By Trisha L. Mowbray & Ryan Sims (Jones Day)
The Bankruptcy Code includes special protections for real property lessees whose lease agreements are rejected in bankruptcy by a trustee or chapter 11 debtor-in-possession by giving a lessee under a rejected real property lease the option to remain in possession of the leased premises during the remaining term of the lease. The Bankruptcy Code also provides that a chapter 11 plan must be proposed in good faith as a condition to confirmation of the plan.
The interaction between these two concepts took center stage in a ruling handed down by the U.S. Bankruptcy Court for the District of Colorado. In In re The Aspen Chapel, No. 22-11531 MER, 2026 WL 120329 (Bankr. D. Col. Jan. 15, 2026), the court refused to approve a disclosure statement for a chapter 11 plan that, as proposed, would have violated the statutory protections given to a tenant under a rejected lease. The court also held that the plan was unconfirmable for this reason and because the debtor proposed the plan in bad faith by attempting to rewrite the provisions of the rejected lease in derogation of the non-debtor tenant’s rights.
Aspen Chapel is an unusual case. It involved a financially viable debtor with few debts that did not need to file for chapter 11 protection to reorganize or restructure its liabilities. Instead, the debtor filed for bankruptcy in an effort to reject a real property and then reform the lease agreement for its own benefit. The court accordingly concluded that, even at the disclosure statement stage, the plan was patently unconfirmable because it clearly violated the applicable provisions of the Bankruptcy Code and was therefore not proposed in good faith.
The good faith chapter 11 filing and plan proposal requirements have been much in the news in recent times, with high-profile rulings in several mass tort bankruptcy cases. [Editor’s Note: The BRT recently featured a ruling in the District of Delaware allowing a cannabis company’s Chapter 15 petition, which was filed in part to circumvent rejection in Chapter 11 for failing to file in good faith.]
Key takeaways from the decision include:
- A bankruptcy court can deny confirmation of a chapter 11 plan, even in connection with a motion for court approval of an otherwise unobjectionable disclosure statement, if the plan is unconfirmable because, among other things, it does serve a valid bankruptcy purpose.
- There is an important distinction between the bad faith standard for dismissal of a chapter 11 case, and the requirement that a chapter 11 plan be proposed in good faith.
- Although there is no insolvency requirement for a chapter 11 filing, a solvent debtor must still demonstrate some financial distress that necessitates a chapter 11 filing.
- A plan that does not comply with the applicable provisions of the Bankruptcy Code is not proposed in good faith.
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