1999 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

12-29-1999

In Re: SGL Carbon Corp, [ Official Comm. of

Unsec. Cred. vs. Nucor Corp]

Precedential or Non-Precedential:

Docket 99-5319

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Recommended Citation

"In Re: SGL Carbon Corp, [ Official Comm. of Unsec. Cred. vs. Nucor Corp]" (1999). 1999 Decisions. Paper 332.

http://digitalcommons.law.villanova.edu/thirdcircuit_1999/332
Filed December 29, 1999 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

Nos. 99-5319 & 99-5382 

IN RE: SGL CARBON CORPORATION, Debtor 

OFFICIAL COMMITTEE OF UNSECURED CREDITORS, 

 Appellant at No. 99-5319 

v. 

NUCOR CORPORATION; 

NUCOR-YAMATO STEEL COMPANY, 

 Appellants at No. 99-5382 

On Appeal from the United States District Court 

for the District of Delaware 

D.C. Civil Action No. 98-cv-02779 

(Honorable Joseph J. Farnan, Jr.) 

Argued July 29, 1999 

Before: SCIRICA and McKEE, Circuit Judges, 

and BROTMAN, District Judge* 

(Filed: December 29, 1999) 

_________________________________________________________________ 

* The Honorable Stanley S. Brotman, United States District Judge for the 

District of New Jersey, sitting by designation. 
 PHILIP BENTLEY, ESQUIRE 

 (ARGUED) 

 KENNETH H. ECKSTEIN, ESQUIRE 

 Kramer, Levin, Naftalis & Frankel 

 919 Third Avenue 

 New York, New York 10022 

 TERESA K.D. CURRIER, ESQUIRE 

 Duane, Morris & Heckscher 

 1201 Market Street, Suite 1500 

 P.O. Box 195 

 Wilmington, Delaware 19899 

 Attorneys for Appellant/Cross- 

 Appellee, Official Committee of 

 Unsecured Creditors 

 JAMES J. RODGERS, ESQUIRE 

 (ARGUED) 

 Dilworth, Paxson, Kalish 

 & Kauffman 

 1735 Market Street 

 3200 The Mellon Bank Center 

 Philadelphia, Pennsylvania 19103 

 MICHAEL D. RIDBERG, ESQUIRE 

 Ridberg, Press & Sherbill 

 Three Bethesda Metro Center, 

 Suite 650 

 Bethesda, Maryland 20814 

 Attorneys for Appellants, 

 Nucor Corporation; Nucor-Yamato 

 Steel Company 

 2 
 GEORGE J. WADE, ESQUIRE 

 (ARGUED) 

 Shearman & Sterling 

 599 Lexington Avenue 

 New York, New York 10022 

 LAURA D. JONES, ESQUIRE 

 Young, Conaway, Stargatt & Taylor 

 P.O. Box 391 

 Rodney Square North, 11th Floor 

 Wilmington, Delaware 19899-0391 

 Attorneys for Appellee, 

 SGL Carbon Corporation 

OPINION OF THE COURT 

SCIRICA, Circuit Judge. 

The issue on appeal is whether, on the facts of this case, 

a Chapter 11 bankruptcy petition filed by a financially 

healthy company in the face of potentially significant civil 

antitrust liability complies with the requirements of the 

Bankruptcy Code. In this case, the Official Committee of 

Unsecured Creditors of SGL Carbon Corporation appeals 

the District Court's order denying its motion to dismiss SGL 

Carbon's Chapter 11 bankruptcy petition on bad faith 

grounds. 

This case also presents the threshold issue whether we 

will adopt a "good faith" requirement for Chapter 11 

petitions. We will. After undertaking the fact intensive 

analysis inherent in the good faith determination, we 

conclude that SGL Carbon's Chapter 11 petition lacks a 

valid reorganizational purpose and, therefore, lacks the 

requisite good faith. We will reverse. 

I. 

SGL Carbon is a Delaware corporation that manufactures 

and sells graphite electrodes used in steel production.1 In 

_________________________________________________________________ 

1. SGL Carbon Corp. is a wholly-owned subsidiary of SGL 

Aktiengesellschaft (SGL AG), a German corporation. SGL Carbon Corp. is 

 3 
1997, the United States Department of Justice commenced 

an investigation of alleged price-fixing by graphite electrode 

manufacturers, including the SGL Carbon Group.2 Soon 

thereafter, various steel producers filed class action 

antitrust lawsuits in the United States District Court for 

the Eastern District of Pennsylvania against SGL Carbon 

and other graphite electrode manufacturers. The District 

Court consolidated the cases into a single class action and 

certified a class under Fed. R. Civ. P. 23(b)(3) consisting of 

all United States purchasers of graphite electrodes between 

1992 and 1997. Many class members opted out of the class 

before the November 28, 1998 opt-out deadline and 

subsequently filed or threatened to file separate antitrust 

lawsuits. Since the class certification, six complaints have 

been filed in federal district court and one complaint has 

been filed in a Canadian court. 

In June 1998, SGL Carbon's German parent SGL AG 

recorded a charge in Deutschmarks of approximately $240 

million as its "best estimate" of the SGL Carbon Group's3 

potential liability in the criminal and civil antitrust litigation.4 

_________________________________________________________________ 

comprised of two "business units"--the North American Carbon/ 

Graphite unit, which is of primary interest here, and the specialty 

carbon unit. 

2. In May 1999, SGL AG (SGL Carbon's parent) and its chairman Robert 

Koehler each pled guilty to several criminal antitrust charges and agreed 

to pay fines of $135 million and $10 million respectively. It is important 

to note that the guilty pleas and the payment of the criminal fines by the 

parent company occurred after the filing of the Chapter 11 petition and 

the District Court's denial of the motion to dismiss. 

3. According to the stipulated facts, "[t]he SGL CARBON Group has more 

than 28 manufacturing facilities in 10 countries and has sales in more 

than 90 countries. The SGL CARBON Group is the largest manufacturer 

of carbon and graphite products in the world and the second largest 

manufacturer of graphite electrodes. The North American 

Carbon/Graphite Business Unit is one of two business units of the 

Debtor. The North American Carbon/Graphite Business Unit operates 

only in the United States and Canada." Stipulation of Facts, No. 98B2779, at *1. It is important to note, therefore, that SGL Carbon Corp. is 

only one part of the SGL Carbon Group. 

4. Although the record does not reflect the amount by which the $240 

million reserve was increased by SGL AG subsequent to its guilty plea 

and accompanying fine, the parties have indicated that the reserve was 

increased. It is significant that, at the time of SGL Carbon's Chapter 11 

petition, the $240 million reserve was in place and untouched. 

