Memorandum of Decision Re: New Debtor Syndrome

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re NPNGN, INC.,                                       No. 1-90-01145      Debtor. ___________________________/
Memorandum of Decision
     The debtor was a shell corporation until shortly before its filing, when real property being foreclosed upon was transferred to it by its principal. The foreclosing creditor, the FDIC as Receiver for North America Savings and Loan, promptly brought a motion for relief from the automatic stay, arguing that the petition was filed in bad faith.      After taking testimony, the court found that this was a classic "new debtor syndrome" situation and granted relief as prayed. However, the court found that the case had been filed on the bad advice of counsel and his incorrect belief that the filing was proper. Accordingly, the court stayed the relief granted to FDIC briefly to give the debtor's principal time to consider his options. The debtor then made the instant motion to dismiss these proceedings. The FDIC opposes the motion.      The motives of the FDIC in opposing dismissal are clear. It already has relief from the stay, so that it can proceed unimpeded by the bankruptcy. By keeping the debtor in a bankruptcy proceeding where it has already been adjudicated to be in bad faith, the FDIC avoids the possibility of a subsequent good faith filing where the actual merits of its stay relief request would be litigated. However, this is far more of a sanction against the debtor than the court intended.      In this circuit, a "new debtor syndrome" case is presumptively filed in bad faith; an honest intend to reorganize is irrelevant. In re Thirtieth Place, Inc., 30 B.R. 503 (9th Cir.BAP 1983). However, this does not mean that such a filing is the nefarious crime against man and nature which FDIC argues. Indeed, several distinguished judges have published decisions supporting the legitimacy of "new debtor syndrome" filings. See, e.g., Judge George's dissent in Thirtieth Place and Judge Rainville's decision in In re The Beach Club, 22 B.R. 597 (Bkrtcy.N.D.Cal.1982).      This court granted the FDIC's motion not because it felt that the filing was malum per se; the general economy benefits any time a distressed property is taken off the auction block, and benefits even more if there is a successful reorganization. Rather, the court granted the motion because in this circuit such filings are malum prohibitum under Thirtieth Place.      The FDIC could have sought either dismissal of this case or relief from the automatic stay. Thirtieth Place, supra. Having elected the latter remedy, the FDIC cannot in good faith oppose a subsequent dismissal, thereby achieving a sanction beyond what the court intended. Indeed, if the court were to keep the case open it would deem that by opposing dismissal FDIC had ratified the filing, and thus waived its right to relief from the stay based on a bad faith filing.      For the foregoing reasons, the debtor's motion will be granted and the case will be dismissed. This memorandum constitutes the court's findings and conclusions.
Dated: January 12, 1991                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy