Document Type
Research Memorandum
Publication Date
2024
Abstract
(Excerpt)
Section 1112 of title 11 of the United States Code (the "Bankruptcy Code") enumerates a non-exhaustive list of sixteen factors justifying dismissal of a bankruptcy case for lack of good cause, but bankruptcy courts have the authority to consider other factors as they arise and use equitable powers to reach appropriate results in individual cases. Bankruptcy courts have determined that "good faith" is a requirement to remain in bankruptcy, and "bad faith" is among the reasons to dismiss. To date, no court has adopted a universally accepted definition of good faith.
In recent cases, courts have used their discretionary powers liberally, devising new tests for determining whether a chapter 11 filing is in good faith. In 2023, the Third Circuit held that a court analyzing whether a chapter 11 filing is in good faith must consider whether the petition serves a valid bankruptcy purpose, which turns on whether the debtor demonstrates "financial distress." The U.S. Bankruptcy Court for the Southern District of Indiana adopted this test but required a financial "need" for chapter 11 protection to establish good faith. In the Third and Seventh Circuits, where a debtor is financially healthy, either because it is solvent or has secured a funding agreement indemnifying it from the consequences of litigation, it appears that a debtor cannot have a financial need for chapter 11 protection, and therefore no valid reorganizational purpose
This memorandum examines what a debtor must show to establish a good faith filing and survive a motion to dismiss considering the court’s holding in Aearo. Part I focuses on the requirements for a valid reorganizational purpose and financial need. Part II contrasts this test with those used by the Second and Fourth Circuits.