Monday, October 23, 2006

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").

Thursday, October 12, 2006

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.

Friday, August 18, 2006

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.

Monday, August 07, 2006

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.

Friday, August 04, 2006

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;
(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;
(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.

Thursday, July 27, 2006

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.

Wednesday, July 26, 2006

Excuses, Excuses – Temporary Waivers of Credit Counseling

Some of the first decisions interpreting the BAPCPA amendments made clear that in order to obtain a "waiver" (actually, only an extension of time) of the pre-filing credit counseling requirement imposed by 11 U.S.C. 109(h), a debtor must submit a certification that:

(i) describes exigent circumstances that merit a waiver;
(ii) states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency, but was unable to obtain the services referred to in paragraph (1) during the 5-day period beginning on the date on which the debtor made that request; and
(iii) is satisfactory to the court.

These requirements are mandatory, and the court has no discretion to grant a "waiver" unless the debtor satisfies all three requirements. Several recent cases demonstrate, though, that the courts have at least some discretion in determining what constitutes exigent circumstances that merit a waiver, and what constitutes an inability to obtain counseling.

For instance, two cases in which debtors asserted an inability to obtain counseling due to unavailability of funds to pay for counseling reached contrary results. In In re Piontek, __ B.R. __, 2006 WL 1837905 (Bankr. W.D. Pa. 7/5/06), husband and wife had filed a joint petition under Chapter 13 along with a Certificate of Credit Counseling evidencing the husband's completion of pre-petition counseling, but not the wife's. The wife claimed that one month prior to filing, the couple contacted a credit counseling agency, but they only had enough funds to pay for one credit counseling session, which cost $50 per person.

The Piontek court held that the proper inquiry is "whether the debtor was actually precluded by his or her circumstances from obtaining the briefing," citing In re Tomco, 339 B.R. 145 (Bankr. W.D. Pa. 2006). As a general proposition, insufficient funds may, under the right circumstances, provide a de facto "inability" to obtain counseling, and be a "satisfactory" reason to grant a temporary waiver. However, the court found that the evidence in this case demonstrated that the wife was able to pay for counseling. First, $50 from the $400 retainer to the couple's bankruptcy counsel could have gone to credit counseling, especially since $274 of it was used to pay the filing fee (I wonder how the attorney would have felt about that!). The debtors had a total monthly income of at least $2,361.64, car payments in excess of $1,000, $55 for cable T.V., and $141.88 to the wife's 401(k) plan. They also had $75 cash on hand, $165 in a checking account, and $18,000 in equity in their home. Finally, § 111(c)(2)(B) requires credit counseling agencies to provide services "without regard to [the debtors'] ability to pay the fee," and the wife never requested counseling on a pro bono or reduced fee basis. Had such request been made and inappropriately denied, it would have been possible for the court to conclude that an inability to pay counseling was due to circumstances beyond their control. The Court dismissed the wife, and as a final note rejected the notion that credit counseling obtained by the husband could be imputed to the wife.

On the other hand, Judge Ray, in In re Westenberger, Slip Copy, 2006 WL 1105008 (Bankr. S.D. Fla. 4/25/06), granted a debtor's request for pre-petition waiver based on an inability to pay for credit counseling. The debtor alleged that a creditor had frozen his bank account, which was his only source of income. "The Court [found] the Debtor's situation of being without any money and having no access to funds unless released by the bank to be exigent. As to whether it merits a waiver, the Court [found] that it does because the Debtor's only bank account and sole source of funds was frozen." Unlike Piontek, the court made no mention about the debtor asking for counseling on a pro bono basis.

Meanwhile, in In re Star, 341 B.R. 830 (Bankr. E.D. Va. 4/24/06), the court temporarily waived pre-petition counseling for an incarcerated debtor. Debtor alleged that he was disabled within the meaning of § 109(h)(4) because he did not have credit counseling courses available or access to internet or conventional phone usage. As discussed in our prior post, "Incapacity and Disability Waivers for Credit Counseling Explored"), the court denied his request for a permanent waiver based on the lack of courses available, access to internet, and phone usage.

Debtors should be careful about waiting until the last minute in trying to get credit counseling because if they do, and are unable to obtain counseling, the court may deny an "exigency" argument. In re Afolabi, __ B.R. __, 2006 WL 1524628 (Bankr. S.D. Ind. 6/2/06). In Afolabi, Debtor filed his petition along with a Certification of Exigent Circumstances. Two days later, he filed an Amended Certification alleging that he "had very little time . . . to schedule credit counseling as the final decision to file bankruptcy was made less than 24 hours before the sheriff sale of [his] house . . . ." For Judge Coachys, "the proper focus under § 109(h) is not on the circumstances that hastened or precipitated the bankruptcy filing [(sheriff's sale)] but on whether those circumstance or any other prevented the debtor from being able to obtain credit counseling prior to filing for bankruptcy." The debtor here "waited until the last minute to seek legal advice and bankruptcy protection. This self-created emergency does not constitute 'exigent circumstances.'"

