In Re: SGL Carbon Corp, [ Official Comm. of Unsec. Cred. v. Nucor Corp] , 200 F.3d 154 ( 1999 )

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
12-29-1999
In Re: SGL Carbon Corp, [ Official Comm. of
Unsec. Cred. vs. Nucor Corp]
Precedential or Non-Precedential:
Docket 99-5319
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Recommended Citation
"In Re: SGL Carbon Corp, [ Official Comm. of Unsec. Cred. vs. Nucor Corp]" (1999). 1999 Decisions. Paper 332.
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Filed December 29, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 99-5319 & 99-5382
IN RE: SGL CARBON CORPORATION, Debtor
OFFICIAL COMMITTEE OF UNSECURED CREDITORS,
Appellant at No. 99-5319
v.
NUCOR CORPORATION;
NUCOR-YAMATO STEEL COMPANY,
Appellants at No. 99-5382
On Appeal from the United States District Court
for the District of Delaware
D.C. Civil Action No. 98-cv-02779
(Honorable Joseph J. Farnan, Jr.)
Argued July 29, 1999
Before: SCIRICA and McKEE, Circuit Judges,
and BROTMAN, District Judge*
(Filed: December 29, 1999)
_________________________________________________________________
* The Honorable Stanley S. Brotman, United States District Judge for the
District of New Jersey, sitting by designation.
PHILIP BENTLEY, ESQUIRE
(ARGUED)
KENNETH H. ECKSTEIN, ESQUIRE
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
TERESA K.D. CURRIER, ESQUIRE
Duane, Morris & Heckscher
1201 Market Street, Suite 1500
P.O. Box 195
Wilmington, Delaware 19899
Attorneys for Appellant/Cross-
Appellee, Official Committee of
Unsecured Creditors
JAMES J. RODGERS, ESQUIRE
(ARGUED)
Dilworth, Paxson, Kalish
& Kauffman
1735 Market Street
3200 The Mellon Bank Center
Philadelphia, Pennsylvania 19103
MICHAEL D. RIDBERG, ESQUIRE
Ridberg, Press & Sherbill
Three Bethesda Metro Center,
Suite 650
Bethesda, Maryland 20814
Attorneys for Appellants,
Nucor Corporation; Nucor-Yamato
Steel Company
2
GEORGE J. WADE, ESQUIRE
(ARGUED)
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
LAURA D. JONES, ESQUIRE
Young, Conaway, Stargatt & Taylor
P.O. Box 391
Rodney Square North, 11th Floor
Wilmington, Delaware 19899-0391
Attorneys for Appellee,
SGL Carbon Corporation
OPINION OF THE COURT
SCIRICA, Circuit Judge.
The issue on appeal is whether, on the facts of this case,
a Chapter 11 bankruptcy petition filed by a financially
healthy company in the face of potentially significant civil
antitrust liability complies with the requirements of the
Bankruptcy Code. In this case, the Official Committee of
Unsecured Creditors of SGL Carbon Corporation appeals
the District Court's order denying its motion to dismiss SGL
Carbon's Chapter 11 bankruptcy petition on bad faith
grounds.
This case also presents the threshold issue whether we
will adopt a "good faith" requirement for Chapter 11
petitions. We will. After undertaking the fact intensive
analysis inherent in the good faith determination, we
conclude that SGL Carbon's Chapter 11 petition lacks a
valid reorganizational purpose and, therefore, lacks the
requisite good faith. We will reverse.
I.
SGL Carbon is a Delaware corporation that manufactures
and sells graphite electrodes used in steel production.1 In
_________________________________________________________________
1. SGL Carbon Corp. is a wholly-owned subsidiary of SGL
Aktiengesellschaft (SGL AG), a German corporation. SGL Carbon Corp. is
3
1997, the United States Department of Justice commenced
an investigation of alleged price-fixing by graphite electrode
manufacturers, including the SGL Carbon Group.2 Soon
thereafter, various steel producers filed class action
antitrust lawsuits in the United States District Court for
the Eastern District of Pennsylvania against SGL Carbon
and other graphite electrode manufacturers. The District
Court consolidated the cases into a single class action and
certified a class under Fed. R. Civ. P. 23(b)(3) consisting of
all United States purchasers of graphite electrodes between
1992 and 1997. Many class members opted out of the class
before the November 28, 1998 opt-out deadline and
subsequently filed or threatened to file separate antitrust
lawsuits. Since the class certification, six complaints have
been filed in federal district court and one complaint has
been filed in a Canadian court.
In June 1998, SGL Carbon's German parent SGL AG
recorded a charge in Deutschmarks of approximately $240
million as its "best estimate" of the SGL Carbon Group's3
potential liability in the criminal and civil antitrust litigation.4
_________________________________________________________________
comprised of two "business units"--the North American Carbon/
Graphite unit, which is of primary interest here, and the specialty
carbon unit.
2. In May 1999, SGL AG (SGL Carbon's parent) and its chairman Robert
Koehler each pled guilty to several criminal antitrust charges and agreed
to pay fines of $135 million and $10 million respectively. It is important
to note that the guilty pleas and the payment of the criminal fines by the
parent company occurred after the filing of the Chapter 11 petition and
the District Court's denial of the motion to dismiss.
3. According to the stipulated facts, "[t]he SGL CARBON Group has more
than 28 manufacturing facilities in 10 countries and has sales in more
than 90 countries. The SGL CARBON Group is the largest manufacturer
of carbon and graphite products in the world and the second largest
manufacturer of graphite electrodes. The North American
Carbon/Graphite Business Unit is one of two business units of the
Debtor. The North American Carbon/Graphite Business Unit operates
only in the United States and Canada." Stipulation of Facts, No. 98B-
2779, at *1. It is important to note, therefore, that SGL Carbon Corp. is
only one part of the SGL Carbon Group.
4. Although the record does not reflect the amount by which the $240
million reserve was increased by SGL AG subsequent to its guilty plea
and accompanying fine, the parties have indicated that the reserve was
increased. It is significant that, at the time of SGL Carbon's Chapter 11
petition, the $240 million reserve was in place and untouched.
4
On December 16, 1998, at the direction of SGL AG, SGL
Carbon filed a voluntary Chapter 11 bankruptcy petition in
the United States District Court for Delaware. In SGL
Carbon's Disclosure Statement, in a section addressing
"Factors Leading to [the] Chapter 11 Filing," SGL Carbon
only discussed the antitrust litigation. The bankruptcy
filing contained a proposed reorganization plan under
which only one type of creditor would be required to accept
less than full cash payment for its account, namely the
antitrust plaintiffs who obtained judgments against SGL
Carbon. Under the plan, potential antitrust judgment
creditors would receive credits against future purchases of
SGL Carbon's product valid for 30 months following the
plan's confirmation. The proposed plan also bars any
claimant from bringing an action against SGL Carbon's
affiliates, including its parent SGL AG, "based on, relating
to, arising out of, or in any way connected with" their
claims against SGL Carbon.
