Wednesday, February 22, 2006

Appellate Panel Upholds Credit Counseling Ruling

In the first appellate decision addressing the issue, a Bankruptcy Appellate Panel of the Eighth Circuit has upheld a bankruptcy judge's dismissal of a case due to the debtor's failure to give an adequate excuse for noncompliance with the new BAPCPA pre-filing counseling requirements. In re Dixon, __ B.R. __, 2006 WL 355332 (8th Cir. B.A.P. 2/17/06).

In Dixon, the debtor filed a certification seeking a waiver of the prefiling counseling requirement which attested that his residence was scheduled for a foreclosure, that he did not contact an attorney until the day prior to the foreclosure, that he then contacted a credit counseling agency but was advised that it would be two weeks before they could provide counseling over the phone or 24 hours over the internet, that he did not have a computer to access the internet, and therefore it was impossible for him to obtain counseling before the foreclosure and he had to file a Chapter 13 without completing the counseling.

Bankruptcy Judge Schermer accepted the debtor's representation that he was unable to timely obtain counseling, but found that he had not described "exigent circumstances that merit a waiver" of the pre-filing counseling requirement. In particular, he noted that Missouri law required twenty days notice of a foreclosure, and with that much notice, the debtor's exigent circumstances did not merit a waiver. On appeal, the appellate panel upheld the ruling.

The panel noted that the waiver provision in 11 U.S.C. 109(h)(3) has three requirements: (i) that the debtor's certification describe "exigent circumstances that merit a waiver"; (ii) that the debtor certify that he sought but was unable to obtain counseling within 5 days; and (iii) that the certification is "satisfactory to the court." Taking these in reverse order, the court initially noted that it would be difficult to imagine a circumstance where the first two elements were satisfied but the certification was still not satisfactory to the court, but in order to give meaning to this third element, concluded that it was intended to permit the bankruptcy to exercise its discretion in making the determinations under (i) and (ii). As a result, it applied a generous standard of review, looking at findings of fact only for clear error and at the bankruptcy court's determination of exigent circumstances or satisfaction of the "unfulfilled request" requirement for an abuse of discretion.

Since the bankruptcy court's ruling was based on the failure to satisfy the exigent circumstances requirement, the appellate panel focused on this issue. In doing so, it held that it actually has two components: first, that there are exigent circumstances, and second, that those circumstances merit a waiver of the counseling requirements. Although the imminent foreclosure clearly demonstrated "exigent" circumstances, the bankruptcy court found that those circumstances did not "merit a waiver" -- apparently because the debtor had 20 days' notice of the foreclosure but waited until the last day to seek an attorney's advice. The panel, applying an abuse of discretion standard, declined to reverse the bankruptcy court's decision.

Implicitly, then, the panel found that the determination of whether there are exigent circumstances which merit a waiver may include an evaluation of the debtor's diligence or delay, and whether the debtor bears some responsibility for the exigency. As noted in a previous post, see Got Credit Counseling?, this is an issue on which courts have split, with some holding to the contrary that "exigent circumstances," unlike "excusable neglect," does not require any inquiry into the debtor's responsibility for the exigency. See In re Childs, 335 B.R. 623 (Bankr. D. Md. 12/19/05). A growing number of courts, though, are looking to the debtor's responsibility for the exigency in deciding whether circumstances "merit a waiver." Aside from Dixon, a similar approach was taken in In re Talib, 335 B.R. 424 (Bankr. W.D. Mo. 12/12/05) (where Judge Dow declined to vacate a prior order dismissing a case for failure to comply with the pre-filing counseling requirement), In re Rodriguez, __ B.R. __, 2005 WL 3676824 (Bankr. D. Idaho 12/9/05), and In re DiPinto, __ B.R. __, 2006 WL 213721 (Bankr. E.D. Pa. 1/30/06).

In Talib, the debtor first sought counseling the day before a foreclosure sale, and was told it would not be available for two days. As a result, it was impossible for her to make the necessary certification for a waiver that counseling could not be obtained within five days. Although it may be a "difficult and burdensome requirement" which in some circumstances "may produce harsh results," the court did not find that it was so absurd that it could disregard the plain language of the statute. Judge Dow noted that Congress clearly chose to link the availability of counseling not to the timing of the exigency but to the time of the request; although the requirement "may not be realistic or even fair in many circumstances," the court could not second-guess Congress' policy determination.

In Rodriguez the debtors contacted one agency by internet and were told to call to get a username and password, but couldn't get an answer; they contacted a second agency and were told that a counselor would call back at an unspecified time (and were apparently asked to pay the agency's fee before finding out when the counseling would be available). To prevent an impending wage garnishment, they filed before the second agency responded. The court found that these efforts were also inadequate, since there was nothing to indicate that the second agency could not provide counseling within 5 days. The court refused to find that exigencies could override the 5 day requirement, noting that waiting until the eve of creditor action before addressing the counseling requirement makes the exigency "rather self-inflicted" and that an overly liberal approach to exemptions would vitiate Congressional intent to require almost all debtors to undergo counseling before filing.

Similarly in DiPinto, the court found that the debtor's efforts to obtain counseling, by calling only one agency (which could not make an appointment for 22 days) less than 24 hours before a sheriff's sale of his property, were "deficient." Although the sale was to occur within a matter of hours, the court found that the debtor could have tried to contact other agencies (note that other courts, such as In re Hubbard, 333 B.R. 377 (Bankr. S.D. Tex. 11/16/05) have held that a prospective debtor is not required to "scour the field"). The court would not "reward token effort" with a waiver. In dicta, Judge Raslavich explored, but ultimately did not answer, the question of whether the 109(h) requirements effectively impose a five day "cooling off" period for prospective debtors or whether the five day period may straddle the petition date.

The statute as drafted does produce some incongruous results:
If one debtor contacts a counselor 4 days before a foreclosure and is told he can be counseled 5 days later, he would not be eligible to file before the foreclosure (he would not have completed the counseling, but also would not be able to make the certification required by 109(h)(3)(A)(ii).
If another debtor contacts a counselor 2 days before a foreclosure and is told he can be counseled 6 days later, he is eligible to file - he does qualify for the waiver certification under 109(h)(3)(A)(ii).
If yet another debtor contacts a counselor 1 day before a foreclosure and is told he can be counseled immediately, he also will be eligible to file, assuming he completes the counseling.

