BAPCPA Blog

Appeal of "Debt Relief Agency" Decision Dismissed for Lack of Standing

2006-10-23T08:45:00.000-05:00

Within hours after the main provisions of BAPCPA became effective on October 17, 2005, a Bankruptcy Court in Georgia issued a sua sponte order entitled "In re Attorneys at Law and Debt Relief Agencies" which determined that attorneys are not included in the definition of "debt relief agency," and accordingly not subject to the obligations imposed on such entities under 11 U.S.C. 526. See "Georgia Judge Says Attorneys Not 'Debt Relief Agencies'".

The United States Trustee took an appeal of Judge Davis' order, arguing that it should be vacated because there was no actual "case or controversy" and that no "action, suit or proceeding" had been commenced. In ironic fashion, the District Court effectively agreed with the US Trustee that there was no case or controversy, but as a result dismissed the US Trustee's appeal for lack of standing! In re Attorneys at Law and Debt Relief Agencies, 2006 WL 2925199 (S.D. Ga. 8/25/06).

District Judge Moore noted that the order was entered sua sponte and posted on the Bankruptcy Court's website and later docketed as a miscellaneous proceeding, after which the United States Trustee took an appeal and "vaulted this Court into the BAPCPA rat's nest." The US Trustee argued, among other things, that the Bankruptcy Court lacked jurisdiction to enter the order because there was no "case or controversy" under Article III of the Constitution and no properly commenced "action, suit or proceeding" as required by 28 U.S.C. 151. After the appeal was filed, a local lawyer was permitted to intervene in the appeal on behalf of his law firm as an interested party in support of the order, and was later joined by two other attorneys. They argued in turn that the US Trustee lacked standing to challenge Judge Davis' order.

The District Court noted that standing typically requires that the party have suffered some actual or threatened injury that can be traced to the challenged action which is likely to be redressed by the relief sought. It also noted that the US Trustee in some circumstances also has standing to be heard on behalf of the "public interest" in matters relating to the US Trustee's ability to enforce a bankruptcy law. However, it found that the US Trustee's "public interest" standing only arises in "cases and proceedings" (see 11 U.S.C. 307). As a result, the District Court effectively agreed with the US Trustee -- finding that no petition was filed initiating this matter, and no "case or proceeding" was ever in existence -- but as a result, concluded that Congress "has not authorized [the US Trustee] to advance this peculiar appeal." Accordingly, the appeal was dismissed. (And yes, I think he meant to use "peculiar" and not "particular").

Catching Up on BAPCPA Decisions

2006-10-12T17:15:00.000-05:00

A slow recovery from summer vacation has caused BAPCPA Blog to fall behind on our mission in keeping track of decisions interpreting the BAPCPA amendments. In the interest of getting current, we will be starting a new program: on a weekly basis, we'll post summaries of the new decisions issued that week. Then, as time permits, we'll continue to do lengthier postings analyzing which cases may break new ground, and how they fit into the existing bankruptcy and general jurisprudence.

So for this week, here's what's new:

It was a bad week for Chapter 13 trustees. In In re Lopez, 2006 WL 2848658 (Bankr. C.D. Cal. 10/3/06), the Court rejected a Chapter 13 trustee's argument that BAPCPA amendments to 11 U.S.C. 1326 now require all payments to creditors to go through the trustee and prohibit the debtor from acting as disbursing agent (as has long been the custom in many bankruptcy courts, particularly for payments to secured lenders).

It was a good week for Chapter 13 debtors' lawyers. In In re Mayer, 2006 WL 2850451 (Bankr. D. Ken. 10/2/06) and In re Chapter 13 Fee Applications, 2006 WL 2850115 (Bankr. S.D. Tex. 10/3/06), the courts increased the maximum flat fee which attorneys can charge for representing debtors in Chapter 13 cases which will be considered presumptively reasonable, based on the significant additional burdens on counsel under BAPCPA. The latter case also provides further guidance on what services should be included and may be excluded from a fixed fee arrangement.

It was a bad week for creditors, with yet another court concluding that the 362(c)(3) stay termination provisions only terminate the stay with respect to "property of the debtor" but not as to property of the estate. In re Pope, 2006 WL 2844576 (Bankr. D.R.I. 10/3/06).

Creditors likely won't be pleased with In re West, 2006 WL 2872275 (Bankr. E.D. Ark. 10/10/06) either, which concludes that the new 1328(f) prohibition on obtaining a Chapter 13 discharge for debtors who have obtained an earlier discharge in a prior case is tied to the filing date of the earlier case, and not the discharge date. For instance, the prohibition for debtors who have obtained a prior Chapter 13 discharge applies only to earlier Chapter 13 cases filed within two years of the new case -- not if the discharge was obtained within two years of the new case. Ah, if only Congress had followed the March Hare's advice.

In re White, 2006 WL 2827321 (Bankr. E.D. La. 9/29/06) was more of a mixed bag. In a case construing the "hanging paragraph" of 11 U.S.C. 1325(a) dealing with purchase money vehicle loans, the court rejected the lender's attempt to bootstrap obligations under an insurance program and extended warranty to the vehicle debt subject to treatment under that provision, and also concluded that the debtor was permitted to modify the terms of the claim and pay present value based on a Till formula interest rate. But it also rejected the debtor's attempt to argue that the car loan was either unsecured as a result of 1325(a)(*), and the attempt to "strip down" the car loan to the collateral value.

We'll continue to provide these weekly updates as we also get caught up on the more significant developments of the past couple months.

Another Partial Blow to Constitutionality of BAPCPA "Debt Relief Agency" Rules

2006-08-18T16:30:00.000-05:00

Another court has joined the fray in addressing the constitutionality of the BAPCPA provisions regulating "debt relief agencies." In Olsen v. Gonzales, Case No. 05-6365-HO (D. Or. 8/11/06), an Oregon District Court has held unconstitutional the provisions prohibiting certain advice, but otherwise upheld several other provisions. This follows two other recent decisions, Hersh v. U.S., 2006 WL 2088270 (N.D. Tex. 7/26/06) which held the same provision unconstitutional (as discussed in here in "Portion of BAPCPA "Debt Relief Agency" Provisions Held Unconstitutional"), and Geisenberger v. Gonzales, 2006 WL 1737405 (E.D. Pa. 6/19/06) which declined to address the constitutional issues on standing grounds (as discussed in "Pennsylvania Constitutional Challenge to BAPCPA Rejected on Standing Grounds").

In Olsen, three attorneys (two of whom represented consumers debtors in bankruptcies, and one of whom advised clients regarding bankruptcies but did not file bankruptcy petitions or represent clients in bankruptcy cases) challenged the constitutionality of BAPCPA provisions prohibiting "debt relief agencies" from providing advice to clients to incur debt [11 U.S.C. 526(a)(4)], prohibiting "debt relief agencies" from failing to provide services which they advised that they would provide [11 U.S.C. 526(a)(1)], requiring "debt relief agencies" to make certain disclosures [11 U.S.C. 527], and requiring "debt relief agencies" to make certain statements in advertisements [11 U.S.C. 528], all as violating the First Amendment protection of free speech. The attorneys also challenged the BAPCPA provisions as being unconstitutionally vague in violation of the Due Process Clause.

The court initially tackled the question of whether attorneys are "debt relief agencies" covered by the provision. Notwithstanding the sua sponte opinion in In re Attorneys At Law and Debt Relief Agencies, 332 B.R. 66 (Bankr. S.D. Ga. 2005) the Olsen court found that the plain language of the definition included attorneys. It also noted that a proposed amendment that would have excluded attorneys from the definition was not adopted, giving further support to the plain language interpretation.

Having crossed that initial threshold, it considered whether the attorneys had standing to challenge the statute's constitutionality. It noted that there had been no threatened enforcement of BAPCPA against the plaintiffs. In considering the "chilling effect" on speech, the court referred to one case which permitted such a challenge despite an attorney general's acknowledgment that it would not likely enforce the statute, as compared to another where the court denied standing when the attorney general had unequivocally acknowledged the statute's unconstitutionality and communicating her intention and direction not to enforce it. Here, the attorney general had somewhat equivocally taken the position that 526(a)(1) "does not require attorneys to perform services that become unnecessary or unethical because to do so would be contrary to the purpose of the statute" (a remarkable bit of double-speak, it would seem), which the court apparently concluded was not sufficient to preclude a possible "chilling effect" challenge. As a result, the court addressed the challenged statutes for their "chilling effect," but otherwise found the plaintiffs lacked standing.

On the merits, the Olsen court agreed with the Hersh court that the restrictions on advising clients to incur debt in contemplation of bankruptcy were unconstitutionally overbroad. As in Hersh, the court noted that there may be legitimate reasons for providing such advice to a client, such as taking out a loan to obtain the services of a bankruptcy attorney or to pay the filing fee, legitimately converting a non-exempt asset to an exempt asset, or refinancing a mortgage in order to pay off other debts. However, that was the only provision which the court rejected on constitutional grounds.

On 526(a)(1) (which directs that a debt relief agency "shall not fail to perform any service that such agency informed an assisted person ... it would provide"), the court rejected the challenge that the statute might compel attorneys to provide services which it turned out the client did not need, or which might turn out to be unethical. Instead, the court held that "courts should interpret this section to not require attorneys to provide ill-advised or unethical services," on the theory that this was the purpose of the statute and an interpretation "is based on purpose." (Whoa, what happened to plain language? The case cited by the court, Clark v. Martinez, 543 U.S. 371 (2005), involved an ambiguous statute; where is the ambiguity in 526(a)(1)?) Alternatively, the court suggested that speech would not be chilled, as attorneys would simply be required to couch their promises in conditional language and not abstain from speech.

The court also rejected the attorney's challenge that the disclosure requirements of 527 -- for instance, that attorneys must advise assisted persons that they have a right to hire a bankruptcy petition preparer who is not an attorney -- unconstitutionally compel speech. Like Hersh, the Olsen court held that these provisions do not compel disclosure of an "opposing viewpoint," but only require "notice of another option," and as such pass constitutional muster, particularly since attorneys are also free to provide additional information including the benefits of hiring an attorney.

The court then addressed the 528 advertising requirements - i.e., that any "debt relief agency" (that is, any person who provides "bankruptcy assistance" to an "assisted person") clearly and conspicuously state in advertisements, "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code" or a substantially similar statement. Although one of the plaintiff attorneys did not in fact file bankruptcy petitions or represent people in bankruptcies, the court nonetheless found the statute did not compel him to make an untrue statement, since it permitted a "substantially similar statement" (such as, "We advise people about filing for bankruptcy assistance under the code"). It evaluated the provision under an "intermediate scrutiny" standard for commercial speech as applied to professional service advertising as in In re R.M.J., 455 U.S. 191 (1982). Under this four-prong test, described in Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n of New York, 447 U.S. 557 (1980), the expression must be protected speech; the government must have a substantial interest; the regulation must directly advance that interest; and it must be narrowly drawn. The Court found that "narrowly drawn" does not mean the "least restrictive means" but rather "something short of a least-restrictive-standard," citing Board of Trustees of State Univ. of New York v. Fox, 492 U.S. 469, 477 (1989) (How's that for guidance?) .

Applying this standard, the Olsen court found: (1) the advertisement was protected speech; (2) Congress' intent to prevent deceptive and fraudulent advertisement is a substantial interest; (3) on its face, at least, the regulation advances that interest, notwithstanding arguments of possible overinclusion; and (4) the statute is adequately narrowly drawn, requiring only the insertion of a "two-line admonition into certain advertisements". Even if "there may be better ways to prevent deceptive advertising", Section 528 generally applies to most consumer bankruptcy attorneys while generally not applying to non-consumer bankruptcy attorneys. Accordingly the provision was upheld.

Finally, the court rejected the attorneys' vagueness challenge to sections 526-528, finding that the provisions were not subject to a facial challenge on that basis but would only be subject to an "as applied" challenge. Although the plaintiffs could come up with "abstract challenge[s]" to the language of certain provisions, they were not ripe for review and did not demonstrate facial unconstitutionality.

Pennsylvania Constitutional Challenge to BAPCPA Rejected on Standing Grounds

2006-08-07T07:22:00.000-05:00

The Constitution may have been signed there, but it won't be interpreted there. At least that's the decision of a Philadelphia District Court Judge on a challenge to the constitutionality of the BAPCPA "debt relief agency" provisions in Geisenberger v. Gonzales, __ B.R. __, 2006 WL 1737405 (E.D. Pa. 6/19/06). In contrast to the decision in Hersh v. U.S., __ B.R. __, 2006 WL 2088270 (N.D. Tex. 7/26/06) (discussed recently here), Judge Sanchez has held that a bankruptcy attorney lacks standing to challenge provisions imposing certain obligations and restrictions on attorneys who fall within the definition of a "debt relief agency".

The BAPCPA provisions challenged by attorney Geisenberger were the ones: (1) requiring attorneys to certify that a debtor's decision to reaffirm a debt represents a "fully informed and voluntary" agreement that "does not impose an undue hardship" (11 U.S.C. 524); (2) prohibiting attorneys from advising potential debtors to incur more debt in contemplation of a filing (11 U.S.C. 526); (3) requiring attorneys to inform debtors how to value certain assets at "replacement value" (11 U.S.C. 527); and (4) requiring attorneys to state in advertisements: "We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code" (11 U.S.C. 528).

The Geisenberger court held that the complaint failed to adequately establish sufficient injury to present a "case or controversy." Specifically, the complaint failed to allege that any governmental entity had threatened to enforce the "debt relief agency" provisions of BAPCPA against the attorney. Holding that the plaintiff must present a "real and immediate" threat of enforcement, the court found that the mere possibility of future enforcement was not enough to confer standing. Nor had the plaintiff established an imminent danger of economic loss which would establish standing. Rather, the court found that Geisenberger was merely seeking an "advisory opinion", and dismissed the complaint.

The holding in Geisenberger stands in contrast to that in Hersh, which found that BAPCPA's potential chilling effect on protected First Amendment speech was sufficient to confer standing on the attorney (and then went on to find that portions, specifically the 526 restrictions, are in fact unconstitutional). In finding standing, the Hersh court cited to cases recognizing that when First Amendment issues are at stake, the threshold for standing may be relaxed and does not necessarily require an imminent threat of enforcement. See Center for Individual Freedom v. Carmouche, 449 F.3d 655 (5th Cir. 2006), citing Virginia v. Am. Booksellers Ass'n, 484 U.S. 383 (1988). Rather, the potential chilling effect of the statute on protected speech is sufficient to confer standing (even when the effect may be on the First Amendment rights of others, as in the Am. Booksellers case).

Curiously, the Geisenberger court did not address this line of authority on First Amendment issues, even though it seems to have been followed within the Third Circuit in other cases. See, e.g., Ruocchio v. United Transp. Union, Local 60, 181 F.3d 376, 385 (3d. Cir. 1999); Amato v. Wilentz, 952 F.2d 742, 749 (3d Cir. 1991); Rode v. Dellarciprete, 845 F.2d 1195, 1199-1200 (3d Cir. 1988). Why not? It seems we will never know, as no appeal of the dismissal order was taken.

BAPCPA Preference Amendments Are Creditor-Friendly, But Not Always Enough

2006-08-04T10:54:00.000-05:00

In what may be the first published decision interpreting the BAPCPA amendments to bankruptcy preference provisions for an "ordinary course of business" defense, a North Carolina court has held that the new provisions substantially lighten a creditor/defendant's load, but not enough to provide a defense to the creditor in this particular case. In re National Gas Distributors, LLC, __ B.R. __, 2006 WL 2135557 (Bankr. E.D.N.C. 7/31/06).

In bankruptcy a trustee has the authority to recover "preferential" payments made by an insolvent debtor within 90 days before the filing on debts owed to creditors. The Bankruptcy Code also provides several defenses to preference actions, including what is known as the "ordinary course of business defense." Under pre-BAPCPA law, this defense, codified in 11 U.S.C. 547(c)(2), required a creditor to demonstrate that the payment was:

(1) in payment of a debt incurred by the debtor in the "ordinary
course of business" or financial affairs of the debtor and creditor;
(2) made in the "ordinary course of business" or financial
affairs of the debtor and creditor;
and
(3) made "according to ordinary business terms."

As generally interpreted, the pre-BAPCPA provision required creditors to demonstrate both that the transfer was ordinary with respect to the debtor and creditor's dealings (the "subjective" test), and that such dealings were ordinary for the industry (the "objective" test - sometimes applied to the debtor's industry, sometimes the creditor's, and sometimes both). The objective test in particular often required creditors to find industry experts who could testify as to industry practices, a complicated and expensive burden in most preference cases. BAPCPA amended 547(c)(2), however, so that it now provides protection for transfers:

(1) in payment of a debt incurred by the debtor in the "ordinary course of
business" or financial affairs of the debtor and creditor;
(2) made in the ordinary course of business or financial affairs of the
debtor and creditor;
or
(3) made "according to ordinary business terms".

In National Gas, the corporate debtor had made two payments within 90 days of the filing totaling about $3.25 million to its bank lender to pay off a line of credit and working capital loan owed by the corporation (and also guaranteed by the principals). The line of credit and loan had both matured prior to the payments but had been extended by the bank several times before the payoff. In defense, the bank creditor/defendant contended that the payments were made "according to ordinary business terms" (but not necessarily in the ordinary course of business of the debtor and creditor. In support, the bank submitted an affidavit from one of its loan officers (who had 15 years of experience with the bank and 30 in the banking industry) that: (1) the terms of the line of credit and working capital note were customary for the bank and the banking industry; (2) it was a customary practice at the bank and in the industry to extend maturity dates on loans, and that the extensions were done on standard and ordinary terms; (3) when a loan becomes due, it is typical for the bank and in the industry for borrowers to pay the loans in full on or shortly before the maturity date; and (4) the payment of the line and loan were made within the terms of the notes, as modified. The trustee submitted an affidavit in opposition to summary judgment, but according to Judge Small, the affidavit did not address the bank's "ordinary business terms" defense.

To evaluate whether the bank's evidence established an "ordinary business terms" defense, the court was required to evaluate the effect of the BAPCPA amendments. It started by noting while 547(c) previously included one "ordinary course of business" defense with three separate elements, as amended it now provides both an "ordinary course of business" defense and a "separate, independent" "ordinary business terms" defense. Since the context of the phrase "ordinary business terms" has changed, the court had to look at whether it acquired a different meaning in this new context.

The court looked first to the plain language, but found that the phrase "ordinary business terms" is so inclusive that a plain meaning analysis is not helpful. It also found the legislative history unhelpful. Although the history makes clear that the "or" is to be read in the disjunctive, it provides no further insight into how the reconstructed statute should be interpreted.

Looking further back, Judge Small provides an interesting review of the development of this particular amendment, including a 1995 American Bankruptcy Institute task force recommendation that the defense be clarified, which was adopted by the National Bankruptcy Review Commission. Although the NBRC recommendation was to limit the "objective industry test" to situations where there was insufficient pre-petition conduct to establish a course of dealing between the debtor and creditor, that is not what Congress ultimately did in BAPCPA. Rather, the statute as amended "allows the 'ordinary business terms' defense to be used where a course of dealing existed and even where the transfers at issue clearly deviated from that course of conduct."

Judge Small notes that pre-BAPCPA interpretation of the "ordinary business terms" clause often tied it to the "ordinary course of business" prong -- for instance, applying a "sliding scale" whereby industry standards become more or less important depending on the length of the parties' relationship. But under the amendments, "'ordinary business terms' has been released from the controlling influence of the ordinary course of business subsection." While pre-BAPCPA cases varied in their analysis of which particular industry was relevant (the debtor's, the creditor's, or both), under BAPCPA the court found that review of both the debtor's and creditor's industry was required. It found this result mandated, notwithstanding prior Fourth Circuit law directing that only the creditor's industry need be considered, based on the generally recognized purpose of the ordinary course of business defense being to "leave undisturbed normal financial relations". "If the 'ordinary business terms' defense only requires examination of the industry standards of the creditor, there would be no review or check on the debtor's conduct."

Accordingly, the court looked to the industry standards of both the debtor and its creditors. Applying this test, it found that the bank's affidavit describing the typical and customary practices of the bank and the banking industry "too general to establish industry norms." But perhaps even more significantly, it found that "the industry standards must be applied to the factual circumstances of the transfer." Even though "From [the bank's] point of view, it did nothing out of the ordinary," the court would look at "the debtor's industry standards and the standards applicable to business in general":

"When those standards are examined, the conduct of the debtor in paying its loans was not in accordance with 'ordinary business terms.' It is clear what was going on here: [the debtor] was going out of business and was paying off those debts which [the principals] guaranteed and for which [one of the principal's] assets stood as collateral. These payments were not made 'according to ordinary business terms' and are not the type of transfers that the 'ordinary business terms' defense is designed to protect."

Accordingly, even though the BAPCPA amendment to 547(c)(2) "substantially lightens the creditor's burden of proof," the court rejected the bank's defense and entered judgment in the trustee's favor.

This result is, to me, a puzzling one. It seems that notwithstanding the clear split of 547(c)(2) into an either/or proposition of evaluating either the ordinary course of business or financial affairs of the parties, or the ordinariness of the terms of the transaction, the National Gas decision rejects an "ordinary business terms" defense not because the terms were extraordinary, but because the payment was extraordinary in relation to the rest of the debtor's financial affairs. There doesn't appear to be any evidence in the case that the terms of the loans were unusual or that the payments were not made in accordance with their terms; rather, the payments were extraordinary only when viewed in light of what else was happening in the debtor's business.

If the "ordinary business terms" defense is to be given separate, independent meaning, then it would seem that payments that are made in accordance with the terms of an ordinary loan should be protected, even if they can not be shown to be ordinary with respect to the debtor's other financial affairs.

Erratas, Mea Culpas, Credits and Previews

2006-08-04T10:50:00.000-05:00

Just a few notes to clean up and clarify some prior postings:

In "Excuses, Excuses - Temporary Waivers of Credit Counseling" I queried how, in the Piontek case, the debtor's lawyer would have felt about the Court's suggestion that $50 of the debtor's $400 retainer -- $274 of which was used for the filing fee -- could have been used for credit counseling. What I should have pointed out is that the Court was not proposing that the $50 come out of the lawyer's hide, but rather that the debtor likely could have qualified to pay the filing fee in installments and could have used some of the funds used to pay the filing fee to instead pay for credit counseling. In the same case, Judge Deller has issued a corrected opinion reflecting the citation to Interim Bankruptcy Rule 1006(b) regarding the payment of the filing fee in installments (rather than 1007(b)).

In "Portion of BAPCPA Debt Relief Agency Provisions Held Unconstitutional" we cited the case as Hersch v. United States. Although we clarified that the decision contained a typo and the lawyer's name is actually Susan Hersh (no "c"), we've been assured that the case caption actually contains the correct spelling. It now appears (with the correct spelling) at 2006 WL 2088270. Thanks to attorney Hersh for letting us know of this significant decision.

Thanks are also due to attorney Dennis LeVine of Tampa for promptly bringing to our attention the Landahl case discussed in "Homestead Cap Gets Another Adherent" (in which he represented the successful trustee).

What's coming? We will have a little more to say about credit counseling (including a BAPCPA Blog sighting in a published opinion!) and then hope next to catch up on decisions on means testing / disposable income issues, car loans, and domestic support obligations. Seen an interesting decision? Please let us know.

Portion of BAPCPA "Debt Relief Agency" Provisions Held Unconstitutional

2006-07-27T16:45:00.000-05:00

Almost immediately after BAPCPA was passed, questions arose over the application of certain provisions governing the conduct of "debt relief agencies" to attorneys. As described in prior posts (see "Georgia Judge Says Attorneys Not 'Debt Relief Agencies'", "Court Refuses Advisory Opinion on Lawyers as 'Debt Relief Agencies'"), these provisions, among other things, require any person or entity which falls within the BAPCPA definition of a "debt relief agency" to make certain disclosures to potential debtors, and also prohibits them from counseling potential debtors to take certain actions. In Hersch v. United States, Case No. 3:05-CV-2330-N (N.D. Tex. 7/26/06) a court has now squarely addressed the constitutionality of portions of these BAPCPA provisions, and found that they violate the First Amendment. But before we get there, it's worth discussing how the case got to the point of a decision, and what the court did not hold.

Attorney Susan Hersh (misspelled in the case cite), a Texas attorney whose practice includes counseling clients regarding potential bankruptcies, filed an action in District Court seeking a declaratory judgment that BAPCPA does not apply to attorneys, and that several of its provisions are unconstitutional. Specifically, the provisions at issue were 11 U.S.C. 526(a)(4), which prohibits "debt relief agencies" from giving certain advice; and 527, which requires "debt relief agencies" to make certain disclosures. The Government initially contested Ms. Hersh's standing, on the basis that nobody had taken any action against her to enforce the BAPCPA provisions against her. The court rejected this argument, finding that the alleged suppression of her speech under BAPCPA was sufficient to give standing.

Addressing the merits, the court first considered Hersh's assertion that attorneys should not be included within the definition of "debt relief agency" under BAPCPA. Under the plain language of the definitions of "debt relief agency" and "bankruptcy assistance", however, the court found this argument untenable. There certainly is nothing which expressly excludes attorneys, even though there are five specified exceptions; and some of the provisions (for instance, the inclusion of "providing legal advice" within the meaning of "bankruptcy assistance") could only meaningfully apply to attorneys. Despite possible inconsistencies with other portions of the statute as applied to attorneys (for instance, the requirement in 527(b) that a "debt relief agency" disclose that an assisted person can hire an attorney and that only an attorney can provide legal advice), the court found that "any inferences possibly created by imprecise drafting are surely overwhelmed by the plain language." Looking at the legislative history as well, the court found that Congress clearly had attorneys in mind -- "the House Report on the BAPCPA mentions 'attorney' 164 times."

The court then moved on to consider Hersh's contention that 526(a)(4) was an unconstitutional restriction on speech. That section prohibits a "debt relief agency" from advising a client or prospective client "to incur more debt in contemplation of such person filing a case" or "to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title." As an initial matter, the court considered the standard to be applied. Hersh argued that 426(a)(4) was a content-based restriction subject to strict scrutiny, which requires that any such regulation on speech be (i) narrowly tailored to promote (ii) a compelling government interest. Citing United States v. Playboy Entm't Group, Inc., 529 U.S. 803 (2000). The Government, contrarily, argued that it was an "ethical regulation" subject to a lesser standard of review. Under that lesser standard, the regulation must (i) serve a state's "legitimate interest in regulating the activity in question," and (ii) impose only "narrow and necessary limitations" on lawyers' speech. Gentile v. State Bar of Nev., 501 U.S. 1030 (1991). Although skeptical of this claim that 526(a)(4) is an "ethical regulation," the court found it didn't matter because the statute didn't pass either test because it was not sufficiently narrow.

The court recognized that Congress passed BAPCPA to remedy abuse of the bankruptcy system, including debtors who improperly take on additional debt prior to filing with the intent of discharging it. Rather than closing loopholes or imposing sanctions for such conduct, however, Congress passed 526(a)(4) as a "prophylactic rule" banning attorneys from advising clients to take on additional debt in contemplation of bankruptcy. The court found this restriction overbroad, in that it prevents lawyers from advising clients to take actions that are lawful, and even in some instances, financially prudent. For instance, a client might be well advised to refinance a mortgage at a lower rate to reduce payments or forestall, even prevent bankruptcy. A client also might be well advised to take on a secured debt, such as a car loan, that would survive bankruptcy, if it enabled the debtor to have transportation for work which would provide additional income. 526(a)(4) "prevents lawyers from giving clients their best advice." Indeed, the court found that such restrictions could also deprive the courts, as well as clients, of good counsel, by preventing lawyers from presenting options to their clients and ultimately the court. Thus, 526(a)(4) was overinclusive in that (1) it prevents lawyers from advising clients to take lawful actions; and (2) it extends beyond abuse to prevent advice to take prudent actions, and was held facially unconstitutional.

The court rejected, however, Hersh's assertion that the 527 disclosure requirements were unconstitutional. Looking to Supreme Court case law on compelled disclosures by professionals of factual information regarding services provided, the court found that requirements which advance a substantial government interest, and which did not unduly burden the relationship, were permissible. See Planned Parenthood of Southeast Penn. v. Casey, 505 U.S. 833 (1992). Under this standard, 527 advances a sufficiently compelling government interest (ensuring that clients are informed of certain basic information before filing a bankruptcy) and impose a reasonable burden. The court was not convinced by Hersh's argument that the provision compels disclosure of false or misleading information (for instance, requiring a disclosure that a client "will have to pay a filing fee" when there are provisions for waiver or deferral of filing fees), finding that such generalized statements may be further explained or clarified by an attorney. The required disclosures did not act as a barrier to potential clients seeking relief and were a "sufficiently benign and narrow" means of ensuring client awareness that they passed constitutional muster.

Finally, the court refused to consider Hersh's assertion that the provisions violate the Fifth Amendment right to counsel on the basis that she did not have standing to assert that right on behalf of her prospective clients.

The court has invited Hersh to move for summary judgment on the 526(a)(4) issue after amending her complaint to more specifically assert that claim.

Excuses, Excuses – Temporary Waivers of Credit Counseling

2006-07-26T18:06:00.000-05:00

Some of the first decisions interpreting the BAPCPA amendments made clear that in order to obtain a "waiver" (actually, only an extension of time) of the pre-filing credit counseling requirement imposed by 11 U.S.C. 109(h), a debtor must submit a certification that:

(i) describes exigent circumstances that merit a waiver;
(ii) states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in paragraph (1) during the 5-day period beginning on the date on which the debtor made that request; and
(iii) is satisfactory to the court.

These requirements are mandatory, and the court has no discretion to grant a "waiver" unless the debtor satisfies all three requirements. Several recent cases demonstrate, though, that the courts have at least some discretion in determining what constitutes exigent circumstances that merit a waiver, and what constitutes an inability to obtain counseling.

For instance, two cases in which debtors asserted an inability to obtain counseling due to unavailability of funds to pay for counseling reached contrary results. In In re Piontek, __ B.R. __, 2006 WL 1837905 (Bankr. W.D. Pa. 7/5/06), husband and wife had filed a joint petition under Chapter 13 along with a Certificate of Credit Counseling evidencing the husband's completion of pre-petition counseling, but not the wife's. The wife claimed that one month prior to filing, the couple contacted a credit counseling agency, but they only had enough funds to pay for one credit counseling session, which cost $50 per person.

The Piontek court held that the proper inquiry is "whether the debtor was actually precluded by his or her circumstances from obtaining the briefing," citing In re Tomco, 339 B.R. 145 (Bankr. W.D. Pa. 2006). As a general proposition, insufficient funds may, under the right circumstances, provide a de facto "inability" to obtain counseling, and be a "satisfactory" reason to grant a temporary waiver. However, the court found that the evidence in this case demonstrated that the wife was able to pay for counseling. First, $50 from the $400 retainer to the couple's bankruptcy counsel could have gone to credit counseling, especially since $274 of it was used to pay the filing fee (I wonder how the attorney would have felt about that!). The debtors had a total monthly income of at least $2,361.64, car payments in excess of $1,000, $55 for cable T.V., and $141.88 to the wife's 401(k) plan. They also had $75 cash on hand, $165 in a checking account, and $18,000 in equity in their home. Finally, § 111(c)(2)(B) requires credit counseling agencies to provide services "without regard to [the debtors'] ability to pay the fee," and the wife never requested counseling on a pro bono or reduced fee basis. Had such request been made and inappropriately denied, it would have been possible for the court to conclude that an inability to pay counseling was due to circumstances beyond their control. The Court dismissed the wife, and as a final note rejected the notion that credit counseling obtained by the husband could be imputed to the wife.

On the other hand, Judge Ray, in In re Westenberger, Slip Copy, 2006 WL 1105008 (Bankr. S.D. Fla. 4/25/06), granted a debtor's request for pre-petition waiver based on an inability to pay for credit counseling. The debtor alleged that a creditor had frozen his bank account, which was his only source of income. "The Court [found] the Debtor's situation of being without any money and having no access to funds unless released by the bank to be exigent. As to whether it merits a waiver, the Court [found] that it does because the Debtor's only bank account and sole source of funds was frozen." Unlike Piontek, the court made no mention about the debtor asking for counseling on a pro bono basis.

