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

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

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

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

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

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

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

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.

Riddles and Rhymes - Court Ponders "Automatic" Dismissal

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

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

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

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.

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

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

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?