This focus raises the question of whether 109(h) effectively imposes a de facto 5-day waiting period for potential debtors before they may file. Judge Coachys, while finding the language awkward, concluded that it did: "the most logical reading of the statute dictates that debtors must attempt to obtain credit counseling at least five days in advance of filing." Congress intended individuals to consider an alternative to bankruptcy prior to the petition date and to discourage hasty filings; this goal is not accomplished if the individual waits until just before the petition date to seek credit counseling. By comparison, in Judge Ray's Westenberger opinion discussed above, the debtor offered the credit counseling agency an out-of-state check from a relative, but the agency would not provide counseling until the check cleared its bank account, which would have been more than five days. In those circumstances, Judge Ray found that the "unfulfilled request" requirement had been satisfied.

A second appellate-level decision confirms that bankruptcy courts will have discretion in determining that a debtor's circumstances are not an exigency that merits a waiver, where they are self-inflicted. See In re Hedquist, 342 B.R. 295 (8th Cir. BAP 2006) (holding that bankruptcy court did not abuse its discretion in finding that a debtor's circumstances were not exigent where debtor waited to file a petition until the eve of a foreclosure, despite having ample notice of the foreclosure).

After the debtor files the certificate, and the court satisfies itself that the debtor merits a waiver of the pre-petition counseling, when must the debtor actually complete the counseling and file the Certificate of Credit Counseling? In In re Bass, Slip Copy, 2006 WL 1593978 (Bankr. W.D. Tenn. 6/9/06), a pro se debtor, 15 days after filing the petition, submitted a "Notice of Continuance" indicating that the counseling agency only offered sessions once a month, and that counseling was not available until nine days later. She then was unable to attend that session but attended the following month (50 days after the petition date) and filed a certificate two days later indicating she had completed the counseling. The U.S. Trustee moved to dismiss the case under 11 U.S.C. § 707(a), for failure to comply with the provisions of 109(h)(1) and 109(h)(b)(3) (the extension provision), because the debtor did not complete counseling and file the certificate within 45 days.

Under § 109(h)(B), ". . . in no case may the exemption apply to that debtor after the date that is 30 days after the debtor files a petition, except that the court, for cause, may order an additional 15 days." But 109(h) does not specify the time for filing a certificate of counseling.

dismissn 707(a) says that the court may dimiss a case on the U.S. Trustee's motion for a debtor's failure to file, within fifteen days of the petition date or such additional time as the court allows, "the information required by paragraph (1) of section 521." But curiously (or "strictly speaking," as the court put it in Bass)Section 521 fact is no paragraph (1) of Section521! Although 521(a)(1) (which used to be numbered as 521(1)) requires the filing of certain documents, they do not include the counseling certificate. 521(b)(1), though, does require the filing of a certificate from the counseling agency that counseling has been completed. However, it also does not specify a time for filing (nor does any other portion of the BAPCPA-amended Code).

Under Interim Bankruptcy Rule 1007(c), though, either the certificate from the approved nonprofit budget and credit counseling agency or the certificate of exigent circumstances should be filed with the petition. Interim Bankruptcy Rule 1007(a)(5) provides that the court may extend the time for filing these and other documents specified in Interim Bankruptcy Rule 1007(a) "on motion for cause shown and on notice to the [UST and certain others]."

The U.S. Trustee argued that these provisions collectively required a debtor to obtain counseling and file a certificate confirming same no later than 45 days after the petition date. The court disagreed, stating that it was enough for the debtor to file the certificate of exigent circumstances within the 30 days. The Debtor's filing of a document within 30 days after the filing of her petition, which indicated the next available date that she could obtain the credit counseling, was treated as substantial compliance with Section 109(h)(3). Since she could not obtain the credit briefing within 45 days after her filing but did so as soon as she was able, and this was not the result of her lack of diligence, the court determined based on the totality of the circumstances that the debtor has substantially complied with 109(h) and thus the UST's motion to dismiss was denied.

The foregoing cases demonstrate that the prospects for obtaining waiver of the 109(h) requirements are generally slim. This lack of flexibility has frustrated some courts, particularly where the purpose of such counseling appears lacking (for instance, where debtors qualify for waiver of filing fees due to the severity of their financial problems). As one court put it, "[i]t is a mystery to the Court why Congress granted the Court the authority to waive all filing fees for persons such as the Filer, but not waive the credit counseling requirement. . . . Exactly what form of credit counseling could be useful, or necessary, to a person who qualifies for a waiver of fees under 28 U.S.C. § 1930(f) is even more of a mystery. The rationale for many of the provisions in BAPCPA, the language used in those provisions, and the coordination among them are likely to remain an enigma for a long time." In re Raymond, Slip Copy, 2006 WL 1047033 (Bankr. D. N.H. 4/12/06).