Of course, these results could mostly be avoided if the prospective debtor starts to seek counseling at least a week before the impending creditor action. But where that does not happen, the statute does not particularly reward diligence or punish dilatoriness, but depends mostly on the vagaries of what response the debtor gets from the particular counseling agency he or she has contacted.

Tuesday, February 21, 2006

Some Courts Read BAPCPA Stay Termination Provisions Narrowly (Oh, Won't You (362) Stay Just a Little Bit Longer? Part IV)

In Part I, Part II and Part III of our discussion of the new provisions for termination and extension of the automatic stay under 11 U.S.C. 362(c)(3) and (4), we reviewed procedural issues as well as the courts' interpretations of the "good faith" standard contained (but not defined) in the new statutes. In this post, we see what happens when courts have taken a close look at the language used by Congress in these new provisions. Curiously, when read carefully and interpreted using traditional principles of statutory construction, their scope may be much narrower than is generally assumed (and, likely, than was intended by the legislature).

A prime example of this is found in In re Paschal, __ B.R. __, 2006 WL 258298 (Bankr. E.D.N.C. 1/6/06). In response to a debtor's motion to extend the stay under 362(c)(3)(B), Judge Small first looked to answer the question: "to what extent does § 362(c)(3)(A) terminate the stay?" His answer was surprising, as he concluded that it only terminates as to formal proceedings commenced against the debtor prior to bankruptcy, and not generally as to all other matters covered by the automatic stay.

It was not so easy to get to that answer. Judge Small initially noted:

"In an Act in which head-scratching opportunities abound for both attorneys and judges alike, § 362(c)(3)(A) stands out. It uses the amorphous phrase 'with respect to' a total of four times in short order and raises questions about the meaning of the words 'action taken,' and 'to the debtor.' The language of the statute is susceptible to conflicting interpretations, and if read literally, would apply to virtually no cases at all. In sum, it's a puzzler."
Before getting to the meat of Judge Small's holding, what is he talking about when he says that 362(c)(3)(A) if read literally would apply to virtually no cases at all? Well, read the language closely. 362(c)(3)(A) comes into play "if a single or joint case is filed by or against a debtor who is an individual in a case under chapter 7, 11, or 13...". Under a literal reading, this would only apply to a filing of a case by an individual debtor who is already the subject of a pending case. Thus the statute would cause the stay to be terminated in a new case filed by someone who is already a debtor in a pending case, and who had another case dismissed within the past year. Judge Small concedes, however, that such circumstances are not likely to present themselves, and that such a literal reading would render the statute effectively meaningless. Following U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989), the court determined that the plain meaning would not be conclusive where the literal application yields a result demonstrably at odds with the drafter's intentions. On this particular issue, then, it interpreted the statute as other courts have - that 362(c)(3)(A) is triggered if there is one previously dismissed filing in the past year (and not one previously dismissed plus one pending case in addition to the instant case).

The court did pay more attention, however, to the debtor's argument that the phrase "actions taken," as used in § 362(c)(3)(A), should be narrowly construed. Although the legislative history indicates that Congress intended for 362(c)(3)(A) to terminate all protections of the automatic stay, the debtor argued that the language actually chosen was significantly narrower. Judge Small noted that legislative history may be considered where a statute is ambiguous, but that it is not controlling, especially where the language of the statute, although ambiguous, contradicts the intention expressed in the legislative history.

With this as a starting point, Judge Small looked to what "actions taken" meant in the context of 362(c)(3)(A). He noted that if Congress intended for it to terminate all provisions of the automatic stay, it could have clearly said so as it did in 362(c)(4)(A)(i) (which says that for multiple repeat filers, "the stay under subsection (a) shall not go into effect upon the filing of the later case."). Applying standard principles of statutory construction, he noted that the use of a particular phrase in one section but not another "merehighlightsgts the fact that Congress knew how to include such a limitation when it wanted to," and generally supports a presumption that Congress acted intentionally and purposely in using the different language. Therefore, Judge Small found that the effect of 362(c)(3)(A) must not be as broad as that of 362(c)(4)(A)(i).

He also noted that the phrase "action taken", as used in 362(c)(3)(A), is different from the term "act" which is used in 362(c)(1) and 362(c)(2) (pre-amendment provisions describing when the stay of an "act against property of the estate" or "any other act" terminate). Again, traditional principles of statutory interpretation would indicate that the use of different terms in related statutes implies that different meanings were intended. Therefore, Judge Small concluded that "act" must mean something different from "action taken."

Judge Small looked to instances where the Code uses "act," and saw that they apply very broadly (for instance, in describing the extent of the stay under various provisions of 362(a)). The term "action" had a much narrower usage (i.e., in 362(a)(1) where it is used to refer to the commencement or continuation of a "judicial, administrative, or other action or proceeding," and in the 362(b) exceptions to the stay where it is used to refer to specific types of proceedings excluded from the stay). From this, he concluded that the term "action" means a formal action, such as a judicial, administrative, governmental, quasi-judicial or other "essentially formal activity or proceeding." Furthermore, since 362(c)(3)(A) refers to an "action taken," he concluded that this refers to an action in the past -- that is, one which had already been commenced prior to the filing of the debtor's bankruptcy petition.

Although this narrow reading might surprise anyone familiar with the legislative history of BAPCPA, Judge Small concluded that it was supported by well-established principles of statutory construction. Moreover, he found there were policy justifications as well: it would make sense that Congress would want to protect creditors who had invested time and money in initiating such an action, and terminate the stay as to them, while creditors who had not initiated such an action would know that the stay still applied to them. (What this policy argument fails to take into account, though, is that the principle would be inconsistent with the traditional bankruptcy policy of discouraging the "race to the courthouse"; indeed, it would clearly incentivize creditors to file actions against a potential debtor so as to obtain the benefit of stay termination in the event of a filing).

