Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 I

Bankruptcy Abuse

Prevention and

Consumer Protection

Act of 2005

Introduction: A History of the Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005................................... 1

By Judith Benderson

Means Testing and Preventing Abuse by Consumer Debtors............ 2

By Mary A. DeFalaise

Selected New Consumer Provisions to the Bankruptcy Abuse Prevention

and Consumer Protection Act of 2005............................... 9

By Craig A. Gargotta

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and

the "Automatic" Stay. .......................................... 1 2

By Jeannine R. Lesperance

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:

Impact on Federal Taxes......................................... 1 6

By Stephen J. Csontos

The Family Farmer and Fisherman Bankruptcy Provisions under the

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.... 2 1

By Patricia Allen Conover and M. Kent Anderson

Congressional Changes to Business Bankruptcy...................... 2 7

By Tracy Whitaker

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005:

New Provisions................................................. 3 1

By Matthew J. Troy

Treatment of Unexpired Leases: Post-Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005.................................. 3 5

By Wendy Tien

July

2006

Volume 54

Number 4

United States

Department of Justice

Executive Office for

United States Attorneys

Washington, DC

20535

Michael A. Battle

Director

Contributors' opinions and

statements should not be

considered an endorsement by

EOUSA for any policy, program,

or service.

The United States Attorneys'

Bulletin is published pursuant to

28 CFR § 0.22(b).

The United States Attorneys'

Bulletin is published bimonthly by

the Executive Office for United

States Attorneys, Office of Legal

Education, 1620 Pendleton Street,

Columbia, South Carolina 29201.

Periodical postage paid at

Washington, D.C. Postmaster:

Send address changes to Editor,

United States Attorneys' Bulletin,

Office of Legal Education, 1620

Pendleton Street, Columbia, South

Carolina 29201.

Managing Editor

Jim Donovan

Program Manager

Nancy Bowman

Law Clerk

Carolyn Perozzi

Internet Address

www.usdoj.gov/usao/

reading_room/foiamanuals.

html

Send article submissions to

Managing Editor, United States

Attorneys' Bulletin,

National Advocacy Center,

Office of Legal Education,

1620 Pendleton Street,

Columbia, SC 29201.

In This Issue

In Honor

This issue of the United States Attorneys' Bulletin is dedicated to

James R. Shively, the former First Assistant United States Attorney for the

Eastern District of Washington. Mr. Shively served as an Assistant United

States Attorney for over twenty years and as Interim United States Attorney

from 2000 to 2001. He held the position of Chief, Criminal Division and Chief,

Civil Division during his tenure. Mr. Shively retired from federal service in

October 2004.

Mr. Shively also served his country in the United States Air Force as an

F-105 pilot during the height of the Vietnam war. His plane was shot down on May 5, 1967 and he was

captured by the North Vietnamese and held as a prisoner-of-war (POW) for over five years. He endured

abuse, torture, illness, and hunger at the hands of the guards at the "Hanoi Hilton." He was released from

the POW camp on February 18, 1973. Upon his return to the United States, he was awarded the Silver

Star in recognition of his distinguished military service to this country.

Jim passed away on February 18, 2006 and is survived by his wife, Nancy Banta Shively, his

daughters, Amy Hawk, Jane Shively, Laura Watson, and Nicole Woodland, along with their husbands,

and three grandchildren.

Mr. Shively was a warm, intelligent, gentle, and compassionate man. His experiences in life taught

him the true meaning and value of life as evidenced by the following quote. "It's not a person's rank or

position that makes them successful in life. Instead, it's how they relate to their friends and family, and

what they do for their community. That's how you truly measure success." Interview by Airman Christie

Putz with former Captain James Shively, First Assistant United States Attorney, in Spokane, WA

(Oct. 24, 2003).

Jim will be remembered by his family, friends, and colleagues for his firm commitment to his

profession and his exemplary service to his country, both as an Assistant United States Attorney and as an

Air Force pilot during the Vietnam War.

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 1

Introduction: A History of the

Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005

Judith Benderson

Office of Legal Programs and Policy

Executive Office for United States Attorneys

n the early 1990s, many practitioners in the

bankruptcy community believed that the

1978 Bankruptcy Code, Pub. L. No. 95-

598, 92 Stat. 2549 (1978), the most

comprehensive redrafting of the bankruptcy laws

of the United States since 1898, generally worked

well, but had evolved into something of a

"Christmas tree," with each special interest having

its own exception or carve-out under title 11. In

response, Congress passed the Bankruptcy

Reform Act of 1994, Pub. L. No. 103-394, 108

Stat. 4106 (1994). Congress made changes to the

Code, including an Executive Office for

United States Attorneys' (EOUSA) proposal to

cover criminal bankruptcy schemes, 18 U.S.C.

§ 157. Congress indicated that it was generally

satisfied with the basic framework of the Code,

but established a blue-ribbon panel, the National

Bankruptcy Review Commission, to study the

bankruptcy laws and make recommendations for

further improvements. The bipartisan Commission

consisted of nine members appointed by the

President, the Congress, and the Judiciary. The

Commission delivered its Final Report in 1997.

See NAT'L BANKR. REVIEW COMM'N, FINAL

REPORT, BANKRUPTCY: THE NEXT TWENTY

YEARS (Commission Print Oct. 20, 1997).

Initially, although Congress authorized the

Commission, it did not appropriate the necessary

funding. Its first chairman spent months getting

funding, but died shortly after it was obtained.

Eventually, a new chairman was appointed and

the Commission got about its business. The work

was divided into particular areas and expert

working groups were formed to address: (1)

chapter 11; (2) consumer bankruptcy; (3)

government; (4) jurisdiction and procedure; (5)

mass torts and future claims; (6) service to the

estate and ethics; (7) small business, partnerships,

and single asset real estate; and (8) transnational

bankruptcies. In addition, there was a ten-member

tax advisory committee comprised of federal and

state government representatives, academics, and

practitioners. Input was solicited from groups

across the bankruptcy spectrum, including the

Department of Justice, some of which is reflected

in the recent legislation.

One area, however, that was extremely

controversial from the outset, and created a long

and tortured path for legislative change,

concerned consumer or individual bankruptcy.

Before the October 1997 delivery of the

Commission's Final Report to the Chief Justice,

legislation in sharp disagreement with the Reports'

consumer provisions was introduced. The

controversy within the bankruptcy community

was, and continues to be, whether or not it is too

easy for individual debtors to "abuse" the

bankruptcy system. Abuse is defined as

discharging debts which debtors theoretically

could afford, at least in part, to pay. All sides

provided anecdotes, but few official statistics

existed to support them.

The legislation did, however, include new

requirements for gathering statistics by the

Administrative Office of the U.S. Courts. The

1997 bill was unsuccessful but, like the phoenix,

rose repeatedly from the ashes in some curiously

creative ways. In 2000, for example, in order to

get the bill directly to the floor for a vote, the

Senate Judiciary Committee carved out the entire

contents of an unneeded State Department bill

which had already passed a committee, and

inserted the language of the bankruptcy

legislation. The bill made it to the President's

desk, but was pocket vetoed. The bill was also

stymied by controversial language inserted in

response to bankruptcy being filed to avoid

paying damages to doctors who were injured after

their photographs and personal information was

posted on a Web site protesting abortion rights. In

2005, it was felt that because of the composition

of Congress, the language could be removed and

the bill would pass. The President signed the

Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005, Pub. L. No. 109-8, 119

Stat. 23 (2005) on April 20 of that year.

There was a dramatic increase in the number

of filings in the weeks and days leading up to the

2UNITED STATES ATTORNEYS' BULLETIN JULY 2006

effective date (Oct. 17, 2005). According to The

Third Branch, the newsletter of the

Administrative Office of the U.S. Courts, in

October 2005, more than 600,000 bankruptcy

cases were filed nationwide. New Law Creates

Rush to File in Federal Courts, THIRD BRANCH

(Fed. Courts Newsletter), Nov. 2005, at Vol. 37,

No. 11, available at http://www.uscourts.gov/ttb/

nov05ttb/newlawrush/index.html. By comparison,

in October 2004, filings totaled only 130,679. Id.

There was an equally dramatic drop-off in the

weeks following the effective date. This may be

due to the massive number of bankruptcy

applications filed before the effective date, as well

as practitioners who were in a holding pattern

concerning the effect of the provisions of the new

law.

In August 2005, the Bankruptcy Rules

Committee issued Interim Rules because of the

time constraints involved in addressing the

legislative changes that corresponded with the

slower moving rules process. These can be found

on the U.S. Federal Courts Bankruptcy page,

available at http://www.uscourts.gov/

bankruptcycourts.html. The Committee is in the

process of addressing the required changes and,

until this task is accomplished, the Interim Rules

are in effect.

In the meantime, most of the U.S. Attorneys'

offices are busy with the case backlog under the

old law and old rules.

ABOUT THE AUTHOR

Judith Benderson is currently serving as the

Attorney/Bankruptcy Coordinator, Office of Legal

Programs and Policy at the Executive Office for

United States Attorneys. Prior to being detailed to

this position, she was assigned to EOUSA as the

American Political Science Association

Congressional Fellow. She was detailed to the

National Bankruptcy Review Commission as

Legislative Counsel and Press Officer.a

Means Testing and Preventing Abuse

by Consumer Debtors

Mary A. DeFalaise

Trial Attorney

Financial Litigation Section

Commercial Litigation Branch

Civil Division

I. Introduction

ne of the biggest changes made to the

Bankruptcy Code by the Bankruptcy

Abuse Prevention and Consumer

Protection Act of 2005, Pub. L. No. 109-8, 119

Stat. 23 (BAPCPA), is the inclusion of the "means

test" for consumer cases. Before BAPCPA,

debtors were allowed to unconditionally discharge

certain personal debts through the liquidation and

distribution of their non-exempt assets. See H.R.