Meanwhile, in In re Star, 341 B.R. 830 (Bankr. E.D. Va. 4/24/06), the court temporarily waived pre-petition counseling for an incarcerated debtor. Debtor alleged that he was disabled within the meaning of § 109(h)(4) because he did not have credit counseling courses available or access to internet or conventional phone usage. As discussed in our prior post, "Incapacity and Disability Waivers for Credit Counseling Explored"), the court denied his request for a permanent waiver based on the lack of courses available, access to internet, and phone usage.

Debtors should be careful about waiting until the last minute in trying to get credit counseling because if they do, and are unable to obtain counseling, the court may deny an "exigency" argument. In re Afolabi, __ B.R. __, 2006 WL 1524628 (Bankr. S.D. Ind. 6/2/06). In Afolabi, Debtor filed his petition along with a Certification of Exigent Circumstances. Two days later, he filed an Amended Certification alleging that he "had very little time . . . to schedule credit counseling as the final decision to file bankruptcy was made less than 24 hours before the sheriff sale of [his] house . . . ." For Judge Coachys, "the proper focus under § 109(h) is not on the circumstances that hastened or precipitated the bankruptcy filing [(sheriff's sale)] but on whether those circumstance or any other prevented the debtor from being able to obtain credit counseling prior to filing for bankruptcy." The debtor here "waited until the last minute to seek legal advice and bankruptcy protection. This self-created emergency does not constitute 'exigent circumstances.'"

This focus raises the question of whether 109(h) effectively imposes a de facto 5-day waiting period for potential debtors before they may file. Judge Coachys, while finding the language awkward, concluded that it did: "the most logical reading of the statute dictates that debtors must attempt to obtain credit counseling at least five days in advance of filing." Congress intended individuals to consider an alternative to bankruptcy prior to the petition date and to discourage hasty filings; this goal is not accomplished if the individual waits until just before the petition date to seek credit counseling. By comparison, in Judge Ray's Westenberger opinion discussed above, the debtor offered the credit counseling agency an out-of-state check from a relative, but the agency would not provide counseling until the check cleared its bank account, which would have been more than five days. In those circumstances, Judge Ray found that the "unfulfilled request" requirement had been satisfied.

A second appellate-level decision confirms that bankruptcy courts will have discretion in determining that a debtor's circumstances are not an exigency that merits a waiver, where they are self-inflicted. See In re Hedquist, 342 B.R. 295 (8th Cir. BAP 2006) (holding that bankruptcy court did not abuse its discretion in finding that a debtor's circumstances were not exigent where debtor waited to file a petition until the eve of a foreclosure, despite having ample notice of the foreclosure).

After the debtor files the certificate, and the court satisfies itself that the debtor merits a waiver of the pre-petition counseling, when must the debtor actually complete the counseling and file the Certificate of Credit Counseling? In In re Bass, Slip Copy, 2006 WL 1593978 (Bankr. W.D. Tenn. 6/9/06), a pro se debtor, 15 days after filing the petition, submitted a "Notice of Continuance" indicating that the counseling agency only offered sessions once a month, and that counseling was not available until nine days later. She then was unable to attend that session but attended the following month (50 days after the petition date) and filed a certificate two days later indicating she had completed the counseling. The U.S. Trustee moved to dismiss the case under 11 U.S.C. § 707(a), for failure to comply with the provisions of 109(h)(1) and 109(h)(b)(3) (the extension provision), because the debtor did not complete counseling and file the certificate within 45 days.

Under § 109(h)(B), ". . . in no case may the exemption apply to that debtor after the date that is 30 days after the debtor files a petition, except that the court, for cause, may order an additional 15 days." But 109(h) does not specify the time for filing a certificate of counseling.

dismissn 707(a) says that the court may dimiss a case on the U.S. Trustee's motion for a debtor's failure to file, within fifteen days of the petition date or such additional time as the court allows, "the information required by paragraph (1) of section 521." But curiously (or "strictly speaking," as the court put it in Bass)Section 521 fact is no paragraph (1) of Section521! Although 521(a)(1) (which used to be numbered as 521(1)) requires the filing of certain documents, they do not include the counseling certificate. 521(b)(1), though, does require the filing of a certificate from the counseling agency that counseling has been completed. However, it also does not specify a time for filing (nor does any other portion of the BAPCPA-amended Code).

Under Interim Bankruptcy Rule 1007(c), though, either the certificate from the approved nonprofit budget and credit counseling agency or the certificate of exigent circumstances should be filed with the petition. Interim Bankruptcy Rule 1007(a)(5) provides that the court may extend the time for filing these and other documents specified in Interim Bankruptcy Rule 1007(a) "on motion for cause shown and on notice to the [UST and certain others]."

The U.S. Trustee argued that these provisions collectively required a debtor to obtain counseling and file a certificate confirming same no later than 45 days after the petition date. The court disagreed, stating that it was enough for the debtor to file the certificate of exigent circumstances within the 30 days. The Debtor's filing of a document within 30 days after the filing of her petition, which indicated the next available date that she could obtain the credit counseling, was treated as substantial compliance with Section 109(h)(3). Since she could not obtain the credit briefing within 45 days after her filing but did so as soon as she was able, and this was not the result of her lack of diligence, the court determined based on the totality of the circumstances that the debtor has substantially complied with 109(h) and thus the UST's motion to dismiss was denied.

The foregoing cases demonstrate that the prospects for obtaining waiver of the 109(h) requirements are generally slim. This lack of flexibility has frustrated some courts, particularly where the purpose of such counseling appears lacking (for instance, where debtors qualify for waiver of filing fees due to the severity of their financial problems). As one court put it, "[i]t is a mystery to the Court why Congress granted the Court the authority to waive all filing fees for persons such as the Filer, but not waive the credit counseling requirement. . . . Exactly what form of credit counseling could be useful, or necessary, to a person who qualifies for a waiver of fees under 28 U.S.C. § 1930(f) is even more of a mystery. The rationale for many of the provisions in BAPCPA, the language used in those provisions, and the coordination among them are likely to remain an enigma for a long time." In re Raymond, Slip Copy, 2006 WL 1047033 (Bankr. D. N.H. 4/12/06).

Incapacity and Disability Waivers for Credit Counseling Explored

2006-07-23T13:35:00.000-05:00

(Editor's Note: With this post we start a short series of entries on the 109(h) credit counseling provisions authored by our able summer associate, Daniel Cervantes, who graciously agreed to help us get caught up.)

So far debtors and courts have found little if any wiggle room in the BAPCPA requirement, codified in 109(h), that debtors complete credit counseling in advance of filing. Much of the discussion has focused on the ability to obtain an extension of time to complete the counseling (inartfully called a "waiver") under the provisions of 109(h)(3). However, there is another provision which really is a waiver, and excuses a debtor from the counseling requirement entirely. 11 U.S.C. 109(h)(4) provides that the counseling requirements do not apply to a debtor who "is unable to complete those requirements because of incapacity, disability, or active military duty in a military combat zone."

For purposes of this provision, “incapacity” means that the debtor "is impaired by reason of mental illness or mental deficiency so that he is incapable of realizing and making rational decisions with respect to his financial responsibilities;" and “disability” means that the debtor "is so physically impaired as to be unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing required under paragraph (1). "

In In re Tulper, __ B.R. __, 2006 WL 1651710 (Bankr. D. Col. 5/22/06), the court granted the debtor's Motion for Waiver of Budget and Credit Counseling. At the evidentiary hearing, the court found that Mrs. Tulper, age 60, suffered from heart problems, tremors, asthma, a bad lung, arthritis, a disintegrated spine, and a plate in her right ankle, which combined to make her wheelchair-bound. Moreover, Mrs. Tulper was taking approximately 17 prescribed medications, which she brought to the hearing in their regular container that “was the size of a small tool box.” Id. at 2. The court also found that Mr. Tulper, age 81, who was Mrs. Tulper’s care giver, could not hear or had little hearing capability even with the use of a hearing aid. He also had 40% disability with respect to use of hands and feet. Neither of them had any computer skills.

The court found that there are three elements required to satisfy the disability requirement: (1) the debtor is severely physically impaired; (2) the debtor has made a reasonable effort, despite the impairment, to participate in the pre-petition credit counseling; and (3) the debtor is unable, because of the impairment, to participate meaningfully in an in person, telephone, or Internet briefing pre-petition. Id. at 3. The court easily found that the debtors were physically impaired. The debtors also made a reasonable effort to address credit counseling by conferring with their accountant and attorney, who found that it was very difficult to communicate anything with the debtors. The court found that the Tulpers could not meaningfully participate in the briefing because of their communication difficulties.

Thus, the purpose of counseling could not be fulfilled, and the requirement would be waived: "If a debtor goes to credit counseling and, because of a significant impairment, cannot participate in the credit counseling such that he or she can understand what is conveyed during the credit counseling session, so as to be able to have the 'opportunity to learn about the consequences of bankruptcy,' then the prepetition credit counseling becomes meaningless." (Editor's Note: Query how the attorney could be assured the debtors were making a meaningfully informed decision to file bankruptcy if they were incapable of meaningfully participating in a counseling session.)

To obtain a waiver via § 109(h)(4) disability, the debtor must provide sufficient evidence; mere allegations are not enough. In re Stockwell, Slip Copy, 2006 WL 1149182 (Bankr. D. Vt. 4/27/06). In Stockwell, the debtor alleged disability as a result of a brain tumor, seizures, and blindness. The court set a hearing requiring the debtor to show proof of these disabilities, and the Debtor’s attorney responded with a medical report. Though the court found that “a medical report documenting the disability or incapacity may be sufficient,” the report “[did] not describe a person who ‘is impaired by reason of mental illness or mental deficiency so that [she] is incapable of realizing and making rational decisions with respect to [her] financial responsibilities’ nor ‘so physically impaired as to be unable, after reasonable effort, to participate in’ a personal financial management course.” Id. at 2. Furthermore, “there [was] nothing in the record to verify that the Debtor is blind, nor to affirm that there are no personal financial management courses available in which she could, after reasonable effort, participate, e.g., courses designed for persons who are visually impaired.” Though the motion alleged sufficient facts appearing to warrant a waiver, the debtor could not support the allegations with evidence.

In a very different take on the disability/incapacity exception, in In re Star, 341 B.R. 830 (Bankr. E.D. Va. 4/24/06), an incarcerated debtor argued that his present confinement rendered him “disabled” within the meaning of § 109(h)(4). The debtor argued that because of the specific restrictions of his environment, he was “physically prevented” from participating in any credit counseling classes. Furthermore, no such courses are available for him to attend in person, by phone or via internet. The court held that “incarceration” was not within the meaning of “disability” intended by Congress, but nonetheless treated debtor’s motion as one for Certification of Exigent Circumstances and granted the debtor extra time to complete the counseling course.

Riddles and Rhymes - Court Ponders "Automatic" Dismissal

2006-07-18T18:30:00.000-05:00

Many judges and practitioners have complained that the BAPCPA amendments are a riddle wrapped in a mystery inside an enigma. Such puzzlement has moved Judge A. Jay Cristol to break out in verse. In the aptly named case of In re Riddle, Case No. 06-11313-BKC-AJC (Bankr. S.D. Fla. 7/17/06), Judge Cristol ponders what Congress meant when it said that a case is "automatically dismissed" if the debtor fails to timely file certain required information.

By way of background, 521(a)(1) requires a debtor to file a list of creditors, schedules, statement of financial affairs, copies of payment advices received in the 60 days prior to the petition date, a statement of monthly net income, and a statement disclosing any reasonably anticipated increase in income or expenditures. If a debtor fails to do so within 45 days, 521(i)(1) provides that the case is "automatically dismissed effective on the 46th day" after the petition date. Congress further provides in 521(i)(2) that any party in interest may request the entry of an "order dismissing the case," which if requested should be provided by the court within five days.

All of which raises the question: what happens if a debtor fails to comply with the filing requirements, but no party in interest seeks dismissal of the case? Is the case dismissed, even if there is nothing on the docket reflecting it? How would anyone know? As Judge Cristol puts it (in a tribute to Dr. Seuss' legendary "Green Eggs and Ham"):

I do not like dismissal automatic,
It seems to me to be traumatic.
I do not like it in this case,
I do not like it any place.

As a judge I am most keen
to understand, What does it mean?
How can any person know
what the docket does not show?

The puzzle of 521(i) leads Judge Cristol to plead:

What does automatic dismissal mean?
And by what means can it be seen?
Are we only left to guess?
Oh please Congress, fix this mess!
Until it's fixed what should I do?
How can I explain this mess to you?

Fortunately for Mr. and Mrs. Riddle, all of their required papers had in fact been filed, and their case was not subject to dismissal - automatic or otherwise.

Yet this provision and related ones are proving to be a continuing source of puzzlement and frustration for practitioners, trustees and judges. Several courts have now held that there is no discretion to avoid the automatic dismissal consequence of non-compliance with the 45 day deadline. See In re Lovato, 343 B.R. 268 Bankr. D.N.M. 5/8/06); In re Ott, 343 B.R. 264 (Bankr. D. Col. 4/12/06); In re Williams, 339 B.R. 794 (Bankr. M.D. Fla. 3/17/06); In re Fawson, 338 B.R. 505 (Bankr. D. Utah 2/21/06). Lovato granted a trustee's motion to dismiss, Ott and Williams denied debtors' motions to vacate dismissal orders, and Fawson denied a debtor's belated motion to extend time after the deadline had run. None of these approaches gives the court discretion to preserve the case, much to the consternation of some judges.

In Ott, Judge Brooks found that the legislative commentary on BAPCPA demonstrates a "creditor-friendly" "tone and substance" which is intended to remedy a perceived imbalance favoring debtors. Noting a statement by Professional Todd Zywicki from one of the joint hearings (which starts, "Shoplifting is wrong; bankruptcy is also a moral act. Bankruptcy is a moral as well as an economic act. There is a conscious decision not to keep one's promises."), Judge Brooks notes, "It would seem it is with this lens that Congress viewed debtors as moral equivalents to "shoplifters" in enacting BAPCPA. In so doing, it created a law that is sometimes self-executing, inflexible, and unforgiving. 11 U.S.C. 521(i) is just one of those provisions."

Although the statute permits an extension of time if a request is made before the expiration of the 45-day period under 521(i)(3) "if the court finds justification," the language of that subsection and the automatic dismissal provisions preclude an interpretation of that extension option that would permit an extension after the deadline had expired. As Judge Brooks notes, an "excusable neglect" exception "has been effectively legislated out of the hands of [the] court."

The Lovato case actually presents a curious twist that may merit further discussion - there, the court had entered an administrative order directing that payment advices not be filed with the court, but rather be provided to the trustee at least 7 days before the 341 meeting. The debtor failed to do so and the trustee moved to dismiss, which the court granted. Since the debtor apparently had not attempted to argue excusable neglect or any other excuse, it is unclear whether if she had, the rigid requirements of 521(i)(1) would still hold. The 521(a)(1) filing requirements apply "unless the court orders otherwise." If the court has ordered otherwise, does that take the entire question of compliance out of the realm of 521(i) and back into the standard ream of judicial discretion?

Another variation is presented by the new requirement of 11 U.S.C. 521(e)(2) that a debtor provide copies of its latest tax return at least 7 days before the 341 meeting. Unlike 521(a) and (i), however, the BAPCPA amendments do not provide that noncompliance requires that a case be "automatically" dismissed; rather, 521(3)(2)(B) provides that if the debtor fails to comply, "the court shall dismiss the case unless the debtor demonstrates that the failure to so comply is due to circumstances beyond the control of the debtor." Courts have held that this provision does not result in "automatic" dismissal, and furthermore that the trustee has discretion to decline to file a motion to dismiss despite a debtor's untimely submission of the tax returns if in the best interests of the estate. In re Grasso, 341 B.R. 821 (Bankr. D.N.H. 5/16/06); In re Duffus, 339 B.R. 746 (Bankr. D. Or. 3/8/06). The Grasso case further holds that there is some leeway in interpreting the "circumstances beyond the control of the debtor" standard, and in particular that where the untimeliness is due to attorney error, the consequences of that error need not be visited upon the client in the form of dismissal.

If you're a fan of Judge Cristol's poetry, you will probably also enjoy In re Love, 61 B.R. 558, and In re General Development Corp., 180 B.R. 303.

Bankruptcy Court Can Review Adequacy of Credit Counseling

2006-07-11T13:12:00.000-05:00

Our previous posting, “Credit Counseling Not ‘Adequate’ For Debtors Who Can't Understand It”, discussed one of the few debtor-friendly decisions under Section 109(h), in which Judge A. Jay Cristol, In re Petit-Louis, 338 B.R. 132 (Bankr.S.D.Fla. 3/1/06) (“Petit-Louis I”), held that section 109(h)’s credit counseling requirement cannot be imposed on a debtor who has very limited English-speaking ability, where no approved counseling agency had counselors who spoke the debtor's language. Judge Cristol concluded that Mr. Petit-Louis’s inability to obtain counseling in Creole, combined with the fact that he could not afford to hire a translator, created a barrier to the bankruptcy court that Congress did not intend to create when it mandated that debtors complete a credit counseling course before filing. At the time of the posting, the U.S. Trustee (“UST”) had a pending motion for reconsideration, arguing that the Bankruptcy Court lacked authority to waive the counseling requirement for Mr. Petit-Louis.

Judge Cristol recently reaffirmed his ruling in Petit-Louis I, and provided debtors a second argument for seeking waiver of the pre-filing counseling requirement if a debtor contends that counseling in his district is inadequate. In re Petit-Louis, __ B.R. __, 2006 WL 1793642 (Bankr. S.D. Fla. 6/23/06) ("Petit-Louis II"). First, Judge Cristol held that the bankruptcy court had authority to waive Mr. Petit-Louis’s counseling requirement under section 109(h)(3) (the “Exigent Circumstances Waiver”), as provided in the original decision. Second, Judge Cristol held that the Court also had authority to grant Mr. Petit-Louis’s waiver under section 109(h)(2), which imposes a duty on the UST to decertify a district (thus waiving section 109(h)’s counseling requirement) if adequate credit counseling is not reasonably available in the district.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), debtors are required to attend a credit counseling course from an agency approved by the Office of the U.S. Trustee prior to filing a petition. However, pre-filing counseling is not required for:

A debtor who resides in a district for which the United States trustee . . . determines that the approved nonprofit budget and credit counseling agencies for such district are not reasonably able to provide adequate services to the additional individuals who would otherwise seek credit counseling from such agencies by reason of the requirement of [section 109(h)] . . .

In Petit-Louis II, Judge Cristol stated that this provision gives the UST authority to determine whether counseling in a district is adequate. However, Judge Cristol found that a debtor must be afforded a forum to seek review of an “arbitrary and capricious” adequacy determination by the UST and that the bankruptcy court is the “logical and proper” forum for seeking such review.

Thus, upon Mr. Petit-Louis’s challenge that credit counseling is inadequate for Creole-speaking debtors in the Southern District of Florida who cannot afford to hire a translator, the UST was required to defend its determination of adequacy. In this case, the UST did not set forth any argument or proffer any evidence to support its determination that credit counseling in the district was adequate for debtors such as Mr. Petit-Louis. Because the UST did not meet its burden in responding to Mr. Petit-Louis’s challenge under section 109(h)(2), the bankruptcy court was entitled to waive the pre-filing counseling requirement for Mr. Petit-Louis.

Judge Cristol’s decision provides precedent for a debtor who may be unintentionally barred access to the bankruptcy court on account of his lack of English language ability to seek relief in the bankruptcy court. In this case, Mr. Petit-Louis’s counsel requested the credit counseling waiver by attaching a letter to his petition explaining his substantial efforts to obtain credit counseling in Creole before filing. Because this was a “novel procedural issue for the Debtor” and because the UST was placed on sufficient notice that the debtor intended to challenge the adequacy of counseling, the Court held that the UST was not prejudiced by the procedure. However, future debtors who seek relief from section 109(h)’s counseling requirement in the bankruptcy court on the basis that counseling is not adequate in their district, should do so by filing a motion that puts forth the basis for the requested relief with their voluntary petition.

The UST appears to have recognized some of the problems for limited-English speaking debtors created by section 109(h)’s credit counseling requirement and has accordingly taken steps to solve this problem by approving counseling agencies that provide services in multiple languages. The UST’s list of approved counseling agencies, available on the UST’s national website, now includes information about the languages in which credit counseling agencies are able to provide counseling. If accurate and up-to-date, this information should make it easier for limited-English speaking debtors to find adequate counseling agencies in their district.

(In the interest of full disclosure, I should advise that my firm colleagues Lisa Keyfetz and John Kozyak provided pro bono assistance to Mr. Petit-Louis and Legal Services of Greater Miami in responding to the U.S. Trustee's motion for reconsideration).

Staying Alive - Automatic Stay Not Dead Yet

2006-07-10T18:52:00.000-05:00

Rumors of the death of the automatic stay (and of this blog, by the way!) appear to be greatly exaggerated. With one notable exception, that seems to be the consensus of several decisions issued by judges around the country dealing with BAPCPA amendments to 362 of the Bankruptcy Code that restrict the availability of the automatic stay to repeat filers. We have discussed several decisions extensively here earlier -- see "Oh Won't You (362) Stay Just a Little Bit Longer?" Part I, Part II, Part III, and Part IV. Several more recent cases have built on the foundations discussed in those postings, although at least one court seems to have veered off in another direction.

Generally, where a debtor has been in one prior bankruptcy case which has been dismissed within the year prior to the current case, new 362(c)(3) provides that certain protections of the automatic stay terminate on the 30th day unless a motion to extend the stay is filed and heard before the 30th day. We mentioned in Part IV how the decision in In re Toro-Arcila, 334 B.R. 224 (Bankr. S.D. Tex. 2005) effectively found a way around the 30-day deadline for hearing a motion to extend the stay under 362(c)(3) by holding that a single repeat filer could still use the provisions of 362(c)(4) (which generally cover multiple repeat filers) to reimpose the stay after they stay had expired. Typically this situation arises where the debtor files the motion too close to the 30th day to get a hearing (there is generally no good reason for waiting so long, by the way). At least one other court has concurred with Toro-Arcila, and has ruled that a debtor who files a motion within the 30 day period, but fails to get it heard, can still pursue reimposition of the stay under 362(c)(4). In re Beasley, 339 B.R. 472 (Bankr. E.D. Ark. 3/16/06).

Judge Dalis in Georgia disagreed. In re Whitaker, 341 B.R. 336 (Bankr. S.D. Ga. 4/20/06). All was not lost for the debtor, though. Judge Dalis did not subscribe to the reasoning in Toro-Arcila that much of 362(c)(4)(D) would be rendered meaningless surplusage if that section only applied to multiple repeat filers. But since the debtor had established a case to overcome the presumptive lack of good faith, and there was no other way of granting relief, the court held that it could reimpose the stay under 11 U.S.C. s. 105, which gives the court authority to issue orders "necessary or appropriate" to carry out the provisions of the Code. In doing so, Whitaker relied on a long line of prior decisions recognizing the authority to reimpose the stay in appropriate circumstances.

While Beasley and Whitaker involved situations where stay extension motions were filed on the eve of the 30 day deadline, and consequently could not be heard before the deadline passed, creditors nonetheless should be aware that they need to be on their toes. In In re Frazier, 339 B.R. 516 (Bankr. N.D. Fla. 3/17/06), a court held that five days' notice of a hearing on a motion to impose the stay under 362(c)(4) was adequate. In Frazier, the court reports that the debtor's counsel prior to filing the motion had called the counsel who represented the creditor in the prior case, and served the motion and notice of hearing by fax and mail, and that the creditor (and counsel) did not respond to the motion or appear at the hearing. The creditor then moved for reconsideration, claiming not to have received notice, but at the hearing on the motion for reconsideration failed to provide any evidence and the lawyer appearing had minimal knowledge of the case. The Frazier court held the notice adequate, and made clear that it expected creditors to be prepared to respond to such motions on short notice: "The limited automatic stay for repeat filers is a major feature of BAPCPA which was passed by congress at the behest of the credit industry. Now that they have it, the credit industry, and especially the mortgage servicing companies and the law firms they retain to represent them, need to adapt their practices in order to deal with what they have created."

But one of the most significant - and perhaps surprising - ways in which the significance of the 362 amendments has been limited is that courts are actually taking Congress at its word. Specifically, in 362(c)(3)(A), Congress amended the Code to provide that when a debtor has been in a prior case dismissed within a year of the present filing, the stay shall terminate "with respect to the debtor" on the 30th day after the filing date unless an extension of the stay is granted. Now, bankruptcy practitioners know that "property of the debtor" is generally something different than "property of the estate". Section 362 as it existed prior to the amendments makes multiple, clear distinctions between property of the debtor and property of the estate, and the effect of the stay as to each. Moreover, Congress used different language in 362(c)(4) in describing what happens to multiple repeat filers (i.e., more than one prior case dismissed in the year prior to the current case), where it says, without any such distinctions, that "the stay under subsection (a) shall not go into effect."

Applying generally accepted principles of statutory construction -- that when particular language is used in one section but not another, it is presumed that Congress acts purposefully in using the different language to signify different meanings -- several courts have held that 362(c)(3), if triggered, terminates the automatic stay only as to actions against the debtor or against property of the debtor, but not against property of the bankruptcy estate. See, e.g., In re Harris, 342 B.R. 274 (Bankr. N.D. Ohio 5/1/06); In re Jones, 339 B.R. 360 (Bankr. E.D.N.C. 3/21/06); In re Moon, 339 B.R. 668 (Bankr. N.D. Ohio 3/28/06). Each of these courts notes that if Congress had intended to terminate the stay completely after 30 days for single repeat filers under 362(c)(3), it could have simply used similar language to that used for multiple repeat filers under 362(c)(4). Having chosen not to do so, judges must assume Congress meant what it said.

It is not the first time the Courts (or even these particular judges) have applied this method of statutory analysis to BAPCPA. Indeed, as Judge Small (who also decided In re Paschal, 337 B.R. 274, which previewed this issue as discussed here) noted: "Once again, warily, and with pruning shears in hand, the court re-enters the briar patch that is s. 362(c)(3)(A)."

But at least one court, upon entering that briar patch, has not found the same thing as the others. In In re Jumpp, __ B.R. __, 2006 WL 1731172 (Bankr. D. Mass. 6/23/06), Judge Rosenthal contrarily holds that (1) stay termination under 362(c)(3) is not limited to just property of the debtor; (2) 362(c)(4) cannot be used by a single repeat filer to reimpose the stay after the 30 day period under 362(c)(3) has lapsed; and (3) 11 U.S.C. 105 also cannot be used to reimpose the stay after it has lapsed under 362(c)(3).

In Jumpp, the debtor filed a bankruptcy within a year of a prior dismissal, and on the 29th day after filing moved to extend the stay under 362(c)(3). Unsurprisingly, the hearing was set after the 30th day, and a creditor objected. Judge Rosenthal declined to follow Toro-Arcila's conclusion that 362(c)(4) can be used by a single repeat filer to reimpose the stay (citing Whitaker, discussed above), and denied the motion. The debtor then moved for reconsideration, asking the court to determine that the stay only terminated as to "debts and property of the debtor" and not as to "property of the estate." This was not a meaningless distinction to the debtor, since in the debtor's district the courts treat property -- including, apparently, exempt property -- as property of the bankruptcy estate until a Chapter 13 plan is fully consummated. The court refused to address the issue on a motion for reconsideration and the debtor then filed a motion for a declaratory judgment, and then a motion to reimpose the stay under 105. The motions were opposed by the debtor's mortgagee.

The mortgagee argued that while the 362 amendments were "poorly drafted," it would be an "absurd outcome" to hold that termination of the stay does not apply to property of the estate when it was clear that Congress intended that a repeat filing debtor be required to show by clear and convincing evidence that the petition was not filed in bad faith. Judge Rosenthal noted interpreting 362(c)(3) is "challenging to say the least" and that the language in question "even when read in isolation" is "less than clear."

The court recognized that "there is a difference between property of the debtor and property of the estate" but that the legislative history, "while sparse," "does not indicate that there was an intent to differentiate between the debtor's and the estate's property." Since the "thrust of amended section 362 is to burden the so-called 'repeat filer' with demonstrating why the automatic stay should be extended," the court found that reading 362(c)(3) as being limited to only property of the estate frustrates such a goal.

The Jumpp court also noted that the language of 362(c)(3) does not "directly parallel" that of 362(c)(4), which omits the phrase "with respect to the debtor," but nonetheless could not believe that Congress intended to give a debtor filing her second bankruptcy within a year "significantly greater protection" than one filing her third petition. "It is the number of filings that is the critical distinction Congress was asking courts to make, not the extent to which the automatic stay applies." (Judge Shea-Stonum in Harris clearly felt otherwise, stating "In addition to choosing to differentiate between the number of a debtor's prior bankruptcy filings, Congress also chose to differentiate between the penalty that would be imposed.")

Finally, the Jumpp court rejected the debtor's motion to reimpose the stay under 105, holding that it could not use its equitable powers under 105 to impose a stay that Congress has declared must terminate if the requirements of 362(c)(3) are not met. In so holding, it does not square this conclusion with the opposite holding in Whitaker, even though the Jumpp court relied on Whitaker to conclude that the debtor could not avail herself of 362(c)(4).

The Jumpp decision does a curious job of attempting to adhere to a Congressional intent that is not clearly expressed in the statutory language itself nor clearly developed in any legislative history. The best it can say about that history is that it "does not indicate that there was an intent to differentiate between the debtor's and the estate's property." Yet the statutory language clearly does make such a distinction by including the phrase "with respect to the debtor" (a distinction which is already well-recognized both in the existing language of the statute and in common bankruptcy practice), and the decision provides no explanation for why that language is used in 362(c)(3) and what it means, nor why it was not used in 362(c)(4).

Clearly, interpreting the BAPCPA amendments is no easy task for judges, especially when traditional principles of statutory construction appear to yield results that are not nearly as dramatically creditor-friendly as BAPCPA was advertised to be.

In response to the many who expressed concern, frustration or exasperation at the absence of recent posts here -- no, we did not retire the blog on the one-year anniversary of the BAPCPA amendments (poetic as that may have been). Expect to see several more updates on recent developments here shortly. Please let us know if you come across an interesting decision.

Chapter 13 Plans, Substantial Abuse and Related Issues Addressed

2006-04-19T16:42:00.000-05:00

Much of the pre-effective date discussion about BAPCPA focused on the impact of the new "means-testing" provisions -- providing a mechanical formula for determining whether a Chapter 7 filing is an "abuse" subject to dismissal, and setting forth a minimum standard for disposable income which must be contributed to Chapter 13 plans. Yet there has thus far been minimal case law addressing their implementation. We highlighted one such decision a couple weeks ago in the post "Questions on Means Testing Answered," which discussed the Hardacre case, 2006 WL 541028. Now a couple more decisions can be added to the discussion.

One of the issues addressed in Hardacre was whether a debtor's "projected disposable income," which must be devoted to a Chapter 13 plan under Section 1325(b), is the same thing as the "disposable income" calculated based on the debtor's income for the six months prior to the petition date. The definition of "disposable income" used in 1325(b)(2) incorporates the term "current monthly income," which in turn is defined under Section 101(10A) based on the 6-month pre-filing period. The Hardacre court concluded that "projected disposable income" meant something different from "disposable income," and necessarily requires review of the debtor's current income at time of confirmation rather than the prepetition income.

In In re Jass, 2006 WL 871235 (Bankr. D. Utah 3/22/06), Judge Thurman agreed. In so doing, Judge Thurman provides a useful roadmap for statutory interpretation:

In interpreting a new statute, the Court must begin with the language of the statute itself, asking whether the language of the statute is plain. If so, the Court should generally enforce that language, giving each word its common usage. The Court's inquiry should end with the language of the statute unless 1) a literal application of the statutory language would be at odds with the manifest intent of the legislature; 2) a literal application of the statutory language would produce an absurd result; or 3) the statutory language is ambiguous.

Following this roadmap, Judge Thurman looked first to the language of the amended Code. He applied two assumptions: first, that the Court should give meaning to every word in a statute; and second, that the Court should presume that Congress acts "intentionally and purposefully when it includes particular language in one section of a statute but omits it in another." Applying these assumptions, Judge Thurman found Section 1325(b)(1)(B) to be clear: "projected disposable income" has to mean something different than "disposable income", because otherwise the word "projected" would have no meaning. The word "projected" is future-oriented and necessarily modifies the term "disposable income," requiring the court to consider both future and historical finances of the debtor.

