Does BAPCPA Take Good Faith on Faith?
William Andrew McNeal
Becket & Lee LLP; Malvern, Pa.
Web posted and Copyright © December/January 1, 2007, American Bankruptcy
Not surprisingly, "good faith" is an important theme in, and even a prerequisite to, the "fresh start" offered by bankruptcy. Among the Bankruptcy Code's requirements for confirmation of a chapter 13 plan is that it be proposed in good faith.1 The Code reminds us that confirmation rests on the good faith of the petitioner.2 As 11 U.S.C. §707(b)(3) requires, a chapter 7 debtor faces such scrutiny even if he or she is cleared of any presumption of abuse.3 What is good faith, and how important is it in the wake of passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)? What does it mean today, and how do courts examine it? May the significant changes to the chapter 13 regime for a debtor's allowable income and expenses also give rise to a good-faith basis for objection to the confirmation of her proposed plan?
The 1978 Code
Several recent post-BAPCPA opinions briefly recap good-faith analysis in the wake of the Bankruptcy Reform Act of 1978. Most seem to agree that the amount that a debtor proposed to pay to unsecured creditors was an important good-faith factor. For example, in In re Farrar-Johnson, the U.S. Bankruptcy Court for the Northern District of Illinois related that prior to 1984, a bankruptcy court's good-faith review included whether a plan proposed "substantial or meaningful repayment to unsecured creditors."4 Similarly, another court observed in In re Rotunda that some 25 years ago a plan proposing a 1 percent or less dividend to unsecured creditors was not filed in good faith.5 In deciding In re Lewis, the U.S. Bankruptcy Court for the District of Kansas found that the Tenth Circuit, in its pre-BAPCPA totality-of-the-circumstances good-faith test, relied on 11 Flygare factors, themselves drawn from the Eighth Circuit's well known Estus factors.6 The first Flygare factor included "the amount of the proposed payment....."7 Elsewhere, the Eleventh Circuit, according to In re Johnson, included "the substantiality of repayment" in its nonexhaustive list of 13 factors comprising its totality-of-the-circumstances test for a debtor's good faith.8
In its decision in In re Barr, the court recollected differently, commenting that there was, after 1978, "considerable judicial disagreement about the meaning of the good-faith standard and whether it required a particular level of payments to unsecured creditors."9
The 1984 Amendments
The 1984 Act, better known for its response to the successful constitutional challenge to the bankruptcy bench's jurisdiction in Northern Pipeline Constr. Co. v. Marathon Pipe Line Co.,10 introduced the disposable-income test of 11 U.S.C. §1325(b). Many courts seemed to find that the new statutory test eliminated from a good-faith examination the amount of a debtor's plan payments to unsecured debtors. For example, the Barr court11 observed that most courts concluded that §1325(b)'s test subsumed a good faith-based examination of a debtor's ability to pay. The neighboring U.S. Bankruptcy Court for the Eastern District of North Carolina agreed in the already oft-cited In re Alexander,12 adopting the assumption that good faith lost any relevance to the amount of a plan payment and that Congress intended to delimit judicial discretion with a formulaic approach. The Rotunda court also agreed, citing 1992 case law showing that Congress, in enacting §1325(b), removed from the good-faith standard any minimum payment or percentage for the unsecured creditors.13 In In re Farrar-Johnson, the court found that the 1984 amendments eliminated from a good-faith inquiry the amount a plan proposed to pay to unsecured creditors.14 Somewhat contrastingly, the Johnson court recounted that courts were divided over the 1984 Act's effect on §1325(a)(3), but that some courts removed "factors related to the sufficiency of disposable income from their totality of the circumstances test."15
However, not everyone agreed. According to In re Hall, the Sixth Circuit retained plan payment amount as a factor in a totality of the circumstances based good-faith analysis.16
BAPCPA The Code retains, in 11 U.S.C. §1325(a)(3), the requirement that a chapter 13 plan be proposed in good faith in order to gain confirmation. The Code expands its treatment of projected disposable income, especially vis-à-vis the permissible expenses a debtor may claim in his or her plan.17 But treatment of an objection to confirmation for lack of good faith varies, based largely on interpretations of the effect of the new statutory language governing projected disposable income, in all of its extraordinary detail.
