as it was a shareholder versus board of directors fight. The evidence presented was that Pitcairn was solvent and that the only conflict in the case was a two party dispute. Judge Sontchi noted that there were some defaults on obligations to creditors, but those creditors were not actively pursuing the defaults. Judge Sontchi then lifted the automatic stay and remanded the Chancery Court action to allow the preferred shareholder to proceed.

Judge Sontchi discussed the law on bad faith bankruptcy filings, citing the Third Circuit case of In re: 15376 Memorial Corp., 589 F.3d 605 (3d Cir. 2009), for the proposition that for a bankruptcy case to be filed in good faith, there must be a proper reorganization purpose and it must not have been filed solely as a litigation tactic. Judge Sontchi then concluded that Pitcairn’s case would be dismissed because there was no reorganization purpose and the case was filed as a litigation tactic. The Debtor asked for and was denied a stay of the order by both the Bankruptcy Court and the District Court.