Although Judge Thurman did not believe it necessary to go beyond the statutory language to reach this result, he nonetheless considered alternative methods of statutory interpretation. Where necessary to interpret a statute, Judge Thurman noted, courts can also consider a clear manifestation of congressional intent, the policy underlying a statute, and a preference against surplusage. None of these considerations would have altered the Jass holding. As for a clear expression of Congressional intent, Judge Thurman noted that the first place to look is in the Congressional record - however, the record for the BAPCPA amendments is "little more than a gloss of the statutory language of BAPCPA." Looking to what changes were in fact made, though, Judge Thurman noted that the concepts of "projected disposable income" and the term "disposable income" were not new to BAPCPA; rather, the only thing new was the specific definition of "disposable income". Under pre-BAPCPA practice, courts had previously held that "disposable income" was merely a starting point for determining "projected disposable income" for purposes of 1325. Since Congress did not remove the word "projected' from Section 1325(b)(1)(B), nor add it to the definition of "disposable income" in 1325(b)(2), the Court concluded that Congress did not intend to alter pre-BAPCPA law recognizing a difference between "disposable income" and "projected disposable income".

A contrary interpretation, he found, would be inconsistent with the overarching policy of the Bankruptcy Code to provide a debtor with a fresh start -- a policy which he found still existed, even if "the changes to the Code under the BAPCPA serve to benefit creditors." Moreover, to not interpret "projected disposable income" as something different from "disposable income" would render the word "projected" to be surplusage -- an interpretation which should be avoided.

Consistent with this interpretation, the Court found that the debtor's disposable income during the six months prior to filing was merely a "starting point" for determining the "projected disposable income" for purposes of 1325(b). Although the "disposable income" would be presumed to be accurate, the debtor could overcome that presumption by showing a substantial change in circumstances. To determine whether circumstances existed to justify consideration of "projected disposable income" other than the established "disposable income," the Jass court looks to 11 U.S.C. 707(b)(2)(B), which lays out the circumstances which can overcome a presumption of "abuse" for purposes of a Chapter 7 filing. On this point, the Jass decision puts some more meat on the bones of the Hardacre decision, and provides a specific mechanism for determining whether, as a matter of fact, the debtor's "projected disposable income" is indeed different from his or her "disposable income" for the six months prior to filing.

On another Chapter 13 issue, the court in In re Clay, 2006 WL 768812 (Bankr. D. Utah 3/15/06) (again Judge Thurman) held that the pre-BAPCPA practice of paying secured creditors "outside the plan" remains viable in the BAPCPA regime. Before BAPCPA, it was generally accepted that a debtor could choose to pay a secured creditor directly, rather than through a plan, so long as the creditor was paid pursuant to its contract terms. The Chapter 13 trustee in Clay attempted to argue that the BAPCPA amendments precluded that practice. Judge Thurman determined that he would only stray from the pre-BAPCPA practice, which was confirmed in published opinions, if the BAPCPA changes required a new rule of law. He found they did not.

The Trustee argued first that the provisions of 1325(a)(5) require that a plan provide for payments of secured creditors' claims through the plan in equal monthly amounts. The court rejected the notion that this requirement was intended to preclude the pre-BAPCPA practice of paying creditors directly, consistent with prior rulings that it only applied to secured claims "provided for by the plan" (language which is still used in the BAPCPA provisions).

He also rejected the argument that amendments to Section 1326(a)(1) evidenced an intent to overrule the practice. The amendments require a debtor to pay adequate protection payments to a creditor secured by personal property, and to provide the trustee with evidence of such payment. Indeed, the court found that the provision, which requires adequate protection payments to be made "directly to a creditor," evidenced a Congressional intent to allow debtors to continue making payments to secured creditors directly under the terms of their contract.

Other changes as well ratified the Court's conclusion. For instance, the Code had already provided that a residential mortgage could not be "stripped down," with courts universally recognizing in response that debtors could pay mortgage creditors directly. With this background, in BAPCPA, Congress implemented a similar restriction on strip-down of certain purchase money vehicle loans, with the apparent intention that the debtor could still elect to pay the loan directly according to its terms.

Accordingly, the court in Clay held that the practice of paying secured creditors directly, rather than through a Chapter 13 plan, remains alive and well -- much to the chagrin of Chapter 13 trustees who would rather make the disbursements themselves.

On a final note we'll mention a case which addresses a pre-BAPCPA "substantial abuse" issue, but looks to the BAPCPA amendments for guidance. In re Mars, 2006 WL 861663 (Bankr. W. D. Mich. 3/28/06). Mr. Mars was retired, and between social security and part-time earnings received $1,475 per month net of taxes. His wife was a 64-year old minister who earned$1,900 per month net of taxes and also was provided a parsonage, with a value of $400 per month. She was hoping to retire in a year and had chronic health problems. The debtors' monthly expenses were $3,384 per month, which probably underestimated unreimbursed business expenses. Although their monthly expenses were equal to their net cash earnings, the US Trustee moved to dismiss the case under 11 U.S.C. 707(b) alleging that the filing was a "substantial abuse" because the debtors, by doing some "modest belt tightening" and taking advantage of some Chapter 13 benefits, could supposedly pay a $5,800 dividend to unsecured creditors over 36 months.

In BAPCPA, Congress replaced the 707(b) "substantial abuse" provisions, which typically required an evaluation of the totality of the circumstances, with a more mechanical evaluation of whether "abuse" exists, creating a presumption of abuse if the debtor's monthly income exceeds certain aggregate allowed expenses. The Mars court found that BAPCPA was helpful in offering "clues" as to what Congress meant when it referred to "substantial abuse" in the predecessor version of the statute. In particular, it indicated that if a filing is presumed abusive under BAPCPA if income exceeds the allowed budget by more than $166 / month, then presumably "some multiple of that different must exist in order for the abuse to be deemed substantial" for purposes of the predecessor version.

In comparing the old and new versions of 707(b), the court made three observations: (1) under the old version (perhaps unlike the new), the court is not precluded from looking at factors other than the ability to confirm a Chapter 13 plan; (2) a debtor's income must be "significantly higher" than the statutory budget under the new regime to constitute a "substantial abuse" under the old version; and (3) it is appropriate to focus on the debtor's total income in excess of the expenses of a theoretical "similarly situated person in the debtor's community" (i.e., what the means test tries to capture) rather than on the particular spending choices the particular debtor has actually made. Such a focus appropriately "remove[s] the court from the private lives of those who appear before it," and permits a general determination of a fair division of future income between creditors and the debtor, instead of a subjective scrutiny of a debtor's personal choices as to how he spends his share of that allotment.

Applying this approach to the case before it, the court found that the circumstances did not present a case of "substantial abuse," and denied the US Trustee's motion to dismiss. Such flexibility may well not exist under the BAPCPA regime.

Section 366’s Requirements Have Not Changed for Some Debtors

2006-04-19T13:22:00.000-05:00

Our prior post, “New Subsection 366(c) Protects Utility's Bargaining Power”, discussed the first case to interpret newly enacted subsection 366(c). The post discussed new barriers for chapter 11 debtors who seek to insure that utilities do not discontinue service following a bankruptcy filing under BAPCPA, on account of new requirements defining adequate assurance of payment and new procedures that take away the debtor’s bargaining power. A subsequent case interpreting the new subsection, In re Astle, 2006 WL 626184 (Bankr. D. Idaho 2006), makes clear that the more onerous forms of adequate assurance required under new section 366(c)(1)(A) apply only to chapter 11 cases. Thus, under Astle, pre-BAPCPA law will continue to govern the assurance of payment that a non-chapter 11 debtor must provide to secure continuity of utility service. Moreover, the decision arguably relieves non-chapter 11 debtors from the procedural uncertainties discussed in the prior posting, by implying that all of the changes to section 366 apply only to chapter 11 cases.

The Astles filed a “family farmer” bankruptcy under chapter 12 in November 2005 . Idaho Power, the Astles’ pre-petition power provider, refused to continue to provide power post-petition unless the Astles prepaid a deposit of $44,162, an amount equal to the Astles projected 2006 utility charges. Unwilling (and unable) to pay this large sum upfront, the Astles moved the bankruptcy court for a determination that a first priority lien in their 220 head dairy herd constituted adequate assurance of payment of the projected 2006 post-petition utility charges. Idaho Power objected to the Astels' motion, arguing that, as a provider of utility service, it was entitled to one of the forms of adequate assurance specified in new subsection 366(c)(1)(A), such as a cash deposit, a letter of credit, or a surety bond.

The court granted the Astles' motion, holding that section 366(c)(1)(A) does not apply to the Astles' case, which was filed under chapter 12. Rather, the court held that the onerous forms of adequate assurance found in new subsection apply only to chapter 11 cases. The first priority lien in the amount of $44,162 (in a herd valued at $390,000) constituted adequate assurance of payment under 366(b), the applicable section in this case, since, under pre-BAPCPA case law, adequate assurance of payment “does not require an absolute guarantee of payment. What is required is that the utility will be protected from unreasonable risk of nonpayment.”

To reach this conclusion, Judge Myers focused on the plain language of new subsection 366(c), rejecting legislative history as unnecessary because “Section 366(c)’s language and meaning are plain enough”. (This is probably true as to the section’s applicability to non-chapter 11 cases. But, as discussed in the prior posting “New Subsection 366(c) Protects Utility's Bargaining Power” the same cannot be said regarding its meaning in chapter 11 cases where the new subsection does apply). The court focused on the language of section 366(c)(1)(A), which states: “For purposes of this subsection, the term ‘assurance of payment’ means-- (i) a cash deposit; (ii) a letter of credit; (iii) a certificate of deposit; . . .”. (emphasis added). The court focused on Congress’ use of “this subsection”, rather than “this section”, and concluded that the language “is referring to subsection (c) alone.”

To determine what cases subsection (c) applies to, Judge Myers looked to section 366(c)(2), which “is itself limiting” in that it states: “Subject to paragraphs (3) and (4), with respect to a case filed under chapter 11, a utility referred to in subsection (a) may alter, refuse, or discontinue utility service, if during the 30-day period beginning on the date of the filing of the petition, the utility does not receive from the debtor or the trustee adequate assurance of payment for utility service that is satisfactory to the utility.” Thus, Judge Myers found that section 366(c)(1)(A) together with 366(c)(2) together indicate that the newly specified forms of adequate assurance of payment apply only to chapter 11 cases.

Judge Myers’ decision should give non-chapter 11 debtors substantial comfort in bargaining with utilities to continue service post-petition. Moreover, the decision has implications for newly added subsection 366(c)(4), which gives utilities a right to set off against a debtor’s pre-petition security deposit. This provision is also limiting, as it states: “with respect to a case subject to this subsection, a utility may recover or set off against a security deposit . . .”, (emphasis added), and thus may only apply to chapter 11 debtors as well.

Dude, Where's My Car? Most Courts Hold Purchase Money Vehicle Loans Still Secured Under BAPCPA

2006-04-19T10:15:00.000-05:00

We previously reported in Another Take on Purchase Money Vehicle Loans on a decision from Judge Walker in the Southern District of Georgia holding that the effect of BAPCPA amendments to 11 U.S.C. 1325 is to render claims arising from purchase money loans made within 910 days of bankruptcy for vehicles acquired for the debtor's personal use to be entirely unsecured claims. In re Carver, 2006 WL 563321 (Bankr. S.D. Ga. 3/6/06). The amendment, which I refer to as 1325(a)(*) because Congress didn't see fit to give it a number, provides that "section 506 shall not apply" to 910-day claims. While some courts had held that this provision merely precluded the "strip-down" of such vehicle loans in a Chapter 13 plan into secured and unsecured claims under Section 506(a), see Strip Tease? No More Stripping Down Many Auto Loans, the Carver case instead held that if 506 did not apply, such claims must be deemed wholly unsecured (although they were still entered to special treatment).

Now a fellow judge of the Southern District of Georgia has ruled contrary to Carver, and held, like the majority of the courts that have addressed the issue, that 1325(a)(*) merely prohibits bifurcation, and effectively mandates that 910-day claims be treated as wholly secured. In re Brown, 2006 WL 775648 (Bankr. S.D. Ga. 3/27/06). In Brown, Judge Dalis addressed multiple cases which all presented the same fact pattern: the debtors had purchased vehicles for personal use within 910 days of filing bankruptcy; the lenders filed proofs of claim listing the debts as 100% secured; no objections were filed to the claims; the debtors' plans proposed to pay the claims without interest; and the lenders objected to confirmation, contending that they had to receive the present value of their claims under 11 U.S.C. 1325.

The Brown court rejected the argument (adopted by Judge Walker in Carver) that the language of 1325(a)(*) that "section 506 shall not apply" meant that the lenders' claims could not be treated as secured claims. To the contrary, Judge Dalis found that 506 is not intended to provide the definition of an allowed secured claim. Rather, other Code sections provide such definitions: Section 502 governs whether a claim is deemed "allowed" (including, such as here, where no objection is filed); and Section 101(37) establishes that a debt is "secured" by a lien (providing that the term "lien" means a charge against or interest in property "to secure payment of a debt"). Because the claims at issue were "allowed" under 502, and "secured" by recourse to underlying collateral, they were "allowed secured claims" -- which, under 1325(a)(5), must receive present value under a Chapter 13 plan.

Thus, like In re Johnson, 2006 WL 270231; In re Robinson, 2006 WL 349801; and In re Wright, 2006 WL 547824, mentioned in prior posts, Judge Dalis in Brown concludes that 910-day claims must be treated as fully secured claims entitled to present value, but are subject to modification with respect to the interest rate necessary to meet the present value requirement.

On a related note, a judge in Utah has recently held that a Chapter 13 plan must pay the full present value of a 910-day claim, even where the creditor does not object to lesser treatment. In re Montoya, 2006 WL 931562 (Bankr. D. Utah 4/10/06). In Montoya, the debtor's Chapter 13 plan proposed to bifurcate a 910-day claim a la 506(a)(1), notwithstanding the 1325(a)(*) amendment. The creditor, despite this new BAPCPA ammunition, did not file a proof of claim and did not object to the debtor's plan. Notwithstanding the lack of any objection, Judge Boulden held that the debtor's plan could not be confirmed.

Joining the majority, Judge Boulden agreed that the effect of 1325(a)(*) is to require that for purposes of 1325(a)(5), 910-day claims must be treated as fully secured. She also noted the general principle that if a plan is properly noticed and otherwise meets the requirements of 1325(a), "the Court may deem a secured creditor's silence to constitute acceptance of a plan and the plan may be confirmed." The reason for this "implied acceptance" is because Chapter 13, unlike Chapter 11, has no balloting mechanism to evidence a creditor's acceptance. Thus, the judicial doctrine of "implied acceptance" "fills the drafting gap in the Code."

Despite the principle of implied acceptance, however, Judge Boulden found that even in the absence of a creditor objection, a plan that proposed to bifurcate a 910-day claim could not be confirmed: "Creditors are entitled to rely on the few unambiguous provisions of the BAPCPA for their treatment. They should not be required to scour every Chapter 13 plan to ensure that provisions of the BAPCPA specifically inapplicable to them will not be inserted in a proposed plan in the debtor's hope that the improper secured creditor treatment will become res judicata."

She alternatively ruled that even if implied consent were applicable, the Plan could still not be confirmed because it did not satisfy 1325(a)(1)'s requirement that the plan "complies with the provisions of this chapter and with the other applicable provisions of this title." She ruled that "The offending provision presents no less a bar to confirmation than failing to pay priority claims in full, proposing a plan in bad faith, or proposing a plan that is not feasible."

This "You Snooze, You're Fine" principle is arguably inconsistent with the fact that satisfaction of the present value requirement of Section 1325(a)(5)(B) is only one of three distinct options for dealing with a secured claim in a Chapter 13 plan (subsections (A) - acceptance; (B) - present value; and (C) - surrender, are linked by a disjunctive "or"). The first option, in 1325(a)(5)(A), is that "the holder of such claim has accepted the plan." If the failure to object to a Chapter 13 plan is a deemed acceptance (and it generally is understood to be), then there seems to be no reason to even reach the present value requirement of 1325(a)(5)(B). A creditor is always free to take less than they might otherwise be entitled to under the Code, and if they acquiesce to such treatment then the Chapter 13 plan might not violate any provision of the Code.

Indeed it is possible that a secured lender might be financially motivated to accept such treatment, particularly if the alternative is that the debtor will surrender the vehicle -- which might leave the lender with no deficiency claim at all. See Purchase Money Vehicle Creditors Get No Claim Upon Surrender.

You Say Strike It, I Say Dismiss It - What Happens When an Ineligible Debtor Files

2006-04-18T17:50:00.000-05:00

Certain elements of the new BAPCPA pre-filing credit counseling requirements are clear in their effect: generally, under 11 U.S.C. 109(h), a debtor who fails to obtain counseling before filing for bankruptcy will be deemed ineligible, with a limited extension available for debtors who certify that they face exigent circumstances and that they requested but were unable to obtain counseling from an approved agency within five days after requesting it. What is less clear, though, is what should happen if the debtor has not complied with these requirements. Does the case get dismissed? If so, and the debtor then obtains the required counseling and refiles, he or she may find that the bankruptcy relief they get may be limited -- in particular, the provisions for termination of the automatic stay after 30 days under 11 U.S.C. 362(c)(3) may be triggered by the prior dismissed case.

In order to address this concern, some courts have suggested that the initial filing ought to be stricken rather than dismissed, on the theory that a filing by an ineligible debtor is void ab initio and no case is commenced. This fixes the 362(c)(3) problem, but creates its own set of problems: if no case is commenced by such a filing, does that mean that no automatic stay is (or was) in effect as a result of the initial filing? If so, are creditors free to simply pursue their remedies regardless of a bankruptcy filing if the debtor has not completed the counseling necessary to satisfy the eligibility requirements?

While courts grapple with the question of striking or dismissing, there is little doubt that Congress has no intention of calling the whole thing off, so we will take a closer look at the cases on both sides of the debate. We first highlighted the issue in the Got Credit Counseling? post, where we mentioned the Hubbard, 333 B.R. 377, Valdez, 335 B.R. 801, and Rios, 336 B.R. 177 cases, all of which have effectively held that a filing by a debtor who has not completed the counseling requirements should be stricken, such that it will not count as a prior case in the event of a subsequent filing (the Valdez case actually "dismisses" rather than "strikes", but nonetheless makes clear that it will not be considered as a "case in which the individual was a debtor" for purposes of a later filing). Since those decisions were issued, several more courts have taken on the issue, with varying results.

The most rigorous argument for striking was made recently in In re Salazar, 2006 WL 827842 (Bankr. S.D. Tex. 3/29/06). In Salazar, Judge Isgur (not one to be shy about venturing opinions construing BAPCPA) presented the question in terms of whether the automatic stay should be regarded as having been invoked by an ineligible debtor's filing. He finds the answer to be clear:

"The legal question is: Did Congress intend to impose an eligibility requirement on putative debtors, but also intend for an ineligible person to receive the benefits of the automatic stay? The answer is: It is impossible to believe that Congress specifically identified people to exclude from the bankruptcy process, yet permitted those same people to benefit from bankruptcy's most powerful protection: the automatic stay."

Judge Isgur supports this conclusion with an analysis of three relevant statutes:
Section 362 says that "a petition filed under section 301, 302 or 303 ... operates as a stay ..."
Section 302 says that "a case under a chapter of this title is commenced by the filing with the bankruptcy court of a single petition under such chapter by an individual that may be a debtor under such chapter ..." (302 applies to joint cases, 301 uses similar language for an individual case)
Section 109 addresses "who may be a debtor," and specifies in 109(h) that "an individual may not be a debtor under this title unless such individual ..." has completed the pre-filing credit counseling.

From these three sections, Judge Isgur draws the following "syllogism": (1) individuals who have not received counseling and do not qualify for a waiver are ineligible to be debtors under 109; (2) only eligible debtors may file a petition under 302; therefore (3) without the filing of a petition under 302, the automatic stay provisions in 362 are not invoked.

*(Close readers may note a possible flaw in the syllogism, which will be discussed further below.)

Judge Isgur readily acknowledged that this interpretation may create uncertainty, since it raises questions of whether the filing of a petition really does trigger the protections of the automatic stay. Yet he noted several examples where the law tolerates uncertainty (i.e., adverse possession, unrecorded tax liens, preferences and fraudulent conveyances, and more on point, the multitude -- 28, with the BAPCPA amendments -- of exceptions to the automatic stay). Particularly in light of the "proliferation of exceptions" to the automatic stay, Judge Isgur found "no reason why certainty must trump policy." Since, under his reading, "Congress intended to make certain people ineligible to file bankruptcy," he found it implausible that Congress "specifically identified people to exclude from the bankruptcy process, yet permitted those same people to benefit from bankruptcy's most powerful protection: the automatic stay." (Judge Isgur's take on the legislative intent may be accurate but seems more cynical than many members of Congress might admit; others, such as in Rios, have more generously suggested that the intent was to ensure that potential debtors are advised of the alternatives to bankruptcy before filing).

Judge Isgur finds support for his interpretation in the amendments to Section 521 of the Code. The amendments include a provision, 521(i), that calls for the "automatic" dismissal of a case if the debtor fails to timely file certain papers. They also include a provision, 521(b), requiring the filing of a certificate confirming that the debtor obtained the required counseling. The failure to file the counseling certificate is not listed as one of the things that triggers an automatic dismissal, however - an omission which Judge Isgur finds is explainable only because Congress intended that a filing without completing the counseling requirement could not even validly commence a case subject to dismissal.

The Salazar decision rejects the argument that a contrary intention is demonstrated by the amendment to 362(b)(21) of the Code. 362(b)(21) creates an exception to the automatic stay for the foreclosure of real estate "if the debtor is ineligible under section 109(g) to be a debtor". [109(g) creates a 180 day prejudice period if a prior case was dismissed for willful failure to abide by orders or to properly prosecute the bankruptcy case, or if the debtor voluntarily dismissed after a stay relief motion was filed]. The debtor in Salazar argued that such an exception would be unnecessary, and mere surplusage, if the filing by an ineligible debtor did not trigger the stay in the first place. Noting a split of authority in the decided cases on whether a filing in violation of 109(g) is void ab initio, Judge Isgur concluded instead that 362(b)(21) was adopted "with the apparent intent to legislatively overrule courts that were misapplying the statute as written." Even if it were treated as surplusage, though, the court held that it should not give meaning to surplusage if doing so would be demonstrably at odds with the legislative intent, citing Lamie v. U.S. Trustee, 540 U.S. 526 (2004).

Accordingly, Judge Isgur in Salazar struck the debtors' petition and determined that no automatic stay arose as a result of the filing of their petition. Although he found the difference between "striking" and "dismissing" to be merely semantic, he did note that "There is a difference between a bankruptcy case and a bankruptcypetition." The consequences of dismissing a "case" under a provision such as 11 U.S.C. 707, are different from the consequences of dismissing a "petition" under 11 U.S.C. 109. "Dismissal of a petition amounts to dismissal of a 'case' prior to the case's commencement" such that no stay is ever in effect (but with the additional effect that a petition dismissed under 109 is not a "case pending within the preceding 1-year period" for purposes of 362(c)(3) and (4)). The distinction between a "case" and a "petition" will be discussed more below too.

A similar result was reached in the case of In re Calderon, 2006 WL 871477 (Bankr. S.D. Fla. 3/8/06) (the first published opinion from our former partner at KT&T, now newly appointed Judge Laurel Isicoff), where Judge Isicoff held that an individual who filed without completing the counseling requirements was not eligible to be a debtor, therefore no case was commenced, and in a subsequent case the filing would not constitute a "case of the debtor" for purposes of the 362(c)(3) stay termination provisions.

The Salazar opinion was certified for direct appeal to the Fifth Circuit Court of Appeals under the new provisions for direct certification under 28 U.S.C. 158(d)(2), and an appeal was filed on April 12.

Meanwhile, the opposite conclusion has been reached in several other decisions, the most recent and thorough of which may be In re Seaman, Case No. 05-40032 (Bankr. E.D.N.Y. 3/30/06) (no Westlaw cite available yet). In Seaman, Judge Strong noted that 109(h) is silent as to the appropriate resolution for cases where the debtor is ineligible due to noncompliance with the counseling requirements. In the absence of specific statutory guidance, she looked to decisions construing analogous provisions of the Bankruptcy Code.

Indeed, before the BAPCPA amendments, a debtor could be ineligible under 109 for a variety of reasons other than failure to complete the counseling requirements. One example is where a debtor files a Chapter 13 petition but is not eligible for relief under that chapter under 109(e), either because they do not have regular income or because they have debts that exceed the statutory limits. Judge Strong notes that courts have "with apparent unanimity" concluded that when a Chapter 13 petition is filed by a debtor ineligible for relief under that provision, a case is nonetheless commenced which can either be voluntarily converted or dismissed. Likewise, courts have dismissed, rather than stricken, cases filed by petitioners who are ineligible because of their corporate or entity status. Judge Strong also notes that courts have dismissed, rather than stricken, cases filed by petitioners who are ineligible under 109(g) (although she fails to note the conflicting opinions on the issue).

Judge Strong then turned to the several cases that had evaluated whether to strike, or dismiss, a petition filed without complying with the pre-filing counseling requirements, including Hubbard, Rios, and Valdez, as well as In re Ross, 338 B.R. 134 (Bankr. N.D. Ga. 2/8/06), In re Tomco, 2006 WL 459347 (Bankr. W.D. Pa. 2/27/06), and an unpublished opinion in In re Taylor, Case No. 05-35381DM (Bankr. N.D. Cal. 3/9/06). While those first three opinions held that striking was the appropriate disposition, Ross, Tomco and Taylor concluded to the contrary that dismissal rather than striking was warranted.

In Ross, Judge Bonapfel noted that the BAPCPA amendments did not provide any different consequence for 109(h) ineligibility than for any other type of ineligibility, and that there was no indication of an intent to establish a new rule. As a result, 109(h) ineligibility should be treated like any other type of ineligibility. Like Judge Strong, Judge Bonapfel also noted that courts uniformly recognize that a Chapter 13 filing by an ineligible debtor still commences a case. While he noted the split of authority on 109(g) ineligibility, he recognized that courts had formulated a variety of ways to deal with serial filing abuse, such as through annulment of the stay, dismissals with prejudice, and in rem stay relief orders. As a result, he found that 109(g) was not jurisdictional such that a filing by a debtor who was not eligible under its terms still commences a case that is not a "nullity" or void ab initio. Unlike Judge Isgur, Judge Bonapfel found this interpretation to be ratified by the 362(b)(21) amendment creating an exception to the stay for real estate foreclosures against debtors ineligible under 109(g) -- if such a filing were void ab initio, there would be no reason for the amendment.

Since there was no evidence that Congress intended to treat 109(h) ineligibility any differently than any other form of ineligibility, it follows that a filing by a debtor ineligible under 109(h) is effective and is not a nullity or void ab initio. While recognizing that this may implicate the 362(c)(3) and (4) provisions in a later case, Judge Bonapfel suggests that treating an ineligible filing as void ab initio might result in a "pyrrhic victory" in the meantime if a creditor completes a repossession or foreclosure because no stay is in effect.

The Tomco case also concludes that dismissal rather than striking is appropriate. Judge Deller initially noted the "profound" effects of the new pre-filing counseling requirement and the practical difficulties they present. Most debtors, he notes, are not meeting with lawyers well in advance of a potential filing to figure out their options -- instead, they are usually trying to negotiate with their lenders or landlords, trying to refinance their debtors, or busily trying to supplement their income. They typically will have little funds with which to hire counsel because their income is being used for family expenses. Then, when efforts to resolve their financial problems fail, "the honest debtor is caught by surprise by the nuances of the credit counseling briefing provisions of the 2005 Act and finds that bankruptcy relief may be beyond his or her reach." Nonetheless, Judge Deller rejected the earlier decisions, such as Rios, which struck petitions filed by debtors who had not fulfilled the counseling requirements, which he believed were rationalizing their result on equitable grounds in light of the concern that the filing would create a "strike" for purposes of a subsequent filing and the 362 "not-so-automatic stay" termination provisions.

Although Congress did not amend Section 707 of the Code (dealing with "cause" for dismissal) to include ineligibility, he found found that such a failure was not indicative of any particular intention on the part of Congress; rather, there is no need to specify that ineligibility would be "cause" for dismissal (particularly since 707 is drafted as a non-exclusive list). He also rejected the notion that the language of Section 301 (that a case is commenced by the filing of a petition "by an entity that may be a debtor" under such chapter) suggests that if the debtor is ineligible, no case is "commenced." Rather, Judge Deller was of the view that the word "may" has an "expansive connotation" which as used in ordinary common parlance simply means "might" or expresses a "possibility". As such, any individual "had the possibility of being a debtor", but has to obtain the credit counseling "to be certain." (This explanation is not entirely convincing, especially since Section 109 is in fact called "Who may be a debtor." It doesn't seem to be too much of a leap to conclude that the "may be a debtor" as used in Section 301 is the same "may be a debtor" as defined in Section 109).

The Tomco court rejected the notion that ineligibility impacts the determination of whether a case is "commenced," expressing concern with the possibility that if such a filing is deemed void ab initio, there would be no stay whatsoever in effect. He was unwilling to impose the risk on the debtor or its creditors that a creditor might take unilateral action after a petition was filed in the absence of a court order or express statutory provision providing otherwise. Like Judge Bonapfel in Ross, Judge Deller also found that the amendment to 362(b)(21) confirmed that Congress did not regard filings by ineligible debtors as void ab initio. Since Congress "is presumed to know the state of existing law when it enacts legislation," the creation of an additional stay exception evidences an understanding that a bankruptcy filing in violation of 109 nonetheless commences a case and results in an automatic stay.

The Taylor case likewise concluded that dismissal rather than striking was the appropriate result "under ordinary principles of statutory construction," and suggested that the potential consequences in a subsequent filing might not be "as draconian as they first appear" because a dismissal under 109(h) would not appear to establish a presumed lack of good faith for purposes of 362(c)(3) and (4) (under which the stay can be preserved upon a showing of good faith).

After digesting all these decisions, Judge Strong in Seaman concluded that dismissal rather than striking was appropriate: (1) eligibility is not jurisdictional -- until a court determines that a petitioner is ineligible, a case is commenced by the filing of a petition and cannot be a nullity; (2) dismissal for ineligibility under 109(h) comports with other sections of the Bankruptcy Code and BAPCPA as a whole -- other ineligibility provisions are regarded as warranting dismissal rather than striking, and a conclusion that no case is commenced would make the amendment to 362(b)(21) superfluous; (3) the legislative history suggests that Congress intended to discourage abuse of the bankruptcy system and in particular to address the serial filing problem by requiring pre-filing counseling -- striking, however, could result in abuse of the automatic stay by permitting a debtor to get a temporary stay until the time a petition is stricken, again and again; (4) striking might prevent a debtor from realizing the benefits of bankruptcy through a subsequent filing if no stay goes into effect and a creditor takes action before the new filing; meanwhile, even if the petition is dismissed, a good faith debtor could still get full bankruptcy protection by moving to reinstate the stay in a subsequent filing.

So what's the right answer? My two cents -- remember that "syllogism" in Salazar which led to the conclusion that a filing of a petition by an ineligible debtor does not trigger the automatic stay? Here's where I think the flaw is. Section 362 says that "a petition filed under section 301, 302 or 303" operates as a stay. But 301, 302 and 303 do not actually say that a petition may only be filed by an eligible debtor; rather, what they is that "a case is commenced" by the filing of a petition by an eligible debtor. Thus, the filing of a petition by an ineligible debtor can trigger the automatic stay under 362 (which refers to the filing of a petition, not to the commencement of a case), but that petition will not commence a "case" unless the petitioner is eligible. So the stay would be in effect temporarily pending determination of eligibility, but if the debtor is determined not to be eligible, then the petition would be dismissed (or stricken, if you prefer), and would not be regarded as a "previous case" for purposes of 362(c)(3) or (4). To the extent this presents an opportunity for abuse by debtors seeking to take advantage of the temporary stay, courts could remedy such abuse in the same ways they have dealt with serial filings before -- through retroactive annulment of the stay, dismissals with prejudice, in rem stay relief orders, and so on. Would it work?

