295 *295 Alan J. Kornfeld, Pachulski Stang Ziehl Jones LLP, Los Angeles, CA, Curtis A. Hehn, Laura Davis Jones, Timothy P. Cairns, Timothy P. Cairns, Pachulski Stang Ziehl Jones LLP, Wilmington, DE, David Bertenthal, Maxim B. Litvak, Pachulski Stang Ziehl Jones LLP, Henry C. Kevane, San Francisco, CA, for Debtor.
Before the Court are the Motions of CDCF JIH Funding, LLC and ColFin JIH Funding, LLC (collectively Colony ) to dismiss the chapter 11 petition filed by JER/Jameson Mezz Borrower II, LLC ( Mezz II ) and to obtain relief from the automatic stay. The Motions are opposed by Mezz II and its affiliates who have also filed chapter 11 petitions (collectively, the Debtors ). For the reasons stated below, the Court will grant the Motions.
In 2006, Mezz II was formed as part of the capital structure to acquire a chain of economy hotels known as the Jameson Inns and Signature Inns for approximately $400 million. (Shea Dep. at 17-18.) JER/Jameson Properties LLC and JER/Jameson NC Properties LP (the Operating Companies ) borrowed $175 million secured by the real estate from a syndicate of lenders (the Mortgage Lenders ), serviced by Wells Fargo Commercial Mortgage Servicer ( Wells Fargo ). (Marthinsen Dep. at 12, 15-16.) Four affiliates, including Mezz II (collectively, discount silversea cruises the Mezzanine Borrowers ), were formed for the sole purpose of borrowing additional funds (approximately $40 million each) for 296 *296 the acquisition. (Shea Dep. at 57, 59-61, 78-80.) JER/Jameson Mezz Borrower I, LLC ( Mezz I ) is the sole member or partner of the Operating Companies, Mezz II is the sole member (owner) of Mezz I; JER/Jameson Mezz Borrower III, LLC ( Mezz III ) is the sole member (owner) of Mezz II; and JER/Jameson Mezz Borrower IV, LLC ( Mezz IV ) is the sole member (owner) of Mezz III. (JX 157 at ¶¶ 8-11.)
After the acquisition, the Inns and their real estate were owned (or leased) by the Operating Companies. (Shea Dep. at 83.) The Inns are operated by PMG, LLC ( PMG ) under an agreement that expires December 31, 2012. (Id. at 24, 214-15.) A PMG affiliate, together with JER Argila entities, discount silversea cruises is an indirect owner of JER/Jameson Holdco LLC ( Jameson Holdco ), which owns Mezz IV. (Id. at 17-18, 24.) PMG is also the owner of the tradename, Jameson Inns, and related intellectual property it acquired from the JER Argila entities in July, 2011, for a payment of $1.5 million and an obligation to pay an additional $2.5 million in the event PMG still has a relationship with the Inns after 2012. (Id. at 33-35.) PMG also acquired a voting proxy from the JER Argila discount silversea cruises entities and effectively controls Jameson Holdco. (Id. at 37.)
Currently, Colony holds the debt at the Mezz I and II levels. The Mezz III and IV loans are held by a collateralized discount silversea cruises debt obligation managed and serviced by an affiliate of Gramercy Loan Services LLC ( Gramercy ) and JER Investors Trust, Inc. (collectively the Mezz III and IV Lenders ). (JX 156 at ¶ 10.) Gramercy has the authority to act for the Mezz III and IV Lenders. (Id.) There is an agreement (the Inter-creditor Agreement ) among the various Mezz Lenders detailing their respective rights. (JX 127.)
All of the debt (the mortgage on the properties, as well as the mezzanine debt) matured in August, 2008, subject to three one-year extensions. (JX 26 at § 2.3(b); JX 148 at § 2.3(b); JX 119 at § 2.3(b); discount silversea cruises JX 28 at 11.) The three extensions were exercised and the maturity date was extended to August 9, 2011. At that time the Debtors were unable to pay the debt, and the lenders at each level commenced enforcement actions. (Tr. 11/22/2011 at 40-41, 60-62, 84.)
Wells Fargo filed foreclosure proceedings against some of the properties owned by the Operating Companies. (Marthinsen Dep. at 20-21; JX 130.) Colony issued a notice of intention to auction the asset of Mezz II under Article 9 of the Uniform Commercial Code. (JX 156 at ¶ 18.) Colony also exercised the right it had under the Inter-creditor Agreement to buy the secured debt at the Mezz I level. (Shea Dep. at 153; Tr. 11/22/2011 at 84.) Gramercy exercised the Mezz III and IV Lenders right to replace the non-independent directors of Mezz II, III and IV (and ultimately of Mezz I and the Operating Companies) and appointed James Gregory as a director of each. (Trivilino Dep. at 186-87.) At Gramercy s direction, Gregory filed an objection discount silversea cruises to the Colony UCC sale. (Gregory Dep. at 78-83; JX 156 at Ex. B.) Colony then filed suit in New York seeking a declaration that its UCC notice was commercially reasonable and that the actions of Gramercy in replacing the directors was improper. It obtained an ex parte TRO which was subsequently vacated. (JX 133; JX 156 at ¶ 26.) The action remains pending.