The next day, on December 17, in a press release, SGL
Carbon explained it had filed for bankruptcy "to protect
itself against excessive demands made by plaintiffs in civil
antitrust litigation and in order to achieve an expeditious
resolution of the claims against it." The press release also
stated:
SGL CARBON Corporation believes that in its case
Chapter 11 protection provides the most effective and
efficient means for resolving the civil antitrust claims.
. . .
. . . .
"SGL CARBON Corporation is financially healthy,"
said Wayne T. Burgess, SGL CARBON Corporation's
president. "If we did not face [antitrust] claims for such
excessive amounts, we would not have had to file for
Chapter 11. We expect to continue our normal
business operations."
. . . .
However, because certain plaintiffs continue to make
excessive and unreasonable demands, SGL CARBON
Corporation believes the prospects of ever reaching a
5
commercially practicable settlement with them are
remote. After much consideration, SGL CARBON
Corporation determined that the most appropriate
course of action to address the situation without
harming its business was to voluntarily file for chapter
11 protection.
. . . .
Contemporaneous with the press release, SGL AG
Chairman Robert Koehler conducted a telephone conference
call with securities analysts, stating that SGL Carbon was
"financially healthier" than before and denying the antitrust
litigation was "starting to have a material impact on [SGL
Carbon's] ongoing operations in the sense that . . . [it was]
starting to lose market share." He also stated that SGL
Carbon's Chapter 11 petition was "fairly innovative [and]
creative" because "usually Chapter 11 is used as protection
against serious insolvency or credit problems, which is not
the case [with SGL Carbon's petition]."
Two weeks after SGL Carbon filed its petition and issued
the press release, the United States Trustee formed a nine
member Official Committee of Unsecured Creditors. Eight of
the committee members are antitrust plaintiffs; two of the
eight serve as class representatives and the other six have
opted out of the class.5 In January 1999, the Committee
filed a motion to dismiss SGL Carbon's bankruptcy petition
on the grounds that it was a "litigation tactic designed to
frustrate the prosecution of the civil antitrust claims
pending against [SGL Carbon] and preserve[SGL Carbon's]
equity from these claims." In re SGL Carbon Corp., 233 B.R.
285, 287 (D. Del. 1999).
The District Court held a hearing on the motion on
February 17, 1999.6 Neither side presented witnesses. The
evidence was entirely documentary or deposition testimony,
including the deposition of SGL Carbon's Vice President
Theodore Breyer, who directs the company's graphite
electrode business in the United States. In his deposition,
Breyer testified that SGL Carbon was financially healthy,
_________________________________________________________________
5. The ninth Committee member is a trade creditor--Conoco, Inc.
6. SGL Carbon's case was not referred to a bankruptcy court.
6
having no overdue debts when it filed its Chapter 11
petition. Breyer stated that he recommended filing for
bankruptcy because he believed SGL Carbon "could not
expeditiously settle with the [antitrust] plaintiffs" absent
Chapter 11 protection. Acknowledging that bankruptcy
protection was the "sole reason" SGL AG's Executive
Committee had authorized the Chapter 11 petition, Breyer
testified that he believed filing for Chapter 11 would
"change the negotiating platform" with plaintiffs and
"increase the pressure on . . . plaintiffs to settle."
The District Court denied the Committee's motion to
dismiss on April 23, 1999 assuming, without deciding, that
11 U.S.C. S 1112(b) imposes a duty of good faith upon
bankruptcy petitioners. It further assumed this duty
requires the proposed reorganization to further what it
characterized as Chapter 11's purpose: " `to restructure a
business's finances so that it may continue to operate,
provide its employees with jobs, pay its creditors and
produce a return for its stockholders.' " SGL Carbon Corp.,
233 B.R. at 288 (quoting H.R. Rep. No. 595 (1977) reprinted
in 1978 U.S.C.C.A.N. 6179). The court made nofindings
that SGL Carbon filed for bankruptcy for reasons other
than to improve its negotiating position with plaintiffs. But
the court concluded the petition furthered the purpose of
Chapter 11 because plaintiffs' litigation was imperiling SGL
Carbon's operation by distracting its management, was
potentially ruinous and could eventually force the company
out of business. The court explained that
[t]he distractions of the litigation pose a serious threat
to the continued successful operations of [SGL
Carbon]. Further, the potential liability faced by [SGL
Carbon] could very well force it out of business.
Consistent with the policies and purposes of Chapter
11 which encourage early filing so as to increase the
possibility of successful reorganization, the Court will
not allow [SGL Carbon] to wait idly by for impending
financial and operational ruin, when [SGL Carbon] can
take action now to avoid such a consequence.
SGL Carbon Corp., 233 B.R. at 291.
The Committee has appealed.
7
II.
The District Court had jurisdiction over this bankruptcy
case under 28 U.S.C. S 1334(a). We have jurisdiction under
28 U.S.C. S 1291. See In re Brown, 916 F.2d 120, 124 (3d
Cir. 1990) (holding that order denying motion to dismiss a
bankruptcy petition is "final" under 28 U.S.C.S 1291).
We have not yet had occasion to decide what standard of
review to apply to a dismissal of a Chapter 11 petition.
Consistent with the other courts of appeals to consider the
issue, we believe this decision is committed to the sound
discretion of the bankruptcy or district court and will
review for abuse of discretion. See, e.g., Leavitt v. Soto (In
re Leavitt), 171 F.3d 1219 (9th Cir. 1999) (reviewing for
abuse of discretion);7 In re Abijoe Realty Corp., 943 F.2d
121, 128 (1st Cir. 1991) (same). Mindful that "an abuse of
discretion exists where the district court's decision rests
upon a clearly erroneous finding of fact, an errant
conclusion of law, or an improper application of law to
fact," ACLU v. Black Horse Pike Reg'l Bd. of Ed., 84 F.3d
1471, 1476 (3d Cir. 1996) (internal quotations omitted), we
review the findings of fact leading to the decision for clear
error and exercise plenary review over the court's
conclusions of law. See First Jersey Nat'l Bank v. Brown (In
re Brown), 951 F.2d 564, 567 (3d Cir. 1991). See also
Leavitt, 171 F.3d at 1222 (applying differing standards of
review to different components of good faith/bad faith
determination); Abijoe Realty Corp., 943 F.2d at 128 (same).
III.