Rep. No. 109-31(I), at 10-11, as reprinted in 2005

U.S.C.C.A.N. 88, 96-97. In 1938, Congress

recognized that individual debtors should be

allowed to pay off at least some of their debt and

codified a debtor's choice to pay creditors through

an extended repayment plan. Id. This choice,

however, was completely voluntary. Id. Today,

total or partial repayment of consumer debt is

done through a three or five year payment plan

under chapter 13 of the Bankruptcy Code,

whereas a discharge of consumer debt is

accomplished by filing for relief under chapter 7

of the Bankruptcy Code.

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 3

Although a debtor's right to seek a discharge

of consumer debt under chapter 7 was unfettered

for many years, Congress eventually limited the

consumer debtor's "unconditional" discharge

through a series of amendments to the Bankruptcy

Reform Act of 1978, Pub. L. No. 95-598, 92 Stat.

2549. See Eugene R. Wedoff, Means Testing in

the New § 707(B), 79 AM. BANKR. L.J. 231, 233-

34 (2005) (discussing pre-BAPCPA bankruptcy

amendments and legislative history). These

amendments were aimed at curbing abuse by

consumer debtors who could repay some of their

personal debts, but avoided their obligations by

filing for chapter 7. H.R. Rep. No. 109-31(I), at

12, 98. The amendments allowed the court to

dismiss a chapter 7 case for cause, substantial

abuse, or, under certain circumstances, by motion

of the United States Trustee. Id. at 11-12, 98.

Notwithstanding these amendments, the former

Bankruptcy Code still favored granting discharges

to individual debtors. Id. at 12, 98. The

bankruptcy courts were also divided over what

constitutes "substantial abuse," creating varying

criteria for dismissing a chapter 7 case. See id. See

also In re Hardacre, No. 05-95518, 2006 WL

541028 *1 (Bankr. N.D. Tex. Mar. 6, 2006)

(acknowledging former § 707(b) did not define

"substantial abuse"); In re Johnson, 318 B.R. 907,

919 (Bankr. N.D. Ga. 2005) (stating that courts

given discretion to determine substantial abuse on

a case-by-case basis); In re Attanasio, 218 B.R.

180 (Bankr. N.D. Ala. 1998) (listing cases

analyzing "substantial abuse").

Consequently, Congress enacted BAPCPA to

limit abuse by consumer debtors and reform the

bankruptcy system. BAPCPA eliminates the

presumption in favor of discharging debtors'

liabilities and allows a chapter 7 case to be

dismissed for abuse, rather than substantial abuse.

11 U.S.C. § 707(b)(1). Moreover, BAPCPA

establishes a "means test" to determine whether a

presumption of abuse exists in cases filed under

chapter 7. See generally 11 U.S.C. § 707(b)(2).

The "means test" is designed to identify debtors

who can afford to make payments to creditors and

prevent them from filing a chapter 7 bankruptcy

case. See John Hennigan, Rousey and the New

Retirement Funds Exemption, 13 AM. BANKR.

INST. L. REV. 777, 798 (Winter 2005)

(summarizing means test under BAPCPA). The

following describes how to determine whether a

presumption of abuse arises under the new chapter

7 means test, how such presumption may be

rebutted, new certification requirements for

debtors' attorneys, and other additions to the

Bankruptcy Code intended to curb consumer

abuse.

II. Determining whether a presumption

of abuse exists

Upon filing for relief under chapter 7, a debtor

is now required to file a "Statement of Current

Monthly Income And Means Test Calculation"

(Bankruptcy Form B22A). In addition, the debtor

must also file a schedule of current income

(Schedule I) and schedule of current expenses

(Schedule J). This statement is a worksheet used

to determine whether seeking relief under chapter

7 is presumptively abusive. If, after deducting

allowable expenses from the debtor's current

monthly income (CMI), the debtor's disposal

monthly income exceeds either (i) the greater of

$100 or 25 percent of the debtor's nonpriority

unsecured claims, or (ii) $166.67, a presumption

of abuse arises. 11 U.S.C. § 707(b)(2)(A).

Determining the debtor's disposable monthly

income starts by calculating the debtor's CMI. The

Bankruptcy Code defines CMI as the average

monthly income received by the debtor from all

sources (regardless of whether such income is

taxable income), for the six months prior to filing,

ending on the last day of the calendar month

immediately preceding the date of the

commencement of the case, if the debtor filed a

Schedule I. 11 U.S.C. § 101(10A)(A). If the

debtor did not file a Schedule I, the date on which

the court determines current income controls. Id.

This income includes amounts paid by an entity,

other than the debtor, on a regular basis for

household expenses, excluding social security

benefits and victim payments resulting from war

crimes, crimes against humanity, and payments

resulting from acts of international or domestic

terrorism. 11 U.S.C. § 101(10A)(B).

Next, the debtor deducts allowable expenses

from his or her CMI. Allowable expenses that

may be deducted include those expenses specified

under the National Standards and Local

Standards, and the debtor's actual monthly

expenses for the categories specified as "Other

Necessary Expenses," defined in the Collection

Financial Standards issued by the Internal

Revenue Service (IRS). 11 U.S.C.

§ 707(b)(2)(A)(ii)(I). The IRS' National Standards

4UNITED STATES ATTORNEYS' BULLETIN JULY 2006

include amounts for: (1) food; (2) housekeeping

supplies; (3) apparel and services; (4) personal

care products and services; and (5) miscellaneous

expenses. Tables setting forth actual amounts for

these expenses, as well as median income and

census bureau information, can be found at:

http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.

htm.

In addition to the expenses listed by the IRS, a

debtor may also deduct: (1) costs for reasonably

necessary health insurance; (2) costs for disability

insurance; (3) amounts for certain health savings

accounts; (4) reasonably necessary costs

associated with protecting the debtor and the

debtor's family from acts of violence under federal

law; and (5) actual amounts, up to $1,500 a year

(under certain conditions) that are not accounted

for by any of the other allowable expenses for

each of the debtor's minor, dependant children

who attend a private or public elementary or

secondary school. 11 U.S.C. § 707(b)(2)(A)(ii)(I),

(IV). Other allowable deductions include

reasonable and necessary: (1) costs to continue the

care and support of an elderly, chronically ill or

disabled household member (or member of the

debtor's immediate family who is unable to pay

such costs); (2) amounts for home energy costs in

excess of those amounts specified in the

Collection Financial Standards for which the

debtor can provide documentation; and (3)

additional amounts not to exceed 5 percent of the

National Standards for food and clothing. 11

U.S.C. §§ 707(b)(2)(A)(ii)(II), (V). Debtors who

are eligible to file under chapter 13 may also

deduct from their CMI actual administrative

expenses associated with administering a chapter

13 plan which do not exceed 10 percent of the

projected plan payments. 11 U.S.C.

§ 707(b)(2)(A)(ii)(III).

Although debtors can not deduct payments for

debts as a monthly expense, see 11 U.S.C.

§ 707(b)(2)(A)(ii)(I), debtors' payments for

secured debts and priority debts are accounted for

when determining monthly disposable income.

See, e.g., In re Nuttall, 334 B.R. 921, 924 (Bankr.

W.D. Mo. 2005); In re Hill, 328 B.R. 490, 502

(Bankr. S.D. Tex. 2005). Debtors are allowed to

deduct their average monthly payments for

secured and priority debts from their CMI before

determining whether their disposable monthly

income exceeds the amounts described in 11

U.S.C. § 707(b)(2)(A). Id. A debtor's average

monthly payment for a secured debt is calculated

by taking the total of all amounts contractually

due over sixty months, starting from the month

the petition is filed, and dividing such amount by

sixty. 11 U.S.C. § 707(b)(2)(A)(iii). Amounts for

priority claims are also calculated by taking the

total amount of debt entitled to priority (including

priority child support and alimony claims) and

dividing by sixty. 11 U.S.C. § 707(b)(2)(A)(iv).

Again, if, after deducting these amounts and

allowable expenses, a debtor's disposable monthly

income exceeds the amounts described in 11

U.S.C. § 707(b)(2)(A), the debtor's bankruptcy

case will be presumed abusive.

III. Notice of presumption of abuse

If a presumption of abuse arises under

§ 707(b), the clerk must give notice to all of the

debtor's creditors of such presumption within ten

days after the debtor files for relief under chapter

7. 11 U.S.C. § 342(d). The United States Trustee

will subsequently hold a first meeting of creditors

within twenty to sixty days of the filing of the

petition for relief. 11 U.S.C. § 341(a); FED. R.

BANKR. P. 2003(a). Within ten days after the first

meeting of creditors, the United States Trustee

(which, for the purposes of this article, includes

bankruptcy administrators) must file a statement

with the court stating that: (1) the debtor's case is

presumed to be an abuse under § 707(b); (2) a

presumption of abuse does not exist; or (3) the

debtor failed to submit the appropriate documents

to complete the means test. See 11 U.S.C.

§ 704(b)(1)(A). See also In re Fawson, No.

05-80244, 2006 WL 398182 *1 (Bankr. D. Utah

Feb. 21, 2006) (trustee forced to file notice that

debtor failed to file or transmit necessary means

testing documents). If the debtor fails to provide

the trustee the information required under § 521,

the case will be dismissed after forty-five days.

See 11 U.S.C. § 521(i); Fawson, 2006 WL

398182 at *6 (dismissing case under § 521(i)

where debtor failed to request enlargement of time

to file required documentation).

The court must provide a copy of the

United States Trustee's statement to the creditors

in the debtor's case within five days after

receiving the statement. 11 U.S.C.§ 704(b)(1)(B).

If a presumption of abuse exists, then the

United States Trustee must decide whether to file

a motion to dismiss or convert the debtor's case

under § 707(b), or determine whether special

circumstances warrant an exception. 11 U.S.C.

§ 704(b)(2). The United States Trustee has thirty

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 5

days to make this decision, and if no motion is

filed, the trustee must file a statement explaining

why such motion would not be appropriate. Id. If

a motion to dismiss or convert is filed and the

debtor objects, the court must conduct a trial

where the debtor will have to overcome the

presumption of abuse. If the debtor cannot rebut

the presumption, the debtor's case will be

converted to a chapter 11 or chapter 13 case, or be

dismissed. 11 U.S.C. § 707(b)(1).

