You Can Check Out Anytime You Like, but You Can Never Leave
I know, I know, The Eagles are terrible. But the most famous line from their most famous song popped into my head yesterday while reading a recent opinion by Judge Humrickhouse in which she denied a debtor’s motion to have its case dismissed. Usually, of course, it’s the other way around: debtors want to stay in bankruptcy and it’s the creditors who want a case dismissed. But In re Surtronics, Inc. is an important reminder that bankruptcy is not always a hospitable place for debtors. And when bankruptcy turns inhospitabable, a debtor doesn’t have an absolute right to leave.
Section 1112(b)(1) provides a list of sixteen causes for a chapter 11 case being dismissed. Most of these can be generally categorized as “uncooperative debtor” kind of activities: not filing what you’re supposed to, not showing up where you’re supposed to, not paying who you’re supposed to pay, etc. But the very first “cause for dismissal” is of a slightly different sort. 1112(b)(4)(A) states that “the term ’cause’ includes a substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.” In other words, when a struggling company fails to turn around its operations and business continues to deteriorate, a debtor is able to raise the white flag and have its case dismissed. In Surtronics, that’s what the debtor claimed had happened. Problem was, business hadn’t deteriorated. In fact, profits were up.
But why would the debtor make such an argument? And, even more curiously, why would the debtor’s landlord object to the argument?
Because sometimes debtors lose certain rights in bankruptcy, and sometimes creditors gain rights that it would not have had outside of bankruptcy. In the instant case, Surtronics‘s landlord had obtained the right to immediately evict the debtor-tenant from its commercial space. If the case had been dismissed, those rights gained by the creditor would have been lost and it would have had to resort to a lengthy state court eviction action. 1112(b)(1) states that dismissal is permitted only if dismissal is in the best interest of the debtor and the creditors. If there are no assets to administer and creditors don’t have any use for the rights and protections that bankruptcy offers them, then dismissal is usually uncontroversial. But in a contentious case where both debtor and creditors have fought hard to gain certain rights under bankruptcy, the court will be sympathetic to a creditor’s pleas to lock the bankruptcy court doors from the outside and finish what it started.