Wednesday, December 14, 2005

Another Florida Judge Joins Homestead Debate

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

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

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

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

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

Clarification of Credit Counseling Requirements

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

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

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

Monday, December 05, 2005

Request to Extend Stay Must be Served on Affected Creditors

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

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

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

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

Credit Counseling Certification Not Extended for Excusable Neglect

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

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

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

Thursday, December 01, 2005

Once is an Accident ...

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

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

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

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

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

Tuesday, November 29, 2005

New Subsection 366(c) Protects Utility's Bargaining Power

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) amended 11 U.S.C. 366, by adding a new subsection (c) that provides additional protections for utilities. The first decision interpreting the new subsection will leave Chapter 11 debtors uncertain of how to insure that utilities do not discontinue service following a bankruptcy filing.

In In re Lucre, Inc., __ B.R. __, 2005 WL 3111078 (Bankr. W.D. Mich. 11/9/05), the debtor, a Competitive Local Exchange Carrier, filed an emergency motion thirteen days after filing its Chapter 11 petition seeking to extend the automatic injunction imposed by section 366(a) to prevent its power company and several telecommunications companies from discontinuing or refusing service. The debtor argued that the injunction should be continued notwithstanding new subsection 366(c) because the debtor made an offer of adequate assurance, and the utilities failed to respond.

The new addition of 366(c) creates a complicated timeline. Under subsection (a), a utility is basically prohibited from refusing or discontinuing service to a debtor, except as provided under subsection (b) and new subsection (c). Under subsection (b), the utility may not refuse or discontinue service if within 20 days after an order for relief, the debtor furnishes adequate assurance of payment (i.e. a deposit or other security) for service after that date; on request, the court can order reasonable modification of the amount of the deposit or other security. Under 366(c), in a Chapter 11 case, a utility may refuse or discontinue service, if within 30 days after the petition date, the utility does not receive adequate assurance of payment for utility service "that is satisfactory to the utility;" on request, the court may also order modification of the amount of such assurance of payment under 366(c).

With respect to the 10 day “gap” between section 366(b) and 366(c), the court explained that the debtor’s offer of adequate protection “stands on its own” and that the utility had the burden of seeking modification if it was not satisfied. However, the Lucre court refused to consider the Debtor's request to extend the subsection (a) injunction beyond the 30 days, on the basis that the statute requires "as a condition to continuing the injunction" either the utility's acceptance of the debtor's proposed adequate assurance, or the debtor's acceptance of the adequate assurance proposed by the utility. According to Judge Hughes, the debtor "has no recourse to modify the adequate assurance payment the utility is demanding until the [debtor] actually accepts what the utility proposes."

Thus, the court effectively held that new subsection 366(c) prevents a Chapter 11 debtor from moving quickly to determine adequate assurance of payment, and protects the bargaining power of the utility. Unfortunately, it does not quite answer the question of what to do when the utility simply refuses to negotiate. The court does suggest that a utility might be subject to an implicit obligation to bargain in good faith with the debtor before electing to discontinue service, and that a debtor may have the right to seek to enjoin the utilities from exercising their rights to discontinue under subsection (c). This seems to really ratchet up the burden on the debtor and the court, presumably requiring the filing of an adversary proceeding for injunctive relief and a motion for preliminary injunction before the 30th day if the debtor doesn't want to wait around and see if the lights go dark.

At the same time, the court limited the group of utility companies entitled to the benefits of new subsection (c). Judge Hughes pointed to the distinction between the use of “service” in subsections (a) and (b) and “utility service” in new subsection (c). The court held that this distinction indicated Congress’ intent that the new subsection only apply to utilities that provide services that the debtor itself actually consumes. In this case, two of the utilities provided wholesale telecommunications services, which were purchased by the debtor and passed on to its own customers, and for whom the debtor also provided reciprocal services under an interconnection agreement. The court held that these utilities did not provide “utility service” to the Debtor within the meaning of subsection (c), and are not entitled to the “more stringent” requirements of that subsection.