If no presumption of abuse exists or the

debtor rebuts such presumption, the court must

determine whether granting the debtor relief

would be an abuse of the Bankruptcy Code. 11

U.S.C. § 707(b)(3). To make this determination,

the court must consider whether the debtor filed

the petition in bad faith or if the totality of the

circumstances demonstrates abuse. 11 U.S.C.

§ 707(b)(3)(A)-(B). The circumstances the court

considers include whether the debtor filed for

relief to reject a personal services contract and the

debtor's financial need to reject such a contract. 11

U.S.C. § 707(b)(3)(B). Thus, even if a

presumption of abuse does not arise, the court

may still conclude that granting chapter 7 relief to

the debtor is abusive. See Hill, 328 B.R. at 507.

Thereafter, if the court finds that granting

relief in the case would be an abuse of the

Bankruptcy Code, the court, on its own or by

motion of the United States Trustee or any party

in interest, may move to dismiss the debtor's case.

11 U.S.C. § 707(b)(1). In making such a finding,

the court can not consider whether the debtor

made, or continues to make, charitable

contributions to any qualified religious or

charitable entity or organization as those terms are

defined under § 548(d) of the Bankruptcy Code.

Id. If the court determines that the debtor's case

would constitute an abuse under chapter 7, the

case will be converted or dismissed. 11 U.S.C.

§ 707(b)(1).

IV. Rebutting the presumption of abuse

A presumption of abuse may be rebutted by

showing exceptional circumstances if the

circumstances justify additional expenses or an

adjustment to CMI for which there is no

reasonable alternative. 11 U.S.C.

§ 707(b)(2)(B)(i). See Hardacre, 2006 WL

541028 at *2. Exceptional circumstances include

serious medical conditions and being called to

active military duty. Id. For each additional

expense or adjustment to CMI, the debtor must

provide supporting documentation, provide a

detailed explanation of why the special

circumstances make the additional expense or

adjustment reasonable and necessary, and attest

under oath as to the accuracy of the supporting

information provided. 11 U.S.C.

§§ 707(b)(2)(B)(ii)-(iii). The presumption of

abuse will only be rebutted if the additional

expenses or adjustments cause the debtor's CMI to

be less than: the lesser of "(I) 25 percent of the

debtor's non-priority claims, or $6,000, whichever

is greater; or (II) $10,000." 11 U.S.C.

§ 707(b)(2)(B)(iv).

Certain disabled veterans are exempt from

means testing and do not have to rebut a

presumption of abuse. Specifically, any disabled

veteran (as defined in 38 U.S.C. § 3741(1)) who

incurred his or her indebtedness while on active

duty or while performing a homeland defense

activity (as defined in 32 U.S.C. § 901(1)) is not

subject to means testing or rebutting a

presumption of abuse. 11 U.S.C. § 707(b)(2)(D).

If the debtor qualifies for this exception, a court

cannot dismiss or convert such a debtor's case

based on means testing. Id.

V. "Safe harbors" against means testing

BAPCPA provides two "safe harbors" to

protect lower income debtors from their creditors.

H.R. Rep. No. 109-31, at 15, 51, 381, 485 (2005).

See Wedoff, supra at 238. First, only a judge or

the United States Trustee may file a motion to

dismiss or convert a case under § 707(b) if the

debtor's CMI (or the debtor's and debtor's spouse's

CMI in a jointly filed case), when multiplied by

twelve, at the time the order for relief is entered, is

equal to or less than:

6UNITED STATES ATTORNEYS' BULLETIN JULY 2006

The median family

income of the

applicable state for one

earner. . .

if the debtor is in a

household of one

person.

The highest median

family income of the

applicable state for a

family of the same

number or fewer

individuals. . .

if the debtor is in a

household of two-

four individuals.

The same as a

household with two-

four individuals, plus

$525 per month for

each individual in

excess of four. . .

if the debtor is in a

household exceeding

four individuals.

11 U.S.C. § 707(b)(6). For any year, median

family income means the median family income

both calculated and reported by the Bureau of the

Census in the then most recent year. 11 U.S.C.

§ 101(39A). If such calculation is not done or

reported in the then current year, median family

income is determined by adjusting annually, after

the most recent year, the increase in the Consumer

Price Index (CPI) for All Urban Consumers

during the period between the most recent year

and the current year. Id.

Second, no one can file a motion to dismiss

under § 707(b)(2) based on the ability of a debtor,

including veterans, to repay debts if the debtor's

and the debtor's spouse's CMI, when multiplied by

twelve at the time the order for relief is entered, is

equal to or less than:

The median family

income of the

applicable state for one

earner. . .

if the debtor is in a

household of one

person.

The highest median

family income of the

applicable state for a

family of the same

number or fewer

individuals. . .

if the debtor is in a

household of two-

four individuals.

The same as a

household with two-

four individuals, plus

$525 per month for

each individual in

excess of four. . .

if the debtor is in a

household exceeding

four individuals.

11 U.S.C. § 707(b)(7)(A). The CMI of the

debtor's spouse is not considered in this

calculation if: (1) the case is not jointly filed; (2)

the debtor and his or her spouse are legally

separated, or living separate and apart; and (3)

they are doing so for purposes other than trying to

qualify the debtor for this exception. 11 U.S.C.

§ 707(b)(7)(B). To qualify for this exception,

debtors must also file a statement, under the

penalty of perjury, that they are legally separated,

or living separate and apart, and disclose any

aggregate amounts that they may be receiving

from their spouse that contribute to their CMI. 11

U.S.C. § 707(b)(7)(B)(ii).

VI. Certifications by debtors' attorneys

Besides requiring an immediate determination

whether presumed abuse exists, BAPCPA also

requires more accountability on the part of

debtors' attorneys. See 11 U.S.C. § 707(b)(3)(C).

By signing a petition, pleading, or motion, an

attorney is deemed to have certified that the

attorney: "(i) performed a reasonable investigation

into the circumstances that gave rise to the

particular petition, pleading, or written motion;

and (ii) determined that such document is well

grounded in fact; and is warranted under existing

law. . . ." Id. The attorney may also argue that

existing law should be reversed or modified as

long as such argument is made in good faith and

does not constitute an abuse of the Bankruptcy

Code. 11 U.S.C. § 707(b)(3)(C)(ii). Further, the

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 7

attorney's signature on the debtor's petition for

relief constitutes a certification that the attorney

has made an inquiry as to the information

contained in the debtor's bankruptcy schedules

and has no knowledge that the information

contained in such schedules is incorrect. 11

U.S.C. § 707(b)(3)(D).

If a United States Trustee files a motion to

dismiss or convert a debtor's case under § 707(b),

the court may order that the debtor's attorney

reimburse the trustee for all reasonable costs in

prosecuting the motion, if such motion is

successful and the court finds that, by filing the

debtor's case under chapter 7, the debtor's attorney

violated Rule 9011 of the Federal Rules of

Bankruptcy Procedure. 11 U.S.C.

§ 707(b)(4)(A)(i)-(ii). On its own, or by motion of

an interested party, the court may also assess an

appropriate civil penalty against the debtor's

attorney and order that such penalty be turned

over to the United States Trustee in accordance

with the procedures set forth in Bankruptcy Rule

9011. 11 U.S.C. § 707(b)(4)(B). A debtor,

however, may be awarded reasonable costs in

contesting a motion for sanctions brought by a

party in interest (but not the United States

Trustee) if the court does not grant the sanctions

motion and: (1) the position of the movant

violated Bankruptcy Rule 9011; or (2) the

attorney did not conduct a reasonable

investigation before filing the motion that

complied with the requirements of 11 U.S.C.

§ 707(b)(3)(C)(ii) and was made solely for the

purpose of coercing a debtor into waiving his or

her rights under the Bankruptcy Code. 11 U.S.C.

§ 707(b)(5)(A).

VII. Other BAPCPA provisions

curtailing abuse and fraud

BAPCPA also includes many other notable

additions aimed at curbing consumer abuse and

fraud. For instance, BAPCPA imposes stricter

limits on a debtor's ability to file successive

bankruptcy cases. See, e.g., 11 U.S.C. § 727(a)(8)

(extending time between filings to eight years).

There are also more limits on debtors receiving

discharges. See 11 U.S.C. § 727(a)(11) (requiring

completion of an instructional course concerning

personal financial management); 11 U.S.C.

§ 727(a)(12) (delaying discharge if there is a

pending proceeding against the debtor pursuant to

which the debtor could be found guilty of certain

types of felonies or liable for violations of other

criminal and civil laws as described in

§ 522(q)(i)). See also 11 U.S.C. § 727(d)(4)

(revoking discharge if debtor fails to satisfactorily

explain material misstatement made in an audit or

fails to make available information necessary for

an audit). Further, the court may dismiss a debtor's

chapter 7 case if: (1) the debtor is convicted of a

crime of violence or convicted of a drug

trafficking crime; (2) it is in the best interest of the

victim; and (3) the debtor is unable to show, by a

preponderance of the evidence, that his or her

bankruptcy case is necessary to satisfy a claim for

a domestic support obligation. 11 U.S.C. § 707(c).

BAPCPA also imposes stricter requirements

for exempting homestead property. Under

BAPCPA, a debtor must be domiciled in a state

for at least two years before claiming a homestead

exemption under state law, see 11 U.S.C.

§ 522(b)(3)(A), and may not exempt amounts

exceeding $125,000 for such homestead property

unless the debtor has owned the property for at

least forty months. 11 U.S.C. § 522(p)(1)(D). If

the debtor transferred an interest in his or her

previous principle residence to the current

principle residence and the properties were

located in the same state, the $125,000 cap does

not apply. 11 U.S.C. § 522(p)(2)(B). A debtor also

cannot exempt an interest in his or her homestead

property that exceeds $125,000 if the court

determines that the debtor has been found guilty

of certain types of felonies or is liable for a debt

arising from the violation of other criminal or civil

laws, including debts arising from securities fraud,

civil RICO actions, and acts causing serious injury

to another person. 11 U.S.C. § 522(q)(1).

Additionally, BAPCPA requires that all

individual debtors receive credit counseling

within the six months preceding their bankruptcy

filings. See 11 U.S.C. §§ 109(h), 521(b).

