Bad Faith in Chapter 11: When Bankruptcy Becomes a Weapon Instead of a Shield

Chapter 11 bankruptcy exists so that businesses in financial distress can reorganize their debts and emerge as going concerns. It is not a tool for solvent companies to rewrite contracts they don’t like. A recent decision from the U.S. Bankruptcy Court for the District of Colorado draws that line with clarity.

In In re The Aspen Chapel, No. 22-11531 MER, 2026 WL 120329 (Bankr. D. Col. Jan. 15, 2026), Judge Michael E. Romero refused to approve a disclosure statement for a Chapter 11 plan proposed by a Colorado nonprofit that owned a chapel leased to the Aspen Jewish Congregation under a 99-year lease executed in 1989. The lease was unusual: it did not grant exclusive use, lacked specific payment terms, had no default provision, and contained no modification clause. Those ambiguities produced years of litigation between the parties.

Rather than resolving the dispute in state court, the debtor filed for Chapter 11 in 2022 and immediately sought to reject the lease. The tenant exercised its rights under Section 365(h)(1)(A)(ii) of the Bankruptcy Code, which gives a non-debtor lessee the option to remain in possession for the balance of the lease term after rejection. This is one of the most important protections in the Code. The legislative history is explicit: rejection of a lease by a debtor-lessor should not deprive the tenant of the estate for which it bargained. See H.R. Rep. No. 95-595, 349–50 (1977); S. Rep. No. 95-989, 60 (1978).

The debtor’s plan attempted to override that protection by imposing specific payment obligations, usage limitations, and a default provision that were not in the original lease. The debtor argued these terms merely documented the parties’ 36-year course of conduct. The court disagreed, finding that the course of performance “largely failed to establish the clear terms of the lease” and that the plan altered the status quo by providing payment terms favorable to the debtor and usage restrictions not found in the lease.

Judge Romero’s analysis hit on two independent confirmation barriers.

First, the plan violated Section 1129(a)(1) because it failed to comply with the Bankruptcy Code, specifically Section 365(h). A tenant who elects to retain its rights under a rejected lease keeps all of those rights, including rights relating to the amount and timing of rent, use, possession, quiet enjoyment, subletting, and assignment. The debtor cannot use a plan to rewrite those terms.

Second, the plan was not proposed in good faith under Section 1129(a)(3). The good faith inquiry at the plan confirmation stage asks whether the plan achieves a result consistent with the objectives and purposes of the Bankruptcy Code. Matter of Madison Hotel Assocs., 749 F.2d 410, 425 (7th Cir. 1984). Courts consider whether the debtor has attempted to abuse the judicial process, the purpose of the Chapter 11 case, the debtor’s conduct during the case, and the provisions of the plan itself. See In re Pikes Peak Water Co., 779 F.2d 1456, 1460 (10th Cir. 1985).

The court drew an important distinction here. Filing for bankruptcy to take advantage of a specific provision of the Code, such as the statutory cap on lease rejection claims under Section 502(b)(6), is not inherently bad faith. But the debtor must show the plan serves a legitimate bankruptcy purpose beyond the mere desire to invoke a particular Code provision. As Judge Romero put it, every bankruptcy filing is to obtain relief under some provision of the Code; if that were sufficient by itself, the good faith limitation would be meaningless.

This debtor was solvent. It had relatively few liabilities and no secured debt encumbering the chapel. The court found the bankruptcy was filed primarily to reject the lease and force new terms on the tenant, not to reorganize or restructure financial obligations. While insolvency is not required for a Chapter 11 filing, a solvent debtor must still demonstrate some financial distress that necessitates bankruptcy relief. The court cited the Third Circuit’s influential decision in In re LTL Management, LLC, 64 F.4th 84 (3d Cir. 2023), which held that a debtor not suffering from financial distress cannot demonstrate that its petition serves a valid bankruptcy purpose.

There are several practical takeaways from this case.

For commercial landlords and tenants, the decision reinforces that Section 365(h) protections are robust. A debtor-lessor cannot reject a lease and then use the plan process to impose different terms. The tenant’s right to remain in possession includes the right to the same economic deal it bargained for.

For real estate operators considering strategic bankruptcy filings, the case is a cautionary tale. If you’re solvent and your primary objective is to change the terms of a lease or other contract, bankruptcy court is likely the wrong forum. The court will look at the totality of the circumstances and ask whether the plan serves a legitimate rehabilitative purpose. If the answer is no, the plan won’t be confirmed, and you’ll have consumed years and significant resources to end up right where you started.

For bankruptcy practitioners, the decision is a reminder that courts retain discretion to deny approval of a disclosure statement, not just deny plan confirmation, when the plan is “patently unconfirmable.” A plan is patently unconfirmable when its defects cannot be remedied by creditor voting and involve undisputed or fully developed material facts. Citing In re American Capital Equipment, LLC, 688 F.3d 145, 154 (3d Cir. 2012), the court found this standard was met because the plan’s violations of Section 365(h) were clear on the face of the plan documents.

This decision sits alongside a growing body of case law, including LTL Management, In re Bestwall LLC, 71 F.4th 168 (4th Cir. 2023), and In re SGL Carbon Corp., 200 F.3d 154 (3d Cir. 1999), establishing that Chapter 11 has boundaries. It is a powerful tool for genuine reorganization, but it is not a blank check for strategic maneuvering by parties who don’t need its protections.