Monday, November 28, 2005

Home Equity Appreciation Not Subject to Cap

While there has already been considerable jurisprudence since BAPCPA was passed which deals with the $125,000 cap for homesteads purchased within 1,215 days of the petition date under 522(p), a recent case weighs in on whether an increase in the equity position in a homestead during the 1,215-day period is subject to the statutory cap and not exempt.

In In re Blair, __ B.R. __, 2005 WL 3108495 (Bankr.N.D. Tex. 11/21/05), the Debtors claimed an exemption for the equity in their homestead in an amount just under $700,000. The Debtors had purchased their home in 2000, outside the 1,215 lookback period, but continued to make regular mortgage payments and build equity in the property during the 1,215-day period. An unsecured creditor challenged the exemption listed for the homestead equity and asserted that the Debtors were not entitled to an uncapped exemption for the equity increase during the 1,215-day lookback period.

In relevant part, 522(p) provides that " ... a debtor may not exempt any amount of interest that was acquired by the debtor during the 1,215-day period ... that exceeeds in the aggregate $125,000 in value ..." As Judge Hale in Blair noted, the term "interest" which must be acquired by the debtor during the 1,215-day period to trigger the new homestead cap is not defined. Judge Hale held that a debtor does not actually "acquire" equity in a home, but rather acquires title to a home. Thus, the "interest" the Debtors acquired was the actual purchase of the home, which was completed well before the 1,215-day period, and not subject to the $125,000 cap.

The court found this interpretation was consistent with related subsections of 522, including the companion provision in section 522(p)(2)(B), which allows for rollover by a detbor of the equity in one home to another home located in the same state. A debtor is not subject to the homestead cap if he takes the proceeds of his first residence and reinvests them in a second residence even within the prescribed period of section 522(p). The unsecured creditor's reading of the statute would seem at odds with this provision (if debtors can reinvest proceeds of one homestead into another, why can't they simply retain the increased value of a homestead they've already bought?).

Finally, Judge Hale concluded that while the term "interest" was unambiguous, if any ambiguity required inquiry into the legislative history of 522(p), the debtors would still prevail. If the purpose of 522(p) was to prevent out of state residents from moving to certain states in order to file for bankruptcy under more advantageous state homestead exemption laws, that rationale did not apply to the debtors in this case.

"As far as credit counseling goes..."

Well, there appears to be at least point on which BAPCPA is manifestly clear: there will be no evading the threshold pre-filing credit counseling requirement, at least not without a signed certification that the debtor attempted to but was unable to obtain counseling prior to filing. Several other courts have joined in the chorus to strictly enforce the credit counseling additions to the 11 U.S.C. 109 eligiblity provisions, and to deny extensions unless they make the necessary certifications.

In In re LaPorta, __ B.R. __, 2005 WL 3078507 (Bankr. D. Minn. 10/27/05), a pro se debtor filed her petition together with an unsigned, unverified statement that began "As far as credit counseling goes...", and then proceeded to explain that the credit counseling agencies listed on the U.S. Trustee's website were too far for her to travel, but that she was willing to take a free online course if one was available. A separate submission indicated that the filing was intended to prevent the repossession of the debtor's car.

The court dismissed the petition on the basis that Ms. LaPorta was not eligible to be a debtor under 11 U.S.C. 109. She did not complete the counseling requirements, her unsigned statement was not a "certification" (which must be signed under penalty of perjury) sufficient to be treated as a request for an extension, and even if it were, it failed to certify that she had in fact made a request for credit counseling services that had not been provided. Finding the statute "utterly clear," the case was dismissed. While the court acknowledged that the result "is harsh," it found no other result possible under BAPCPA, particularly given Congress' insertion of the new counseling requirements into 109, the section that defines the eligibility to be a debtor.