Since there was no evidence of any "action taken" against the debtor prior to the filing, the court found that 362(c)(3)(A) did not have any effect. Nonetheless, conceding that 362(c)(3)(A) is "a puzzler" and that other courts might hold differently, the court alternatively found cause to grant an extension of the stay and entered an order accordingly.

In Paschal, Judge Small noted but did not decide the effect of another ambiguity in 362(c)(3)(A): what does it mean when it says that the stay is terminated "with respect to the debtor"? In In re Johnson, __ B.R. __, 2006 WL 51210 (Bankr. W.D. Tenn. 1/9/06), Judge Boswell concludes that it means exactly what it says - the stay terminates only as to actions against the debtor, but not as to property of the estate.

The specific language at issue is in 362(c)(3)(A), which says that "the stay under subsection (a) with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case." Like Judge Small, Judge Boswell compared this to the language in 362(c)(1), which says that "the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate." Bankruptcy practitioners understand that the filing of a bankruptcy petition creates an estate, which is something different from the debtor. Thus, reading (c)(1) and (c)(3)(A) together, Judge Boswell concluded that (c)(3)(A) only terminates the stay as to property of the debtor, but not as to property of the estate.

He notes that under 11 U.S.C. 541, "property of the estate" includes all interests of the debtor in property as of the commencement of the case. In addition, under 11 U.S.C. 1306, in a Chapter 13 case it also includes all post-petition earnings and other property acquired post-petition. Under local procedures of the court, all "property of the estate" remains as such in a Chapter 13 case, and does not revest in the debtor, until the case is discharged or dismissed or the court orders otherwise. Since all such property is property of the estate, and since the stay as to such property is not terminated by virtue of 362(c)(3)(A), Judge Boswell concludes that any creditor seeking to foreclose or repossess property which is "property of the estate" must seek stay relief or risk violating the automatic stay.

Does this render 362(c)(3)(A) a nullity? Not necessarily. Even if limited to "property of the debtor," as distinguished from "property of the estate," it could still apply to property which is exempt but subject to a consensual lien. It could also apply upon confirmation of a Chapter 13. Although the Johnson court had local procedures which deferred revesting of property in the debtor, the general effect of confirmation under 11 U.S.C. 1327 is to revest property of the estate in the debtor upon confirmation. Arguably, applying the termination provisions to "property of the debtor" but not "property of the estate" could also be supported by policy considerations, in that its effect would be visited upon the repeat-filing debtor without necessarily prejudicing other creditors in their recovery from the bankruptcy estate.

Judge Morris of New York had a different spin on the same "with respect to the debtor" language in In re Parker, __ B.R. __, 2006 WL 65268 (Bankr. S.D.N.Y. 1/4/06). In Parker, the court was required to decide what happens to the stay in a joint case where one of the joint debtors has engaged in acts which would trigger 362(c)(3) or (4), but the other debtor has not. Mr. Parker had filed three prior bankruptcies, two of which had been pending in the past year (thereby triggering 362(c)(4)). His wife had been in two prior cases, however each was dismissed more than a year before the current filing, so neither 362(c)(3) nor (c)(4) were triggered as to her. Because Mr. Parker had been in two prior cases dismissed within the past year, a creditor moved for the entry of an order confirming that no stay was in effect pursuant to 362(c)(4).

362(c)(4) provides that if triggered, "the stay under [Section 362(a)] shall not go into effect upon the filing of the later case." Although the plain language would apply based on the conduct of one debtor, Judge Morris looked also to 362(c)(3), which says that for a single repeat filer the stay terminates only "with respect to the debtor." Although that language was not used in (c)(4), she still found that both sections "focus on, and apply to, the acts of a specific debtor rather than joint debtors in the aggregate." Accordingly, the court concluded that the application of both 362(c)(3) and (c)(4) must be analyzed separately as to each debtor in a joint case, and entered an order confirming that no stay was in effect as to Mr. Parker, but that the stay was in effect as to Mrs. Parker. The Parker decision does not specifically address whether termination of the stay "with respect to the debtor" covers property of the estate or not, as discussed in Johnson.

If Parker were a 362(c)(3) case, this result might be easier to reconcile with the other cases discussed above - similar to Johnson, it would be consistent with the conclusion that 362(c)(3) applies only "with respect to the debtor," and thus would not apply to property of the estate (or to separate property of the other spouse). The difficult part is the conclusion that 362(c)(4) has the same effect, even though it uses different language and clearly states that the stay "shall not go into effect" (without limitation as to a particular debtor). The opinion refers to no principle of statutory construction that would justify interpreting one section as having the same effect as another even though they use different language. Indeed, the use of different language is exactly what supports the conclusion in Johnson that terminating the stay "with respect to the debtor" means something different than saying that no stay comes into effect.

It may seem equitable not to "punish" one spouse in a joint case with termination of the stay based on the prior filings of the other spouse. But it's not clear that such a distinction is supported by the statute. It should be noted that 362(c)(4) specifically refers to either a "single or joint case" in describing both the prior filings and the current filing which trigger its applicability. It would hardly be surprising that Congress did not intend to permit a serial filer to avoid the impact of (c)(4) by filing multiple unsuccessful cases individually, and then once they are dismissed, file a joint case with his or her spouse and still have the benefit of the stay.

One final twist is presented in In re Toro-Arcila, 334 B.R. 224 (Bankr. S.D. Tex. 12/12/05). In this case, the debtor had been in a prior case dismissed within the past year, and filed a motion to impose or extend the stay on the 30th day after filing the new petition (oops!). Not surprisingly, the court was unable to ensure notice of the motion and conduct a hearing before the expiration of the 30 days as required by 362(c)(3)(B). As a result, the automatic stay terminated by operation of law and no relief was available under (c)(3)(B). Nonetheless, the court considered whether relief was still available under 362(c)(4). Unlike (c)(3)(B), (c)(4)(B) only requires that the motion is filed within the first 30 days, but does not require that it be heard within that time.