Conviction Not Required to Prompt Homestead Exemption Cap for "Criminal Act"

2006-04-18T17:03:00.000-05:00

In prior posts, we have discussed the new BAPCPA provisions imposing a dollar cap on the homestead exemption which can be claimed by debtors. In a matter of first impression, however, Judge William C. Hillman in In re Larson, 2006 WL 891532 (Bankr.D.Mass. 4/5/06) was faced with the issue of whether the $125,000 exemption cap provided by new Section 522(q)(1)(B)(iv), which is applied to debts arising from certain "criminal acts" causing death or serious physical injury within the prior 5 years, required a conviction or a certain level of culpability for such act.

In Larson, the debtor was involved in a tragic automobile accident in September 2002, wherein the passenger in the vehicle she hit did not survive. The debtor was charged with motor vehicular homicide by negligent operation under Massachusetts state law. Judge Hillman noted that the state court transcript (which was attached to the objection to exemption and in which the debtor admitted sufficient facts regarding the act in state court) revealed that the state court judge found facts sufficient to find the debtor guilty. The state court judge continued the matter without a finding for one year during which time the debtor was placed on supervised probation. In addition, the driver of the other automobile obtained a $1,000,000 civil judgment against the debtor.

When the debtor filed her voluntary Chapter 7 petition on October 11, 2005, she listed on Schedule A a single family residence with a market value of $544,000 subject to a secured claim of approximately $87,000. On Schedule C, the debtor claimed an exemption of $500,000 for the residence under Massachusetts law. The Chapter 7 trustee and the driver of the other automobile filed objections to the claimed homestead exemption and argued that the $500,000 claimed exemption must be reduced to $125,000 pursuant to new Section 522(q)(1)(B)(iv) since the automobile accident debt arose from a "criminal act" that caused death to another individual within the preceding 5 years. (Note: unlike most of the BAPCPA provisions which became effective in October 2005, 522(q) became applicable immediately upon the effective date of BAPCPA back in April 2005) .

The debtor responded that neither the Bankruptcy Code nor BAPCPA define "criminal act," and that Congress must have meant to include conduct involving something greater than negligence. The debtor pointed to legislative history that included an earlier version of the statute providing that the language in Section 522(q)(1) should be construed liberally to encompass misconduct that rises above mere negligence. In fact, the debtor opined that Congress may have even intended that the "criminal act" requirement could be met only by means of a conviction, which did not occur in this case. In addition, the debtor argued that, under Massachusetts law, her charge involving negligence was lesser than reckless conduct. Finally, the debtor argued that the homestead cap should not apply because her claimed homestead was necessary for her support under new Section 522(q)(2).

As a threshold matter, Judge Hillman noted that the statutory list found in 522(q)(1)(B)(iv) reducing the homestead cap was disjunctive, and that he only needed to find that such debt arose from a "criminal act," not needing to find that the act was also an intentional tort and willful/reckless conduct. Judge Hillman surveyed various case law including Massachusetts law which recognized that the phrase "criminal act" does not require a conviction or a certain level of culpability. Most pointedly, Judge Hillman found that Congress did not specifically require a conviction for purposes of Section 522(q)(1)(B)(iv), but did so in Section 522(q)(1)(A), which provides that a homestead exemption be reduced to $125,000 if the court determines after notice and a hearing that the debtor has been "convicted" of a felony which demonstrates that the bankruptcy filing was an abuse. Judge Hillman followed the long-standing principle of statutory construction that the inclusion of particular language in one section but the omission of such language in another is intentional and done with purpose. Based on the above-described findings, Judge Hillman found the term "criminal act" clear and did not lead to an absurd result and, as such, he did not need to look to legislative history.

Since the record evidence indisputable established that the debtor had committed the act at issue, Judge Hillman found that the cap applied and scheduled a further evidentiary hearing where the debtor may present evidence as to whether the difference between her claimed and capped homestead is necessary for her support pursuant to Section 522(q)(2).

Credit Counseling Not "Adequate" For Debtors Who Can't Understand It

2006-04-10T16:01:00.000-05:00

We've previously noted here that at least one point of agreement in interpreting the BAPCPA amendments is that judges have little flexibility in considering filings by debtors who have not satisfied the pre-filing credit counseling requirement of 11 U.S.C. 109(h). See "Got Credit Counseling?" A recent decision by Judge A. Jay Cristol, In re Petit-Louis, 338 B.R. 132 (Bankr.S.D.Fla. 3/1/06), however, holds that the requirement cannot be imposed on a debtor who has very limited English-speaking ability, where no approved counseling agency had counselors who spoke the debtor's language.

In Petit-Louis, Judge Cristol waived the pre-petition credit counseling requirement because, notwithstanding considerable effort, the Creole-speaking Mr. Petit-Louis was unable to find a single credit counseling agency in the Southern District of Florida which could provide counseling to him in Creole. Judge Cristol concluded that Mr. Petit-Louis’s inability to obtain counseling in Creole, combined with the fact that he could not afford to hire a translator, created a barrier to the bankruptcy court that Congress did not intend to create when it mandated that debtors complete a credit counseling course before filing. (The debtor had obtained a waiver of the filing fee under the new in forma pauperis filing provisions authorized by the new Act).

Prior to filing, Mr. Petit-Louis contacted every single certified credit counseling agency in the Southern District of Florida to determine whether the agency could provide credit counseling in Creole. Not one agency could do so. For this reason, Mr. Petit-Louis filed his voluntary petition for chapter 7 and attached a letter explaining his efforts to obtain credit counseling and requesting a waiver of the requirement based on unavailability in his district.

In response to Mr. Petit-Louis’s waiver request, the U.S. Trustee argued that the Office of the U.S. Trustee had not decertified the Southern District of Florida pursuant to its authority under Section 109(h)(2), and that she did not have authority to waive the requirement for individual debtors such as Mr. Petit-Louis. Judge Cristol looked to Section 109(h)(2), which provides that the pre-filing credit counseling requirement shall not apply to debtors who reside in districts in which the United States trustee determines that there are not agencies “reasonably able to provide adequate services” to debtors. He stated that this provision “places the obligation for providing the credit counseling in a meaningful way upon the Office of the United States Trustee”.

The U.S. Trustee contended that her office has provided meaningful access to potential debtors because there are ten approved credit counseling agencies in the Southern District of Florida. To the extent the agencies do not provide counseling in Creole, the debtor can access any of the agencies by hiring an interpreter. Judge Cristol rejected the U.S. Trustee’s position that Mr. Petit-Louis should be required to pay for a translator for the credit counseling course. He stated that a debtor who cannot pay the filing fee “obviously… could not pay for a certified interpreter and Congress has provided in forma pauperis for such Debtors”. The court had found (without objection from the U.S. Trustee) that Mr. Petit-Louis, who had a total family income of less than $17,000 per year to support a family of six, qualified for the filing fee waiver. Judge Cristol found that Congress did not intend for Mr. Petit-Louis to be precluded access to the bankruptcy court simply because he could not afford to hire a translator.

The U.S. Trustee has filed a nineteen page motion for reconsideration of the waiver. The motion for reconsideration is based on the U.S. Trustee’s (mis)understanding that Judge Cristol waived the counseling requirement pursuant to Section 109(h)(3)’s exigent circumstances waiver. The U.S. Trustee contends that the court lacks authority to permanently waive the credit counseling requirement under Section 109(h)(3) and that Mr. Petit-Louis failed to file a “Certification”, as required by the provision, anyway. The Certification requirements are discussed in the previous post "Got Credit Counseling?" The U.S. Trustee's motion for reconsideration remains pending.

(In the interest of full disclosure, I should advise that my firm colleagues Lisa Keyfetz and John Kozyak are providing pro bono assistance to Mr. Petit-Louis and Legal Services of Greater Miami in responding to the U.S. Trustee's motion for reconsideration).

Questions on Means Testing Answered

2006-04-06T10:10:00.000-05:00

Among the most talked-about provisions of the new Bankruptcy Reform Act were the new "means-testing" provisions, intended to curb perceived abuses of the bankruptcy process. In one of the first published decisions on the complicated new provisions, In re Hardacre, __ B.R. __, 2006 WL 541028 (Bankr. N.D. Tex. 3/6/06) provides a helpful explanation of the impact and implementation of means-testing; clarifies what "projected disposable income" means, as that phrase is used in the amendments; and holds that debtors may not "double-dip" by taking multiple deductions from disposable income for mortgage and car expenses.

Judge Nelms explains first how means-testing is used to determine whether a Chapter 7 filing is a "substantial abuse" calling for dismissal under 11 U.S.C. 707(b). Where the statute previously failed to define "substantial abuse" and courts would typically consider the totality of the circumstances, that discretion has now been replaced with a mathematical formula. The debtor's current monthly income is calculated, then reduced by certain living expenses, and the difference is multiplied by 60. If the "income available for creditors," as Judge Nelms calls it, is greater than $10,000, abuse is presumed. If it is less than $6,000, abuse is not presumed. If it is between $6,000 and $10,000, abuse is presumed only if the income exceeds 25% of the debtor's non-priority unsecured claims. The presumption may be overcome if the debtor demonstrates "special circumstances." If a presumption arises, that court may dismiss the case, or if the debtor consents, convert it to Chapter 11 or 13.

Hardacre was filed as a Chapter 13 so substantial abuse was not an issue. But the means-testing provisions still were relevant because 11 U.S.C. 1325, which governs confirmation of a Chapter 13 plan, requires that if there is an objection to the plan, the debtor must commit all the debtor's "projected disposable income" during the "applicable commitment period" to payment of unsecured claims. If the debtor's annual income exceeds the median family income (as reported by the Census Bureau) for similar sized households in her state, then the "applicable commitment period" for the Chapter 13 plan is at least five years, unless creditors can be paid in full in a shorter time (if annual income does not exceed the median income, then the "applicable commitment period" is 3 years). Moreover, if the debtor's annual income exceeds the median income, then the permitted expenses considered for calculating "disposable income" are determining using the means test.

Judge Nelms noted that the phrase "projected disposable income" is subject to conflicting interpretations. 1325(b)(2) defines "disposable income" as "current monthly income" less certain expenses. But "current monthly income" is defined in 11 U.S.C. 101(10A) as the debtor's average income for the 6 months prior to the petition date. This can lead to anomalous results, to say the least: a debtor anticipating a significant increase in future income is incentivised to file quickly (so that the income which must be committed to the plan is based on her prior rather than future earnings), while a debtor who experiences a substantial loss of income around the time of filing might be unable to confirm a plan because she cannot devote the amount of "projected disposable income" necessary based on her prepetition income level.

After taking a close look at the statute, Judge Nelms concluded that "projected disposable income" for purposes of 1325(b) is based on the debtor's post-petition income rather than the prior six months. First, the use of "projected" before "disposable income" suggests Congress intended something other than "disposable income," under the traditional presumption that Congress acts intentionally when it uses different language in different sections of a statute. Second, the statute refers to projected disposable income "to be received" in the applicable commitment period -- language which would be superfluous (perhaps nonsensical) if Congress was referring to the debtor's pre-petition income. Finally, 1325(b)(1) requires the court to determine whether the debtor is committing all of her projected disposable income "as of the effective date of the plan." Again, the language indicates that the court should consider current income, rather than historical income.

Having resolved that riddle, Judge Nelms turned to the issue of allowed expenses. To determine the expenses which may be deducted from gross income to get to "projected disposable income," 707(b)(2)(A)(ii) permits the debtor to deduct standard expense allowances developed by the IRS. (The IRS uses them to evaluate a taxpayer's ability to pay delinquent taxes). There are "National Standards" that the IRS has determined to be reasonable expenditures for food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous expenses. There are also "Local Standards" for transportation and housing costs. Transportation costs include both ownership costs (allowances for lease or purchase expenses for up to two cars) and operating costs (amounts deemed necessary to operate up to two cars). Then, just to make it a little more complicated, the debtor is also allowed under 707(b)(2)(A)(iii) a deduction for average monthly payments on secured debts.

The debtor in Hardacre contended that she was entitled (indeed, specifically directed by the statutory language) to deduct for the standard housing and auto ownership allowances under (ii), and deduct for her actual mortgage and auto loan payments under (iii), to determine her disposable income. The debtor pointed out that 707(b)(2)(A) says the debtor's current monthly income is to be reduced by the amounts determined "under clauses (ii), (iii), and (iv) [payments on priority claims]," and that the use of the conjunctive "and" clearly indicated that debtors should deduct expenses under each of the clauses, even if there was some overlap.

The Chapter 13 trustee, in response, contended that such "double-dipping" was not allowed. The trustee pointed to 707(b)(2)(A)(ii)(I), which says that "Notwithstanding any other provision of this clause, any monthly expenses of the debtor shall not include any payment for debts." Judge Nelms found the meaning of this statement "anything but plain," but set out to figure out what it meant in the context of the rest of the statute, noting that "Statutory construction is a holistic endeavor."

Judge Nelms starts with the premise that the plain meaning of statutory language will control unless it is demonstrably at odds with the drafters' intentions; if a statute is ambiguous, then, Judge Nelms infers that the court clearly may reject a construction that is inconsistent with the legislative intent. Accordingly, he found it appropriate to recognize that the Congressional intent in passing the means test was to ensure that debtors who can repay some portion of their unsecured debts be required to do so.

With this guidance, Judge Nelms noted that the phrase "shall not include" as used in the above provision was open to two readings: either it could mean that in calculating the monthly expense deductions under the Local Standards for housing and auto ownership, the court should disregard any payments for debts (the debtor's position); or it could mean that the expense allowances under the Local Standards should be reduced by payments for debts (the trustee's position).

The court found the debtor's interpretation untenable because it would render the sentence above completely superfluous. The Local Standards are not based on the actual debt payments made by the debtor but are based solely on the IRS standards. If the language were construed as the debtor hoped, it would merely be instructing the court to disregard actual expenses that are not included in the Local Standards in any event. Such an interpretation would violate the rule that every word in a statute is presumed to have meaning.

The Hardacre court then turned to the alternative interpretation: that the expense allowances under the Local Standards should be reduced by payments for debts. This opened up yet another question -- which debts? Judge Nelms determined that it could not possibly mean all debt payments, because the very purpose of the means test is to determine the amount of money available to pay unsecured creditors in a plan. Since the Local Standards were issued by the IRS, Judge Nelms looked to the types of "debt payments" that could reduce allowances under the IRS standards. The way the IRS applies its standards, the taxpayer is allowed to deduct either the amount in the Local Standards or "the amount actually spent." From this, Judge Nelms concluded that the "payments for debts" in the language at issue was intended to refer to secured debts related to mortgage or car ownership expenses (as provided in (iii)).

We're not done with the questions, though: if the Local Standards deductions must be reduced by payments on home or car secured debts, does the debtor get the greater or the lesser of these? If the Local Standards exceed the actual payments, is the debtor limited to the actual payments? And if the actual payments are over the Local Standards, do the Standards impose a cap? Judge Nelms concluded that the debtor had to be entitled to take the greater of the two. The only way to get to a contrary result, he found, was if the Local Standards allowance under (ii) could be reduced to a negative number by debt payments and then subtracted from the secured debt allowance under (iii) -- something which he did not believe was contemplated by the statute.

The Hardacre decision makes a valiant attempt to provide some much-needed clarity to the means-testing provisions as they relate to Chapter 13 plan confirmation.

Purchase Money Vehicle Creditors Get No Claim Upon Surrender

2006-04-04T08:16:00.000-05:00

In prior posts, we've discussed the new BAPCPA provisions that provide special treatment for secured loans made within 910 days of bankruptcy to acquire a vehicle for the debtor's personal use ("910-day claims"). See Strip Tease? No More Stripping Down Many Auto Loans; Another Take on Purchase Money Vehicle Loans. With one exception (In re Carver,2006 WL 563321), most courts have held that the amendment to 11 U.S.C. 1325(a) requires that such claims be treated as secured claims for the full amount of the claim. In re Johnson, 2006 WL 270231; In re Robinson, 2006 WL 349801; In re Wright, 2006 WL 547824.

None of those cases answer the question that is posed in In re Ezell, 338 B.R. 330 (Bankr. E.D. Tenn. 3/13/06): what is the effect of the new 1325(a)(*) provision when the debtor elects to surrender the vehicle instead of retain it? As discussed earlier, 1325(a)(*) states that 11 U.S.C. 506 (which provides, among other things, for the bifurcation of an undersecured claim into a secured portion for the value of the collateral and an unsecured portion for the deficiency) does not apply to 910-day claims. This is clearly an important question: the litigants in Ezell were joined by an amicus group of several lender intervenors, as well as the National Association of Consumer Bankruptcy Attorneys. The Ezell court held that if such a claim must be regarded as fully secured because 506 does not apply, then the claim has to be deemed fully satisfied when the collateral is surrendered.

Judge Stair in Ezell first discusses what happened to vehicle loans under pre-BAPCPA law. Generally, the debtor had three options: (1) the debtor and creditor could agree on terms; (2) the debtor could surrender the vehicle under 1325(a)(5)(C), in which case the creditor would sell the vehicle collateral, apply the sale proceeds to the debt, and have an unsecured claim for the deficiency; or (3) the debtor could retain the collateral under 1325(a)(5)(B)and "strip down" the lender's claim by providing in his Chapter 13 plan for a secured claim for the collateral value as of the petition date, and an unsecured claim for the deficiency. Thus, pre-BAPCPA, the 506(a) bifurcation provision "came into play" both when the debtor retained the vehicle and crammed down the plan, and when the debtor surrendered the vehicle. The Ezell court was unconvinced by the creditor's argument that 506(a) had no application when collateral was surrendered under pre-BAPCPA 1325(a)(5)(C).

Then, Judge Stair notes that the new BAPCPA provision (which we've referred to as 1325(a)(*), and he refers to as the "Anti-Cramdown Paragraph") precludes the use of 506 to reduce or bifurcate a 910-day claim into secured and unsecured components. As a result, unless the claim is subject to reduction for other reasons, the creditor's allowed secured claim must be fixed at the full amount of the debt. Thus if the debtor seeks to retain the vehicle, the plan must provide for the full amount of the claim to be paid as a secured claim over the life of the plan (as detailed in prior posts, this is consistent with the holding of several other cases addressing the amendment). For purposes of surrender as well, Judge Stair held that the claim must also be presumed to be fully secured, with the result being that there can be no deficiency claim:

It only stands to reason that the same analysis is true when applied to surrender under Revised s. 1325(a)95)(C) -- the creditor is fully secured, and surrender therefore satisfies the creditor's allowed claim in full.

Although Judge Stair did not find the language particularly ambiguous, he acknowledged that "because of its construction, Revised s. 1325(a) is, at best, confusing." He turned to the legislative history to evaluate his interpretation. Although it provided no "particular insight" helpful to the court, he also did not find any evidence that his interpretation was inconsistent with congressional intent. The legislative history only confirms that Congress intended to prevent bifurcation of 910-day claims, but provides no further clarification. Accordingly, "The court has no choice but to interpret the Anti-Cramdown Paragraph as written, i.e., that it applies to both Revised s. 1325(a)(5)(B) [retention of collateral] and (C) [surrender of collateral]." He noted:

To apply the Anti-Cramdown Paragraph only to Revised s. 1325(a)(5)(B), but not to Revised s. 1325(a)(5)(C), would allow a secured creditor, upon surrender of its collateral, to bifurcate its claim into different secured and unsecured components, contrary to its unambiguous mandate that Revised s. 506 "shall not apply to a claim described in [Revised s. 1325(a)(5)]."

Accordingly, a 910-day creditor whose collateral is surrendered cannot pursue a deficiency claim, regardless of the amount actually realized from the liquidation of the collateral: "Because application of s. 506(a) is entirely removed from the picture, there can be no deficiency balance, either secured or unsecured, and surrender satisfies an allowed claim in full."

It's hard to imagine that the credit lobby actually intended for the changes to1325(a) to preclude deficiency claims on surrendered vehicles, but it appears to be a logical -- even fair! -- reading of the statute. As Judge Stair notes, "A creditor whose allowed secured claim falls within the terms of the Anti-Cramdown Paragraph is no more or less disadvantaged by the debtor's surrender of its collateral ... than is the debtor who, if he or she chooses to retain the collateral, must ... pay the full amount of the debt in satisfaction of the creditor's allowed secured claim." Chalk this one up to the Law of Unintended Consequences?

Another Take on Purchase Money Vehicle Loans

2006-04-03T10:31:00.000-05:00

Earlier, we discussed here several recent decisions on BAPCPA amendments to 11 U.S.C. 1325(a) dealing with the treatment of purchase-money auto loans made within 910 days of bankruptcy. See Strip Tease? No More Stripping Down Many Auto Loans. In the Johnson case, 2006 WL 270231, a debtor had unsuccessfully argued that such loans must be treated under the new provision as special unsecured loans that must get paid the liquidation value of the vehicle collateral. That argument didn't fly in the Johnson case, but a variation on it has been adopted in In re Carver, __ B.R. __, 2006 WL 563321 (Bankr. S.D. Ga. 3/6/06).

As described in the prior post, the two earlier cases which have addressed the provision conclude that for loans made on vehicles acquired for personal use within 910 days of bankruptcy ("910-day claims"), such loans cannot be "stripped down" to the value of the collateral and treated as secured claims for the collateral value and unsecured loans for the balance. Rather, the debtor is required to pay the full value of the claim, with flexibility only to modify the term and interest rate under a Chapter 13 plan.

Carver, like the previous cases, notes many of the confusing and apparently sloppy drafting issues presented by 1325(a): it has no alphanumeric designation and "merely dangles at the end of s. 1325(a)," and it omits the word "period" when it refers to "the 910-day [period] preceding the date of the filing of the petition..." Unlike the other cases, though, Judge Walker in Carver finds that the provision of 1325(a)(*) (as I refer to the un-numbered addition) providing that "section 506 shall not apply" to 910-day claims means that they are not secured claims.

According to Carver, without application of s. 506(a), a claim "is merely an allowed claim; it cannot be a secured claim." As a result, 1325(a)(*) "must be read to provide that for purposes of 1325(a)(5), a 910 claim is not a secured claim and therefore not subject to the treatment provided in that paragraph." [1325(a)(5) specifies the treatment that must be afforded to secured claims under a Chapter 13 plan]. Judge Walker rejected the creditor's contention that a claim secured by collateral is "inherently a secured claim," finding such "conversational terminology" useless in the context of the Bankruptcy Code where the allocation of money depends on the classification of a claim according to "precise terminology." In reaching his conclusion, Judge Walker reviews several years' worth of the history of the amendment, including predecessor versions which would have given such claims fully secured status (by requiring that the collateral be valued as the balance due on the debt). Since such provisions ultimately were rejected, Judge Walker concludes that such treatment was not intended by the legislation as it was ultimately passed.

Of course, the question remains of how such claims are to be treated. Judge Walker notes that by creating a special provision solely for 910-day claims, "Congress has demonstrated an intent to treat them differently than other unsecured or secured claims, but it has not provided a basis for treating them preferentially." Since he finds no basis for treating such claims as secured claims, "The Court is left with a claim that is not to be treated as unsecured (pro rata distribution) and not to be treated as secured (paid in full with interest)." Carver attempts to resolve this conundrum by seeking "to craft a rule consistent with the Court's understanding of congressional intent on this issue."

Using Section 1111(b) as a guide, Judge Walker determines that the rule should be that in a Chapter 13 plan, "a 910 claim must receive the greater of (1) the full amount of the claim without interest; or (2) the amount the creditor would receive if the claim were bifurcated and crammed down (i.e., secured portion paid with interest and unsecured portion paid pro rata)." In the case before the court, the claim was for $15,000 and the collateral was valued by the debtor at $14,500, who proposed to pay the creditor its claim in full without interest (i.e., $15,000). Since the creditor would likely receive greater than $15,000 if its claim were bifurcated ($14,500 plus interest over the life of the plan would presumably exceed $15,000, without even considering any distribution on the $500 unsecured claim), the court denied confirmation of the debtor's plan.

The rule in Carver is an interesting one, but it's unclear where it comes from. It has no clear basis in any of the language of the Code, either that which existed prior to amendment or in the BAPCPA amendments itself. The confusion, it seems, is in presuming that 506(a) provides the sole source for defining what a secured claim is, rather than treating 506(a) as merely a means for bifurcating an under-secured claim into a secured and unsecured portion. This presumption seems inconsistent with the general principle, fairly consistently recognized and applied, that liens and other secured interests are determined according to non-bankruptcy law and generally pass through bankruptcy unaffected. See, e.g., Dewsnup v. Timm, 502 U.S. 410 (1992).

Meanwhile, a couple other principles identified in the last post have been re-confirmed by additional decisions which, unlike Carver, hold that a 910-day claim must be treated as a secured claim:

In In re Jackson, __ B.R. __, 2006 WL 563317 (Bankr. M.D. Ga. 3/6/06), the court, like in In re Horn, __ B.R. __, 2006 WL 416314 (Bankr. M.D. Ala. 2/23/06), confirmed that the 910-day provisions do not apply where the vehicle has not been purchased for the debtor's personal use. In Jackson, Judge Walker rejected the creditor's argument that a sales contract which stated that the vehicle was purchased for "personal, family or household use" precluded the debtor from contesting that the vehicle was "acquired for the personal use of the debtor" (the language used in 11 U.S.C. 1325(a)(*)). In fact, the debtor had acquired the vehicle at issue to replace his wife's previous car, the wife was always the primary driver, and the debtor had primary use of another vehicle.

The court noted that while Congress has used the phrase "personal, family or household purpose" in other sections of the Bankruptcy Code, it elected not to use that language in 1325(a)(*), instead choosing the more narrow "personal use of the debtor." Under traditional principles of statutory interpretation, "it is generally presumed that Congress acts intentionally and purposefully when it includes particular language in one section of a statute but omits it in another." Accordingly, the Jackson court concluded that 1325(a)(*) only applied to vehicles acquired for the use of the debtor and not to vehicles acquired for family or household use by someone other than the debtor. As a result, the lender did not have the protections of 1325(a)(*).

In In re Wright, __ B.R. __, 2006 WL 547824 (Bankr. M.D. Ala. 2/28/06), the court confirmed, like in In re Robinson, __ B.R. __, 2006 WL 349801, that the BAPCPA amendments do not abrogate Till v. SCS Credit Corp., and thus do not preclude a debtor from altering the interest rate to be applied to such a claim.

While some courts are ending up on the same page, the Carver decision demonstrates that the language of 1325(a)(*) will vex courts and litigants as they struggle to give effect to both the language Congress has chosen and the intent it has expressed. The confusion in applying 1325(a)(*) when the debtor elects to surrender the vehicle will be discussed in the next post.

BAPCPA Business Changes Not Easy to Decipher Either

2006-04-02T09:39:00.000-05:00

There's been much talk about the difficulties of interpreting some of the language used by Congress in amending many bankruptcy consumer provisions. The BAPCPA changes to business bankruptcies have not yet generated as much discussion. But as issues are coming up in the business cases filed after BAPCPA's effective date, courts and litigators are finding that - lo and behold! - some of the business provisions are equally abstruse (if not obtuse).

In In re TCR of Denver, LLC, 2006 WL 626156 (Bankr. D. Col. 2/17/06), Judge Brooks took a close look at the amendments to 11 U.S.C. 1112 dealing with conversion or dismissal. It wasn't pretty. (He was aided by amusing briefs written in verse by creditor's and debtor's counsel, which you can read here: Creditor's Brief; Debtor's Brief). In amending 1112(b), Congress intended to, and did, a couple things: (1) instead of providing that a court "may" dismiss or convert if cause is demonstrated, it provided that the court "shall" dismiss or convert "absent unusual circumstances"; and (2) it changed, and added to, the list of factors that are included in the definition of "cause" for conversion or dismissal in 1112(b)(4). Congress also did one more thing it perhaps didn't intend to do: where the predecessor version of the statute used the disjunctive "or" in the final item of the list of what is included as being "cause," the amended version uses the conjunctive "and". As a result, Judge Brooks was required to consider whether amended 1112(b) requires a movant seeking conversion or dismissal to demonstrate all of the elements listed in 1112(b)(4) to establish cause to convert or dismiss. He noted:

This is a case where the language of BAPCPA passed by Congress tends to defy logic and clash with common sense. This is an example of a specific revision to the Bankruptcy Code, if followed by the Court and applied as Congress seems to intend - i.e., by way of strict construction - would result in an absurd decision and totally unworkable precedent. These drafting problems have the potential of bringing the bankruptcy system to a halt while debtors, creditors, and the courts try to figure out just exactly what Congress intended. This Court would add that the largely overlooked changes to the bankruptcy provisions related to non-consumer cases, such as this case presently before the Court, may sometimes equal the poor crafting of the consumer provisions. Moreover, serious and consequential questions may be looming on the horizon because of inartful drafting.

Although the "common-sense" reading of amended 1112(b), and the reading dictated by traditional rules of construction, would result in an interpretation that required a "perfect storm" of all of the listed elements in order to establish cause, Judge Brooks concluded that such an interpretation could not be adopted. The "Plain Meaning Rule" did not apply here because it would lead to an absurd result: if all of the elements were required, virtually no case would ever qualify for conversion or dismissal. For instance, one of the listed elements is the failure to pay a domestic support obligation; since no corporate debtor would have such an obligation, no corporate debtor would satisfy all the elements.

Moreover, Judge Brooks noted that the terms "and" and "or" (or should I say "and" or "or"?) have a history of "lax" and "inappropriate" use in legislative drafting (citing Norman Singer, Statutes and Statutory Construction). As a result, where the word "and" is used inadvertently, and the intent or purpose appears to require the word "or," the statute may be regarded as a drafting error which may be rectified by a judicial construction. (I wonder whether such a rule typically holds equally true where Congress has specifically amended a statute to change an "or" to an "and").

Ultimately, Judge Brooks concludes that a disjunctive reading of 1112(b)(4) is supported by the statute's use of the word "includes" as the lead-in to the list. This interpretation was consistent with the "scant" legislative history indicating that Congress intended to make the provisions for conversion or dismissal "broader, more strict as to debtors, and more encompassing" -- an intent that would be directly contradicted by requiring all the listed elements to be demonstrated before a case could be converted or dismissed. Such an intent is evident in the change from "may" to "shall," which clearly tilts in favor of dimsissal or conversion and limits judicial discretion, and the addition of several more factors to the list of what may constitute "cause." Accordingly, Judge Brooks concludes that a movant need not demonstrate all the elements listed in 1112(b)(4) before seeking conversion or dismissal of a Chapter 11 case.

In fairness to Congress, the mysterious change from "or" to "and" may not really be so mysterious after all, as even under a plain reading it does not necessarily change the meaning of the statute. Since the lead-in to the list says that cause "includes" the following elements, the use of "and" doesn't (at least to me) suggest even under a "common-sense" reading that they all must be present. If someone were to say that the category of fruits includes apples, pears, grapes, and kiwis, not many people would think that something must simultaneously be an apple, pear, grape and kiwi in order to be a fruit.

Nonetheless, the 1112(b) changes are yet one more example of how the BAPCPA amendments have created more, rather than less, confusion in the practice of bankruptcy law. Judge Brooks cites to prescient commentary from Judge Keith Lundin, published shortly before BAPCPA went effective:

Whether by design or default, bankruptcy practitioners and judges will spend decades unraveling cross-references that lead nowhere and interpreting new terms of art that fail to communicate. If the drafters intended to make bankruptcy more complicated and expensive by making the bankruptcy law less coherent and more difficult of application, they succeeded.

Hon. Keith M. Lundin, Ten Principles of BAPCPA: Not What Was Advertised, 24 Am. Bankr. Inst. J. 1, 70 (Sept. 2005). Congress would have done well to follow the advice of the March Hare in Alice in Wonderland.*

*The Hatter opened his eyes very wide on hearing this; but all he SAID was, `Why is a raven like a writing-desk?'
`Come, we shall have some fun now!' thought Alice. `I'm glad they've begun asking riddles.--I believe I can guess that,' she added aloud.
`Do you mean that you think you can find out the answer to it?' said the March Hare.
`Exactly so,' said Alice.
`Then you should say what you mean,' the March Hare went on.
`I do,' Alice hastily replied; `at least--at least I mean what I say--that's the same thing, you know.'
`Not the same thing a bit!' said the Hatter. `You might just as well say that "I see what I eat" is the same thing as "I eat what I see"!'
`You might just as well say,' added the March Hare, `that "I like what I get" is the same thing as "I get what I like"!'
`You might just as well say,' added the Dormouse, who seemed to be talking in his sleep, `that "I breathe when I sleep" is the same thing as "I sleep when I breathe"!'
`It IS the same thing with you,' said the Hatter, and here the conversation dropped, and the party sat silent for a minute, while Alice thought over all she could remember about ravens and writing-desks, which wasn't much.

