Cold Piazza: Judicial Construction of the Chapter 7 "for Cause" Provision

• Publication year: 2015

Cold Piazza: Judicial Construction of the Chapter 7 "For Cause" Provision

Wes Pickard

COLD PIAZZA: JUDICIAL CONSTRUCTION OF THE CHAPTER 7 "FOR CAUSE" PROVISION

ABSTRACT

This Comment analyzes a recent decision by the U.S. Court of Appeals for the Eleventh Circuit focusing on the role of an implied good faith inquiry in the "for cause" provision in Chapter 7 of the Bankruptcy Code. The decision in Piazza v. Nueterra Healthcare (In re Piazza) contributes to a purported circuit split on whether the "for cause" provision should be the locus for an implied good faith inquiry or whether such an inquiry should be left to other parts of the Code. Circuit courts that embrace an implied good faith inquiry in the "for cause" provision are further fractured on the question of the nature of the test that should be applied.

This Comment argues that the circuit split on the implied good faith inquiry is an illusion. All circuit courts that have examined the issue would likely consider the same behaviors to be grounds for dismissal for bad faith in a future case. The more critical issue for debtors and creditors in bankruptcy is discord among the courts of appeals with regard to the implied good faith test. This Comment argues that multifactor tests like the one endorsed in Piazza are counteractive to the goal of the implied good faith inquiry, namely deterring abuse of the bankruptcy system. Further, by applying a rule-like factor test, the Piazza court creates harsh results for debtors through the inherent over- and under-inclusivity of such tests. Invoking jurisprudential concerns, this Comment concludes that the best application of the implied good faith inquiry is an amorphous good faith standard that allows bankruptcy judges maximum discretion.

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Introduction............................................................................................1363

I. The Implied Good Faith Requirement And Bankruptcy........1366

A. The History of the Implied Good Faith Requirement .............. 1367
B. The Core of Bankruptcy........................................................... 1368
C. The Implied Good Faith Requirement in Federal Courts........ 1370

II. Explanation of In re Piazza.........................................................1372
III. A More Desirable Implied Good Faith Requirement..............1379

A. The "For Cause" Circuit Split Is Illusory............................... 1380
B. A Standard Is Preferred to a Rule in Deterring Abuse............. 1382

IV. Countervailing Concerns and Implications...........................1385

A. Implications of the Circuit Split Proposal ............................... 1386
B. Countervailing Concerns Regarding the Amorphous Standard Proposal .................................................................................. 1386

Conclusion................................................................................................1388

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Introduction

Out of the over 800,000 debtors that filed for bankruptcy protection under Chapter 7 of the Bankruptcy Code in the twelve-month period ending on March 31, 2013, 25,579 of them filed with predominantly business debts.¹ Owing to uncertainty in a pivotal area of bankruptcy law,² individual debtors ought to have considered how their prepetition behavior would appear to the bankruptcy judge assigned their case. If a debtor files for Chapter 7 bankruptcy in a jurisdiction with a stringent good faith standard, her case might be dismissed—allowing creditors to pursue their claims at any cost—for behavior that many debtors might find ordinary or routine in contemplating bankruptcy.³

A proliferation of different approaches in different jurisdictions regarding eligibility for bankruptcy has generated significant confusion about the role of a debtor's prebankruptcy behavior in determining her eligibility for bankruptcy relief.⁴ It creates harsh results among those not properly on notice as to a particular jurisdiction's requirements of good faith, induces practice problems for attorneys looking to advise their clients on their chances of success in bankruptcy, raises structural and administrative concerns,⁵ and prompts the potential for forum shopping by debtors.⁶

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When Congress passed the Bankruptcy Code in 1978,⁷ it expressly embraced (with few exceptions)⁸ the ability of any person or business to file for Chapter 7 bankruptcy.⁹ And yet, to prevent too wide a berth for potential filers, Congress simultaneously enacted several provisions that constrain eligibility for bankruptcy's protections.¹⁰ These provisions reflect an important policy choice by Congress: bankruptcy provides unique capabilities that allow needy debtors to pursue a fresh start in their lives or the lives of their businesses. That said, these capabilities should not be available to debtors when they seek to use bankruptcy as a shortcut to shirk their creditors.¹¹

