In a troubling case of first impression, the Third Circuit upheld the dismissal of a debtor's Chapter 7 case under § 707 of the Bankruptcy Code on grounds that the debtor lacked good faith in filing for Chapter 7 relief. The debtor, who had been separated from his spouse for over five years at the time of his bankruptcy filing, claimed an exemption under § 522(b)(2)(B) in property he owned with his wife as a tenant by the entirety. The trustee challenged this exemption and sought the dismissal of the debtor's petition for "lack of good faith" under §707(a) of the Code. The District Court and a divided Third Circuit panel affirmed the Bankruptcy Court's order dismissing the debtor's case.
The facts of Tamecki are unremarkable. The Tameckis had been separated for approximately five years at the time of the debtor's Chapter 7 filing. While Ms. Tamecki filed for divorce in 1993, for unknown reasons, the divorce action was never finalized. In his petition, the debtor (Mr. Tamecki) claimed an exemption under § 522(b)(2)(2)(B) of the Bankruptcy Code on his share of the home equity. The trustee challenged this election and sought dismissal under §707(a) for lack of good faith. In so doing, the trustee argued that the debtor, who sought to discharge approximately $35,000 in credit card debt, filed his petition in bad faith because the parties' divorce was imminent. Specifically, the trustee urged that the debtor would soon be entitled to his unencumbered share of the equity in the dissolved tenancy by the entirety, or approximately $50,000. This would be sufficient not only to cover the debtor's credit card obligations but would leave the debtor with sufficient funds for a fresh start. Under those circumstances, the trustee inferred that the "timing" of the debtor's Chapter 7 filing smacked of bad faith.
The debtor's response was threefold. First, he urged that the trustee must prove "extreme misconduct" as grounds for dismissal; second, that ability to repay is not, in and of itself, evidence of bad faith; and third, that he did no more than avail himself of an exemption to which he was properly entitled under the Bankruptcy Code.
Notwithstanding the debtor's contentions, the Bankruptcy Court found, and the District Court and Third Circuit affirmed, that the debtor failed to affirmatively prove his good faith and dismissed his petition.
Only two other Circuits, the Eighth and the Sixth, have addressed this issue, both holding that bad faith may be grounds for dismissal only under extremely limited circumstances and where the court has made specific findings of egregious behavior or misconduct. Indeed, bankruptcy and district courts routinely have reserved "bad faith" dismissals for the truly egregious cases involving persons with substantial means who have flaunted their wealth and continued a lavish lifestyle while creatively scheming to conceal their assets and defraud their creditors.
In her dissent, Circuit Judge Rendell strenuously disagreed with the majority, reasoning that the debtor fit the profile of the average consumer debtor. He had marital problems, health problems and employment problems. He had a large credit card debt that he incurred for subsistence purposes by using unsolicited "live" checks that MBNA sent to him while experiencing a lull in his income as a result of health and employment problems. Further, Judge Rendell argued that instead of setting forth evidence of some type of misconduct or fraud that would put the debtor's good faith at issue under § 707, the trustee made only bald allegations, without proffering any evidence about the timing of the debtor's still-unconsummated divorce and his accrual of debt to MBNA. In fact, the debtor provided responses that were not discredited by the Bankruptcy Court.
Both the trustee and the Bankruptcy Court conceded that this ruling in Tamecki breaks new ground in the law regarding good faith filing. Indeed, the trustee's argument which was upheld by the majority, without any evidence that the debtor "schemed" with his spouse to postpone the divorce for their mutual benefit, appears to be that the debtor had an obligation to expedite his divorce before filing bankruptcy to ensure that his state-law-protected tenancy by the entirety would be terminated. This would allow the debtor's home equity to become available to creditors.
Ramifications
Tamecki implies that timing does count. The majority in Tamecki endorsed and announced an unprecedented rule that insolvent individuals must refrain from filing bankruptcy if they may have more assets in the future, such that filing before a realization of such assets, even absent proof of bad intent, is grounds for dismissal of a debtor's bankruptcy case.
After Tamecki, one must consider whether an insolvent individual is barred from filing for bankruptcy, for example, if his wealthy parent is ill, absent any evidence that he is timing his filing so as to deprive creditors of his potential inheritance? Clearly, there is no such restriction in the Bankruptcy Code. As the dissent aptly noted, "it is untenable that an entirely unsupported assertion can trigger an obligation on the part of the debtor to affirmatively prove his good faith or lose all entitlement to bankruptcy relief." The Third Circuit's decision in Tamecki is clearly contrary to those of other circuit courts which have addressed the "bad faith" issue.