(Who can tell how a raven is like a writing desk?)

Homestead Cap Gets Another Adherent

2006-03-06T14:10:00.000-05:00

Another Florida bankruptcy judge, this time in Tampa, has given broad application to the new BAPCPA provision capping the exemption for homesteads acquired less than 1,215 days before bankruptcy. In In re Landahl, __ B.R. __, 2006 WL 506034 (Bankr. M.D. Fla. 3/2/06), Judge May joined several other judges who have held that the BAPCPA amendment limiting the homestead exemption to $125,000 applies in all states and not only those which give their residents a choice between the federal and state exemption schemes. A list of the prior posts on this subject appears at the bottom of this post.

As previously discussed here, two Florida judges have already reached the same conclusion, as have two judges in Nevada. In re Kaplan, 331 B.R. 483 (Bankr. S.D. Fla. 2005); In re Wayrynen, 332 B.R. 479 (Bankr. S.D. Fla. 2005); In re Virissimo, 332 B.R. 201 (Bankr. D. Nev. 2005); In re Kane, 336 B.R. 477 (Bankr. D. Nev. 2006). One Arizona bankruptcy judge has reached a contrary conclusion and found that the plain language of 11 U.S.C. 522(p), by which the cap is triggered "as a result of electing under subsection (b)(3)(A) to exempt property under State or local law," means that it does not apply in states where the state law does not permit such an election. In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005). The judges applying the cap broadly have gotten there by a variety of means: in Kaplan, by finding the statutory language ambiguous, in Virissimo, by finding it to refer to the election to claim exemptions (rather than the election of state vs. federal law), and in Kane by finding the election reference to be a scrivener's error which can be corrected to be consistent with the legislative intent. Judge Haines in McNabb, however, thought it unnecessary to consider the legislative intent and found the language clear and unambiguous.

Judge May in Landahl does not criticize Judge Haines' reasoning -- to the contrary, he describes McNabb as a "well-crafted opinion that points out a number of the drafting problems inherent to BAPCPA". Nonetheless, he sides with Kaplan, Virissimo and Kane. By way of further elaboration, Judge May explains that it would be "irresponsible" for the court to rule that an amendment added to existing law after considerable debate is inoperative in circumstances that are not clearly spelled out in either the statute itself or the legislative history. Rather, the link of the "electing" language in 522(p) to the state vs. federal election requires the court to "connect the dots" to get to the election described in 522(b)(1) (describing the option to choose between state and federal exemption laws). The language of new 522(p) doesn't refer to 522(b)(1), but rather refers to (b)(3)(A) (which is the provision under which state law exemptions may be used).

Accordingly, Judge May -- like Judge Riegle in Virissimo -- finds that the "electing" language can plausibly be read simply as referring to the act of claiming an exemption for homestead property under state law in any given case. He adopts this reading as being both consistent with the other provisions of the statute, and giving the statute a meaning consistent with the legislative history.

One interesting side-note on Landahl. The scenario the BAPCPA amendment was intended to protect against was the prodigal debtor who stiffed his creditors but acquired an expensive homestead in a state with an unlimited exemption, then later filed bankruptcy and sought to keep the expensive house. In Landahl, however, the debtor did not even buy the homestead, but rather had inherited his interest in the property less than 1,215 days before the petition was filed. The means of acquiring it made no difference to the result, though, and the cap was deemed to apply.

For more on the homestead cap, see:
Another Judge Applies Homestead Cap Broadly; What Would Scalia Do?
Homestead Havens Still Viable?
Florida Bankruptcy Judge Applies Homestead Cap
Another Court Applies Homestead Cap
Another Florida Judge Joins Homestead Debate
Also see the ABI Journal written with my colleague David Samole, "Homestead Exemption No Longer Debtor's Paradise".

Strip-Tease? No More Stripping Down Many Auto Loans

2006-03-01T17:33:00.000-05:00

Forgive the title, but purchase money security interests on vehicles generally do not make for gripping headlines. Congress, though, found them interesting enough that the treatment of such loans in bankruptcy has been modified under BAPCPA.

Prior to the new reform act, Chapter 13 debtors who owned cars that were "underwater" (the debt on the vehicle exceeded its value) and who wished to keep the car were able to "strip down" the lender's claim under 11 U.S.C. 506(a)(1) -- reduce the secured portion of the lender's claim to the value of the vehicle, and pay that amount with interest during the term of the Chapter 13 plan, while treating the balance of the claim as an unsecured claim (only a fraction of which typically gets paid in a Ch. 13 plan). BAPCPA made an amendment to Section 1325 of the Bankruptcy Code which provides that "section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day [sic] preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle ... acquired for the personal use of the debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding the filing." (It's unclear whether to refer to this provision as 1325(a)(9) -- although that's where the language was added, it has nothing at all to do with the pre-existing portion of 1325(a)(9). I'll refer to it as "1325(a)(*)").

In other words, if a car was bought for personal use within 910 days of the bankruptcy filing, 506 (which governs the determination of secured status) does not apply. This would appear to mean that debtors can no longer strip down auto loans using 506(a)(1) if the car was bought in the past 910 days.

In In re Johnson, __ B.R. __, 2006 WL 270231 (Bankr. M.D.N.C. 2/2/06), the debtor took the interesting tack of arguing that if 506 does not apply, then any claim arising from such a loan must be an unsecured claim - a special kind of unsecured claim that must be paid at least the liquidation value of the vehicle. The creditor, GMAC, argued to the contrary that the language was ambiguous, but that its only logical reading is to create special treatment for 910-day vehicle loans such that the bifurcation provision of 506(a) cannot be applied to them. In support, GMAC argued "that the purpose of enacting BAPCPA was to put more money in the hands of such creditors" (points for candor?) and that the debtors' reading would not fulfill this purpose.

The court was persuaded by GMAC's argument, and found that 1325(a)(*) precludes the strip-down of purchase money security loans on vehicles purchased within 910 days of the petition date. As a result, the debtor has to repay the full amount of the vehicle loan, with interest. The court did note, however, that under 11 U.S.C. 1322(b)(2), the debtor may still modify the term and interest rate of the loan.

This latter point was discussed in greater detail in In re Robinson, __ B.R. __, 2006 WL 349801 (Bankr. W.D. Mo. 2/10/06). Judge Federman, like Judge Waldrep in Johnson, concluded that the debtor could not strip down a vehicle loan on a car purchased for personal use within 910 days of the filing, and that the creditor was entitled to a secured claim for the total amount of its claim, regardless of the value of the vehicle. He rejected, however, the creditor's argument that 1325(a)(*) precluded the debtor from altering the term or interest rate of the loan.

In reaching this conclusion, Judge Federman noted that the Supreme Court recently confirmed in Till v. SCS Credit Corp., 541 U.S. 465 (2004) that debtors can modify the interest rates that secured creditors are to receive in a Chapter 13 case under 11 U.S.C. 1322(b)(2). While the creditor contended that Till was no longer good law in light of the amendment, Judge Federman disagreed. Rather, he found that if Congress had intended to modify Till's application to auto loans, it could have clearly done so by specifically modifying 1322(b)(2) or referring to "discount rate" or "interest." Indeed, Congress had previously done so with respect to home mortgages, and the Till decision had extended an express invitation to Congress to enact remedial legislation if the Supreme Court had gotten it wrong. As a result, while the BAPCPA amendments require the debtor to pay the full amount of the vehicle loan creditor's claim over the course of the Chapter 13 plan, they do not overrule Till or prevent the debtor from modifying the interest rate to be paid on the claim.

Not all loans secured by vehicles will fall within the ambit of 1325(a)(*), though, as was noted in In re Horn, __ B.R. __, 2006 WL 416314 (Bankr. M.D. Ala. 2/23/06). In Horn, the lender made a loan to the debtor which was used to purchase the car in 1997, and then between 2001 and 2003 refinanced the loan four more times, each time advancing additional funds to the debtor. Judge Williams found that under state law, the loan did not qualify as a "purchase-money obligation" because the debtor did not incur the entire debt as all or part of the purchase price of the vehicle. As a result of the multiple refinancings and additional advances, the security interest in the vehicle lost its purchase-money character. Thus, 506 still applied in determining the secured claim of the lender, which could be bifurcated and stripped down.

So there's still some stripping under BAPCPA after all.

Appellate Panel Upholds Credit Counseling Ruling

2006-02-22T12:27:00.000-05:00

In the first appellate decision addressing the issue, a Bankruptcy Appellate Panel of the Eighth Circuit has upheld a bankruptcy judge's dismissal of a case due to the debtor's failure to give an adequate excuse for noncompliance with the new BAPCPA pre-filing counseling requirements. In re Dixon, __ B.R. __, 2006 WL 355332 (8th Cir. B.A.P. 2/17/06).

In Dixon, the debtor filed a certification seeking a waiver of the prefiling counseling requirement which attested that his residence was scheduled for a foreclosure, that he did not contact an attorney until the day prior to the foreclosure, that he then contacted a credit counseling agency but was advised that it would be two weeks before they could provide counseling over the phone or 24 hours over the internet, that he did not have a computer to access the internet, and therefore it was impossible for him to obtain counseling before the foreclosure and he had to file a Chapter 13 without completing the counseling.

Bankruptcy Judge Schermer accepted the debtor's representation that he was unable to timely obtain counseling, but found that he had not described "exigent circumstances that merit a waiver" of the pre-filing counseling requirement. In particular, he noted that Missouri law required twenty days notice of a foreclosure, and with that much notice, the debtor's exigent circumstances did not merit a waiver. On appeal, the appellate panel upheld the ruling.

The panel noted that the waiver provision in 11 U.S.C. 109(h)(3) has three requirements: (i) that the debtor's certification describe "exigent circumstances that merit a waiver"; (ii) that the debtor certify that he sought but was unable to obtain counseling within 5 days; and (iii) that the certification is "satisfactory to the court." Taking these in reverse order, the court initially noted that it would be difficult to imagine a circumstance where the first two elements were satisfied but the certification was still not satisfactory to the court, but in order to give meaning to this third element, concluded that it was intended to permit the bankruptcy to exercise its discretion in making the determinations under (i) and (ii). As a result, it applied a generous standard of review, looking at findings of fact only for clear error and at the bankruptcy court's determination of exigent circumstances or satisfaction of the "unfulfilled request" requirement for an abuse of discretion.

Since the bankruptcy court's ruling was based on the failure to satisfy the exigent circumstances requirement, the appellate panel focused on this issue. In doing so, it held that it actually has two components: first, that there are exigent circumstances, and second, that those circumstances merit a waiver of the counseling requirements. Although the imminent foreclosure clearly demonstrated "exigent" circumstances, the bankruptcy court found that those circumstances did not "merit a waiver" -- apparently because the debtor had 20 days' notice of the foreclosure but waited until the last day to seek an attorney's advice. The panel, applying an abuse of discretion standard, declined to reverse the bankruptcy court's decision.

Implicitly, then, the panel found that the determination of whether there are exigent circumstances which merit a waiver may include an evaluation of the debtor's diligence or delay, and whether the debtor bears some responsibility for the exigency. As noted in a previous post, see Got Credit Counseling?, this is an issue on which courts have split, with some holding to the contrary that "exigent circumstances," unlike "excusable neglect," does not require any inquiry into the debtor's responsibility for the exigency. See In re Childs, 335 B.R. 623 (Bankr. D. Md. 12/19/05). A growing number of courts, though, are looking to the debtor's responsibility for the exigency in deciding whether circumstances "merit a waiver." Aside from Dixon, a similar approach was taken in In re Talib, 335 B.R. 424 (Bankr. W.D. Mo. 12/12/05) (where Judge Dow declined to vacate a prior order dismissing a case for failure to comply with the pre-filing counseling requirement), In re Rodriguez, __ B.R. __, 2005 WL 3676824 (Bankr. D. Idaho 12/9/05), and In re DiPinto, __ B.R. __, 2006 WL 213721 (Bankr. E.D. Pa. 1/30/06).

In Talib, the debtor first sought counseling the day before a foreclosure sale, and was told it would not be available for two days. As a result, it was impossible for her to make the necessary certification for a waiver that counseling could not be obtained within five days. Although it may be a "difficult and burdensome requirement" which in some circumstances "may produce harsh results," the court did not find that it was so absurd that it could disregard the plain language of the statute. Judge Dow noted that Congress clearly chose to link the availability of counseling not to the timing of the exigency but to the time of the request; although the requirement "may not be realistic or even fair in many circumstances," the court could not second-guess Congress' policy determination.

In Rodriguez the debtors contacted one agency by internet and were told to call to get a username and password, but couldn't get an answer; they contacted a second agency and were told that a counselor would call back at an unspecified time (and were apparently asked to pay the agency's fee before finding out when the counseling would be available). To prevent an impending wage garnishment, they filed before the second agency responded. The court found that these efforts were also inadequate, since there was nothing to indicate that the second agency could not provide counseling within 5 days. The court refused to find that exigencies could override the 5 day requirement, noting that waiting until the eve of creditor action before addressing the counseling requirement makes the exigency "rather self-inflicted" and that an overly liberal approach to exemptions would vitiate Congressional intent to require almost all debtors to undergo counseling before filing.

Similarly in DiPinto, the court found that the debtor's efforts to obtain counseling, by calling only one agency (which could not make an appointment for 22 days) less than 24 hours before a sheriff's sale of his property, were "deficient." Although the sale was to occur within a matter of hours, the court found that the debtor could have tried to contact other agencies (note that other courts, such as In re Hubbard, 333 B.R. 377 (Bankr. S.D. Tex. 11/16/05) have held that a prospective debtor is not required to "scour the field"). The court would not "reward token effort" with a waiver. In dicta, Judge Raslavich explored, but ultimately did not answer, the question of whether the 109(h) requirements effectively impose a five day "cooling off" period for prospective debtors or whether the five day period may straddle the petition date.

The statute as drafted does produce some incongruous results:
If one debtor contacts a counselor 4 days before a foreclosure and is told he can be counseled 5 days later, he would not be eligible to file before the foreclosure (he would not have completed the counseling, but also would not be able to make the certification required by 109(h)(3)(A)(ii).
If another debtor contacts a counselor 2 days before a foreclosure and is told he can be counseled 6 days later, he is eligible to file - he does qualify for the waiver certification under 109(h)(3)(A)(ii).
If yet another debtor contacts a counselor 1 day before a foreclosure and is told he can be counseled immediately, he also will be eligible to file, assuming he completes the counseling.

Of course, these results could mostly be avoided if the prospective debtor starts to seek counseling at least a week before the impending creditor action. But where that does not happen, the statute does not particularly reward diligence or punish dilatoriness, but depends mostly on the vagaries of what response the debtor gets from the particular counseling agency he or she has contacted.

Some Courts Read BAPCPA Stay Termination Provisions Narrowly (Oh, Won't You (362) Stay Just a Little Bit Longer? Part IV)

2006-02-21T14:47:00.000-05:00

In Part I, Part II and Part III of our discussion of the new provisions for termination and extension of the automatic stay under 11 U.S.C. 362(c)(3) and (4), we reviewed procedural issues as well as the courts' interpretations of the "good faith" standard contained (but not defined) in the new statutes. In this post, we see what happens when courts have taken a close look at the language used by Congress in these new provisions. Curiously, when read carefully and interpreted using traditional principles of statutory construction, their scope may be much narrower than is generally assumed (and, likely, than was intended by the legislature).

A prime example of this is found in In re Paschal, __ B.R. __, 2006 WL 258298 (Bankr. E.D.N.C. 1/6/06). In response to a debtor's motion to extend the stay under 362(c)(3)(B), Judge Small first looked to answer the question: "to what extent does Â§ 362(c)(3)(A) terminate the stay?" His answer was surprising, as he concluded that it only terminates as to formal proceedings commenced against the debtor prior to bankruptcy, and not generally as to all other matters covered by the automatic stay.

It was not so easy to get to that answer. Judge Small initially noted:

"In an Act in which head-scratching opportunities abound for both attorneys and judges alike, Â§ 362(c)(3)(A) stands out. It uses the amorphous phrase 'with respect to' a total of four times in short order and raises questions about the meaning of the words 'action taken,' and 'to the debtor.' The language of the statute is susceptible to conflicting interpretations, and if read literally, would apply to virtually no cases at all. In sum, it's a puzzler."

Before getting to the meat of Judge Small's holding, what is he talking about when he says that 362(c)(3)(A) if read literally would apply to virtually no cases at all? Well, read the language closely. 362(c)(3)(A) comes into play "if a single or joint case is filed by or against a debtor who is an individual in a case under chapter 7, 11, or 13...". Under a literal reading, this would only apply to a filing of a case by an individual debtor who is already the subject of a pending case. Thus the statute would cause the stay to be terminated in a new case filed by someone who is already a debtor in a pending case, and who had another case dismissed within the past year. Judge Small concedes, however, that such circumstances are not likely to present themselves, and that such a literal reading would render the statute effectively meaningless. Following U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989), the court determined that the plain meaning would not be conclusive where the literal application yields a result demonstrably at odds with the drafter's intentions. On this particular issue, then, it interpreted the statute as other courts have - that 362(c)(3)(A) is triggered if there is one previously dismissed filing in the past year (and not one previously dismissed plus one pending case in addition to the instant case).

The court did pay more attention, however, to the debtor's argument that the phrase "actions taken," as used in Â§ 362(c)(3)(A), should be narrowly construed. Although the legislative history indicates that Congress intended for 362(c)(3)(A) to terminate all protections of the automatic stay, the debtor argued that the language actually chosen was significantly narrower. Judge Small noted that legislative history may be considered where a statute is ambiguous, but that it is not controlling, especially where the language of the statute, although ambiguous, contradicts the intention expressed in the legislative history.

With this as a starting point, Judge Small looked to what "actions taken" meant in the context of 362(c)(3)(A). He noted that if Congress intended for it to terminate all provisions of the automatic stay, it could have clearly said so as it did in 362(c)(4)(A)(i) (which says that for multiple repeat filers, "the stay under subsection (a) shall not go into effect upon the filing of the later case."). Applying standard principles of statutory construction, he noted that the use of a particular phrase in one section but not another "merehighlightsgts the fact that Congress knew how to include such a limitation when it wanted to," and generally supports a presumption that Congress acted intentionally and purposely in using the different language. Therefore, Judge Small found that the effect of 362(c)(3)(A) must not be as broad as that of 362(c)(4)(A)(i).

He also noted that the phrase "action taken", as used in 362(c)(3)(A), is different from the term "act" which is used in 362(c)(1) and 362(c)(2) (pre-amendment provisions describing when the stay of an "act against property of the estate" or "any other act" terminate). Again, traditional principles of statutory interpretation would indicate that the use of different terms in related statutes implies that different meanings were intended. Therefore, Judge Small concluded that "act" must mean something different from "action taken."

Judge Small looked to instances where the Code uses "act," and saw that they apply very broadly (for instance, in describing the extent of the stay under various provisions of 362(a)). The term "action" had a much narrower usage (i.e., in 362(a)(1) where it is used to refer to the commencement or continuation of a "judicial, administrative, or other action or proceeding," and in the 362(b) exceptions to the stay where it is used to refer to specific types of proceedings excluded from the stay). From this, he concluded that the term "action" means a formal action, such as a judicial, administrative, governmental, quasi-judicial or other "essentially formal activity or proceeding." Furthermore, since 362(c)(3)(A) refers to an "action taken," he concluded that this refers to an action in the past -- that is, one which had already been commenced prior to the filing of the debtor's bankruptcy petition.

Although this narrow reading might surprise anyone familiar with the legislative history of BAPCPA, Judge Small concluded that it was supported by well-established principles of statutory construction. Moreover, he found there were policy justifications as well: it would make sense that Congress would want to protect creditors who had invested time and money in initiating such an action, and terminate the stay as to them, while creditors who had not initiated such an action would know that the stay still applied to them. (What this policy argument fails to take into account, though, is that the principle would be inconsistent with the traditional bankruptcy policy of discouraging the "race to the courthouse"; indeed, it would clearly incentivize creditors to file actions against a potential debtor so as to obtain the benefit of stay termination in the event of a filing).

Since there was no evidence of any "action taken" against the debtor prior to the filing, the court found that 362(c)(3)(A) did not have any effect. Nonetheless, conceding that 362(c)(3)(A) is "a puzzler" and that other courts might hold differently, the court alternatively found cause to grant an extension of the stay and entered an order accordingly.

In Paschal, Judge Small noted but did not decide the effect of another ambiguity in 362(c)(3)(A): what does it mean when it says that the stay is terminated "with respect to the debtor"? In In re Johnson, __ B.R. __, 2006 WL 51210 (Bankr. W.D. Tenn. 1/9/06), Judge Boswell concludes that it means exactly what it says - the stay terminates only as to actions against the debtor, but not as to property of the estate.

The specific language at issue is in 362(c)(3)(A), which says that "the stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case." Like Judge Small, Judge Boswell compared this to the language in 362(c)(1), which says that "the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate." Bankruptcy practitioners understand that the filing of a bankruptcy petition creates an estate, which is something different from the debtor. Thus, reading (c)(1) and (c)(3)(A) together, Judge Boswell concluded that (c)(3)(A) only terminates the stay as to property of the debtor, but not as to property of the estate.

He notes that under 11 U.S.C. 541, "property of the estate" includes all interests of the debtor in property as of the commencement of the case. In addition, under 11 U.S.C. 1306, in a Chapter 13 case it also includes all post-petition earnings and other property acquired post-petition. Under local procedures of the court, all "property of the estate" remains as such in a Chapter 13 case, and does not revest in the debtor, until the case is discharged or dismissed or the court orders otherwise. Since all such property is property of the estate, and since the stay as to such property is not terminated by virtue of 362(c)(3)(A), Judge Boswell concludes that any creditor seeking to foreclose or repossess property which is "property of the estate" must seek stay relief or risk violating the automatic stay.

Does this render 362(c)(3)(A) a nullity? Not necessarily. Even if limited to "property of the debtor," as distinguished from "property of the estate," it could still apply to property which is exempt but subject to a consensual lien. It could also apply upon confirmation of a Chapter 13. Although the Johnson court had local procedures which deferred revesting of property in the debtor, the general effect of confirmation under 11 U.S.C. 1327 is to revest property of the estate in the debtor upon confirmation. Arguably, applying the termination provisions to "property of the debtor" but not "property of the estate" could also be supported by policy considerations, in that its effect would be visited upon the repeat-filing debtor without necessarily prejudicing other creditors in their recovery from the bankruptcy estate.

Judge Morris of New York had a different spin on the same "with respect to the debtor" language in In re Parker, __ B.R. __, 2006 WL 65268 (Bankr. S.D.N.Y. 1/4/06). In Parker, the court was required to decide what happens to the stay in a joint case where one of the joint debtors has engaged in acts which would trigger 362(c)(3) or (4), but the other debtor has not. Mr. Parker had filed three prior bankruptcies, two of which had been pending in the past year (thereby triggering 362(c)(4)). His wife had been in two prior cases, however each was dismissed more than a year before the current filing, so neither 362(c)(3) nor (c)(4) were triggered as to her. Because Mr. Parker had been in two prior cases dismissed within the past year, a creditor moved for the entry of an order confirming that no stay was in effect pursuant to 362(c)(4).

362(c)(4) provides that if triggered, "the stay under [Section 362(a)] shall not go into effect upon the filing of the later case." Although the plain language would apply based on the conduct of one debtor, Judge Morris looked also to 362(c)(3), which says that for a single repeat filer the stay terminates only "with respect to the debtor." Although that language was not used in (c)(4), she still found that both sections "focus on, and apply to, the acts of a specific debtor rather than joint debtors in the aggregate." Accordingly, the court concluded that the application of both 362(c)(3) and (c)(4) must be analyzed separately as to each debtor in a joint case, and entered an order confirming that no stay was in effect as to Mr. Parker, but that the stay was in effect as to Mrs. Parker. The Parker decision does not specifically address whether termination of the stay "with respect to the debtor" covers property of the estate or not, as discussed in Johnson.

If Parker were a 362(c)(3) case, this result might be easier to reconcile with the other cases discussed above - similar to Johnson, it would be consistent with the conclusion that 362(c)(3) applies only "with respect to the debtor," and thus would not apply to property of the estate (or to separate property of the other spouse). The difficult part is the conclusion that 362(c)(4) has the same effect, even though it uses different language and clearly states that the stay "shall not go into effect" (without limitation as to a particular debtor). The opinion refers to no principle of statutory construction that would justify interpreting one section as having the same effect as another even though they use different language. Indeed, the use of different language is exactly what supports the conclusion in Johnson that terminating the stay "with respect to the debtor" means something different than saying that no stay comes into effect.

It may seem equitable not to "punish" one spouse in a joint case with termination of the stay based on the prior filings of the other spouse. But it's not clear that such a distinction is supported by the statute. It should be noted that 362(c)(4) specifically refers to either a "single or joint case" in describing both the prior filings and the current filing which trigger its applicability. It would hardly be surprising that Congress did not intend to permit a serial filer to avoid the impact of (c)(4) by filing multiple unsuccessful cases individually, and then once they are dismissed, file a joint case with his or her spouse and still have the benefit of the stay.

One final twist is presented in In re Toro-Arcila, 334 B.R. 224 (Bankr. S.D. Tex. 12/12/05). In this case, the debtor had been in a prior case dismissed within the past year, and filed a motion to impose or extend the stay on the 30th day after filing the new petition (oops!). Not surprisingly, the court was unable to ensure notice of the motion and conduct a hearing before the expiration of the 30 days as required by 362(c)(3)(B). As a result, the automatic stay terminated by operation of law and no relief was available under (c)(3)(B). Nonetheless, the court considered whether relief was still available under 362(c)(4). Unlike (c)(3)(B), (c)(4)(B) only requires that the motion is filed within the first 30 days, but does not require that it be heard within that time.

Thus the question for the court was whether a (c)(4)(B) motion to impose the stay was only available to multiple repeat filers (for whom no stay goes into effect by virtue of (c)(4)(A)), or whether it could be used by a single repeat filer for whom the stay terminates after 30 days under (c)(3)(A). Although a natural reading of (c)(4)(B) would seem to indicate that it applies only to a multiple-repeat filer subject to (c)(4)(A), the court found that it was also available to a single repeat filer faced with the peculiar situations of the debtor in this case.

The reason for this conclusion was that if the (c)(4)(B) motion to impose the stay was only available to multiple repeat filers, then most of (c)(4)(D)(i) (describing the circumstances when there will be a presumptive lack of good faith on a motion to impose the stay) would be completely superfluous. 362(c)(4)(D)(i) describes three disjunctive factors which will give rise to a presumptive lack of good faith. The first of these, though, is that the debtor must be a multiple repeat filer within the past year. In other words, every debtor who triggers the provisions of 362(c)(4)(A) that prevent the stay from going into effect would also trigger the presumptive lack of good faith under 362(c)(4)(D)(i)(I). If (c)(4)(D) only applied to multiple repeat filers, then, it would never be necessary to consider the two other factors.

Judge Isgur noted that this would render superfluous an entire section comprised of 278 words and multiple paragraphs -- coincidentally, he noted, the same exact length as Abraham Lincoln's Gettysburg Address: "Although the meaning of this subsection cannot be compared to the importance of the Gettysburg Address, the Court presumes that Congress did not codify words of comparable length with no meaning whatsoever."

Since the two other factors in (c)(4)(D) had to serve some purpose, Judge Isgur concluded that they could be relevant if a single repeat filer sought relief under that provision - such as the debtor currently before him, who regretfully waited until the 30th day to seek relief and as a result was disqualified from getting an extension of the stay under (c)(3)(B). To hold otherwise would lead to the incongruous result that a single-repeat filer who waited until the 30th day to seek an extension would be unable to seek imposition of the stay in his present case, but could simply dismiss that case and file a new one and then get a hearing in the new case.

If nothing else, these cases demonstrate that Congress' sloppy drafting may provide some opportunities for creative lawyering. If BAPCPA is to be taken at its word, there may well be instances where it accomplishes far less than what its supporters expected.

Oh, Won't You (362) Stay Just a Little Bit Longer? Part III

2006-02-20T16:33:00.000-05:00

In last week's posts on termination and extension of the automatic stay under 362(c)(3) and (4), Part I discussed notice and procedure issues, and Part II discussed how one court in In re Charles, 334 B.R. 207, approached the burdens of proof for invoking the presumptive lack of good faith for purposes of 362(c)(3)(B). We also described how the Charles II decision, to evaluate "good faith," borrowed from existing law regarding the "totality of circumstances" considered in determining good faith on a motion to convert or dismiss a Chapter 13 case. This post will further discuss how courts are applying the "totality of the circumstances" test for good faith to motions to extend the stay.

Judge Isgur had another opportunity to apply his test in In re Collins, 335 B.R. 646 (Bankr. S.D. Tex. 12/27/05). In Collins, the debtor had filed one prior case in 1998, two cases in 2000, and one case in 2005 which was voluntarily dismissed without prejudice in October 2005. He then filed a new case in November 2005. His schedules indicated a slight decrease in monthly income and a slight inrease in monthly expenses since his last filing, with his debts remaining largely the same. Two of his creditors opposed the motion to extend the stay. Although no presumption arose under 362(c)(3)(C)(i)(I) or (II) (there was only one case dismissed in the past year, and it was dismissed voluntarily rather than as a result of any failure to comply with the obligations set forth in (II)), the debtor failed to meet his burden under (III). The debtor's financial affairs since his last case were largely unchanged, there were some inconsistencies in his schedules, and it was unlikely the debtor could propose a feasible plan based on accurate numbers.

The court somewhat ruefully noted the debtor's predicament. He worked two jobs, taking on as many part-time hours as he could. He supported three children as a single parent, without child support. He didn't make luxury purchases or live an extravagant lifestyle. His only major assets were his house and a car that was more than six years old. "Like so many debtors who have come before this Court, Mr. Collins has been honest to the best of his ability. ... Unfortunately for this Debtor, good faith under the Code is not based on one's lifestyle or family affairs. Being a good faith and a hard worker is not enough under s. 362(c)(3)(C)."

The Collins case highlights the importance of identifying the reason for the prior dismissal - it may or may not be grounds for invoking the presumption. This is also shown by In re Warneck, __ B.R. __, 2006 WL 62667 (Bankr. S.D.N.Y. 1/4/06). In Warneck, the debtor had filed Case #1 in October 2003, which was dismissed prior to confirmation; then filed Case #2 in August 2004, which was dismissed prior to confirmation in January 2005. The debtor then filed Case #3 in November 2005. Although the prior cases were dismissed due to the failure to make plan payments, they were dismissed prior to confirmation, and thus did not fall within the scope of 362(c)(3)(C)(i)(II)(cc) as a failure to perform the terms of a "plan confirmed by the court." Because there was only one prior dismissal in the past year and the debtor had submitted an affidavit evidencing a change in financial and personal affairs, no presumption arose. In the absence of a presumption or any objection by another party, Judge Morris held that "a request to extend the automatic stay should be liberally granted."

Other courts have taken a similar approach to the good faith question by looking to existing case law. In In re Montoya, 333 B.R. 449 (Bankr. D. Utah 11/23/05), Judge Boulden also looked to the factors used by courts in evaluating a motion to dismiss or convert a Chapter 13 case under a "totality of the circumstances" approach, identifying as the relevant factors the nature of the debts; the timing of the filing; how the debts arose; the debtor's motivation; the effect on creditors; the debtor's treatment of creditors; and whether the debtor has been forthcoming. Judge Boulden indicates that 362(c)(3)(B) requires the court to view these issues from the creditors' perspective, since the statute dictates that the debtor must demonstrate good faith as to the creditors to be stayed. She finds this suggests that factors dealing with the effect on creditors may be more heavily weighed.

Looking at these considerations, Judge Boulden found in Montoya that subjective evidence of the debtor's honest intent was not enough to overcome the negative impact on creditors. The repeat filing only six days after dismissal of the prior case prevented creditors from taking any action to collect on their debts, and the debtor's repeat filings had allowed the debtor to continue to use depreciating collateral without any compensation to creditors (especially in light of the debtor's failure to make any payments under her prior plans). The stay extension was denied even though the debtor presented evidence of stable employment and a resolution of the medical problems that had prevented her from making payments under her earlier plan.