Sunday, July 23, 2006

Incapacity and Disability Waivers for Credit Counseling Explored

(Editor's Note: With this post we start a short series of entries on the 109(h) credit counseling provisions authored by our able summer associate, Daniel Cervantes, who graciously agreed to help us get caught up.)

So far debtors and courts have found little if any wiggle room in the BAPCPA requirement, codified in 109(h), that debtors complete credit counseling in advance of filing. Much of the discussion has focused on the ability to obtain an extension of time to complete the counseling (inartfully called a "waiver") under the provisions of 109(h)(3). However, there is another provision which really is a waiver, and excuses a debtor from the counseling requirement entirely. 11 U.S.C. 109(h)(4) provides that the counseling requirements do not apply to a debtor who "is unable to complete those requirements because of incapacity, disability, or active military duty in a military combat zone."

For purposes of this provision, “incapacity” means that the debtor "is impaired by reason of mental illness or mental deficiency so that he is incapable of realizing and making rational decisions with respect to his financial responsibilities;" and “disability” means that the debtor "is so physically impaired as to be unable, after reasonable effort, to participate in an in person, telephone, or Internet briefing required under paragraph (1). "

In In re Tulper, __ B.R. __, 2006 WL 1651710 (Bankr. D. Col. 5/22/06), the court granted the debtor's Motion for Waiver of Budget and Credit Counseling. At the evidentiary hearing, the court found that Mrs. Tulper, age 60, suffered from heart problems, tremors, asthma, a bad lung, arthritis, a disintegrated spine, and a plate in her right ankle, which combined to make her wheelchair-bound. Moreover, Mrs. Tulper was taking approximately 17 prescribed medications, which she brought to the hearing in their regular container that “was the size of a small tool box.” Id. at 2. The court also found that Mr. Tulper, age 81, who was Mrs. Tulper’s care giver, could not hear or had little hearing capability even with the use of a hearing aid. He also had 40% disability with respect to use of hands and feet. Neither of them had any computer skills.

The court found that there are three elements required to satisfy the disability requirement: (1) the debtor is severely physically impaired; (2) the debtor has made a reasonable effort, despite the impairment, to participate in the pre-petition credit counseling; and (3) the debtor is unable, because of the impairment, to participate meaningfully in an in person, telephone, or Internet briefing pre-petition. Id. at 3. The court easily found that the debtors were physically impaired. The debtors also made a reasonable effort to address credit counseling by conferring with their accountant and attorney, who found that it was very difficult to communicate anything with the debtors. The court found that the Tulpers could not meaningfully participate in the briefing because of their communication difficulties.

Thus, the purpose of counseling could not be fulfilled, and the requirement would be waived: "If a debtor goes to credit counseling and, because of a significant impairment, cannot participate in the credit counseling such that he or she can understand what is conveyed during the credit counseling session, so as to be able to have the 'opportunity to learn about the consequences of bankruptcy,' then the prepetition credit counseling becomes meaningless." (Editor's Note: Query how the attorney could be assured the debtors were making a meaningfully informed decision to file bankruptcy if they were incapable of meaningfully participating in a counseling session.)

To obtain a waiver via § 109(h)(4) disability, the debtor must provide sufficient evidence; mere allegations are not enough. In re Stockwell, Slip Copy, 2006 WL 1149182 (Bankr. D. Vt. 4/27/06). In Stockwell, the debtor alleged disability as a result of a brain tumor, seizures, and blindness. The court set a hearing requiring the debtor to show proof of these disabilities, and the Debtor’s attorney responded with a medical report. Though the court found that “a medical report documenting the disability or incapacity may be sufficient,” the report “[did] not describe a person who ‘is impaired by reason of mental illness or mental deficiency so that [she] is incapable of realizing and making rational decisions with respect to [her] financial responsibilities’ nor ‘so physically impaired as to be unable, after reasonable effort, to participate in’ a personal financial management course.” Id. at 2. Furthermore, “there [was] nothing in the record to verify that the Debtor is blind, nor to affirm that there are no personal financial management courses available in which she could, after reasonable effort, participate, e.g., courses designed for persons who are visually impaired.” Though the motion alleged sufficient facts appearing to warrant a waiver, the debtor could not support the allegations with evidence.

In a very different take on the disability/incapacity exception, in In re Star, 341 B.R. 830 (Bankr. E.D. Va. 4/24/06), an incarcerated debtor argued that his present confinement rendered him “disabled” within the meaning of § 109(h)(4). The debtor argued that because of the specific restrictions of his environment, he was “physically prevented” from participating in any credit counseling classes. Furthermore, no such courses are available for him to attend in person, by phone or via internet. The court held that “incarceration” was not within the meaning of “disability” intended by Congress, but nonetheless treated debtor’s motion as one for Certification of Exigent Circumstances and granted the debtor extra time to complete the counseling course.

Tuesday, July 18, 2006

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.

Tuesday, July 11, 2006

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).

Monday, July 10, 2006

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.

Wednesday, April 19, 2006

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.