“Bad Faith” Bankruptcy Dismissals In The Wake Of LTL Management: Recent Developments

Cadwalader partner Casey Servais authored an article in The Review of Banking & Financial Services analyzing how courts have applied the “bad faith” bankruptcy filing doctrine following the Third Circuit’s 2023 decision in In re LTL Management, LLC. The article explains that LTL requires dismissal of a Chapter 11 case where the debtor is not “financially distressed,” sharpening the notion of a “valid bankruptcy purpose” while creating tension with the Bankruptcy Code’s lack of an express insolvency requirement.

Casey surveys decisions in the wake of LTL, including cases involving parent guarantees and Texas/Delaware divisional mergers, where courts dismissed filings as “bad faith” either because generous funding arrangements meant the debtor lacked genuine financial distress or because the debtor’s financial condition was transparently “manufactured.”

He also highlights a Delaware decision finding LTL’s “financial distress” standard satisfied where the debtor was balance‑sheet insolvent and contrasts the Third Circuit’s approach with the Fourth Circuit’s “objective futility” test, underscoring the potential for circuit splits and forum shopping.

Casey concludes that LTL has elevated “financial distress” as a practical gating issue for Chapter 11 in some jurisdictions, but that the doctrine remains “unusually ill‑defined,” leaving practitioners to navigate differing circuit standards and unresolved questions that may ultimately require Supreme Court guidance.

Read the full article here.

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