Meanwhile in Texas, a court had similarly denied a motion for extension of time to comply with the counseling requirements which was not accompanied by a certification, and which did not demonstrate that the debtor had requested but was unable to obtain counseling services. In re Hubbard, 332 B.R. 285 (Bankr. S.D. Tex. 10/31/05). A week later, however, the court reconsidered, and entered an order requiring the U.S. Trustee of the district to describe what procedures it had followed in determining that credit counseling was available in the district. In re Hubbard, __ B.R. __, 2005 WL 3061939 (Bankr. S.D. Tex. 11/8/05). Under 109(h)(2), the credit counseling requirements do not apply if the U.S. Trustee determines that adequate counseling services are not reasonably available in the district.

Things did not end well for the debtor or her counsel. The U.S. Trustee responded to the court that there were several counseling services available, and indeed 53 of 79 petitions filed after October 17, 2005 by debtors represented by counsel included certifications of having received counseling. Only six requests for extension had been made, five of which (including Ms. Hubbard) were made by debtors all represented by the same lawyer. The court on November 16, 2005 entered an order striking the debtor's petition (and those of the four other debtors represented by the same lawyer) and has required debtor's counsel to show cause why his fees should not be disgorged.

A court in Ohio has also joined the bandwagon. In re Cleaver, Case No. 05-46572 (Bankr. S.D. Ohio 11/17/05) (link to as-yet unpublished opinion here; thanks to alert reader Edward J. Boll, III of Lerner, Sampson & Rothfuss, L.P.A. in Cincinnati for the tip). In Cleaver, Judge Walter found that a motion for extension which was also signed by the debtor "barely suffices" as a "certification," but that its contents were inadequate since it did not indicate that the debtor had attempted to obtain counseling before filing.

Judge Walter noted a couple other interesting questions that may be presented by 109(h)(3) as well, although they were not presented by Mr. Cleaver's inadequate motion. For instance, he queries whether the required certification that the debtor requested but was unable to obtain the counseling services "during the 5-day period" beginning on the day the request was made effectively imposes a five day "waiting period" after requesting counseling before a debtor can file the petition with the requested certification. He also raises the question of whether a certification that a single agency could not provide the services would be adequate, or whether the prospective debtor must certify that no approved agency could provide the services within five days.

These questions may await another day -- but in the meantime, it appears increasingly clear that courts will not be accepting petitions if they are not accompanied by a signed certification satisfying all of the requirements of 109(h)(3), including that the debtor had requested but not been able to obtain counseling.

No Appeal on Homestead Cap?

There are several new cases to report on, but before doing so let's briefly revisit the "Great Homestead Debate of 2005." We've previously reported on the conflicting decisions interpreting the 522(p) homestead cap, with at least one court holding that the cap only applied in "non-opt-out" states where debtors could elect between federal and state exemptions, and several others holding that the cap applied universally. A judge in Nevada in the latter camp had issued a certification for direct appeal of her decision to the Ninth Circuit Court of Appeals, based on conflict with an earlier Arizona decision. See In re Virissimo, 332 B.R. 208 (Bankr. D. Nev. 2005).

Unfortunately, it appears that any hope for an early circuit-level decision on this issue may be dashed -- despite the certification, the debtor apparently has not taken an appeal of the October 31, 2005 order sustaining the trustee's objection to the homestead exemption. The Virissimo docket reflects that the trustee is now moving forward with a motion to sell the homestead property. Those of us hoping for more clarity on this issue may still be waiting a while.

Wednesday, November 16, 2005

No Excusing Credit Counseling Requirements

We earlier mentioned a Virginia case which denied a request for extension of time to comply with the new credit counseling requirements where the debtor did not certify that he had sought and been unable to receive counseling before filing. In re Watson, 332 BR 740 (Bankr. E.D. Va. 11/3/05). Debtors are faring no better elsewhere. A Missouri court has likewise concluded that the certification of an unfulfilled request is essential for obtaining an extension, regardless of the exigent circumstances otherwise demonstrated. In re Gee, 332 B.R. 602 (Bankr. W.D. Mo. 10/26/05). Judge Dow in Gee held that such a certification is a "plainly stated requirement" for granting a waiver and politely declined the Debtor's invitation to rewrite the statute.