 4 
On December 16, 1998, at the direction of SGL AG, SGL 

Carbon filed a voluntary Chapter 11 bankruptcy petition in 

the United States District Court for Delaware. In SGL 

Carbon's Disclosure Statement, in a section addressing 

"Factors Leading to [the] Chapter 11 Filing," SGL Carbon 

only discussed the antitrust litigation. The bankruptcy 

filing contained a proposed reorganization plan under 

which only one type of creditor would be required to accept 

less than full cash payment for its account, namely the 

antitrust plaintiffs who obtained judgments against SGL 

Carbon. Under the plan, potential antitrust judgment 

creditors would receive credits against future purchases of 

SGL Carbon's product valid for 30 months following the 

plan's confirmation. The proposed plan also bars any 

claimant from bringing an action against SGL Carbon's 

affiliates, including its parent SGL AG, "based on, relating 

to, arising out of, or in any way connected with" their 

claims against SGL Carbon. 

The next day, on December 17, in a press release, SGL 

Carbon explained it had filed for bankruptcy "to protect 

itself against excessive demands made by plaintiffs in civil 

antitrust litigation and in order to achieve an expeditious 

resolution of the claims against it." The press release also 

stated: 

 SGL CARBON Corporation believes that in its case 

 Chapter 11 protection provides the most effective and 

 efficient means for resolving the civil antitrust claims. 

 . . . 

 . . . . 

 "SGL CARBON Corporation is financially healthy," 

 said Wayne T. Burgess, SGL CARBON Corporation's 

 president. "If we did not face [antitrust] claims for such 

 excessive amounts, we would not have had to file for 

 Chapter 11. We expect to continue our normal

 business operations." 

 . . . . 

 However, because certain plaintiffs continue to make 

 excessive and unreasonable demands, SGL CARBON 

 Corporation believes the prospects of ever reaching a 

 5 
 commercially practicable settlement with them are 

 remote. After much consideration, SGL CARBON

 Corporation determined that the most appropriate 

 course of action to address the situation without 

 harming its business was to voluntarily file for chapter 

 11 protection. 

 . . . . 

Contemporaneous with the press release, SGL AG 

Chairman Robert Koehler conducted a telephone conference 

call with securities analysts, stating that SGL Carbon was 

"financially healthier" than before and denying the antitrust 

litigation was "starting to have a material impact on [SGL 

Carbon's] ongoing operations in the sense that . . . [it was] 

starting to lose market share." He also stated that SGL 

Carbon's Chapter 11 petition was "fairly innovative [and] 

creative" because "usually Chapter 11 is used as protection 

against serious insolvency or credit problems, which is not 

the case [with SGL Carbon's petition]." 

Two weeks after SGL Carbon filed its petition and issued 

the press release, the United States Trustee formed a nine 

member Official Committee of Unsecured Creditors. Eight of 

the committee members are antitrust plaintiffs; two of the 

eight serve as class representatives and the other six have 

opted out of the class.5 In January 1999, the Committee 

filed a motion to dismiss SGL Carbon's bankruptcy petition 

on the grounds that it was a "litigation tactic designed to 

frustrate the prosecution of the civil antitrust claims 

pending against [SGL Carbon] and preserve[SGL Carbon's] 

equity from these claims." In re SGL Carbon Corp., 233 B.R. 

285, 287 (D. Del. 1999). 

The District Court held a hearing on the motion on 

February 17, 1999.6 Neither side presented witnesses. The 

evidence was entirely documentary or deposition testimony, 

including the deposition of SGL Carbon's Vice President 

Theodore Breyer, who directs the company's graphite

electrode business in the United States. In his deposition, 

Breyer testified that SGL Carbon was financially healthy, 

_________________________________________________________________ 

5. The ninth Committee member is a trade creditor--Conoco, Inc. 

6. SGL Carbon's case was not referred to a bankruptcy court. 

 6 
having no overdue debts when it filed its Chapter 11 

petition. Breyer stated that he recommended filing for 

bankruptcy because he believed SGL Carbon "could not 

expeditiously settle with the [antitrust] plaintiffs" absent 

Chapter 11 protection. Acknowledging that bankruptcy 

protection was the "sole reason" SGL AG's Executive

Committee had authorized the Chapter 11 petition, Breyer 

testified that he believed filing for Chapter 11 would 

"change the negotiating platform" with plaintiffs and 

"increase the pressure on . . . plaintiffs to settle." 

The District Court denied the Committee's motion to

dismiss on April 23, 1999 assuming, without deciding, that 

11 U.S.C. S 1112(b) imposes a duty of good faith upon 

bankruptcy petitioners. It further assumed this duty 

requires the proposed reorganization to further what it 

characterized as Chapter 11's purpose: " `to restructure a 

business's finances so that it may continue to operate, 

provide its employees with jobs, pay its creditors and 

produce a return for its stockholders.' " SGL Carbon Corp., 

233 B.R. at 288 (quoting H.R. Rep. No. 595 (1977) reprinted 

in 1978 U.S.C.C.A.N. 6179). The court made nofindings 

that SGL Carbon filed for bankruptcy for reasons other 

than to improve its negotiating position with plaintiffs. But 

the court concluded the petition furthered the purpose of 

Chapter 11 because plaintiffs' litigation was imperiling SGL 

Carbon's operation by distracting its management, was 

potentially ruinous and could eventually force the company 

out of business. The court explained that 

 [t]he distractions of the litigation pose a serious threat 

 to the continued successful operations of [SGL 

 Carbon]. Further, the potential liability faced by [SGL 

 Carbon] could very well force it out of business. 

 Consistent with the policies and purposes of Chapter 

 11 which encourage early filing so as to increase the 

 possibility of successful reorganization, the Court will 

 not allow [SGL Carbon] to wait idly by for impending 

 financial and operational ruin, when [SGL Carbon] can 

 take action now to avoid such a consequence.

SGL Carbon Corp., 233 B.R. at 291. 

The Committee has appealed. 

 7 
II. 

The District Court had jurisdiction over this bankruptcy 

case under 28 U.S.C. S 1334(a). We have jurisdiction under 

28 U.S.C. S 1291. See In re Brown, 916 F.2d 120, 124 (3d 

Cir. 1990) (holding that order denying motion to dismiss a 

bankruptcy petition is "final" under 28 U.S.C.S 1291). 

We have not yet had occasion to decide what standard of 

review to apply to a dismissal of a Chapter 11 petition. 

Consistent with the other courts of appeals to consider the 

issue, we believe this decision is committed to the sound 

discretion of the bankruptcy or district court and will 

review for abuse of discretion. See, e.g., Leavitt v. Soto (In 

re Leavitt), 171 F.3d 1219 (9th Cir. 1999) (reviewing for 

abuse of discretion);7 In re Abijoe Realty Corp., 943 F.2d 

121, 128 (1st Cir. 1991) (same). Mindful that "an abuse of 

discretion exists where the district court's decision rests 

upon a clearly erroneous finding of fact, an errant

conclusion of law, or an improper application of law to 

fact," ACLU v. Black Horse Pike Reg'l Bd. of Ed., 84 F.3d 

1471, 1476 (3d Cir. 1996) (internal quotations omitted), we 

review the findings of fact leading to the decision for clear 

error and exercise plenary review over the court's 

conclusions of law. See First Jersey Nat'l Bank v. Brown (In 

re Brown), 951 F.2d 564, 567 (3d Cir. 1991). See also 

Leavitt, 171 F.3d at 1222 (applying differing standards of 

review to different components of good faith/bad faith 

determination); Abijoe Realty Corp., 943 F.2d at 128 (same). 

