Single Asset Real Estate Case Dismissed for “Bad Faith” Under Fourth Circuit Precedent

In In re Fairfield TIC, LLC, Case No. 18-73744-VJ (Bankr. E.D. Va. Nov. 20, 2018), the Bankruptcy Court for the Eastern District of Virginia dismissed a single asset real estate case, pursuant to section 1112(b) of the Bankruptcy Code, on “bad faith” grounds, based on the holding in Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989).


The debtor was a Delaware LLC whose sole asset was a 66.2296% tenant-in-common interest in a shopping mall. The remaining interests in the shopping mall were held by three other similar entities that did not file bankruptcy. The four tenants in common (“TICs”) and their TIC Agreement, which dictated an inflexible form of ownership, were created to take advantage of the “like-kind exchange” provisions of the Tax Code. See 26 U.S.C. § 1031. In accordance with the Tax Code, the TIC Agreement placed certain limitations on the TICs’ ownership rights, including the requirement that any action to sell, manage, or lease the shopping mall be made by the unanimous consent of all the TICs.

The debtor filed bankruptcy on the eve of foreclosure by noteholders (“Noteholders”) that were owed $30 million in debt, which was secured by the shopping mall. The shopping mall had a value of no more than $27 million, thus was fully-encumbered by the Noteholder’s security interest. At the time of the bankruptcy, the debtor had no exit-strategy to pay off the Noteholder’s debt, which had matured.

After the bankruptcy filing, the Noteholders moved to dismiss the case pursuant to section 1112(b), which provides that a court “shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter . . . for cause.” 11 U.S.C. § 1112(b)(4) (emphasis added).


In Carolin, the Fourth Circuit Court of Appeals adopted the view that chapter 11 implicitly requires a debtor to file its petition in good faith, thereby recognizing that a “bad faith” filing constitutes “cause” for dismissal or conversion under section 1112(b). 886 F.2d at 700. Dismissal would be proper in cases when the debtor acts in both objective and subjective bad faith. See id. at 700-01. From an objective standpoint, the debtor must have an objectively reasonable possibility of reorganization. See id. at 701. From a subjective standpoint, the filing must not be merely with the intent to abuse the reorganization process or cause hardship or delay to creditors, without an intent or ability to reorganize. See id.. The Fourth Circuit noted that, while the evidence for both the objective and subjective prongs may overlap, a separate inquiry is required for each.  See id.

In Fairfield TIC, the Bankruptcy Court found that the objective prong of the Carolin test was satisfied because (a) the case involved a single asset debtor with a 66% interest in real property that was fully encumbered; (b) the debtor had no equity in the shopping mall; (c) the debtor had limited or no access to revenues from the shopping mall; (d) the investment nature of debtor’s ownership interest demonstrated that there was no going concern for the debtor to protect; and (e) the debtor could not propose a valid chapter 11 plan without the support of its fellow TICs, which had chosen not to join in the bankruptcy filing.

With respect to the last instance, the debtor suggested that there were refinancing or sale options that would allow the shopping mall to reorganize. But, since the non-debtor TICs did not voice their support for any reorganization plan, the Court found that any such plan could not be confirmed, as it would entail altering the TICs’ rights under the TIC Agreement; in particular, with respect to the unanimous consent requirement for the transactions unilateral proposed by the debtor. The Bankruptcy Court reasoned that there was no Bankruptcy Code provision that would allow the debtor to involuntarily alter the non-debtor TICs’ rights through the bankruptcy. Citing In re Geneva ANHX LLC, 496 B.R. 888, 902 (Bankr. C.D. Ill. 2013).

Turning to subjective bad faith, the Court held that this prong is governed by the “totality of the circumstances,” taking into consideration such things as: (a) whether the debtor only has one asset that is encumbered by secured creditors’ liens; (b) whether the debtor has employees or an ongoing business to protect; (c) the amount of the debtor’s cash flow and income available to fund a reorganization or offer adequate protection; (d) the number and extent of unsecured claims; (e) allegations of wrongdoing by the debtor; (f) the timing of the bankruptcy filing; (g) whether the reorganization is essentially a two-party dispute; (h) whether the debtor has exhausted other remedies such that bankruptcy is the only possibility of forestalling the loss of property. Citing In re Kinard, No. C/A 01-03621, 2001 WL 1806039, at *6-7 (Bankr. D. S.C. Nov. 16, 2001) (applying Carolin to determine bad faith).

In Fairfield TIC, many of the Kinard factors applied to the debtor. In particular, the Court found that the debtor had one asset that was fully encumbered; no regular income or ongoing business; no employees; and only a few unsecured creditors.

The Noteholders also suggested that any plan of reorganization essentially involved resolving a two-party dispute between the Noteholders and the debtor. In response, the debtor cited to a separate, additional dispute with a small unsecured claimant. But, the Court ultimately found that the lack of significant unsecured creditors resembled essentially a two-party dispute. Citing In re Little Creek Dev. Co., 779 F.2d 1068, 1073 (5th Cir. 1986).

The Court further found that the timing of the bankruptcy indicated subjective bad faith, as the debtor filed a week before the scheduled foreclosure sale and after failing to stop the Noteholders in enforcing their rights in state court. This timing essentially demonstrated an intent to delay the Noteholders’ remedies.

Finally, the Court found that ill will is not necessary to find bad faith; rather, a lack of good faith is a sufficient wrongdoing to justify relief. In Fairfield TIC, the totality of circumstances demonstrated a lack of good faith in the bankruptcy filing. In particular, the Court noted that the debtor’s awareness that it could not reorganize the shopping mall (through a sale or refinancing) without the unanimous consent of all the TICs—three of which did not join the debtor in bankruptcy—demonstrated sufficient bad faith to warrant relief under section 1112(b).

Considering the lack of equity in the shopping mall, the Court found that no other creditor would receive a distribution through the debtor’s reorganization. Accordingly, based on the examples of objective and subjective bad faith displayed by the debtor, the Court held that the bankruptcy case should be dismissed, instead of converted to chapter 7.


Even though it involved a complicated TIC structure, Fairfield TIC is not an atypical single asset real estate case. Debtors in such cases commonly face challenges sustaining their reorganization efforts for a myriad of reasons, including a lack of funding, under-developed exit strategies and highly motivated creditors that have little patience for a pro-longed bankruptcy process. Given such challenges, a free fall bankruptcy, with little advance planning, is a virtual recipe for disaster. To optimize the chances for success, a single asset real estate debtor should be, at least, prepared to demonstrate that it can confirm a chapter 11 plan in short fashion and is not merely using the bankruptcy to stave off one creditor’s exercise of remedies.