Chapter 11 Plan that Abridged Non-Debtor Lessee's Rights to Remain in Possession After Rejection Unconfirmable as Having Been Proposed in Bad Faith

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 ("DIP") 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. 

Rejection in Bankruptcy of Unexpired Leases Under Which the Debtor Is the Lessor 

Section 365(a) of the Bankruptcy Code provides that, subject to bankruptcy court approval, a bankruptcy trustee or DIP (pursuant to section 1107(a)) "may assume or reject any executory contract or unexpired lease of the debtor." Rejection of a contract or lease that has not been previously assumed by the trustee constitutes a breach of the agreement as of the date immediately preceding the bankruptcy petition date. See 11 U.S.C. § 365(g). 

Section 365(h)(1) provides that, if the trustee or DIP rejects an unexpired real property lease under which the debtor is the lessor, the non-debtor lessee (and any permitted successor or assign, pursuant to subsection (h)(1)(D)) has the option of either treating the lease as terminated or retaining its rights under the lease for the balance of the lease term. In particular, section 365(h)(1)(A) provides as follows: 

If the trustee rejects an unexpired lease of real property under which the debtor is the lessor and— 

(i) if the rejection by the trustee amounts to such a breach as would entitle the lessee to treat such lease as terminated by virtue of its terms, applicable nonbankruptcy law, or any agreement made by the lessee, then the lessee under such lease may treat such lease as terminated by the rejection; or 

(ii) if the term of such lease has commenced, the lessee may retain its rights under such lease (including rights such as those relating to the amount and timing of payment of rent and other amounts payable by the lessee and any right of use, possession, quiet enjoyment, subletting, assignment, or hypothecation) that are in or appurtenant to the real property for the balance of the term of such lease and for any renewal or extension of such rights to the extent that such rights are enforceable under applicable nonbankruptcy law. 

11 U.S.C. § 365(h)(1)(A). Pursuant to section 365(h)(1)(B), a tenant electing to retain its rights under a rejected lease may offset future rent against any damages caused by the debtor-lessor's nonperformance after the rejection date, but cannot assert a claim against the estate. 

In enacting section 365(h)(1), lawmakers sought to "codify a delicate balance between the rights of a debtor-lessor and the rights of its tenants" by preserving the parties' expectations in a real estate transaction. In re Lee Road Partners, Ltd., 155 B.R. 55, 60 (Bankr. E.D.N.Y. 1993). The provision's legislative history indicates that lawmakers intended that rejection of a lease by a debtor-lessor should not deprive the tenant of its estate for the term for which it bargained. See H.R. Rep. No. 95-595, 349–50 (1977); S. Rep. No. 95-989, 60 (1978). 

Good Faith Chapter 11 Plan Proposal, Legality, and Bankruptcy Code Compliance Requirements 

Section 1129(a) of the Bankruptcy Code sets forth the requirements for consensual confirmation of a chapter 11 plan. Sections 1129(a)(1) and (a)(2) mandate that the plan and the plan proponent, respectively, comply with the applicable provisions of the Bankruptcy Code. 

Section 1129(a)(3) provides that every chapter 11 plan must be "proposed in good faith and not by any means forbidden by law." This provision has been construed to require that a plan be proposed with honesty and good intentions and with a basis for expecting that a reorganization or liquidation, as the case may be, can be effected. See In re Breitburn Energy Partners LP, 582 B.R. 321, 352 (Bankr. S.D.N.Y. 2018) (citing cases). 

In keeping with that mantra, bankruptcy courts are required to determine whether a chapter 11 plan, viewed in light of the totality of the circumstances, fairly "achieve[s] 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) (citations omitted); Breitburn, 582 B.R. at 352; see generally Collier on Bankruptcy ("Collier") ¶ 1129.02[3] (16th ed. 2026). In making a good-faith determination, court have considered several factors. These include 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 Travelers Ins. Co. v. Pikes Peak Water Co. (In re Pikes Peak Water Co.), 779 F.2d 1456, 1460 (10th Cir. 1985); Search Mkt. Direct Inc. v. Jubber (In re Paige), 685 F.3d 1160, 1178–79 (10th Cir. 2012). 

