IN RE VISI-TRAK CORPORATION

RANDOLPH BAXTER, United States Bankruptcy Judge.

John R. Mickowski (Mickowski) seeks dismissal of the voluntary petition for relief under Chapter 11 filed by Visi-Trak Corporation (the Debtor). Upon due consideration of the arguments of counsel an examination of the pertinent pleadings, and the record, generally, the following factual findings an conclusions of law are rendered.

On February 4, 1999, Mickowski obtained a patent infringement judgment against the Debtor in an amount of $5,998,627.00 awarded by the District Court for the Southern District of New York based upon the Debtor's willfully inducing the infringement of patents in suit. The award was inclusive of treble damages and attorneys fees. Efforts made by the Debtor to stay execution of the judgment and the injunction pending appeal were denied by both the Southern District of New York and by the U.S. Court of Appeals for the Federal Circuit. The Southern District of New York also enjoined the Debtor, its officers and all others acting on their behalf from any continuation of the adjudged infringement conduct. See, Michowski v. Visi-Trak, et al, 94 Civ. 6088 (JES), Opinion and Order, at 21 S.D. New York (February 3, 1999). Subsequently, Mickowski transferred his judgment to the Northern District of Ohio for purposes of enforcement. In its order issued on May 27, 1999, the District Court for the Northern District of Ohio (Manos, J.) enjoined the Debtor from transferring its assets to render itself judgment proof. That order was premised on the finding that the Debtor was "in the process of transferring much of its assets to Germany and is taking other steps to render itself judgment proof." Id. The District Court (Manos, J.) ultimately issued a preliminary injunction against the Debtor prohibiting it from disposing of its assets. Even with that measure of relief issued by the district court in favor of Michowski, the district court still had to resort to a dispatch of the U.S. Marshal's service to enforce its order. This activity is unrefuted and directly reflects on the Debtor's level of disobedience to the District Court's order.

Bankruptcy relief is a privilege, as opposed to a right In re Garner 498 U.S. 279, 286 (1991). It is reserved for the honest, but financially distressed, debtor to obtain a fresh start. In re Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). Honesty is an integral part of this fundamental purpose of bankruptcy law and is a prerequisite to prosecuting any type of relief in bankruptcy. A debtor's prepetition conduct, as well as its postpetition conduct, is to be scrutinized in determining whether a case was filed in good faith. As one court correctly noted: "Good faith is merged into the power of the Court to protect its jurisdictional integrity from schemes of improper petitions seeking to circumvent jurisdictional restrictions and from petitioners with demonstrable frivolous purposes absent any economic reality." In re Northwest Recreational Activities, Inc., 4 B.R. 36 (Bankr.N.D.Ga. 1980).

Herein, it is unrefuted that the District Court had to enforce its prepetition injunctive order against the Debtor through the dispatch of U.S. Marshals to the Debtor's business premises. This activity clearly evinces a disregard of the district court's order on the part of the Debtor. A debtor simply cannot be allowed to disobey orders issued by one component of the federal judiciary (i.e., district court) and, subsequently, seek comfort in another unit of the federal judiciary (i.e., the bankruptcy court). This, effectively, is what the Debtor did herein. In the wake of the district court's enforcement of its order enjoining the Debtor from specified conduct, the Debtor filed its voluntary petition for relief in the bankruptcy court in order to be shielded by the automatic stay relief of § 362(a) of the Bankruptcy Code, rather than obey the district court's order. Such conduct by the Debtor was an abuse of the federal judicial process. As stated above, bankruptcy relief is only afforded to the honest, but financially distressed, debtor. Local Loan Co. v. Hunt, supra. In the matter at bar, that element of honesty is missing, in view of the Debtor's prepetition conduct. The Debtor's foray into bankruptcy was nothing more than a continued escape mechanism from Michowski, its largest unsecured creditor, at any cost including an abuse of the judicial process.

