## Facts

- Three individual debtors, members of the music group TLC, filed separate Chapter 11 cases that were jointly administered but not substantively consolidated.
- The debtors had entertainment-industry agreements, including production and songwriting agreements with Pebbitone and a recording agreement involving LaFace, plus an inducement letter guaranteeing album delivery in certain circumstances.
- The business relationship deteriorated, the debtors changed management, and negotiations to revise or buy out the production arrangement stalled.
- LaFace made personal loans to the debtors to address their financial problems.
- The debtors’ schedules and testimony reflected cash-flow strain and difficulty paying ordinary personal obligations (e.g., car, credit card, and housing payments).
- The debtors moved to reject executory contracts with Pebbitone and LaFace under 11 U.S.C. § 365.
- LaFace and Pebbitone moved to dismiss (and LaFace also sought abstention), alleging the petitions were filed in bad faith to gain leverage and escape contractual obligations, and asserting misstatements of assets/liabilities and continued extravagant spending.

## Issues

1. Whether the Chapter 11 petitions were filed in bad faith constituting “cause” for dismissal (or abstention) under 11 U.S.C. § 1112(b).

## Decision

- The court denied LaFace’s motion to dismiss or abstain and denied Pebbitone’s motion to dismiss.
- The court held the petitions were not filed in bad faith and served a legitimate bankruptcy purpose.
- The court found evidence of real financial distress and multiple creditors, not merely a two-party contract fight.
- The court concluded that pursuing rejection of burdensome executory contracts is a recognized Chapter 11 function and is not, standing alone, improper.
- The court determined the movants did not meet their burden to show intentional misrepresentation or process abuse warranting dismissal at the outset.
- The court found dismissal premature given the debtors’ potential to propose a reorganization that could provide a meaningful return to creditors.

## Legal Principles

- Although § 1112(b) does not expressly require good faith, lack of good faith may constitute “cause” to dismiss a Chapter 11 case because the statutory list of causes is nonexclusive.
- The good-faith inquiry focuses on whether a petition seeks objectives outside the legitimate scope of bankruptcy law or otherwise abuses the bankruptcy process, evaluated under the totality of circumstances.
- Evidence relevant to bad faith can include absence of genuine financial distress, use of bankruptcy as a litigation tactic in a limited-party dispute, material misstatements of assets or liabilities, and absence of a plausible reorganization.
- Rejection of burdensome executory contracts under § 365 is a central mechanism of reorganization and does not by itself establish bad faith.

## Conclusion

The bankruptcy court allowed the jointly administered Chapter 11 cases to proceed, holding that the debtors’ filings were not in bad faith where the record showed real financial strain, multiple creditors, and a plausible reorganization objective that could include rejection of executory entertainment contracts.


In re Watkins, 210 B.R. 394 (Bankr. N.D. Ga. 1997)