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D ock e t 99-4061

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. e du/thir dc ir c uit_2000/206Filed September 27, 2000

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 99-4061

IN RE: RONALD M. TAMECKI, SR.,

Debtor

RONALD M. TAMECKI, SR.,

Appellant

v.

LAWRENCE G. FRANK

ON APPEAL FROM THE

UNITED STATES DISTRICT COURT

FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

(Dist. Court No. 99-cv-01240) District Court Judge: James F. McClure, Jr.

Argued: May 25, 2000

Before: ALITO, RENDELL and DUHE,* Circuit Judges.

(Filed September 27, 2000)

FRANK E. GARRIGAN (Argued) Garrigan & Rosini 112 East Independence Street Shamokin, Pennsylvania 17872

Attorney for Appellant

___________________________________________________ ______________

* Honorable John M. Duhe Jr., United States Circuit Judge for the United States Court of Appeals for the Fifth Circui t, sitting by designation.LAWRENCE G. FRANK (Argued)

Law Office of Lawrence G. Frank

2023 North Second Street Harrisburg, Pennsylvania 17102

Attorney for Appellee

OPINION OF THE COURT

DUHE, Circuit Judge:

We AFFIRM the decision of the district court affirm ing the bankruptcy court's dismissal of Ronald M. Tamecki's ("Debtor") Chapter 7 petition.

BACKGROUND

Debtor filed for Chapter 7 protection seeking disch arge of an approximately $35,000 credit card debt owed to M BNA America. He possesses only one substantial asset, h is share of a tenancy by the entirety in his home, which he holds with his estranged wife. Debtor and his wife have a ccrued over $100,000 of equity in the home.

The Tameckis had been separated for approximatelyfi ve years at the time Debtor filed for bankruptcy, and they have now been separated for more than seven years. Debtor and his wife live in different towns, and each live s with a significant other. Mrs. Tamecki filed for divorce i n July 1993 but, for unknown reasons, the action is still pending.
The most recent trial date was continued either on joint motion of the parties or without objection by the D ebtor.

In his petition Debtor claimed an exemption under Section 522(b)(2)(B) of the Bankruptcy Code on his share of the home equity. See 11 U.S.C. S 522(b)(2)(B). The trustee in bankruptcy ("Trustee") challenged this election and sought dismissal of Debtor's petition for "lack of good faith" under Section 707(a) of the Code. See 11 U.S.C. S 7 07(a). According to Trustee, Debtor's divorce is "right ar ound the corner"; and, thus, Debtor will soon be entitled to his unencumbered share of the dissolved tenancy by the entirety. The Trustee estimates that this would be

2approximately $50,000, an amount sufficient to cove r

Debtor's obligations and still leave him with enoug h money for a "fresh start." Accordingly, the Trustee reaso ned that Debtor acted in bad faith in filing his petition kn owing that he would soon be in a position to repay his debts. The bankruptcy court found that Debtor had failed to pr ove his good faith in filing for bankruptcy and dismissed t he Debtor's petition under Section 707(a). The distric t court
affirmed.

DISCUSSION

Section 707(a) allows a bankruptcy court to dismiss a petition for cause if the petitioner fails to demon strate his good faith in filing. See In re Zick, 931 F.2d 1124 , 1126-27 (6th Cir. 1991), In re Marks, 174 B.R. 37, 40 (E.D. Pa. 1994). Although the Code does not define "good fait h," courts in this circuit have uniformly held that"[a] t the very least, good faith requires a showing of honest inte ntion." See Marks, 174 B.R. at 40. Courts have cautioned, however, that:

Dismissal based on lack of good faith . . . should be confined carefully and is generally utilized only in those egregious cases that entail concealed or misrepresented assets and/or sources of inco me, lavish lifestyles, and intention to avoid a large s ingle debt based upon conduct akin to fraud, misconduct or gross negligence.

Zick, 931 F.2d at 1129. Courts can determine good f aith only on an ad hoc basis and must decide whether the petitioner has abused the provisions, purpose, or s pirit of bankruptcy law. See Marks, 174 B.R. at 40. The part ies agree that the decision to dismiss a petition for l ack of good
faith rests within the sound discretion of the bank ruptcy court. See Zick, 931 F.2d at 1126, In re Atlas Supp ly Corp., 857 F.2d 1061, 1063 (5th Cir. 1988).