The good faith plan proposal requirement under section 1129(a)(3) must be distinguished from the requirement that a chapter 11 case be filed in good faith, absent which the case may be dismissed for "cause" under section 1112(b) of the Bankruptcy Code. See In re Boy Scouts of Am., 137 F.4th 126, 166 n.25 (3d Cir. 2025) ("[t]he question of whether a Chapter 11 bankruptcy petition is filed in good faith is a judicial doctrine, distinct from the statutory good faith requirement for confirmation pursuant to § 1129(a)(3). … So while both inquiries concern the good faith of the debtor, the good-faith proposal of a plan implicates unique considerations about the treatment of creditors and the prospect of effectuating the Code's purposes.") (citation omitted), cert. denied sub nom. Lujan Claimants v. Boy Scouts of Am., No. 25-490, 2026 WL 79599 (U.S. Jan. 12, 2026); Madison Hotel, 749 F.2d at 425 ("[F]or purposes of determining good faith under section 1129(a)(3) …, the important point of inquiry is the plan itself and whether such plan will fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code. The district court's decision failed to make this legal distinction between the good faith that is required to confirm a plan under section 1129(a)(3) and the good faith that has been established as a prerequisite to filing a Chapter 11 petition for reorganization."); see generally Collier at ¶ 1112.07[5][b][3]. 

Aspen Chapel 

The Aspen Chapel (the "debtor") is a Colorado nonprofit that owns a building leased to the Aspen Jewish Congregation ("AJC") under a 99-year lease agreement (the "lease") executed in 1989. The lease was not a typical commercial lease in that it did not grant AJC the exclusive use of the chapel, but instead provided that AJC would share occupancy with other tenants and pay a portion of unidentified and unquantified "maintenance and operation costs." The lease suggested that tenants would fundraise to pay for current and future "repairs and replacements," but without specifying any details. It also lacked other typical commercial lease provisions, such as a default provision and terms governing modification of the agreement. The lease's lack of clarity concerning rent, maintenance, and other payments led to litigation between the debtor and AJC. 

The debtor filed for chapter 11 protection in 2022 in the District of Colorado. The debtor immediately sought bankruptcy court authority to reject the lease, but AJC elected to retain its right to occupy the chapel pursuant to section 365(h)(1)(A)(ii) of the Bankruptcy Code, including rights "relating to the amount and timing of payment of rent and other amounts … and any right of use, possession, quiet enjoyment that are in or appurtenant to the real property for the balance of the terms of such lease." 

Because rejection of the lease did nothing to resolve the dispute between the debtor and AJC, the debtor proposed to do so in its chapter 11 plan. The original plan included several terms that would control the relationship between the parties going forward, including permitted use of the chapel, specific payment obligations, and standard lease terms, including a default provision. According to the debtor, these provisions merely documented terms that had been established by the parties' course of conduct during the 36 years that AJC had been a tenant. AJC countered that the plan's provisions regarding the lease were in derogation of AJC's rights under section 365(h). 

The bankruptcy court agreed with AJC, ruling that the parties' course of performance largely failed to establish the clear terms of the lease, and that the chapter 11 plan was unconfirmable under section 1129(a)(1) of the Bankruptcy Code because it failed to comply with the provisions of the Bankruptcy Code, including section 365(h). The court also concluded that the debtor had not proposed the plan in good faith—as required by section 1129(a)(3)—because it did not serve a legitimate bankruptcy purpose. According to the bankruptcy court, the primary reason the debtor filed for bankruptcy and proposed the plan was to reject the lease and force new lease terms on AJC. 

The debtor amended its chapter 11 plan several times, arguing that the most recent amended plan included lease terms that complied with the bankruptcy court's previous ruling. AJC countered that the amended plan suffered from the same infirmities that led the court to rule the initial plan unconfirmable. The debtor then sought approval of a disclosure statement for the amended plan. 

The Bankruptcy Court's Ruling 

Initially, U.S. Bankruptcy Judge Michael E. Romero explained that the motion before the court sought approval of the disclosure statement for the debtor's amended plan under the "adequate information" requirements of section 1125 of the Bankruptcy Code, rather than confirmation of the plan. Even so, he emphasized, it is within a bankruptcy court's discretion to deny approval of a disclosure statement if it supports "an inherently or patently unconfirmable" plan, thereby preventing the waste of resources entailed by soliciting acceptances for a futile plan. Aspen Chapel, 2026 WL 120329, at *2 (citing In re American Capital Equipment, LLC, 688 F.3d 145, 154 (3d Cir. 2012)). 

