Cite as: Keith M. Lundin, Lundin On Chapter 13, § 103.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
The good-faith requirement for confirmation in § 1325(a)(3) is the most litigated provision of Chapter 13 and one of the most litigated provisions of the entire Code. At this writing, there are more than 600 reported decisions applying the good-faith standard, including at least 47 opinions from the courts of appeals and bankruptcy appellate panels.1 The cases are a labyrinth of rules and exceptions swallowing rules. Nearly identical fact patterns have produced conflicting results across jurisdictions and even within the same jurisdiction over time. Statutory changes since 1978—in particular, the enactment of the disposable income test in § 1325(b) in 19842—have caused many courts to rethink the meaning of good faith.
If a creditor goes to the expense of raising an objection to confirmation in a Chapter 13 case, chances are “lack of good faith” will be asserted as one ground. All too often, good faith is a generic “it ain’t fair” objection to confirmation.
Sometimes a good-faith objection is a misguided effort to raise some other issue. For example, creditors persist in arguing that it is bad faith for a debtor to propose a “deep composition” plan—a plan in which unsecured claim holders will receive a small percentage of allowed claims—even when the plan meets all the financial tests for confirmation in other sections of the Code. Creditors are almost always better off to object based on the more specific economic tests3 when the debtor’s effort is at issue.
Nearly every circuit court of appeals and bankruptcy appellate panel has decided at least one good-faith Chapter 13 case.4 Two basic approaches emerge. One group of circuits has adopted some variation of the “factors approach” in which good faith is reduced to several discrete, not always simpler, considerations. Other circuits decline to list factors and instead prescribe a generic test in which the (undefined) phrase of art “good faith” is replaced with an (undefined) phrase of art such as “honesty of intention” or “totality of the circumstances.” At least two circuits have approved both the factors approach and the totality-of-the-circumstances approach.5 One court of appeals honestly admitted frustration at divining the meaning of good faith in Chapter 13 cases.6 In early 2000, the Bankruptcy Appellate Panel for the First Circuit offered this critical review of 20 years of good-faith decisions under the Code:
The meaning of the term “good faith” has gone far afield from that intended by the drafters of the Bankruptcy Code. Applying individualized standards of moralistic decision-making reserved only for Congress, many courts have interpreted “good faith” to mean fairness to creditors as determined by the court. But fairness is a relative term, and there is no evidence that Congress intended that courts apply such a fairness standard to each Chapter 13 plan. . . . [M]any of the factors employed in the case law have been preempted by contrary judgments explicitly made by Congress. . . . The meaning of good faith is simple honesty of purpose. . . . In applying the same good faith requirement under the prior Act, courts looked only to the honesty of the debtor’s postfiling conduct. They did not concern themselves with the debtor’s prefiling conduct or the “purpose or spirit” of bankruptcy law. If Congress intended to change this pre-Code approach, we must presume Congress would have expressed that intent. The contrary view of good faith, so prevalent in the case law, is blatantly inconsistent with a debtor’s clear statutory rights. Section 1328 expressly grants a debtor a discharge even if the debts result from conduct such as fraud and hence are nondischargeable in Chapter 7. Section 1325 expressly requires a debtor only to devote all projected three year disposable income to the plan and provide creditors with at least what they would get in Chapter 7. And the Code contains no prohibition against the debtor filing a Chapter 13 petition after a Chapter 7 case, not even a prohibition against filing while the Chapter 7 case remains open. . . . The [United States v. Estus (In re Estus), 695 F.2d 311 (8th Cir. 1982),] line of decisions represents pure judicial legislation. . . . The decisions finding bad faith from circumstances such as those present in this case do so in a fashion which attempts to obscure their true basis, usually disapproval of the debtor’s conduct which created the debt. Courts use the Estus factors as a screen for their real rationale. . . . In employing diverse factors and permitting a court to rely upon any one or more of the factors, the standard provides little guidance . . . . The public and the bar deserve something better. . . . We do not hold today that an examination of the surrounding circumstances is inappropriate in determining whether a debtor has met the good faith requirement of section 1325. Even the simplistic word “honesty” can be elastic in its perception and application, subsuming as it does the elusive element of “intent” which can be judged only by examining surrounding circumstances such as the debtor’s candor with creditors and the court. But we do say that courts must be very careful not to allow the freedom of such an examination to seduce them into a moralistic override of Congress’ determinations. A review of the surrounding circumstances should and must be limited to an examination of only those circumstances which are relevant. The impact of the debtor’s prefiling conduct upon the dischargeability of debt had the case been filed under Chapter 7 is not a factor which is relevant to good faith. Nor is the filing of a Chapter 13 case after a prior Chapter 7 case and following a change of circumstances, such as a change in the debtor’s financial circumstances or a ruling of nondischargeability in the Chapter 7 case.7
