BAPCPA Business Changes Not Easy to Decipher Either

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?)