Tuesday, November 15, 2005

Another Homestead Limitation for Fraudulent Asset Conversions

Maybe it's just because the 522 amendments became effective in April, but there sure do seem to be a lot of opinions coming out on the new homestead limitations. Unlike those already reported on, including McNabb, Kaplan, and Virissimo, which deal with the $125,000 cap for homesteads purchased within 1,215 days of the petition date under 522(p), this latest opinion addresses the limitation under 522(o) imposed when non-exempt assets are used to increase the value of a homestead. In re Maronde, __ B.R. __, 2005 WL 3016196 (Bankr. D. Minn. 11/8/05).

In Maronde, the debtor in October 2003 took out a $50,000 home equity line of credit on his residence. He used most of the line to acquire a truck and trailer. By late 2004 he was in financial trouble, and in early 2005 came up with the idea of taking out balance transfers on newly obtained credit cards, and using the proceeds to pay down the line of credit. Over one week in February 2005, he made four transfers from different credit cards to pay down $31,500 on the home equity line (over the next several weeks he attempted six more such transfers, but apparently those wily credit card companies finally caught on). After consulting with a bankruptcy attorney in March, the following month he sold the truck and trailer (which would not be fully exempt) for about $20,000 and used the proceeds to pay off the remaining balance on the home equity line. He then filed a Chapter 13 petition on April 20, 2005, the effective date of the BAPCPA exemption amendments (woops!).

Mr. Maronde claimed equity in the homestead of $69,572 as exempt (ignoring for the sake of simplicity an issue as to the acreage of the property, Minnestoa law allows a debtor to claim a homestead exemption of up to $200,000), and the Trustee objected, relying on newly enacted 522(o), which provides that for purpoess of 522(b)(3)(A), "the value of an interest in [a homestead] shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt, under subsection (b), if on such date the debtor had held the property so disposed of."

Judge Dreher, after reviewing the new amendments, concluded that the Congressional purpose is clear: "debtors seeking the protection of state exemptions must meet their state exemption provision requirements as limited by s. 522(o) and (p)." (Those following the debate on the applicability of the 522(p) cap in opt-out states may want to take notice). As a result, the question of whether Mr. Maronde's homestead exemption would be limited depended on whether he acted with the intend to hinder, delay or defraud creditors when he sold his truck and trailer and used the proceeds to pay off the home equity line (and thereby increase the equity in his homestead).

In answering this question, Judge Dreher concluded that the interpretation of the language "intent to hinder, delay, or defraud a creditor," as used in 522(o), should follow the established case law already in existence interpreting similar language in section 548 fraudulent conveyance and 727(a)(2) denial of discharge proceedings. Applying the traditional "badges of fraud," the court had no trouble concluding that the debtor was engaged in a scheme to defraud his creditors by transforming non-exempt assets (the truck and trailer) into exempt (equity in his homestead). As a result, the court denied the debtor's homestead exemption to the extent of the increased equity attributable to the truck and trailer proceeds used to pay off the equity line.

Monday, November 14, 2005

No Extension for Credit Counseling

On November 3, 2005 a Virginia court issued a published opinion on the new credit counseling provisions in BAPCPA, rejecting a debtor's request for more time to satisfy the new requirement that individual debtors complete a credit counseling program prior to filing. In re Watson, __ B.R. __, 205 WL 2990902 (Bankr. E.D. Va. 2005).

Amended 11 U.S.C. 109(h) requires that individual debtors, within 180 days prior to filing, complete a credit counseling program from an approved agency. There are provisions for a temporary waiver of this requirement if the debtor files a certification that: "(i) describes exigent circumstances that merit a waiver of the requirements ...; (ii) states that the debtor requested credit counseling services ... but was unable to obtain the services [within 5 days after the request]; and (iii) is satisfactory to the court." In Watson, the debtor filed a certification that he had been unable to obtain credit counseling prior to filing because he had been involved in a hearing and mediation on an unlawful detainer action filed by the landlord of his business premises until immediately before he filed his personal bankruptcy. The certification did not indicate that the debtor had requested credit counseling from an approved agency. The Watson court concluded that this didn't cut it, denied the request for an extension and dismissed the case.