There is a trend in the good-faith decisions that a debtor’s prepetition conduct or misconduct is relevant to the debtor’s good faith notwithstanding that § 1325(a)(3) focuses on the filing of the plan: “the plan has been proposed in good faith.”8
Early good-faith decisions emphasized economic considerations—how much the debtor was proposing to pay, how much the debtor was able to pay, what percentage of claims would be paid through the plan and how long the debtor would make payments into the plan. With the enactment of the disposable income test in § 1325(b) in 1984, more recent decisions have appropriately questioned whether any economic component of good faith remains in § 1325(a)(3).9
Several courts have considered whether the good faith that conditions confirmation in § 1325(a)(3) is the same good faith that many courts require of Chapter 13 debtors upon a motion to convert or dismiss for cause under § 1307(c).10 As a matter of statutory construction, because Congress requires good faith as an explicit condition for confirmation in § 1325(a)(3), it is not obvious why courts insist on adding good faith as a threshold requirement for commencing a Chapter 13 case.11 In In re Huerta,12 the bankruptcy court concluded that the “‘good faith’ factors under § 1325(a)(3) are the same as those used under § 1307(c).”13 In contrast, the U.S. Court of Appeals for the Seventh Circuit concluded in In re Love14 that the good-faith inquiry for confirmation under § 1325(a)(3) is similar but not the same as the good-faith inquiry for cause for dismissal under § 1307(c): “Because dismissal is harsh we agree that the bankruptcy court should be more reluctant to dismiss a petition under Section 1307(c) for lack of good faith than to reject a plan for lack of good faith under Section 1325(a).”15
Decisions dismissing Chapter 13 cases for cause for lack of good faith read like decisions assessing a debtor’s good faith at confirmation under § 1325(a)(3).16 Unfortunately, assessing good faith as an included cause for dismissal often occurs at an early stage of the Chapter 13 case before the debtor has had a complete opportunity to formulate a plan and to demonstrate good faith for § 1325(a)(3) purposes. Especially in jurisdictions that move quickly to confirmation after the filing of a Chapter 13 case,17 it makes sense for courts to engage in only one good-faith analysis at confirmation.
A good-faith objection to confirmation is often a negotiating tool to leverage the debtor into more favorable treatment of creditors. It works just often enough to encourage creditors to raise the objection with much frequency. The cost of litigating a good-faith objection to confirmation is itself incentive for the debtor to consider more favorable treatment for a creditor or a class of creditors. Occasionally, debtors will offer favorable separate classification to short-circuit a good-faith objection to confirmation.18 Debtors are sometimes trapped between the good-faith test that inspires special treatment to resolve objections to confirmation and the unfair-discrimination test19 that regulates such inspirations.
The hot areas for good-faith litigation are the treatment of claims arising from prepetition misconduct by the debtor, including claims that would be nondischargeable in a Chapter 7 case; and the deep composition cases when the debtor satisfies the disposable income test but simply cannot pay more than a very small percentage of unsecured claims during the life of the plan. Also, the courts continue to struggle to define the good-faith limits on serial filings—“Chapter 20” cases and beyond. These are difficult cases, and the reported decisions offer no reliable predictors of outcome in the next case.
Appendix F is a collection of good-faith decisions organized by circuit and by states within circuits. Good-faith cases are fact-bound.20 The rules are difficult to generalize. The reported cases give debtors and creditors some authority for almost any position in good-faith litigation.
It may be helpful to think of the good-faith standard in § 1325(a)(3) as the outer boundary of what can be accomplished in a Chapter 13 case. The use of an undefinable term like good faith indicates congressional intent that bankruptcy courts exercise substantial discretion to determine confirmation on a case-by-case basis. What follows is an effort to collect and dissect the arguments and to examine the sometimes conflicting logic of the reported cases.