III. 

11 U.S.C. S 1112(b) governs the dismissal or conversion 

of Chapter 11 petitions. It provides in part: 

 [T]he court may convert a case under [Chapter 11] to 

 a case under Chapter 7 . . . or may dismiss a case 

 under this chapter, whichever is in the best interest of 

 creditors and the estate, for cause . . . . 

_________________________________________________________________ 

7. Although In re Leavitt addressed a good faith determination regarding 

a Chapter 13 bankruptcy petition, there is no significant distinction 

between Chapter 11 and Chapter 13 petitions with respect to the 

appropriate standard of review. 

 8 
11 U.S.C. S 1112(b). 

The statute provides for dismissal for cause, if it is in the 

best interest of the creditors and the estate. Conversion is 

not an option here.8 We will determine whether there is 

cause for dismissal. 

A. 

The threshold issue is whether Chapter 11 petitions may 

be dismissed for "cause" under 11 U.S.C. S 1112(b) if not 

filed in good faith. Although we have not squarely 

addressed this issue, we implied in First Jersey Nat'l Bank 

v. Brown (In re Brown), 951 F.2d 564 (3d Cir. 1991), that 

Chapter 11 imposes a good-faith obligation. In Brown, we 

considered evidence of bad faith in reviewing the dismissal 

of a Chapter 11 petition, but concluded "the evidence . . . 

of bad faith . . . was not strong enough for us to say that 

it was established as a matter of law." Id. at 572. Because 

Brown focused on the adequacy of the record for making a 

good faith/bad faith determination, we did not expressly 

address whether "bad faith" constituted cause for 

dismissal. In this case, we make clear what we implied in 

_________________________________________________________________ 

8. In other circumstances, deciding a motion to dismiss under 11 U.S.C. 

S 1112(b), may involve a two-step process offirst deciding whether there 

is cause and then deciding whether to dismiss or convert. See Rollex v. 

Associated Materials, Inc. (In re Superior Siding & Window, Inc.), 14 F.3d 

240, 242 (4th Cir. 1994). That procedure is understandable when 

applied to the statutory bases for finding cause that turn on the 

impossibility of Chapter 11 relief. See 11 U.S.C. S 1112(b). The same is 

not necessarily true in all bad faith cases. Two forms of bad faith can 

make a Chapter 11 petition objectionable. One involves either pre- or 

post-petition misconduct by the debtor. In such cases, where the debtor 

otherwise properly belongs in bankruptcy, dismissal need not always 

follow from a finding of bad faith stemming from such misconduct. See 

7 Collier on Bankruptcy 1112-70 (15th ed. 1996) ("[I]n many 

circumstances, the court might be better advised to address the bad 

conduct of the debtor (or some other party) in a manner other than 

through dismissal of the proceedings."). In bad faith cases involving the 

filing of a petition that is an abuse of the bankruptcy process, however, 

S 1112(b)'s conversion/dismissal choice is inappropriate. The proponent 

of an abusive petition does not belong in bankruptcy so it is unnecessary 

to ask whether dismissal or conversion is in the interest of the 

creditors. 

 9 
Brown--Chapter 11 bankruptcy petitions are subject to 

dismissal under 11 U.S.C. S 1112(b) unlessfiled in good 

faith. 

Four factors guide our adoption of a good faith standard 

--the permissive language of S 1112(b), viewed in light of its 

legislative history; the decisions of our sister courts of 

appeals; the equitable nature of bankruptcy; and the 

purposes underpinning Chapter 11. 

We begin with 11 U.S.C. S 1112(b), which allows the

court to dismiss or convert a Chapter 11 petition for cause 

 including-- 

 (1) continuing loss to or diminution of the es tate 

 and absence of a reasonable likelihood of 

 rehabilitation; 

 (2) inability to effectuate a plan; 

 (3) unreasonable delay by the debtor that is 

 prejudicial to the creditors; 

 (4) failure to propose a plan [of reorganiz ation] 

 within any time fixed by the court; 

 (5) denial of confirmation of every proposed plan 

 and denial of a request made for additional time for 

 filing another plan or a modification of a plan; 

 (6) revocation of an order of confirmation u nder 

 section 1144 of this title, and denial of confirmation 

 of another plan or a modified plan under section 

 1129 of this title; 

 (7) inability to effectuate substantial 

 consummation of a confirmed plan; 

 (8) material default by the debtor with respec t to a 

 confirmed plan; 

 (9) termination of a plan by reason of the 

 occurrence of a condition specified in the plan; or 

 (10) nonpayment of any fees or charges require d 

 under chapter 123 of title 28. 

11 U.S.C. S1112(b). As many courts and commentators

have noted, this language neither requires nor prohibits 

 10 
imposition of a "good faith" requirement on Chapter 11 

petitions. But we have noted the provision that"cause" 

"includ[es]" the ten enumerated factors strongly suggests 

those factors are not exhaustive and that a court may 

consider whether other facts and circumstances qualify as 

"cause." See Brown, 951 F.2d at 572; 7 Collier on 

Bankruptcy at 1112-20. That interpretation of S 1112(b) is 

strengthened by the statute's legislative history, which 

provides in part: 

 [The] list [contained in S 1112(b)] is not exhaustive. The 

 court will be able to consider other factors as they 

 arise, and to use its equitable powers to reach an 

 appropriate result in individual cases. 

H.R.Rep. No. 595, at 405, reprinted in 1978 U.S.S.C.A.N. 

5963, 6362. The Bankruptcy Code's rules of construction, 

which provide that "include" and "including" are not 

limiting terms, also support an expansive reading of 

S 1112(b). See 11 U.S.C. S 102(3). Section 1112(b), by its 

terms, therefore, does not preclude consideration of 

unenumerated factors in determining "cause." 

We also note the courts of appeals that have considered 

the issue have held that the absence of good faith 

constitutes "cause" to dismiss a Chapter 11 petition under 

S 1112(b). See, e.g., Trident Assocs. Ltd. Partnership v. 

Metropolitan Life Ins. Co. (In re Trident Assocs. Ltd. 

Partnership), 52 F.3d 127, 130 (6th Cir. 1995); Marsch v. 

Marsch (In re Marsch), 36 F.3d 825, 828 (9th Cir. 1994); 

Humble Place Joint Ventures v. Foray (In re Humble Place 

Joint Venture), 936 F.2d 814, 816 (5th Cir. 1991); First Nat'l 

Bank of Sioux City v. Kerr (In re Kerr), 908 F.2d 400, 404 

(8th Cir. 1990); Phoenix Piccadilly, Ltd. v. Life Ins. Co. (In re 

Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1394 (11th Cir. 

1988). In addition, several other courts of appeals have 

concluded that Chapter 11 imposes a general good faith 

requirement under which petitions can be dismissed for 

bad faith. See, e.g., C-TC 9th Ave. Partnership v. Norton Co. 