Exceptions will be made if the debtor lives in a

district in which the United States Trustee has

determined that the approved non-profit budget

and credit counseling agencies for such district are

not reasonably able to provide adequate services,

see 11 U.S.C. § 109(h)(2)(A), or the debtor is

unable to complete counseling due to incapacity,

disability, or active military duty in a military

combat zone. 11 U.S.C. § 109(h)(4). To be

considered incapacitated, the debtor must suffer

some type of mental illness or deficiency that

renders him or her unable to make rational

decisions about his or her financial

8UNITED STATES ATTORNEYS' BULLETIN JULY 2006

responsibilities. Id. To be considered disabled, the

debtor must be unable to participate in counseling

after reasonable efforts are made, either in person,

by telephone, or over the Internet. Id.

A debtor may also postpone counseling and

file for bankruptcy if, after making a request, the

approved agency is unable to counsel the debtor

within five days and exigent circumstances exist.

See 11 U.S.C. § 109(h)(3)(A). The debtor must

file a certification that is satisfactory to the court

describing the exigent circumstances, and

explaining why the debtor was unable to receive

counseling from an approved agency within the

prescribed period of time. Id. The debtor,

however, must still obtain credit counseling no

later than thirty days after filing a petition for

relief, which may be extended by an additional

fifteen days for cause. 11 U.S.C. § 109(h)(3)(B).

See In re LaPorta, 332 B.R. 879, 881 (Bankr. D.

Minn. 2005) (noting that exemption under

§ 109(h)(3)(B) is not permanent). The

certification filed with the court may also have to

be signed under penalty of perjury to qualify for

an extension under § 109(h)(3)(A). See LaPorta,

332 B.R. at 881 (finding that a "certification"

under federal law must be "subscribed" and

contain statements that the content of the

document is true and correct under the penalty of

perjury pursuant to 28 U.S.C. § 1746). See also In

re Wallert, 332 B.R. 884, 887 (Bankr. D. Minn.

2005) (acknowledging that debtor's submission to

court that met requirements of 28 U.S.C. § 1746

constituted a certification under § 109(h)(3)(A));

but see In re Graham, 336 B.R. 292, 296 (Bankr.

W.D. Ky. 2005) (finding that plain language of

§ 109(h)(3)(A) does not require certification to

adhere to requirements of 28 U.S.C. § 1746); In re

Cleaver, 333 B.R. 430, 434 (Bankr. S.D. Ohio

2005) (debtor must attest only to truth of

statements contained in submission to court to be

considered certification under § 109(h)(3)(A)).

VIII. Conclusion

These are just some of the provisions of

BAPCPA, along with the means test, intended to

decrease consumer bankruptcy abuse and fraud.

Whether these provisions will actually decrease

consumer fraud still remains to be seen. However,

BAPCPA has clearly increased administrative

expenses for both the court and debtors. See

Wedoff, supra at 277. Implementing and enforcing

the means test not only requires substantially

more documentation and information to be

provided by debtors, but the means test involves

preparing complex calculations and time-

consuming review by the United States Trustees

Id. Courts will also continue exercising their

discretion in determining whether special

circumstances exist to rebut presumed abuse and

whether a debtor's case should be dismissed for

bad faith or under the totality of the

circumstances, thus creating a lack of certainty

and uniformity among the courts applying

BAPCPA. See id. at 279; Hill, 328 B.R. at 506.

Accordingly, irrespective of whether BAPCPA

actually decreases consumer abuse, BAPCPA will

not decrease bankruptcy litigation or the amount

of work and time required of debtors, attorneys,

and the courts.

ABOUT THE AUTHOR

Mary A. DeFalaise is an attorney in the

Financial Litigation Section of the Commercial

Litigation Branch in the Civil Division in

Washington, DC, where she represents the

United States in bankruptcy proceedings

throughout the country. Prior to joining the

Department of Justice in 2004, Ms. DeFalaise

worked for the law firm of Taft, Stettinius &

Hollister, LLP in Cincinnati, Ohio, where she was

a member of the firm's Debtor/Creditors' Rights

practice group. She may be contacted via e-mail at

mary.defalaise@usdoj.gov, or by telephone at

(202) 307-0183. Her mailing address is 1100 L

St., NW, Room 10002, Washington, DC, 20005. a

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 9

Selected New Consumer Provisions to

the Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005

Craig A. Gargotta

Assistant United States Attorney

Western District of Texas

I. Introduction

hen Congress passed the Bankruptcy

Abuse Prevention and Consumer

Protection Act, Pub. L. No. 109-8,

119 Stat 23 (2005) (BAPCPA), into law in

October 2005, the focus of the legislation was to

root out perceived abuses in the manner that the

courts administered consumer cases. Congress

found that too many debtors were discharging

debt when they could pay more of their claims.

Further, creditors argued that debtors filed cases

repeatedly to keep them at bay, without any

intention of repaying their claims. Secured

creditors complained that chapter 13 debtors

impermissibly bifurcated their secured claims on

personal property into their secured and unsecured

components, only to seek releases of liens when

the secured claims were paid. This article analyzes

the prior Bankruptcy Code and the changes

BAPCPA made to these provisions.

II. Discharge under chapters 7 and 13

A. Chapter 7

As an initial matter, a consumer debtor

generally files under one of two chapters of the

Bankruptcy Code–chapter 7 (straight liquidation)

or chapter 13 (reorganization of debt). Under

BAPCPA, Congress sought to force debtors to file

more chapter 13 cases by passing a means test and

limiting the number of discharges that a debtor

could obtain. Consequently, Congress amended

the discharge provisions of both chapter 7 and

chapter 13 by making it more difficult to obtain a

discharge and limiting the number of successive

cases that a person could file.

A chapter 7 discharge under 11 U.S.C. § 727

occurs in a relatively short amount of time after

the petition is filed (ninety days). It can be issued

prior to the chapter 7 trustee filing his/her final

report, account of moneys received, property

liquidated, and debts paid. The operative statute

governing discharge in chapter 7 is § 727.

Although § 727 has many sub-sections, the

primary components may be summarized as

follows.

The court shall grant the debtor a discharge

under § 727(a) unless one or more of the

following facts are found.

• The debtor is not an individual (businesses

such as corporations and partnerships do not

receive a discharge in bankruptcy).

• The debtor defrauded a creditor or officer of

the estate charged with custody of property of

the estate by transferring, removing,

destroying, mutilating, or concealing the

property within one year prior to the petition

date or after the chapter 7 petition is filed.

• The debtor falsified records regarding the

debtor's financial condition or business

transactions.

• The debtor failed to explain the loss or

deficiency of assets to meet the debtor's

liabilities.

• The debtor refused to obey a lawful order of

the court, other than to respond to a material

question or testify.

• The debtor had been previously issued a

discharge under § 727 or § 1141, in a case

commenced within the last six years of the

date of filing of the petition. Under the new

Act, this period has been extended to eight

years.

• The debtor received: (1) a discharge under

§§ 1228 or 1328 within six years of the date

of the filing of the petition, unless the chapter

12 or 13 plan paid 100 percent of the allowed

unsecured claims; or (2) the chapter 12 or 13

plan paid 70 percent of unsecured claims, the

plan was proposed in good faith, and was the

10 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

debtor's best effort; or (3) the court approved

a written waiver of discharge executed after

the order for relief under this chapter.

• BAPCPA now provides that a debtor cannot

get a discharge if the debtor fails to take an

instructional course regarding personal

financial management described in § 111,

unless it is determined that there are no

sufficient courses present in the district where

the debtor files bankruptcy.

A new § 727(a)(12) was added. By way of

background, § 522 (the section dealing with

exemptions) has a new § 522(q) that provides an

absolute homestead cap of $125,000 if the debtor

was convicted of a felony demonstrating that the

filing of the case was an abuse of the Act or the

debtor owes a debt arising from a violation of

state or federal securities fraud. If there is an

action under § 522(q) pending, the court will not

grant a discharge under § 727(a).

B. Chapter 13

A chapter 13 debtor receives a discharge

under § 1328(a) after all payments are made under

the plan. A chapter 13 plan discharges all debts

provided for in the plan, with the following

exceptions.

• Secured debt on residential property (provided

for under § 1322(b)(5)).

• Child support or alimony debts as defined

under § 523(a)(5).

• Student loans debts as defined under

§ 523(a)(8). Student loans are not

dischargeable unless it can be demonstrated

that the repayment of the student loan would

be an "undue hardship" on the debtor. Under

the new Act, this now includes not only

governmental loans, but private loans as well.

• Death or personal injury caused by the

debtor's operation of a motor vehicle while

intoxicated (debts under § 523(a)(9)).

• Debts for restitution or a fine included in a

sentence for the debtor's conviction of a

crime. See Kelly v. Robinson, 479 U.S. 36

(1986) (Supreme Court held that fines or

conditions imposed as part of a criminal

sentence are nondischargeable).

A chapter 13 discharge previously dismissed

debts obtained by fraud, as defined in

§§ 523(a)(2), (a)(4), and (a)(6). The new Act

changes this provision to reflect that debts related

to the following factors are nondischargeable in

any case.

• Section 523(a)(2) (credit obtained by false

pretenses).

• Section 523(a)(3) (unscheduled debts).

• Section 523(a)(4) (fraud by the fiduciary).

• Damages awarded for willful or malicious

injury resulting in a personal injury or death.

• Section 523(a)(14) debts incurred to pay non-

dischargeable taxes, other than federal taxes.

Section 1328(a)(2) has been amended to

provide that trust fund taxes and taxes under

§ 507(a)(8)(C), or in paragraphs (1)(B) and

(1)(C), are no longer dischargeable in chapter 13

cases.

Section 1328(b)(10) was added to allow a

chapter 13 debtor to pay interest on non-

dischargeable taxes to the extent that the debtor

has disposable income to do so. The new Act

allows for interest and penalties to accrue on non-

dischargeable taxes during the pendency of the

case.

