While Chapter 11 does not require debtor insolvency, it does require good faith (applicable to the petition and the plan), which for solvent debtors seeking to reject and modify lease-counterparty rights, includes establishing some level of financial distress susceptible to resolution through the plan process.
Key takeaways
- While Chapter 11 does not require insolvency, it does require that the debtor be facing some level of financial distress that can be resolved under the Bankruptcy Code.
- Filing for Chapter 11 to invoke express provisions of the Bankruptcy Code is not, by itself, conclusive evidence of either good or bad faith.
- A solvent debtor’s Chapter 11 plan that contains terms violating the Bankruptcy Code is proposed in bad faith and is therefore unconfirmable.
Introduction
While debtor insolvency is not an eligibility requirement, solvent debtors seeking Chapter 11 relief continue to avail themselves of Bankruptcy Code provisions, often those relating to governing real estate leases, continue to encounter substantial roadblocks. For example, NMSBPCSLDHB, L.P. v Integrated Telecom Express, Inc., 384 F.3d 108 (3rd Cir. 2004) is a seminal decision holding that a cash flush tenant-debtor filing Chapter 11 solely to reduce real estate lease liabilities pursuant to Bankruptcy Code § 502(b)(5) was not filed in good faith. More recently, the bankruptcy court in In re Bedmar, LLC, 2025 Bankr. LEXIS 2131, 2025 WL 2496260 (Bankr. D. Del. Aug. 29, 2025) similarly dismissed a Chapter 11 where the tenant-debtor, current on all of its leases and not otherwise suffering financial distress, filed to reject and reduce lease liabilities from $372 million to $33 million for the sole benefit of shareholders. In this alert, we examine the basis for denying a landlord-debtor relief under Chapter 11 in the case of In re The Aspen Chapel, Case No. 22-11531 (Bankr. D.Colo. Jan. 15, 2026), a recently issued decision from the U.S. Bankruptcy Court for the District of Colorado.
Background
Despite the absence of an express provision in the Bankruptcy Code, for decades courts have held that a Chapter 11 petition must be filed in good faith. See e.g. Caroline Corp. v. Miller, 64 F.2d 693 (4th Cir. 1989) (Chapter 11 filing not in good faith if filed with subjective bad faith and with objective futility).
Similarly, there is no eligibility provision in the Bankruptcy Code requiring that a Chapter 11 debtor be insolvent or suffering from any level of financial distress. This is in contrast to Chapter 9 (for municipalities), where Section 109(c)(3) expressly requires debtor insolvency as a condition to filing.
In contrast to filing eligibility, Section 1129(a)(3), which governs Chapter 11 plan confirmation, requires that a confirmable plan be “proposed in good faith and not by any means forbidden by law.”
The Aspen Chapel Decision
Against the backdrop of these general principles, the landlord-debtor in Aspen Chapel sought Chapter 11 relief for no reason other than apparently to resolve issues with its tenant under a 1989 real estate lease that omitted traditional payment, maintenance and use provisions. Otherwise, like the debtors in Integrated and Bedman, the landlord-debtor in Aspen Chapel did not suffer from financial distress. Nevertheless, the landlord-debtor rejected the lease (constituting a breach rather than termination) and filed first and second reorganization plans that purported to effectively rewrite it to fill in the omitted terms. The tenant, who had exercised its rights under Section 365(h)(1)(A)(ii) to retain occupancy and general lease rights, opposed confirmation.
The bankruptcy court in Aspen Chapel denied confirmation of both the originally filed and amended plans on the basis they failed to satisfy Section 1129(a)(3)’s mandate that they be proposed in good faith and not by any means forbidden by law. The court reasoned that the lease modifications proposed by landlord-debtor (even if sensible) violated Section 365(h)(1)(A)(ii), which allows a tenant to retain its rights under an unexpired lease if the debtor rejects the lease. This includes rights related to rent payment, use, possession, and other lease terms, for the lease duration and any enforceable renewals or extensions, as long as these rights are valid under applicable nonbankruptcy law. In this case, landlord-debtor sought to alter the lease by providing specific payment and other terms, which the court held violated Section 365(h)(1)(A)(ii) and were thus, not proposed in good faith and instead forbidden by law under Section 1129(a)(3).
Turning its attention to Section 1129(a)(3)’s good faith requirement, the court detailed the debtor’s lack of any financial distress and found that its sole objective in the case was to resolve its lease disputes with the tenant. In doing so, the court observed that it is neither bad faith for a debtor to seek bankruptcy relief to invoke specific Bankruptcy Code provisions nor bad faith to seek claim modification in ways permitted by the Bankruptcy Code. It also reasoned that filing for Chapter 11 to invoke relief offered by Bankruptcy Code does not, alone, establish good faith. Ultimately, the court found that even a solvent debtor must demonstrate some financial distress, and that if, absent such distress, rehabilitation or reorganization of the debtor is unnecessary, its plan can neither serve the goals of Chapter 11 nor satisfy the good faith confirmation requirement.
Conclusion
While the case involved a landlord-debtor rather than a tenant-debtor, the Aspen Chapel decision advances the wave of decisions adverse to solvent debtors (or debtors not confronting financial distress) who file Chapter 11 solely to reject a lease or modify and limit the non-debtor counterparty’s claims and rights. While an insolvent and financially distressed tenant-debtor would likely survive a dismissal challenge where it could show that lease rejection benefits creditors it does not otherwise have the ability to pay in full, it seems unlikely that the same debtor in the role of a landlord could consequently obtain confirmation of a plan involving a lease that modifies the rights a tenant preserved under Section 365(h)(1)(A)(ii).
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About the Authors
Patrick Potter is a member of Dickinson Wright’s Restructuring and Insolvency Practice Group in the firm’s Washington, D.C. office, where he advises clients on complex business challenges with a focus on the commercial real estate, healthcare, and hospitality sectors. He maintains a national and international restructuring practice and has appeared before more than 50 bankruptcy judges and federal courts across the United States. With more than three decades of experience representing creditors and other stakeholders, Patrick now primarily serves as lead counsel to debtors in complex chapter 11 proceedings, guiding financially distressed businesses through restructurings that preserve enterprise value and save jobs. In addition to his U.S. practice, he has more than a decade of experience advising foreign governments on the development of modern insolvency laws and restructuring frameworks, including on-the-ground initiatives in the Middle East, North Africa, and Eastern Europe, and regularly speaks, writes, and leads workshops in coordination with the World Bank Group, the U.S. Department of Commerce, INSOL International, and other international organizations.
Nicholas Hall advises business entities and individuals on corporate matters and real estate transactions from Dickinson Wright’s Lexington office. He brings a practical, straightforward approach to his work, shaped by six years of active duty service as a Judge Advocate General in the United States Air Force, including a deployment to Djibouti with the Combined Joint Task Force – Horn of Africa. During his military service, Nicholas advised senior-level commanders on matters spanning international and operational law, contracts, cyber law, military justice, and federal income tax, and provided legal assistance to military members, dependents, and retirees. He now draws on that broad experience to help clients navigate corporate and real estate matters with clarity and confidence.