The U.S. Court of Appeals for the Fourth Circuit has upheld the dismissal of a debtor’s chapter 11 petition filed two days before for the expiration of a holdover, at-will tenancy, finding that the debtor’s lack of good faith in filing the petition constituted cause for dismissal. Maryland Port Admin. v. Premier Auto. Svcs., Inc. (In re Premier Auto. Svcs., Inc.), 492 F.3d 274 (4th Cir. 2007).

The debtor, Premier Automotive Services, Inc. (“Premier”) was an import-export motor vehicle company that processed trucks and other equipment through the State of Maryland-owned Dundalk Marine Terminal. Premier operated for more than 40 years at the same premises, under a variety of leases. Premier’s most recent lease for the property expired in June 2002; however, after the lease expired, Premier remained on the leased property as a holdover tenant on a month-to-month basis, while it pursued negotiations lessor Maryland Port Administration (“MPA”) for a new long-term lease.

After more than three years of failed lease negotiations with Premier, the MPA entered into a five-year lease with a new tenant, and in March 2005, provided Premier with formal notice of the termination of its month-to-month lease. Two days before Premier was to have vacated the property, it filed its chapter 11 petition, thus invoking the automatic stay provisions of 11 U.S.C. § 362(a), and in a related adversary proceeding, alleged a number of various constitutional violations against, inter alia, the MPA.

The bankruptcy court subsequently granted the MPA’s motion for summary judgment in the adversary action, ordered the automatic stay lifted, and dismissed Premier’s chapter 11 petition. In dismissing the bankruptcy case, the court found that the case had been filed in bad faith, and noted that the expired lease was not “property of the estate” as contemplated by 11 U.S.C. § 521(b). The bankruptcy court further opined that it had no authority to resuscitate a lease that expired by its own terms pre-petition.

While the bankruptcy proceedings were pending, Premier filed a complaint with the Federal Maritime Commission (“FMC”) based upon the same facts underlying the bankruptcy case, and alleged therein a number of violations of the Federal Shipping Act. The Administrative Law Judge ultimately dismissed Premier’s petition on sovereign immunity grounds. Premier appealed the dismissal of its FMC petition and, following the dismissal, filed a second action in the federal district court seeking injunctive relief pending final judgment on the FMC appeal.

The district court consolidated the bankruptcy appeal and the FMC complaint, affirmed the bankruptcy court’s grant of summary judgment in favor of the MPA, and dismissed the injunctive relief complaint. The plaintiff once again appealed, and asserted that its bankruptcy case had been filed in good faith because Premier needed the MPA lease to continue its business operations. Premier also asserted that its constitutional claims properly constituted property of the bankruptcy estate.

On Appeal

Evaluating the case, the Fourth Circuit preliminarily observed that its own precedent requires a two-prong analysis to prove a lack of good-faith filing: first, an examination of the “objective futility” test, which focuses on whether there exists a reasonable possibility of an effective reorganization; and second, a review of the “subjective bad faith” test, which questions whether the filing was made with an improper motivation or for an impermissible purpose. See Carolin Corp. v. Miller, 886 F.2d 693, 702 (4th Cir. 1989).

Affirming the lower courts’ rulings, the court found evidence in the record that supported findings of both “objective futility” and “subjective bad faith” in Premier’s chapter 11 filing. In analyzing the objective futility test, the court disagreed with Premier’s assertion that the subject litigation actually constituted 3its plan for an effective reorganization. Noting that Premier had no cognizable property interest in the lease that expired pre-petition, the court concluded that Premier’s “reorganization-qualitigation strategy” was wholly illusory, and that Premier had no realistic possibility of an effective reorganization.

Next, the court determined that several factual circumstances supported the lower courts’ findings that Premier had filed the bankruptcy case in bad faith. Notably, Premier had shown no evidence of financial difficulties at the time of filing. Specifically, the court observed that Premier’s bankruptcy filings evidenced its solvency, revealed no unsecured creditor claims and few, if any, secured claims. Further, the court noted that Premier declined to avail itself of its state law remedies before filing the chapter 11 petition.

Moreover, the court found that the timing of the petition’s filing constituted further evidence of bad faith. Reasoning that Premier’s chapter 11 filing was commenced for the improper purpose of avoiding eviction and compelling the MPA to execute a new lease with the debtor on terms more favorable thanthe MPA found acceptable, the Fourth Circuit concluded that the bankruptcy case had been properly dismissed.

The court then examined Premier’s contention that, lease interests aside, it had the right to maintain its bankruptcy case because the constitutional claims asserted in the adversary action constituted property of the bankruptcy estate. Particularly, Premier claimed a constitutional property interest in the right to fair negotiations with the State of Maryland in the leasing of state-owned property.

Rejecting this analysis, the court concluded that Section 541(b)(2) of the Bankruptcy Code excepts from “property of the estate” any interest a debtor has in a nonresidential lease that has expired by its own terms prior to the petition filing. The court further found that the most Premier might claim is a right to process, not property, and held that Premier’s unilateral expectation that judicially compelled negotiations might culminate in agreement does not rise to the level of constitutionally protected interest.

Finally, in upholding the dismissal of Premier’s case, the court stressed that allowing a debtor to resort to the bankruptcy process for meritless constitutional claims advanced solely to thwart a lawful eviction would do nothing but subvert the purpose for a chapter 11 reorganization.