## Facts

- Related real-estate entities controlled by Morton L. Ginsberg owned multifamily apartment properties and borrowed under loan structures intended to be “bankruptcy remote.”
- Loan documents required unanimous board (or partner) approval for any voluntary bankruptcy filing and installed a third “independent” director, Laurence Richardson, associated with the secured lender’s affiliate.
- The debtors defaulted; secured creditors (Chase as trustee and REFG, a DLJ subsidiary) pursued foreclosure and obtained judgments totaling about $370 million.
- Evidence indicated the properties might exceed the secured debt in value, but were not being adequately maintained or marketed, potentially depressing foreclosure-sale proceeds.
- Because the governance provisions prevented a voluntary Chapter 11 filing, Ginsberg and counsel arranged for trade creditors and professionals to file involuntary Chapter 11 petitions against 11 entities to stop foreclosures and pursue reorganization.
- Orders for relief were entered; Chase and REFG moved to dismiss under 11 U.S.C. § 1112, alleging collusive, bad-faith filings; the court held a trial limited to bad faith/collusion and related relief.

## Issues

1. Whether the involuntary Chapter 11 cases should be dismissed under 11 U.S.C. § 1112 as collusive and filed in bad faith because they were orchestrated by the debtors to circumvent bankruptcy-remote governance provisions.
2. If dismissal was denied, whether appointment of Chapter 11 trustees was warranted due to governance failures and conflicts involving the purportedly independent director and lender-affiliated interests.

## Decision

- The court denied the motions to dismiss, holding that orchestration of the involuntary petitions did not, by itself, establish bad faith warranting dismissal.
- Applying the Second Circuit standard, the court found the movants failed to prove both objective futility of reorganization and subjective bad faith in filing.
- The court appointed Chapter 11 trustees for the debtor entities to protect estate stakeholders given serious governance and conflict-of-interest concerns.

## Legal Principles

- In the Second Circuit, dismissal for bad-faith filing requires proof of both (1) objective futility of the reorganization process and (2) subjective bad faith in filing.
- “Collusion” in arranging an involuntary petition is not per se grounds for dismissal; absent a fraudulent or deceitful purpose, collusion must still satisfy the objective-futility and subjective-bad-faith requirements.
- Collusive involuntary filings used to evade prior dismissal orders or refiling bars are materially different from involuntary filings arranged to overcome contractual or organizational barriers to a voluntary filing.
- Where reorganization or value-maximizing sale remains plausible (including potential equity above secured debt), objective futility is not established.
- Even when dismissal is unwarranted, appointment of a Chapter 11 trustee is an appropriate remedy when management dysfunction, conflicted control, or failure to discharge fiduciary duties threatens creditor and equity-holder interests.

## Conclusion

The court held that debtor-orchestrated involuntary Chapter 11 petitions designed to bypass bankruptcy-remote governance provisions were not dismissible absent proof of both objective futility and subjective bad faith, but it protected the estates by appointing Chapter 11 trustees due to governance breakdowns and conflicts tied to lender-affiliated control.


In re Kingston Square Assocs., 214 B.R. 713 (Bankr. S.D.N.Y. 1997)