First, the court rejected the debtor's argument that the 109(h) requirements cited above are disjunctive rather than conjunctive (i.e., that there can be either exigent circumstances or an unfulfilled request to counseling agency). The court concluded that the use of a semi-colon between clauses (i) and (ii), with an "and" to connect clause (iii), clearly demonstrated the intent that the statute be interpreted conjunctively, notwithstanding the absence of a phantom "and" between clauses (i) and (ii). Somewhat apologetically, it noted that "while the result of interpreting Section 109(h)(3)(A) using the Plain Meaning Rule may produce an unpopular and perhaps even burdensome result, this Court is not the forum in which to seek a remedy; the proper venue instead lies with Congress."

Having concluded that the plain language requires an individual to seek credit counseling prior to filing, it then addressed the debtor's alternative argument that the imposition of such a requirement is an unconstitutional violation of the equal protection clause. Specifically, the debtor argued that the imposition of the credit counseling requirement only on individual debtors denies equal protection to people who choose to operate their businesses as sole proprietorships rather than through corporations or limited liability companies. Unsurprisingly, the Watson court was not persuaded. Since sole proprietors are not a "suspect" class meriting heightened review, and the counseling requirement does not burden a fundamental right (there being no constitutional right to a discharge of debts), the court found that the credit counseling requirement passed the necessary rational basis test.

The Watson decision confirms that exigent circumstances alone will not excuse debtors from the credit counseling requirements; debtors must also certify that they have actually sought, and been unable to get, credit counseling before filing.

Court Confronts Extension of Automatic Stay

The filing of a bankruptcy petition generally puts into effect an "automatic stay" which prevents creditors from pursuing further collection activities. Prior to the passage of BAPCPA, the stay usually would be in effect until the earliest of the closing or dismissal of the case, or the debtor receiving or being denied a discharge. A creditor typically would have to take affirmative action in order to have the stay lifted. BAPCPA made some dramatic changes to the automatic stay provisions. One of these is that if a person has been in a prior bankruptcy case within the previous year, the stay automatically terminates after 30 days unless the debtor (or another party in interest) obtains an order continuing the stay. 11 U.S.C. 362(c)(3). A Texas bankruptcy court has become the first to issue a published decision analyzing the mechanics of these new provisions. In re Charles, 332 B.R. 538 (Bankr. S.D. Tex. 11/4/05).

In Charles, the debtor had filed a previous case which was voluntarily dismissed on July 6, 2005. He then filed a new case on October 31, 2005 (after the effective date of BAPCPA). Simultaneously with the new filing, the debtor filed an emergency motion to continue the automatic stay and a motion requesting an expedited hearing. The court first noted that if a debtor, like Mr. Charles, has been a debtor in a prior case pending within the preceding one year period, then the automatic stay created by the new filing is gone on the 30th day after the filing. However, 362(c)(3)(B) permits a debtor to file a motion to extend the stay. The court noted that the statute's only facial requirements are that (1) notice of the motion, and the hearing, are completed before the expiration of the 30 days; and (2) the debtor proves that the new filing is "in good faith as to the creditors to be stayed." The Charles court suggests this is not as simple as it may seem, however.

First, according to the court, the motion cannot simply seek extension of the stay generally, but must demonstrate, as to each creditor to be stayed, why the motion is appropriate as to that creditor. While Mr. Charles' motion gave adequate notice as to one particular creditor, it did not "set forth a reasoned basis to extend the stay as to any [other] creditor." Accordingly, while the court permitted the motion to go forward as to the one creditor, it required the debtor to replead allegations as to each creditor against whom he sought to impose a continued stay out of concern that "creditors be given abundantly fair warning that their right may be adversely affected." The Charles court expressed concern that creditors may be unfamiliar with the new provisions and that the relevant provisions in BAPCPA "are, at best, particularly difficult to parse and, at worst, virtually incoherent." (Some may find ironic the court's solicitude for creditors who were the primary force behind the amendments).