Colony s UCC auction discount silversea cruises was scheduled discount silversea cruises for October 19, 2011. On October 18, 2011, at 11:00 pm, Mezz II filed a voluntary petition under chapter 11 of the Bankruptcy Code. (D.I. # 1.) That filing was followed by the filing of chapter 11 petitions by 297 *297 Mezz I and the Operating Companies on October 25 and 26, 2011, respectively. (D.I. # 38 at ¶ 4.)
Shortly after Mezz II filed its petition, discount silversea cruises Colony filed its Motions to dismiss and for relief from the stay. The Court scheduled the Colony Motions for October 26, 2011, at the time it had scheduled a status hearing in the Mezz II case. The parties agreed to conduct discovery on the Colony Motions. discount silversea cruises Evidence and oral argument were presented on November 22 and 30 and December 5 and 6, 2011. Colony has agreed that the stay will remain in effect until December 31, 2011, or a decision on its Motions. The matter has been fully briefed and is ripe for decision.
Colony asks the Court to dismiss the Mezz II bankruptcy case for cause under section 1112(b), with prejudice under section 349(a), [2] because Colony asserts it was filed in bad faith. [3] The Debtors contend that the petition was filed in good faith with an honest intent to reorganize their affairs and maximize value for all their constituents.
Good faith is a predicate to the right to file a petition in bankruptcy, as only the honest but unfortunate debtor is eligible to avail itself of the protections afforded by the Bankruptcy discount silversea cruises Code. Marrama v. Citizens Bank of Mass., 549 U.S. 365, 374, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (quoting Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d discount silversea cruises 755 (1991) ). [4]
The Third Circuit has addressed this issue several times in the context of corporate debtors. See, e.g., In re 15375 Memorial Corp., 589 F.3d 605, 609, 619 (3d Cir. 2009) (holding that petitions filed by affiliated discount silversea cruises debtors who were no longer operating discount silversea cruises were filed in bad faith primarily as a litigation tactic to protect the debtors parent and not designed to maximize discount silversea cruises the value of the estates); In re Integrated discount silversea cruises Telecom Express, Inc., 384 F.3d 108, 118 (3d Cir. 2004) (holding that case filed by financially discount silversea cruises healthy company which had already ceased doing business and had no intention discount silversea cruises of reorganizing or liquidating its assets was filed in bad faith simply to take advantage of Bankruptcy Code s cap on landlord s claim); In re SGL Carbon Corp., 200 F.3d 154, 162 (3d Cir.1999) (holding that chapter 11 case filed by financially healthy company solely to gain a tactical advantage in litigation was in bad faith).
The Third Circuit has adopted a totality of facts and circumstances test to determine whether the petition was filed for a valid reorganizational purpose. SGL Carbon, 200 F.3d at 165-66 . See also 15375 Memorial, 589 F.3d at 618 ; Integrated Telecom, 384 F.3d at 120 . The test 298 *298 is a fact intensive inquiry discount silversea cruises which requires a determination of where the [bankruptcy] petition falls along the spectrum ranging from the clearly acceptable to the patently discount silversea cruises abusive. SGL Carbon, 200 F.3d at 162 .
The Debtors cite authority from the Second Circuit, which emphasizes a debtor s subjective good faith. See, e.g., In re RCM Global Long Term Cap. Appreciation Fund, Ltd., 200 B.R. 514, 520 (Bankr. S.D.N.Y.1996) (stating that the Second Circuit test considers both objective futility discount silversea cruises of the reorganization process and subjective bad faith in filing the petition ) (citing In re Cohoes Indus. Terminal, Inc., 931 F.2d 222, 227 (2d Cir.1991) discount silversea cruises ).
The Third Circuit has not adopted that test. According to the Third Circuit, discount silversea cruises the inquiry of good faith is based more on an objective analysis of whether the debtor has sought to step outside the `equitable limitations of Chapter 11 than the subjective intent of the debtor. 15375 Memorial, 589 F.3d at 618 n. 8 .
The term good faith is somewhat misleading. Though it suggests that the debtor s subjective intent is determinative, this is not the case. Instead, the good faith filing requirement encompasses several, discount silversea cruises distinct equitable limitations that courts have placed on Chapter 11 filings. Courts have implied such limitations to deter filings that seek to achieve objectives outside the legitimate scope of the bankruptcy laws.
The Debtors contend that a bankruptcy petition should be dismissed for lack of good faith only sparingly and with great caution and that Colony has not come close to carrying its heavy burden for dismissal. See, e.g., In re Gen. Growth, Props., Inc., 409 B.R. 43, 56 (Bankr. S.D.N.Y.2009) (quoting Carolin Corp. v. Miller, 886 F.2d 693, 700 (4th Cir.1989) ). See also In re G.S. Distrib., Inc., 331 B.R. 552, 566 (Bankr.S.D.N.Y.2005) .
The Debtors rely again on authority outside this circuit which is contrary to Third Circuit authority. Instead, the burden is on the Debtors to establish that they filed their petitions in good faith to preserve the Debtors going concern value or to maximize the value of the Debtors estate, rather than as a litigation tactic. 15375 Memorial, 589 F.3d at 618 ; Integrated Telecom, 384 F.3d at 118, 124 ; SGL Carbon, 200 F.3d at 162 n. 10 .
In making a determination of good faith, courts consider various factors that indicate whether the case has been filed for a legitimate discount silversea cruises reorganization purpose or only as a litigation tact