Curiously, while Judge Boulden found that the short period of time between the prior and current filing weighed against the debtor, another judge from the same district, applying pretty much the same factors, has found that a lengthy delay between filings might also weigh against the debtor. In In re Galanis, 334 B.R. 685 (Bankr. D. Utah 12/7/05), Judge Thurman adopted the same "good faith" test as was applied in Montoya. In Galanis, Judge Thurman held that the relevant factors for purposes of 362(c)(3)(B) are the timing of the filing, how the debts arose, the debtor's motive in filing, the effect on creditors, the reason for the prior dismissal, the likelihood of funding a Chapter 13 plan, and whether there are objections.

In applying these factors, the Galanis court noted that if a debtor delays a subsequent filing while having no intention to repay his debts, that would be evidence of bad faith (although a delay might have good explanations, such as medical issues). This creates an odd dichotomy with Montoya, which suggested that a filing shortly after a prior dismissal could also be evidence of bad faith. As to the other factors, though the Montoya analysis is comparable, looking to whether the debts were for necessities rather than luxury items, whether the debtor appears to be making a responsible effort to address his debts, whether the creditors' collateral is depreciating in value as a result of any delay, and whether the debtor has a significant likelihood of funding a plan.

Other courts following the same approach as Montoya and Galanis include In re Havner, __ B.R. __, 2006 WL 51214 (Bankr. M.D.N.C. 1/4/06); and In re Ball, __ B.R. __, 2006 WL 172273 (Bankr. M.D.N.C. 1/25/05). In re Mark, 2006 WL 164883 (Bankr. D. Md. 1/23/06) also borrows from existing case law evaluating good faith on a motion to dismiss a Chapter 11 case and for confirmation of a Chapter 13 plan.

Next, Part IV will discuss some of the complications created by the language used by Congress in 362(c)(3) and (c)(4), and how traditional principles of statutory construction suggest a much narrower reading of their scope than has been generally assumed.

Oh, Won't You (362) Stay Just a Little Bit Longer? Part II

2006-02-13T15:23:00.000-05:00

In Part I, we layed out the basic framework of new 362(c)(3) and (c)(4) which restrict the applicability of the automatic stay to repeat filers, and discussed a few of the cases dealing with basic procedural issues under these new BAPCPA provisions. In this posting, we'll discuss the allocation of the burden of proof on motions to extend or impose the stay, and the test for determining "good faith" as required for such relief.

Judge Isgur of Texas has provided a helpful roadmap for wading through the 362(c)(3)(C) elements, and in particular, for determining when the presumptive lack of good faith arises, in the case of In re Charles, 334 B.R. 207 (Bankr. S.D. Tex. 11/30/05) (Charles II). Judge Isgur notes that the statute itself does not address what standard of proof applies in determining whether the presumption factors exist, and which party has the burden. Absent a statute or rule to the contrary, the burden of proof is typically by a preponderance of the evidence, which is the standard he uses unless another standard is indicated. In reviewing the different elements, the guiding principle applied in Charles II is that if a factor requires an affirmative determination, the burden of proof rests on the party alleging such conduct. Applying this test, the Charles II case breaks down the components of 362(c)(3)(C).

Starting with the elements of whether the rebuttable presumption of no good faith arises, Charles II holds that the standard for each of these is a preponderance standard, which is allocated between the movant and any opponent as follows:
(I) as to whether there was more than one previous case pending - the opponent;
(II) as to whether a prior case was dismissed for one of the "bad" reasons (failure to (aa) file or amend required documents, (bb) provide adequate protection, or (cc) perform a confirmed plan) - the opponent (if such a dismissal is proven, the burden of showing substantial excuse under (aa) falls on the debtor);
(III) as to the presence or absence of a substantial change in financial or personal affairs - the debtor (since the debtor would have superior access to such information);
(IV) as to a stay relief motion having been granted or pending in a prior case - the opponent.

If the rebuttable presumption of no good faith arises, the debtor bears the burden of demonstrating that the current filing is in good faith as to creditors to be stayed by clear and convincing evidence. If no rebuttable presumption arises, the debtor bears the burden of demonstrating good faith by a preponderance of the evidence.

As to whether the court should exercise its discretion to extend the stay (which remains a discretionary rather than mandatory act even if good faith is demonstrated), Charles II holds that the debtor bears the burden by a preponderance of the evidence.

One curiosity of the Charles II case's allocation of the burdens of proof is that it seems to suggest that a debtor need not make any affirmative showing in its motion to extend the stay as to the non-applicability of many of the presumption factors. If it is a creditor's burden to come forward and demonstrate that either 362(c)(3)(C)(i)(I) (multiple prior filings) or 362(c)(3)(C)(i)(II) (a "bad" prior dismissal) give rise to a presumption, then a debtor's motion might only have to generally allege that the new filing is in good faith and describe sufficiently changed circumstances to avoid a presumption arising from 362(c)(3)(C)(i)(III). The placement of this burden on the creditor is further suggested by the court's caution in its earlier decision, In re Charles, 332 B.R. 538 (Bankr. S.D. Tex. 11/4/05) that extension motions might be decided without hearing if there is no timely filed objection.

It's worth noting that the elements for invoking the presumption are alternative and not cumulative - any one element will be enough to create the presumption. Thus, in In re Montoya, 333 B.R. 449 (Bankr. D. Utah 11/23/05), Judge Boulden found that evidence of a debtor's changed financial circumstances was irrelevant if the presumption was triggered through another subsection, such as multiple prior dismissed cases or a prior dismissal for non-compliance with a confirmed plan. (Judge Boulden also noted a curiosity in the multiple repeat filer provisions that under BAPCPA, a debtor who has already had one case previously dismissed and who faces dismissal of a second case would be treated better if she files a new third case before Case #2 is dismissed - she would get the benefit of the 30-day stay in Case #3, while if Case #3 were not filed until after Case #2 is dismissed, no stay would go into effect upon the filing of Case #3. Why should this be? I have no good answer.)

Having laid out the burdens of proof, the Charles II court went on to evaluate what "good faith" means for purposes of 362(c)(3). Although the term is undefined in BAPCPA or in the pre-existing Code, there has been long-standing use of the term in related contexts -- in particular, in evaluating whether a Chapter 13 plan is proposed in good faith under 11 U.S.C. 1325, and in determining whether a Chapter 13 case should be converted or dismissed for lack of good faith under 11 U.S.C. 1307. In applying the "totality of the circumstances" test used in these contexts, Charles II identifies both an objective and a subjective component. Objective good faith requires a debtor to have a meaningful chance of success in the newly filed case, a standard he found relevant to 362(c)(3)(C) because of the apparent Congressional intent to limit the stay to only those repeat cases which have a likelihood of success, versus those repeat filings which are solely to hinder and delay creditors. In adopting 362(c)(3), Judge Isgur concludes that Congress "intended the Court to conduct an early triage of a case to determine if the case has a reasonable likelihood of success."

If the case meets this objective test, then the court considers the totality of the circumstances including (i) the nature of the debts (i.e., if they are for reasonable and necessary living expenses or if they arise from questionable conduct of the debtor); (ii) the nature of any collateral (i.e., if a creditor is secured by the debtor's homestead, sole source of transportation or other necessities) ; (iii) any eve of bankruptcy purchases; (iv) the debtor's conduct in the present case (i.e. attendance at required meetings, filing of documents and performance of debtor's other duties); (v) the reasons why the debtor wishes to extend the stay (i.e., to prevent the loss of an essential asset, versus to delay or harass a creditor); and (vi) any other relevant circumstances.

From this analysis the Charles II case proposes the following decision tree:

(1) Does the creditor to be stayed agree?
Yes - stay extended (but mere lack of response will not be considered a stipulation to a stay)
No -->
(2) Is case likely to result in a discharge? (objective test)
No - stay extension denied absent exceptional circumstances.
Yes -->
(3) Do other factors show good faith? (subjective test)
Consider totality of circumstances.

Applying this test, Judge Isgur found that the debtor had demonstrated that the totality of factors weighed in favor of a stay. Although the debtor had presented an "unconvincing" reason to extend the stay to all creditors (the diversion of attention and resources) rather than just one particular mortgage-holder, all the other identified factors weighed in the debtor's favor, especially since it was likely that the case would pay creditors at least as much as they would get in a Chapter 7 liquidation.

Next, Part III will discuss in further detail how courts have approached the "good faith" determination.

Oh, Won't You (362) Stay Just a Little Bit Longer? Part I

2006-02-13T15:01:00.000-05:00

Now that much of the dust is starting to settle over the credit-counseling certification requirements debtors must satisfy to be eligible to file, it's time to turn our attention to one of the other major issues confronted by debtors filing under the BAPCPA regime: the provisions for termination and extension of the 11 U.S.C. 362 automatic stay for debtors who have been involved in previous cases.

BAPCPA added two new sections to 362 dealing with the applicability of the stay to repeat filers. Although some judges have highlighted inconsistencies or errors in the statutory language (surprise!!), most courts recognize the general effect of the amendments to be as follows: (1) under new 362(c)(3), if a debtor has been the subject of one prior case dismissed within the year before the current bankruptcy filing, the automatic stay terminates after 30 days unless a motion to extend the stay has been granted; and (2) under new 362(c)(4), if a debtor has been the subject of two or more prior cases dismissed within the prior year, no stay goes into effect upon the filing and the debtor must move to have the stay take effect. The stay will be extended (or put into effect, as the case may be) only if the new filing is in good faith as to the creditors to be stayed, and the law creates specific presumptions as to when a filing is not in good faith which may only be overcome by clear and convincing evidence to the contrary.

The presumptive lack of good faith will exist if (1) more than one previous case was pending within the preceding one year; (2) a previous case was dismissed after the debtor's failure to (a) file or amend the petition or other documents required by the Code or the court without substantial excuse; (b) provide court-ordered adequate protection; or (c) perform the terms of a confirmed plan; or (3) there has been no substantial change in the debtor's financial or personal affairs since the last dismissal or any other reason to conclude that the current case will result in a chapter 7 discharge or a confirmed and fully performed chapter 11 or 13 plan. In addition, there is a presumptive lack of good faith as to a particular creditor who had obtained stay relief or had a stay relief motion pending as of the dismissal of a prior case.

Because there are several decisions that have already issued, I will be dividing this discussion up into several posts. This first post will deal with basic notice and procedure issues -- a bit dry, I know, but some courts have denied relief because the debtors failed to give adequate notice or to provide an adequate basis for relief in their requests. Part II will discuss the burdens of proof on the debtor and parties opposing the stay. Part III will further discuss courts' takes on the "good faith" standard, which is undefined in the amendments or elsewhere in the Bankruptcy Code. Part IV will look at some of the more difficult issues courts have already confronted in interpreting the provisions, and how some courts have followed principles of statutory construction to narrow their applicable scope.

The first reported decision confronting a motion to extend stay under 362(c)(3)(B) was issued by Judge Isgur of Texas (who is becoming quite a prolific author on BAPCPA issues, having already penned six published opinions). In In re Charles, 332 B.R. 538 (Bankr. S.D. Tex. 11/4/05), the debtor, who had been involved in a previously dismissed case, filed a motion for extension simultaneously with the petition, together with a motion to expedite hearing. Absent specific local rules providing for expedited hearing, such a motion may well be necessary, because 362(c)(3)(B) specifies that the motion must be filed, and "notice and a hearing" on the motion must be completed within the 30-day period before the stay expires.

Although the debtor had timely requested a hearing, Judge Isgur was still concerned with the adequacy of notice in apprising affecting parties of the nature of the relief sought. In particular, Judge Isgur was concerned that the motion failed to set out a basis for extending the stay as to any creditor other than one mortgage holder. While 362(c)(3)(B) permits the stay to be extended "as to any or all creditors," the court held that a motion seeking relief as to all creditors must set forth sufficient allegations to state a basis for such relief, and to give all creditors notice of the issues to be addressed at the hearing.

In addition, Judge Isgur noted that this was the first motion of its kind filed in his court under the new Act. Particular because the relevant provisions are "at best, particularly difficult to parse and, at worst, virtually incoherent," he was concerned that creditors might be unfamiliar with them and must be given "abundantly fair warning" that their rights might be affected.

Finally, noting that the burden of proof for obtaining an extension is on the debtor, the court found that the statute's "only articulated requirement" is that the debtor prove that the filing of the later case is in good faith as to the creditors to be stayed. The structure of the statute provides a series of steps for applying certain presumptions in making this determination, though, which are explained in greater detail in a subsequent opinion (to be discussed in a later post). For purposes of the matter before him, Judge Isgur set the motion for hearing with respect to extending the stay against the mortgage-holder, and gave the debtor leave to amend to assert a basis as to other creditors. The Charles I decision also noted that absent a timely objection, the court might grant the motion without a hearing (as permitted for matters which require "notice and a hearing," in light of the definition for that phrase in 11 U.S.C. 102(1) which effectively interprets it as meaning notice and an opportunity for a hearing if requested by a party in interest).

Notice and procedure issues were also addressed in In re Wilson, __ B.R. __, 2005 WL 3693206 (Bankr. E.D. Tenn. 12/5/05). The decision in Wilson deals with motions filed in three separate cases to extend the stay under 362(c)(3), as well as a motion to impose the stay in another case under 362(c)(4)(B). Although only one of the motions was opposed, the court discussed certain issues sua sponte to inform parties of the court's expectations for future motions.

Although the debtors served notice of the extension motions on all creditors, in certain cases they did not provide at least 20 days notice of the hearing, as required by the court's local rules. For these, the court rejected the motions to extend the stay on the basis that the notice was inadequate (leading me to wonder, why didn't the court simply reschedule the hearing to afford at least 20 days' notice?). Aside from the notice question, the court found the motions inadequate on their substance as well. Since a presumption of no good faith arose from the prior dismissed case, the court held that mere statements in a motion or brief carried no evidentiary weight, and that a motion for extension must be accompanied by an affidavit setting forth the facts relied on to rebut the presumption.

The court directed that the affidavit should set forth: (1) whether the extension is sought as to all creditor or a single creditor; (2) the case number, commencement and dismissal dates of prior cases; (3) the reasons under 362(c)(3)(C) that there would be a presumption of no good faith; (4) any change in the debtor's financial or personal affairs to support the contention that the case will successfully conclude with a discharge; and (5) any additional information the movant believes is significant. If the motion is opposed, the debtor may then choose to rest on the affidavit or offer testimony in support of the requested relief.

The motions before the court were deemed insufficient because they did not set forth the prior case numbers nor explanations of the prior dismissals. In rather draconian fashion, the court apparently refused to hear testimony offered by the debtors at hearing because of the inadequate notice to parties in interest and because the motions were "fatally defective" due to their insufficient allegations.

The Wilson court was similarly dismissive of the motion to impose the stay under 362(c)(4)(B). Under the court's local rules, hearings on such motions must be on at least 5 days' notice unless permission for a shorter time is given by the clerk, and notice must be by a method effecting immediate receipt (i.e., e-mail or facsimile). Although the debtor had given 6 days notice, he was held not to have complied with the rules because the notice's certificate of service did not evidence expedited service as required by the local rule. Moreover, the motion was also denied on its substance since it did not state with particularity the grounds relied upon nor provide any evidentiary proof.

Timing of notice was also the factor in In re Taylor, 334 B.R. 660 (Bankr. D. Minn. 12/9/05). There, motions for extensions of the stay were denied due to insufficiency of notice. The court held that mailing the motion to creditors 5-8 days in advance of the hearing is not "reasonably calculated to apprise interested parties of the pendency of the motion and to afford them an opportunity to present their objections." Given the out-of-state location of most creditors, and the presumption that mail delivery would take 3-4 days, the court found the short notice was not reasonably likely to give sufficient opportunity for creditors to review the motion, evaluate the newly-effective statutory text, investigate the circumstances of the earlier filing, and prepare and file a formal response. The court held that mailing of notice at least 14 days, or actual delivery at least 10 days, in advance of the hearing (consistent with its local rules' general requirement) would be adequate notice.

Guidance is also provided by the decision in In re Phillips, __ B.R. __, 2006 WL 91311 (Bankr. E.D. Okla. 1/6/06). Like the Charles court, Judge Cornish of Oklahoma advises attorneys that if a motion to extend the stay is unopposed, the motion may be granted in certain circumstances without the necessity of a hearing. Those circumstances require proper notice and an opportunity to object provided to all affected creditors, and a motion which properly pleads all the elements under 362(c)(3) including rebutting a presumption of no good faith (if applicable) by clear and convincing evidence. Unlike Judge Stair in the Wilson case, though, the Phillips decision does not appear to require an affidavit to accompany the motion.

The lessons to be learned? Debtors better make sure that notice of a motion to extend, or impose, the stay, complies with applicable local rules or procedures as to timing of notice. Also, make sure that the motion addresses the relevant factors for whether the presumption applies, and if so the grounds for rebutting it (and in Judge Stair's court in Tennessee, at least, make sure it is accompanied by an affidavit). From the creditors' perspective, they should be aware that some courts may be prepared to grant extensions even without a hearing if no party has made a timely objection.

Next, Part II will discuss in more detail how the burdens of proof are being allocated on applicability of the early stay termination provisions, the presumption of no good faith, and overcoming that presumption.

Another Judge Applies Homestead Cap Broadly; What Would Scalia Do?

2006-02-06T17:03:00.000-05:00

We've previously noted several decisions that wrestle with the new BAPCPA provision imposing a dollar cap on the homestead exemption which can be claimed by debtors who acquired their homes less than 1,215 days before filing -- see Homestead Havens Still Viable?; Florida Bankruptcy Judge Applies Homestead Cap; Another Court Applies Homestead Cap; Another Florida Judge Joins Homestead Debate; also see the ABI Journal written with my colleague David Samole, "Homestead Exemption No Longer Debtor's Paradise". We can now add Judge Markell of Nevada to the list of judges who interpret the cap broadly as applying in all states, and not merely those that permit an election between federal and state exemptions. In re Kane, __ B.R. __, 2006 WL 181369 (Bankr. D. Nev. 1/12/06). Judge Markell joins fellow Nevada Judge Riegle and Judges Mark and Friedman of Florida in the broad approach, leaving Judge Haines of Arizona as the only judge who has found that the language used by Congress invoking the cap "as a result of electing" state law exemptions limits the cap to only the "non-opt-out" states. See 11 U.S.C. 522(p).

Judge Markell's route for getting to that result diverges somewhat from those taken by the other judges, though. Judge Mark found 522(p) to be ambiguous, and accordingly referred to legislative history which overwhelmingly reflected congressional intent to limit the homestead exemption available in all states, including notorious debtor havens like Florida (an "opt-out" state). Judge Riegle on the other hand found that the "electing" language referred to the decision to claim a homestead exemption (although she alternatively held that the statute was ambiguous and relied on the legislative history to reach the same conclusion as Judge Mark). Judge Markell, meanwhile, takes what might be called the "What Would Scalia Do?" approach.

First, Judge Markell notes that under the wording of 522(p), the homestead cap only comes into effect "as a result of electing" to exempt property under state law; but in "opt-out" states, debtors cannot and do not "elect" anything, thus "nothing happens as the 'result of electing'" in such states. After summarizing the five decisions construing 522(p) discussed previously here, he then goes on to review the legislative history of the amendment, including House and Senate debates and the House Report on the bill, demonstrating the congressional intent to close the "mansion loophole." Although recognizing that "as Section 522(p) is written and as it was enacted," the language only applies to opt-out states (which means only five jurisdictions where homestead exemptions exceed the $125,000 cap), he finds that limited result "inconceivable" in light of the legislative history and "demonstrably not what members of Congress thought they were implementing" when they voted in favor of the bill.

As a result, Judge Markell concludes that the "result of electing" language is "a mistake in drafting the text of the statute" and that the drafters "no doubt used the word 'electing' without realizing that it made any difference." (Like many of us who puzzle over the ambiguities or outright drafting errors of BAPCPA, Judge Markell is less than convinced by the commentary of Professor Todd Zywicki, who testified to the Senate Judiciary Committee that the act was "fine as it is" and that "There is no word that I would change in this particular piece of legislation.") The question asked in Kane, then, is under what circumstances may a court correct a "scrivener's error" in legislation?

To answer this question, Judge Markell effectively poses another: What Would Scalia Do? His reasoning: since Justice Scalia is among the strictest of textualists, if the methods used by Scalia would permit reformation of the statute, then it must be OK. In applying the "WWSD?" test, Judge Markell reviews several Scalia dissents and concurrences in cases involving legislative snafus, and finds that Scalia acknowledges the appropriateness of correcting a scrivener's error "where on the very face of the statute it is clear to the reader that a mistake of expression (rather than of legislative wisdom) has been made." The Kane decision identifies two requirements under the "WWSD?" test: first, the plain meaning of the statute must lack any rational purpose -- not just the probable intent, but any plausible purpose whatsoever; and second, the intended meaning must be obvious -- in other words, inadequately expressed but absolutely clear.

Applying this test, Judge Markell concludes that the text of 522(p) meets both of Justice Scalia's requirements. He finds that there could be no plausible purpose in linking the 1,215-day ownership requirement to the debtor's ability to choose between federal and state exemptions, and not a shred of evidence in the legislative history demonstrating such an intent. He further finds that extensive record makes the intent of Congress "crystal clear," and that there is "no feasible rationale or policy for enacting what the text of the statute says." As a result, the Kane decision concludes that it is proper to give 522(p) the meaning that Congress intended, and accordingly holds that the cap applies in all states notwithstanding the "electing" language it "inartfully, unthinkingly, and, as it turned out, incorrectly" used.

Court Refuses Advisory Opinion on Lawyers as "Debt Relief Agencies"

2006-02-06T12:05:00.000-05:00

Unlike its sister court in the Southern District of Georgia (see "Georgia Judge Says Attorneys Not Debt Relief Agencies"), a Middle District of Georgia bankruptcy judge has refused to give an advisory opinion on whether attorneys fall within the definition of a "debt relief agency" as defined in new 11 U.S.C. 101(12A). Matter of McCartney, __ B.R. __, 2006 WL 75306 (Bankr. M.D. Ga. 1/12/06). As discussed in the prior post, BAPCPA added provisions to the Bankruptcy Code defining a "debt relief agency" and, in 11 U.S.C. 526, imposed several requirements on such agencies as to the disclosures they must make to assisted persons, and the advice they may and may not give to such persons.

In McCartney, the debtors filed their petition pro se and subsequently hired an attorney, then filed a motion seeking a determination that attorneys who practice before the court are not "debt relief agencies." Judge Hershner refused to consider the motion on standing grounds, finding that no party had threatened to enforce any of the debt relief agency provisions of BAPCPA against the debtor. As a result the debtor had not sustained and was not under an immediate threat of any real, actual or direct harm or injury. The motion was dismissed for failing to present a case or controversy.

Although not discussed in any detail in the opinion, it should be noted that the United States Trustee filed a response in opposition to the motion, and argued that the plain language of BAPCPA, the legislative history (including a failed amendment seeking to expressly exclude attorneys), and a history of other legislation subjecting attorneys to federal regulation (such as the Fair Debt Collection Practices Act and the Sarbanes-Oxley Act) all demonstrated that Congress did in fact intend for attorneys to be subject to the "debt relief agency" provisions. Anyone assuming from Judge Davis' earlier opinion that the "debt relief agency" provisions did not apply to attorneys should proceed with caution.

Refco Court Clarifies Committee Duty to Provide Information Access

2006-01-25T16:50:00.000-05:00

One of the notable changes to business bankruptcy practice made by the recent BAPCPA amendments is the new statutory requirement that Creditors' Committees "provide access to information" for creditors. 11 U.S.C. 1102(b)(3) requires official committees to: (1) "provide access to information" for creditors holding claims of the type represented by the committee; (2) "solicit and receive comments" from the creditors; and (3) be subject to a court order that compels "any additional report or disclosure to be made" to the creditors. Many practitioners have puzzled over the implementation of these new requirements, since the statute leaves undefined the "information" which committees are required to provide, and fails to explain the implications of these requirements as to confidential or privileged information.

At the request of the Creditors' Committee in the Refco bankruptcy, Bankruptcy Judge Drain has provided some thoughtful and helpful clarification. In re Refco, Inc., __ B.R. __, 336 B.R. 187 (Bankr. S.D.N.Y. 1/20/06). The highly publicized bankruptcy of Refco, the largest independent U.S. futures brokerage, was precipitated by the disclosure that the company's CEO had secretly incurred $430 million in debt to the company. After the filing, the Debtors quickly moved to sell their futures business. A Creditors' Committee was appointed which worked with the Debtors on the proposed sale, analyzed potential claims, and began to investigate the events precipitating the filing. Shortly after its appointment, the Committee moved for clarification of its obligations based on the concern that 1102(b)(3)(A) might be interpreted as imposing duties contrary to other applicable laws and the Committee's fiduciary duties.

After noting that the new provisions of 1102(b)(3) fail to define the "information" which committees must make available or describe how it should be delivered, and that the legislative history provides no meaningful guidance as to the purpose or intent of the provision, Judge Drain turned to analogous provisions of the existing Bankruptcy Code for help. In particular, the court noted that the Code has long had a similar requirement for trustees that they "furnish such information concerning the estate and the estate's administration as is requested by a party in interest" unless the court orders otherwise. 11 U.S.C. 704(7).

Judge Drain identified identified three relevant propositions that have been applied in interpreting a trustee's duties under 704(7): (1) the duty to furnish information is "fairly extensive" in light of the overriding duty to keep parties informed, with the burden generally being on the trustee to demonstrate why information should not be disclosed; (2) the duty to provide information is not unlimited, though, and a trustee can obtain a protective order if disclosure would result in waiver of attorney-client privilege or require disclosure of proprietary or confidential information; and (3) the trustee's right to a protective order is informed by the trustee's fiduciary duties, and whether the purpose of the requesting party is inconsistent with those duties (for instance, if the requesting party is seeking information in order to obtain an undue advantage over another party). Judge Drain found each of those considerations to be applicable to construing a committee's obligation to provide access to information under 1102(b)(3)(A).

The Refco court also looked to similar provisions in the Bankruptcy Act of 1898 which required a committee to "report to the creditors" periodically "concerning the progress of the proceeding." Courts construing this obligation found it to not require the committee to forward to each creditor "all of the raw data it receives and considers," but only to provide a fair presentation of the status of the debtor, so long as there were no material omissions. Judge Drain found this principle to also apply with equal logic to the "access to information" obligation under 1102(b)(3)(A).

Finally, the court looked to the duties and functions of the Creditors' Committee to evaluate the propriety of possible confidentiality restrictions. Judge Drain noted that the diverse functions of official committees -- serving as negotiating bodies for a plan, providing supervision and oversight over debtors, investigating the debtors' assets and affairs -- make the committees more than mere conduits for the exchange of information between debtors and creditors, but active participants in the process. In this capacity, committee members often receive confidential or proprietary information from the debtor and others which their fiduciary duties of loyalty to the unsecured creditor body require them to hold in confidence. Disclosure of such information to others can present additional complications when the debtor has public stock or debt, since securities laws may prohibit selective disclosure (and even the selective disclosure of information generated independently by the committee might also implicate such concerns). In addition, committees have an interest in maintaining confidentiality in order to preserve the committee's own attorney-client or other privileges, particularly where the committee is authorized to pursue litigation on behalf of the estate generally.

In order to reconcile and balance these concerns, the Refco court entered an order that directs the Committee to provide general information to its constituency, but protected the Committee from disclosing (1) confidential and non-public or proprietary information; (2) information which if disclosed could result in waiver of attorney-client or other applicable privilege; and (3) information which if disclosed could violate an agreement, order or law, including applicable securities laws. It further directs the Committee to consider the requesting party's willingness to enter into a confidentiality order and/or trading constraints in determining whether otherwise protected information can be disclosed. Finally, it commits to the court's prompt determination of any disputes over the provision of information, in light of the legitimate concern that such information may be stale and without value if not provided promptly.

Helpfully, the court's published opinion includes a copy of the order setting forth the "Creditor Information Protocol." The order contemplates that the Committee will proactively, through a website, provide: (1) general information concerning the cases, including case dockets, access to docket filings, and identification of significant parties; (2) monthly Committee reports summarizing recent proceedings, events and public financial information; (3) highlights of significant events; (4) a calendar of upcoming significant events; (5) access to the claims docket; (6) a general overview of the chapter 11 process; (7) copies of any press releases issued by the Committee and the Debtors; (8) a registration form to request "real-time" case updates by email; (9) a form for submitting creditor questions, comments, and requests for specific information; (10) responses to such requests (with provision for providing such responses privately in the Committee's discretion); (11) answers to frequently asked questions; and (12) links to other relevant websites.

The Committee is excused from providing "confidential, proprietary or other non-public information" whether provided by the Debtors, a third party, or prepared by or for the Committee itself. It is also excused from providing information if the disclosure would constitute a general waiver of attorney-client, work-product or other applicable privilege of the Committee. The Debtors are obligated to assist the Committee in identifying confidential information. To the extent information is obtained by the Committee through formal or informal discovery, disclosure is governed not by the Protocol but inestead by any order governing the discovery.

Provisions are made for creditors to request additional information from the Committee, to which the Committee must respond within twenty days (shortened to ten days after January 31, 2006) by either providing the information or giving the reasons why it cannot be provided, including any grounds for confidentiality. If the matter cannot be resolved by the parties, the requesting party can move to compel. The Committee must consider, in deciding whether to release information, the requesting creditor's willingness to enter into reasonable confidentiality and/or trading restrictions. If the Committee believes information which was originally provided by the Debtors (or another entity) on a confidential basis should be provided to creditors, it can give notice to the Debtor (or other entity) which has 15 days to object to its disclosure.

While committees in other cases will likely seek similar clarification orders, Judge Drain cautioned that as the law develops, "the need for such comfort orders should end." For now, the Refco decision serves as a model for providing some much-needed clarity to the obligations of committees under 1102(b)(3)(A).

Court Encourages Use of Cross-Border Insolvency Provisions

2006-01-23T19:00:00.000-05:00

Aside from the provisions affecting consumers, BAPCPA made several other notable changes to bankruptcy practice. One of these was the passage of Chapter 15, intended to provide more effective mechanisms for dealing with cross-border insolvencies (previously addressed only by the bare-bones provision for ancillary proceedings under 11 U.S.C. 304). The new provisions in Chapter 15 provide for the commencement of an ancillary case by an authorized foreign representative, and for a wide range of bankruptcy relief to be available upon recognition of the foreign proceeding.

A New York District Court has provided the first published commentary on the new Chapter 15 provisions of BAPCPA. In United States v. J.A. Jones Const. Group, LLC,333 B.R. 637 (E.D.N.Y. Nov. 29, 2005), the court suggests that a Chapter 15 ancillary case is now the exclusive means of obtaining a stay of pending litigation which involves an entity that is the subject of a foreign insolvency proceeding.

The J.A. Jones opinion was issued in response to a letter received by the court from an individual who represented that he was the interim receiver to the property of one of the defendants in the litigation pending in New York pursuant to an order entered in a Canadian insolvency proceeding. The Canadian bankruptcy proceeding involved the parent corporation of the entity which was a defendant in the New York case.

The District Court effectively held that Chapter 15 is now the exclusive means for obtaining such relief, stating that "In the absence of recognition under Chapter 15, this Court has no authority to consider [the receiver's] request for a stay." Out of concern for comity, the judge did stay the litigation for 60 days to give an appropriate representative an opportunity to commence a Chapter 15 case. As of this posting, there was no indication that a Chapter 15 petition has been filed.

Got Credit Counseling?

2006-01-16T15:42:00.000-05:00

While the interpretation of some new BAPCPA provisions (like the homestead caps) have engendered debate, others -- for better or worse -- are abundantly clear. One thing that appears to be beyond dispute is that there will be no evading the pre-petition credit counseling requirements of 11 U.S.C. 109(h), or at least the requirement that debtors certify they have sought and were unable to obtain such counseling prior to filing.

Several recent cases have provided some additional clarity on the application of this new requirement, and the very limited circumstances in which it can be waived or extended. In a case that was previously discussed here, a Texas court has issued another published opinion, In re Hubbard, 333 B.R. 377 (Bankr. S.D. Tex. 11/16/05). This opinion clarifies that: (1) a "certification" as required by the statute must contain a declaration under penalty of perjury, as indicated in 28 USC 1746, or be deemed insufficient; (2) completion of credit counseling post-petition is insufficient; and (3) the effect of non-compliance with the counseling requirement is that a petition will be "stricken" rather than "dismissed," on the theory that if the debtor is ineligible there is no valid case to be dismissed.