Section 1328 was amended by new

subparagraph (f) that provides that a debtor cannot

get a discharge in a chapter 13 case if: (1) the

debtor filed a case under chapter 7, 11, or 12 in

the previous four years preceding the date of order

of relief for chapter 13; or (2) the debtor filed a

previous chapter 13 case in the two year period

preceding the date of order of relief. This will

most likely eliminate successive chapter 13 cases,

and "chapter 20" cases, wherein the debtor filed a

chapter 7 to discharge unsecured, non-

dischargeable debt, and subsequently files a

chapter 13 case to pay non-dischargeable debt,

such as home mortgages or taxes. See Johnson v.

Home State Bank, 501 U.S. 78 (1991).

In addition, a chapter 13 debtor, like a chapter

7 debtor, must take an instructional course

concerning personal debt management as a

condition of discharge, unless it is determined that

no adequate course exists in the district where the

debtor filed.

New § 1328(h) provides that the court cannot

allow a discharge if there is a proceeding pending

under § 522(q). The court is required to determine

under chapters 7, 11, and 13, at least ten days

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 11

before discharge, that no § 522(q) proceeding is

pending.

III. Treatment of non-residential

secured claims in chapter 13 cases

under the new Act

Lien stripping of personal property in chapter

13 plans has received considerable review by the

bankruptcy courts over the last few years. The

dispute centers on whether a chapter 13 debtor can

require a creditor who has a lien on personal

property to release the lien once the secured value

of the claim is paid, or whether the creditor can

require the debtor to complete the plan and obtain

a discharge before the lien is released. The issue

involved consideration of the interplay between

§§ 349, 506(a), 506(d), 1325, and 1327. Courts

previously adopted two distinct paths in deciding

whether the debtor can compel a creditor to

release a lien on personal property (usually a

vehicle whose value is less than the outstanding

debt) prior to discharge. The new Act changes

prior case law.

Congress addressed the lien stripping issue

through amendments to § 348. Section 348(f)(1)

has been amended by providing that valuations in

chapter 13 cases of allowed secured claims shall

only apply to cases converted to chapters 11 and

12, but not chapter 7. Secured claims in chapter

13 cases converted to chapter 11 or 12 shall be

reduced to the extent that the claims were paid

through the chapter 13 plan. Further, the value of

the creditor's secured claim continues to be that

value, even if the case is converted to another

chapter under the Code. In addition, unless a pre-

bankruptcy default is fully cured by the time of

conversion, the basis for the pre-bankruptcy

default retains the legal status it would have under

applicable non-bankruptcy law.

This provision resolves a long-standing

division among courts as to whether a chapter 13

debtor can get a release of a lien on personal

property (a vehicle) before discharge. The intent

of this provision is to prohibit a debtor from

retaining personal property, providing only for

repayment of the secured component of the claim,

and then retaining the collateral without

completing a chapter 13 plan and releasing the

lien before discharge. There was a split in

authority as to the legitimacy of such an action.

Cf. In re Johnson, 213 B.R. 443 (Bankr. N.D. Ill.

1999)(lien stripping permissible on personal

property) with In re Pruitt, 203 B.R. 134, 136-37

(Bankr. S.D. Ind. 1996)(lien stripping disallowed

until all payments made under plan).

In addition, § 1325(a)(5)(B) was amended to

require that the periodic payments made under the

chapter 13 plan be in equal monthly amounts and

that the payments at least equal the amount to

which the secured creditor would be entitled as

protection payments. This amendment would

eliminate stair step or balloon payments on

personal property and ensure an equal

amortization of monthly payments on the debt.

Section 1326(a)(1) was amended to provide

that plan payments be made within thirty days of

the filing of the plan or the order of relief, which

ever is earlier. As such, if the chapter 13 plan is

not filed simultaneously with the chapter 13

petition, the debtor will have to start making plan

payments thirty days after filing. The amount of

the plan payment is to be determined by: (1) what

the trustee proposes; (2) the amount required in a

lease on personal property, paid directly to the

lessor, that becomes due after the filing of relief;

or (3) on a purchase money security interest in

personal property, an amount that equals at least

the amount the creditor would require to be

adequately protected. The intention of this

provision is to continue payments on personal

property (most likely vehicles) with minimal

interruption.

The amended provisions of §§ 1325 and 1326

continue the established practice of the trustee

retaining plan payments until the plan has been

confirmed or denied. In addition, proof of

insurance is required on all personal property

subject to a lien or lease within sixty days of

filing.

IV. Conclusion

BAPCPA places more burdens on consumer

debtors in obtaining a discharge. BAPCPA

protects the interests of secured claims by

requiring full payment of secured claims and

requiring the debtor obtain a discharge, before a

lien is released in a chapter 13 case.

ABOUT THE AUTHOR

Craig A. Gargotta is an AUSA in the Western

District of Texas, and has practiced primarily in

12 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

the area of bankruptcy for over fifteen years. Mr.

Gargotta has been a contributing editor to the

American Bankruptcy Institute Journal for

thirteen years and is also editor-in-chief of The

Federal Lawyer. He is a regular speaker at Office

of Legal Education bankruptcy seminars and has

published over thirty articles or columns on

bankruptcy, including a law review article on

post-petition tax compliance in the Spring 2003

issue of the American Bankruptcy Institute Law

Review. He also teaches legal writing at St. Mary's

Law School and will be a contributing author for

the State Bar of Texas' handbook on consumer

bankruptcy. a

Bankruptcy Abuse Prevention

Consumer Protection Act of 2005 and

the "Automatic" Stay

Jeannine R. Lesperance

Trial Attorney

Commercial Litigation Branch

Civil Division

I. Introduction

ne of the provisions of the Bankruptcy

Code most affected by the Bankruptcy

Abuse Prevention and Consumer

Protection Act, Pub. L. No. 109-8, 119 Stat 23

(2005) (BAPCPA), is 11 U.S.C. § 362. Section

362 stays third parties from taking certain actions

affecting the debtor, which gives the debtor time

to organize its affairs. This article will focus on

what is new in § 362, with an emphasis on federal

practice, excluding tax issues, which are covered

separately in this issue.

II. Is anything the same?

Despite Congress' liberal use of the red pen in

BAPCPA, the main application of the provision

has not changed. See In re Wilson, 336 B.R. 338

(Bankr. E.D. Tenn. 2005). Section 362 provides

that the filing of a bankruptcy petition acts as a

stay to eight general categories of activities,

including actions to collect pre-petition claims,

enforcement of judgments against estate property,

and liens. See 11 U.S.C. § 362(a). The eight

categories remain unchanged, except for a minor

clarification involving tax proceedings. 11 U.S.C.

§ 362(a)(8).

III. Many new exceptions

Rather than change the general categories of

activities to which the stay applies, Congress

chose to expand the "exceptions" to the stay from

eighteen to twenty-eight. See 11 U.S.C. § 362(b).

The following categories of exceptions, as

amended by BAPCPA, cover areas most likely to

be encountered by government bankruptcy

attorneys.

The category of exceptions relating to family

law were substantially amended. The amended

provisions are found at 11 U.S.C. § 362(b)(2).

They broaden the category of activities which are

excepted from the stay to include all domestic

support obligations, as well as proceedings to

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 13

establish paternity, custody, and visitation

schedules, and those regarding domestic violence.

They also make it easier for creditors in domestic

cases to collect support obligations by permitting

automatic collections to continue, even if they

attach to estate property, and by allowing

enforcement agencies to intercept tax refunds for

defaulting debtors. A new provision relating to

support obligations specifically permits

government entities to withhold or suspend

licenses, including drivers' licenses and

occupational or professional licenses, as a

sanction for failure to pay support. Although there

is no conforming amendment to 11 U.S.C. § 525

(which prohibits the revocation or suspension of

any license due to the debtor's status as a bankrupt

or failure to pay a dischargeable debt), Congress

may have deemed a conforming amendment

unnecessary because bankruptcy courts no longer

have discretion to discharge support obligations.

See 11 U.S.C. § 523(a)(15).

Another category of exceptions which has

changed significantly relates to the financial

markets. BAPCPA broadened existing provisions

regarding setoff under commodity contracts,

repurchase agreements, and swap agreements. See

11 U.S.C. §§ 362(b)(6), (b)(7), (b)(17); see also

Christopher J. Redd, Treatment of Securities &

Derivatives Transactions in Bankruptcy, 24 AM.

BANKR. INST. J. 36 (Sept. 2005). New

§ 362(b)(27) extends similar protections for setoff

under master netting agreements. Congress also

made clear that bankruptcy courts were not to

usurp the authority of those who police the

nation's financial markets. New § 362(b)(25)

excepts from the stay investigations, orders, and

other enforcement activities of a "securities self-

regulatory organization," other than an order for

the payment of monetary sanctions. The markets

are permitted, under subsection (b)(25)(C), to

delist or otherwise refuse participation to stocks

which do not meet the organization's listing

requirements. Apparently fearing that bankruptcy

judges might attempt to use their equitable powers

under 11 U.S.C. § 105 to avoid these exceptions,

Congress further enacted new § 362(o), which

provides that bankruptcy courts have no power to

stay acts otherwise excepted from the stay under

§§ 362(b)(6), (7), (17) or (27).

New § 362(b)(19) works with other

amendments to the Code to permit retirement

plans to automatically withhold the debtor's pay to

collect a loan extended by a plan without seeking

relief from the stay. Congress likewise took steps

to insulate retirement funds from creditors by

providing that contributions to various retirement

plans are excluded from "property of the estate,"

11 U.S.C. § 541(b)(7), and by providing that debts

owed to various retirement plans are

nondischargeable in individual cases. 11 U.S.C.

§ 523(a)(18).

Another group of exceptions limits the stay's

application to actions affecting real property. See

11 U.S.C. §§ 362(b)(20)-(23). New § 362(b)(20)

is an in rem provision, which works in

conjunction with new § 362(d)(4), to prevent

abuses arising from multiple bankruptcy filings to

avoid foreclosure. Subsection (d)(4) allows a

creditor to obtain relief from the stay to foreclose

on real property if it shows that the bankruptcy

filing was part of a scheme to delay or defraud

creditors. Subsection (b)(20) provides that the stay

does not arise with respect to real property if a

creditor obtained relief under § (d)(4) with respect

to such property in a previous case within the

preceding two years. The debtor may seek relief

from the court in the second proceeding if it can

show changed circumstances or other good cause.