Some courts maintain the position that BAPCPA retains the 1984 Act's removal of ability to pay or amount of payment from the consideration of a debtor's good faith. They include the Barr court,18 with the Alexander court agreeing;19 the Johnson court, at least to a degree;20 the court in In re Farrar-Johnson, which opined that disposable income is simple arithmetic based on 11 U.S.C. §(b)(2)(A) and (B) and that a debtor's good faith in claiming them cannot be relevant;21 and the Rotunda court, which found that the enactment of BAPCPA limited its discretion to review a plan's reasonableness based on the totality of the circumstances even if it meant confirmation of a 0 percent plan.22
Other courts found sufficiency of payment to unsecured creditors to continue in its role as a factor in assessing a debtor's good faith. In Lewis, the court opined that, in the absence of any amendment to §1325(a)(3) of the Code by BAPCPA, the Tenth Circuit's Flygare factors remained determinative of a plan's good faith.23 The court found that debtors' "cramdown" treatment of debt secured by a vehicle lacked good faith because it denied money that would otherwise go to their unsecured creditors.24 The U.S. Bankruptcy Court for the Northern District of Georgia, in In re Grady, opined that a debtor's payment into her plan of her projected disposable income (exemplifying the risk of unintended consequences, the court coined the term "actual" disposable income, perhaps, inadvertently adding semantic confusion to an already confusing topic), as required by 11 U.S.C. §1325(b)(1)(B), harmonized with the good-faith requirement of §1325(a)(3).25 In re Edmunds, decided by the U.S. Bankruptcy Court in the District of South Carolina, concluded that the so-called Deans factors26 remain relevant under BAPCPA, and opined that nothing in BAPCPA's legislative history indicated that Congress intended to abandon, as elements of good faith, consideration of a debtor's actual financial situation at the time of his petition or the percentage of his proposed plan's repayment to unsecured creditors.27 Elsewhere, in a thorough and thoughtful review of the issues and facts before it in In re LaSota, the U.S. Bankruptcy Court for the Western District of New York sustained a chapter 13 trustee's objection to confirmation of a plan that, according to the trustee, understated the amount the debtors had the ability to pay.28 Pointing out that BAPCPA did not repeal, though it could have done so, the good-faith requirement, the court opined: "Contrary to some other authority, this writer finds that BAPCPA does not command that there be no inquiry into such matters."29 Rather colloquially but nevertheless, with an undeniably viscerally appealing rationality, the court quoted itself: "Give up the Harley Davidson and increase your payment to your credit card debts and to your old rent defaults to your previous landlady, and then you can have a plan confirmed that will discharge the rest."30
Over the years, as the Code has been recast by Congress to attempt to reduce judicial discretion by, among other means, expanding the formulaic permissible income and expenses requirements for confirmation of a plan, many have found a concomitant diminution of the role of financial considerations in examining the good faith of a debtor. Others have not. Instead, they point to the perdurance through the years of the good-faith requirement for confirmation. Indeed, equity would seem to support their approach. As the LaSota court opined, "the flaw in the reasoning of the courts in the cases to the contrary is in the failure to recognize the profound truth that chapter 13 always was, and still remains, 'rough justice.'"31
1 11 U.S.C. §1325(a)(3).
2 11 U.S.C. §1325(a)(7).
3 Recall that a chapter 7 debtor may face a statutory presumption of abuse under certain circumstances. 11 U.S.C. §707(b)(2).
4 No. 06 B 3089, 2006 Bankr. LEXIS 2214, at *19 (Bankr. N.D. Ill. Sept. 15, 2006) (citing In re Smith, 848 F.2d 813, 820 (7th Cir. 1988).
5 No. 06-60054, 2006 Bankr. LEXIS 2346, at *23 (Bankr. N.D.N.Y. Sept. 1, 2006).
6 347 B.R. 769, 773-74 (Bankr. D. Kan. 2006) (citing Flygare v. Boulden, 709 F.2d 1344, 1347-48 (10th Cir. 1983), quoting, in turn, In re Estus, 695 F.2d 311, 317 (8th Cir. 1982)).
8 346 B.R. 256, 261 (Bankr. S.D. Ga. 2006) (quoting Kitchens v. Ga. R.R. Bank & Trust Co. (In re Kitchens), 702 F.2d 885, 888-89 (11th Cir. 1983)).
9 341 B.R. 181, 183 (Bankr. M.D.N.C. 2006).
10 458 U.S. 50 (1982).
11 341 B.R. at 184.
12 344 B.R. 742, 752 (Bankr. E.D.N.C. 2006) (quoting Culhane, Marianne B., and White, Michaela M., "Catching Can-Pay Debtors: Is the Means Test the Only Way?," 13 Am. Bankr. Inst. L. Rev. 665, 681 (2005)).
13 2006 Bankr. LEXIS 2346, at *24 (citing In re Groff, 131 B.R. 703,708 (Bankr. E.D. Wis. 1992).
14 2006 Bankr. LEXIS 2214, at *19.
15 346 B.R. at 262.
16 346 B.R. 420, 426 (Bankr. W.D. Ky. 2006) (citing In re Alt, 305 F.3d 413, 419 (6th Cir. 2002) and In re Barrett, 964 F.2d 588, 591 (6th Cir. 1992)).
17 See 11 U.S.C. §§707(b) and 1325(b).
18 341 B.R. at 184.
19 344 B.R. at 752.
20 346 B.R.at 261-62.
21 2006 Bankr. LEXIS 2214, at *20.
22 2006 Bankr. LEXIS 2346, at *24.
23 347 B.R. at 774*13.
24 Id. at *14.
25 343 B.R. 747, 751 (Bankr. N.D. Ga. 2006).
26 See Deans v. O'Connell, 692 F.2d 968, 972 (4th Cir. 1982).
27 No. 06-01602-JW, 2006 Bankr. LEXIS 2255, at **30-32 (Bankr. D. S.C. Sept. 18, 2006).
28 No. 05-70085, 2006 Bankr. LEXIS 2345, at **18-19 (Bankr. W.D.N.Y. Sept. 19, 2006).
29 Id. at *15. 30 Id. at *5.
31 Id. at *17.