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Making the Case for a 'Good Faith' Chapter 11 Filing

By Paul D. Leake

The distinction between recourse to Chapter 11 protection as a legitimate means to maximize the value of a company's assets and/or to restructure its financially troubled yet otherwise viable operations, on the one hand, and clear bankruptcy abuse, on the other, is sometimes murky. A court called upon to make such a distinction is obliged to “get into the debtor's head” and investigate the board's motives for commencing a bankruptcy case and, in some cases, to decide whether the debtor's otherwise permissible use of the powerful provisions of federal bankruptcy law is impermissible because the debtor's motives are antithetical to the basic purposes of bankruptcy.

The Bankruptcy Code contains a variety of mechanisms that abridge, alter or delay creditor rights and remedies, including the automatic stay, discharge of debts, avoidance of preferential transfers, rejection of unfavorable contracts and limitations on the amount of certain employee and landlord claims. However, it is generally recognized that a debtor can avail itself of these mechanisms only if its decision to seek Chapter 11 protection in the first place comports with lawmaker's intentions in 1978 in enacting the Bankruptcy Code. At the heart of this analysis lurks Chapter 11's “good faith” filing requirement. The “good faith” standard is an integral part of the balancing process between debtor and creditor interests that is manifest in many provisions of the Bankruptcy Code. Unfortunately, caselaw guidance on the concept of “good faith” is often abstruse, offering little concrete guidance, and sometimes contradictory.

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