## Facts

- Victory Construction Co., Inc. was a nonoperating corporation with no active business, income, or material assets other than a single parcel of real property.
- Victory acquired the property via quitclaim deed for about $100,000, funded by its sole shareholder, though the property was valued at roughly $3 million.
- The property was encumbered by seven preexisting liens securing about $2.9 million in debt; required monthly payments totaled about $15,000 and were already in default when Victory acquired the property.
- Victory knew lienholders intended to foreclose and made no post-acquisition payments and no meaningful efforts to negotiate extensions or forbearance.
- Victory’s acquisition strategy relied on preserving below-market lien interest rates as a financing device for a contemplated future business, using litigation and bankruptcy to prevent foreclosure.
- After a foreclosure sale date was set by a senior secured creditor, Victory filed a Chapter 11 petition, triggering the automatic stay and stopping the foreclosure.

## Issues

1. Whether “good faith” is an implicit prerequisite to filing or maintaining a Chapter 11 case.
2. Whether lack of good faith in filing Chapter 11 constitutes “cause” under 11 U.S.C. § 362(d)(1) to terminate the automatic stay independent of adequate protection, equity, or reorganization necessity.
3. Whether Victory’s Chapter 11 petition was filed in bad faith, warranting stay relief.

## Decision

- The court held that a debtor’s good faith is an implicit prerequisite to the filing or continuation of a Chapter 11 case.
- The court held that lack of good faith in filing the Chapter 11 petition constitutes “cause” under § 362(d)(1) to lift the automatic stay, independent of adequate protection considerations.
- The court found Victory filed Chapter 11 in bad faith because it had no ongoing business or income, acquired a heavily encumbered and defaulted property with foreclosure imminent, and used Chapter 11 primarily to delay creditors and preserve favorable below-market liens.
- The court granted the secured creditors relief from the automatic stay, permitting foreclosure to proceed.

## Legal Principles

- Chapter 11 contains an implied good-faith requirement; the process is intended to facilitate legitimate reorganization objectives consistent with the Bankruptcy Code.
- “Cause” under 11 U.S.C. § 362(d)(1) includes a bad-faith filing, and stay relief may be granted on that ground without first resolving adequate protection, equity cushion, or necessity to an effective reorganization.
- In single-asset real estate cases lacking operations, employees, or cash flow, courts closely examine whether the filing is primarily a delay tactic to impede secured creditors rather than a bona fide reorganization effort.

## Conclusion

The bankruptcy court terminated the automatic stay because Victory’s Chapter 11 petition was filed without good faith and functioned mainly as a device to block foreclosure and preserve advantageous financing terms, which constituted “cause” for stay relief under § 362(d)(1).


In re Victory Construction Co., Inc., 9 B.R. 549 (Bankr. C.D. Cal. 1981)