11 U.S.C. S 1112(b) governs the dismissal or conversion
of Chapter 11 petitions. It provides in part:
[T]he court may convert a case under [Chapter 11] to
a case under Chapter 7 . . . or may dismiss a case
under this chapter, whichever is in the best interest of
creditors and the estate, for cause . . . .
_________________________________________________________________
7. Although In re Leavitt addressed a good faith determination regarding
a Chapter 13 bankruptcy petition, there is no significant distinction
between Chapter 11 and Chapter 13 petitions with respect to the
appropriate standard of review.
8
11 U.S.C. S 1112(b).
The statute provides for dismissal for cause, if it is in the
best interest of the creditors and the estate. Conversion is
not an option here.8 We will determine whether there is
cause for dismissal.
A.
The threshold issue is whether Chapter 11 petitions may
be dismissed for "cause" under 11 U.S.C. S 1112(b) if not
filed in good faith. Although we have not squarely
addressed this issue, we implied in First Jersey Nat'l Bank
v. Brown (In re Brown), 951 F.2d 564 (3d Cir. 1991), that
Chapter 11 imposes a good-faith obligation. In Brown, we
considered evidence of bad faith in reviewing the dismissal
of a Chapter 11 petition, but concluded "the evidence . . .
of bad faith . . . was not strong enough for us to say that
it was established as a matter of law." Id. at 572. Because
Brown focused on the adequacy of the record for making a
good faith/bad faith determination, we did not expressly
address whether "bad faith" constituted cause for
dismissal. In this case, we make clear what we implied in
_________________________________________________________________
8. In other circumstances, deciding a motion to dismiss under 11 U.S.C.
S 1112(b), may involve a two-step process offirst deciding whether there
is cause and then deciding whether to dismiss or convert. See Rollex v.
Associated Materials, Inc. (In re Superior Siding & Window, Inc.), 14 F.3d
240, 242 (4th Cir. 1994). That procedure is understandable when
applied to the statutory bases for finding cause that turn on the
impossibility of Chapter 11 relief. See 11 U.S.C. S 1112(b). The same is
not necessarily true in all bad faith cases. Two forms of bad faith can
make a Chapter 11 petition objectionable. One involves either pre- or
post-petition misconduct by the debtor. In such cases, where the debtor
otherwise properly belongs in bankruptcy, dismissal need not always
follow from a finding of bad faith stemming from such misconduct. See
7 Collier on Bankruptcy 1112-70 (15th ed. 1996) ("[I]n many
circumstances, the court might be better advised to address the bad
conduct of the debtor (or some other party) in a manner other than
through dismissal of the proceedings."). In bad faith cases involving the
filing of a petition that is an abuse of the bankruptcy process, however,
S 1112(b)'s conversion/dismissal choice is inappropriate. The proponent
of an abusive petition does not belong in bankruptcy so it is unnecessary
to ask whether dismissal or conversion is in the interest of the
creditors.
9
Brown--Chapter 11 bankruptcy petitions are subject to
dismissal under 11 U.S.C. S 1112(b) unlessfiled in good
faith.
Four factors guide our adoption of a good faith standard
--the permissive language of S 1112(b), viewed in light of its
legislative history; the decisions of our sister courts of
appeals; the equitable nature of bankruptcy; and the
purposes underpinning Chapter 11.
We begin with 11 U.S.C. S 1112(b), which allows the
court to dismiss or convert a Chapter 11 petition for cause
including--
(1) continuing loss to or diminution of the es tate
and absence of a reasonable likelihood of
rehabilitation;
(2) inability to effectuate a plan;
(3) unreasonable delay by the debtor that is
prejudicial to the creditors;
(4) failure to propose a plan [of reorganiz ation]
within any time fixed by the court;
(5) denial of confirmation of every proposed plan
and denial of a request made for additional time for
filing another plan or a modification of a plan;
(6) revocation of an order of confirmation u nder
section 1144 of this title, and denial of confirmation
of another plan or a modified plan under section
1129 of this title;
(7) inability to effectuate substantial
consummation of a confirmed plan;
(8) material default by the debtor with respec t to a
confirmed plan;
(9) termination of a plan by reason of the
occurrence of a condition specified in the plan; or
(10) nonpayment of any fees or charges require d
under chapter 123 of title 28.
11 U.S.C. S1112(b). As many courts and commentators
have noted, this language neither requires nor prohibits
10
imposition of a "good faith" requirement on Chapter 11
petitions. But we have noted the provision that"cause"
"includ[es]" the ten enumerated factors strongly suggests
those factors are not exhaustive and that a court may
consider whether other facts and circumstances qualify as
"cause." See Brown, 951 F.2d at 572; 7 Collier on
Bankruptcy at 1112-20. That interpretation of S 1112(b) is
strengthened by the statute's legislative history, which
provides in part:
[The] list [contained in S 1112(b)] is not exhaustive. The
court will be able to consider other factors as they
arise, and to use its equitable powers to reach an
appropriate result in individual cases.
H.R.Rep. No. 595, at 405, reprinted in 1978 U.S.S.C.A.N.
5963, 6362. The Bankruptcy Code's rules of construction,
which provide that "include" and "including" are not
limiting terms, also support an expansive reading of
S 1112(b). See 11 U.S.C. S 102(3). Section 1112(b), by its
terms, therefore, does not preclude consideration of
unenumerated factors in determining "cause."
We also note the courts of appeals that have considered
the issue have held that the absence of good faith
constitutes "cause" to dismiss a Chapter 11 petition under
S 1112(b). See, e.g., Trident Assocs. Ltd. Partnership v.
Metropolitan Life Ins. Co. (In re Trident Assocs. Ltd.
Partnership), 52 F.3d 127, 130 (6th Cir. 1995); Marsch v.
Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994);
Humble Place Joint Ventures v. Foray (In re Humble Place
Joint Venture), 936 F.2d 814, 816 (5th Cir. 1991); First Nat'l
Bank of Sioux City v. Kerr (In re Kerr), 908 F.2d 400, 404
(8th Cir. 1990); Phoenix Piccadilly, Ltd. v. Life Ins. Co. (In re
Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1394 (11th Cir.
1988). In addition, several other courts of appeals have
concluded that Chapter 11 imposes a general good faith
requirement under which petitions can be dismissed for
bad faith. See, e.g., C-TC 9th Ave. Partnership v. Norton Co.
(In re C-TC 9th Ave. Partnership), 113 F.3d 1304 (2d Cir.
1997); Carolin Corp. v. Miller, 886 F.2d 693, 698 (4th Cir.