Once a party calls into question a petitioner's goo d faith, the burden shifts to the petitioner to prove his go od faith. See Marks, 174 B.R. at 40 citing In re Sky Group In t'l, Inc., 108 B.R. 86, 90 (Bankr. W.D. Pa. 1989) ("Once the g ood faith issue is placed in question, the party bringi ng the

3petition has the burden of proving that the petitio n was

brought in good faith."). The bankruptcy court foun d that Debtor failed to meet this burden. We agree.

Debtor testified that he accrued over $35,000 in de bt at a time when he was earning less than one-tenth this 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 marr iage
confirmed the Trustee's assertion that divorce and dissolution of the tenancy by the entirety were"rig ht
around the corner.1" The district court did not abu se its discretion in determining that together these facts are sufficient to shift the burden to Debtor to prove h is good
faith.2

Debtor's response was three-fold: first, that the T rustee must prove "extreme misconduct"; second, that abili ty to repay is not, in and of itself, evidence of bad fai th, see Marks, 174 B.R. at 41 and third; that he did no mor e than avail himself of a proper exception under the Code. While we agree with Debtor and the court in Zick that we should not lightly infer bad faith, Debtor's response is i nsufficient to carry his burden of proving good faith. Debtor p roffered no evidence of good faith other than his testimony that he

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1. Tamecki's testimony confirms that he and his wif e are estranged. They have been separated for seven years. They live in s eparate towns, each with a new significant other. A divorce proceeding has been pending since 1993. They have not sought counseling, nor is there any indication that either party has made overtures toward a recon ciliation. No explanation for the delay in finalizing the divorce has been provided. Accordingly, we see no error in the bankruptcy cour t's apparent discounting of Tamecki's self-serving testimony tha t he would take his wife back "in a heartbeat." That may be true, but t here is no evidence that her return is either imminent or likely.

2. We do not suggest, as the Dissent indicates, tha t "consumer debtors [must] affirmatively demonstrate good faith absent any challenge," or that "dismissal is appropriate anytime the debtor f ails to affirmatively demonstrate his good faith." We hold merely that in this case where the trustee has called into question debtor's good fait h, and put on evidence sufficient to impugn that good faith, the burden th en shifts to the debtor to prove his good faith.

4accrued his debt for subsistence purposes, intended to

repay the debt, and that he loved his wife and woul d take her back "in a heartbeat." The bankruptcy court cho se to discount this self-serving testimony and instead re lied upon evidence that Debtor acquired a comparatively large consumer debt just prior to filing for bankruptcy a nd during the pendency of his divorce. While Debtor is correct that ability to repay is not in and of itself suffi cient proof of bad faith, both the reasonableness of his accrual o f the debt and the timing of his filing, particularly in relation to the curious and unexplained circumstances relating to the divorce proceeding, were sufficiently questionable to warrant good faith scrutiny. Debtor's assertion tha t the Code permits him to take the entireties exemption s imply begs the question and does not address whether he a vailed himself of that provision in good faith. Ultimately , we find no error in the bankruptcy court's ruling that Debt or failed to prove his good faith.

AFFIRMED.

5ALITO, Circuit Judge, concurring:

I join the opinion of the Court, but I add a few wo rds to clarify the narrow point of disagreement between th e majority and the dissent. As I understand the posit ion of our dissenting colleague, she agrees (a) that a Cha pter 7 consumer case may be dismissed for "bad faith" and (b) that, once a debtor's good faith is appropriately p ut at issue, it is the burden of the debtor to produce ev idence of good faith. I do not understand the dissent to argu e that in this case the debtor produced evidence of good fait h, and thus the only apparent point of disagreement concer ns the question whether, on the particular facts of this c ase, the debtor's good faith was sufficiently put at issue t o require him to demonstrate good faith.

