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Bankr. E.D.N.C.: In re Swartville, L.L.C.- Good Faith Filing of Chapter 11 "Dirt for Debt" Plan to Protect Guarantors

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By Ed Boltz, 18 April, 2012
Summary: Swartville owed TD Bank $1,615,000, secured by real property and guaranteed by the three principals of the company.  Following default and rather than foreclosing on the property, TD Bank brought suit against the guarantors.  Swartville then filed Chapter 11, proposing to surrender the real property in satisfaction of the debt.  TD Bank objected that such plan was not filed in good faith, as it was intended solely to benefit the guarantors by forcing TD Bank to take the real property in reduction of the debt. Applying the two-prong good faith test developed by the 4th Circuit in Carolin Corp. v. Miller, 886 F.2d 693, 699 (4th Cir. 1989), the bankruptcy court first held that the plan of reorganization was feasible.  Because TD Bank asserted that the subjective bad faith test was inextricably tied to the feasibility of the plan, the bankruptcy court proceeded to find that utilizing the valuation process of 11 U.S.C. § 506 and the surrender powers under 11 U.S.C. § 1129(b)(2)(A)(iii) was not improper.  A "dirt for debt" plan is not per se bad faith. For a copy of the opinion, please see: Swartville, L.L.C.- Good Faith Filing of Chapter 11 Dirt for Debt Plan to Protect Guarantors.pdf

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