229 F.3d 205 | 3rd Cir. | 2000
Lead Opinion
OPINION OF THE COURT
We AFFIRM the decision of the district court affirming the bankruptcy court’s dismissal of Ronald M. Tamecki’s (“Debtor”) Chapter 7 petition.
BACKGROUND
Debtor filed for Chapter 7 protection seeking discharge of an approximately $35,000 credit card debt owed to MBNA America. He possesses only one substantial asset, his share of a tenancy by the entirety in his home, which he holds with his estranged wife. Debtor and his wife have accrued over $100,000 of equity in the home.
The Tameckis had been separated for approximately five years at the time Debt- or filed for bankruptcy, and they have now been separated for more than seven years. Debtor and his wife live in different towns, and each lives with a significant other. Mrs. Tamecki filed for divorce in July 1993 but, for unknown reasons, the action is still pending. The most recent trial date was continued either on joint motion of the parties or without objection by the Debtor.
In his petition Debtor claimed an exemption under Section 522(b)(2)(B) of the Bankruptcy Code on his share of the home equity. See 11 U.S.C. § 522(b)(2)(B). The trustee in bankruptcy (“Trustee”) challenged this election and sought dismissal of Debtor’s petition for “lack of good faith” under Section 707(a) of the Code. See 11 U.S.C. § 707(a). According to Trustee, Debtor’s divorce is “right around the corner”; and, thus, Debtor will soon be entitled to his unencumbered share of the dissolved tenancy by the entirety. The Trustee estimates that this would be approximately $50,000, an amount sufficient to cover Debtor’s obligations and still leave him with enough money for a “fresh start.” Accordingly, the Trustee reasoned that Debtor acted in bad faith in filing his
DISCUSSION
Section 707(a) allows a bankruptcy court to dismiss a petition for cause if the petitioner fails to demonstrate his good faith in filing. See In re Zick, 931 F.2d 1124, 1126-27 (6th Cir.1991), In re Marks, 174 B.R. 37, 40 (E.D.Pa.1994). Although the Code does not define “good faith,” courts in this circuit have uniformly held that “[a]t the very least, good faith requires a showing of honest intention.” See Marks, 174 B.R. at 40. Courts have cautioned, however, that:
Dismissal based on lack of good faith ... should be confined carefully and is generally utilized only in those egregious cases that entail concealed or misrepresented assets and/or sources of income, lavish lifestyles, and intention to avoid a large single debt based upon conduct akin to fraud, misconduct or gross negligence.
Zick, 931 F.2d at 1129. Courts can determine good faith only on an ad hoc basis and must decide whether the petitioner has abused the provisions, purpose, or spirit of bankruptcy law. See Marks, 174 B.R. at 40. The parties agree that the decision to dismiss a petition for lack of good faith rests within the sound discretion of the bankruptcy court. See Zick, 931 F.2d at 1126, In re Atlas Supply Corp., 857 F.2d 1061, 1063 (5th Cir.1988).
Once a party calls into question a petitioner’s good faith, the burden shifts to the petitioner to prove his good faith. See Marks, 174 B.R. at 40 citing In re Sky Group Int'l, Inc., 108 B.R. 86, 90 (Bankr.W.D.Pa.1989) (“Once the good faith issue is placed in question, the party bringing the petition has the burden of proving that the petition was brought in good faith.”). The bankruptcy court found that Debtor failed to meet this burden. We agree.
Debtor testified that he accrued over $35,000 in debt at a time when he was earning less than one-tenth this amount. Debtor could point to no marked calamity or sudden loss of income that precipitated his need to accrue such a comparatively large consumer debt. Moreover, Debtor’s testimony concerning the state of his marriage confirmed the Trustee’s assertion that divorce and dissolution of the tenancy by the entirety were “right around the corner.”
Debtor’s response was threefold: first, that the Trustee must prove “extreme misconduct”; second, that ability to repay is not, in and of itself, evidence of bad faith, see Marks, 174 B.R. at 41 and third; that he did no more than avail himself of a proper exception under the Code. While we agree with Debtor and the
AFFIRMED.
. Tamecki's testimony confirms that he and his wife are estranged. They have been separated for seven years. They live in separate towns, each with a new significant other. A divorce proceeding has been pending since 1993. They have not sought counseling, nor is there any indication that either party has made overtures toward a reconciliation. No explanation for the delay in finalizing the divorce has been provided. Accordingly, we see no error in the bankruptcy court’s apparent discounting of Tamecki's self-serving testimony that he would take his wife back "in a heartbeat.” That may be true, but there is no evidence that her return is either imminent or likely.
