In the early 2000s, the conversation around the standards for a good faith filing in bankruptcy was intense, particularly leading up to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Concerns were widespread that bankruptcy provisions were vulnerable to abuse, prompting a national debate on what could constitute a bad-faith filing. Nearly 20 years later, the landscape has evolved significantly. The financial crisis of 2008 brought unprecedented mortgage foreclosures and forced a larger segment of the population to consider bankruptcy. This historical shift has influenced how courts and practitioners approach the question of good faith in bankruptcy filings today.
Identifying Bad Faith Filings: Key Indicators
Outside of mass tort bankruptcies, cases dismissed for bad faith typically involve debtors perceived to be abusing the automatic stay provision, particularly in single-asset bankruptcies. These situations often arise when a debtor uses bankruptcy not to reorganize or protect assets but rather as a tactical weapon to delay creditors—what can be described as using bankruptcy as a sword rather than a shield.
Serial filers, or those engaging in successive Chapter 11 filings (often referred to as "Chapter 22" cases), also face scrutiny for bad faith. Additionally, courts may view the filing with suspicion when bankruptcy is used to resolve a two-party dispute. However, it’s important to note that none of these scenarios automatically constitute bad faith. Courts assess bad faith by considering the totality of the circumstances, meaning that each case is judged on its specific facts.
Why No Pre-Filing Good Faith Standard?
One might wonder why there isn't a pre-filing standard to deter bad faith bankruptcies before they reach the courts, saving money that could be used to pay off debts. This is due to the nature of financial distress. When a company or individual faces severe financial difficulties, the need for bankruptcy protections often arises suddenly. A lengthy, multi-factor analysis to determine good faith before filing would create a bottleneck, potentially undermining the protective purpose of Chapter 11.
What Would a Good Faith Filing Requirement Look Like?
If a good faith filing requirement were implemented, it would need to be highly flexible. The requirement would likely focus on the debtor's demonstration of a legitimate need for bankruptcy protection rather than simply proving financial distress. Current bankruptcy law does not require debtors to show means of insolvency; any good faith requirement would need to respect this principle.
Notable Cases of Bad Faith and Contested Filings
While mass tort bankruptcies often grab headlines, other types of filings have also been dismissed for bad faith. Although it's challenging to pinpoint a significant non-mass tort case dismissed solely for bad faith, courts tend to scrutinize successive Chapter 11 filings closely. On the flip side, some cases, despite facing allegations of bad faith, remain in bankruptcy. A notable example is In re Bowers Inv. Co., LLC, where the court allowed the bankruptcy to proceed despite challenges.
Circuit Splits: Divergent Approaches to Evaluating Good Faith
The evaluation of good faith in bankruptcy is not uniform across all jurisdictions. Most circuits assess the totality of circumstances, considering factors such as the debtor's honesty, the purpose of the filing, and compliance with court procedures. However, there is a notable split between circuits on the "objective futility" requirement. The Fourth Circuit, for instance, requires not only a finding of bad faith but also that reorganization is objectively futile—a higher bar than in other circuits, such as the Eleventh, which allows for dismissal purely on the basis of bad faith.
The Impact of Recent High-Profile Bankruptcies
The issue of bad faith filings has gained renewed attention following the first bankruptcy attempt by Johnson & Johnson's subsidiary LTL Management LLC. While this case has brought the discussion to the forefront, concerns about bad faith filings are not new. They have been a persistent issue in bankruptcy law, albeit with varying degrees of prominence depending on the economic context and the specific cases.
What Constitutes a Bad Faith Filing?
The concept of a bad faith filing remains somewhat subjective, but certain principles are generally agreed upon. A filing is likely to be deemed in bad faith if the debtor cannot demonstrate a genuine need for bankruptcy protections—beyond merely delaying creditors—or if reorganization is futile and unlikely to add value for creditors. When these conditions aren't met, bankruptcy is more likely being used as a strategic tool to harass creditors rather than as a necessary shield to protect the debtor.
Conclusion
The last two decades have seen significant changes in how courts and practitioners approach the concept of good faith in bankruptcy filings. While the standards continue to evolve, the underlying principles of fairness, honesty, and the need for protection remain central to evaluating each case. As the landscape of bankruptcy law continues to develop, understanding the nuances of good faith filings will remain critical for both debtors and creditors navigating these complex waters.