1989); Connell v. Coastal Cable T.V., Inc. (In re Coastal
Cable T.V., Inc.), 709 F.2d 762, 764 (1st Cir. 1983) (Breyer,
J.). Numerous district and bankruptcy courts have reached
11
the same conclusion under either or both approaches. See
Carlos J. Cuevas, Good Faith and Chapter 11: Standard
that Should Be Employed to Dismiss Bad Faith Chapter 11
Cases, 60 Tenn. L. Rev. 525 (1993).9
The "good faith" requirement for Chapter 11 petitioners
has strong roots in equity. The court in In re Victory
Construction Co., Inc., in first articulating the good faith
requirement under the current Bankruptcy Code,
highlighted the equitable nature of the doctrine when it
explained:
Review and analysis of [the bankruptcy laws and
relevant cases] disclose a common theme and objective
[underlying the reorganization provisions]: avoidance of
the consequences of economic dismemberment and
liquidation, and the preservation of ongoing values in a
manner which does equity and is fair to rights and
interests of the parties affected. But the perimeters of
this potential mark the borderline between fulfillment
and perversion; between accomplishing the objectives
of rehabilitation and reorganization, and the use of
these statutory provisions to destroy and undermine
the legitimate rights and interests of those intended to
benefit by this statutory policy. That borderline is
patrolled by courts of equity, armed with the doctrine
of "good faith" . . . .
9 B.R. 549, 558 (Bankr. C.D. Calif. 1981) order stayed
Hadley v. Victory Construction Co., Inc. (In re Victory
Construction Co., Inc.), 9 B.R. 570 (Bankr. C.D. Calif. 1981).
A debtor who attempts to garner shelter under the
Bankruptcy Code, therefore, must act in conformity with
the Code's underlying principles. See Little Creek Dev. Co.
v. Commonwealth Mortgage Corp. (In re Little Creek Dev.
Co.), 779 F.2d 1068, 1076 (5th Cir. 1986) ("[A] good faith
standard protects the jurisdictional integrity of the
bankruptcy courts by rendering their equitable weapons
_________________________________________________________________
9. We need not dwell on the fine distinctions between the two closely
related approaches. See 7 Collier on Bankruptcy at 1112-62-1112-64.
Despite analytic differences, the conclusion of every court of appeals to
address the issue is clear--Chapter 11 petitions must be filed in good
faith or they are subject to dismissal.
12
. . . available only to those debtors and creditors with `clean
hands.' "); see also 7 Collier on Bankruptcy at 1112-68
("Another basic underpinning of the good faith doctrine is
the equitable concept of `clean hands.' As a general matter,
bankruptcy relief is equitable in nature, and, as a general
rule, equitable remedies are not available to any party who
fails to act in an equitable fashion.").
Finally, we believe a good faith requirement is supported
by the purposes underlying Chapter 11. As the Court of
Appeals for the Fifth Circuit noted,
[A good faith standard] furthers the balancing process
between the interests of debtors and creditors which
characterizes so many provisions of the bankruptcy
laws and is necessary to legitimize the delay and costs
imposed upon parties to a bankruptcy. Requirement of
good faith prevents abuse of the bankruptcy process by
debtors whose overriding motive is to delay creditors
without benefitting them in any way . . . .
In re Little Creek, 779 F.2d at 1072; see also Carolin, 886
F.2d at 698 (stating that court's ability to impose good faith
requirement is "indispensable to proper accomplishment of
the basic purposes of Chapter 11 protection").
After considering the language of S 1112(b), its legislative
history, the decisions of other courts of appeals, the
equitable nature of bankruptcy proceedings, and the
purposes behind Chapter 11, we conclude a Chapter 11
petition is subject to dismissal for "cause" under 11 U.S.C.
S 1112(b) unless it is filed in good faith.
B.
Having determined that S 1112(b) imposes a good-faith
requirement on Chapter 11 petitions, we consider whether
SGL Carbon's Chapter 11 petition was filed in good faith.10
_________________________________________________________________
10. Once at issue, the burden falls upon the bankruptcy petitioner to
establish that the petition has been filed in"good faith." See, e.g., In
re
Fox, 232 B.R. 229, 233 (Bankr. D. Kan. 1999); Stage I Land Co. v. United
States, 71 B.R. 225, 229 (D. Minn. 1986). See also 7 Collier on
Bankruptcy at 1112-53 ("[I]f the issue is whether the petition was filed
in good faith, the burden rests on the petitioner.").
13
The requisite fact intensive inquiry requires determining
where SGL Carbon's petition falls along the spectrum
ranging from the clearly acceptable to the patently abusive.
We first review the District Court's findings of fact and then
examine the totality of facts and circumstances to
determine whether they support a finding of good faith. See
In re Trident, 52 F.3d at 131; In re Marsch, 36 F.3d at 829;
In re Laguna, 30 F.3d at 738.
i.
As discussed in part I, the District Court found SGL
Carbon's Chapter 11 petition was filed in good faith for two
reasons: first, because the distractions caused by the
antitrust litigation "posed a serious threat to[SGL
Carbon's] continued successful operations," and second,
because the litigation might result in a judgment that could
cause the company "financial and operational ruin," SGL
was required to file when it did. SGL Carbon, 233 B.R. at
291. Although mindful of the careful consideration given by
the able District Court, we believe each of thesefindings of
fact was clearly erroneous.11
Although there is some evidence that defending against
the antitrust litigation occupied some officers' time, there is
no evidence this "distraction" posed a "serious threat" to
the company's operational well being. At his deposition,
Theodore Breyer12 testified the antitrust litigation consumed
a significant portion of his time. But Breyer also noted the
Carbon/Graphite Business Unit had met all of itsfinancial
targets during the nine months preceding filing.
Additionally, Breyer testified that only his business unit
was heavily involved in the antitrust litigation, recognizing
that any management distraction effecting the rest of SGL
Carbon resulted from the bankruptcy filing and not the
antitrust litigation. As noted, SGL AG and SGL Carbon
_________________________________________________________________
11. Although we conclude these findings were clearly erroneous, we do
not hold that under the proper circumstances managerial distraction
and other litigation harms may not constitute factors contributing to
good faith.
12. As noted, Breyer is the Vice President in charge of SGL Carbon's
North American Carbon/Graphite Business Unit.
14
officers insisted the company was financially healthy
despite the litigation. In addition, SGL AG's Chairman
denied that the litigation was having a "material negative
impact on [SGL Carbon's] operations." In light of all the
evidence, we believe the District Court's finding to the
contrary is mistaken. See United States v. U.S. Gypsum Co.,
333 U.S. 364, 395 (1948).
We also find clearly erroneous that SGL Carbon's
Chapter 11 petition was filed at the appropriate time to
avoid the possibility of a significant judgment that "could
very well force [SGL Carbon] out of business." There is no
evidence that the possible antitrust judgments might force
SGL Carbon out of business. To the contrary, the record is
replete with evidence of SGL Carbon's economic strength.
