What Are Standards For Bad Faith Dismissal Of A Chapter 11 Case? (In re JPK)

By: Donald L Swanson

What are the legal standards for dismissing a regular Chapter 11 or Subchapter V case for being filed in bad faith?  

This question is addressed in In re JPK Newco, LLC, Case No. 25-0200 in the District of Columbia Bankruptcy Court (decided June 12, 2026). What follows is a summary of the In re JPK opinion.

Facts

This Subchapter V bankruptcy case is part of a long and sordid history of litigation between Two Creditors and Debtor, including an extensive motions practice in Debtor’s previous Chapter 11 case and in numerous adversary proceedings.

Debtor is a limited liability company with a principal place of business in McLean, Virginia. Debtor’s bankruptcy has:

• no secured claims; and
• only three unsecured claims, two of which are contingent, unliquidated, and disputed claims of the Two Creditors arising out of prepetition litigation.  

Debtor is a special purpose entity formed to own and hold two junior promissory notes (one from each of the Two Creditors), secured by junior liens on parcels of real property located in Washington, DC. Debtor’s only other asset is an unsecured promissory note payable from a Third Party that is past due and owing.

At all times, Debtor has been candid about this case being filed as an attempt to resolve the ongoing litigation with Two Creditors.

Debtor filed a previous Chapter 11 case, which was dismissed on motion by the U.S. Trustee, without a hearing, based on Debtor’s consent and on lack of response from any creditor.

In the pending Subchapter V, Two Creditors promptly file a Motion to Dismiss Debtor’s Petition for cause—as not filed in good faith. 

Debtor timely submits its Subchapter V Plan, which makes Plan funding contingent on both, (i) resolution of litigation with Two Creditors, and (ii) recovery on the two promissory notes owed by Two Creditors and on the promissory note owed by Third Party.

In addition to their Motion to Dismiss, Two Creditors also object to confirmation of Debtor’s Plan and to Debtor’s eligibility for Subchapter V relief.

Standard for Determining Bad Faith under § 1112

Under § 1112, a court may dismiss a case “for cause,” and § 1112(b)(4) provides a non-exhaustive list of “cause” circumstances.

Courts have added that a petition filed in bad faith may also be dismissed for “cause,” though bad faith is not included in the § 1112(b)(4) list. But there is a split among circuit courts of appeals on what standard to apply in assessing bad faith.

–An Early Standard

Carolin Corp. v. Miller, 886 F.2d 693 (4th Cir. 1989), adopts a two-part test for determining bad faith, requiring proof of both (i) objective futility (i.e., whether a reorganization was realistically possible), and (ii) subjective intent of bad faith based on the totality of circumstances (the “Carolin Test”). The Second and Third Circuits also adopt this test.

–A Contrary Standard

Conversely, the Eleventh Circuit holds that subjective intent based upon the totality of circumstances, alone, may establish bad faith for dismissal, expressly declining to include an objective futility element.

–A Middle Standard

Somewhat in the middle, the Fifth Circuit says that courts must conduct a fact-specific inquiry of all factors – both objective and subjective.

–Some Common Ground

All circuits addressing the issue agree that the subjective intent component is a totality of circumstances analysis, but they provide differing lists of factors to consider.

D.C. Bankruptcy Court Precedents

This D.C. Bankruptcy Court has two published opinions on dismissal for bad faith. Each opinion recognizes the Carolin Test but finds that the case before it involves fact-specific and limited exceptions to the Carolin Test.

–Latest D.C. Opinion

In re Allen, 300 B.R. 105, 123 (Bankr. D.D.C. 2003), addresses bad faith as a basis for annulling the automatic stay on a serial bankruptcy filer and says:

• “both objective evidence of a fundamentally unfair result and subjective evidence that the debtor filed a petition for a fundamentally unfair purposes . . . are relevant to the good faith inquiry”; but
• “when applied to serial filers, the Carolin Test may be modified to eliminate the need to consider objective futility when the debtor’s actions inherently constitute an abuse of the bankruptcy system.”

–Prior D.C. Opinion

Allen relies on In re Franklin Mortgage & Investment Company, Inc., 143 B.R. 295, 300 (Bankr. D.D.C. 1992), involving a “new debtor syndrome” (i.e., a one-asset entity is created on the eve of foreclosure to isolate insolvent property from creditors) and finds:

• the unfair delay caused by a “new debtor syndrome” is sufficient “cause” for dismissal; and
• further inquiry into objective futility “makes no sense,” even though proof of objective futility is required in other contexts. 

District Court Precedents

Two unpublished District Court opinions from the District of Columbia implicitly adopt elements of the Carolin Test.

In re Rudd, Case No. 94-0751 (D.D.C., April 13, 1995), affirms the Bankruptcy Court’s denial of a motion to dismiss because the petition was not objectively futile.

1210-1216 Massachusetts Ave., Case No. 92-0074 (D.D.C., June 23, 1992):

• holds that objective futility “must be determined based on the totality of the circumstances”; and
• upholds dismissal of a petition for cause on both objective futility and subjective bad faith, but it adds—since adequate support for a bad faith dismissal is met, there is no need to decide if the standard in this circuit is less stringent than Carolin.

So, the D.C. Bankruptcy Court finds that the appropriate standard for a bad faith dismissal is the Carolin Test, requiring a movant to prove both (1) objective futility and (2) subjective intent for bad faith based upon the totality of the circumstances.

Applying the Carolin Test

Under the Carolin Test, if a movant fails to prove objective futility, the court need not reach the analysis of subjective intent.

Objective futility is designed to ensure that the petition filing relates to the statutory objective of resuscitating a financially troubled debtor. The analysis looks for, (i) the existence of a going concern, and (ii) a hope of rehabilitation.

In general, a court must look to whether the debtor is moving towards confirming a plan and/or whether a realistic possibility of an effective reorganization exists.

Here, Debtor filed a Subchapter V Plan well before the statutory deadline for doing so.  Debtor also meets all the debtor in possession procedural requirements, such as filing all required documents and attending the § 341 meeting.

The D.C. Bankruptcy Court examines Debtor’s Plan to ensure it is not a mere “placeholder” and notes that Debtor’s Plan contains a history of the Debtor, a liquidation analysis, and projections—as required by § 1190.

So, the objective factors in this case do not point to objective futility.

Two Creditors argue that the Subchapter V case provides Debtor a litigation advantage. But such factor alone does not lead to a finding of objective futility. As the Third Circuit acknowledges in In re LTL Management, 64 F.4th 84, 110 n. 19 (3rd Cir. 2023):

• the purpose of filing a petition may be to beat litigation, but “still, it is not bad faith to seek to gain an advantage from declaring bankruptcy — why else would one declare it?”  

Ruling

Under the totality of facts and circumstances, the D.C. Bankruptcy Court finds that, (i) the JPK Debtor has a reasonable likelihood of reorganization, and (ii) a potentially confirmable Plan is pending.

As such, (i) the filing of Debtor’s Subchapter V case is not objectively futile, (ii) Two Creditors have failed to meet the first element of the Carolin Test, and (iii) their Motion to Dismiss must be denied.

Because Two Creditors fail to establish objective futility, it is not necessary to reach the question of subjective intent.

Conclusion

The standards for dismissing a regular Chapter 11 or Subchapter V case as a bad faith filing are relatively undeveloped at this time. 

It will be interesting to see how such standards play out in the future.

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