. We do not suggest, as the Dissent indicates, that "consumer debtors [must] affirmatively demonstrate good faith absent any challenge,” or that "dismissal is appropriate anytime the debtor fails to affirmatively demonstrate his good faith.” We hold merely that in this case where the trustee has called into question debtor’s good faith, and put on evidence sufficient to impugn that good faith, the burden then shifts to the debtor to prove his good faith.
Dissenting Opinion
dissenting:
Some background is necessary to understand the framework in which we analyze this dispute and why I strenuously disagree with the outcome in this case, the reasoning, and the rule implicitly set forth by the majority. The Bankruptcy Code contains no explicit good faith filing requirement.
In nearly all respects, Tameeki fits the profile of the average consumer debtor. He has marital problems, health problems, and employment problems. He has a large credit card debt that he incurred for subsistence purposes by using unsolicited “live checks” that MBNA sent to him while he was experiencing a lull in income and ability to perform construction work due to
One would expect, therefore, that this case was dismissed for bad faith because the trustee put forth evidence of some type of misconduct or fraud. However, the trustee offered no evidence that put Ta-mecki’s good faith at issue. He only made bald allegations, without proffering any evidence, about the timing of Tamecki’s still-uneonsummated divorce and his accrual of debt to MBNA, to which Tamecki provided responses that were not discredited by the Bankruptcy Court. The trustee, who is the primary advocate of dismissing Ta-mecki’s case, conceded at oral argument that even after conducting considerable research, he knows of no case with an analogous fact pattern or remotely on point; he could not name one. Having canvassed the landscape, I have not found a case bearing any resemblance to this one in which bad faith was found to exist. Simply put, our ruling breaks new ground in the law regarding good faith filing.
In dismissing Tamecki’s case, the Bankruptcy Court made no specific findings of bad faith. However, in upholding the dismissal of Tamecki’s case, the majority focuses on Tamecki’s accrual of debt to MBNA and his pending divorce, both of which I will discuss in turn.
Tamecki accrued most of his debt to MBNA within the two years prior to filing for bankruptcy. In addressing this accrual of debt, the Bankruptcy Court made no finding that Tamecki ran up his debts in contemplation of bankruptcy or made extravagant purchases in reckless disregard of his financial situation. To the contrary, the Bankruptcy Court credited Tamecki’s testimony that he incurred this debt to supplement his paltry income for food and other necessities. It is difficult to contemplate what more Tamecki could have done to refute any inference of bad faith from his use of the unsolicited live checks for subsistence at a time when he had nominal income. If the existence of a large credit card debt, unaccompanied by any evidence that the debtor incurred the debt without the intent to repay,
The majority ruling also relies on Ta-mecki’s still-unconsummated divorce proceedings. Tamecki’s wife filed for divorce more than five years prior to the bankruptcy filing, but the proceedings have been dormant for much of that time. Ta-mecki claims he would never divorce his wife of his own accord; he testified that he wants to remain married to her. The trustee opined, with no evidence, that Ta-mecki’s divorce is “right around the corner,” in which event he could be forced to sell his home, break the tenancy by the entirety protected by Pennsylvania law, and pay MBNA what he owes. I might find this contention persuasive if the trustee had offered any specific evidence, and the Bankruptcy Court had specifically found, that Tamecki had timed his bankruptcy and divorce to defraud his creditors. However, the Bankruptcy Court made no such finding, nor did it indicate that the possibility of Tamecki’s divorce
A closer look at the trustee’s argument reveals its slippery slope. Failing to put forth any evidence that Tamecki has schemed with his wife to postpone the divorce for their mutual benefit, the trustee’s position on the divorce issue, as clarified in oral argument, is that Tamecki had an obligation “to move his divorce along” before filing for bankruptcy so that the state-law-protected tenancy by the entirety would be broken to make his home equity available for creditors, regardless of whether Tamecki actually wants to save his marriage.
I will refrain from refuting a variety of specific statements made by the majority, with one exception, namely, its assertion that a court may dismiss a chapter 7 case for cause if the debtor fails to demonstrate good faith in filing, citing the Zick decision. Zick does not require consumer debtors to affirmatively demonstrate good faith absent any challenge. Zick says that lack of good faith may be a valid basis for dismissing a bankruptcy case for cause under section 707(a), see Zick, 931 F.2d at 1126, not that dismissal is appropriate anytime the debtor fails to affirmatively demonstrate his good faith.
I respectfully dissent.