Thus the question for the court was whether a (c)(4)(B) motion to impose the stay was only available to multiple repeat filers (for whom no stay goes into effect by virtue of (c)(4)(A)), or whether it could be used by a single repeat filer for whom the stay terminates after 30 days under (c)(3)(A). Although a natural reading of (c)(4)(B) would seem to indicate that it applies only to a multiple-repeat filer subject to (c)(4)(A), the court found that it was also available to a single repeat filer faced with the peculiar situations of the debtor in this case.

The reason for this conclusion was that if the (c)(4)(B) motion to impose the stay was only available to multiple repeat filers, then most of (c)(4)(D)(i) (describing the circumstances when there will be a presumptive lack of good faith on a motion to impose the stay) would be completely superfluous. 362(c)(4)(D)(i) describes three disjunctive factors which will give rise to a presumptive lack of good faith. The first of these, though, is that the debtor must be a multiple repeat filer within the past year. In other words, every debtor who triggers the provisions of 362(c)(4)(A) that prevent the stay from going into effect would also trigger the presumptive lack of good faith under 362(c)(4)(D)(i)(I). If (c)(4)(D) only applied to multiple repeat filers, then, it would never be necessary to consider the two other factors.

Judge Isgur noted that this would render superfluous an entire section comprised of 278 words and multiple paragraphs -- coincidentally, he noted, the same exact length as Abraham Lincoln's Gettysburg Address: "Although the meaning of this subsection cannot be compared to the importance of the Gettysburg Address, the Court presumes that Congress did not codify words of comparable length with no meaning whatsoever."

Since the two other factors in (c)(4)(D) had to serve some purpose, Judge Isgur concluded that they could be relevant if a single repeat filer sought relief under that provision - such as the debtor currently before him, who regretfully waited until the 30th day to seek relief and as a result was disqualified from getting an extension of the stay under (c)(3)(B). To hold otherwise would lead to the incongruous result that a single-repeat filer who waited until the 30th day to seek an extension would be unable to seek imposition of the stay in his present case, but could simply dismiss that case and file a new one and then get a hearing in the new case.

If nothing else, these cases demonstrate that Congress' sloppy drafting may provide some opportunities for creative lawyering. If BAPCPA is to be taken at its word, there may well be instances where it accomplishes far less than what its supporters expected.

Monday, February 20, 2006

Oh, Won't You (362) Stay Just a Little Bit Longer? Part III

In last week's posts on termination and extension of the automatic stay under 362(c)(3) and (4), Part I discussed notice and procedure issues, and Part II discussed how one court in In re Charles, 334 B.R. 207, approached the burdens of proof for invoking the presumptive lack of good faith for purposes of 362(c)(3)(B). We also described how the Charles II decision, to evaluate "good faith," borrowed from existing law regarding the "totality of circumstances" considered in determining good faith on a motion to convert or dismiss a Chapter 13 case. This post will further discuss how courts are applying the "totality of the circumstances" test for good faith to motions to extend the stay.

Judge Isgur had another opportunity to apply his test in In re Collins, 335 B.R. 646 (Bankr. S.D. Tex. 12/27/05). In Collins, the debtor had filed one prior case in 1998, two cases in 2000, and one case in 2005 which was voluntarily dismissed without prejudice in October 2005. He then filed a new case in November 2005. His schedules indicated a slight decrease in monthly income and a slight inrease in monthly expenses since his last filing, with his debts remaining largely the same. Two of his creditors opposed the motion to extend the stay. Although no presumption arose under 362(c)(3)(C)(i)(I) or (II) (there was only one case dismissed in the past year, and it was dismissed voluntarily rather than as a result of any failure to comply with the obligations set forth in (II)), the debtor failed to meet his burden under (III). The debtor's financial affairs since his last case were largely unchanged, there were some inconsistencies in his schedules, and it was unlikely the debtor could propose a feasible plan based on accurate numbers.

The court somewhat ruefully noted the debtor's predicament. He worked two jobs, taking on as many part-time hours as he could. He supported three children as a single parent, without child support. He didn't make luxury purchases or live an extravagant lifestyle. His only major assets were his house and a car that was more than six years old. "Like so many debtors who have come before this Court, Mr. Collins has been honest to the best of his ability. ... Unfortunately for this Debtor, good faith under the Code is not based on one's lifestyle or family affairs. Being a good faith and a hard worker is not enough under s. 362(c)(3)(C)."

The Collins case highlights the importance of identifying the reason for the prior dismissal - it may or may not be grounds for invoking the presumption. This is also shown by In re Warneck, __ B.R. __, 2006 WL 62667 (Bankr. S.D.N.Y. 1/4/06). In Warneck, the debtor had filed Case #1 in October 2003, which was dismissed prior to confirmation; then filed Case #2 in August 2004, which was dismissed prior to confirmation in January 2005. The debtor then filed Case #3 in November 2005. Although the prior cases were dismissed due to the failure to make plan payments, they were dismissed prior to confirmation, and thus did not fall within the scope of 362(c)(3)(C)(i)(II)(cc) as a failure to perform the terms of a "plan confirmed by the court." Because there was only one prior dismissal in the past year and the debtor had submitted an affidavit evidencing a change in financial and personal affairs, no presumption arose. In the absence of a presumption or any objection by another party, Judge Morris held that "a request to extend the automatic stay should be liberally granted."

Other courts have taken a similar approach to the good faith question by looking to existing case law. In In re Montoya, 333 B.R. 449 (Bankr. D. Utah 11/23/05), Judge Boulden also looked to the factors used by courts in evaluating a motion to dismiss or convert a Chapter 13 case under a "totality of the circumstances" approach, identifying as the relevant factors the nature of the debts; the timing of the filing; how the debts arose; the debtor's motivation; the effect on creditors; the debtor's treatment of creditors; and whether the debtor has been forthcoming. Judge Boulden indicates that 362(c)(3)(B) requires the court to view these issues from the creditors' perspective, since the statute dictates that the debtor must demonstrate good faith as to the creditors to be stayed. She finds this suggests that factors dealing with the effect on creditors may be more heavily weighed.