Bankruptcy courts were not established to serve as safe harbors for debtors who wrongfully use the judicial process to the detriment of their creditors. Where such conduct occurs, and for good cause shown, bankruptcy courts are empowered to dismiss a case at the court's discretion. See, 11 U.S.C. § 1112(b). Also, under § 105(a) of the Code, the Court may issue any order, process or judgment that is necessary or appropriate to effectuate the provisions of the Bankruptcy Code. More specifically, § 105(a)provides in pertinent part:

(a) . . . No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process. (Emphasis added). 11 U.S.C. § 105(a).

By statute, bankruptcy courts constitute a unit of the federal district courts. See, U.S.C. § 151. As such, inappropriate conduct committed by debtors who are under orders issued by a district court cannot be safe harbored in the bankruptcy courts. Where such conduct occurs, at the instance of bankruptcy petition filing, the implicit element of a good faith filing is missing and the case is subject to dismissal.

As the Bankruptcy Code provides no definition for the term "cause" or "good faith" under either §§ 362(d) or 1112(b), courts must determine whether a discretionary dismissal is appropriate on a case by case basis. In re Laguna Assoc. Ltd. Partnerships, 30 F.3d 734, 737 (6th Cir. 1994). A debtor's lack of good faith in filing a bankruptcy petition has often been used as sufficient cause to remove the injunctive shield which protects debtors. See, In re Arnold, 806 F.2d 937, 939 (9th Cir. 1986). The Sixth Circuit has long acknowledged that bad faith may serve as a ground for dismissal of a petition. In re Charfoos, 979 F.2d 390, 392 (6th Cir. 1992); In re Winshall Settlor's Trust, 758 F.2d 1136 (6th Cir. 1985) ("An implicit prerequisite to the right to file is `good faith' on the part of the debtor, the absence of which may constitute cause for dismissal under § 1112(b).); accord, In re Trident Assoc. Ltd. Partnership, 52 F.3d 127, 849 F.2d 1393, 1394 (11th Cir. 1988).

The Debtor caused to be filed its voluntary petition for relief on June 15, 1999. The exclusivity period under which the Debtor possessed the sole right to file a reorganization or liquidation plan with the court expired on January 18, 2000. Indeed, no plan was filed by the Debtor until March 14, 2000 during the pendency of the hearing on Michowski's motion to dismiss the Debtor's case. Even then, such plan filing was filed in haste and is procedurally deficient, as no disclosure statement filing preceded the filing of the plan. Necessarily, the bankruptcy court must adjudge the adequacy of a properly submitted disclosure statement before any consideration may be given to a submitted plan. See, 11 U.S.C. § 1125. In brief, more than sufficient time has lapsed for the Debtor to have filed a properly submitted plan. As one court noted:

[D]ismissal under § 1112(b) is appropriate where the debtor's failure to file an acceptable plan after a reasonable time indicates its inability to do so whether the reason for the debtor's inability to file is its poor financial condition, the structure of the claims against it, or some other reason. Hall v. Vance, 887 F.2d 1041, 1044 (9th Cir. 1989).

Some courts have adopted a holistic objective-subjective good faith test in determining whether a Chapter 11 case should be dismissed. In re Carolin Corp. v. Miller, 886 F.2d 693, 702 (4th Cir. 1989). This test for dismissal emphasizes the primary goal of Chapter 11 as being debtor rehabilitation. The objective prong of the test examines the ability of the debtor to reorganize under Chapter 11, while the subjective prong was designed to prevent the debtor from abusing Chapter 11 and its creditors. Id. at 701, 702. The principal focus of courts which have deployed the objective-subjective test centers on whether the debtor has a realistic chance of reorganizing. The objective test is focused on the notion that a debtor must have a realistic possibility of reorganizing. See, N.L.R.B. v. Bildisco, 465 U.S. 513, 527 (1984); In re Winshall Settlor's Trust; 758 F.2d 1136, 1137 (6th Cir. 1985); In re Ionosphere Clubs, 98 B.R. 174, 177-78 (Bankr.S.D.N.Y. 1989). If it is evident from the commencement of a case that reorganization is hopeless, courts typically will make a finding of bad faith, inferring that the only reason the case was filed was to thwart creditors. Carolin, supra, at 693; In re North Redington Beach Assocs., 91 B.R. 166 (Bankr.M.D.Fla. 1988).