The dissent apparently believes that, in order to p ut Tamecki's good faith at issue, it was incumbent upo n the trustee to produce evidence that, among other thing s, there is no good reason for the unusual delay in the comp letion of the Tameckis' divorce proceeding. See Dissenting Opinion at 9 ("[T]he trustee offered no evidence that put T amecki's good faith at issue. He only made bald allegations, without proffering any evidence about the timing of Tamecki 's still unconsummated divorce. . . ."). But the trustee, wh o is obviously not a party to the divorce proceeding, is in a comparatively poor position to show the reason for the delay. The known facts about the divorce proceeding are sufficient to place upon the debtor the burden of e xplaining the reason for the delay, which has now reached sev en years. It may be that there are entirely legitimate reasons for the delay. If so, it should have been easy for Tamecki to show what they were. But he made no effort to do so

.

Under the particular circumstances of this case-- w hich, contrary to the implication of the dissent, is not the average consumer bankruptcy case -- the bankruptcy judge di d not commit an abuse of discretion is dismissing the pet ition.

6RENDELL, Circuit Judge, dissenting:

Some background is necessary to understand the framework in which we analyze this dispute and why I strenuously disagree with the outcome in this case, the reasoning, and the rule implicitly set forth by the majority. The Bankruptcy Code contains no explicit good faith filing requirement.1 It does, however, permit the court to dismiss cases, including chapter 7 consumer cases, "for cau se." See 11 U.S.C. SS 707(a), 930(a), 1112(b), 1208(c), 1307 (c). We have not previously addressed the question of wheth er lack of good faith is grounds for dismissal of chapter 7 consumer bankruptcy cases under section 707(a), nor have we established how to go about determining bad fait h in such a context.2 Only two other courts of appeals h ave squarely confronted the question of bad faith dismi ssal of a consumer bankruptcy case under section 707(a). Both have held that bad faith may be grounds for dismissal un der that provision, but have narrowly construed bad fai th, finding that cases should be dismissed under only v ery limited circumstances in which the bankruptcy court has made specific findings of egregious behavior or mis conduct. See Huckfeldt v. Huckfeldt (In re Huckfeldt), 39 F. 3d 829, 832 (8th Cir. 1994); Industrial Ins. Servs., Inc. v . Zick (In re Zick), 931 F.2d 1124, 1129 (6th Cir. 1991). Both in and outside of these two circuits, bankruptcy and distr ict courts

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1. The one exception is in chapter 9, which governs bankruptcies by municipalities and contains an express good faithfi ling requirement. See 11 U.S.C. S 921(c). The Bankruptcy Code does requir e that repayment or reorganization plans -- as opposed to bankruptcy ca ses themselves -- be proposed in good faith. See 11 U.S.C. SS 1129(a)(3) , 1225(a)(3), 1325(a)(3).

2. Although we have not ruled on the use of section 707(a) to dismiss cases "for cause" on account of bad faith, we recen tly have held, in the context of a sophisticated corporate debtor in chap ter 11, that lack of good faith can be grounds for dismissal "for cause" under section 1112. See In re SGL Carbon Corp., 200 F.3d 154, 161 (3d C ir. 1999). We also stated in a footnote in SGL that "once at issue, th e burden falls upon the bankruptcy petitioner to establish that the petitio n has been filed in `good faith.' " Id. at n.10. However, even if this statement were to be extended to chapter 7 consumer cases, as we discuss later, and as distinguished from the situation in SGL, nothing in the record of this case puts Tamecki's good faith "at issue."

7have reserved bad faith dismissal for the truly egr egious

case, often involving individuals with substantial means who have flaunted their wealth, have continued thei r lavish lifestyles, and are engaging in creative, elaborate schemes
to conceal their assets and cheat their creditors o r to otherwise inflict harm on third parties.3 Indeed, b ecause the standards for finding bad faith have been set so hi gh by the federal courts, cases involving conduct that might appear questionable are nonetheless not dismissed due to t he lack of actual evidence of bad faith or misconduct. See, e.g., In re Marks, 174 B.R. 37, 40 (E.D. Pa. 1994) (explaini ng, in upholding the bankruptcy court's decision not to di smiss the case, that "[t]he bankruptcy court stated that the record did not establish any unexplained transfer of asset s, multiple case filings, extraordinary procedural gym nastics, or lack of candor and completeness in the debtor's statements and schedules.").4 With that background, I now
turn to the facts of this case.