Second, the statute creates a rebuttable presumption that certain new cases are not filed in good faith, including cases filed by debtors who have had more than one case pending in the prior year, debtors whose cases were dismissed for failure to file or amend required documents without substantial excuse, failure to provide court-ordered adequate protection, or failure to perform the terms of a confirmed plan, or debtors who have not had a substantial change in their financial or personal affairs since the prior dismissal and there is no other reason to conclude the case will succeed. 11 U.S.C. 362(c)(3)(C). This presumption can be rebutted only be clear and convincing evidence, indicating to the Charles court that "Congress intended to direct the Court to conduct an early triage of refiled cases."

Third, the Charles court went beyond the articulated requirements of the new provisions to find that a court should extend the stay only if the movant can also demonstrate "sufficient equitable factors" to justify the exercise of such discretion (although it failed to articulate any such factors). Perhaps most curious, though, is that after suggesting a need to satisfy unspoken equitable considerations, the Charles court concludes by stating that if there is no timely objection to the debtor's motion to continue the stay, the motion may be granted without hearing.

The motion to extend the stay was set for a further hearing on November 18, 2005 and if we get more information as to its resolution you will see it here.

Tuesday, November 08, 2005

Interim Rules on Direct Appeals

In my last post, I noted that a Nevada court had detected a "catch-22" in the new provisions for direct appeals from the bankrutpcy court to the circuit court of appeal, which arguably require a bankruptcy court to make a certification that the matter warrants a direct appeal before any notice of appeal has been filed. The Ninth Circuit Bankruptcy Appellate Panel has addressed this potential snafu by adopting interim rules for direct appeals, as recommended by the United States Judicial Conference Standing Rules Committee. In re Adoption of Interim Procedural Rules, 332 B.R. 199 (9th Cir. B.A.P. 2005).

The interim rules: (1) confirm that a certification prior to filing of a notice of appeal is ineffective unless and until a notice of appeal is filed; (2) provide that a certification may be made only by the Bankruptcy Court prior to the docketing of the appeal, and only by the District Court or BAP after the appeal is docketed; (3) specify that a request by the parties for certification should be filed with the clerk of the court in which the matter is then pending; and (4) specify the contents of a request for certification and set the deadline for a response.

Since typically there is a gap in time between the filing of the notice of appeal and the docketing of the appeal with the District Court or BAP while the record on appeal is being identified and assembled, the rules give the Bankrutpcy Judge the opportunity to issue a certification either before or after a notice of appeal is filed.

Friday, November 04, 2005

Nevada Homestead Decision Certified for Direct Appeal

One other interesting side-note about the Nevada decision in Virissimo. As a matter of first impression involving the "statutory construction of a hotly contested provision of BAPCPA," and in light of the conflict with the decision in McNabb, the Bankruptcy Judge in Virissimo has certified the decision for direct appeal to the Ninth Circuit Court of Appeals -- invoking another of the new provisions added by BAPCPA. In re Virissimo, 332 B.R. 208 (Bankr. D. Nev. 2005). If the Ninth Circuit authorizes the direct appeal (and if any of the litigants actually take an appeal, see below), there may be a circuit-level decision on the issue sooner rather than later.

Prior to BAPCPA, appeals of all bankrutpcy orders were subject to a two-stage appellate process: first to the District Court (or to a Bankruptcy Appellate Panel in the jurisdictions which have them), and then (at the elction of either party) to the Circuit Court of Appeals. The efficiency of the system was certainly subject to question, since the standard of review exercised by both the District Court and the Circuit Court of Appeals is identical. In amendments to 28 U.S.C. 158, Congress has created a mechanism for bypassing the two-step review in certain situations.

I'll confess I had not looked closely at the 28 U.S.C. 158 amendments before seeing Virissimo. On first reading, they may sound familiar -- because the standard is similar to (but not identical to) the standard for interlocutory appeals from the District Court to the Circuit Courts of Appeal under 28 U.S.C. 1292. The facial similarity may be misleading, though, since there are significant differences. Under new 28 U.S.C. 158(d)(2), the Court of Appeals can authorize a direct appeal, bypassing the District Court, if (1) the order involves "a question of law as to which there is no controlling decision" from the circuit or the Supreme Court, "or involves a matter of public importance"; (2) the order "involves a question of law requiring resolution of conflicting decisions"; or (3) an immediate appeal "may materially advance the progress of the case or proceeding in which the appeal is taken". The lower court can certify sua sponte or on motion by a party if it finds that one of these conditions exists, or apparently, is required to certify even if it does not find any of the conditions are satisfied, if the appellants and a majority of the appellees request it. The decision of whether to authorize the direct appeal rests with the circuit.

