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.