Several other cases have similarly confirmed that completion of credit counseling post-filing will not remedy the failure to obtain it pre-filing. In re Fuller, __ B.R.__, 2005 WL 3454699 (Bankr. W.D. Pa. 12/16/05); In re Rodgers, __ B.R. __, 2005 WL 3454702 (Bankr. W.D. Pa. 12/16/05); In re Stidham, __ B.R. __, 2005 WL 3454709 (Bankr. W.D. Pa. 12/16/05); In re Childs, __ B.R. __, 2005 WL 3529729 (Bankr. D. Md. 12/19/05); In re Davenport, __ B.R. __, 2005 WL 3292700 (Bankr. M.D. Fla. 12/6/05). In Davenport, the case was dismissed notwithstanding the debtor's eminently logical and practical "no harm, no foul" argument that the dismissal would be "futile" since she could merely refile a new petition with the credit counseling certificate now in hand.

Multiple courts have also agreed that when a debtor fails to comply with the 109(h) pre-petition counseling requirements, the petition should be "stricken" rather than "dismissed." In re Valdez, __ B.R. __, 2005 WL 3526495 (Bankr. S.D. Fla. 12/13/05); In re Rios, __ B.R. __, 2005 WL 3462728 (Bankr. S.D.N.Y. 12/19/05). This is not an idle distinction; rather, the effect of treating the filing as a nullity and striking it is that if (or, more likely, when) the debtor refiles, the first filing will not be treated as a previously filed case which would trigger a presumption of bad faith and result in the automatic expiration of the automatic stay after 30 days under 11 U.S.C. 362(c)(3). The Rios court cautions that notwithstanding its opinion that a filing without satisfying the counseling requirements is void ab initio, parties would be well advised to seek a court determination as to whether a case was properly commenced before acting in reliance on a filing being void for lack of eligibility.

The Hubbard case also provides some insight on what would be necessary to represent that counseling is unavailable. While a debtor's lawyer may act as the debtor's agent for purposes of inquiring about the availability of counseling, mere general inquiries (rather than specific requests for a particular debtor) will not be a sufficient basis for representing that counseling is not available. On the other hand, a debtor will not be required to "scour the field" and seek out counseling from multiple agencies if it contacts one which is unable to provide the services within five days. If the debtor faces exigent circumstances, he/she can then file an appropriate certification without seeking counseling from another agency. Meanwhile, other courts have been more generous than the Hubbard court as for what constitutes a "certification," permitting any paper or motion which contains the reuired information and is signed by the debtor to constitute a "certification." See, e.g., In re Graham,__ B.R. __, 2005 WL 3629925 (Bankr. W.D. Ky. 12/21/05); see also Childs, supra (certification need not be under oath).

Congratulations are perhaps due to Mr. Melvin Carter, one of five debtors whose cases are described in the Childs decision referred to above. Mr. Carter was the only one of the five granted a waiver from the prepetition credit counseling requirement (and, as far as I can tell, the only one described in any published opinion). How did he do it? Mr. Carter's certification (his third, actually, after the court had denied earlier motions for extension) stated: "My real property ... is scheduled for foreclosure on October 21, 2005 at 11:04 A.M. On October 20, 2005, I was advised to seek credit counseling, which I did. Due to the large number of requests, I was unable to obtain an appointment for credit counseling until November 26, 2005. I completed the required counseling on November 26, 2005."

The court in Childs (a per curiam decision which is described as representing the consensus of all the members of the Maryland Bankruptcy Court) held that a certification is sufficient if it contains a simple description of the exigent circumstances precipitating the filing, and states that the debtor requested counseling that was not made available to him within five days, even if it does not specify the date the services were requested. Applying this standard, Mr. Carter's certification (unlike those of the other debtors in Childs and every other case that has so far been reported) was deemed sufficient.

Also worth noting in the Childs case is its definition of "exigent circumstances" as used in 109(h). The court defines this standard as "minimal," and requiring only "some looming event that renders prepetition credit counseling to be infeasible." It purposefully distinguishes this standard from the "excusable neglect" standard applied in other circumstances, noting that "exigent circumstances," unlike "excusable neglect," requires no inquiry into the reasons for the exigency and the debtor's responsibility for them. Other courts may disagree, however. Compare In re Talib, 2005 WL 3272411 (Bankr. W.D. Mo. 12/1/05) (description of exigent circumstances must explain why debtor waited until eleventh hour to seek counseling).

To get a taste of how bankruptcy judges feel about applying these new provisions, you should also read "Tell Us How You Really Feel About Credit Counseling".

Tell Us How You Really Feel About Credit Counseling

2006-01-16T14:15:00.000-05:00

While judges have been fairly uniform in applying the new credit counseling requirements under BAPCPA (and dismissing cases where debtors fail to comply with them), that doesn't mean they are happy about it. In In re Valdez, ___ B.R. ___, 2005 WL 3526495 (Bankr. S.D. Fla. 12/13/05), Judge A. Jay Cristol of the Southern District of Florida, when required to dismiss a case filed by a pro se debtor who was unaware of the counseling requirement, rhetorically queried:

"The Court wonders what exactly was intended by Congress in regard to this Code section. Is it the intent of Congress that poor, ignorant persons who do not know the law and cannot afford to obtain the advice of counsel are to be denied protection and assistance of the Bankruptcy Code which is available to more affluent and better educated persons? Or is it the intent of Congress that decent, honest, hardworking persons, who have suffered financial misfortune or tragedy, be educated by budget and credit counseling services to help them determine if there is a more appropriate way to deal with their financial problems? Sadly, the language in the Code does not clearly reveal Congress' intent; either the Code language was inartfully drafted or the congressional intent was indeed the former less compassionate, harsher result, rather than the latter."

While expressing the "sympathy of the Court" to the debtor who was the object of this harsh result, Judge Cristol held that he could not modify statutory language based on sympathy and was required to dismiss the case because the debtor had not fulfilled the pre-petition counseling requirement.

Judge Thomas Fulton of Kentucky is also willing to give Congress the benefit of the doubt. In In re Graham, __ B.R. __, 2005 WL 3629925 (Bankr. W.D. Ky. 12/21/05), he suggests a somewhat discretionary standard for evaluating whether credit counseling could have been obtained by a debtor prior to filing, looking to what a debtor could "reasonably accomplish in light of his or her particular, and likely exigent, circumstances." Believing (perhaps against evidence to the contrary) that Congress continues to have the intent to "provide relief and a fresh start to honest but unfortunate debtors who would otherwise face a series of untenable choices," Judge Fulton suggests that "Surely such a body of persons ostensibly guided by mercy would not strand the lost so squarely between Scylla and Charybdis!"

Judge Frank Monroe of Texas was not nearly so generous to Congress. In In re Sosa, ___ B.R. ___, 2005 WL 3627817 (Bankr. W.D. Tex. 12/22/05), Judge Monroe notes how those responsible for passing the Act "did all in their power to avoid the proffered input" from sitting bankruptcy judges, professors, and professional associations in order to further an agenda "to make more money off the backs of the consumers in this country," suggesting that calling BAPCPA a "consumer protection" act is "the grossest of misnomers."

On the pre-filing credit counseling required by 11 U.S.C. 109(h)(1), Judge Monroe sarcastically notes, "No doubt this is a truly exhaustive budget analysis." While viewing the pre-filing requirement as "inane," Judge Monroe nonetheless found it to be a clear and unambiguous provision -- sarcastically adding, "obviously designed by Congress to protect consumers." As a result, even though the debtors actually completed credit counseling after having filed their petition, the court was required to dismiss their case, leading Judge Monroe to wonder, "Can any rational human being make a cogent argument this this makes any sense at all?"

Upon entering the dismissal order, Judge Monroe concluded, "Congress must surely be pleased."

Meanwhile, one debtor has been spared from the application of BAPCPA. In In re Looper, ___ B.R. ___, 2005 WL 3455200 (Bankr. E.D. Tenn. 2005), the court has concluded that a debtor who filed his petition on the effective date of BAPCPA -- October 17, 2005 -- would not be subject to the new credit counseling provisions. Why? Because he was a prisoner serving a life sentence without the possibility of parole. How did inmate Looper get a break, while so many other debtors have not?

In Looper, the debtor presented his petition for mailing to the clerk's office on October 14, 2005, and it arrived on October 17, 2005 and was stamped as filed on that latter date. But under Supreme Court precedent, pro se prisoners are protected by the "Prisoner Mailbox Rule," under which documents to be filed by a pro se prisoner (who can't personally travel to the courthouse to physically file documents) are deemed "filed" when they are delivered to prison officials for mailing. Because the court found no specific provision of the Bankruptcy Code and Rules defining "filing," it concluded that the "Prisoner Mailbox Rule" applied and the petition was treated as having been filed on October 14, 2005. As a result, the debtor was not required to comply with BAPCPA's new credit counseling requirements, which apply to petitions filed on or after October 17, 2005.

Isn't it good to know some debtors can still get a break?

Another Florida Judge Joins Homestead Debate

2005-12-14T15:54:00.000-05:00

Another judge in the Southern District of Florida has weighed in on the effect of the BAPCPA amendments' caps on homestead exemptions. In re Wayrynen, 332 B.R. 479 (Bankr. S.D. Fla. 10/14/05). In Wayrynen, the trustee objected to a debtor's claim of exemption for a homestead with a $150,000 value which had been purchased a month prior to his bankruptcy filing. 11 U.S.C. 522(p) imposes a $125,000 cap on exemptions claimed for homesteads purchased within 1,215 days of the petition date. The debtor responded by contending that the cap did not apply in Florida, an "opt out" state which does not permit an election between federal and Florida exemptions, and furthermore that the cap did not apply because the equity in the homestead was derived from the sale of a previous home in Florida which had been owned more than 1,215 days prior to the filing date. For earlier discussion of the debate over the cap's applicability in "opt out" states, see prior postings here: "Homestead Havens Still Viable?", "Florida Bankruptcy Judge Applies Homestead Cap", and "Another Court Applies Homestead Cap".

Judge Friedman noted in Wayrynen, like Judge Haines in McNabb, that the "as a result of electing" language in 522(p) could be construed as meaning that a Florida resident (who, as a result of state law, does not have the option of electing between federal and state exemptions) is not subject to the cap. However, like Judge Mark (the Chief Judge of the Southern District of Florida), Judge Friedman found that such an interpretation would be contrary to the intention of the Reform Act's drafters. He reconciled the language with the legislative intent by finding that a Florida resident who claims a homestead exemption under state law has made an election by having chosen to reside in Florida, having chosen to purchase a residence in Florida, having chosen to make it his or her permanent residence, and having availed himself or herself of bankruptcy relief.

Nonetheless, the debtor prevailed on his second argument that the equity in his current homestead in excess of the cap was still exempt because it was derived from a previously owned Florida homestead owned more than 1,215 days prior to the petition date. 522(p)(2)(B) provides a "carve-out" from the cap which excludes the amount of any "interest transferred from a debtor's previous principal residence (which was acquired prior to the beginning of such 1215-day period) into the debtor's current principal residence" if they are both in the same state.

The debtor had initially purchased a Florida residence in 1989 for slightly less than $100,000. He sold that property in August 2002 (within 1,215 days of the petition date) for $250,000, realizing a little more than $150,000 in equity. He then purchased another Florida residence the next month for about $175,000. The second homestead was then sold in March 2005 for $271,500, and a new homestead purchased for $146,000. Judge Friedman found that the "interest transferred" from the debtor's previous residence (the first property) amounts to $150,000 (the built-up equity realized upon its sale) which was reinvested in the subsequent homesteads, and that since the amount of that "interest" is excluded from the interest being claimed as exempt, the debtor was entitled to claim the entire $150,000 present value of his current homestead as exempt.

In so holding, Judge Friedman rejected the trustee's argument that the reference in the "carve-out" to the Debtor's previous principal residence" should be construed as referring only to the particular property owned by the debtor immediately prior to the own being claimed as exempt. Instead, he extended the protection of the carve-out to prior homesteads owned by the debtor as well, on the basis that the safe harbor appears to have been intended "to afford protection to individuals like the Debtor who, rather than seeking to take advantage of Florida's exemption provisions to shelter illicitly- or improperly-obtained funds, simply have benefited as a result of their ownership of Florida real property and the general appreciation of property values attributable to previous intra-state transactions."

Clarification of Credit Counseling Requirements

2005-12-14T09:55:00.000-05:00

A Pennsylvania bankruptcy court has issued a pair of opinions clarifying the credit counseling requirements imposed under BAPCPA. In In re Granda, __ B.R. __, 2005 WL 3348878 (Bankr. W.D. Pa. 12/6/05) and In re Skarbek, __ B.R. __, 2005 WL 3348879 (Bankr. W.D. Pa. 12/6/05), the court explained that BAPCPA imposes two separate credit counseling requirements: (1) an individual must receive pre-filing counseling on the opportunities available for credit counseling and a related budget analysis in order to be eligible to file under 11 U.S.C. 109(h); and (2) a debtor must complete post-filing counseling on personal financial management in order to be eligible for a discharge under 11 U.S.C. 727(a)(11).

In Granda and Skarbek, the debtors had filed certifications indicating that prior to filing their petitions, they had "completed an instructional course in personal financial management" provided by an approved instruction provider. The court found that the certification confused the two separate requirements. While the "credit counseling" requirement must be completed prior to filing, the "financial management" course must be completed after filing the petition. Both of the counseling agencies that had "counseled" the debtors indicated that they only provided the first type of services.

As a result, the debtor's certifications that they had completed the "financial management" courses pre-filing were deemed insufficient and stricken, and the debtors ordered to complete post-filing personal financial management courses and to file amended certifications.

Request to Extend Stay Must be Served on Affected Creditors

2005-12-05T12:55:00.000-05:00

In In re Collins, __ B.R. __, 2005 WL 3163962 (Bankr. D. Minn. 11/29/05), a Minnesota bankruptcy court has confirmed that a motion to extend the automatic stay and avoid termination pursuant to 11 U.S.C. 362(c)(3) must be served on all affected creditors.

Although the Collins court notes that the relevant provisions are "clumsily drafted," it nonetheless finds that the legislative intent "unmistakably appears" that Congress intended that if a debtor takes a "second plunge" into bankruptcy within a year of dismissal of a prior case, the automatic stay is only in effect for 30 days, and can be continued thereafter only on request via motion upon a specific showing, as specified in the statute.

Since "the Act's largesse under these provisions inures to creditors" who are its clear beneficiaries, any creditors who would be affected by the extension are entitled to be notified of the request for such relief and to know the particulars of the request. This, the court found, is confirmed by the statute's reference to a "motion" (rather than an "application" or "request") and the requirement of "notice and a hearing." Since no notice to creditors was given, the debtor's motion to extend the stay was denied.

It should be noted that many bankruptcy courts treat provisions which call for "notice and a hearing" as permitting relief to be granted without an actual hearing, provided that notice and an opportunity to object is provided. See 11 U.S.C. 102(1). By the language of 362(c)(3)(B), such "negative notice" relief could be available for motions to extend the stay. We will have to see if courts begin to adopt procedures for doing so under their local rules.

Credit Counseling Certification Not Extended for Excusable Neglect

2005-12-05T11:53:00.000-05:00

The recently reported case of In re Sukmungsa, __ B.R. __, 2005 WL 3160607 (Bankr. D. Utah 11/23/05) rejects yet one more effort to sidestep the new credit counseling requirements in 11 U.S.C. 109(h). In Sukmungsa, the debtor tried under Fed.R.Civ.P. 60(b), made applicable by Fed.R.Bankr.P. 9024, to vacate a dismissal order entered due to the debtor's failure to certify completion of the prepetition credit counseling, using an excusable neglect theory. As previously discussed here, BAPCPA added a new required to 11 U.S.C. 109 that prohibits an individual from being a debtor if they have not received pre-filing credit counseling from an approved agency; in addition, newly added 11 U.S.C. 521(b) requires an individual debtor to file a certificate, from the counseling agency, describing the services provided.

The court rejected the excusable neglect argument. Applying the factors outlined in Pioneer Investments Services Co. v. Brunswick Associates Ltd. Partnership, 507 U.S. 380 (1993), the court noted that the danger of prejudice and the lack of impact on judicial proceedings weighed in favor of the debtor, and that the debtor's good faith was a "neutral" factor in the analysis. But the court found that the reason for the delay and the debtor's control over it -- that is, the failure to timely certify completion of the prefiling counseling requirements -- precluded the relief sought. While there apparently was some confusion over whether the debtor had in fact completed the counseling requirements, the court found that no sufficient reason had been presented by the debtor or its counsel to explain the failure to timely file the certification. The court did not address the question of whether or not 109(h) presents a jurisdictional bar to bankruptcy relief.

The next question many practitioners may be asking is whether Bankruptcy Rule 9006 might provide an avenue for extending the time to comply with the counseling or certification requirements for "excusable neglect." Although no case has yet addressed it, I suspect the answer would be no -- Rule 9006 applies to deadlines set by the Bankruptcy Rules, by notice, or by court order, but not by its terms to those set by statute, and the specified circumstances for waiver as described in 109(h)(3) would seem to be undermined by resort to excusable neglect. What do you think? Click on "comments" below and let us know.

Once is an Accident ...

2005-12-01T17:40:00.000-05:00

The recently issued decision in In re Montoya, __ B.R. __, 2005 WL 3160532 (Bankr. D. Utah 2005) provides a fairly detailed analysis of a debtor's motion to extend the automatic stay under new 11 U.S.C. 362(c)(3)(B). Unfortunately, for the debtor, she was unable to overcome the presumption of a bad faith filing as a result of her unsuccessful prior Chapter 13 bankruptcy, which had been dismissed only six days before filing the new Chapter 13 petition.

In Montoya, the debtor had actually filed three bankruptcies. The first was a Chapter 13 in August 1999, which was converted to Chapter 7 after confirmation when the debtor failed to make plan payments. She obtained a Chapter 7 discharge in November 2000. In August 2004, she filed her second Chapter 13 case, but made only one plan payment over several months and the case was dismissed October 21, 2005. She filed a third case six days later on October 27, 2005. (The saying goes, "Once is an accident, twice is a coincidence, three times is enemy action.") .

On November 2, 2005 the Debtor filed a motion to extend the stay, stating that the filing was in good faith as to all her creditors and that the extension would allow her to prosecute a plan and make payments to her creditors. The motion was served on all creditors, and none objected, although the Chapter 13 Trustee did. After conducting an evidentiary hearing, the court concluded that (1) the debtor's second filing did give rise to a presumption of bad faith filing under 362(c)(3)(C)(i)(II), since it was filed within the preceding year and was dismissed because of the debtor's failure to perform the terms of the plan; and (2) the debtor was unable to overcome the presumption of bad faith.

In evaluating whether the debtor could prove good faith by clear and convincing evidence, as required by 362(c)(3)(C)(i), the court found that the "traditional" factors for evaluating whether a Chapter 13 petition is filed in good faith "can still be useful" to determine whether a case has been filed in good faith under the new BAPCPA provisions. After conducting that analysis, however, the court found that the debtor could not overcome the presumption of bad faith. Her repeat filings presumptively had negatively affected her creditors, and she had not presented sufficient evidence to show that negative effect had been overcome, particularly when they had received no payments for fifteen months, had been effectively stayed since the second filing, their collateral had depreciated, and they were not being treated any better under the current plan than in the predecessor.

Interestingly, the court noted that the denial of the motion did not have the effect of lifting the stay as to property of the bankruptcy estate, and did not speculate as to how it might affect confirmation of the Debtor's chapter 13 plan.

New Subsection 366(c) Protects Utility's Bargaining Power

2005-11-29T18:18:00.000-05:00

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) amended 11 U.S.C. 366, by adding a new subsection (c) that provides additional protections for utilities. The first decision interpreting the new subsection will leave Chapter 11 debtors uncertain of how to insure that utilities do not discontinue service following a bankruptcy filing.

In In re Lucre, Inc., __ B.R. __, 2005 WL 3111078 (Bankr. W.D. Mich. 11/9/05), the debtor, a Competitive Local Exchange Carrier, filed an emergency motion thirteen days after filing its Chapter 11 petition seeking to extend the automatic injunction imposed by section 366(a) to prevent its power company and several telecommunications companies from discontinuing or refusing service. The debtor argued that the injunction should be continued notwithstanding new subsection 366(c) because the debtor made an offer of adequate assurance, and the utilities failed to respond.

The new addition of 366(c) creates a complicated timeline. Under subsection (a), a utility is basically prohibited from refusing or discontinuing service to a debtor, except as provided under subsection (b) and new subsection (c). Under subsection (b), the utility may not refuse or discontinue service if within 20 days after an order for relief, the debtor furnishes adequate assurance of payment (i.e. a deposit or other security) for service after that date; on request, the court can order reasonable modification of the amount of the deposit or other security. Under 366(c), in a Chapter 11 case, a utility may refuse or discontinue service, if within 30 days after the petition date, the utility does not receive adequate assurance of payment for utility service "that is satisfactory to the utility;" on request, the court may also order modification of the amount of such assurance of payment under 366(c).

With respect to the 10 day “gap” between section 366(b) and 366(c), the court explained that the debtor’s offer of adequate protection “stands on its own” and that the utility had the burden of seeking modification if it was not satisfied. However, the Lucre court refused to consider the Debtor's request to extend the subsection (a) injunction beyond the 30 days, on the basis that the statute requires "as a condition to continuing the injunction" either the utility's acceptance of the debtor's proposed adequate assurance, or the debtor's acceptance of the adequate assurance proposed by the utility. According to Judge Hughes, the debtor "has no recourse to modify the adequate assurance payment the utility is demanding until the [debtor] actually accepts what the utility proposes."

Thus, the court effectively held that new subsection 366(c) prevents a Chapter 11 debtor from moving quickly to determine adequate assurance of payment, and protects the bargaining power of the utility. Unfortunately, it does not quite answer the question of what to do when the utility simply refuses to negotiate. The court does suggest that a utility might be subject to an implicit obligation to bargain in good faith with the debtor before electing to discontinue service, and that a debtor may have the right to seek to enjoin the utilities from exercising their rights to discontinue under subsection (c). This seems to really ratchet up the burden on the debtor and the court, presumably requiring the filing of an adversary proceeding for injunctive relief and a motion for preliminary injunction before the 30th day if the debtor doesn't want to wait around and see if the lights go dark.

At the same time, the court limited the group of utility companies entitled to the benefits of new subsection (c). Judge Hughes pointed to the distinction between the use of “service” in subsections (a) and (b) and “utility service” in new subsection (c). The court held that this distinction indicated Congress’ intent that the new subsection only apply to utilities that provide services that the debtor itself actually consumes. In this case, two of the utilities provided wholesale telecommunications services, which were purchased by the debtor and passed on to its own customers, and for whom the debtor also provided reciprocal services under an interconnection agreement. The court held that these utilities did not provide “utility service” to the Debtor within the meaning of subsection (c), and are not entitled to the “more stringent” requirements of that subsection.

Home Equity Appreciation Not Subject to Cap

2005-11-28T17:53:00.000-05:00

While there has already been considerable jurisprudence since BAPCPA was passed which deals with the $125,000 cap for homesteads purchased within 1,215 days of the petition date under 522(p), a recent case weighs in on whether an increase in the equity position in a homestead during the 1,215-day period is subject to the statutory cap and not exempt.

In In re Blair, __ B.R. __, 2005 WL 3108495 (Bankr.N.D. Tex. 11/21/05), the Debtors claimed an exemption for the equity in their homestead in an amount just under $700,000. The Debtors had purchased their home in 2000, outside the 1,215 lookback period, but continued to make regular mortgage payments and build equity in the property during the 1,215-day period. An unsecured creditor challenged the exemption listed for the homestead equity and asserted that the Debtors were not entitled to an uncapped exemption for the equity increase during the 1,215-day lookback period.

In relevant part, 522(p) provides that " ... a debtor may not exempt any amount of interest that was acquired by the debtor during the 1,215-day period ... that exceeeds in the aggregate $125,000 in value ..." As Judge Hale in Blair noted, the term "interest" which must be acquired by the debtor during the 1,215-day period to trigger the new homestead cap is not defined. Judge Hale held that a debtor does not actually "acquire" equity in a home, but rather acquires title to a home. Thus, the "interest" the Debtors acquired was the actual purchase of the home, which was completed well before the 1,215-day period, and not subject to the $125,000 cap.

The court found this interpretation was consistent with related subsections of 522, including the companion provision in section 522(p)(2)(B), which allows for rollover by a detbor of the equity in one home to another home located in the same state. A debtor is not subject to the homestead cap if he takes the proceeds of his first residence and reinvests them in a second residence even within the prescribed period of section 522(p). The unsecured creditor's reading of the statute would seem at odds with this provision (if debtors can reinvest proceeds of one homestead into another, why can't they simply retain the increased value of a homestead they've already bought?).

Finally, Judge Hale concluded that while the term "interest" was unambiguous, if any ambiguity required inquiry into the legislative history of 522(p), the debtors would still prevail. If the purpose of 522(p) was to prevent out of state residents from moving to certain states in order to file for bankruptcy under more advantageous state homestead exemption laws, that rationale did not apply to the debtors in this case.

"As far as credit counseling goes..."

2005-11-28T17:45:00.000-05:00

Well, there appears to be at least point on which BAPCPA is manifestly clear: there will be no evading the threshold pre-filing credit counseling requirement, at least not without a signed certification that the debtor attempted to but was unable to obtain counseling prior to filing. Several other courts have joined in the chorus to strictly enforce the credit counseling additions to the 11 U.S.C. 109 eligiblity provisions, and to deny extensions unless they make the necessary certifications.

In In re LaPorta, __ B.R. __, 2005 WL 3078507 (Bankr. D. Minn. 10/27/05), a pro se debtor filed her petition together with an unsigned, unverified statement that began "As far as credit counseling goes...", and then proceeded to explain that the credit counseling agencies listed on the U.S. Trustee's website were too far for her to travel, but that she was willing to take a free online course if one was available. A separate submission indicated that the filing was intended to prevent the repossession of the debtor's car.

The court dismissed the petition on the basis that Ms. LaPorta was not eligible to be a debtor under 11 U.S.C. 109. She did not complete the counseling requirements, her unsigned statement was not a "certification" (which must be signed under penalty of perjury) sufficient to be treated as a request for an extension, and even if it were, it failed to certify that she had in fact made a request for credit counseling services that had not been provided. Finding the statute "utterly clear," the case was dismissed. While the court acknowledged that the result "is harsh," it found no other result possible under BAPCPA, particularly given Congress' insertion of the new counseling requirements into 109, the section that defines the eligibility to be a debtor.

Meanwhile in Texas, a court had similarly denied a motion for extension of time to comply with the counseling requirements which was not accompanied by a certification, and which did not demonstrate that the debtor had requested but was unable to obtain counseling services. In re Hubbard, 332 B.R. 285 (Bankr. S.D. Tex. 10/31/05). A week later, however, the court reconsidered, and entered an order requiring the U.S. Trustee of the district to describe what procedures it had followed in determining that credit counseling was available in the district. In re Hubbard, __ B.R. __, 2005 WL 3061939 (Bankr. S.D. Tex. 11/8/05). Under 109(h)(2), the credit counseling requirements do not apply if the U.S. Trustee determines that adequate counseling services are not reasonably available in the district.

Things did not end well for the debtor or her counsel. The U.S. Trustee responded to the court that there were several counseling services available, and indeed 53 of 79 petitions filed after October 17, 2005 by debtors represented by counsel included certifications of having received counseling. Only six requests for extension had been made, five of which (including Ms. Hubbard) were made by debtors all represented by the same lawyer. The court on November 16, 2005 entered an order striking the debtor's petition (and those of the four other debtors represented by the same lawyer) and has required debtor's counsel to show cause why his fees should not be disgorged.

A court in Ohio has also joined the bandwagon. In re Cleaver, Case No. 05-46572 (Bankr. S.D. Ohio 11/17/05) (link to as-yet unpublished opinion here; thanks to alert reader Edward J. Boll, III of Lerner, Sampson & Rothfuss, L.P.A. in Cincinnati for the tip). In Cleaver, Judge Walter found that a motion for extension which was also signed by the debtor "barely suffices" as a "certification," but that its contents were inadequate since it did not indicate that the debtor had attempted to obtain counseling before filing.

Judge Walter noted a couple other interesting questions that may be presented by 109(h)(3) as well, although they were not presented by Mr. Cleaver's inadequate motion. For instance, he queries whether the required certification that the debtor requested but was unable to obtain the counseling services "during the 5-day period" beginning on the day the request was made effectively imposes a five day "waiting period" after requesting counseling before a debtor can file the petition with the requested certification. He also raises the question of whether a certification that a single agency could not provide the services would be adequate, or whether the prospective debtor must certify that no approved agency could provide the services within five days.

These questions may await another day -- but in the meantime, it appears increasingly clear that courts will not be accepting petitions if they are not accompanied by a signed certification satisfying all of the requirements of 109(h)(3), including that the debtor had requested but not been able to obtain counseling.

No Appeal on Homestead Cap?

2005-11-28T15:07:00.000-05:00

There are several new cases to report on, but before doing so let's briefly revisit the "Great Homestead Debate of 2005." We've previously reported on the conflicting decisions interpreting the 522(p) homestead cap, with at least one court holding that the cap only applied in "non-opt-out" states where debtors could elect between federal and state exemptions, and several others holding that the cap applied universally. A judge in Nevada in the latter camp had issued a certification for direct appeal of her decision to the Ninth Circuit Court of Appeals, based on conflict with an earlier Arizona decision. See In re Virissimo, 332 B.R. 208 (Bankr. D. Nev. 2005).

Unfortunately, it appears that any hope for an early circuit-level decision on this issue may be dashed -- despite the certification, the debtor apparently has not taken an appeal of the October 31, 2005 order sustaining the trustee's objection to the homestead exemption. The Virissimo docket reflects that the trustee is now moving forward with a motion to sell the homestead property. Those of us hoping for more clarity on this issue may still be waiting a while.

No Excusing Credit Counseling Requirements

2005-11-16T17:35:00.000-05:00

We earlier mentioned a Virginia case which denied a request for extension of time to comply with the new credit counseling requirements where the debtor did not certify that he had sought and been unable to receive counseling before filing. In re Watson, 332 BR 740 (Bankr. E.D. Va. 11/3/05). Debtors are faring no better elsewhere. A Missouri court has likewise concluded that the certification of an unfulfilled request is essential for obtaining an extension, regardless of the exigent circumstances otherwise demonstrated. In re Gee, 332 B.R. 602 (Bankr. W.D. Mo. 10/26/05). Judge Dow in Gee held that such a certification is a "plainly stated requirement" for granting a waiver and politely declined the Debtor's invitation to rewrite the statute.

Another Homestead Limitation for Fraudulent Asset Conversions

2005-11-15T13:30:00.000-05:00

Maybe it's just because the 522 amendments became effective in April, but there sure do seem to be a lot of opinions coming out on the new homestead limitations. Unlike those already reported on, including McNabb, Kaplan, and Virissimo, which deal with the $125,000 cap for homesteads purchased within 1,215 days of the petition date under 522(p), this latest opinion addresses the limitation under 522(o) imposed when non-exempt assets are used to increase the value of a homestead. In re Maronde, __ B.R. __, 2005 WL 3016196 (Bankr. D. Minn. 11/8/05).

In Maronde, the debtor in October 2003 took out a $50,000 home equity line of credit on his residence. He used most of the line to acquire a truck and trailer. By late 2004 he was in financial trouble, and in early 2005 came up with the idea of taking out balance transfers on newly obtained credit cards, and using the proceeds to pay down the line of credit. Over one week in February 2005, he made four transfers from different credit cards to pay down $31,500 on the home equity line (over the next several weeks he attempted six more such transfers, but apparently those wily credit card companies finally caught on). After consulting with a bankruptcy attorney in March, the following month he sold the truck and trailer (which would not be fully exempt) for about $20,000 and used the proceeds to pay off the remaining balance on the home equity line. He then filed a Chapter 13 petition on April 20, 2005, the effective date of the BAPCPA exemption amendments (woops!).