By comparison, under 28 U.S.C. 1292(b), a district court can certify an interlocutory appeal to the circuit if the order "involves a controlling question of law as to which there is substantial ground for difference of opinion and ... an immediate appeal may materially advance the ultimate termination of the litigation." The bankruptcy direct appeal provision is similar, but would appear to be broader: (1) unlike the interlocutory appeal statute, the bankruptcy direct appeal statute is not limited to "controlling" issues of law; (2) the bankrutpcy direct appeal provisions expressly include matters of first impression and does not specify the level of the "conflicting decisions" to be resolved, while the interlocutory appeal standard has been interpreted as not requiring certification of matters of first impression or conflicts among lower courts; (3) the interlocutory appeal statute uses the conjunctive "and," while the bankrutpcy direct appeal statute uses the disjunctive "or," when referring to the appeal materially advancing the termination of the litigation. As a result, while the interlocutory appeal must both involve a controlling question of law and also must have the potential to materially advance the litigation, a bankruptcy order could theoretically be certified for direct appeal even if it did not involve a controlling question of law, if its resolution might advance the "progress of the case or proceeding". Also interesting is the requirement that the court certify upon the agreement of the parties, even if it does not find any of the conditions to be satisfied. (Whether or not the circuit would accept the certification is, of course, another matter).

One of the curious things about the process in the Virissimo case is that the judge issued the certfication before any party had taken an appeal. She notes in the opinion that the statute "creates the classic 'catch-22.'" Since the filing of an appeal typically ends the jurisdiction of the bankruptcy court, Judge Riegle concluded that a court that believes certification is appropriate must do so before an appeal is docketed. Of course, if no appeal is taken then the certification is a pointless act.

The homestead issue would seem to be a good candidate for direct appeal, especially with the conflict within the Ninth Circuit between McNabb and Virissimo -- we'll be following it to see if the Ninth Circuit takes it.

Wednesday, November 02, 2005

Another Court Applies Homestead Cap

A bankruptcy judge in Nevada has joined Judge Mark of Florida in concluding that the 522(p) homestead exemption cap applies in all states, and not just those which permit residents to elect between the federal and state exemptions. In re Virissimo, 332 B.R. 201 (Bankr. D. Nev. 2005). As previously discussed here, at least one judge in Arizona has held that the language used by Congress in 522(p) to create a $125,000 cap on exemptions for homesteads purchased less than 1,215 days prior to bankruptcy does not apply in states where the state legislature has prohibited debtors from selecting the federal rather than state exemptions. In re McNabb, 326 B.R. 785 (Bankr. D. Ariz. 2005). A Florida court has held to the contrary that 522(p) can and should be interpreted consistently with legislative intent to impose the cap on all state homestead exemptions. In re Kaplan, 2005 WL 2508151 (Bankr. S.D. Fla. 2005). The different results center on the interpretation of the phrase in 522(p) which renders the cap applicable "as a result of electing under subsection (b)(3)(A) to exempt property under State or local law," and the extent of reliance on legislative history. Judge Riegle in Virissimo joins the Kaplan court in applying the cap broadly.

In divining the plain meaning of 522(p), Judge Riegle concludes that there is an "election" for purposes of 522(p) when a debtor elects to claim property as exempt, and "elects" to do so under 522(b)(3). She suggests that a debtor always "elects" between exemptions under the federal provisions under 522(b)(2) and the state or local provisions under 522(b)(3), even if an "election" to use 522(b)(2) might be ineffective if the state law prohibits use of the federal exemptions and a timely objection is made.

