In bankruptcy, good faith is a lot like good art. It is difficult to describe, but you know it when you see it. The same can be said with bad faith. A recent chapter 13 case out of the 9th Circuit illustrates that point.
The debtor filed a chapter 13 case in August 2004. Since chapter 13 is a voluntary proceeding, a debtor has the option of voluntarily dismissing their case at any time. Also, in chapter 13, the debtor is typically in control of assets of the estate. In this debtor’s case, one of the assets was claim that was being arbitrated against an LLC.
The debtor’s plan was met with objections from the trustee as well as creditors. The debtor assured the court that he would use funds obtained in the arbitration to fund the plan. In July 2005, the debtor was awarded approximately $185,000 in the arbitration. That month, the court ordered him to pay that sum to the chapter 13 trustee.
In August, the debtor’s attorney sought permission to withdraw from the case citing a breakdown in the attorney client relationship. At the hearing, the court learned that the debtor had not complied with the prior order from the court by turning the money over to the trustee. The court gave the debtor one hour to deliver the money, or the court was going to convert the case to chapter 7. The debtor did not deliver the money, and on that same day, the debtor filed a “Notice of Dismissal.”
