The United States Bankruptcy Code (the “Bankruptcy Code”) offers a wide range of instances where a bankruptcy court can dismiss a case. Section 1112(b) of the Bankruptcy Code provides that “the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause . . . .” Section 1112(b)(4) lists different scenarios that constitute “for cause.” Although not explicitly within the statutory scheme, a requirement that the debtor files his bankruptcy petition in good faith is one manifestation of the bankruptcy court’s equitable power that has been implied in the statute. Thus, courts have interpreted the “for cause” provision in section 1112(b) to include a filing made in bad faith.
In re The Sunshine Group, LLC demonstrates the court using its equitable power to dismiss a bankruptcy petition filed in bad faith. There, the court held a debtor in bad faith when it was done as a litigation tactic to avoid a state court’s decision to authorize a receiver’s plan. Moreover, the debtor had no revenues to fund reorganization, no ongoing business, and only had one asset, further supporting the court’s conclusion that the debtor filed the petition in bad faith.
While In re The Sunshine Group, LLC provides an example of a bad faith filing, it is only one interpretation of this multi-factored analysis. Bankruptcy courts have highlighted the necessity of treating each inquiry into a bad faith filing on a case-by-case basis. For that reason, the court weighs many factors to determine whether a debtor filed a petition in bad faith. This article examines the current state of the law by looking at the purpose behind the court reading an implied requirement of good faith into section 1112(b) and the factors that bankruptcy courts use to decide if a debtor filed in bad faith. Part I discusses the purpose for reading a good faith requirement into the statute, and Part II examines the factors that bankruptcy courts have used in defining a bad faith filing.