The "good faith" of a chapter 13 debtor will now be subject to examination at two different instances in the confirmation process. 11 U.S.C. §1325 (a)(3) requires that the court find that "the plan has been proposed in good faith and not by any means forbidden by law." BAPCPA amends 11 U.S.C. §1325(a) by adding new subsection (7), which provides that confirmation of a plan is also dependent upon whether "the action of the debtor in filing the petition was in good faith." Objecting creditors now have two "good faith" arguments available.

Totality of the Circumstances Defines Good Faith

"Good faith" is not defined in either the Bankruptcy Code or in BAPCPA. "Good faith" is defined in Black's Law Dictionary (8th Edition, 2004) as "a state of mind consisting in (1) honesty in belief or purpose...(4) absence of intent to defraud or to seek unconscionable advantage." Most circuits have looked to the "totality of the facts and circumstances." In re Smith, 2005 WL 2030520 (Bankr. W.D. Mo. 2005), and In re Henry, 2004 WL 3485494 (Bankr. S.D. Ohio 2004), are the most recent cases articulating the approaches in the Sixth and Eighth Circuits. In order to define and develop the concept of "good faith," those various circuits outlined factors to be examined in order to properly apply a good-faith standard. Some of those factors include motivation and sincerity of the debtor, whether there were inaccuracies in the plan that would mislead the court, the extent of preferential treatment, etc.; more than a dozen factors are discussed in these cases.¹ But these cases relate to whether the debtor proposes the plan in good faith. One can argue that some of those standards apply to the filing of the petition.

Likewise, in applying the good-faith requirement of 11 U.S.C. §1129(a)(3), the courts have looked to the totality of the circumstances. The Seventh Circuit in In re Madison Hotel Associates, 749 F.2d 410, 415 (7th Cir. 1984), defined good faith to include "a reasonable likelihood that that plan will achieve a result consistent with the objectives and purposes of the Bankruptcy Code."

Improper Purpose Defines Bad Faith

Under 11 U.S.C. §303(i)(2), the court can enter judgment against a petitioning creditor who acts in "bad faith." In the latter instance, the legislative history talks about "frivolous...and spiteful petitions..."² "Bad faith" is not defined in the Bankruptcy Code. A "bad-faith filing" is defined in Black's Law Dictionary as "the act of submitting a bankruptcy petition that is inconsistent with the purpose of the Bankruptcy Code or is an abuse of the bankruptcy system (i.e., not having filed in good faith)."

The applicable case law is more expansive.³ If one presumes that "bad faith" evidences a lack of good faith, this case law is instructive in suggesting several tests that can be applied. The "improper use" test looks to whether or not the petitioning creditor sought to obtain a disproportionate advantage.⁴ The "improper purpose" test finds bad faith if the filing of the petition was motivated by factors such as ill will, malice or an intent to harass or embarrass.⁵ There are additional tests based on a reasonable-person standard or a Rule 9011 standard.⁶

These tests may be applied to aid the court in determining whether or not the chapter 13 debtor filed the petition in "bad faith" or did not evidence "good faith," yet one must be mindful that 11 U.S.C. §303(i)(2) relates to an award of damages and not a denial of confirmation.

Presumptively Not in Good Faith

BAPCPA added 11 U.S.C. §362(c) (3)(c), which discusses the effect of prior filings. There is a presumption of "not in good faith" filing if the prior case was dismissed because the debtor failed to file the proper documents, comply with court orders or pay adequate protection assuming no change in the debtor's circumstances. BAPCPA also added 11 U.S.C. §362-(c)(4)(D) to address serial filing of three cases. The same presumption of filing "not in good faith" applies to the third filing. Creditors will benefit from the presumption in objecting to confirmation in cases filed under the factual circumstances set out in these amendments.

Conclusion

There is no legislative history to help counsel and the courts. The plain meaning of "good faith" and "bad faith" are defined in terms consistent with bankruptcy case law. The amendment effected by 11 U.S.C. §1325(a)(7) was no doubt intended by the credit industry supporters of BAPCPA to give creditors another tool to prevent bankruptcy abuse. The resulting litigation will lead to standards and tests developed by the courts. Creditors will utilize 11 U.S.C. §362(c) amendments to deny confirmation. The results are likely to be consistent with case law developed under 11 U.S.C. §§1325(a)(3), 303(i)(2) and 1129(a)(3).

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Footnotes

¹ In re Estus, 695 F.2d 311 (8th Cir. 1982), and In re Caldwell, 851 F.2d 852, 859-60, (6th Cir. 1988). Return to article

² 130 Cong. Rec. H 7482 (June 29, 1984). Return to article

³ See the discussion in In re Bayshore Wireless Products Corp., 209 F.3d 100 (2d Cir. 2000). Return to article

⁴ In re K.P. Enter., 135 B.R. 174, 179 (Bankr. D. Me. 1992). Return to article

⁵ In re Camelot Inc., 25 B.R. 861, 864 (Bankr. E.D. Tenn. 1982). Return to article

⁶ See In re Wavelength Inc., 61 B.R. 614, 620 (9th Cir. BAP 1986) ("what a reasonable person would have believed"); General Trade Inc. v. Yale Materials Handling Corp., 119 F.3d 1485, 1501-1502. A number of courts apply the standards set forth in Bankruptcy Rule 9011. Return to article