One of the fundamental tools Congress gave bankruptcy courts to police abusive filings was the ability to dismiss a Chapter 7 filing "for cause."¹² As enacted in 1978,¹³ the "for cause" provision applied to all debtors and allowed a bankruptcy judge to dismiss for behaviors including "unreasonable delay . . . prejudicial to creditors," "nonpayment of any fees or charges required," and "failure of the debtor in a voluntary case to file" certain documents associated with the bankruptcy.¹⁴ Because the Bankruptcy Code construes "including" as "not limiting,"¹⁵ the three listed behaviors are illustrative rather than exhaustive, meaning that courts can dismiss a case for any number of reasons that they find constitute "cause."¹⁶

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The 1978 version of the Chapter 7 "for cause" provision applied regardless of the nature of debt.¹⁷ But when Congress promulgated the 1984 amendments to the Bankruptcy Code,¹⁸ a new provision took responsibility for handling abuse in consumer debtor cases.¹⁹ Although consumer debtor cases can still be dismissed under the "for cause" provision, it is most often utilized when the debtor submits his petition with 50.1% of debts relating to business ventures.²⁰ Despite the relative ease of knowing when to apply the "for cause" provision in any given Chapter 7 bankruptcy, the polysemous nature of "for cause" has created an array of questions as to both the nature and extent of its application.

One fundamental question is whether Congress intended bankruptcy courts administering a Chapter 7 case to use the "for cause" provision to apply an implied good faith requirement.²¹ Answering in the affirmative compels another question: what test should bankruptcy courts use to enforce the implied good faith requirement? Courts around the nation have ostensibly split (highlighted by the Eleventh Circuit's recent decision in In re Piazza)²² both

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on the fundamental question²³ and on the derivative question.²⁴

This Comment argues that, despite the claims made in In re Piazza, the circuit split on the implied good faith requirement in the "for cause" provision is illusory. The true circuit split on this issue—the nature of the application of the implied good faith requirement—is significantly more problematic, and the Piazza court has endorsed an overly rule-like test that will create hardship on Chapter 7 debtors. Part I details the history of the implied good faith requirement, discusses core themes of bankruptcy, and outlines the current application of the requirement by U.S. Courts of Appeals.²⁵ Part II reviews the Eleventh Circuit's resolution of the implied good faith question both in terms of its foundation in the "for cause" provision and its appropriate application.²⁶ Part III discusses why the purported circuit split on the "for cause" provision is illusory and suggests that the appropriate test for bankruptcy courts should be an open-ended, amorphous standard.²⁷ Finally, Part IV considers countervailing concerns and implications of those proposals.²⁸

I. The Implied Good Faith Requirement and Bankruptcy

Creating the most desirable application of the implied good faith requirement necessitates reviewing the history of the test and its relationship to the goals of bankruptcy. Section A describes the history of the implied good faith requirement as utilized by bankruptcy courts over the last one hundred and fifty years. section B illustrates the core of bankruptcy, which includes promoting a debtor's fresh start and the efficient collection of debts. Section C features the treatment of the "for cause" provision and implied good faith

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requirement in federal courts of appeals to lay the foundation for the argument that any circuit split between them is illusory.

A. The History of the Implied Good Faith Requirement

Understanding the history of the "for cause" provision is an important element to understanding why the good faith requirement is implied in the Code. For the purposes of this Comment, several principles can be elucidated from its history. First, Congress has chosen not to enact an express good faith requirement for filing a bankruptcy petition in Chapter 7, despite definitively knowing how to do so. Second, courts have nonetheless applied some form of an implied good faith test since the early stages of bankruptcy law. Third, Congress has given little guidance on the purposes of a good faith inquiry for reorganization under Chapter 11 or rehabilitation under Chapter 13, and it has given even less for liquidation under Chapter 7.

Early bankruptcy acts (in 1800,²⁹ 1841,³⁰ 1867,³¹ and 1898)³² did not expressly compel a debtor to file for bankruptcy in good faith, nor did they have a "for cause" provision at all. Nonetheless, "[e]very bankruptcy statute since 1898 has incorporated literally, or by judicial interpretation, a standard of good faith for the commencement, prosecution, and confirmation of bankruptcy proceedings."³³ This incorporation continued even though the 1938 Chandler Act amendments to the Bankruptcy Act of 1898...