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Over a vigorous dissent, the 3rd U.S. Circuit Court of Appeals has upheld the dismissal of a Chapter 7 bankruptcy case due to the “bad faith” of the debtor, finding that once the trustee called the debtor’s good faith into question, “the burden shifts to the petitioner to prove his good faith.” All three judges wrote opinions in In Re: Ronald M. Tamecki Sr., with visiting Senior U.S. Circuit Judge John M. Duhe of the 5th Circuit writing the majority opinion. U.S. Circuit Judge Marjorie O. Rendell wrote the dissent, and Samuel A. Alito wrote a concurring opinion. Tamecki filed for Chapter 7 protection seeking discharge of about $35,000 in credit-card debt owed to MBNA America. He said he possessed only one substantial asset — his share of a tenancy by the entirety in his home, which he holds with his estranged wife. Together, he said that he and his wife had $100,000 of equity in the home. The Tameckis had been separated for approximately five years at the time he filed for bankruptcy, and have now been separated for more than seven years. They live in different towns, and each lives with a significant other. Mrs. Tamecki filed for divorce in July 1993, but the action is still pending. In his bankruptcy petition, Tamecki claimed an exemption under Section 522(b)(2)(B) of the Bankruptcy Code on his share of the home equity. But the trustee in bankruptcy challenged this election and sought dismissal of his petition for “lack of good faith” under Section 707(a) of the code. According to the trustee, Tamecki’s divorce is “right around the corner,” and he will therefore soon be entitled to his unencumbered share of the dissolved tenancy by the entirety, giving him about $50,000 — an amount sufficient to cover his debts and still leave him with enough money for a “fresh start.” The trustee reasoned that Tamecki acted in bad faith in filing his petition knowing that he would soon be in a position to repay his debts. The bankruptcy court agreed and dismissed the petition, finding that Tamecki had failed to prove his good faith in filing. Duhe found that Section 707(a) allows a bankruptcy court to dismiss a petition for cause if the petitioner fails to demonstrate his good faith in filing. Although the Bankruptcy Code does not define “good faith,” Duhe said courts in the 3rd Circuit have uniformly held that “at the very least, good faith requires a showing of honest intention.” Duhe said courts can determine good faith “only on an ad hoc basis and must decide whether the petitioner has abused the provisions, purpose, or spirit of bankruptcy law.” In a key holding that caused a split on the three-judge panel, Duhe said: “Once a party calls into question a petitioner’s good faith, the burden shifts to the petitioner to prove his good faith.” Duhe found that the lower court did not err in finding bad faith because Tamecki testified that he accrued over $35,000 in debt at a time when he was earning less than one-tenth that amount. “Debtor could point to no marked calamity or sudden loss of income that precipitated his need to accrue such a comparatively large consumer debt. Moreover, debtor’s testimony concerning the state of his marriage confirmed the trustee’s assertion that divorce and dissolution of the tenancy by the entirety were ‘right around the corner.’ The district court did not abuse its discretion in determining that together these facts are sufficient to shift the burden to debtor to prove his good faith,” Duhe wrote. Tamecki, he said, “proffered no evidence of good faith other than his testimony that he accrued his debt for subsistence purposes, intended to repay the debt, and that he loved his wife and would take her back ‘in a heartbeat.’” The bankruptcy court, Duhe said, “chose to discount this self-serving testimony and instead relied upon evidence that debtor acquired a comparatively large consumer debt just prior to filing for bankruptcy and during the pendency of his divorce.” RENDELL DISSENTS Rendell, whose practice prior to joining the court focused mainly on bankruptcy, filed a strong dissent. The Bankruptcy Code, Rendell said, “contains no explicit good faith filing requirement,” but does permit the court to dismiss cases “for cause.” Rendell said the 3rd Circuit has not previously addressed the question of whether lack of good faith is grounds for dismissal of Chapter 7 consumer bankruptcy cases and has never established “how to go about determining bad faith in such a context.” Only two other courts of appeals have squarely confronted the question of bad faith dismissal of a consumer bankruptcy case, she said, and both have held that bad faith may be grounds for dismissal under that provision, “but have narrowly construed bad faith, finding