1 Most of these opinions are collected by circuits in App. F.
2 See discussion of projected disposable income test beginning at § 91.1 In General.
3 See § 193.1 [ Economic Components of Good Faith—In General ] § 108.1 Economic Components of Good Faith—In General.
4 See App. F.
5 See, e.g., Metro Employees Credit Union v. Okoreeh-Baah (In re Okoreeh-Baah), 836 F.2d 1030 (6th Cir. 1988); Noreen v. Slattergren (In re Noreen), 974 F.2d 75, 76 (8th Cir. 1992) (Although most of the factors listed in United States v. Estus (In re Estus), 695 F.2d 311 (8th Cir. 1982), were “subsumed” by 11 U.S.C. § 1325(b), “the totality of the circumstances analysis adopted by Estus . . . remains in place.”); Banks v. Vandiver (In re Banks), 248 B.R. 799, 803–04 (B.A.P. 8th Cir. 2000) (“The relevant inquiry regarding good faith is ‘whether the debtor has stated his debts and expenses accurately; whether he has made any fraudulent misrepresentation to mislead the bankruptcy court; or whether he has unfairly manipulated the Bankruptcy Code.’ Education Assistance Corp. v. Zellner, 827 F.2d 1222, 1227 (8th Cir. 1987). However, the foregoing inquiry is governed by a ‘totality of the circumstances’ test. [Noreen v. Slattengren, 974 F.2d 75, 76 (8th Cir. 1992); Handeen v. LeMaire (In re LeMaire), 898 F.2d 1346, 1349 (8th Cir. 1990)]; [United States v. Estus (In re Estus),] 695 F.2d 311 (8th Cir. 1982). Factors which are particularly relevant to determining good faith under the totality of the circumstances include: (1) the nature of the debt sought to be discharged; (2) whether the debt would be dischargeable in a chapter 7 bankruptcy case; and (3) the debtor’s motivation and sincerity in seeking chapter 13 relief. . . . Another relevant factor in determining good faith is the Debtor’s pre-filing conduct. . . . However, even in light of egregious pre-filing conduct by the Debtor, a chapter 13 plan may be confirmed if other factors ‘suggest that the plan nevertheless represents a good faith effort by the debtor to satisfy his creditors’ claims.’”), aff’d, 267 F.3d 875 (8th Cir. 2001).
6 In re Schaitz, 913 F.2d 452 (7th Cir. 1990) (Seventh Circuit has “perhaps not [been] as helpful as we might have” in the effort to define good faith; “this court has yet to take sides on the difficult question of the proper meaning to assign ‘good faith’ in Chapter 13.” Court declined to further analyze good faith. Debtor’s plan compromised a claim that was declared nondischargeable in a prior Chapter 7 case. Confirmation was reversed and remanded with (uncertain) “directions.”). See also In re Mandarino, 277 B.R. 464, 467 (Bankr. E.D.N.Y. 2002) (“This Court is very reluctant [to] impose its personal ethical norms in defining good faith in chapter 13 cases . . . . Findings of bad faith are best limited to a well-defined pattern of serial filings of chapter 13 petitions to ‘save a home from foreclosure’ when there is no reasonable prospect that a plan can satisfy the criterion of feasibility under section 1325(a)(6). Outside this pattern, the case law on good faith in a chapter 13 case . . . is a hopeless morass. . . . When the law of chapter 13 degenerates into a medieval morality play, nobody is advantaged. Indeed, objections on grounds of bad faith simply add to the costs of legal representation that chapter 13 debtors can ill afford.”), corrected and superseded by 2002 WL 1050388 (Bankr. E.D.N.Y. May 20, 2002).
