Honesty of intention, freedom from knowledge of circumstances that would put a reasonable person on inquiry, and an absence of design to gain an improper advantage. Referred to by courts as an “overriding principle of bankruptcy administration,” the concept comes into play throughout a bankruptcy case—from the filing of the case, to the protection of certain persons doing business with the estate, to the potential applicability of certain defenses asserted by a transferee, to the filing of a plan. For example:
- If a debtor files a bankruptcy case with a lack of good faith, cause exists for the bankruptcy court to dismiss the bankruptcy.
- The validity of a transaction by which a third party has acquired property of the estate will not be affected by a reversal or modification on appeal of the order that authorized the sale, if the third party acted with good faith (and if the transaction was not stayed pending appeal).
- The validity of a lending transaction, and the validity of a lien taken in connection with such lending, will not be affected by a reversal or modification on appeal of the order that authorized the loan, if the party lending money to the estate acted with good faith (and if the lending transaction was not stayed pending appeal).
- A transferee liable for a fraudulent transfer is entitled to a lien on the property it is required to return to the estate, but only to the extent of the value it gave to the debtor at the time of the transfer and only if it received the transfer in good faith.
- A subsequent transferee of an avoidable transfer (i.e., someone other than the initial transferee who took directly from the debtor) is not liable for the avoidable transfer if it took for value, in good faith, and without knowledge of the voidability of the transfer.
A Chapter 11 plan can be confirmed by a bankruptcy court only if certain requirements are met, one being that the plan be filed in good faith and not by any means forbidden by law.