At the time of filing, SGL Carbon's assets had a stipulated
book value of $400 million, only $100,000 of which was
encumbered. On the date of the petition, SGL Carbon had
$276 million in fixed and non-disputed liabilities. Of those
liabilities, only $26 million were held by outsiders as the
remaining liabilities were either owed to or guaranteed by
SGL AG. Although SGL Carbon's parent, SGL AG, recorded
a $240 million charge on its books as "its best estimate of
the potential liability and expenses of the SGL Carbon
Group in connection with all civil and criminal antitrust
matters," SGL Carbon is only one part of the SGL Carbon
Group covered by the reserve. Furthermore, at the time
SGL Carbon filed its petition, that is, before SGL AG paid
its $135 million criminal fine, the $240 million reserve was
untouched. In documents accompanying its petition, SGL
Carbon estimated the liquidation value of the antitrust
claims at $54 million. In contrast, no evidence was
presented with respect to the amount sought by the
antitrust plaintiffs beyond SGL Carbon's repeated
characterization of their being "unreasonable."
Whether or not SGL Carbon faces a potentially crippling
antitrust judgment, it is incorrect to conclude it had to file
when it did. As noted, SGL Carbon faces no immediate
financial difficulty. All the evidence shows that management
repeatedly asserted the company was financially healthy at
the time of the filing. Although the District Court believed
the litigation might result in a judgment causing "financial
15
and operational ruin" we believe that on the facts here, that
assessment was premature. A Chapter 11 petition would
impose an automatic stay on all efforts to collect the
judgment and would allow the company the exclusive right
to formulate a reorganization plan under which the amount
of the judgment could be adjusted to allow the company to
reorganize. SGL Carbon has offered no evidence it could not
effectively use those protections as the prospect of such a
judgment became imminent.13 The District Court's finding
that the petition had to be filed at that particular time to
avoid financial ruin and therefore was made in good faith is
clearly contradicted by the evidence.
The District Court was correct in noting that the
Bankruptcy Code encourages early filing. See SGL Carbon,
233 B.R. at 291. It is well established that a debtor need
not be insolvent before filing for bankruptcy protection. See,
e.g., In re The Bible Speaks, 65 B.R. 415, 424 (Bankr. D.
Mass. 1986); In re Talladega Steaks, Inc., 50 B.R. 42, 44
(Bankr. N.D. Ala. 1985). See also Daniel R. Cowans,
Bankruptcy Law and Practice (7th ed. 1998) 232. It also is
clear that the drafters of the Bankruptcy Code understood
the need for early access to bankruptcy relief to allow a
debtor to rehabilitate its business before it is faced with a
hopeless situation.14 Such encouragement, however, does
not open the door to premature filing, nor does it allow for
the filing of a bankruptcy petition that lacks a valid
reorganizational purpose. See, e.g., In re Marsch, 36 F.3d at
838; In re Coastal Cable, 709 F.2d at 764; In re Ravick
Corp., 106 B.R. 834, 843 (Bankr. D.N.J. 1989).
SGL Carbon, therefore, is correct that the Bankruptcy
Code does not require specific evidence of insolvency for a
_________________________________________________________________
13. The Texaco Corporation's use of the bankruptcy protections is
instructive. See In re Texaco, Inc., 84 B.R. 893 (Bank. S.D.N.Y. 1988).
Texaco resorted to bankruptcy only after suffering an $11 billion
judgment. Even saddled with such a large judgment, bankruptcy
provided Texaco a means of reorganizing and continuing as a going
concern.
14. See, e.g., Alan N. Resnick, Bankruptcy As A Vehicle for Resolving
Enterprise-Threatening Mass Tort Liability, 148 U. Pa. L. Rev. ____
(forthcoming 2000) M12.
16
voluntary Chapter 11 filing. But SGL Carbon cites no case
holding that petitions filed by financially healthy companies
cannot be subject to dismissal for cause. At any rate, as we
explain more fully, SGL Carbon's ability to meet its debts is
but one of many factors compelling the conclusion it did
not enter Chapter 11 with a valid reorganizational purpose.
We do not hold that a company cannot file a valid
Chapter 11 petition until after a massive judgment has
been entered against it. Courts have allowed companies to
seek the protections of bankruptcy when faced with
pending litigation that posed a serious threat to the
companies' long term viability. See, e.g., Baker v. Latham
Sparrowbush Assocs. (In re Cohoes Indus. Terminal Inc.),
931 F.2d 222 (2d Cir. 1991); In re The Bible Speaks, 65
B.R. 415 (Bankr. D. Mass. 1986); In re Johns-Manville, 36
B.R. 727 (Bankr. S.D.N.Y. 1984). In those cases, however,
debtors experienced serious financial and/or managerial
difficulties at the time of filing. In Cohoes, the Court of
Appeals for the Second Circuit found a good faithfiling, in
part, because "it [was] clear that Cohoes[the debtor] was
encountering financial stress at the time it filed its petition
. . . ." 931 F.2d at 228. In Bible Speaks, pending litigation
had already had an adverse effect on the debtor'sfinancial
well being as it was experiencing "a cash flow problem
which prevent[ed] it from meeting its current obligations,"
compounded by an inability to obtain financing. 65 B.R. at
426. In Johns-Manville, the debtor was facing significant
financial difficulties. A growing wave of asbestos-related
claims forced the debtor to either book a $1.9 billion
reserve thereby triggering potential default on a $450
million debt which, in turn, could have forced partial
liquidation, or file a Chapter 11 petition. See In re Johns-
Manville, 36 B.R. at 730. Large judgments had already been
entered against Johns-Manville and the prospect loomed of
tens of thousands of asbestos health-related suits over the
course of 20-30 years.15 See id. at 729. See also Sandrea
_________________________________________________________________
15. A large number of pending or potential claims also contributed to two
other mass tort related bankruptcy petitions. The 1985 bankruptcy
petition of the A.H. Robins Company came only after"the Company had
settled 9,238 claims for approximately $530,000,000" and "still faced
17
Friedman, Note, Manville: Good Faith Reorganization or
"Insulated" Bankruptcy, 12 Hofstra L. Rev. 121 (1983).
For these reasons, SGL Carbon's reliance on those cases
is misplaced. The mere possibility of a future need to file,
without more, does not establish that a petition wasfiled in
"good faith." See, e.g., In re Cohoes Indus. Terminal Inc.,
931 F.2d at 228 ("Although a debtor need not be in
extremis in order to file [a Chapter 11] petition, it must, at
least, face such financial difficulty that, if it did not file at
that time, it could anticipate the need to file in the future.").