that cases should be dismissed under only very limited circumstances in which the bankruptcy court has made specific findings of egregious behavior or misconduct.” Generally, Rendell said, bankruptcy and district courts “have reserved bad faith dismissal for the truly egregious case, often involving individuals with substantial means who have flaunted their wealth, have continued their lavish lifestyles, and are engaging in creative, elaborate schemes to conceal their assets and cheat their creditors or to otherwise inflict harm on third parties.” Rendell found that “because the standards for finding bad faith have been set so high by the federal courts, cases involving conduct that might appear questionable are nonetheless not dismissed due to the lack of actual evidence of bad faith or misconduct.” Tamecki’s case, she said, “fits the profile of the average consumer debtor.” His petition, she said, shows that he has marital problems, health problems, and employment problems, as well as a large credit card debt that he incurred for subsistence purposes by using unsolicited “live checks” that MBNA sent to him while he was experiencing a lull in income and ability to perform construction work due to his health and employment problems. “However, far from the anecdotes of debtors who buy real estate to convert cash into exempt home equity in contemplation of bankruptcy, Tamecki and his wife have owned the house for many years; indeed, Tamecki built the house himself,” Rendell wrote. “Tamecki therefore has none of the obvious badges of bad faith as gleaned from the other cases.” Rendell said she parted company with her colleagues because they endorsed the lower court’s shifting of the burden to Tamecki to prove his good faith. “The trustee offered no evidence that put Tamecki’s good faith at issue. He only made bald allegations, without proffering any evidence, about the timing of Tamecki’s still-unconsummated divorce and his accrual of debt to MBNA, to which Tamecki provided responses that were not discredited by the bankruptcy court,” Rendell wrote. Rendell said the trustee conceded at oral argument “that even after conducting considerable research, he knows of no case with an analogous fact pattern or remotely on point; he could not name one.” In her own research, Rendell said, “I have not found a case bearing any resemblance to this one in which bad faith was found to exist. Simply put, our ruling breaks new ground in the law regarding good faith filing.” Rendell found that the trustee’s argument “reveals its slippery slope.” Without putting forth any evidence that Tamecki schemed with his wife to postpone the divorce for their mutual benefit, she said, “the trustee’s position on the divorce issue, as clarified in oral argument, is that Tamecki had an obligation ‘to move his divorce along’ before filing for bankruptcy so that the state-law-protected tenancy by the entirety would be broken to make his home equity available for creditors, regardless of whether Tamecki actually wants to save his marriage.” Rendell said she was “concerned that by endorsing this argument, the majority is announcing an unprecedented rule that insolvent individuals must refrain from filing for bankruptcy if they may have more assets in the future, such that filing before realization of such assets, even absent proof of bad intent, is grounds for dismissal of one’s bankruptcy case.” Rendell said she also disagreed with the majority’s reliance on In Re: Zick, a 6th Circuit decision, to support the holding that a court may dismiss a Chapter 7 case for cause if the debtor fails to demonstrate good faith in filing. “Zick does not require consumer debtors to affirmatively demonstrate good faith absent any challenge. Zick says that lack of good faith may be a valid basis for dismissing a bankruptcy case for cause under section 707(a), not that dismissal is appropriate anytime the debtor fails to affirmatively demonstrate his good faith,” Rendell wrote. “Even if the burden shifts to a consumer Chapter 7 debtor to defend his good faith after good faith has been put ‘at issue,’ I would submit that placing good faith at issue requires more than an unsupported hypothesis about the state of Tamecki’s relationship with his estranged wife and pointing to a specific credit card debt in the bankruptcy schedules,” she wrote. Rendell said she found it “untenable that an entirely unsupported assertion can trigger an obligation on the part of a debtor to affirmatively prove his good faith or lose all entitlement to bankruptcy relief.” Such a procedure, she said, “would be contrary to that employed by our sister courts of appeals, and constitutes an unwarranted departure from existing law.”

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