(In re C-TC 9th Ave. Partnership), 113 F.3d 1304 (2d Cir. 

1997); Carolin Corp. v. Miller, 886 F.2d 693, 698 (4th Cir. 

1989); Connell v. Coastal Cable T.V., Inc. (In re Coastal 

Cable T.V., Inc.), 709 F.2d 762, 764 (1st Cir. 1983) (Breyer, 

J.). Numerous district and bankruptcy courts have reached 

 11 
the same conclusion under either or both approaches. See 

Carlos J. Cuevas, Good Faith and Chapter 11: Standard 

that Should Be Employed to Dismiss Bad Faith Chapter 11 

Cases, 60 Tenn. L. Rev. 525 (1993).9 

The "good faith" requirement for Chapter 11 petitioners 

has strong roots in equity. The court in In re Victory 

Construction Co., Inc., in first articulating the good faith 

requirement under the current Bankruptcy Code, 

highlighted the equitable nature of the doctrine when it 

explained: 

 Review and analysis of [the bankruptcy laws and 

 relevant cases] disclose a common theme and objective 

 [underlying the reorganization provisions]: avoidance of 

 the consequences of economic dismemberment and 

 liquidation, and the preservation of ongoing values in a 

 manner which does equity and is fair to rights and 

 interests of the parties affected. But the perimeters of 

 this potential mark the borderline between fulfillment 

 and perversion; between accomplishing the objectives 

 of rehabilitation and reorganization, and the use of 

 these statutory provisions to destroy and undermine 

 the legitimate rights and interests of those intended to 

 benefit by this statutory policy. That borderline is 

 patrolled by courts of equity, armed with the doctrine 

 of "good faith" . . . . 

9 B.R. 549, 558 (Bankr. C.D. Calif. 1981) order stayed 

Hadley v. Victory Construction Co., Inc. (In re Victory 

Construction Co., Inc.), 9 B.R. 570 (Bankr. C.D. Calif. 1981). 

A debtor who attempts to garner shelter under the 

Bankruptcy Code, therefore, must act in conformity with 

the Code's underlying principles. See Little Creek Dev. Co. 

v. Commonwealth Mortgage Corp. (In re Little Creek Dev. 

Co.), 779 F.2d 1068, 1076 (5th Cir. 1986) ("[A] good faith 

standard protects the jurisdictional integrity of the 

bankruptcy courts by rendering their equitable weapons 

_________________________________________________________________ 

9. We need not dwell on the fine distinctions between the two closely 

related approaches. See 7 Collier on Bankruptcy at 1112-62-1112-64. 

Despite analytic differences, the conclusion of every court of appeals to 

address the issue is clear--Chapter 11 petitions must be filed in good 

faith or they are subject to dismissal. 

 12 
. . . available only to those debtors and creditors with `clean 

hands.' "); see also 7 Collier on Bankruptcy at 1112-68 

("Another basic underpinning of the good faith doctrine is 

the equitable concept of `clean hands.' As a general matter, 

bankruptcy relief is equitable in nature, and, as a general 

rule, equitable remedies are not available to any party who 

fails to act in an equitable fashion."). 

Finally, we believe a good faith requirement is supported 

by the purposes underlying Chapter 11. As the Court of 

Appeals for the Fifth Circuit noted, 

 [A good faith standard] furthers the balancing process 

 between the interests of debtors and creditors which 

 characterizes so many provisions of the bankruptcy 

 laws and is necessary to legitimize the delay and costs 

 imposed upon parties to a bankruptcy. Requirement of 

 good faith prevents abuse of the bankruptcy process by 

 debtors whose overriding motive is to delay creditors 

 without benefitting them in any way . . . . 

In re Little Creek, 779 F.2d at 1072; see also Carolin, 886 

F.2d at 698 (stating that court's ability to impose good faith 

requirement is "indispensable to proper accomplishment of 

the basic purposes of Chapter 11 protection"). 

After considering the language of S 1112(b), its legislative 

history, the decisions of other courts of appeals, the 

equitable nature of bankruptcy proceedings, and the

purposes behind Chapter 11, we conclude a Chapter 11 

petition is subject to dismissal for "cause" under 11 U.S.C. 

S 1112(b) unless it is filed in good faith. 

B. 

Having determined that S 1112(b) imposes a good-faith 

requirement on Chapter 11 petitions, we consider whether 

SGL Carbon's Chapter 11 petition was filed in good faith.10 

_________________________________________________________________ 

10. Once at issue, the burden falls upon the bankruptcy petitioner to 

establish that the petition has been filed in"good faith." See, e.g., In 

re 

Fox, 232 B.R. 229, 233 (Bankr. D. Kan. 1999); Stage I Land Co. v. United 

States, 71 B.R. 225, 229 (D. Minn. 1986). See also 7 Collier on 

Bankruptcy at 1112-53 ("[I]f the issue is whether the petition was filed 

in good faith, the burden rests on the petitioner."). 

 13 
The requisite fact intensive inquiry requires determining 

where SGL Carbon's petition falls along the spectrum 

ranging from the clearly acceptable to the patently abusive. 

We first review the District Court's findings of fact and then 

examine the totality of facts and circumstances to 

determine whether they support a finding of good faith. See 

In re Trident, 52 F.3d at 131; In re Marsch, 36 F.3d at 829; 

In re Laguna, 30 F.3d at 738. 

i. 

As discussed in part I, the District Court found SGL 

Carbon's Chapter 11 petition was filed in good faith for two 

reasons: first, because the distractions caused by the 

antitrust litigation "posed a serious threat to[SGL

Carbon's] continued successful operations," and second, 

because the litigation might result in a judgment that could 

cause the company "financial and operational ruin," SGL 

was required to file when it did. SGL Carbon, 233 B.R. at 

291. Although mindful of the careful consideration given by 

the able District Court, we believe each of thesefindings of 

fact was clearly erroneous.11 

Although there is some evidence that defending against 

the antitrust litigation occupied some officers' time, there is 

no evidence this "distraction" posed a "serious threat" to 

the company's operational well being. At his deposition, 

Theodore Breyer12 testified the antitrust litigation consumed 

a significant portion of his time. But Breyer also noted the 

Carbon/Graphite Business Unit had met all of itsfinancial 

targets during the nine months preceding filing. 

Additionally, Breyer testified that only his business unit 

was heavily involved in the antitrust litigation, recognizing 

that any management distraction effecting the rest of SGL 

Carbon resulted from the bankruptcy filing and not the 

antitrust litigation. As noted, SGL AG and SGL Carbon 

_________________________________________________________________ 

11. Although we conclude these findings were clearly erroneous, we do 

not hold that under the proper circumstances managerial distraction 

and other litigation harms may not constitute factors contributing to 

good faith. 

12. As noted, Breyer is the Vice President in charge of SGL Carbon's 

North American Carbon/Graphite Business Unit. 