Looking at these considerations, Judge Boulden found in Montoya that subjective evidence of the debtor's honest intent was not enough to overcome the negative impact on creditors. The repeat filing only six days after dismissal of the prior case prevented creditors from taking any action to collect on their debts, and the debtor's repeat filings had allowed the debtor to continue to use depreciating collateral without any compensation to creditors (especially in light of the debtor's failure to make any payments under her prior plans). The stay extension was denied even though the debtor presented evidence of stable employment and a resolution of the medical problems that had prevented her from making payments under her earlier plan.

Curiously, while Judge Boulden found that the short period of time between the prior and current filing weighed against the debtor, another judge from the same district, applying pretty much the same factors, has found that a lengthy delay between filings might also weigh against the debtor. In In re Galanis, 334 B.R. 685 (Bankr. D. Utah 12/7/05), Judge Thurman adopted the same "good faith" test as was applied in Montoya. In Galanis, Judge Thurman held that the relevant factors for purposes of 362(c)(3)(B) are the timing of the filing, how the debts arose, the debtor's motive in filing, the effect on creditors, the reason for the prior dismissal, the likelihood of funding a Chapter 13 plan, and whether there are objections.

In applying these factors, the Galanis court noted that if a debtor delays a subsequent filing while having no intention to repay his debts, that would be evidence of bad faith (although a delay might have good explanations, such as medical issues). This creates an odd dichotomy with Montoya, which suggested that a filing shortly after a prior dismissal could also be evidence of bad faith. As to the other factors, though the Montoya analysis is comparable, looking to whether the debts were for necessities rather than luxury items, whether the debtor appears to be making a responsible effort to address his debts, whether the creditors' collateral is depreciating in value as a result of any delay, and whether the debtor has a significant likelihood of funding a plan.

Other courts following the same approach as Montoya and Galanis include In re Havner, __ B.R. __, 2006 WL 51214 (Bankr. M.D.N.C. 1/4/06); and In re Ball, __ B.R. __, 2006 WL 172273 (Bankr. M.D.N.C. 1/25/05). In re Mark, 2006 WL 164883 (Bankr. D. Md. 1/23/06) also borrows from existing case law evaluating good faith on a motion to dismiss a Chapter 11 case and for confirmation of a Chapter 13 plan.

Next, Part IV will discuss some of the complications created by the language used by Congress in 362(c)(3) and (c)(4), and how traditional principles of statutory construction suggest a much narrower reading of their scope than has been generally assumed.

Monday, February 13, 2006

Oh, Won't You (362) Stay Just a Little Bit Longer? Part II

In Part I, we layed out the basic framework of new 362(c)(3) and (c)(4) which restrict the applicability of the automatic stay to repeat filers, and discussed a few of the cases dealing with basic procedural issues under these new BAPCPA provisions. In this posting, we'll discuss the allocation of the burden of proof on motions to extend or impose the stay, and the test for determining "good faith" as required for such relief.

Judge Isgur of Texas has provided a helpful roadmap for wading through the 362(c)(3)(C) elements, and in particular, for determining when the presumptive lack of good faith arises, in the case of In re Charles, 334 B.R. 207 (Bankr. S.D. Tex. 11/30/05) (Charles II). Judge Isgur notes that the statute itself does not address what standard of proof applies in determining whether the presumption factors exist, and which party has the burden. Absent a statute or rule to the contrary, the burden of proof is typically by a preponderance of the evidence, which is the standard he uses unless another standard is indicated. In reviewing the different elements, the guiding principle applied in Charles II is that if a factor requires an affirmative determination, the burden of proof rests on the party alleging such conduct. Applying this test, the Charles II case breaks down the components of 362(c)(3)(C).

Starting with the elements of whether the rebuttable presumption of no good faith arises, Charles II holds that the standard for each of these is a preponderance standard, which is allocated between the movant and any opponent as follows:
(I) as to whether there was more than one previous case pending - the opponent;
(II) as to whether a prior case was dismissed for one of the "bad" reasons (failure to (aa) file or amend required documents, (bb) provide adequate protection, or (cc) perform a confirmed plan) - the opponent (if such a dismissal is proven, the burden of showing substantial excuse under (aa) falls on the debtor);
(III) as to the presence or absence of a substantial change in financial or personal affairs - the debtor (since the debtor would have superior access to such information);
(IV) as to a stay relief motion having been granted or pending in a prior case - the opponent.

If the rebuttable presumption of no good faith arises, the debtor bears the burden of demonstrating that the current filing is in good faith as to creditors to be stayed by clear and convincing evidence. If no rebuttable presumption arises, the debtor bears the burden of demonstrating good faith by a preponderance of the evidence.

As to whether the court should exercise its discretion to extend the stay (which remains a discretionary rather than mandatory act even if good faith is demonstrated), Charles II holds that the debtor bears the burden by a preponderance of the evidence.

One curiosity of the Charles II case's allocation of the burdens of proof is that it seems to suggest that a debtor need not make any affirmative showing in its motion to extend the stay as to the non-applicability of many of the presumption factors. If it is a creditor's burden to come forward and demonstrate that either 362(c)(3)(C)(i)(I) (multiple prior filings) or 362(c)(3)(C)(i)(II) (a "bad" prior dismissal) give rise to a presumption, then a debtor's motion might only have to generally allege that the new filing is in good faith and describe sufficiently changed circumstances to avoid a presumption arising from 362(c)(3)(C)(i)(III). The placement of this burden on the creditor is further suggested by the court's caution in its earlier decision, In re Charles, 332 B.R. 538 (Bankr. S.D. Tex. 11/4/05) that extension motions might be decided without hearing if there is no timely filed objection.

It's worth noting that the elements for invoking the presumption are alternative and not cumulative - any one element will be enough to create the presumption. Thus, in In re Montoya, 333 B.R. 449 (Bankr. D. Utah 11/23/05), Judge Boulden found that evidence of a debtor's changed financial circumstances was irrelevant if the presumption was triggered through another subsection, such as multiple prior dismissed cases or a prior dismissal for non-compliance with a confirmed plan. (Judge Boulden also noted a curiosity in the multiple repeat filer provisions that under BAPCPA, a debtor who has already had one case previously dismissed and who faces dismissal of a second case would be treated better if she files a new third case before Case #2 is dismissed - she would get the benefit of the 30-day stay in Case #3, while if Case #3 were not filed until after Case #2 is dismissed, no stay would go into effect upon the filing of Case #3. Why should this be? I have no good answer.)