A chapter 11 plan is "patently unconfirmable," Judge Romero noted, if confirmation defects cannot be remedied by creditor voting, and those infirmities concern either undisputed or fully developed material facts. Id. (citing In re K Lunde, LLC, 513 B.R. 587, 590 (Bankr. D. Colo. 2014)). 

The bankruptcy court agreed with AJC that, despite modifications to certain provisions of the original chapter 11 plan regarding the lease terms, the amended plan altered AJC's rights under the lease in violation of section 365((h). According to Judge Romero, the amended plan altered the status quo "by providing clear-cut payment terms favorable to the Debtor" and specific limitations on usage rights that were not in the lease. Id. at *3. 

Such derogation of section 365(h), the bankruptcy court wrote, "demonstrate[s] that, as with the First Plan, the Debtor did not propose the Amended Plan in good faith," as required by section 1129(a)(3). 

Because the debtor was solvent with relatively few liabilities, Judge Romero explained, the chapter 11 case was "somewhat unusual." He noted that, although there is no insolvency requirement for a bankruptcy filing, the absence of such a prerequisite "'does not mean that all solvent firms should have unfettered access to Chapter 11.'" Id. at *4 (quoting In re Integrated Telecom Express, Inc., 384 F.3d 108, 122 (3d Cir. 2004). Instead, Judge Romero emphasized, "a solvent debtor must still demonstrate some financial distress that necessitates a Chapter 11 filing." Id. (citing Integrated Telecom, 384 at 122; In re Roman Catholic Church of Archdiocese of New Orleans, 632 B.R. 593, 602 (Bankr. E.D. La. 2021)). If a debtor does not require rehabilitation or reorganization, he wrote, "its plan cannot serve 'the rehabilitative purpose for which Chapter 11 was designed.'" Id. (quoting In re SGL Carbon Corp., 200 F.3d 154, 163 (3d Cir. 1999); Integrated Telecom, 384 F.3d at 122). 

In the case before it, the bankruptcy court found, the debtor was financially viable and could easily pay its prepetition debts, which included no secured debt encumbering the chapel. According to the court, in the absence of any financial distress, it was evident that the debtor did not need a plan of reorganization, but rather, filed for bankruptcy to reject the lease and obtain a new lease with AJC with defined payment obligations and use restrictions. 

Judge Romero noted that it is not bad faith for a debtor to file for bankruptcy to take advantage of provisions of the Bankruptcy Code, such as the statutory cap on claims arising from the rejection of real property leases in section 502(b)(6). However, he emphasized, "a debtor must show its plan serves a legitimate bankruptcy purpose beyond the mere desire to invoke a particular provision of the Code." Otherwise, the good faith limitation would be "eviscerate[d]" inasmuch as "every bankruptcy filing is to obtain relief under some provision of the Bankruptcy Code." Id. 

The bankruptcy court concluded that that the debtor's proposal of an amended chapter 11 plan that forced altered lease terms onto AJC in violation of section 365(h) demonstrated a lack of good faith. 

It accordingly denied approval of the disclosure statement, denied confirmation of the amended plan, and directed the debtor to inform the court how it intended to proceed (either by amending the plan once more or seeking dismissal of the case). 

Outlook 

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. See, e.g., In re LTL Management, LLC, 58 F.4th 738 (3d Cir. 2023), amended and superseded, 64 F.4th 84, 101, 103 (3d Cir. 2023) (ruling that "a debtor who does not suffer from financial distress cannot demonstrate its Chapter 11 petition serves a valid bankruptcy purpose supporting good faith," but noting that financial distress does not always require insolvency); In re Bestwall LLC, 71 F.4th 168, 182 (4th Cir. 2023) (distinguishing LTL and reiterating its departure from the Third Circuit regarding the standard for dismissal for bad faith filings by noting that "this Court applies a more comprehensive standard to a request for dismissal of a bankruptcy petition for lack of good faith; that is, the complaining party must show both 'subjective bad faith' and the 'objective futility of any possible reorganization.'"); In re Aldrich Pump LLC, 2023 WL 9016506 (Bankr. W.D.N.C. Dec. 28, 2023) (refusing to dismiss absent demonstration of objective futility even if the debtor lacked financial distress); In re Bestwall LLC, 658 B.R. 348 (Bankr. W.D.N.C. 2024) (finding no constitutional requirement of financial distress by a chapter 11 debtor), aff'd, 148 F.4th 233 (4th Cir. 2025). 

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.