 14 
officers insisted the company was financially healthy 

despite the litigation. In addition, SGL AG's Chairman 

denied that the litigation was having a "material negative 

impact on [SGL Carbon's] operations." In light of all the 

evidence, we believe the District Court's finding to the 

contrary is mistaken. See United States v. U.S. Gypsum Co., 

333 U.S. 364, 395 (1948). 

We also find clearly erroneous that SGL Carbon's 

Chapter 11 petition was filed at the appropriate time to 

avoid the possibility of a significant judgment that "could 

very well force [SGL Carbon] out of business." There is no 

evidence that the possible antitrust judgments might force 

SGL Carbon out of business. To the contrary, the record is 

replete with evidence of SGL Carbon's economic strength. 

At the time of filing, SGL Carbon's assets had a stipulated 

book value of $400 million, only $100,000 of which was 

encumbered. On the date of the petition, SGL Carbon had 

$276 million in fixed and non-disputed liabilities. Of those 

liabilities, only $26 million were held by outsiders as the 

remaining liabilities were either owed to or guaranteed by 

SGL AG. Although SGL Carbon's parent, SGL AG, recorded 

a $240 million charge on its books as "its best estimate of 

the potential liability and expenses of the SGL Carbon 

Group in connection with all civil and criminal antitrust 

matters," SGL Carbon is only one part of the SGL Carbon 

Group covered by the reserve. Furthermore, at the time 

SGL Carbon filed its petition, that is, before SGL AG paid 

its $135 million criminal fine, the $240 million reserve was 

untouched. In documents accompanying its petition, SGL 

Carbon estimated the liquidation value of the antitrust 

claims at $54 million. In contrast, no evidence was

presented with respect to the amount sought by the 

antitrust plaintiffs beyond SGL Carbon's repeated 

characterization of their being "unreasonable." 

Whether or not SGL Carbon faces a potentially crippling 

antitrust judgment, it is incorrect to conclude it had to file 

when it did. As noted, SGL Carbon faces no immediate 

financial difficulty. All the evidence shows that management 

repeatedly asserted the company was financially healthy at 

the time of the filing. Although the District Court believed 

the litigation might result in a judgment causing "financial 

 15 
and operational ruin" we believe that on the facts here, that 

assessment was premature. A Chapter 11 petition would 

impose an automatic stay on all efforts to collect the 

judgment and would allow the company the exclusive right 

to formulate a reorganization plan under which the amount 

of the judgment could be adjusted to allow the company to 

reorganize. SGL Carbon has offered no evidence it could not 

effectively use those protections as the prospect of such a 

judgment became imminent.13 The District Court's finding 

that the petition had to be filed at that particular time to 

avoid financial ruin and therefore was made in good faith is 

clearly contradicted by the evidence. 

The District Court was correct in noting that the 

Bankruptcy Code encourages early filing. See SGL Carbon, 

233 B.R. at 291. It is well established that a debtor need 

not be insolvent before filing for bankruptcy protection. See, 

e.g., In re The Bible Speaks, 65 B.R. 415, 424 (Bankr. D. 

Mass. 1986); In re Talladega Steaks, Inc., 50 B.R. 42, 44 

(Bankr. N.D. Ala. 1985). See also Daniel R. Cowans,

Bankruptcy Law and Practice (7th ed. 1998) 232. It also is 

clear that the drafters of the Bankruptcy Code understood 

the need for early access to bankruptcy relief to allow a 

debtor to rehabilitate its business before it is faced with a 

hopeless situation.14 Such encouragement, however, does 

not open the door to premature filing, nor does it allow for 

the filing of a bankruptcy petition that lacks a valid 

reorganizational purpose. See, e.g., In re Marsch, 36 F.3d at 

838; In re Coastal Cable, 709 F.2d at 764; In re Ravick 

Corp., 106 B.R. 834, 843 (Bankr. D.N.J. 1989). 

SGL Carbon, therefore, is correct that the Bankruptcy 

Code does not require specific evidence of insolvency for a 

_________________________________________________________________ 

13. The Texaco Corporation's use of the bankruptcy protections is 

instructive. See In re Texaco, Inc., 84 B.R. 893 (Bank. S.D.N.Y. 1988). 

Texaco resorted to bankruptcy only after suffering an $11 billion 

judgment. Even saddled with such a large judgment, bankruptcy 

provided Texaco a means of reorganizing and continuing as a going 

concern. 

14. See, e.g., Alan N. Resnick, Bankruptcy As A Vehicle for Resolving 

Enterprise-Threatening Mass Tort Liability, 148 U. Pa. L. Rev. ____ 

(forthcoming 2000) M12. 

 16 
voluntary Chapter 11 filing. But SGL Carbon cites no case 

holding that petitions filed by financially healthy companies 

cannot be subject to dismissal for cause. At any rate, as we 

explain more fully, SGL Carbon's ability to meet its debts is 

but one of many factors compelling the conclusion it did 

not enter Chapter 11 with a valid reorganizational purpose. 

We do not hold that a company cannot file a valid 

Chapter 11 petition until after a massive judgment has 

been entered against it. Courts have allowed companies to 

seek the protections of bankruptcy when faced with 

pending litigation that posed a serious threat to the 

companies' long term viability. See, e.g., Baker v. Latham 

Sparrowbush Assocs. (In re Cohoes Indus. Terminal Inc.), 

931 F.2d 222 (2d Cir. 1991); In re The Bible Speaks, 65 

B.R. 415 (Bankr. D. Mass. 1986); In re Johns-Manville, 36 

B.R. 727 (Bankr. S.D.N.Y. 1984). In those cases, however, 

debtors experienced serious financial and/or managerial 

difficulties at the time of filing. In Cohoes, the Court of 

Appeals for the Second Circuit found a good faithfiling, in 

part, because "it [was] clear that Cohoes[the debtor] was 

encountering financial stress at the time it filed its petition 

. . . ." 931 F.2d at 228. In Bible Speaks, pending litigation 

had already had an adverse effect on the debtor'sfinancial 

well being as it was experiencing "a cash flow problem 

which prevent[ed] it from meeting its current obligations," 

compounded by an inability to obtain financing. 65 B.R. at 

426. In Johns-Manville, the debtor was facing significant 

financial difficulties. A growing wave of asbestos-related 

claims forced the debtor to either book a $1.9 billion 

reserve thereby triggering potential default on a $450 

million debt which, in turn, could have forced partial 

liquidation, or file a Chapter 11 petition. See In re JohnsManville, 36 B.R. at 730. Large judgments had already been 

entered against Johns-Manville and the prospect loomed of 

tens of thousands of asbestos health-related suits over the 

course of 20-30 years.15 See id. at 729. See also Sandrea 

_________________________________________________________________ 

15. A large number of pending or potential claims also contributed to two 

other mass tort related bankruptcy petitions. The 1985 bankruptcy 

petition of the A.H. Robins Company came only after"the Company had 

settled 9,238 claims for approximately $530,000,000" and "still faced 

 17 
Friedman, Note, Manville: Good Faith Reorganization or 

"Insulated" Bankruptcy, 12 Hofstra L. Rev. 121 (1983). 