Mr. Maronde claimed equity in the homestead of $69,572 as exempt (ignoring for the sake of simplicity an issue as to the acreage of the property, Minnestoa law allows a debtor to claim a homestead exemption of up to $200,000), and the Trustee objected, relying on newly enacted 522(o), which provides that for purpoess of 522(b)(3)(A), "the value of an interest in [a homestead] shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt, under subsection (b), if on such date the debtor had held the property so disposed of."

Judge Dreher, after reviewing the new amendments, concluded that the Congressional purpose is clear: "debtors seeking the protection of state exemptions must meet their state exemption provision requirements as limited by s. 522(o) and (p)." (Those following the debate on the applicability of the 522(p) cap in opt-out states may want to take notice). As a result, the question of whether Mr. Maronde's homestead exemption would be limited depended on whether he acted with the intend to hinder, delay or defraud creditors when he sold his truck and trailer and used the proceeds to pay off the home equity line (and thereby increase the equity in his homestead).

In answering this question, Judge Dreher concluded that the interpretation of the language "intent to hinder, delay, or defraud a creditor," as used in 522(o), should follow the established case law already in existence interpreting similar language in section 548 fraudulent conveyance and 727(a)(2) denial of discharge proceedings. Applying the traditional "badges of fraud," the court had no trouble concluding that the debtor was engaged in a scheme to defraud his creditors by transforming non-exempt assets (the truck and trailer) into exempt (equity in his homestead). As a result, the court denied the debtor's homestead exemption to the extent of the increased equity attributable to the truck and trailer proceeds used to pay off the equity line.

No Extension for Credit Counseling

2005-11-14T20:37:00.000-05:00

On November 3, 2005 a Virginia court issued a published opinion on the new credit counseling provisions in BAPCPA, rejecting a debtor's request for more time to satisfy the new requirement that individual debtors complete a credit counseling program prior to filing. In re Watson, __ B.R. __, 205 WL 2990902 (Bankr. E.D. Va. 2005).

Amended 11 U.S.C. 109(h) requires that individual debtors, within 180 days prior to filing, complete a credit counseling program from an approved agency. There are provisions for a temporary waiver of this requirement if the debtor files a certification that: "(i) describes exigent circumstances that merit a waiver of the requirements ...; (ii) states that the debtor requested credit counseling services ... but was unable to obtain the services [within 5 days after the request]; and (iii) is satisfactory to the court." In Watson, the debtor filed a certification that he had been unable to obtain credit counseling prior to filing because he had been involved in a hearing and mediation on an unlawful detainer action filed by the landlord of his business premises until immediately before he filed his personal bankruptcy. The certification did not indicate that the debtor had requested credit counseling from an approved agency. The Watson court concluded that this didn't cut it, denied the request for an extension and dismissed the case.

First, the court rejected the debtor's argument that the 109(h) requirements cited above are disjunctive rather than conjunctive (i.e., that there can be either exigent circumstances or an unfulfilled request to counseling agency). The court concluded that the use of a semi-colon between clauses (i) and (ii), with an "and" to connect clause (iii), clearly demonstrated the intent that the statute be interpreted conjunctively, notwithstanding the absence of a phantom "and" between clauses (i) and (ii). Somewhat apologetically, it noted that "while the result of interpreting Section 109(h)(3)(A) using the Plain Meaning Rule may produce an unpopular and perhaps even burdensome result, this Court is not the forum in which to seek a remedy; the proper venue instead lies with Congress."

Having concluded that the plain language requires an individual to seek credit counseling prior to filing, it then addressed the debtor's alternative argument that the imposition of such a requirement is an unconstitutional violation of the equal protection clause. Specifically, the debtor argued that the imposition of the credit counseling requirement only on individual debtors denies equal protection to people who choose to operate their businesses as sole proprietorships rather than through corporations or limited liability companies. Unsurprisingly, the Watson court was not persuaded. Since sole proprietors are not a "suspect" class meriting heightened review, and the counseling requirement does not burden a fundamental right (there being no constitutional right to a discharge of debts), the court found that the credit counseling requirement passed the necessary rational basis test.

The Watson decision confirms that exigent circumstances alone will not excuse debtors from the credit counseling requirements; debtors must also certify that they have actually sought, and been unable to get, credit counseling before filing.

Court Confronts Extension of Automatic Stay

2005-11-14T19:50:00.000-05:00

The filing of a bankruptcy petition generally puts into effect an "automatic stay" which prevents creditors from pursuing further collection activities. Prior to the passage of BAPCPA, the stay usually would be in effect until the earliest of the closing or dismissal of the case, or the debtor receiving or being denied a discharge. A creditor typically would have to take affirmative action in order to have the stay lifted. BAPCPA made some dramatic changes to the automatic stay provisions. One of these is that if a person has been in a prior bankruptcy case within the previous year, the stay automatically terminates after 30 days unless the debtor (or another party in interest) obtains an order continuing the stay. 11 U.S.C. 362(c)(3). A Texas bankruptcy court has become the first to issue a published decision analyzing the mechanics of these new provisions. In re Charles, 332 B.R. 538 (Bankr. S.D. Tex. 11/4/05).

In Charles, the debtor had filed a previous case which was voluntarily dismissed on July 6, 2005. He then filed a new case on October 31, 2005 (after the effective date of BAPCPA). Simultaneously with the new filing, the debtor filed an emergency motion to continue the automatic stay and a motion requesting an expedited hearing. The court first noted that if a debtor, like Mr. Charles, has been a debtor in a prior case pending within the preceding one year period, then the automatic stay created by the new filing is gone on the 30th day after the filing. However, 362(c)(3)(B) permits a debtor to file a motion to extend the stay. The court noted that the statute's only facial requirements are that (1) notice of the motion, and the hearing, are completed before the expiration of the 30 days; and (2) the debtor proves that the new filing is "in good faith as to the creditors to be stayed." The Charles court suggests this is not as simple as it may seem, however.

First, according to the court, the motion cannot simply seek extension of the stay generally, but must demonstrate, as to each creditor to be stayed, why the motion is appropriate as to that creditor. While Mr. Charles' motion gave adequate notice as to one particular creditor, it did not "set forth a reasoned basis to extend the stay as to any [other] creditor." Accordingly, while the court permitted the motion to go forward as to the one creditor, it required the debtor to replead allegations as to each creditor against whom he sought to impose a continued stay out of concern that "creditors be given abundantly fair warning that their right may be adversely affected." The Charles court expressed concern that creditors may be unfamiliar with the new provisions and that the relevant provisions in BAPCPA "are, at best, particularly difficult to parse and, at worst, virtually incoherent." (Some may find ironic the court's solicitude for creditors who were the primary force behind the amendments).

Second, the statute creates a rebuttable presumption that certain new cases are not filed in good faith, including cases filed by debtors who have had more than one case pending in the prior year, debtors whose cases were dismissed for failure to file or amend required documents without substantial excuse, failure to provide court-ordered adequate protection, or failure to perform the terms of a confirmed plan, or debtors who have not had a substantial change in their financial or personal affairs since the prior dismissal and there is no other reason to conclude the case will succeed. 11 U.S.C. 362(c)(3)(C). This presumption can be rebutted only be clear and convincing evidence, indicating to the Charles court that "Congress intended to direct the Court to conduct an early triage of refiled cases."

Third, the Charles court went beyond the articulated requirements of the new provisions to find that a court should extend the stay only if the movant can also demonstrate "sufficient equitable factors" to justify the exercise of such discretion (although it failed to articulate any such factors). Perhaps most curious, though, is that after suggesting a need to satisfy unspoken equitable considerations, the Charles court concludes by stating that if there is no timely objection to the debtor's motion to continue the stay, the motion may be granted without hearing.

The motion to extend the stay was set for a further hearing on November 18, 2005 and if we get more information as to its resolution you will see it here.

Interim Rules on Direct Appeals

2005-11-08T14:33:00.000-05:00

In my last post, I noted that a Nevada court had detected a "catch-22" in the new provisions for direct appeals from the bankrutpcy court to the circuit court of appeal, which arguably require a bankruptcy court to make a certification that the matter warrants a direct appeal before any notice of appeal has been filed. The Ninth Circuit Bankruptcy Appellate Panel has addressed this potential snafu by adopting interim rules for direct appeals, as recommended by the United States Judicial Conference Standing Rules Committee. In re Adoption of Interim Procedural Rules, 332 B.R. 199 (9th Cir. B.A.P. 2005).

The interim rules: (1) confirm that a certification prior to filing of a notice of appeal is ineffective unless and until a notice of appeal is filed; (2) provide that a certification may be made only by the Bankruptcy Court prior to the docketing of the appeal, and only by the District Court or BAP after the appeal is docketed; (3) specify that a request by the parties for certification should be filed with the clerk of the court in which the matter is then pending; and (4) specify the contents of a request for certification and set the deadline for a response.

Since typically there is a gap in time between the filing of the notice of appeal and the docketing of the appeal with the District Court or BAP while the record on appeal is being identified and assembled, the rules give the Bankrutpcy Judge the opportunity to issue a certification either before or after a notice of appeal is filed.

Nevada Homestead Decision Certified for Direct Appeal

2005-11-04T16:58:00.000-05:00

One other interesting side-note about the Nevada decision in Virissimo. As a matter of first impression involving the "statutory construction of a hotly contested provision of BAPCPA," and in light of the conflict with the decision in McNabb, the Bankruptcy Judge in Virissimo has certified the decision for direct appeal to the Ninth Circuit Court of Appeals -- invoking another of the new provisions added by BAPCPA. In re Virissimo, 332 B.R. 208 (Bankr. D. Nev. 2005). If the Ninth Circuit authorizes the direct appeal (and if any of the litigants actually take an appeal, see below), there may be a circuit-level decision on the issue sooner rather than later.

Prior to BAPCPA, appeals of all bankrutpcy orders were subject to a two-stage appellate process: first to the District Court (or to a Bankruptcy Appellate Panel in the jurisdictions which have them), and then (at the elction of either party) to the Circuit Court of Appeals. The efficiency of the system was certainly subject to question, since the standard of review exercised by both the District Court and the Circuit Court of Appeals is identical. In amendments to 28 U.S.C. 158, Congress has created a mechanism for bypassing the two-step review in certain situations.

I'll confess I had not looked closely at the 28 U.S.C. 158 amendments before seeing Virissimo. On first reading, they may sound familiar -- because the standard is similar to (but not identical to) the standard for interlocutory appeals from the District Court to the Circuit Courts of Appeal under 28 U.S.C. 1292. The facial similarity may be misleading, though, since there are significant differences. Under new 28 U.S.C. 158(d)(2), the Court of Appeals can authorize a direct appeal, bypassing the District Court, if (1) the order involves "a question of law as to which there is no controlling decision" from the circuit or the Supreme Court, "or involves a matter of public importance"; (2) the order "involves a question of law requiring resolution of conflicting decisions"; or (3) an immediate appeal "may materially advance the progress of the case or proceeding in which the appeal is taken". The lower court can certify sua sponte or on motion by a party if it finds that one of these conditions exists, or apparently, is required to certify even if it does not find any of the conditions are satisfied, if the appellants and a majority of the appellees request it. The decision of whether to authorize the direct appeal rests with the circuit.

By comparison, under 28 U.S.C. 1292(b), a district court can certify an interlocutory appeal to the circuit if the order "involves a controlling question of law as to which there is substantial ground for difference of opinion and ... an immediate appeal may materially advance the ultimate termination of the litigation." The bankruptcy direct appeal provision is similar, but would appear to be broader: (1) unlike the interlocutory appeal statute, the bankruptcy direct appeal statute is not limited to "controlling" issues of law; (2) the bankrutpcy direct appeal provisions expressly include matters of first impression and does not specify the level of the "conflicting decisions" to be resolved, while the interlocutory appeal standard has been interpreted as not requiring certification of matters of first impression or conflicts among lower courts; (3) the interlocutory appeal statute uses the conjunctive "and," while the bankrutpcy direct appeal statute uses the disjunctive "or," when referring to the appeal materially advancing the termination of the litigation. As a result, while the interlocutory appeal must both involve a controlling question of law and also must have the potential to materially advance the litigation, a bankruptcy order could theoretically be certified for direct appeal even if it did not involve a controlling question of law, if its resolution might advance the "progress of the case or proceeding". Also interesting is the requirement that the court certify upon the agreement of the parties, even if it does not find any of the conditions to be satisfied. (Whether or not the circuit would accept the certification is, of course, another matter).

One of the curious things about the process in the Virissimo case is that the judge issued the certfication before any party had taken an appeal. She notes in the opinion that the statute "creates the classic 'catch-22.'" Since the filing of an appeal typically ends the jurisdiction of the bankruptcy court, Judge Riegle concluded that a court that believes certification is appropriate must do so before an appeal is docketed. Of course, if no appeal is taken then the certification is a pointless act.

The homestead issue would seem to be a good candidate for direct appeal, especially with the conflict within the Ninth Circuit between McNabb and Virissimo -- we'll be following it to see if the Ninth Circuit takes it.

Another Court Applies Homestead Cap

2005-11-02T17:00:00.000-05:00

A bankruptcy judge in Nevada has joined Judge Mark of Florida in concluding that the 522(p) homestead exemption cap applies in all states, and not just those which permit residents to elect between the federal and state exemptions. In re Virissimo, 332 B.R. 201 (Bankr. D. Nev. 2005). As previously discussed here, at least one judge in Arizona has held that the language used by Congress in 522(p) to create a $125,000 cap on exemptions for homesteads purchased less than 1,215 days prior to bankruptcy does not apply in states where the state legislature has prohibited debtors from selecting the federal rather than state exemptions. In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005). A Florida court has held to the contrary that 522(p) can and should be interpreted consistently with legislative intent to impose the cap on all state homestead exemptions. In re Kaplan, 2005 WL 2508151 (Bankr. S.D. Fla. 2005). The different results center on the interpretation of the phrase in 522(p) which renders the cap applicable "as a result of electing under subsection (b)(3)(A) to exempt property under State or local law," and the extent of reliance on legislative history. Judge Riegle in Virissimo joins the Kaplan court in applying the cap broadly.

In divining the plain meaning of 522(p), Judge Riegle concludes that there is an "election" for purposes of 522(p) when a debtor elects to claim property as exempt, and "elects" to do so under 522(b)(3). She suggests that a debtor always "elects" between exemptions under the federal provisions under 522(b)(2) and the state or local provisions under 522(b)(3), even if an "election" to use 522(b)(2) might be ineffective if the state law prohibits use of the federal exemptions and a timely objection is made.

Alternatively, Judge Riegle finds the statute ambiguous in that it is susceptible to multiple interpretations and, like Judge Mark, concludes that legislative history can be relied on when the clearly expressed legislative intent is contrary to the strict language. Also like Judge Mark, the Nevada court had no difficulty discerning Congressional intent to apply the cap to all debtors and not solely those who reside in states that permit the use of federal exemptions.

With three notable decisions already issued, the homestead cap -- which was one of the most frequently discussed BAPCPA changes -- is proving to be a continuing subject of debate and dispute.

Georgia Judge Says Attorneys Not "Debt Relief Agencies"

2005-11-02T15:00:00.000-05:00

Apparently too impatient to await an actual case or controversy, a Georgia bankruptcy judge issued a sua sponte ruling on October 17, 2005, the effective date of most BAPCPA provisions, determining that attorneys are not "debt relief agencies" as that term is used in BAPCPA. In re Attorneys at Law and Debt Relief Agencies, __ B.R. __, 2005 WL 2626199 (Bankr. S.D. Ga. 2005).

As noted by Judge Davis, BAPCPA imposes substantial requirements on activities of "debt relief agencies," defined as "any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer." 11 U.S.C. 101(12A). "Bankruptcy assistance," in turn, is defined as including any services provided to an assisted person "with the express or implied purpose of providing information, advice, counsel, document preparation, or filing, or attendance at a creditors' meeting or appearing in a case or proceeding on behalf of another or providing legal representation with respect to a case or proceeding under this title." 11 U.S.C. 101(4A). For instance, "debt relief agencies" are required to enter into written contracts with "assisted persons," disclose in all advertising that their services contemplate bankruptcy, and provide written notice to "assisted persons" of the disclosure requirements of the Bankruptcy Code and potential sanctions for non-compliance. They are required to advise the "assisted person" that the person may proceed pro se, and they are prohibited, among other things, from counseling an "assisted person" to pay an attorney for services in contemplation of bankruptcy. See 11 U.S.C. 526.

After going over much of the commentary written in anticipation of the passage of BAPCPA on the "debt relief agency" provisions, Judge Davis concluded that attorneys are not "debt relief agencies." First, he noted that while the definition of "debt relief agency" includes "petition preparers," that term expressly excludes "attorneys," which is a separately defined term under 11 U.S.C. 101(4). Pointing to plain meaning, he reasoned that "attorney" and "debt relief agency" are not synonymous and do not in common understanding include each other. Judge Davis found that the references to "providing legal representation" in the definition of "debt relief agency" refer to the unauthorized practice of law by non-attorneys, rather than the rendering of legal advice by attorneys. and was intended to empower bankruptcy courts to protect consumers harmed by such unauthorized practice.

Second, Judge Davis noted the illogic of interpreting certain of the provisions (for instance, those requiring a "debt relief agency" to advise an "assisted person" that they have the right to hire an attorney or how to perform services pro se) as applying to attorneys. Interpreting "debt relief agency" as excluding attorneys therefore favors a logical and sensible interpretation over an illogical or absurd one.

Finally, the court found that it would be inappropriate to interpret the amendments as effecting a broad preemption of the traditional right of states to regulate the practice of law absent a clearly expressed legislative intention to do so. Finding no such express intent, and indeed some contrary indications that Congress did not intend to curtail the states' role in enforcing the qualifications for the practice of law, he declined to interpret the definition of "debt relief agency" as including attorneys, which would "ensare attorneys in the thicket of ss. 526, 527 and 528."

Florida Bankruptcy Judge Applies Homestead Cap

2005-10-28T10:46:00.000-05:00

In an opinion rejecting the conclusion of an Arizona Bankruptcy Court discussed earlier, the Chief Bankruptcy Judge of the Southern District of Florida has concluded that the 522(p) homestead cap applies in Florida, an "opt-out" state. In re Kaplan, Case No. 05-14491-BKC-RAM (Bankr. S.D. Fla. Oct. 6, 2005). You can view the opinion here: In re Kaplan. [Edited 11/28/05: It's now been published at 331 B.R. 483].

As discussed earlier, BAPCPA amended 522(p) in order to put a $125,000 limitation on the homestead exemption available to a debtor who purchased a home less than 1,215 days prior to filing for bankruptcy. As a result of the language used by Congress, at least one court has concluded that the cap only applies in states where a debtor has a choice between the federal and state exemptions, and not in states where the legislature precludes use of the federal exemptions. In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005).

Judge Mark considered McNabb, and conceded that the decision is supportable "based on the language as drafted, interpreted using narrow rules of statutory construction" But he stated that "this Court strongly disagrees with the result." Unlike Judge Haines, Judge Mark found the language which invokes the cap "as a result of electing under subsection (b)(3)(A) to exempt property under State law" to be ambiguous. While it could mean that the cap only applies in "non-opt-out" states where a debtor has a choice of electing between the state and federal exemptions, Judge Mark suggested it could also be intended to describe debtors who are utilizing state law exemptions under 522(b)(3), whether their state permits a choice or not.

Conceding that Congress did not choose the best language to accomplish its intended purpose, Judge Mark nonetheless found the ambiguity permitted consideration of the legislative intent. Contrary to Judge Haines' struggle to find anything meaningful in the legislative history, Judge Mark found the legislative intent to be clear, citing a House Report indicating that the bill intended to restrict the "mansion loophole" by which debtors in certain states could shield virtually all the equity in their homes, and statements of particular senators specifically referring to wealthy individuals doing so "in a State such as Florida." Judge Mark found nothing in the legislative history suggesting an intent that the cap be limited only to non-opt-out states.

As a result, the court interpreted the language of 522(p) to apply to all states, declining the opportunity "to be vindictive to its legislative colleagues when it can and should interpret and apply a statute as intended." The Kaplan decision now sets up a conflict over the effect of the 522(p) cap and its effect in the "opt-out" states where the state legislature does not permit its residents to elect between the federal and state exemptions.

Retroactive Effect of Deprizio Amendment

2005-10-27T13:01:00.000-05:00

Some practitioners of a certain age may have been surprised to learn that BAPCPA contains an amendment intending to fix the "Deprizio" problem - didn't they do this back in 1994? Well, a Creditors' Committee was disappointed, if not surprised, to learn that not only is there a new Deprizio amendment, but it applies even to pending cases including one that had been tried but no judgment yet entered. In re ABC-NACO, Inc., ___ B.R. ___, 2005 WL 2649305 (Bankr. N.D. Ill. 2005).

To recap, prior to 1994, lenders who had the good sense to have obtained guarantees from corporate insiders were often penalized in bankruptcy preference actions. Since 11 U.S.C. 547 and 550 permitted a trustee to avoid and recover a transfer "to or for the benefit of a creditor" made up to one year prior to bankruptcy if the creditor was an insider, courts treated payments to the lender as payments for the benefit of the insider guarantors (since they reduced the guarantors contingent liability on the guarantee), and permitted a one-year reachback, even though the lender itself was not an insider. See In re Deprizio, 874 F.2d 1186 (7th Cir. 1989). In 1994 Congress amended 11 U.S.C. 550(c) in the hope of eliminating such exposure, by providing that a transfer could not be recovered during the one-year reachback from a transferee that is not an insider.

Unfortunately (and you may be seeing a pattern here), the Congressional fix did not work perfectly. If the transfer at issue was a lien (i.e., the borrower granted additional collateral to secure the loan), a trustee could simply avoid the transfer and preserve it for the benefit of the estate, without invoking the recovery provisions of 550 (and the protection contained in it for non-insider creditors). In order to fix the hole left by the 1994 amendments, BAPCPA added a new subsection to 547 which provides that in the Deprizio scenario (i.e., a transfer made between 90 days and 1 year to a non-insider creditor, which is for the benefit of an insider creditor), the transfer shall be considered avoided "only with respect to the creditor that is an insider." Unlike most of the provisions of BAPCPA, this particular amendment is effective immediately in any case pending or commenced on or after the date of enactment of BAPCPA.

In ABC-NACO, the Creditors Committee had been given authority to pursue a preference action against a bank which had received pledges of additional collateral from the debtor within a year prior to the petition date. The preference action had already been tried, but judgment had not yet been entered, as of April 20, 2005 when BAPCPA was enacted. The defendant bank filed a post-trial motion for judgment as a matter of law relying on the BAPCPA amendment to 547. The Committee conceded that the amendment if applied would provide a defense to the claim, but contended that the retroactive application of the amendment was unconstitutional as a violation of the Takings Clause and the Due Process Clause.

Judge Wedoff rejected both arguments. As to the Takings Clause, the court found that the Committee could not have any vested property interest in the 547 cause of action until judgment is entered, relying on a "well-established principle" enunciated in McCullough v. Virginia, 172 U.S. 102 (1898) and consistently followed since then. It also found that the Committee had no vested interest in the real estate subject to the transfer, because it only could have such rights as a result of a judgment being entered on the avoidance action. It also rejected the notion that the debtor or estate had any contractual rights to have preferential transfers avoided as a result of a purported "implied provision" in the mortgage agreements incorporating the Bankruptcy Code avoidance provisions as they existed at the time the mortgages were granted.

Finally, the court rejected the Committee's complaint that retroactive application would be a denial of substantive due process, finding that the statute met the standard of being "rationally related to a legitimate legislative purpose." Although the Committee argued that Congress' goal of encouraging lending supported by insider guarantees would justify only prospective and not retroactive application (since loans already made need no encouragement), Judge Wedoff noted an additional reason for the enactment of the amendment which did justify retroactive application: that Congress never intended for there to be an extended preference period based on insider guarantees in the first place.

As a result, Judge Wedoff found no barrier to the retroactive application of the BAPCPA amendment to 547, and accordingly granted judgment in favor of the bank.

Blogitus Interruptus!

2005-10-27T12:57:00.000-05:00

Had a couple of additional updates to do, but Hurricane Wilma had other plans. The good news is that our office is up and running again with no damage. Several other offices in South Florida (and some courts) were not nearly as lucky, and we wish them all a speedy recovery. A couple more case reports coming shortly.

First Application of New Involuntary Provision

2005-10-23T11:03:00.000-05:00

A Maine bankruptcy court has become the first to issue a published decision applying the amended version of 11 U.S.C. 303 governing involuntary bankruptcies. In re Dilley, ___ B.R. ___, 2005 WL 2241975 (Bankr. D. Maine 2005). The pre-amendment version of the involuntary bankruptcy statute disqualified a creditor from filing if its claim was subject to a "bona fide dispute as to liability." BAPCPA amends this to provide that the creditor is disqualified if the claim is subject to a bona fide dispute as to liability "or amount." Unlike most provisions of BAPCPA, the amendments to 303 took effect immediately upon the Act's passage, and apply both to pending and newly filed cases.

It is hard to imagine a factual scenario more horrendous than that described in Dilley. The alleged debtor had been indicted for killing his estranged wife and his mother -- in front of their two minor children. The debtor admitted to the shooting at the scene, but later pled not guilty. The administrator for the late wife's estate, and the conservator for the two children, filed an involuntary petition against the debtor based on their claims for wrongful death, intentional infliction of emotional distress and support.

The Dilley court noted the absence of any useful legislative history on the amendment to 303, and determined that the "clarification" to include disputes as to amount "does not appear to be a departure from the broad scope attributed to 'bona fide dispute' before the amendment took effect." (In fact, several circuits have held that a dispute as to amount, but not liability, would not disqualify a creditor unless the dispute could bring the amount of the claim below the dollar threshold for filing an involuntary).

Applying the new language disjunctively, the court determined that a creditor is disqualified if its claim is subject to dispute as to either liability or amount. It found the wrongful death and emotional distress claims subject to dispute as to liability, notwithstanding the debtor's admission at the crime scene (which it concluded would be admissible as evidence), because the debtor's not guilty plea "establishes a contest to be resolved in the criminal court." (This conclusion seems to improperly equate a mere unsworn denial -- the not guilty plea -- with an evidentiary dispute, and also to improperly tie the debtor's criminal exposure -- which is subject to different legal standards -- with his liability on the civil claim).

Applying the amended language of 303, it also found the support claims to be subject to dispute not as to liability, but as to amount, because the support obligation was dependent on the debtor's current income and his present incarceration strongly suggested an inability to pay. As a result, the court dismissed the involuntary bankruptcy.

Preview of Reclamation Issues

2005-10-21T14:44:00.000-05:00

An Arizona bankruptcy court has a premonition of a potential issue arising from the new reclamation provisions in 11 U.S.C. 546(c). In re Tucker, 329 B.R. 291 (Bankr. D. Ariz. 2005). BAPCPA provides more favorable provisons for vendors who sell goods to a debtor shortly before bankruptcy; among other things, it increases the time for them to make a reclamation demand to 45 days after the debtor's receipt of the goods, compared to 10 days under pre-BAPCPA law.

In Tucker, the court, applying pre-BACPA law, evaluated a seller's right to reclaim a vehicle sold to the debtor under the state Uniform Commercial Code. In a footnote, the court questioned whether state law UCC analysis still applies under the amended 546(c). While 546(c) previously referred to a seller's right under "any statutory or common law" to reclaim, BAPCPA deletes the reference to statutory or common law, causing the Tucker court to query whether new 546(c) creates "an entirely new and self-contained body of reclamation law" rather than merely validating (and expanding) rights that exist under the UCC. If so, the Tucker court suggests that UCC analysis may not even apply.

Dicta on Means Testing

2005-10-21T14:15:00.000-05:00

In re Reeves, 327 B.R. 436 (Bankr. W.D. Mo. 2005) does not apply BAPCPA but does give a preview of the interrelation between pre-amendment "substantial abuse" law and BAPCPA "means testing." In Reeves, the court looked at (but found it unnecessary to decide) whether income of a non-filing spouse should be considered when determining whether granting relief to a debtor under Chapter 7 would be a substantial abuse. Most courts do find that the non-filing spouse's income must be considered.

The court suggested in a footnote that the question may be rendered moot under the amended provisions of 11 U.S.C. 707(b). Citing Brown & Ahern's 2005 Bankruptcy Reform Legislation With Analysis, Judge Dow noted their commentary that the definition of "current monthly income" for the new means test includes income of the debtor's spouse only in a joint case. If the definition is interpreted as precluding consideration of a spouse's income except in a joint case, this would actually mark a departure from existing practice which could make some individual debtors eligible for Chapter 7 (if they do not file jointly) whose cases would have been dismissed under the substantial abuse provisions of pre-amendment law.

Homestead Havens Still Viable?

2005-10-19T11:53:00.000-05:00

In what may be the first reported decision applying the BAPCPA amendments, an Arizona bankruptcy court has concluded that Congress screwed up in drafting the cap on homestead exemptions. In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005). In McNabb, the court found that the particular language Congress used meant that the cap only applies in the few states where a debtor has a choice between state and federal exemptions -- and not in states that have "opted out" of the federal exemptions, including Arizona (and, it should be noted, Florida, a notorious debtor haven).

The McNabb court focused on the portion of 522(p) which says that it applies "as a result of electing" the state exemptions. Although 11 U.S.C. 522 is drafted so that debtors have a choice between the state and federal exemptions, it also allows states to "opt out" of the election and require resident debtors to only use the state exemptions. Most state legislatures have passed laws "opting out". Since residents of those states cannot "elect" betweeen the federal and state exemptions, the McNabb court determined that the 522(p) cap does not apply to them.

Since the court found the language unambiguous, it saw no need to refer to legislative history; upon reviewing the history, the court found it "virtually useless" in interpreting the particular language at issue. Although Judge Haines conceded that "it makes little sense" to limit the cap to the few non-opt-out states, while permitting residents in states that have opted out to take advantage of more generous homestead exemptions, he concluded that this was a problem for Congress to fix and not the courts.

The McNabb ruling, if followed by other courts, will substantially limit the application of the 522(p) homestead cap.

How to Use BAPCPA Blog

2005-10-19T11:30:00.000-05:00

The BAPCPA Blog will be updated regularly with notes and comments on court decisions implementing the BAPCPA amendments. We encourage you to check the website regularly for updates and to contribute your own commentary. This post provides some guidance for how to use the BAPCPA Blog.

Want to share your own thoughts? Underneath each posting there is a link for “comments.” Clicking on this link will open up a form where you can type in and post your own commentary and opinions. You can choose whether to include your name or to post anonymously. To avoid spam, there is a “word verification” which requires you to type in some random letters that appear in the form. Just type them in the space, click the “Publish Your Comment” button, and your comments will be posted to the BAPCPA Blog. We welcome your input and thoughts.

See something on BAPCPA Blog that may be of interest to your colleagues or clients? Underneath each posting there is an envelope with an arrow on it. Clicking on the envelope will enable you to send an email of the posting to someone else. Just type in your name, your email address, the email address of the recipient, and add your own message if you want.

Using RSS (Really Simple Syndication) technology, you can get regular updates as new content is added to the BAPCPA Blog. If you use a newsreader program or a web-based news aggregator you can subscribe to BAPCPA Blog simply by using one of the links under the “Subscribe” heading. Want more information on how to use RSS? Try Yahoo! News RSS.

You can also subscribe to the BAPCPA Blog and receive updates by email. Just type your email address into the form (there is then a brief registration process) and you will begin receiving email updates when the BAPCPA Blog is updated.

Looking for something in particular? At the very top of the page, there is a box where you can type in a search term and click on "Search this Blog." For instance, I've tried to include in each post a reference to the section of the Bankruptcy Code which the case analyzes; so if you're looking for all posts which discuss the amendments to 11 U.S.C. 522 you could do a search for "522" and get a listing of the posts referring to the statute.

Hope this helps, and we look forward to hearing from you.

Welcome!

2005-10-19T11:02:00.001-05:00

Since the Bankruptcy Abuse Prevenstion and Consumer Protection Act of 2005 ("BAPCPA") was passed on April 20, 2005, there has been much discussion about how several of its provisions will be implemented. Much of that discussion suggests that some of the amendments may be something less than a model of clarity. A few provisions went into effect immediately, while many others became effective 180 days after passage - October 17, 2005. This blog will follow and report on how the BAPCPA Amendments are being interpreted by the courts.