. The one exception is in chapter 9, which governs bankruptcies by municipalities and contains an express good faith filing requirement. See 11 U.S.C. § 921(c). The Bank-ruplcy Code does require that repayment or reorganization plans — as opposed to bankruptcy cases themselves — be proposed in good
. Although we have not ruled on the use of section 707(a) to dismiss cases "for cause” on account of bad faith, we recently have held, in the context of a sophisticated corporate debt- or in chapter 11, that lack of good faith can be grounds for dismissal "for cause” under section 1112. See In re SGL Carbon Corp., 200 F.3d 154, 161 (3d Cir.1999). We also stated in a footnote in SGL that "once at issue, the burden falls upon the bankruptcy petitioner to establish that the petition has been filed in 'good faith.' ” Id. at n. 10. However, even if this statement were to be extended to chapter 7 consumer cases, as we discuss later, and as distinguished from the situation in SGL, nothing in the record of this case puts Tamecki's good faith "at issue.”
. See, e.g., In re Lacrosse, 244 B.R. 583, 588-589 (Bankr.M.D.Pa.1999) (dismissing case of debtor with 58 credit cards and over $500,000 of consumer debt, who lived a lavish lifestyle and drove luxury cars, and who also falsely enticed clients to give him money by saying that he intended to make tax-free investments); In re Brown, 88 B.R. 280, 284-285 (Bankr.D.Hawai'i 1988) (dismissing case of successful ophthalmologist who engaged in prebankruptcy asset planning to remove more than $700,000 from the reach of creditors and who sought to avoid an obligation to a recipient of cataract surgery who lost all vision in her right eye).
. The Court in Marks continued by explaining that "[m]ost instances of dismissal for bad faith under § 707(a) involve concealment, misrepresentation, or unexplained transfers to place assets beyond the reach of creditors.” Id. at 41. Thus, even the cases of debtors that appear not to need bankruptcy relief have not been dismissed for bad faith in the absence of evidence of misconduct. See, e.g., In re Josey, 169 B.R. 138, 140 (Bankr.S.D.Ohio 1994); In re Bridges, 135 B.R. 36, 38 (Bankr.E.D.Ky.1991).
. The Bankruptcy Code contains a provision, section 523(a), under which creditors can challenge the dischargeability of specific debts. If there was any question that Tamecki incurred the debt without the intent to pay it, MBNA could have pursued its rights under that provision.
. The majority’s reference to the Bankruptcy Court’s assessment of the testimony regarding the marital status as ''apparent discounting of Tamecki's self-serving testimony” is curious in light of the Bankruptcy Court’s lack of any reference whatsoever to any concern regarding the marital situation. As noted above, the Bankruptcy Court does not even refer to the timing of the divorce as having any bearing on its decision or the outcome.
. The trustee's alternative position at oral argument was that if Tamecki and his wife get back together, they should be required to take a second mortgage on their home to pay the MBNA debt. Regardless of the relative merits of this argument as a policy matter, it has no foundation in current bankruptcy law.
. The Huckfeldt decision from the Court of Appeals for the Eighth Circuit also makes no mention of placing the burden of proving good faith on the debtor, taking only the cautious step that a specific finding of bad faith may be grounds for section 707(a) dismissal.
Concurrence Opinion
concurring:
I join the opinion of the Court, but I add a few words to clarify the narrow point of disagreement between the majority and the dissent. As I understand the position of our dissenting colleague, she agrees (a) that a Chapter 7 consumer case may be dismissed for “bad faith” and (b) that, once a debtor’s good faith is appropriately put at issue, it is the burden of the debtor to produce evidence of good faith. I do not understand the dissent to argue that in this case the debtor produced evidence of good faith, and thus the only apparent point of disagreement concerns the question whether, on the particular facts of this case, the debtor’s good faith was sufficiently put at issue to require him to demonstrate good faith.
The dissent apparently believes that, in order to put Tamecki’s good faith at issue, it was incumbent upon the trustee to produce evidence that, among other things, there is no good reason for the unusual delay in the completion of the Tameckis’ divorce proceeding. See Dissenting Opinion at 210 (“[T]he trustee offered no evidence that put Tamecki’s good faith at issue. He only made bald allegations, without proffering any evidence about the timing of Tamecki’s still unconsummated divorce.... ”). But the trustee, who is obviously not a party to the divorce proceeding, is in a comparatively poor position to show the reason for the delay. The known facts about the divorce proceeding are sufficient to place upon the debtor the burden of explaining the reason for the delay, which has now reached seven years. It may be that there are entirely legitimate reasons for the delay. If so, it should have been easy for Tamecki to show what they were. But he made no effort to do so.
Under the particular circumstances of this case — which, contrary to the implication of the dissent, is not the average consumer bankruptcy case — the bankruptcy judge did not commit an abuse of discretion is dismissing the petition.