Subsection (b)(21) is an in personam

provision which permits secured creditors to

enforce liens and security interests against real

property if the debtor is either ineligible to file

under 11 U.S.C. § 109(g) or if the debtor files its

petition in contravention of an order in a prior

case. Prior to BAPCPA, courts split on the

question of whether the Code grants a judge the

authority to enter an order prohibiting a debtor

from filing another bankruptcy petition. Although

§ 362(b)(21) does not expressly address the issue,

it adopts, by implication, the view of those courts

holding that they may enter such orders.

Subsection (b)(22) relates to leaseholds. It

lifts the stay to permit a landlord who has

obtained a pre-petition judgment of eviction to

enforce its order thirty days after the petition date.

During the thirty day delay, the debtor may avoid

eviction by curing the default and depositing the

unpaid rent into the court. This provision may

impact the application of a recent federal

precedent interpreting § 525, which prohibits

discrimination by governmental units. In In re

Stoltz, 315 F.3d 80 (2d Cir. 2002), the court held

that the debtor's leasehold interest in public

housing was akin to a "grant" under 11 U.S.C.

§ 525. Id. at 93-94. The government could not

evict the tenant even though it had obtained a pre-

14 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

petition judgment of eviction. Title 11 U.S.C.

§ 362(b)(22) requires a debtor to pay arrearages to

maintain possession. Courts could hold that

(b)(22) overrules Stoltz for government lessors or

that Stoltz remains good law because (b)(22) is

silent as to government lessors and Congress

made no conforming amendment to § 525.

Subsection (b)(23) lifts the stay fifteen days

after the lessor files a certification that the debtor

endangered the property or used controlled

substances at the property within the past thirty

days. If the debtor objects, the court must hear the

matter within ten days.

Another new provision excepts from the stay

any transfer that "is not avoidable" under §§ 544

and 549. 11 U.S.C. § 362(b)(24). Under a narrow,

and probably its most likely, reading, subsection

(b)(24) means that only transfers specified to be

unavoidable in §§ 544 and 549 are excepted from

the stay (for example, certain charitable

contributions, post-petition transfers for new value

in involuntary cases, or post-petition transfers of

real property to good faith purchasers). It is

difficult to read the provision in a manner which

makes sense, however, given that § 544 applies

only to pre-petition events, which are unaffected

by the stay. Commentators also have remarked

that making the stay inapplicable to transfers

which are "not avoidable" under § 549 could

mean that an illegal foreclosure would not violate

the stay (or subject the lender to sanctions) once

the real property was sold to a good faith

purchaser. See Randolph J. Haines, Does

BAPCPA Validate Some Post-petition

Foreclosure Sales That Would Otherwise Violate

the Automatic Stay?, 9 NORTON BANKR. L.

ADVISER 1 (2005); Richard Levin & Alesia

Ranney-Marinelli, The Creeping Repeal of

Chapter 11: The Significant Business Provisions

of the Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005, 79 AM BANKR.

L.J. 603, 634 (2005).

Other new exceptions of interest affect offsets

by utilities, 11 U.S.C. § 366(c)(4) (referring to

§ 362(a)(7)); actions to exclude health care

providers from Medicare and Medicaid, 11 U.S.C.

§ 362(b)(28); and various tax provisions, 11

U.S.C. § 362(b)(26), which are addressed

separately in this issue.

IV. Termination/inapplicability of the

stay

Section 362(a) describes activities that

generally are subject to the stay. Section 362(b)

describes activities that might otherwise fall

within the purview of § 362(a), but which

Congress has excepted from its application. Other

provisions in § 362 describe the circumstances

under which the stay, commenced upon filing

pursuant to § 362(a), terminates. Finally, some

provisions describe circumstances under which

the stay is deemed never to arise, despite the terms

of § 362(a). New provisions in the latter two

categories are found at § 362(c).

Subsections (c)(1) and (2), which set forth the

general rule as to when the stay terminates, remain

largely unchanged by BAPCPA. Congress created

new §§ 362(c)(3) and (c)(4), however, to rein in

perceived abuses by serial filers. Subsection (c)(3)

applies when an individual who had a prior case

dismissed (except for a dismissal under 11 U.S.C.

§ 707(b)) in the year preceding the filing, files a

petition under chapter 7, 11, or 13. If 11 U.S.C.

§ 362(c)(3) applies, the stay arises on the petition

date but terminates after thirty days, unless the

debtor can show that the later case was filed in

good faith. Subsection (c)(4) applies to filings by

individuals who had two prior cases dismissed

(except under § 707(b)) in the year preceding the

filing. If 11 U.S.C. § 362(c)(4) applies, the stay

never arises upon the filing of the petition. An

interested party can ask the court to impose a stay

if it can show that the later petition was filed in

good faith.

Subsections (c)(3) and (c)(4) appear to be the

most litigated of BAPCPA's changes to § 362.

Because BAPCPA created new grounds upon

which cases could be dismissed, see 11 U.S.C.

§§ 707, 1112, debtors are more likely to find

themselves in a one or two strike position,

possibly requiring them to overcome a

presumption of bad faith before they can benefit

from a stay when they file another petition. At

least two courts have held that to overcome the

presumption of bad faith under 11 U.S.C.

§ 362(c)(3), the debtor must establish good faith

by "clear and convincing evidence." In re Mark,

336 B.R. 260, 264-65 (Bankr. D. Md. 2006); In re

Phillips, 336 B.R. 818, 819-20 (Bankr. E.D. Okla.

2006). A debtor is more likely to meet that burden

if it can show a change in circumstances which

leads the court to believe that the new filing has a

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 15

better chance of success than the first. For a

comprehensive list of factors to consider in

determining "good faith," see In re Havner, 336

B.R. 98 (Bankr. M.D.N.C. 2006).

At least two courts have found that 11 U.S.C.

§ 362(c)(3) did not apply to a subsequent filing,

despite the fact that the later case was filed within

a year after a prior case was dismissed. In In re

Johnson, 335 B.R. 805 (Bankr. W.D. Tenn. 2006),

the court drew a distinction between "acts against

property of the estate" and actions taken "with

respect to the debtor," and held that the debtor did

not need to seek an extension of the stay beyond

thirty days to protect his home from foreclosure.

Id. at 805. Because the home was "property of the

estate" and subsection (c)(3) does not apply to

"property of the estate," the burden remained on

the bank to seek relief from the stay (for example,

under § 362(d)(4)). Id. In In re Paschal, 337 B.R.

274 (Bankr. E.D.N.C. 2006), the court held that

subsection (c)(3) only terminates the stay as to a

formal judicial or administrative proceeding

commenced prior to the petition date. Id. at 280.

In so holding, the court drew a distinction

between the broad term "any act" used in

§§ 362(c)(1) and (2), and "action taken" in

subsection (c)(3). Id. at 279-80. "Action," the

court opined, connotes "formal activity." Id. at

280. "Taken" must refer to an act in the past, or

pre-petition activities. Id. Having so narrowly

construed subsection (c)(3), the court concluded

that despite the dismissal of a prior case within the

previous year, (c)(3) did not terminate the stay

after thirty days because no creditor had filed any

formal proceeding against the debtor prior to the

petition date in the later case. Id. at 281.

V. Preferred treatment for creditors

with interests in personal property

New § 362(h) (formerly the sanctions

provision of § 362, which was recodified at

§ 362(k)) terminates the stay as to personal

property if the debtor fails: (1) to file a "statement

of intention" under § 521(a)(2) or to indicate

therein whether it will surrender or retain (redeem,

reaffirm, assume) the property and to take the

necessary steps to surrender or retain the property

within the specified time period; or (2) to file a

motion for relief, showing that the property is of

value to the estate and offering the creditor

adequate protection. But see Philip R. Principe,

Did BAPCPA Eliminate the "Fourth Option" for

Individual Debtors' Secured Personal Property?,

24 AM. BANKR. INST. J. 6 (Oct. 2005) (discussing

whether BAPCPA preserved the debtor's right to

"ride through" a bankruptcy without redeeming or

reaffirming). Section 521(a)(6) similarly

terminates the stay with respect to purchase

money security interests, but Congress chose not

to include a conforming amendment in § 362.

This provision may assist the United States when

it takes a security interest in personalty such as

equipment, livestock (farm loans), or furniture and

fixtures (Small Business Administration, Housing

and Urban Development loans). Congress

provided further that if a creditor repossesses

personal property in violation of § 362(h), the

debtor may not seek punitive damages for the stay

violation if the creditor can show it had a "good

faith belief" that the stay was terminated under

§ 362(h).

VI. Sanctions for stay violations

Section 362's sanctions provision was

recodified from former § 362(h) to new § 362(k),

although most of its terms remain the same. For

purposes of legal research, attorneys may need to

search under both the old and new section

numbers to find applicable case law. Section

362(k) permits the court to award actual damages,

including costs and fees, as well as punitive

damages (except for good faith violations of

§ 362(h)). Section 362(k)'s impact is limited,

however, by BAPCPA's new notice provisions.

Under 11 U.S.C. § 342(g)(2), the court may not

impose a monetary penalty for violating the stay

unless the debtor provided "effective notice"

within the meaning of § 342, even if the creditor

actually knew about the bankruptcy. Notice may

not be effective if, for example, the creditor

designates a particular individual for service and

the debtor serves someone else within the

organization. See 11 U.S.C. § 342(g)(1); see also

Levin & Ranney-Marinelli, supra, at 633.

VII. Comfort orders

New § 362(j) allows the court to issue an

order confirming that the stay has terminated

under subsection (c), even if there is no dispute on

record between the parties. This permits more

conservative creditors to confirm that no stay is in

effect before they take action against the debtor or

estate property.

16 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

VIII. Conclusion

One of the few things commentators and

courts seem to agree on is that BAPCPA will

provide fodder for litigation for years to come.

