Wednesday, December 14, 2005

Another Florida Judge Joins Homestead Debate

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

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

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

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

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

Clarification of Credit Counseling Requirements

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

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

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

Monday, December 05, 2005

Request to Extend Stay Must be Served on Affected Creditors

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

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

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

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

Credit Counseling Certification Not Extended for Excusable Neglect

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

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

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

Thursday, December 01, 2005

Once is an Accident ...

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

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

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

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

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