SGL Carbon, by its own account, and by all objective
indicia, experienced no financial difficulty at the time of
filing nor any significant managerial distraction. Although
SGL Carbon may have to file for bankruptcy in the future,
such an attenuated possibility standing alone is not
sufficient to establish the good faith of its present petition.
ii.
We also consider whether other evidence establishes the
good faith of SGL Carbon's petition, that is, whether the
totality of facts and circumstances support a finding of
good faith. Courts have not been unanimous about what
constitutes "good faith" in the Chapter 11filing context.
See, e.g., In re Trident, 52 F.3d at 131 (setting forth eight
factors for courts to consider); In re Marsch, 36 F.3d at
828-29 (describing different approaches); In re Kerr, 908
F.2d at 404 (defining "bad faith" as "a pattern of
concealment, evasion, and direct violations of the Code or
court order which clearly establishes an improper motive
. . . ."); Carolin, 886 F.2d at 700-02 (examining approaches
of other courts and holding a petition lacks good faith if
_________________________________________________________________
over five thousand pending cases in state and federal court." In re A.H.
Robins, 89 B.R. 555, 557 (Bankr. E.D. Va. 1988). Similarly, at the time
it filed for bankruptcy Dow Corning Corporation faced 440,000 potential
claimants which had resulted in the filing of more than "19,000
individual silicone-gel breast implant lawsuits and at least 45 putative
silicone-gel breast implant class actions." In re Dow Corning Corp., 211
B.R. 545, 553 (Bankr. E.D. Mich. 1997). See also Richard L. Marcus &
Edward F. Sherman, Complex Litigation (3d ed. 1998) 205-07.
18
reorganization is objectively futile and if petitioner displays
subjective bad faith); In re Phoenix Piccadilly , 849 F.2d at
1394 (noting that courts may consider "any factors which
evidence `an intent to abuse the judicial process and the
purposes of the reorganization provisions' or . . . factors
which evidence that the petition was filed `to delay or
frustrate the legitimate efforts of secured creditors to
enforce their rights' " (citations omitted)); In re Little Creek
Dev. Co., 779 F.2d at 1072-73 (5th Cir. 1986) (instructing
bankruptcy courts to consider "the debtor's financial
condition, motives, and the local financial realities"). See
also Cuevas, supra, at 529 (noting different approaches).
Despite those differing approaches, several cases hold
that a Chapter 11 petition is not filed in good faith unless
it serves a valid reorganizational purpose. See, e.g., In re
Marsch, 36 F.3d at 828; In re Coastal Cable, 709 F.2d at
764 (stating that there must be "some relation" between
filing and the "reorganization-related purposes that
[Chapter 11] was designed to serve"); In re Ravick Corp.,
106 B.R. 834, 843 (Bankr. D.N.J. 1989). Similarly, because
filing a Chapter 11 petition merely to obtain tactical
litigation advantages is not within "the legitimate scope of
the bankruptcy laws," In re Marsch, 36 F.3d at 828, courts
have typically dismissed Chapter 11 petitions under these
circumstances as well. See id.; In re Argus Group 1700, Inc.,
206 B.R. 757, 765-66 (E.D. Pa. 1997); Furness v. Lilienfield,
35 B.R. 1006, 1013 (D. Md. 1983) ("The Bankruptcy
provisions are intended to benefit those in genuine financial
distress. They are not intended to be used as a mechanism
to orchestrate pending litigation."); In re HBA East, Inc., 87
B.R. 248, 259-60 (Bankr. E.D.N.Y. 1988) ("As a general rule
where, as here, the timing of the filing of a Chapter 11
petition is such that there can be no doubt that the
primary, if not sole, purpose of the filing was a litigation
tactic, the petition may be dismissed as not beingfiled in
good faith."); In re Martin, 51 B.R. 490, 495 (Bankr. M.D.
Fla. 1985). The In re Marsch Court articulated the
relationship between the good faith determination and the
dismissal of petitions filed merely for tactical advantage:
The term "good faith" is somewhat misleading. Though
it suggests that the debtor's subjective intent is
19
determinative, this is not the case. Instead, the"good
faith" filing requirement encompasses several, distinct
equitable limitations that courts have placed on
Chapter 11 filings. Courts have implied such
limitations to deter filings that seek to achieve
objectives outside the legitimate scope of the
bankruptcy laws. Pursuant to 11 U.S.C. S 1112(b),
courts have dismissed cases filed for a variety of
tactical reasons unrelated to reorganization.
In re Marsch, 36 F.3d at 828 (citations omitted).
It is easy to see why courts have required Chapter 11
petitioners to act within the scope of the bankruptcy laws
to further a valid reorganizational purpose. Chapter 11
vests petitioners with considerable powers--the automatic
stay, the exclusive right to propose a reorganization plan,
the discharge of debts, etc.--that can impose significant
hardship on particular creditors. When financially troubled
petitioners seek a chance to remain in business, the
exercise of those powers is justified. But this is not so when
a petitioner's aims lie outside those of the Bankruptcy
Code. See United Sav. Ass'n v. Timbers of Inwood Forest
Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.),
808 F.2d 363, 373 (5th Cir. 1987) (en banc), aff'd, 484
U.S. 365 (1988) (stating that if Chapter 11 plan does not
have a rehabilitative purpose, the "statutory provisions
designed to accomplish the reorganizational objectives
become destructive of the legitimate rights and interests of
creditors"); In re Little Creek, 779 F.2d at 1072 (explaining
that Chapter 11 powers should be given only to debtors
with "clean hands"); Furness, 35 B.R. at 1009 ("Chapter 11
was designed to give those teetering on the verge of a fatal
financial plummet an opportunity to reorganize on solid
ground and try again, not to give profitable enterprises an
opportunity to evade contractual or other liabilities."); see
also 7 Collier on Bankruptcy at 1112-22 (stating that
dismissal is appropriate when costs of Chapter 11 are not
justified).
Courts, therefore, have consistently dismissed Chapter
11 petitions filed by financially healthy companies with no
need to reorganize under the protection of Chapter 11. See
In re Marsch, 36 F.3d at 828-29; In re Argus Group 1700,
20
206 B.R. at 765-66; Furness, 35 B.R. at 1011-13; In re
Talladega Steaks, Inc., 50 B.R. 42, 44 (Bankr. N.D. Ala.