Having laid out the burdens of proof, the Charles II court went on to evaluate what "good faith" means for purposes of 362(c)(3). Although the term is undefined in BAPCPA or in the pre-existing Code, there has been long-standing use of the term in related contexts -- in particular, in evaluating whether a Chapter 13 plan is proposed in good faith under 11 U.S.C. 1325, and in determining whether a Chapter 13 case should be converted or dismissed for lack of good faith under 11 U.S.C. 1307. In applying the "totality of the circumstances" test used in these contexts, Charles II identifies both an objective and a subjective component. Objective good faith requires a debtor to have a meaningful chance of success in the newly filed case, a standard he found relevant to 362(c)(3)(C) because of the apparent Congressional intent to limit the stay to only those repeat cases which have a likelihood of success, versus those repeat filings which are solely to hinder and delay creditors. In adopting 362(c)(3), Judge Isgur concludes that Congress "intended the Court to conduct an early triage of a case to determine if the case has a reasonable likelihood of success."

If the case meets this objective test, then the court considers the totality of the circumstances including (i) the nature of the debts (i.e., if they are for reasonable and necessary living expenses or if they arise from questionable conduct of the debtor); (ii) the nature of any collateral (i.e., if a creditor is secured by the debtor's homestead, sole source of transportation or other necessities) ; (iii) any eve of bankruptcy purchases; (iv) the debtor's conduct in the present case (i.e. attendance at required meetings, filing of documents and performance of debtor's other duties); (v) the reasons why the debtor wishes to extend the stay (i.e., to prevent the loss of an essential asset, versus to delay or harass a creditor); and (vi) any other relevant circumstances.

From this analysis the Charles II case proposes the following decision tree:

(1) Does the creditor to be stayed agree?
Yes - stay extended (but mere lack of response will not be considered a stipulation to a stay)
No -->
(2) Is case likely to result in a discharge? (objective test)
No - stay extension denied absent exceptional circumstances.
Yes -->
(3) Do other factors show good faith? (subjective test)
Consider totality of circumstances.

Applying this test, Judge Isgur found that the debtor had demonstrated that the totality of factors weighed in favor of a stay. Although the debtor had presented an "unconvincing" reason to extend the stay to all creditors (the diversion of attention and resources) rather than just one particular mortgage-holder, all the other identified factors weighed in the debtor's favor, especially since it was likely that the case would pay creditors at least as much as they would get in a Chapter 7 liquidation.

Next, Part III will discuss in further detail how courts have approached the "good faith" determination.

Oh, Won't You (362) Stay Just a Little Bit Longer? Part I

Now that much of the dust is starting to settle over the credit-counseling certification requirements debtors must satisfy to be eligible to file, it's time to turn our attention to one of the other major issues confronted by debtors filing under the BAPCPA regime: the provisions for termination and extension of the 11 U.S.C. 362 automatic stay for debtors who have been involved in previous cases.

BAPCPA added two new sections to 362 dealing with the applicability of the stay to repeat filers. Although some judges have highlighted inconsistencies or errors in the statutory language (surprise!!), most courts recognize the general effect of the amendments to be as follows: (1) under new 362(c)(3), if a debtor has been the subject of one prior case dismissed within the year before the current bankruptcy filing, the automatic stay terminates after 30 days unless a motion to extend the stay has been granted; and (2) under new 362(c)(4), if a debtor has been the subject of two or more prior cases dismissed within the prior year, no stay goes into effect upon the filing and the debtor must move to have the stay take effect. The stay will be extended (or put into effect, as the case may be) only if the new filing is in good faith as to the creditors to be stayed, and the law creates specific presumptions as to when a filing is not in good faith which may only be overcome by clear and convincing evidence to the contrary.

The presumptive lack of good faith will exist if (1) more than one previous case was pending within the preceding one year; (2) a previous case was dismissed after the debtor's failure to (a) file or amend the petition or other documents required by the Code or the court without substantial excuse; (b) provide court-ordered adequate protection; or (c) perform the terms of a confirmed plan; or (3) there has been no substantial change in the debtor's financial or personal affairs since the last dismissal or any other reason to conclude that the current case will result in a chapter 7 discharge or a confirmed and fully performed chapter 11 or 13 plan. In addition, there is a presumptive lack of good faith as to a particular creditor who had obtained stay relief or had a stay relief motion pending as of the dismissal of a prior case.

Because there are several decisions that have already issued, I will be dividing this discussion up into several posts. This first post will deal with basic notice and procedure issues -- a bit dry, I know, but some courts have denied relief because the debtors failed to give adequate notice or to provide an adequate basis for relief in their requests. Part II will discuss the burdens of proof on the debtor and parties opposing the stay. Part III will further discuss courts' takes on the "good faith" standard, which is undefined in the amendments or elsewhere in the Bankruptcy Code. Part IV will look at some of the more difficult issues courts have already confronted in interpreting the provisions, and how some courts have followed principles of statutory construction to narrow their applicable scope.

The first reported decision confronting a motion to extend stay under 362(c)(3)(B) was issued by Judge Isgur of Texas (who is becoming quite a prolific author on BAPCPA issues, having already penned six published opinions). In In re Charles, 332 B.R. 538 (Bankr. S.D. Tex. 11/4/05), the debtor, who had been involved in a previously dismissed case, filed a motion for extension simultaneously with the petition, together with a motion to expedite hearing. Absent specific local rules providing for expedited hearing, such a motion may well be necessary, because 362(c)(3)(B) specifies that the motion must be filed, and "notice and a hearing" on the motion must be completed within the 30-day period before the stay expires.