For these reasons, SGL Carbon's reliance on those cases 

is misplaced. The mere possibility of a future need to file, 

without more, does not establish that a petition wasfiled in 

"good faith." See, e.g., In re Cohoes Indus. Terminal Inc., 

931 F.2d at 228 ("Although a debtor need not be in 

extremis in order to file [a Chapter 11] petition, it must, at 

least, face such financial difficulty that, if it did not file at 

that time, it could anticipate the need to file in the future."). 

SGL Carbon, by its own account, and by all objective 

indicia, experienced no financial difficulty at the time of 

filing nor any significant managerial distraction. Although 

SGL Carbon may have to file for bankruptcy in the future, 

such an attenuated possibility standing alone is not 

sufficient to establish the good faith of its present petition. 

ii. 

We also consider whether other evidence establishes the 

good faith of SGL Carbon's petition, that is, whether the 

totality of facts and circumstances support a finding of 

good faith. Courts have not been unanimous about what 

constitutes "good faith" in the Chapter 11filing context. 

See, e.g., In re Trident, 52 F.3d at 131 (setting forth eight 

factors for courts to consider); In re Marsch, 36 F.3d at 

828-29 (describing different approaches); In re Kerr, 908 

F.2d at 404 (defining "bad faith" as "a pattern of 

concealment, evasion, and direct violations of the Code or 

court order which clearly establishes an improper motive 

. . . ."); Carolin, 886 F.2d at 700-02 (examining approaches 

of other courts and holding a petition lacks good faith if 

_________________________________________________________________ 

over five thousand pending cases in state and federal court." In re A.H. 

Robins, 89 B.R. 555, 557 (Bankr. E.D. Va. 1988). Similarly, at the time 

it filed for bankruptcy Dow Corning Corporation faced 440,000 potential 

claimants which had resulted in the filing of more than "19,000 

individual silicone-gel breast implant lawsuits and at least 45 putative 

silicone-gel breast implant class actions." In re Dow Corning Corp., 211 

B.R. 545, 553 (Bankr. E.D. Mich. 1997). See also Richard L. Marcus & 

Edward F. Sherman, Complex Litigation (3d ed. 1998) 205-07. 

 18 
reorganization is objectively futile and if petitioner displays 

subjective bad faith); In re Phoenix Piccadilly , 849 F.2d at 

1394 (noting that courts may consider "any factors which 

evidence `an intent to abuse the judicial process and the 

purposes of the reorganization provisions' or . . . factors 

which evidence that the petition was filed `to delay or 

frustrate the legitimate efforts of secured creditors to 

enforce their rights' " (citations omitted)); In re Little Creek 

Dev. Co., 779 F.2d at 1072-73 (5th Cir. 1986) (instructing 

bankruptcy courts to consider "the debtor's financial 

condition, motives, and the local financial realities"). See 

also Cuevas, supra, at 529 (noting different approaches). 

Despite those differing approaches, several cases hold 

that a Chapter 11 petition is not filed in good faith unless 

it serves a valid reorganizational purpose. See, e.g., In re 

Marsch, 36 F.3d at 828; In re Coastal Cable, 709 F.2d at 

764 (stating that there must be "some relation" between 

filing and the "reorganization-related purposes that 

[Chapter 11] was designed to serve"); In re Ravick Corp., 

106 B.R. 834, 843 (Bankr. D.N.J. 1989). Similarly, because 

filing a Chapter 11 petition merely to obtain tactical 

litigation advantages is not within "the legitimate scope of 

the bankruptcy laws," In re Marsch, 36 F.3d at 828, courts 

have typically dismissed Chapter 11 petitions under these 

circumstances as well. See id.; In re Argus Group 1700, Inc., 

206 B.R. 757, 765-66 (E.D. Pa. 1997); Furness v. Lilienfield, 

35 B.R. 1006, 1013 (D. Md. 1983) ("The Bankruptcy 

provisions are intended to benefit those in genuine financial 

distress. They are not intended to be used as a mechanism 

to orchestrate pending litigation."); In re HBA East, Inc., 87 

B.R. 248, 259-60 (Bankr. E.D.N.Y. 1988) ("As a general rule 

where, as here, the timing of the filing of a Chapter 11 

petition is such that there can be no doubt that the 

primary, if not sole, purpose of the filing was a litigation 

tactic, the petition may be dismissed as not beingfiled in 

good faith."); In re Martin, 51 B.R. 490, 495 (Bankr. M.D. 

Fla. 1985). The In re Marsch Court articulated the 

relationship between the good faith determination and the 

dismissal of petitions filed merely for tactical advantage: 

 The term "good faith" is somewhat misleading. Though 

 it suggests that the debtor's subjective intent is 

 19 
 determinative, this is not the case. Instead, the"good 

 faith" filing requirement encompasses several, 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. Pursuant to 11 U.S.C. S 1112(b), 

 courts have dismissed cases filed for a variety of 

 tactical reasons unrelated to reorganization. 

In re Marsch, 36 F.3d at 828 (citations omitted). 

It is easy to see why courts have required Chapter 11 

petitioners to act within the scope of the bankruptcy laws 

to further a valid reorganizational purpose. Chapter 11 

vests petitioners with considerable powers--the automatic 

stay, the exclusive right to propose a reorganization plan, 

the discharge of debts, etc.--that can impose significant 

hardship on particular creditors. When financially troubled 

petitioners seek a chance to remain in business, the 

exercise of those powers is justified. But this is not so when 

a petitioner's aims lie outside those of the Bankruptcy 

Code. See United Sav. Ass'n v. Timbers of Inwood Forest 

Assocs., Ltd. (In re Timbers of Inwood Forest Assocs., Ltd.), 

808 F.2d 363, 373 (5th Cir. 1987) (en banc), aff'd, 484 

U.S. 365 (1988) (stating that if Chapter 11 plan does not 

have a rehabilitative purpose, the "statutory provisions 

designed to accomplish the reorganizational objectives 

become destructive of the legitimate rights and interests of 

creditors"); In re Little Creek, 779 F.2d at 1072 (explaining 

that Chapter 11 powers should be given only to debtors 

with "clean hands"); Furness, 35 B.R. at 1009 ("Chapter 11 

was designed to give those teetering on the verge of a fatal 

financial plummet an opportunity to reorganize on solid 

ground and try again, not to give profitable enterprises an 

opportunity to evade contractual or other liabilities."); see 

also 7 Collier on Bankruptcy at 1112-22 (stating that 

dismissal is appropriate when costs of Chapter 11 are not 

justified). 

Courts, therefore, have consistently dismissed Chapter 

11 petitions filed by financially healthy companies with no 

need to reorganize under the protection of Chapter 11. See 

In re Marsch, 36 F.3d at 828-29; In re Argus Group 1700, 

 20 
206 B.R. at 765-66; Furness, 35 B.R. at 1011-13; In re 

Talladega Steaks, Inc., 50 B.R. 42, 44 (Bankr. N.D. Ala. 

