Reorganizing your company is at the center of a Chapter 11 bankruptcy case. A plan is created and must generally be approved by a majority of the creditors looking to get paid. After approval, it must be confirmed by the bankruptcy court.

Of the 13 confirmation requirements, the third is that the plan must be proposed in good faith, and not by any means not allowed by the law. The idea here is to ensure that the plan complies with the general intent of the bankruptcy laws.

A reorganization plan proposed in good faith complies with all laws and satisfies the goal of reorganization. The good faith requirement focuses only on plan proposal. Bad faith in the acceptance of a plan won't run afoul of the good faith requirement.

Good Faith Factors

When looking at good faith, the court tries to make sure the plan will fairly achieve a result in line with the objectives and purposes of the bankruptcy laws. The most commonly used standard requires the court to look at the plan in light of the circumstances of the plan's creation.

Other factors that courts may apply are whether or not:

  • The plan is proposed with honesty and good intentions
  • There is a basis for expecting that reorganization will work 
  • There was fundamental fairness in dealing with the creditors

Indications of Bad Faith

Factors indicating a plan may have been proposed in bad faith include:

  • Filing a bankruptcy case in response to a loss in a non-bankruptcy lawsuit, for example, just to avoid or delay paying a judgment for damages
  • The court finds that creditors were manipulated to meet the requirement that at least one class of creditors accept the plan
  • A competitor of the debtor proposes a plan intending to eliminate competition
  • Plans proposed as a strategy for delay
  • Plans proposed solely for tax considerations

Proposal by Means Forbidden by Law

The second part of the good faith proposal requirement is a plan can't be confirmed if it's "proposed by means forbidden by law." One example is a plan with components that violate state law, such as prohibited stock transactions or holdings by certain businesses.

Another example is when a plan proponent has bribed another to do something to ease plan confirmation. This is clearly illegal and would cause the court to deny confirmation. Also against the law is a plan that creates a monopoly or some other illegal trade restraint.

Questions for Your Attorney

  • My business did lose a lawsuit recently. Will this be an issue if a Chapter 11 case is filed?
  • What if a main purpose of my need to file bankruptcy is because I owe significant business taxes?
  • Can you review my proposed plan to confirm it's in compliance with the law?