Although the debtor had timely requested a hearing, Judge Isgur was still concerned with the adequacy of notice in apprising affecting parties of the nature of the relief sought. In particular, Judge Isgur was concerned that the motion failed to set out a basis for extending the stay as to any creditor other than one mortgage holder. While 362(c)(3)(B) permits the stay to be extended "as to any or all creditors," the court held that a motion seeking relief as to all creditors must set forth sufficient allegations to state a basis for such relief, and to give all creditors notice of the issues to be addressed at the hearing.

In addition, Judge Isgur noted that this was the first motion of its kind filed in his court under the new Act. Particular because the relevant provisions are "at best, particularly difficult to parse and, at worst, virtually incoherent," he was concerned that creditors might be unfamiliar with them and must be given "abundantly fair warning" that their rights might be affected.

Finally, noting that the burden of proof for obtaining an extension is on the debtor, the court found that the statute's "only articulated requirement" is that the debtor prove that the filing of the later case is in good faith as to the creditors to be stayed. The structure of the statute provides a series of steps for applying certain presumptions in making this determination, though, which are explained in greater detail in a subsequent opinion (to be discussed in a later post). For purposes of the matter before him, Judge Isgur set the motion for hearing with respect to extending the stay against the mortgage-holder, and gave the debtor leave to amend to assert a basis as to other creditors. The Charles I decision also noted that absent a timely objection, the court might grant the motion without a hearing (as permitted for matters which require "notice and a hearing," in light of the definition for that phrase in 11 U.S.C. 102(1) which effectively interprets it as meaning notice and an opportunity for a hearing if requested by a party in interest).

Notice and procedure issues were also addressed in In re Wilson, __ B.R. __, 2005 WL 3693206 (Bankr. E.D. Tenn. 12/5/05). The decision in Wilson deals with motions filed in three separate cases to extend the stay under 362(c)(3), as well as a motion to impose the stay in another case under 362(c)(4)(B). Although only one of the motions was opposed, the court discussed certain issues sua sponte to inform parties of the court's expectations for future motions.

Although the debtors served notice of the extension motions on all creditors, in certain cases they did not provide at least 20 days notice of the hearing, as required by the court's local rules. For these, the court rejected the motions to extend the stay on the basis that the notice was inadequate (leading me to wonder, why didn't the court simply reschedule the hearing to afford at least 20 days' notice?). Aside from the notice question, the court found the motions inadequate on their substance as well. Since a presumption of no good faith arose from the prior dismissed case, the court held that mere statements in a motion or brief carried no evidentiary weight, and that a motion for extension must be accompanied by an affidavit setting forth the facts relied on to rebut the presumption.

The court directed that the affidavit should set forth: (1) whether the extension is sought as to all creditor or a single creditor; (2) the case number, commencement and dismissal dates of prior cases; (3) the reasons under 362(c)(3)(C) that there would be a presumption of no good faith; (4) any change in the debtor's financial or personal affairs to support the contention that the case will successfully conclude with a discharge; and (5) any additional information the movant believes is significant. If the motion is opposed, the debtor may then choose to rest on the affidavit or offer testimony in support of the requested relief.

The motions before the court were deemed insufficient because they did not set forth the prior case numbers nor explanations of the prior dismissals. In rather draconian fashion, the court apparently refused to hear testimony offered by the debtors at hearing because of the inadequate notice to parties in interest and because the motions were "fatally defective" due to their insufficient allegations.

The Wilson court was similarly dismissive of the motion to impose the stay under 362(c)(4)(B). Under the court's local rules, hearings on such motions must be on at least 5 days' notice unless permission for a shorter time is given by the clerk, and notice must be by a method effecting immediate receipt (i.e., e-mail or facsimile). Although the debtor had given 6 days notice, he was held not to have complied with the rules because the notice's certificate of service did not evidence expedited service as required by the local rule. Moreover, the motion was also denied on its substance since it did not state with particularity the grounds relied upon nor provide any evidentiary proof.

Timing of notice was also the factor in In re Taylor, 334 B.R. 660 (Bankr. D. Minn. 12/9/05). There, motions for extensions of the stay were denied due to insufficiency of notice. The court held that mailing the motion to creditors 5-8 days in advance of the hearing is not "reasonably calculated to apprise interested parties of the pendency of the motion and to afford them an opportunity to present their objections." Given the out-of-state location of most creditors, and the presumption that mail delivery would take 3-4 days, the court found the short notice was not reasonably likely to give sufficient opportunity for creditors to review the motion, evaluate the newly-effective statutory text, investigate the circumstances of the earlier filing, and prepare and file a formal response. The court held that mailing of notice at least 14 days, or actual delivery at least 10 days, in advance of the hearing (consistent with its local rules' general requirement) would be adequate notice.

Guidance is also provided by the decision in In re Phillips, __ B.R. __, 2006 WL 91311 (Bankr. E.D. Okla. 1/6/06). Like the Charles court, Judge Cornish of Oklahoma advises attorneys that if a motion to extend the stay is unopposed, the motion may be granted in certain circumstances without the necessity of a hearing. Those circumstances require proper notice and an opportunity to object provided to all affected creditors, and a motion which properly pleads all the elements under 362(c)(3) including rebutting a presumption of no good faith (if applicable) by clear and convincing evidence. Unlike Judge Stair in the Wilson case, though, the Phillips decision does not appear to require an affidavit to accompany the motion.

The lessons to be learned? Debtors better make sure that notice of a motion to extend, or impose, the stay, complies with applicable local rules or procedures as to timing of notice. Also, make sure that the motion addresses the relevant factors for whether the presumption applies, and if so the grounds for rebutting it (and in Judge Stair's court in Tennessee, at least, make sure it is accompanied by an affidavit). From the creditors' perspective, they should be aware that some courts may be prepared to grant extensions even without a hearing if no party has made a timely objection.

Next, Part II will discuss in more detail how the burdens of proof are being allocated on applicability of the early stay termination provisions, the presumption of no good faith, and overcoming that presumption.

Monday, February 06, 2006

Another Judge Applies Homestead Cap Broadly; What Would Scalia Do?