1985). Those courts have recognized that if a petitioner has
no need to rehabilitate or reorganize, its petition cannot
serve the rehabilititative purpose for which Chapter 11 was
designed. See In re Winshall Settlor's Trust, 758 F.2d 1136,
1137 (6th Cir. 1985) ("The purpose of Chapter 11
reorganization is to assist financially distressed business
enterprises by providing them with breathing space in
which to return to a viable state."); see also S. Rep. No. 95-
989, at 9 reprinted in 1978 U.S.C.C.A.N. 5787, 5795 (noting
that "Chapter 11 deals with the reorganization of a
financially distressed enterprise . . . ").
The absence of a valid reorganizational purpose 16 and the
consequent lack of good faith by SGL Carbon is evident
here. SGL Carbon's financial disclosure documents give no
indication the company needed to reorganize under Chapter
11 protection. Prior to filing, SGL Carbon had assets of
$400 million and liabilities of only $276 million, or a net
worth of $124 million. In addition, there is no evidence that
SGL Carbon had difficulty meeting its debts as they came
due, that it had any overdue debts, or that it had defaulted
on any debts. Nor is there any evidence that SGL had any
difficulty raising or borrowing money, or otherwise had
impaired access to the capital markets.
Statements by SGL Carbon and its officials confirm the
company did not need to reorganize under Chapter 11. As
discussed, in a press release issued when SGL Carbonfiled
its petition, the company's president insisted SGL Carbon
was "financially healthy" and that its "normal business
operations" would continue despite bankruptcy. In
addition, SGL AG's Chairman Robert Koehler stated in a
conference call with securities analysts that SGL Carbon
was experiencing "healthy and growing success" and denied
that the class action antitrust litigation was materially
interfering with SGL Carbon's operations or its customer
_________________________________________________________________
16. By focusing on whether there is a valid reorganization purpose, we
do not hold that a lack of good faith is limited to this situation.
Indeed,
"no list is exhaustive of all the factors which could be relevant when
analyzing a particular debtor's good faith." In re Laguna, 30 F.3d at 738.
21
relationships. Koehler added that unlike most Chapter 11
cases, SGL Carbon's petition did not involve "serious
insolvency or credit problems." SGL Carbon Vice President
Theodore Breyer acknowledged in his deposition that SGL
Carbon had no defaults nor any financial distress when it
filed for Chapter 11.
An examination of the reorganization plan SGL Carbon
filed simultaneously with its Chapter 11 petition also
suggests the petition was not motivated by a desire to
reorganize or rehabilitate SGL Carbon's business. 17 Under
the proposed plan, all creditors--including SGL Carbon's
parent SGL AG--other than civil antitrust judgment
creditors are to be paid in full in cash. Antitrust judgment
creditors, by contrast, would be required to accept limited-
time credits to purchase SGL Carbon's products. 18 The
plan's differing treatment of creditors suggests SGL
Carbon's petition was not filed to reorganize the company
but rather to put pressure on antitrust plaintiffs to accept
the company's settlement terms.19
_________________________________________________________________
17. Although the "good faith" of the reorganization plan is not before
this
court, the features of the proposed plan help illuminate the lack of good
faith in the filing. Using the plan to reason backwards concerning SGL
Carbon's motivations is consistent with the practices of bankruptcy
courts. As one bankruptcy court has noted:
Much of the case law on good faith draws heavily upon the time-
honored method of analyzing and establishing a nexus between
cause and effect. Long a modus habilis not only in bankruptcy but
in criminal and tort law and in virtually any legal inquiry where
intent is an issue, this sort of posteriori inquiry permits courts
to
work backwards from effect to cause--to reason, that is, that if
the
probable effect of a reorganization plan is to treat unfairly of
creditors, then the probable cause of the filing was bad faith.
In re Kahn, 34 B.R. 574, 575 (Bankr. W.D. Ky. 1983).
18. Although the plan is not at issue, we note that an analogous
arrangement was held inappropriate as a means of resolving an action
in a nonbankruptcy context. See In re General Motors Corp. Pick-up Truck
Fuel Tank Products Liability, 55 F.3d 768 (3d Cir. 1995).
19. Although it is true the proposed plan would be subject to a separate
"good faith" determination by the bankruptcy court before it could
implemented, see 11 U.S.C. S 1129(a)(3), that is only appropriate if the
22
Comments made by SGL Carbon and SGL AG officers
support that view of SGL Carbon's motives for filing for
Chapter 11. Those officers expressly and repeatedly
acknowledged Chapter 11 petition was filed solely to gain
tactical litigation advantages. See, e.g., December 17, 1998
Press Release; Koehler Conference Call of December 17,
1998 ("We are [filing] merely . . . because of the excessive
demands [of litigants]."); Breyer Deposition (filing for
Chapter 11 would "change the negotiating platform" and
"increase the pressure on . . . plaintiffs to settle"). In
addition, under the heading "Factors Leading to the
Chapter 11 Filing," SGL Carbon's bankruptcy Disclosure
Statement discusses only the civil antitrust litigation and
the difficulties it was having in reaching a settlement with
the remaining plaintiffs.
On appeal, SGL Carbon plays down the litigation tactics
behind its Chapter 11 petition and instead claims it was
forced into Chapter 11 by serious economic difficulty
stemming from the litigation. The company alleges this
difficulty came in three forms: harmful distraction of its
management, the possibility that the litigation would result
in a judgment that "could very well force [SGL Carbon] out
of business," and harm to its customer relationships with
plaintiffs. Because we have already concluded thefirst two
arguments are not supported by the facts, we will address
only the third.
We are not convinced by SGL Carbon's claim that a
Chapter 11 filing was necessary because we see no
evidence the antitrust litigation was significantly harming
its business relationships with the antitrust plaintiffs. For
example, none of SGL Carbon's officers stated that any
customer terminated its purchases from the company
_________________________________________________________________
bankruptcy petition properly belongs before the bankruptcy court. In a
case, such as this one, where a debtor attempts to abuse the bankruptcy
process, proceedings should end well before formal consideration of the
plan. Cf. In re Metropolitan Realty Corp., 433 F.2d 676, 679 (5th Cir.
1970) ("As soon as the lack of good faith affirmatively appeared, the
district court acted properly in dismissing the petition even though the
plan stage had not been reached.").
23
because of the litigation.20 As noted, SGL AG Chairman
Koehler denied the litigation was having a material impact
on SGL Carbon's customer relationships. We note that SGL
Carbon offered no evidence (testamentary or otherwise)
from any customer on this issue. It is also significant that
SGL Carbon's Disclosure Statement, which accompanied its
petition, does not mention harm to customer relationships.
Nor did SGL Carbon attempt to explain how filing for
Chapter 11 would improve its customer relationships. As
noted, many of those customers are plaintiffs in the
antitrust litigation. Moreover, the evidence before the
District Court indicated SGL Carbon's customers eliminated
their orders only after the Chapter 11 petition wasfiled,
suggesting it was the petition, rather than the litigation,
that caused the harm of which the company now
complains. After sifting through the evidence, the only
support for SGL Carbon's argument are its conclusory
allegations. We do not believe those suffice.