In nearly all respects, Tamecki fits the profile of the average consumer debtor. He has marital problems, h ealth problems, and employment problems. He has a large c redit card debt that he incurred for subsistence purposes by using unsolicited "live checks" that MBNA sent to h im while he was experiencing a lull in income and ability to perform

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3. See, e.g., In re Lacrosse , 244 B.R. 583, 588-58 9 (Bankr. M.D. Pa. 1999) (dismissing case of debtor with 58 credit car ds and over $500,000 of consumer debt, who lived a lavish lifestyle and drove luxury cars, and who also falsely enticed clients to give him money by saying that he intended to make tax-free investments); In re Brown , 88 B.R. 280, 284- 285 (Bankr. D. Hawaii 1988) (dismissing case of suc cessful ophthalmologist who engaged in prebankruptcy asset planning to remove more than $700,000 from the reach of creditors and who sought to avoid an obligation to a recipient of cataract surgery wh o lost all vision in

her right eye).

4. The Court in Marks continued by explaining that "[m]ost instances of dismissal for bad faith under S 707(a) involve conc ealment, misrepresentation, or unexplained transfers to plac e assets beyond the reach of creditors." Id. at 41. Thus, even the case s of debtors that

appear not to need bankruptcy relief have not been dismiss ed for bad faith in the absence of evidence of misconduct. See, e.g., I n re Josey, 169 B.R. 138, 140 (Bankr. S.D. Ohio 1994); In re Bridges , 1 35 B.R. 36, 38 (Bankr. E.D. Ky. 1991).

8construction work due to his health and employment

problems. He has an even lower income (under $4,000 per year in 1996 and 1997) than most debtors. He also h as equity in a home held in tenancy by the entirety wi th his estranged wife that, under Pennsylvania law, cannot be touched by his creditors, either in or out of bankr uptcy unless or until the tenancy is broken. However, far from the anecdotes of debtors who buy real estate to convert cash into exempt home equity in contemplation of bankrup tcy, Tamecki and his wife have owned the house for many years; indeed, Tamecki built the house himself. Tam ecki therefore has none of the obvious badges of bad fai th as gleaned from the other cases.

One would expect, therefore, that this case was dismissed for bad faith because the trustee put for th evidence of some type of misconduct or fraud. Howev er, the trustee offered no evidence that put Tamecki's good faith at issue. He only made bald allegations, without proff ering anyevidence, about the timing of Tamecki's stillunconsummated divorce and his accrual of debt to MB NA, to which Tamecki provided responses that were not discredited by the Bankruptcy Court. The trustee, w ho is the primary advocate of dismissing Tamecki's case, conceded at oral argument that even after conductin g considerable research, he knows of no case with an analogous fact pattern or remotely on point; he cou ld not name one. Having canvassed the landscape, I have no t found a case bearing any resemblance to this one in which bad faith was found to exist. Simply put, our rulin g breaks new ground in the law regarding good faith filing.

In dismissing Tamecki's case, the Bankruptcy Court made no specific findings of bad faith. However, in upholding the dismissal of Tamecki's case, the majo rity
focuses on Tamecki's accrual of debt to MBNA and hi s pending divorce, both of which I will discuss in tu rn.

Tamecki accrued most of his debt to MBNA within the two years prior to filing for bankruptcy. In addres sing this accrual of debt, the Bankruptcy Court made no findi ng that Tamecki ran up his debts in contemplation of bankru ptcy or made extravagant purchases in reckless disregard of his financial situation. To the contrary, the Bankruptc y Court

9credited Tamecki's testimony that he incurred this debt to

supplement his paltry income for food and other necessities. It is difficult to contemplate what mo re Tamecki could have done to refute any inference of bad fait h from
his use of the unsolicited live checks for subsiste nce at a
time when he had nominal income. If the existence o f a large credit card debt, unaccompanied by any eviden ce that
the debtor incurred the debt without the intent to repay,5 is sufficient for bad faith dismissal, the bankruptcy courts and the majority of debtors in our circuit should b e prepared for an onslaught of good faith challenges.

