Friday, October 28, 2005

Florida Bankruptcy Judge Applies Homestead Cap

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

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

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

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

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

Thursday, October 27, 2005

Retroactive Effect of Deprizio Amendment

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

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

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

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

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

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

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

Blogitus Interruptus!

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

Sunday, October 23, 2005

First Application of New Involuntary Provision

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

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

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

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

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

Friday, October 21, 2005

Preview of Reclamation Issues

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

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

Dicta on Means Testing

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

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

Wednesday, October 19, 2005

Homestead Havens Still Viable?

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

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

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

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

How to Use BAPCPA Blog

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

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

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

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

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

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

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


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