1985). Those courts have recognized that if a petitioner has 

no need to rehabilitate or reorganize, its petition cannot 

serve the rehabilititative purpose for which Chapter 11 was 

designed. See In re Winshall Settlor's Trust, 758 F.2d 1136, 

1137 (6th Cir. 1985) ("The purpose of Chapter 11 

reorganization is to assist financially distressed business 

enterprises by providing them with breathing space in 

which to return to a viable state."); see also S. Rep. No. 95- 

989, at 9 reprinted in 1978 U.S.C.C.A.N. 5787, 5795 (noting 

that "Chapter 11 deals with the reorganization of a

financially distressed enterprise . . . "). 

The absence of a valid reorganizational purpose 16 and the 

consequent lack of good faith by SGL Carbon is evident 

here. SGL Carbon's financial disclosure documents give no 

indication the company needed to reorganize under Chapter 

11 protection. Prior to filing, SGL Carbon had assets of 

$400 million and liabilities of only $276 million, or a net 

worth of $124 million. In addition, there is no evidence that 

SGL Carbon had difficulty meeting its debts as they came 

due, that it had any overdue debts, or that it had defaulted 

on any debts. Nor is there any evidence that SGL had any 

difficulty raising or borrowing money, or otherwise had 

impaired access to the capital markets. 

Statements by SGL Carbon and its officials confirm the 

company did not need to reorganize under Chapter 11. As 

discussed, in a press release issued when SGL Carbonfiled 

its petition, the company's president insisted SGL Carbon 

was "financially healthy" and that its "normal business 

operations" would continue despite bankruptcy. In 

addition, SGL AG's Chairman Robert Koehler stated in a 

conference call with securities analysts that SGL Carbon 

was experiencing "healthy and growing success" and denied 

that the class action antitrust litigation was materially 

interfering with SGL Carbon's operations or its customer 

_________________________________________________________________ 

16. By focusing on whether there is a valid reorganization purpose, we 

do not hold that a lack of good faith is limited to this situation. 

Indeed, 

"no list is exhaustive of all the factors which could be relevant when 

analyzing a particular debtor's good faith." In re Laguna, 30 F.3d at 738. 

 21 
relationships. Koehler added that unlike most Chapter 11 

cases, SGL Carbon's petition did not involve "serious 

insolvency or credit problems." SGL Carbon Vice President 

Theodore Breyer acknowledged in his deposition that SGL 

Carbon had no defaults nor any financial distress when it 

filed for Chapter 11. 

An examination of the reorganization plan SGL Carbon 

filed simultaneously with its Chapter 11 petition also 

suggests the petition was not motivated by a desire to 

reorganize or rehabilitate SGL Carbon's business. 17 Under 

the proposed plan, all creditors--including SGL Carbon's 

parent SGL AG--other than civil antitrust judgment 

creditors are to be paid in full in cash. Antitrust judgment 

creditors, by contrast, would be required to accept limitedtime credits to purchase SGL Carbon's products. 18 The 

plan's differing treatment of creditors suggests SGL 

Carbon's petition was not filed to reorganize the company 

but rather to put pressure on antitrust plaintiffs to accept 

the company's settlement terms.19 

_________________________________________________________________ 

17. Although the "good faith" of the reorganization plan is not before 

this 

court, the features of the proposed plan help illuminate the lack of good 

faith in the filing. Using the plan to reason backwards concerning SGL 

Carbon's motivations is consistent with the practices of bankruptcy 

courts. As one bankruptcy court has noted: 

 Much of the case law on good faith draws heavily upon the time- 

 honored method of analyzing and establishing a nexus between 

 cause and effect. Long a modus habilis not only in bankruptcy but 

 in criminal and tort law and in virtually any legal inquiry where 

 intent is an issue, this sort of posteriori inquiry permits courts 

to 

 work backwards from effect to cause--to reason, that is, that if 

the 

 probable effect of a reorganization plan is to treat unfairly of 

 creditors, then the probable cause of the filing was bad faith. 

In re Kahn, 34 B.R. 574, 575 (Bankr. W.D. Ky. 1983). 

18. Although the plan is not at issue, we note that an analogous 

arrangement was held inappropriate as a means of resolving an action 

in a nonbankruptcy context. See In re General Motors Corp. Pick-up Truck 

Fuel Tank Products Liability, 55 F.3d 768 (3d Cir. 1995). 

19. Although it is true the proposed plan would be subject to a separate 

"good faith" determination by the bankruptcy court before it could 

implemented, see 11 U.S.C. S 1129(a)(3), that is only appropriate if the 

 22 
Comments made by SGL Carbon and SGL AG officers 

support that view of SGL Carbon's motives for filing for 

Chapter 11. Those officers expressly and repeatedly

acknowledged Chapter 11 petition was filed solely to gain 

tactical litigation advantages. See, e.g., December 17, 1998 

Press Release; Koehler Conference Call of December 17, 

1998 ("We are [filing] merely . . . because of the excessive 

demands [of litigants]."); Breyer Deposition (filing for 

Chapter 11 would "change the negotiating platform" and 

"increase the pressure on . . . plaintiffs to settle"). In 

addition, under the heading "Factors Leading to the

Chapter 11 Filing," SGL Carbon's bankruptcy Disclosure 

Statement discusses only the civil antitrust litigation and 

the difficulties it was having in reaching a settlement with 

the remaining plaintiffs. 

On appeal, SGL Carbon plays down the litigation tactics 

behind its Chapter 11 petition and instead claims it was 

forced into Chapter 11 by serious economic difficulty 

stemming from the litigation. The company alleges this 

difficulty came in three forms: harmful distraction of its 

management, the possibility that the litigation would result 

in a judgment that "could very well force [SGL Carbon] out 

of business," and harm to its customer relationships with 

plaintiffs. Because we have already concluded thefirst two 

arguments are not supported by the facts, we will address 

only the third. 

We are not convinced by SGL Carbon's claim that a 

Chapter 11 filing was necessary because we see no 

evidence the antitrust litigation was significantly harming 

its business relationships with the antitrust plaintiffs. For 

example, none of SGL Carbon's officers stated that any 

customer terminated its purchases from the company 

_________________________________________________________________ 

bankruptcy petition properly belongs before the bankruptcy court. In a 

case, such as this one, where a debtor attempts to abuse the bankruptcy 

process, proceedings should end well before formal consideration of the 

plan. Cf. In re Metropolitan Realty Corp., 433 F.2d 676, 679 (5th Cir. 

1970) ("As soon as the lack of good faith affirmatively appeared, the 

district court acted properly in dismissing the petition even though the 

plan stage had not been reached."). 

 23 
because of the litigation.20 As noted, SGL AG Chairman 

Koehler denied the litigation was having a material impact 

on SGL Carbon's customer relationships. We note that SGL 

Carbon offered no evidence (testamentary or otherwise) 

from any customer on this issue. It is also significant that 

SGL Carbon's Disclosure Statement, which accompanied its 

petition, does not mention harm to customer relationships. 