The extensive revisions to § 362, particularly the

serial filing provisions, are likely to remain at the

eye of the litigation storm. AUSAs must practice

the conservative approach–seek approval from the

court before taking any action which might cause

a potential stay violation, while taking the steps

necessary to preserve the government's interest in

its claims and collateral.

ABOUT THE AUTHOR

Jeannine R. Lesperance has been a trial

attorney in the Commercial Litigation Branch,

Civil Division since 1993. Her practice is

comprised primarily of bankruptcy matters, with

an emphasis on health care insolvency.a

Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005:

Impact on Federal Taxes

Stephen J. Csontos

Senior Legislative Counsel

Tax Division

I. Introduction

ankruptcy Abuse Prevention and

Consumer Protection Act, Pub. L. No.

109-8, 119 Stat. 23 (BAPCPA), title VII

contains twenty tax-related provisions. Some of

these changes apply only to state and local tax

claims. Other titles of BAPCPA also include tax-

related changes, particularly provisions

confirming that debtors and trustees must comply

with their tax return filing obligations. Many of

BAPCPA's tax-related amendments reflect the

Department of Justice (Department) Bankruptcy

Working Group's September 1996

recommendations to the National Bankruptcy

Review Commission, as subsequently refined by

the Commission's Tax Advisory Committee.

II. Debtors' tax return filing obligations

Until enactment of BAPCPA, the Bankruptcy

Code did not include comprehensive rules

regarding the obligations of trustees and debtors

to file tax returns. Bankruptcy courts dealt with

unfiled returns in a variety of ways. Some courts

published local rules or general orders directing

debtors to file delinquent tax returns. Other courts

required the government to file a motion to

compel the debtor to file such returns. In chapter

13 cases, the issue was often raised by filing an

objection to plan confirmation.

BAPCPA enacted the following provisions

that relate to a debtor's obligation to file tax

returns and the consequences of failure to file or

to produce requested tax returns.

• An individual debtor in a chapter 7 or 11 case

must provide a copy of the debtor's most

recent federal income tax return or a transcript

of that return to the trustee at least seven days

before the § 341 meeting. See Bankruptcy

Code § 521(e)(2).

• The debtor must also provide a copy of that

return or transcript to any creditor that makes

a timely request. Id.

• A debtor's failure to provide the tax return or

transcript to the trustee or a creditor will result

in dismissal of the case, except for

circumstances beyond the debtor's control. Id.

• A chapter 7 or 13 case is subject to dismissal

or conversion if an individual debtor fails to:

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 17

(1) file any tax return that becomes due after

the petition date within ninety days of a

request from the Internal Revenue Service

(IRS) or other taxing authority; or (2) to

obtain an extension of the due date for the

return. See Bankruptcy Code § 521(j).

• An individual debtor in a chapter 7, 11, or 13

case must file with the court, at the request of

the court, the United States Trustee, or any

party in interest, a copy of: (1) any federal

income tax return for a post-petition tax year

that ends while the case is pending; and (2)

any delinquent federal income tax returns

filed post-petition for tax years that ended

within three years before the petition date. See

Bankruptcy Code § 521(f).

• The court may not grant a discharge to an

individual debtor in a chapter 7 or 11 case or

confirm an individual's chapter 11 or chapter

13 plan, unless requested tax documents have

been filed with the court. See BAPCPA

§ 1228, a provision not codified in the

Bankruptcy Code.

• A small business debtor must append to its

bankruptcy petition a copy of its most recent

federal income tax return or a statement that it

has not filed a return. See Bankruptcy Code

§ 1116.

• The failure of a chapter 11 debtor to file post-

petition tax returns or pay post-petition taxes,

as those taxes become due, is now specified

grounds for dismissal or conversion for cause.

See Bankruptcy Code § 1112(b)(4)(I).

In addition, chapter 13 now includes detailed

tax return filing provisions in new § 1308 and

amended § 1325. In general, prior to the date of

the § 341 meeting, a chapter 13 debtor must file

all pre-petition income tax returns for the four

years ending before commencement of the case.

The trustee is authorized to hold the § 341

meeting open for a reasonable time to allow the

debtor to file delinquent tax returns, but not longer

than 120 days after the meeting is first scheduled

(or, for any return not due on the petition date, the

due date of return under the last automatic

extension to which the debtor is entitled).

"Return" is defined, for purposes of this section,

as including a return prepared under 26 U.S.C.

§ 6020(a) or (b) or a written stipulation to a

judgment or final order of a non-bankruptcy

tribunal. Note that this definition of a "return" is

different from, and broader than, the definition

that now appears in flush language at the end of

§ 523(a) and is discussed, infra. Upon motion of

the United States Trustee or a party in interest, the

court is required to dismiss a case or convert it to

chapter 7 for failure to file tax returns. A proof

claim for taxes is timely if filed within sixty days

after a return is filed under § 1308. See

Bankruptcy Code § 502(b)(9).

III. Trustees' obligations to file tax

returns and pay taxes in due course

BAPCPA amended 28 U.S.C. § 960 to require

officers and agents conducting any business under

court authority, such as bankruptcy trustees and

debtors in possession, to pay all federal, state, and

local taxes in the course of the business when due,

unless: (1) the tax is a property tax secured by a

lien against estate property that the trustee

abandons in a chapter 11 case within a reasonable

period of time after the lien attaches; or (2)

payment of the tax is excused under a specific

Bankruptcy Code provision.

In addition, Bankruptcy Code § 503(b)(1)(D),

as amended, provides that: (1) a taxing authority

is not required to file a request for the payment of

administrative taxes; (2) in a case under chapter 7,

payment of administrative taxes can be deferred

until final distribution, where the estate does not

have sufficient funds to pay in full all

administrative expenses with the same priority as

the taxes; and (3) the trustee is authorized to pay

any taxes incurred by the bankruptcy estate

(including property taxes) as an administrative

expense, whether or not the tax is secured. Thus,

administrative taxes can be paid in the ordinary

course without requesting payment or filing a

motion as a condition of getting paid.

IV. BAPCPA amendments that affect

priority tax claims

A. Wage and pension claims

BAPCPA raised the aggregate monetary

limits on wage and benefit claims in former

Bankruptcy Code § 507(a)(3) and 507(a)(4)

(redesignated § 507(a)(4) and (5)) from $4,000 to

$10,000, and increased the look-back period for

wage claims from ninety days before the petition

date to 180 days before filing. The increased

monetary limits and the longer look-back period

18 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

will indirectly affect tax priority claims under

§ 507(a)(8) by depleting the amount available, in

some cases, to satisfy such claims.

B. Pre-petition tax claims

BAPCPA amended § 507(a)(8) to codify and

extend the Supreme Court's holding in Young v.

United States, 535 U.S. 43 (2002), regarding the

impact of serial bankruptcies on the tax priority

time periods. The priority period for income tax

returns due within three years of the petition date,

as well as the 240-day post-assessment priority

period, are suspended not only while collection is

stayed or prohibited because of a prior bankruptcy

proceeding, but also during the pendency of a

collection due process request, hearing, and

appeal, or while collection was precluded because

of a confirmed bankruptcy reorganization plan,

plus ninety days. In addition, the 240-day period

is stayed while an offer-in-compromise is

pending, plus thirty days. The amendment also

clarifies that paragraphs (i), (ii), and (iii) of

§ 507(a)(8)(A) all pertain solely to tax years of the

debtor ending on or before the petition date. See

In re Pacific-Atlantic Trading Co., 64 F.3d 1292

(9th Cir. 1995). Although 26 U.S.C. § 6331(k)(2)

prohibits collection while an installment payment

agreement is pending or in effect, the BAPCPA

amendments do not suspend the tax priority

period under such circumstances.

C. Chapter 11 pre-petition tax claims

Section 1129(a)(9)(C) of the Bankruptcy

Code specifies that priority taxes can be deferred

and paid over time. BAPCPA changed the

treatment of periodic tax payments under

§ 1129(a)(9) in four ways: (1) deferred payments

must be completed within five years beginning

with the petition date (rather than six years from

the assessment date); (2) the payments must be in

"regular installment payments"; (3) the payment

schedule must be no less favorable than the

payment schedule of the most favored class of

non-priority, unsecured claims provided for by the

plan (other than a class of nuisance claims); and

(4) the same payment schedule applies to tax

claims secured by a lien that, if unsecured, would

otherwise be described in § 507(a)(8). The

legislative history does not define "regular

installment payments." The modifier "regular"

suggests that the term means monthly or quarterly

payments of an equal amount, not annual or

escalating payments. Moreover, the legislation

specifically prohibits plans that provide more

favorable treatment to general unsecured claims as

a whole, than to priority tax claims. As a priority

claimant, the IRS will benefit from the changes to

§ 1129(a)(9).

D. Pre-petition tax claims of a family

farmer

Bankruptcy Code § 1222, as amended,

reclassifies a priority tax claim of a family farmer

as a general, unsecured claim in a chapter 12 case

when the claim arises from the "sale, transfer,

exchange, or other disposition of any farm asset,"

as long as the debtor receives a discharge (the

debtor makes all payments required by the plan).

The term "farm asset" includes produce, livestock,

farmland, and equipment. This change applies to

cases commenced on or after April 20, 2005.

E. Priority of late-filed claims

Bankruptcy Code § 726(a)(1) states that late

filed claims in a chapter 7 case are entitled to the

same priority in distribution as timely filed claims,

if filed before the date when the trustee begins

distribution. As modified by BAPCPA,

§ 726(a)(1) requires late claims to be filed on or

before the earlier of ten days after the summary of

the trustee's final report is mailed to creditors or

the date on which the trustee makes final

distribution.

V. Discharge issues

A. Definition of a return

Bankruptcy Code § 523(a)(1)(B) excepts from

discharge tax debts for which a return either was

not filed, or was filed late, less than two years

before the filing of the bankruptcy petition. When

a taxpayer has not filed a return, 26 U.S.C. § 6020

authorizes the IRS to prepare one. Under

§ 6020(a), a return prepared by the IRS, with the

cooperation of the taxpayer and signed by the

taxpayer, is considered a return for Internal

Revenue Code purposes. On the other hand, a

substitute return prepared by the IRS, but not

signed by the taxpayer, is not considered a return

for tax purposes. See 26 U.S.C. § 6020(b).

