§ 109.1 — Smell Tests

Revised: June 7, 2004

[1]

A significant number of courts have minimized or abandoned the lists of factors and measure good faith based on an overall impression or sense of the debtor and the debtor’s intentions.1 These generic tests—“fundamental fairness,” “totality of the circumstances” and “honesty of intention”—might cynically be described as substituting one undefined phrase for another. They are restatements of the broad discretion bankruptcy courts have in assessing the good-faith boundaries of confirmation of Chapter 13 plans. The U.S. Court of Appeals for the Seventh Circuit explained the generic test for good faith as well as anyone can:

[T]his court has held that good faith is a term incapable of precise definition, and, therefore, the good faith inquiry is a fact intensive determination better left to the discretion of the bankruptcy court. . . . [W]e have directed the bankruptcy courts to look at the totality of circumstances and, thereby, make good faith determinations on a case-by-case basis. . . . The purpose of a case-by-case totality of circumstances test is to allow the bankruptcy judge, who is in the best position to evaluate the witnesses’ credibility against the other evidence, to weigh the evidence in making the good faith determinations. . . . At base, this inquiry often comes down to a question of whether the filing is fundamentally fair . . . whether the filing is fundamentally fair to creditors and, more generally, is the filing fundamentally fair in a manner that complies with the spirit of the Bankruptcy Code’s provisions. . . . We realize that the standard of fundamental fairness does not provide a great deal of needed guidance. Unfortunately, however, we cannot completely alleviate the confusion and at the same time retain the advantages of the totality of circumstances test. This is because as our definition of good faith becomes more precise, the bankruptcy court has less discretion to weigh the evidence first hand in making good faith evaluations. In short, the downside of the totality of circumstances test is a degree of uncertainty. . . . [T]he good faith inquiry is both subjective and objective. That is, both objective evidence of a fundamentally unfair result and subjective evidence that a debtor filed a petition for a fundamentally unfair purpose that was not in line with the spirit of the Bankruptcy Code are relevant to the good faith inquiry.2
[2]

The reported decisions applying a generic test for good faith are not readily distinguishable from those applying a list of factors. At a hearing on confirmation in a jurisdiction that uses the totality-of-the-circumstances or the honesty-of-intention approach to good faith, debtor’s counsel presents the same evidence that would be appropriate if the court applied a long list of factors: the debtor has been honest and forthright in the statement and schedules; the debtor’s budget is reasonable; the debtor has committed all projected disposable income for at least three years; the debtor’s circumstances do not permit a greater contribution each month; and so forth. As a practical matter, it makes little difference in the way counsel prepares for the confirmation hearing that the court uses the 12 factors in Kitchens v. Georgia Railroad Bank & Trust Co. (In re Kitchens),3 or the honesty-of-intention analysis in Barnes v. Whelan.4

[3]

One problem in a factors-approach jurisdiction that is somewhat less important in a generic-test jurisdiction is the effect of Code changes on good-faith analysis. For example, many of the factors-approach cases decided by the courts of appeals prior to the 1984 Code amendments list economic considerations that were consumed by the enactment of the disposable income test in § 1325(b).5 It takes years for good-faith cases to work their way to the courts of appeals to permit reconsideration of the collection of factors.6 Bankruptcy courts in the Eleventh Circuit have continued to apply the 12 factors in Kitchens in spite of serious question whether all of the Kitchens factors have vitality.7 Smell-test jurisdictions demonstrate more flexibility to allow good faith to evolve with changes in other aspects of the Code.8


 

1  See, e.g., Noreen v. Slattengren, 974 F.2d 75 (8th Cir. 1992); Society Nat’l Bank v. Barrett (In re Barrett), 964 F.2d 588 (6th Cir. 1992); In re Love, 957 F.2d 1350 (7th Cir. 1992); In re Doersam, 849 F.2d 237 (6th Cir. 1988); In re Smith, 848 F.2d 813 (7th Cir. 1988); Downey Sav. & Loan Ass’n v. Metz (In re Metz), 820 F.2d 1495 (9th Cir. 1987); In re Chaffin, 816 F.2d 1070 (5th Cir. 1987); Public Fin. Corp. v. Freeman, 712 F.2d 219 (5th Cir. 1983); Johnson v. Vanguard Holding Corp., 708 F.2d 865 (2d Cir. 1983); Barnes v. Whelan, 689 F.2d 193 (D.C. Cir. 1982); In re Baker, 129 B.R. 127 (Bankr. W.D. Tex. 1991); In re Gurst, 76 B.R. 985 (Bankr. E.D. Pa. 1987); In re Gathright, 67 B.R. 384 (Bankr. E.D. Pa. 1986).

 

2  In re Love, 957 F.2d 1350, 1355, 1357 (7th Cir. 1992).

 

3  702 F.2d 885 (11th Cir. 1983).

 

4  689 F.2d 193 (D.C. Cir. 1982).

 

5  See § 108.1  Economic Components of Good Faith—In General and discussion beginning at § 91.1  In General

 

6  Compare Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir. 1982), and Metro Employees Credit Union v. Okoreeh-Baah (In re Okoreeh-Baah), 836 F.2d 1030 (6th Cir. 1988).

 

7  See, e.g., In re Hale, 65 B.R. 893 (Bankr. S.D. Ga. 1986) (1984 amendment adding the disposable income test of § 1325(b)(1) does not alter application of the Kitchens v. Georgia Railroad Bank & Trust Co. (In re Kitchens), 702 F.2d 885 (11th Cir. 1983), criteria.).

 

8  See, e.g., In re Gathright, 67 B.R. 384, 390 (Bankr. E.D. Pa. 1986), aff’d, 71 B.R. 343 (E.D. Pa. 1987) (Strongly critical of the laundry-list approach adopted by other courts, the 1984 amendments restrict good faith to “the traditional concept of ‘serious debtor misconduct or abuse.’”).