The majority ruling also relies on Tamecki's stillunconsummated divorce proceedings. Tamecki's wifefi led for divorce more than five years prior to the bankr uptcy filing, but the proceedings have been dormant for m uch of
that time. Tamecki claims he would never divorce hi s wife of his own accord; he testified that he wants to re main married to her. The trustee opined, with no evidenc e, that Tamecki's divorce is "right around the corner," in which event he could be forced to sell his home, break th e tenancy by the entirety protected by Pennsylvania l aw, and pay MBNA what he owes. I might find this contention persuasive if the trustee had offered any specific evidence, and the Bankruptcy Court had specifically found, th at Tamecki had timed his bankruptcy and divorce to def raud his creditors. However, the Bankruptcy Court made n o such finding, nor did it indicate that the possibil ity of Tamecki's divorce played any role in its ruling. In fact, the Court never shared its view on this issue; it did n ot explicitly accept the trustee's argument in this re gard, nor
did it discredit Tamecki's assertion that he did no t want to be divorced from his wife (and therefore had no int ention to break the tenancy by the entirety on his own accord ).6 The majority takes a quantum and unprecedented leap by

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5. The Bankruptcy Code contains a provision, sectio n 523(a), under which creditors can challenge the dischargeability of specific debts. If there was any question that Tamecki incurred the de bt without the intent to pay it, MBNA could have pursued its right s under that provision. 6. The majority's reference to the Bankruptcy Court 's assessment of the testimony regarding the marital status as "apparent discounting of Tamecki's self-serving testimony" is curious in lig ht of the Bankruptcy Court's lack of any reference whatsoever to any con cern regarding the marital situation. As noted above, the Bankruptcy C ourt does not even refer to the timing of the divorce as having any be aring on its decision

or the outcome.

10crediting the trustee's argument and using it as a basis for

upholding the dismissal of Tamecki's case.

A closer look at the trustee's argument reveals its slippery slope. Failing to put forth any evidence t hat Tamecki has schemed with his wife to postpone the d ivorce for their mutual benefit, the trustee's position on the divorce issue, as clarified in oral argument, is th at Tamecki had an obligation "to move his divorce along" befor e filing for bankruptcy so that the state-law-protected tena ncy by the entirety would be broken to make his home equit y available for creditors, regardless of whether Tame cki actually wants to save his marriage.7 In addition t o being concerned about the result in the case before us, I am concerned that by endorsing this argument, the majo rity 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 filin g before realization of such assets, even absent proof of ba d intent, is grounds for dismissal of one's bankruptcy case. For example, is an insolvent individual barred fromfili ng for bankruptcy if his wealthy parent is ill, absent any evidence that he is timing his filing so as to deprive credi tors of his potential inheritance? I submit that there is no su ch restriction in the Bankruptcy Code, and the courts should

not create one.

I will refrain from refuting a variety of specific statements made by the majority, with one exception, namely, i ts assertion that a court may dismiss a chapter 7 case for cause if the debtor fails to demonstrate good faith in filing, citing the Zick decision. Zick does not require con sumer debtors to affirmatively demonstrate good faith abs ent any challenge. Zick says that lack of good faith may be a valid basis for dismissing a bankruptcy case for cause un der section 707(a), see Zick, 931 F.2d at 1126, not tha t dismissal is appropriate anytime the debtor fails t o

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7. The trustee's alternative position at oral argum ent was that if Tamecki and his wife get back together, they should be requ ired to take a second mortgage on their home to pay the MBNA debt. Regard less of the relative merits of this argument as a policy matter, it has no foundation in current bankruptcy law.

11affirmatively demonstrate his good faith.8 Even if the

burden shifts to a consumer chapter 7 debtor to def end his good faith after good faith has been put "at issue, " I would submit that placing good faith at issue requires mo re than an unsupported hypothesis about the state of Tameck i's relationship with his estranged wife and pointing t o a specific credit card debt in the bankruptcy schedul es. I frankly find it untenable that an entirely unsuppor ted assertion can trigger an obligation on the part of a debtor to affirmatively prove his good faith or lose all e ntitlement to bankruptcy relief. Such a procedure would be con trary to that employed by our sister courts of appeals, and constitutes an unwarranted departure from existing law.

I respectfully dissent.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

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8. The Huckfeldt decision from the Court of Appeals for the Eighth Circuit also makes no mention of placing the burden of proving good faith on the debtor, taking only the cautious step that a specific finding of bad faith may be grounds for section 707(a) dism issal.

12