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.