The debtor Coleen M. Larson filed a petition for chapter 11 relief on August 31, 1990. The debtor and her husband borrowed 3.4 million to build a 60 unit apartment building known as the Fontainebleau in 1985. The Larsons defaulted upon the loan on several occasions and were party to three separate workout agreements.

        On April 1, 1988, the Larsons filed for relief under chapter 7 of the Bankruptcy Code. The Larsons attempted a strip down of the 3.4 million dollar F.D.I.C. lien to 1.25 million. Judge Ross refused the requested strip down and the debtor appealed his decision to the Ninth Circuit Bankruptcy Appellate Panel.

        On April 20, 1990 the Larsons and F.D.I.C. entered into an agreement to pay the F.D.I.C. 1.8 million dollars for a release of its lien. The Bankruptcy Appellate Panel appeal was dismissed on April 26, 1990. On April 30, 1990 the F.D.I.C. received $150,000.00 in disbursements and the option price was lowered to $1,650,000.00. The Larsons had until June 1, 1990 to obtain 1.65 million to satisfy the F.D.I.C. The Larsons paid an additional $75,000.00 and the deadline was extended to August 31, 1990. The purchase amount was lowered to $1,575,000.00. There is         1 ABR 210  approximately $300,000.00 cash in hand held by a property management company that could be applied toward purchase. Coleen Larson has obtained a loose commitment to finance the balance of 1.3 million. There are tax liens and mechanic's liens against the property totalling approximately $180,000.00. Mrs. Larson received a discharge in her chapter 7 proceeding but the case remains open.

        A hearing was held on the F.D.I.C.'s motion for relief from stay, dismissal and sanctions on September 18, 1990. The hearing was continued on several occasions as the parties engaged in negotiations. The negotiations failed and a final hearing was held on October 5, 1990.

        At the hearing, it was apparent that the debtor now has no possibility of an effective reorganization. She is undergoing a divorce and has only a one-half interest in the property. Her spouse is apparently unwilling to convey the property to her, despite efforts on her part to obtain the property. The property has substantial liens for taxes and mechanic's liens against it which must be paid prior to financing. Her financing "commitment" is very loose and really no commitment at all at this time. Even the debtor admitted it would be "difficult" to close the transaction within the 60 day extension period of 11 U.S.C. § 108(b). Under these circumstances, there is no possibility of an effective reorganization for the debtor at this time.

        The F.D.I.C. seeks dismissal for a bad faith filing and sanctions under In re Chisum, 847 F.2d 597 (9th Cir. 1988). I have a problem with Chisum and its mandatory requirement of sanctions         1 ABR 211  for every bad faith dismissal. I think violations of Bankruptcy Rule 9011 should be met on the merits rather than automatically imposed. Here the debtor filed a petition based upon the 1981 Bankruptcy Appellate Panel decision In re Sante Fe Development and Mortgage Corporation, 16 B.R. 165 (Bankr. 9th Cir. 1981). Sante Fe allowed a "broad reading of section 108(b)" to preserve "the maximum amount of property and business opportunities to be used for the rehabilitation of the debtor." In re Sante Fe Development and Mortgage Corporation, supra at 168. From my viewpoint, the debtor and her attorney had, on the date of the petition, a belief that the petition was well grounded in fact and warranted by existing law or a good faith argument for the extension, modification or reversal of existing law. I do not think the petition was filed for an improper purpose, based upon that case. Moreover, the fact that her chapter 7 is still open is not determinative of the issue of bad faith. In re Grimes, 117 B.R. 531 (Bankr. 9th Cir. 1990).

        As events have unfolded it is apparent that the debtor now has no ability to reorganize. The petition will be dismissed on those grounds with prejudice. Although it is a close call, no sanctions will be imposed. The F.D.I.C. may pursue appropriate remedies for breach of the settlement agreement in another forum.

       DATED:    October 10, 1990.

DONALD MacDONALD IV
United States Bankruptcy Judge