Cite as: Keith M. Lundin, Lundin On Chapter 13, § 105.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
That the debtor filed Chapter 13 to stop a trial, a foreclosure sale or some other imminent action by a creditor is often cited by the courts as evidence of a debtor’s lack of good faith at confirmation.1 Don’t look for logic to support this conclusion. If there is any logic to the timing of bankruptcy filings, it is that debtors delay filing bankruptcy until some especially pressing event makes life unbearable.2 The cases holding that “filing on the eve of a foreclosure” is evidence of bad faith have to be saying something different than that timing is conduct punishable in bankruptcy.
Bankruptcy generally, and Chapter 13 in particular, is management of problems with creditors. Filing a Chapter 13 case before a foreclosure sale is evidence of good judgment more than it is evidence of bad faith—waiting until after the foreclosure sale may preclude the debtor from rehabilitating the mortgage and keeping the home.3 The debtor who files on the eve of a trial for damages in some other court may be following good advice—before trial, the claims involved may be contingent or unliquidated and not counted for purposes of Chapter 13 eligibility;4 waiting costs the expense of defense and may render the debtor ineligible for Chapter 13 relief.
Good faith is not about timing.5 To prove good faith at confirmation, must the debtor withhold filing the petition until after a state court trial or until after entry of judgment? Until the creditor garnishes the debtor’s wages?6 This makes no sense. The trial is wasted money for the creditor and high risk for no reward for the debtor. Filing before trial is more humane for everyone. It just seems to make some judges angry.
Perhaps the legitimate good-faith issue lurking in these cases is the question whether the debtor has any intent to rehabilitate. Is something going to happen in the Chapter 13 case other than just invoking the automatic stay for a short while before the case collapses? It has been said that filing a Chapter 13 case to stop a foreclosure or lawsuit is not bad faith unless the debtor is “without the ability or intention to reorganize.”7
An example of immoderate bad-faith inferences from the timing of the filing is the Eighth Circuit’s opinion in Noreen v. Slattengren.8 In Noreen, the debtor filed the Chapter 13 case 11 days before trial of a civil action for damages for sexual abuse of a minor. The bankruptcy court refused the debtor an evidentiary hearing on the issue of good faith and instead “found” that the plan was not filed in good faith because it was filed “not because of debts that became due in the ordinary course, but in anticipation of the likely damage award resulting from [the] civil suit.”9 Good faith is a question of fact that can only be decided based on the facts of individual cases.10 By refusing the debtor a hearing on the good-faith question, the Eighth Circuit inappropriately equated “proximity of filing” to “bad faith” as a matter of law. Debtors should not be routinely punished for filing a Chapter 13 case to stop adverse creditor action.
1 See, e.g., Noreen v. Slattengren, 974 F.2d 75 (8th Cir. 1992) (filing 11 days before trial of a civil action for damages); Chinichian v. Campolongo, 784 F.2d 1440 (9th Cir. 1986) (strategic filing on eve of state court trial); Lomas Mortgage USA v. Fischer (In re Fischer), 136 B.R. 819 (D. Alaska 1992) (filing mainly to prevent foreclosure on real property); In re Reese, 281 B.R. 735, 741 (Bankr. M.D. Fla. 2002) (“Evidence that a petition was filed to delay or frustrate the legitimate efforts of creditors is an important factor . . . . Debtor’s primary purpose in seeking Chapter 13 relief was to diminish Triple Check’s recovery on its claim. Debtor filed his petition some two months after Triple Check obtained an approximate $51,000.00 judgment, the result of more than two years of litigation. Debtor did not file the case to cure an arrearage on a secured asset or to save personal property.”); In re James, 260 B.R. 498, 510–511 (Bankr. D. Idaho 2001) (Although relief from litigation “can represent a proper basis for bankruptcy relief, . . . Debtor has filed for bankruptcy because the prospect loomed that he would lose in state court largely because of his own misconduct. Unlike those situations where the inevitable costs of prevailing on the merits outweighs [sic] the sense of going forward, Debtor has authored his own demise, . . . Debtor has not shown . . . that his resort to Chapter 13 is consistent with good faith.”); In re Altmann, 256 B.R. 468, 470 (Bankr. S.D. Miss. 2000) (Bad faith that debtor filed Chapter 13 rather than appeal state court judgment for $249,821.39 based on findings that the debtor had acted reprehensibly, outrageously and abusively toward his grandmother. “[T]he debtor appears to have filed the proceeding in lieu of an appeal of the Chancery Court judgment and has failed to act in good faith in filing the Chapter 13.”); In re White, 255 B.R. 737, 743 (Bankr. W.D. Mo. 2000) (That the debtor “waited until [her former husband] has incurred the expense of appraising the property, and publicizing the sale, before she filed this Chapter 13 petition” is one factor indicative of bad faith in the context of a seven-year effort to avoid paying a $300,000 judgment for malicious