The subjective portion of the objective-subjective test examines the debtor's honest intent to reorganize. Id. at 169. In this regard, courts are quick to posit that the bankruptcy court is a court of equity and, as such, bankruptcy cases are not intended to be used as a sword against creditors. See, In re Waldron, 785 F.2d 936, 940 (11th Cir. 1986), cert. denied, 478 U.S. 1028 (1986); In re Penn Central Transp. Co., 458 F. Supp. 1346, 1356 (E.D.Pa. 1978).

In the present case, both prongs of the objective-subjective test are joined. The Debtor's cavalier attitude towards compliance with the district court's injunctive orders, necessitating the use of U.S. Marshals, sufficiently satisfies the objective test. In brief, the Debtor's bankruptcy filing was made to thwart the ability of Michowski to enforce his judgment. On the other hand, the subjective prong of the dismissal test is adequately established from a simple observation of the chronology of the case. Nine months had lapsed following the Debtor's bankruptcy petition filing before it filed a proposed plan of reorganization. The manner of such filing, made on the eve of the hearing for case dismissal, speaks volumes as to the lack of sincerity of the Debtor's efforts to timely and properly prosecute its Chapter 11 case towards rehabilitation. The filing of the Debtor's plan prior to the filing and court approval of a submitted disclosure statement further underscores the lack of a sincere rehabilitative effort by the Debtor.

Upon the totality of these findings and conclusions made herein, the Debtor's petition filing was not made in good faith and, as such, constituted an abuse of the judicial process.

Accordingly, Michowski's motion to dismiss is hereby granted, and the Debtor's case is hereby dismissed.

IT IS SO ORDERED.

At Cleveland, in said District, on the ________ day of March, 2000.

A Memorandum of Opinion And Order having been rendered by the Court in these proceedings,

IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the John R. Michowski's motion to dismiss is granted, and the Debtor's case is dismissed.

Before the Court is a motion of Visi-Trak Corporation (the Debtor) for relief from judgment or, alternatively, to amend judgment. Also before the Court is a motion of the official Committee of unsecured creditors (the Committee) for a stay pending appeal and its motion for rehearing pursuant to Rule 59, Fed.R.Civ.P. and Rule 9023, Bankr.R. Upon due consideration of each motion, the following findings of fact and conclusions of law are hereby rendered:

The Debtor caused its voluntary petition for relief to be filed on June 15, 1999. Upon a duly noticed hearing on the motion of the largest unsecured creditor, John R. Mickowski, the Debtor's case was dismissed on March 24, 2000. The aforementioned motions were timely filed in response.

Upon presentment and consideration of evidence adduced at the hearing on the subject motions, it is apparent that this Court's finding for dismissal of the Debtor's case relating to certain prepetition conduct attributed to the Debtor was unwarranted. An examination of the District Court's June 1, 1999 and June 4, 1999 hearing transcripts clearly evinces that that Court's Temporary Restraining Order was violated by the Debtor. Exhibit D. Indeed, the Debtor's counsel conceded there was a violation of the T.R.O. Nonetheless, upon further directive, the assets removed were returned to the Debtor's location. No evidence of any further removal of the Debtor's assets have been alleged or demonstrated in violation of the District Court's Preliminary Injunction Order.

The District Court was not required to engage the services of the U.S. Marshal to enforce either of its injunctive orders, as was previously understood.

Accordingly, the Debtor's Motion for Relief from Judgment is hereby granted.

Consequently, the Committee's Motion for Stay and its Motion for Rehearing are rendered moot. This Court's Order and Judgment of dismissal entered on March 24, 2000 are hereby vacated, and the case is reinstated. The Debtor's Motion for leave to file its disclosure statement is granted until April 28, 2000.

IT IS SO ORDERED.