Alternatively, Judge Riegle finds the statute ambiguous in that it is susceptible to multiple interpretations and, like Judge Mark, concludes that legislative history can be relied on when the clearly expressed legislative intent is contrary to the strict language. Also like Judge Mark, the Nevada court had no difficulty discerning Congressional intent to apply the cap to all debtors and not solely those who reside in states that permit the use of federal exemptions.

With three notable decisions already issued, the homestead cap -- which was one of the most frequently discussed BAPCPA changes -- is proving to be a continuing subject of debate and dispute.

Georgia Judge Says Attorneys Not "Debt Relief Agencies"

Apparently too impatient to await an actual case or controversy, a Georgia bankruptcy judge issued a sua sponte ruling on October 17, 2005, the effective date of most BAPCPA provisions, determining that attorneys are not "debt relief agencies" as that term is used in BAPCPA. In re Attorneys at Law and Debt Relief Agencies, __ B.R. __, 2005 WL 2626199 (Bankr. S.D. Ga. 2005).

As noted by Judge Davis, BAPCPA imposes substantial requirements on activities of "debt relief agencies," defined as "any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer." 11 U.S.C. 101(12A). "Bankruptcy assistance," in turn, is defined as including any services provided to an assisted person "with the express or implied purpose of providing information, advice, counsel, document preparation, or filing, or attendance at a creditors' meeting or appearing in a case or proceeding on behalf of another or providing legal representation with respect to a case or proceeding under this title." 11 U.S.C. 101(4A). For instance, "debt relief agencies" are required to enter into written contracts with "assisted persons," disclose in all advertising that their services contemplate bankruptcy, and provide written notice to "assisted persons" of the disclosure requirements of the Bankruptcy Code and potential sanctions for non-compliance. They are required to advise the "assisted person" that the person may proceed pro se, and they are prohibited, among other things, from counseling an "assisted person" to pay an attorney for services in contemplation of bankruptcy. See 11 U.S.C. 526.

After going over much of the commentary written in anticipation of the passage of BAPCPA on the "debt relief agency" provisions, Judge Davis concluded that attorneys are not "debt relief agencies." First, he noted that while the definition of "debt relief agency" includes "petition preparers," that term expressly excludes "attorneys," which is a separately defined term under 11 U.S.C. 101(4). Pointing to plain meaning, he reasoned that "attorney" and "debt relief agency" are not synonymous and do not in common understanding include each other. Judge Davis found that the references to "providing legal representation" in the definition of "debt relief agency" refer to the unauthorized practice of law by non-attorneys, rather than the rendering of legal advice by attorneys. and was intended to empower bankruptcy courts to protect consumers harmed by such unauthorized practice.

Second, Judge Davis noted the illogic of interpreting certain of the provisions (for instance, those requiring a "debt relief agency" to advise an "assisted person" that they have the right to hire an attorney or how to perform services pro se) as applying to attorneys. Interpreting "debt relief agency" as excluding attorneys therefore favors a logical and sensible interpretation over an illogical or absurd one.

Finally, the court found that it would be inappropriate to interpret the amendments as effecting a broad preemption of the traditional right of states to regulate the practice of law absent a clearly expressed legislative intention to do so. Finding no such express intent, and indeed some contrary indications that Congress did not intend to curtail the states' role in enforcing the qualifications for the practice of law, he declined to interpret the definition of "debt relief agency" as including attorneys, which would "ensare attorneys in the thicket of ss. 526, 527 and 528."

Friday, October 28, 2005

Florida Bankruptcy Judge Applies Homestead Cap

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

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

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

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

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

Thursday, October 27, 2005

Retroactive Effect of Deprizio Amendment

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

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

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

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

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

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

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

Blogitus Interruptus!

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

Sunday, October 23, 2005

First Application of New Involuntary Provision

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

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

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

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

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

Friday, October 21, 2005

Preview of Reclamation Issues

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

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

Dicta on Means Testing

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

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

Wednesday, October 19, 2005

Homestead Havens Still Viable?

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

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

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

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

How to Use BAPCPA Blog

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

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

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

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

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

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

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


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