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Litigation: A single-asset entity can’t file bankruptcy and stop foreclosure

In Mezz II, a precedent was set to dismiss bad faith bankruptcy filings

On Oct. 18, 2011, JER/Jameson Mezz Borrower II LLC (Mezz II), a mezzanine borrower for the Jameson Inns Inc. hotels, filed a Chapter 11 petition just hours before a scheduled UCC foreclosure sale of Mezz II’s sole asset consisting of its membership interest in JER/Jameson Mezz Borrrower I, LLC (Mezz I). In re JER/Jameson Mezz Borrower II, LLCAs a result of the Chapter 11 filing, the foreclosure sale was stayed.

Mezz II was formed in 2006 as part of a capital structure to acquire the Jameson Inns and Signature Inns hotel chains. As part of the capital structure, Mezz II and Mezz I (along with two other mezzanine borrower affiliates) were formed for the sole purpose of borrowing additional funds. Mezz II is the sole member of Mezz I.

In analyzing the lender’s assertion that the case should be dismissed because it was filed in bad faith solely as a litigation tactic, the Bankruptcy Court began with the 3rd Circuit’s “totality of facts and circumstances” test to determine whether the petition was filed for a valid reorganizational purpose.

According to the 3rd Circuit, the good faith inquiry is “based more on an objective analysis of whether the debtor sought to step outside the equitable limitations of Chapter 11 than the subjective intent of the debtor.”

In discussing the two-party dispute nature of the case, the court specifically referenced testimony of Mezz II’s sole non-independent director who admitted Mezz II filed bankruptcy to stop the lender’s foreclosure sale and that the primary beneficiaries of the bankruptcy were affiliated mezzanine borrowers of the debtor.

The court next turned to whether the filing was for a valid reorganization purpose. While agreeing with the debtor that the court must consider the good of the entire enterprise—Mezz II’s filing in relation to the other affiliated companies cases—the court found that “in the absence of substantive consolidation, Mezz II does not have any chance of confirming a plan.”


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Randye Soref

Randye B. Soref is a shareholder and administrative chair of Buchalter Nemer’s Insolvency and Financial Solutions  practice group. She focuses her practice on bankruptcy and...

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