You have to work really hard to file a Chapter 11 case that gets dismissed from the jump. Bankruptcy courts tend to bend over backwards to avoid smothering a case in the crib. A recent decision from the U.S. Bankruptcy Court for the District of Delaware illustrates one such example. In In re Bedmar, LLC, the court dismissed a Chapter 11 case despite hundreds of millions in liabilities and some sophisticated corporate restructuring.
In 2020, National Resilience, Inc. ("NRI") was formed in response to the COVID-19 pandemic with a mission to enhance U.S.-based pharmaceutical manufacturing capabilities. NRI embarked on an aggressive expansion strategy, purchasing and leasing manufacturing plants, laboratories, and development facilities throughout the United States. But two years later, demand did not match its expansion and NRI sought to rid itself of underperforming and underutilized sites to remain viable.
Rather than restructure all its debts in Chapter 11, NRI tried to slice-and-dice its way out of its problems. NRI executed a series of complex corporate transactions culminating in the creation of Bedmar, LLC. Bedmar was formed just six days before its bankruptcy filing and it was like the pound -- designed to hold dogs. It acquired all the non-performing leases and lease guaranties and just enough cash to pay lease rejection damages. It had no employees, no business operations, and no source of income. It was designed for one function: to file bankruptcy and cap lease liabilities at far less than their full contractual value. The strategy was funded by $135 million in bridge financing from existing shareholders, with the understanding that successful lease rejection would preserve value for the remaining enterprise.
Bedmar filed for Chapter 11 protection and immediately moved to reject all its leases. The company proposed a reorganization plan that would pay landlords the full amount of their statutorily-capped lease rejection claims—a fraction of what they would receive under the full lease terms—while leaving the profitable portions of the enterprise (outside of bankruptcy) untouched.
The landlords were having none of it. They moved to dismiss the case for lack of good faith with the simple argument that this wasn't a legitimate bankruptcy filing but an abuse of the Bankruptcy Code designed to escape contractual obligations. The court agreed.
The court began with a fundamental question: was Bedmar actually in financial distress? While the company's liabilities exceeded its assets on paper, the court found this "financial distress" was manufactured rather than genuine. These facts were telling:
- Bedmar was created specifically for the bankruptcy filing
- The lease payments were current with no defaults or pending litigation
- The company was allocated precisely enough cash to pay expected capped lease claims and professional fees
- Bedmar had no business operations, employees, or income source
- The "distress" resulted from corporate engineering, not operational failures
As the court observed: "The financial distress was not organic or genuine, it was manufactured." This artificial distress couldn't satisfy bankruptcy law's requirement that debtors face legitimate financial difficulties to justify Chapter 11 relief.
The court also found that Bedmar's filing served no valid bankruptcy purpose. The Bankruptcy Code is designed to either preserve going concerns or maximize value for creditors. Bedmar accomplished neither. Bedmar wasn't preserving a going concern—it had no business to preserve. Worse, the filing didn't maximize estate value but rather redistributed value from landlords to NRI's shareholders.
Finally, the court found that NRI put Bedmar in Chapter 11 to obtain tactical litigation advantages. Internal emails from NRI's CEO revealed the strategic nature of the filing, describing the use of "a legal tool to rid Resilience of the toxic sites" to create "a profitable core that will only grow from here" and provide "the best path to return value to shareholders." Stripping assets from entities subject to lease obligations and transferring them to a bankruptcy entity designed to cap those obligations fell squarely within the prohibition against filings made merely to obtain tactical litigation advantages.
Bedmar offers several important takeaways for companies considering creative restructuring strategies:
- Courts will look beyond financial statements to determine whether distress is genuine or manufactured.
- The Bankruptcy Code's protections are for companies with legitimate financial crises, not a "Get Out of My Contract For Free" card.
- When a company is formed specifically to file bankruptcy, courts will examine whether the filing serves legitimate bankruptcy purposes or merely provides tactical advantages.
- Internal communications revealing tactical motivations can be fatal to demonstrating good faith, as NRI learned when the CEO's emails became evidence of improper purpose.
The Bedmar dismissal reflects bankruptcy courts' ongoing efforts to patrol the boundaries between legitimate financial distress and strategic manipulation. Despite Bedmar's ham-handed effort, creative corporate engineering is legally possible and won't result in dismissal. The question is whether such engineering, when combined with a bankruptcy filing, serves legitimate bankruptcy purposes or merely provides tactical advantages at creditors' expense.
