Greg Adams Enterprises, Inc.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
GREG ADAMS ENTERPRISES, INC.
DEBTOR
CASE NO.
10-09784-8-SWH
MEMORANDUM OPINION
On April 4, 2011, this court entered a brief order denying the motion of Nash Finch Co. to
dismiss or convert the debtor’s case. This opinion sets out the basis for the court’s ruling.
Background
Greg Adams Enterprises, Inc. filed a petition for relief under chapter 11 of the Bankruptcy
Code on November 29, 2010. In 2001, the debtor had entered into a service agreement and sublease
with Nash Finch Co., a wholesale grocery distributor, in connection with the debtor’s establishment
of a Piggly Wiggly grocery store in Broadway, North Carolina. Under the service agreement, Nash
extended a loan to the debtor, and the debtor was required to make Nash its primary supplier of
certain goods. 	Under both the service agreement and the sublease, the debtor was required to
purchase at least 47% of the store’s annual retail sales volume from Nash. The sublease was subject
to a prime lease between Nash and Donald F. Andrews, the prime landlord. An amendment to the
sublease provided that the debtor would have two options to extend the sublease for periods of five
SO ORDERED.
SIGNED this 02 day of May, 2011.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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years each, and if the first option was not exercised, the lease would expire on March 20, 2011.
Second Amend. to Lease at 1. 1
In June 2010, prior to the end of the lease term, litigation ensued between the debtor and
Nash Finch Co., among others, in the U.S. District Court for the Middle District of North Carolina.
The action was pending at the time of the hearing before this court, and appears to center around
whether the terms of the service agreement have been breached. Later, in November 2010, Nash
sent a letter to the debtor declaring default under the sublease on numerous grounds. Finally, in
December 2010, shortly after the present petition was filed, the debtor sent Nash a letter canceling
the service agreement due to an alleged material breach of the agreement. Subsequently, the debtor
did not elect to renew the sublease with Nash for the Piggly Wiggly store premises.
In support of its motion to dismiss the debtor’s case, Nash contends that because the debtor
did not renew the sublease, the debtor will have no premises from which to reorganize. Further,
Nash argues that relocation would cause the debtor to lose the goodwill associated with the current
store location. According to Nash, this is “cause” for purposes of § 1112(b)(1) and (4)(A), as it will
result in a substantial loss to or diminution of the estate and the absence of a reasonable likelihood
of rehabilitation. 	In addition, Nash contends that the debtor filed its petition in bad faith.
Specifically, Nash points to a statement by the debtor’s representative at the § 341 meeting, that the
“‘whole reason for the bankruptcy is the litigation.’” Mot. to Dismiss at 7. Nash therefore argues
that the debtor filed the petition in order to obstruct and delay the district court litigation, which is
not a proper purpose for a chapter 11 filing. Finally, Nash contends that the debtor is solvent and
1 The pleadings differ as to the expiration date of the lease, in that Nash’s motion indicates
March 15, 2011, while the Second Amendment to the Lease, which was attached to the motion, as
well as the debtor’s response indicate March 20, 2011.
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has no need to reorganize, and therefore cannot meet its burden of establishing that the petition was
filed in good faith.
On the other hand, the debtor represents that it will have a commercial location after
reorganization because it intends to lease the current premises directly from the prime landlord.
Even if it moved to another location, the debtor contends that it would not lose its goodwill because
it operates the only full-service grocery store in the small town of Broadway. According to the
debtor, instead of filing the petition to impede the litigation, the debtor sought to reorganize and
survive, as the litigation created circumstances that threatened the debtor’s continued existence.
Specifically, the debtor represents that it perceived a threat from both the timing of Nash’s default
letter, which arrived immediately after an unsuccessful mediated settlement conference, as well as
a significant increase in Nash’s prices. Finally, the debtor contends that solvency is not the only
relevant factor in determining whether a petition is filed in good faith. It is the debtor’s position that
it sought bankruptcy protection because it believes Nash has acted in a commercially unreasonable
and wrongful manner, and if allowed to continue, Nash’s actions would have threatened the debtor’s
commercial viability.
Discussion
Under § 1112(b) of the Bankruptcy Code, “the court shall convert a case under [chapter 11]
to a case under chapter 7 or dismiss a case under [chapter 11], whichever is in the best interests of
creditors and the estate, for cause unless the court determines that the appointment under
section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.”
11 U.S.C. § 1112(b)(1). The ‘cause’ asserted by Nash for dismissal pursuant to the statute is a
“substantial or continuing loss to or diminution of the estate and the absence of a reasonable
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likelihood of rehabilitation.” 11 U.S.C. § 1112(b)(4)(A). Although Nash contended in its motion
that such cause exists because the debtor will not have premises from which to operate its business
once the sublease expires, the debtor has since represented that it has negotiated with the prime
lessor to remain on the premises through a direct lease. 	Should this come to fruition, Nash’s
argument under § 1112(b)(4)(A) necessarily fails. Even if the direct lease negotiations fell through,
the court is not convinced that the debtor would lose its goodwill and therefore its customer base if
it moved to another location, given the debtor’s representation that it is the only full-service grocery
store in a small town.
With regard to Nash’s argument that the debtor filed its petition with an improper motive,
the Fourth Circuit held in Carolin Corp. v. Miller that “a generalized ‘good faith filing’ requirement
appears implicit in § 1112(b).” 	886 F.2d 693, 699 (4th Cir. 1989). 	Whether a case may be
dismissed for lack of good faith is determined by application of a two-part test derived from Carolin:
the movant must demonstrate “both objective futility and subjective bad faith.” Id. at 700. Nash,
however, asserts that the Carolin standard should not apply here, because Carolin involved a typical
insolvent debtor rather than a solvent debtor like the one in this case. It is Nash’s position that when
a debtor can pay its debts as they become due, its bankruptcy filing can never be objectively futile,
because it will “reorganize” using a “status quo” plan but continue to pay its debts. With a “status
quo” plan, no creditor would be “impaired” pursuant to § 1124, and as such, no class of creditors
would need to accept the plan under § 1129(a)(8)(A) because “each such class would be exempted
from the acceptance process pursuant to Section 1129(a)(8)(B) of the Bankruptcy Code.” Nash’s
Supp. Memo. at 4. Nash contends that the court should focus solely on the debtor’s intent in filing
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the petition, because when objective futility cannot possibly be found, the Carolin standard will not
be satisfied and the case will always survive the motion to dismiss.
The court disagrees. First, nowhere in the Carolin decision does the court limit its holding
to insolvent debtors. 	Without evidence of a Fourth Circuit decision to the contrary, Carolin is
binding on this court as to the standard for dismissal on the grounds of bad faith, whether the debtor
is solvent or insolvent. In this case, however, the analysis begins and ends with the subjective bad
faith prong of the two-part Carolin test; the court does not need to consider objective futility because
it does not find that the debtor filed its petition in bad faith. This debtor filed its petition under threat
of eviction, whether express or implicit. Given that the debtor’s business is the operation of a retail
store, its business premises is vital to its continued operations. 	Without a business premises to
enable the production of revenue, it follows that the debtor would be unable to meet its financial
obligations. Further, the facts taken as a whole suggest that the debtor filed the petition in an effort
to preserve its business, rather than impede the district court litigation. As a result, Nash has not
established that the debtor filed its petition in bad faith.
Accordingly, the court does not find cause to dismiss the debtor’s case at this time and the
motion to dismiss is DENIED.
END OF DOCUMENT
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