7 Keach v. Boyajian (In re Keach), 243 B.R. 851, 868–71 (B.A.P. 1st Cir. 2000). Accord Berard Indus., Inc. v. Daniel (In re Daniel), No. Civ. A. 00CV12174GAO, 2002 WL 1046695, at *1 (D. Mass. May 22, 2002) (unpublished) (“[In re Keach, 243 B.R. 851 (B.A.P. 1st Cir. 2000),] sets forth a thorough and well-reasoned rationale for examining only the circumstances relevant to the debtor’s proposed plan and the debtor’s post-filing conduct in determining whether a Chapter 13 petitioner has filed a plan ‘in good faith.’ . . . ‘[G]ood faith’ simply means ‘honesty of purpose’ in invoking one’s statutory rights.”). But see In re Scotten, 281 B.R. 147, 149 (Bankr. D. Mass. 2002) (“[Keach v. Boyajian (In re Keach), 243 B.R. 851 (B.A.P. 1st Cir. 2000),] alone is not the test. . . . [A] Debtor’s pre and post-petition conduct are relevant to a finding [of] ‘good faith.’ . . . To follow . . . Keach to its logical conclusion leads to an absurd result. It would mean that a discharge in a Chapter 13 would be denied to a charlatan who committed embezzlement or fraud and was ordered to pay restitution as part of a criminal sentence . . . yet a Debtor is essentially permitted to escape a civil judgment in favor of a victim of a violent crime, who had to seek a civil remedy, as no restitution remedy was available. This Court has a great deal of trouble accepting that Congress intended such a distinction.”).
8 11 U.S.C. § 1325(a)(3) (emphasis added). See § 105.1 Prepetition Conduct and Misconduct—In General, § 105.2 Prepetition Transfers and Transactions and § 105.3 Filing on the Eve of Whatever.
9 See § 193.1 [ Economic Components of Good Faith—In General ] § 108.1 Economic Components of Good Faith—In General.
10 The cases discussing good faith at conversion or dismissal under § 1307(c) are discussed in §§ 312.1 [ Cause for Conversion ] § 141.3 Cause for Conversion, 333.1 [ Cause for Dismissal—In General ] § 152.2 Cause for Dismissal—In General and 334.1 [ Cause for Dismissal, Including Bad-Faith, Multiple and Abusive Filings ] § 152.4 Cause for Dismissal, Including Bad-Faith, Multiple and Abusive Filings.
11 See §§ 312.1 [ Cause for Conversion ] § 141.3 Cause for Conversion and 333.1 [ Cause for Dismissal—In General ] § 152.2 Cause for Dismissal—In General. See, e.g., Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1224 (9th Cir. 1999) (“Although not specifically listed, bad faith is a ‘cause’ for dismissal under § 1307(c). . . . We hold that bad faith is ‘cause’ for a dismissal of a Chapter 13 case with prejudice under § 349(a) and § 1307(c).”); Lilley v. United States (In re Lilley), 181 B.R. 809, 813 (Bankr. E.D. Pa.) (“[T]he Debtor was not guilty of misconduct in the course of the instant bankruptcy proceeding. His only debt, to the IRS, . . . was admittedly stated accurately. No fraudulent misrepresentations of the Debtor to this court were alleged. That is all the formulation of the § 1325(a)(3) criteria in [In re Gathright, 67 B.R. 384 (Bankr. E.D. Pa. 1986), aff’d, 71 B.R. 343 (E.D. Pa. 1987),] obliges the Debtor to do to satisfy the § 1325(a)(3) requirement.”), rev’d in part, aff’d in part, 185 B.R. 489, 494 (E.D. Pa. 1995) (District court affirms finding that plan was proposed in good faith but dismisses case for cause under § 1307(c) because “we find that [the debtor] attempted to defraud the Government by intentionally evading payment of his Federal income taxes and such action constitutes cause for dismissal of his Chapter 13 bankruptcy petition pursuant to 11 U.S.C. § 1307(c).”), rev’d and remanded, 91 F.3d 491, 494–96 (3d Cir. 1996) (District court erred in reversing bankruptcy court with respect to dismissal of Chapter 13 case for cause; however, bankruptcy court erred in holding that good faith is not a filing requirement in a Chapter 13 case. “[T]ax fraud is not ‘cause’ for dismissal of a Chapter 13 petition . . . . Section 1328(a) and 523(a)(1)(C), read together, demonstrate Congress’s intent that tax-related debts of the sort at issue here be dischargeable under Chapter 13 . . . . The bankruptcy court concluded as a matter of law that Chapter 13 has no [good-faith filing] requirement. . . . [T]he district court sidestepped the controversy . . . . We therefore join the Seventh, Ninth and Tenth Circuits in holding that the good faith of Chapter 13 filings must be assessed on a case-by-case basis in light of the totality of the circumstances. . . . Accordingly, we will remand this matter . . . to the bankruptcy court for a determination whether, in light of the totality of the circumstances, Mr. Lilley filed his Chapter 13 petition in good faith.”).
