Summary of a Recent
Judicial Development in
Bankruptcy

Seven Factors to Consider in Determining Bad Faith

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re McKinnon, 378 B.R. 405 (Bankr. S.D. Ga. 2007), the United States Bankruptcy Court for the Southern District of Georgia held that the debtor satisfied the burden of showing that his current case was filed in good faith, and extended the temporary 30-day stay to prevent creditors from foreclosing on farm land on which he had planted crops after his prior Chapter 12 case was dismissed.

Background

Debtor filed a Chapter 12 petition in November 2006, which was dismissed in April 2007. Id. at 408. He filed his Chapter 11 case and motion for automatic stay pursuant to 11 U.S.C. § 362(c)(3)(B) in July 2007. Id. One secured creditor, Prime South, objected to the motion, and another secured creditor, UAP, appeared in favor of it. Id. at 407. The Debtor explained that since his Chapter 12 case was dismissed, he worked out payment arrangements with many of his creditors, and felt that he would be able to make the payments owed. Id. at 408. He planted crops on all the real property secured by Prime South's claim. Id. He was later determined to be no longer eligible to farm by the Farm Services Administration, so he entered into an agreement with another farmer, Steve Dixon, to finance the planting. Id. There was no harvest in 2006 because of bad weather, but the Debtor testified that he believed 2007's harvest would bring in approximately $1.2 million dollars net profit, of which his share would be $500,000. Id. He also stated that he had been trying to sell some real estate to pay his creditors. Id.

Arguments

The Debtor argued that his current case was filed in good faith, and he was eligible for Chapter 11 relief, so the automatic stay should be continued pursuant to 11 U.S.C. § 362(c)(3)(B). Id. at 407.

Prime South argued that the Debtor must show a change in circumstances to rebut the presumption that the current case was filed in bad faith, and alleged that there was not a change in circumstances in this instance. Id. at 408.

Analysis and Holdings

The court began by looking at 11 U.S.C. § 362(c)(3), which states, with regard to a Chapter 7, 11, or 13 creditor who had a case dismissed within the previous year,

(A) the stay under subsection (a) with respect to any action taken with respect to debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case.
Id. at 409.

The statute does not mention Chapter 12 debtors. Id. The court reasoned that legislature could have carved out an exception for Chapter 12 debtors if they had wanted to do so and as a result, it is presumed to be an intentional omission and the exception does not apply to them. Id. This meant that the Debtor had to comply with 11 U.S.C. § 362(c)(3)(B) to obtain an extension of the stay. Id. at 410. Section B requires a debtor to prove that his current case was filed in good faith. Id. The court adopted the Eleventh Circuit test for determining whether a debtor filed in bad faith. Id. at 413.

The Eleventh Circuit test, first applied in In re Phoenix Piccadilly, Ltd., 849 F.2d 1393 (11th Cir.1988), allows the court to "consider any factors which evidence an intent to abuse the judicial process . . . in particular factors which evidence that the petition was filed to delay or frustrate the legitimate efforts of secured creditors to enforce their rights." Id. Seven factors that evidence a bad faith filing are:

(1) Whether the debtor has only one asset, usually real estate, in which it does not hold legal title;
(2) Whether the debtor has few unsecured creditors whose claims are small in relation to the claims of secured creditors;
(3) Whether the debtor has a limited number of employees;
(4) Whether the property is the subject of a foreclosure action as a result of arrearages on the debt;
(5) Whether the debtor's financial problems involve essentially a dispute between the debtor and its creditors holding an interest in the real estate which can be resolved in the pending state court action;
(6) Whether the timing of the debtor's filing evidences an intent to delay or frustrate the legitimate efforts of the debtor's secured creditors to enforce their rights;
(7) Whether there is a reasonable possibility of an effective reorganization of the debtor.
Id.

Applying those factors to this case, the court noted that: (1) the Debtor had more than one asset; (2) he had more unsecured debt than secured; (3) it was unknown how many employees he had but he filed as an individual and not a business; (4) foreclosure proceedings were initiated sometime after the dismissal of his original Chapter 12 case; (5) his financial problems involved one parcel of land encumbered by multiple secured claims from various creditors, which were complicated further by multiple claims against the crops planted on the property; (6) the timing of his filing did not indicate to the court an intent to delay or frustrate his creditors; and (7) it was too soon to consider whether there was a possibility of reorganization. Id. at 414-15. Considering the totality of the circumstances, recognizing that the seven factors were only guidelines and that there is no "per se" approach to bad faith, the court concluded that the Debtor proved beyond a preponderance of the evidence that he filed his Chapter 11 petition in good faith, and overruled Prime South's objection to the motion of continuance. Id. at 415.

The case was decided on September 24, 2007.