prosecution determined to be nondischargeable in a prior Chapter 7 case.); In re Hendricks, 250 B.R. 415, 420 (Bankr. M.D. Fla. 2000) (Evidence of bad faith that debtor converted from Chapter 7 to Chapter 13 “to avoid defending the adversary proceedings” that sought to bar discharge, challenged the debtor’s conversion of nonexempt assets into a Florida homestead exemption and challenged the dischargeability of the judgment that drove the debtor out of California and into Florida.); In re Mattson, 241 B.R. 629 (Bankr. D. Minn. 1999) (One factor in finding of bad faith is that debtors admitted filing third Chapter 13 case to avoid a supersedeas bond after entry of state court judgment for racial discrimination.); In re Petersen, 228 B.R. 19 (Bankr. M.D. Fla. 1998) (Filing on eve of state court judgment is factor indicative of bad faith but not a strong factor.); In re McLaughlin, 217 B.R. 772, 778 (Bankr. W.D. Tex. 1998) (filing on day judgment for breach of fiduciary duty became final and was recorded as a lien); In re Rosencranz, 193 B.R. 629, 636 (Bankr. D. Mass. 1996) (Evidence of bad faith included that “the Debtor filed for bankruptcy to prevent the state court proceedings from going forward.”); In re Oliver, 186 B.R. 403 (Bankr. E.D. Va. 1995) (Chapter 13 case was filed within a year of closing of a prior Chapter 7 case and on the eve of levy by a creditor whose debt was declared nondischargeable in the Chapter 7 case.); In re Clements, 185 B.R. 903 (Bankr. M.D. Fla. 1995) (Chapter 13 case was filed to deal with state court litigation over debtor’s guarantee of a commercial lease.); In re Elisade, 172 B.R. 996 (Bankr. M.D. Fla. 1994) (Chapter 13 case was filed for the sole purpose of avoiding patent infringement litigation.); In re Wilson, 168 B.R. 260 (Bankr. N.D. Fla. 1994) (Chapter 13 case was filed minutes before the debtor was to appear in a state court to answer a contempt motion for failure to cooperate in discovery.); In re Neill, 158 B.R. 93, 98 (Bankr. N.D. Ohio 1993) (Chapter 13 filing was a “thinly veiled attempt to avoid a foreclosure sale.”); In re Standfield, 152 B.R. 528, 536 (Bankr. N.D. Ill. 1993) (Filing Chapter 13 case after the grant of relief from the stay in a prior case and instead of appealing the grant of relief from the stay is an “end run” of the appellate process and “the timing . . . is suspect at best.”); In re Huerta, 137 B.R. 356 (Bankr. C.D. Cal. 1992) (filing solely for the purpose of stopping or delaying a foreclosure); In re Ashton, 63 B.R. 244 (Bankr. D.N.D. 1986) (Sole reason for filing was to stop a foreclosure sale.); In re Langguth, 52 B.R. 572 (Bankr. N.D. Ill. 1985) (filing three days prior to expiration of statutory right of redemption); In re Gates, 42 B.R. 4 (Bankr. N.D. Ga. 1983) (Sole purpose was to thwart a foreclosure.).
2 See In re Petersen, 228 B.R. 19, 25 (Bankr. M.D. Fla. 1998) (“[G]enerally debtors do not seek bankruptcy protection at a time when they feel their financial affairs are manageable. Rather, the likely scenario is that a debtor files because of foreseeable financial doom.”).
3 11 U.S.C. § 1322(c)(1) provides that a Chapter 13 debtor may cure default with respect to a claim secured only by real property that is the debtor’s principal residence “until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.” In Chapter 13 cases filed after October 22, 1994, the debtor who delays filing the Chapter 13 case until after a foreclosure sale risks forfeiting the power to cure default. See § 130.1 [ Prepetition Defaults ] § 82.1 Prepetition Defaults—When is Property “Sold” at Foreclosure?.
4 See discussion of contingent and liquidated debt beginning at § 15.1 What Is Noncontingent Debt?.
5 See In re Nottingham, 228 B.R. 316, 320 (Bankr. M.D. Fla. 1998) (“[T]he timing of the Debtor’s bankruptcy does not indicate a lack of good faith. It is not unusual for a bankruptcy to be filed shortly after litigation is commenced.”).
6 See In re Petersen, 228 B.R. 19, 25 (Bankr. M.D. Fla. 1998) (“[T]he Court finds that the Debtor’s primary purpose in filing was to impede the California Lawsuit, where judgment against Debtor was near a final determination. . . . The timing of filing is a relevant factor in analyzing good faith, but not as telling as [the creditor] would like it to be. The Court would have to draw a line before which any filing by Debtor would be considered as a lack of good faith and after which any filing by Debtor would be considered in good faith. The Court finds that any line drawn would necessarily be arbitrary and therefore, refuses to draw such a line.”).
7 In re Huerta, 137 B.R. 356, 370 (Bankr. C.D. Cal. 1992). See also In re Mandarino, 277 B.R. 464 (Bankr. E.D.N.Y. 2002) (That the debtor negotiated a settlement in civil litigation, then refused to sign and filed a Chapter 13 case, “without more compelling proof” fails to demonstrate bad faith.), corrected and superseded by 2002 WL 1050388 (Bankr. E.D.N.Y. May 20, 2002).
8 974 F.2d 75 (8th Cir. 1992).
9 974 F.2d at 77.
10 Robinson v. Tenantry (In re Robinson), 987 F.2d 665 (10th Cir. 1993) (Good faith is a question of fact subject to the clearly erroneous standard of review.); Society Nat’l Bank v. Barrett (In re Barrett), 964 F.2d 588 (6th Cir. 1992) (Good-faith determination is a factual finding based on the totality of the circumstances and is reviewed under the clearly erroneous standard.).