Nor did SGL Carbon attempt to explain how filing for 

Chapter 11 would improve its customer relationships. As 

noted, many of those customers are plaintiffs in the 

antitrust litigation. Moreover, the evidence before the 

District Court indicated SGL Carbon's customers eliminated 

their orders only after the Chapter 11 petition wasfiled, 

suggesting it was the petition, rather than the litigation, 

that caused the harm of which the company now 

complains. After sifting through the evidence, the only 

support for SGL Carbon's argument are its conclusory 

allegations. We do not believe those suffice. 

SGL Carbon places great emphasis on In re The Bible

Speaks, 65 B.R. 415 (Bankr. D. Mass. 1986), and In re 

Johns-Manville, 36 B.R. 727 (Bankr. S.D.N.Y. 1984), two 

bankruptcy court cases relied on by the District Court.21 

After considering those cases, we conclude they are not 

dispositive. 

SGL Carbon cites In re The Bible Speaks to support its 

argument that the prospect of a significant litigation 

judgment by itself establishes the good faith of a Chapter 

11 petition. But the litigation in Bible Speaks posed 

substantially different problems than does the antitrust 

litigation here. In Bible Speaks, the bankruptcy court found 

_________________________________________________________________ 

20. In fact, SGL Carbon Vice President Breyer testified that he could only 

be certain that one customer had even reduced its purchases from SGL 

Carbon prior to its Chapter 11 petition. Maintaining that a second 

customer may also have reduced its purchases, Breyer could not say 

why either customer had reduced its purchases. Significantly, Breyer 

testified that no customer had terminated its relationship with SGL 

Carbon until after the filing. 

21. We note that SGL Carbon has not supported its argument that 

pending litigation establishes the good faith of a Chapter 11 filing with 

any cases from this circuit, or, indeed, any cases other than the 

distinguishable Bible Speaks and Johns-Manville. 

 24 
the litigation had "already produced a significant effect" on 

the debtor; because of the uncertainty surrounding the 

litigation, the debtor was "unable to obtainfinancing." 65 

B.R. at 426. SGL Carbon has not alleged the antitrust 

litigation has had a similar effect and such evidence is 

absent from the record. In addition, the court in Bible 

Speaks found that a significant judgment in the litigation 

would "probably terminate [the debtor's] existence." Id. 

There is no evidence SGL Carbon could not effectively use 

Chapter 11 following a judgment in the antitrust litigation. 

Also, the court found the litigation prevented the debtor in 

Bible Speaks from making "financing [arrangements] or any 

type of long range plans." Id. at 427. SGL Carbon has not 

alleged the antitrust litigation has impeded itsfinancing or 

planning activities; instead, the petitioner has repeatedly 

insisted the litigation has had no material effect on its 

operations. Finally, the court in Bible Speaks found that 

dismissal was not warranted because Chapter 11 was in 

the best interests of the debtor and its creditor. See id. at 

429. There is no such finding in this case. 

We also believe reliance on In re Johns-Mansville is 

misplaced. As an initial matter, the Johns-Manville Court 

had a narrow view of what constitutes "good faith." After 

expressing doubt that S 1112(b) imposes a good-faith 

requirement in all Chapter 11 cases, see 36 B.R. at 737, 

the court suggested that a Chapter 11 petition lacks good 

faith only if filed by a creditor-less company formed as a 

sham solely for the purpose of filing a bankruptcy petition, 

by a company that never operated legitimately, or by a 

company wishing to forestall tax liability or deed of trust 

powers. See id. at 737-38. As noted, most of the courts of 

appeals believe other facts and circumstances may evidence 

lack of good faith. 

Johns-Mansville is also factually distinguishable. In 

Johns-Manville, the bankruptcy court found the company 

had a "compelling" and "pressing" need to reorganize. Id. at 

730. As we have explained, SGL Carbon has no such need.22 

_________________________________________________________________ 

22. For example, the Johns-Manville Court noted that the company 

would have had to book a $1.9 billion tort liability reserve had it not 

filed 

for Chapter 11. See id. at 730. This booking would in turn have 

accelerated $450 million in outstanding debt and could have forced 

liquidation. SGL Carbon has not shown the failure tofile for Chapter 11 

would cause it such harm. 

 25 
Prior to the Chapter 11 filing, the Johns Manville plaintiffs 

had recovered nearly $4 million in punitive damages

against the company. See In re Johns-Manville, 36 B.R. 

743, 746 (Bankr. S.D. N.Y. 1984). The litigation effected by 

SGL's Chapter 11 petition, in contrast, is in its nascent 

stages. Johns-Manville faced "approximately 16,000 

lawsuits pending as of the filing date" with the prospect of 

the "filing of an even more staggering number of suits" over 

the course of 20-30 years. Johns-Manville, 36 B.R. at 729. 

By contrast, SGL Carbon faces a known and finite number 

of suits. In addition, the Johns-Manville Court made clear 

that its decision was based on factors other than the 

debtor's financial health. Unlike this case, the JohnsManville creditors pursued their motion only after sixteen 

months of bargaining over an acceptable reorganization 

plan resulted in a deadlock. In denying the creditors' 

motion to dismiss, the court stated it would "bear in mind 

the strategical motivations underlying [creditors'] pursuit of 

these motions at this time" and would recognize"the

progress toward a successful, perhaps consensual, 

reorganization that has already taken place." Id. at 731. 

The Official Committee of Unsecured Creditors here did not 

delay in filing the motion to dismiss SGL Carbon's Chapter 

11 petition; nor does SGL Carbon allege the creditors' 

motion was spurred by an intent to extract concessions in 

stalled negotiations. This case, therefore, involves neither 

the creditors' "strategical motivations" nor the "progress 

towards a successful . . . reorganization" that colored the 

Johns-Manville Court's opinion. Id. 

Based on the facts and circumstances of this case, we 

conclude SGL Carbon's Chapter 11 petition lacks a valid 

reorganizational purpose and consequently lacks good faith 

making it subject to dismissal "for cause" under 11 U.S.C. 

S 1112(b).23 

_________________________________________________________________ 

23. Because we conclude SGL Carbon's petition should be dismissed, we 

need not address the creditors' argument that the failure to dismiss 

would deprive it of its Seventh Amendment right to try its antitrust 

claims before a jury. 

 26 
C. 

In reaching our conclusion, we are cognizant that it is 

growing increasingly difficult to settle large scale litigation. 

See, e.g., Ortiz v. Fibreboard Corp., 119 S.Ct. 2295 (1999); 

Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997). We 

recognize that companies that face massive potential 

liability and litigation costs continue to seek ways to rapidly 

conclude litigation to enable a continuation of their 

business and to maintain access to the capital markets. As 

evidenced by SGL Carbon's actions in this case, the

Bankruptcy Code presents an inviting safe harbor for such 

companies. But this lure creates the possibility of abuse 

which must be guarded against to protect the integrity of 

the bankruptcy system and the rights of all involved in 

such proceedings. Allowing SGL Carbon's bankruptcy 

under these circumstances seems to us a significant

departure from the use of Chapter 11 to validly reorganize 

financially troubled businesses. 

IV. 

For the reasons stated, we will reverse the judgment of 

the District Court and remand to the District Court so that 

it may dismiss SGL Carbon's Chapter 11 petition. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 27