We've previously noted several decisions that wrestle with the new BAPCPA provision imposing a dollar cap on the homestead exemption which can be claimed by debtors who acquired their homes less than 1,215 days before filing -- see Homestead Havens Still Viable?; Florida Bankruptcy Judge Applies Homestead Cap; Another Court Applies Homestead Cap; Another Florida Judge Joins Homestead Debate; also see the ABI Journal written with my colleague David Samole, "Homestead Exemption No Longer Debtor's Paradise". We can now add Judge Markell of Nevada to the list of judges who interpret the cap broadly as applying in all states, and not merely those that permit an election between federal and state exemptions. In re Kane, __ B.R. __, 2006 WL 181369 (Bankr. D. Nev. 1/12/06). Judge Markell joins fellow Nevada Judge Riegle and Judges Mark and Friedman of Florida in the broad approach, leaving Judge Haines of Arizona as the only judge who has found that the language used by Congress invoking the cap "as a result of electing" state law exemptions limits the cap to only the "non-opt-out" states. See 11 U.S.C. 522(p).

Judge Markell's route for getting to that result diverges somewhat from those taken by the other judges, though. Judge Mark found 522(p) to be ambiguous, and accordingly referred to legislative history which overwhelmingly reflected congressional intent to limit the homestead exemption available in all states, including notorious debtor havens like Florida (an "opt-out" state). Judge Riegle on the other hand found that the "electing" language referred to the decision to claim a homestead exemption (although she alternatively held that the statute was ambiguous and relied on the legislative history to reach the same conclusion as Judge Mark). Judge Markell, meanwhile, takes what might be called the "What Would Scalia Do?" approach.

First, Judge Markell notes that under the wording of 522(p), the homestead cap only comes into effect "as a result of electing" to exempt property under state law; but in "opt-out" states, debtors cannot and do not "elect" anything, thus "nothing happens as the 'result of electing'" in such states. After summarizing the five decisions construing 522(p) discussed previously here, he then goes on to review the legislative history of the amendment, including House and Senate debates and the House Report on the bill, demonstrating the congressional intent to close the "mansion loophole." Although recognizing that "as Section 522(p) is written and as it was enacted," the language only applies to opt-out states (which means only five jurisdictions where homestead exemptions exceed the $125,000 cap), he finds that limited result "inconceivable" in light of the legislative history and "demonstrably not what members of Congress thought they were implementing" when they voted in favor of the bill.

As a result, Judge Markell concludes that the "result of electing" language is "a mistake in drafting the text of the statute" and that the drafters "no doubt used the word 'electing' without realizing that it made any difference." (Like many of us who puzzle over the ambiguities or outright drafting errors of BAPCPA, Judge Markell is less than convinced by the commentary of Professor Todd Zywicki, who testified to the Senate Judiciary Committee that the act was "fine as it is" and that "There is no word that I would change in this particular piece of legislation.") The question asked in Kane, then, is under what circumstances may a court correct a "scrivener's error" in legislation?

To answer this question, Judge Markell effectively poses another: What Would Scalia Do? His reasoning: since Justice Scalia is among the strictest of textualists, if the methods used by Scalia would permit reformation of the statute, then it must be OK. In applying the "WWSD?" test, Judge Markell reviews several Scalia dissents and concurrences in cases involving legislative snafus, and finds that Scalia acknowledges the appropriateness of correcting a scrivener's error "where on the very face of the statute it is clear to the reader that a mistake of expression (rather than of legislative wisdom) has been made." The Kane decision identifies two requirements under the "WWSD?" test: first, the plain meaning of the statute must lack any rational purpose -- not just the probable intent, but any plausible purpose whatsoever; and second, the intended meaning must be obvious -- in other words, inadequately expressed but absolutely clear.

Applying this test, Judge Markell concludes that the text of 522(p) meets both of Justice Scalia's requirements. He finds that there could be no plausible purpose in linking the 1,215-day ownership requirement to the debtor's ability to choose between federal and state exemptions, and not a shred of evidence in the legislative history demonstrating such an intent. He further finds that extensive record makes the intent of Congress "crystal clear," and that there is "no feasible rationale or policy for enacting what the text of the statute says." As a result, the Kane decision concludes that it is proper to give 522(p) the meaning that Congress intended, and accordingly holds that the cap applies in all states notwithstanding the "electing" language it "inartfully, unthinkingly, and, as it turned out, incorrectly" used.

Court Refuses Advisory Opinion on Lawyers as "Debt Relief Agencies"

Unlike its sister court in the Southern District of Georgia (see "Georgia Judge Says Attorneys Not Debt Relief Agencies"), a Middle District of Georgia bankruptcy judge has refused to give an advisory opinion on whether attorneys fall within the definition of a "debt relief agency" as defined in new 11 U.S.C. 101(12A). Matter of McCartney, __ B.R. __, 2006 WL 75306 (Bankr. M.D. Ga. 1/12/06). As discussed in the prior post, BAPCPA added provisions to the Bankruptcy Code defining a "debt relief agency" and, in 11 U.S.C. 526, imposed several requirements on such agencies as to the disclosures they must make to assisted persons, and the advice they may and may not give to such persons.

In McCartney, the debtors filed their petition pro se and subsequently hired an attorney, then filed a motion seeking a determination that attorneys who practice before the court are not "debt relief agencies." Judge Hershner refused to consider the motion on standing grounds, finding that no party had threatened to enforce any of the debt relief agency provisions of BAPCPA against the debtor. As a result the debtor had not sustained and was not under an immediate threat of any real, actual or direct harm or injury. The motion was dismissed for failing to present a case or controversy.

Although not discussed in any detail in the opinion, it should be noted that the United States Trustee filed a response in opposition to the motion, and argued that the plain language of BAPCPA, the legislative history (including a failed amendment seeking to expressly exclude attorneys), and a history of other legislation subjecting attorneys to federal regulation (such as the Fair Debt Collection Practices Act and the Sarbanes-Oxley Act) all demonstrated that Congress did in fact intend for attorneys to be subject to the "debt relief agency" provisions. Anyone assuming from Judge Davis' earlier opinion that the "debt relief agency" provisions did not apply to attorneys should proceed with caution.