Litigation Tactic to Delay

Bankruptcy cannot be used merely as a litigation tactic to delay or avoid a state court order.

Filing bankruptcy used as a strategy to delay a state court order can be a bad-faith filing. If the creditors will recover more money outside of bankruptcy court than through a liquidation, the court may dismiss the bankruptcy petition.

Owens and her husband were divorced but litigation continued over the family home. The Washington State Superior Court ruled that the family home was a combination of community and separate property because some of the funds Owens used in purchasing the home were community property. The court ordered the home sold and the proceeds divided equally between Owens and her former husband. Owens filed for Chapter 11 bankruptcy, claiming the family home as her only significant asset. Her ex-husband filed a motion to dismiss Owens’ bankruptcy case as a bad faith filing under 11 U.S.C. § 1112(b). The bankruptcy court granted the motion, ruling that the bankruptcy was filed in bad faith as a litigation tactic intended to delay the sale. In its decision, the bankruptcy court noted that Owens had an annual earning capacity between $150,000 and $800,000 and that creditors would recover more if the petition were not converted to Chapter 7.

In a recent case, the BAP affirmed the bankruptcy court. The BAP cited with approval Rollex Corp. v. Associated Materials, Inc. (In re Superior Siding & Window, Inc.), 14 F.3d 240, 243 (4th Cir.1994) which held that when deciding between dismissal and conversion under 11 U.S.C. § 1112(b), “the court must consider the interests of all of the creditors.”

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