SGL Carbon places great emphasis on In re The Bible
Speaks, 65 B.R. 415 (Bankr. D. Mass. 1986), and In re
Johns-Manville, 36 B.R. 727 (Bankr. S.D.N.Y. 1984), two
bankruptcy court cases relied on by the District Court.21
After considering those cases, we conclude they are not
dispositive.
SGL Carbon cites In re The Bible Speaks to support its
argument that the prospect of a significant litigation
judgment by itself establishes the good faith of a Chapter
11 petition. But the litigation in Bible Speaks posed
substantially different problems than does the antitrust
litigation here. In Bible Speaks, the bankruptcy court found
_________________________________________________________________
20. In fact, SGL Carbon Vice President Breyer testified that he could only
be certain that one customer had even reduced its purchases from SGL
Carbon prior to its Chapter 11 petition. Maintaining that a second
customer may also have reduced its purchases, Breyer could not say
why either customer had reduced its purchases. Significantly, Breyer
testified that no customer had terminated its relationship with SGL
Carbon until after the filing.
21. We note that SGL Carbon has not supported its argument that
pending litigation establishes the good faith of a Chapter 11 filing with
any cases from this circuit, or, indeed, any cases other than the
distinguishable Bible Speaks and Johns-Manville.
24
the litigation had "already produced a significant effect" on
the debtor; because of the uncertainty surrounding the
litigation, the debtor was "unable to obtainfinancing." 65
B.R. at 426. SGL Carbon has not alleged the antitrust
litigation has had a similar effect and such evidence is
absent from the record. In addition, the court in Bible
Speaks found that a significant judgment in the litigation
would "probably terminate [the debtor's] existence." Id.
There is no evidence SGL Carbon could not effectively use
Chapter 11 following a judgment in the antitrust litigation.
Also, the court found the litigation prevented the debtor in
Bible Speaks from making "financing [arrangements] or any
type of long range plans." Id. at 427. SGL Carbon has not
alleged the antitrust litigation has impeded itsfinancing or
planning activities; instead, the petitioner has repeatedly
insisted the litigation has had no material effect on its
operations. Finally, the court in Bible Speaks found that
dismissal was not warranted because Chapter 11 was in
the best interests of the debtor and its creditor. See id. at
429. There is no such finding in this case.
We also believe reliance on In re Johns-Mansville is
misplaced. As an initial matter, the Johns-Manville Court
had a narrow view of what constitutes "good faith." After
expressing doubt that S 1112(b) imposes a good-faith
requirement in all Chapter 11 cases, see 36 B.R. at 737,
the court suggested that a Chapter 11 petition lacks good
faith only if filed by a creditor-less company formed as a
sham solely for the purpose of filing a bankruptcy petition,
by a company that never operated legitimately, or by a
company wishing to forestall tax liability or deed of trust
powers. See id. at 737-38. As noted, most of the courts of
appeals believe other facts and circumstances may evidence
lack of good faith.
Johns-Mansville is also factually distinguishable. In
Johns-Manville, the bankruptcy court found the company
had a "compelling" and "pressing" need to reorganize. Id. at
730. As we have explained, SGL Carbon has no such need.22
_________________________________________________________________
22. For example, the Johns-Manville Court noted that the company
would have had to book a $1.9 billion tort liability reserve had it not
filed
for Chapter 11. See id. at 730. This booking would in turn have
accelerated $450 million in outstanding debt and could have forced
liquidation. SGL Carbon has not shown the failure tofile for Chapter 11
would cause it such harm.
25
Prior to the Chapter 11 filing, the Johns Manville plaintiffs
had recovered nearly $4 million in punitive damages
against the company. See In re Johns-Manville, 36 B.R.
743, 746 (Bankr. S.D. N.Y. 1984). The litigation effected by
SGL's Chapter 11 petition, in contrast, is in its nascent
stages. Johns-Manville faced "approximately 16,000
lawsuits pending as of the filing date" with the prospect of
the "filing of an even more staggering number of suits" over
the course of 20-30 years. Johns-Manville, 36 B.R. at 729.
By contrast, SGL Carbon faces a known and finite number
of suits. In addition, the Johns-Manville Court made clear
that its decision was based on factors other than the
debtor's financial health. Unlike this case, the Johns-
Manville creditors pursued their motion only after sixteen
months of bargaining over an acceptable reorganization
plan resulted in a deadlock. In denying the creditors'
motion to dismiss, the court stated it would "bear in mind
the strategical motivations underlying [creditors'] pursuit of
these motions at this time" and would recognize"the
progress toward a successful, perhaps consensual,
reorganization that has already taken place." Id. at 731.
The Official Committee of Unsecured Creditors here did not
delay in filing the motion to dismiss SGL Carbon's Chapter
11 petition; nor does SGL Carbon allege the creditors'
motion was spurred by an intent to extract concessions in
stalled negotiations. This case, therefore, involves neither
the creditors' "strategical motivations" nor the "progress
towards a successful . . . reorganization" that colored the
Johns-Manville Court's opinion. Id.
Based on the facts and circumstances of this case, we
conclude SGL Carbon's Chapter 11 petition lacks a valid
reorganizational purpose and consequently lacks good faith
making it subject to dismissal "for cause" under 11 U.S.C.
S 1112(b).23
_________________________________________________________________
23. Because we conclude SGL Carbon's petition should be dismissed, we
need not address the creditors' argument that the failure to dismiss
would deprive it of its Seventh Amendment right to try its antitrust
claims before a jury.
26
C.
In reaching our conclusion, we are cognizant that it is
growing increasingly difficult to settle large scale litigation.
See, e.g., Ortiz v. Fibreboard Corp., 119 S. Ct. 2295 (1999);
Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997). We
recognize that companies that face massive potential
liability and litigation costs continue to seek ways to rapidly
conclude litigation to enable a continuation of their
business and to maintain access to the capital markets. As
evidenced by SGL Carbon's actions in this case, the
Bankruptcy Code presents an inviting safe harbor for such
companies. But this lure creates the possibility of abuse
which must be guarded against to protect the integrity of
the bankruptcy system and the rights of all involved in
such proceedings. Allowing SGL Carbon's bankruptcy
under these circumstances seems to us a significant
departure from the use of Chapter 11 to validly reorganize
financially troubled businesses.
IV.
For the reasons stated, we will reverse the judgment of
the District Court and remand to the District Court so that
it may dismiss SGL Carbon's Chapter 11 petition.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
27