Bad Faith in the Sixth Circuit: A Totality of the Circumstances Approach

Bad Faith in the Sixth Circuit

by: Jamie L. Harris

Generally, there is a presumption that debtors file petitions for reorganization in good faith. See In re Petralex Stainless, Ltd., 78 B.R. 738, 743 (Bankr.E.D.Pa.1987) ( citing U.S. Fidelity & Guar. Co. v. DJF Realty and Suppliers, Inc., 58 B.R. 1008 (N.D.N.Y.1986)). The burden of proving bad faith is on the moving party and must be demonstrated by a preponderance of the evidence. See id. Creditors may seek relief from the automatic stay and/or dismissal of a debtor’s bankruptcy case based on allegations of bad faith. Both the Supreme Court and the Sixth Circuit Court of Appeals have declined to precisely define good and bad faith in the bankruptcy context, see Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 374 n. 11, 127 S.Ct. 1105, 1111-12 n. 11, 166 L.Ed.2d 956 (2007); Metro Employees Credit Union v. Okoreeh-Baah (In re Okoreeh-Baah), 836 F.2d 1030, 1033 (6th Cir.1988), but certain parameters of the concept are nonetheless clear. The “amorphous notion” of bad faith is “largely defined by factual inquiry.” Okoreeh-Baah, 836 F.2d at 1033. The Supreme Court has “emphasized” that, to support a finding of bad faith, the debtor’s conduct must have been “atypical,” and the case must be “extraordinary.” Marrama, 127 S.Ct. at 1111-12, n. 11. There is no “mechanical good faith equation.” Okoreeh-Baah, 836 F.2d at 1033. Instead, an “infinite variety of factors … must be weighed carefully” and flexibly. Id.

Good faith is determined based on the “totality of circumstances” and in light of the Bankruptcy Code’s purpose to provide debtors with a fresh start. In re Sun Country Development, Inc., 764 F.2d 406, 408 (5th Cir.1985). See also Okoreeh–Baah, 836 F.2d at 1030. The Sixth Circuit “embraces the ‘totality of the circumstances’ approach, not a mechanical, bright-line rule. ” Id. at 1032. “[T]he totality of the circumstances test means exactly what it says: It exacts an examination of all the facts in order to determine the bona fides of the debtor.” Hardin v. Caldwell (In re Caldwell), 851 F.2d 852, 860 (6th Cir.1988) (citation and quotations omitted). To assist courts in conducting their careful, flexible analysis, the Sixth Circuit has articulated eight factors that may be “meaningful in evaluating” bad faith. These factors include:

  1. The debtor has only one asset.
  2. The pre-petition conduct of the debtor has been improper.
  3. There are only a few unsecured creditors.
  4. The debtor’s property has been posted for foreclosure, and the debtor has been unsuccessful in defending against the foreclosure in state court.
  5. The debtor and one creditor have proceeded to a standstill in state court litigation, and the debtor has lost or has been required to post a bond which it cannot afford.
  6. The filing of the petition effectively allows the debtor to evade court orders.
  7. The debtor has no ongoing business or employees.
  8. The lack of possibility of reorganization.

Laguna Assocs. Ltd. P’ship, 30 F.3d at 738. No one factor is dispositive, and this good faith test requires consideration of the totality of the circumstances. Id.

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