12 137 B.R. 356 (Bankr. C.D. Cal. 1992).
13 137 B.R. at 367. Accord In re Lancaster, 280 B.R. 468, 474 (Bankr. W.D. Mo. 2002) (“The difference between good faith in filing a case and good faith in proposing a plan is relatively minor, and the evidence on both issues may properly be considered together. . . . In the Eighth Circuit, the Court of Appeals has articulated the same standard for finding bad faith in both instances. . . . Perhaps the only real distinction between the two is in the burden of proof. Under § 1307(c), the objecting creditor bears the burden of proof, whereas under § 1325(a)(3), the debtor bears the burden.”).
14 957 F.2d 1350 (7th Cir. 1992).
15 957 F.2d at 1356. See In re Smith, 286 F.3d 461, 465–66 (7th Cir. 2002) (“[T]he obligation of good faith is imposed on the debtor at two stages of a Chapter 13 proceeding. First, the debtor must file his petition for Chapter 13 bankruptcy in good faith. . . . Second, the debtor must file his Chapter 13 plan in good faith. . . . [S]imply availing oneself of the more liberal provisions of Chapter 13 to discharge a debt that is not dischargeable in Chapter 7 is not sufficient to constitute bad faith.”). See also In re Lilley, 91 F.3d 491, 496 (3d Cir. 1996) (“We therefore join the Seventh, Ninth and Tenth Circuits in holding that the good faith of Chapter 13 filings must be assessed on a case-by-case basis in light of the totality of the circumstances.”).
16 Compare the cases collected in App. F with the cases discussed in §§ 312.1 [ Cause for Conversion ] § 141.3 Cause for Conversion and 334.1 [ Cause for Dismissal, Including Bad-Faith, Multiple and Abusive Filings ] § 152.4 Cause for Dismissal, Including Bad-Faith, Multiple and Abusive Filings. See, e.g., Leavitt v. Soto (In re Leavitt), 171 F.3d 1219, 1223–24 (9th Cir. 1999) (“Bad faith, as cause for the dismissal of a Chapter 13 petition with prejudice, involves the application of the ‘totality of the circumstances’ test. . . . The bankruptcy court should consider the following factors: (1) whether the debtor ‘misrepresented facts in his [petition or] plan, unfairly manipulated the Bankruptcy Code, or otherwise [filed] his Chapter 13 [petition or] plan in an inequitable manner,’ . . . (2) ‘the debtor’s history of filings and dismissals,’ . . . (3) whether ‘the debtor only intended to defeat state court litigation,’ . . . and (4) whether egregious behavior is present . . . . A finding of bad faith does not require fraudulent intent by the debtor.”).
17 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.
18 See §§ 158.4 [ To Satisfy an Objecting Unsecured Claim Holder ] § 89.5 To Satisfy an Objecting Unsecured Claim Holder and 187.1 [ Separate Classification of Nondischargeable Claims and Good Faith ] § 106.5 Separate Classification of Nondischargeable Claims and Good Faith.
19 See §§ 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1 Power to Classify Unsecured Claims: Tests for Unfair Discrimination, 156.1 [ Claims That Are or Might Be Nondischargeable Only in a Chapter 7 (Chapter 12, or Individual Chapter 11) Case ] § 88.10 Claims That Are or Might Be Nondischargeable Only in a Chapter 7 (Chapter 12, or Individual Chapter 11) Case, 158.4 [ To Satisfy an Objecting Unsecured Claim Holder ] § 89.5 To Satisfy an Objecting Unsecured Claim Holder and 187.1 [ Separate Classification of Nondischargeable Claims and Good Faith ] § 106.5 Separate Classification of Nondischargeable Claims and Good Faith.
20 Good faith is a question of fact reviewed on appeal under the clearly erroneous standard. Robinson v. Tenantry (In re Robinson), 987 F.2d 665 (10th Cir. 1993); Society Nat’l Bank v. Barrett (In re Barrett), 964 F.2d 588 (6th Cir. 1992). See also § 217.1 [ Burden of Proof ] § 115.3 Burden of Proof.