Modified § 523(a)(1)(B) states that, for discharge

purposes, a tax return includes a § 6020(a) return

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 19

prepared by the IRS and "a written stipulation to a

judgment or a final order entered by a non-

bankruptcy tribunal, but does not include a return

made pursuant to § 6020(b)."

The BAPCPA amendments do not answer a

much-litigated question about whether a tax return

filed by a debtor after the IRS has assessed taxes

on the basis of a return prepared under 26 U.S.C.

§ 6020(b) will be treated as a tax return for

discharge purposes. See In re Hindenlang,

164 F.3d 1029 (6th Cir.1999); and In re Payne,

431 F.3d 1055 (7th Cir. 2005).

B. Exception to discharge for corporate

fraud

Bankruptcy Code § 1141(d)(2) has long

provided that an individual chapter 11 debtor's

debts described in § 523(a) are excepted from

discharge. Until now, however, all corporate debts

were discharged, except to the extent that the plan

provided otherwise. New § 1141(d)(6) excepts

from discharge taxes and customs duties for

which a corporate debtor submitted a fraudulent

return or which the debtor attempted to evade or

defeat. Section 1141(d)(2) also excepts from

discharge government claims attributable to false

or fraudulent conduct of a corporate debtor

described in § 523(a)(2)(A) and (B), such as

violations of the False Claims Act, 31 U.S.C.

§ 3729.

C. Tax exception from chapter 13's super

discharge

In general, as a condition of confirmation, a

chapter 13 plan must provide for full payment of

priority taxes. As a consequence, priority taxes,

while not excepted from discharge under

§ 1328(a), are usually satisfied in full. There are

cases, however, in which the debtor fails to

specifically list priority taxes, but the IRS fails to

object, and the court holds that the priority taxes

are provided for and discharged. See In re

Tomlan, 102 B.R. 790 (Bankr. E.D. Wash. 1989),

aff'd, 907 F.2d 114 (9th Cir. 1990). That

circumstance has occurred most frequently with

derivative taxes, such as the trust fund recovery

penalty. Bankruptcy Code § 1328(a)(2), as

amended by BAPCPA, now excepts from

discharge trust fund taxes, taxes attributable to

certain delinquent tax returns, and taxes

attributable to fraud. These changes will not affect

the discharge of priority taxes, other than trust

fund taxes.

D. Discharge of an estate's liability for

unpaid taxes

Amended Bankruptcy Code § 505(b)(2)

discharges the estate from liability for unpaid

taxes when the trustee makes a request for a

prompt audit and satisfies any liability that is

determined in a timely fashion by the IRS. This

amendment overturns decisions holding that, upon

compliance with the prompt audit provisions, a

discharge was available to the debtor and the

trustee, but not to the estate.

VI. Tax liens

A. Limitation on the authority of a trustee

to avoid a tax lien

Bankruptcy Code § 545(2) allows a trustee to

avoid a statutory lien, such as a tax lien, that is not

perfected or enforceable as of the commencement

of the case against a hypothetical bona fide

purchaser. Under 26 U.S.C. § 6323(b), a perfected

federal tax lien is not valid against specified

purchasers (purchasers of securities, motor

vehicles, personal property purchased at retail,

and personal property purchased at casual sales).

An amendment to § 545(2) clarifies that a trustee

cannot rely on the super priority accorded to these

specified purchasers to avoid federal tax liens.

B. Subordination of tax liens

In general, secured claims have priority over

expenses of administration and unsecured claims,

including unsecured priority claims, to the extent

of the value of the property securing the claim.

Prior to enactment of BAPCPA, Bankruptcy Code

§ 724(b) provided less favorable treatment for

secured tax claims in a chapter 7 case, by

subordinating such claims to expenses of

administration and to claims having second

through seventh priority, including administrative

claims incurred in a failed chapter 11 case.

Section § 724(b)(2), as amended, changes the

subordination scheme for federal tax liens. These

liens will not be subordinated to expenses

incurred in a chapter 11 case prior to its

conversion to chapter 7 (except claims for wages,

salaries, commissions, and pension contributions).

20 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

Ad valorem tax liens will receive more favorable

treatment than federal tax liens, and will not be

subordinated to any claims in a chapter 7 case

(except claims for wages, salaries, commissions,

and pension contributions).

VII. Setoff of tax refunds

New Bankruptcy Code § 362(b)(26)

authorizes the setoff of an income tax refund for a

tax period ending before the petition date, against

an income tax liability for a tax period ending

before the petition date. Where setoff is not

permitted under non-bankruptcy law because of a

pending challenge to the amount or legality of the

tax liability, this provision allows the IRS to

freeze the refund unless, after notice and hearing,

the bankruptcy court orders its release because

"adequate protection" within the meaning of § 361

is provided.

Note, however, that the § 362(b)(26)

exception only applies to income taxes and does

not permit the offset of pre-petition income taxes

against other types of taxes.

VIII. Interest rate on tax claims

Until passage of BAPCPA, the Bankruptcy

Code had not specified the appropriate rate for

computing interest on tax claims, and the courts

often declined to apply the statutory interest rate

in favor of a "market rate" or a prime rate adjusted

for risk. New Bankruptcy Code § 511 specifies

that the interest rate on tax claims will be the

applicable non-bankruptcy rate. For IRS claims,

the 26 U.S.C. § 6621 interest rate in the month of

plan confirmation will apply to payments under

the plan, including computation of the present

value of the claim. This rate will also apply to

interest on unpaid taxes incurred during the

administration of a case. Note that, as applied to a

confirmed plan, the rate will not change with

fluctuations in the § 6621 interest rate. The

interest rate in the month of confirmation will

apply even though the effective date of the plan

may be deferred for some time.

IX. Other issues

A. Discussion of tax consequences in

chapter 11 disclosure statements

The feasibility of a proposed reorganization

plan may hinge on the tax consequences of the

plan to the debtor. In addition, the tax

consequences of the plan to the creditors and other

parties in interest may affect their vote.

Bankruptcy Code § 1125, as amended by

BAPCPA, requires a disclosure statement to

include a full discussion of the potential material

federal tax impact of the plan on the debtor and on

a hypothetical investor typical of the holders of

claims or interests in the case.

Note that it is not uncommon for the debtor in

possession (DIP) or other proponent of a plan of

reorganization to exaggerate the tax benefits that

would result from approval of the plan. The IRS

National Office includes attorneys experienced in

deciphering the tax effects of proposed

reorganization plans and will provide assistance to

Department attorneys on request. Contact your

local IRS Counsel or the Tax Division to request

assistance.

B. Post-petition tax returns in an

individual debtor's chapter 11 case

New Bankruptcy Code § 1115(a) expands

property of the estate in an individual debtor's

chapter 11 case to include all property described

in § 541 that the debtor acquires after the petition

date and before the case is closed, dismissed, or

converted, including the debtor's earnings from

post-petition services. Section 1115(b) specifies

that the debtor will retain possession of the

property of the estate unless a trustee or examiner

is appointed or unless the confirmation order

provides otherwise. This revised treatment of a

debtor's post-petition property makes an

individual's chapter 11 case similar to a chapter 12

or 13 case because the DIP will be treated as a

continuation of the pre-petition debtor, instead of

as a new entity in the form of the estate. This new

treatment of a individual debtor's post-petition

property and earnings has some repercussions for

income tax reporting purposes.

Section 1398(a), 26 U.S.C., provides that

when an individual commences a chapter 7 or 11

case, a separate taxable estate is created. The

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 21

estate as an entity must file tax returns reporting

income it receives during the pendency of the case

and must pay the resulting taxes. A separate

taxable entity is not created in a chapter 12 or 13

case. While under new § 1115, the treatment of an

individual chapter 11 debtor closely resembles the

treatment of a chapter 12 or 13 debtor, the

provisions of § 1398 have not been

correspondingly changed to account for the

different Bankruptcy Code treatment of such

debtors. The IRS will issue guidance explaining

the impact of § 1115 on the income tax

obligations of the debtor and the estate to fill the

void until Congress decides whether to clarify §

1398.

X. Conclusion

BAPCPA resolves many tax-related problems

that the Department of Justice Bankruptcy

Working Group identified and that vexed the IRS

and the Department over the years. The new tax

return filing provisions are likely to have a

positive effect, and the other amendments

generally enhance the treatment of tax claims in

bankruptcy proceedings.

ABOUT THE AUTHOR

Stephen J. Csontos is the Senior Legislative

Counsel in the Tax Division. Early in his career,

he co-chaired a Department of Justice, IRS, and

Treasury Task Force whose report on the tax

provisions of the Bankruptcy Code significantly

influenced both the Bankruptcy Reform Act of

1978 and the Bankruptcy Tax Act of 1980. More

recently, he served on the Department of Justice

Bankruptcy Working Group, was responsible for

the tax recommendations contained in the

Working Group's September 1996 Report to the

National Bankruptcy Review Committee, and

subsequently was a member of the Commission's

Tax Advisory Committee. Mr. Csontos has been

an instructor for numerous bankruptcy programs

at the National Advocacy Center, including a

program on BAPCPA presented shortly after its

effective date.a

The Family Farmer and Fisherman

Bankruptcy Provisions under the

Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005

Patricia Allen Conover

Assistant United States Attorney

Middle District of Alabama

M. Kent Anderson

Assistant United States Attorney

Eastern District of Tennessee

I. Introduction

ongress has struggled for several years

with the special provisions for

bankruptcy protection for small family

farmers, and now fishermen. For simplicity we

shall refer to family farmers and fishermen

collectively as "farmers" in this article. A more

detailed discussion of who qualifies follows.

In the oxymoronic world of bankruptcy

lawyer humor, it is quipped that chapter 12 is

somewhere between chapter 11 and chapter 13.

Chapter 13 is the former "wage earner plan"

which allows a person with a "regular" income

(wages, regular commissions, government

benefits, and others) to confirm a three to five

year plan to restructure their debts and avoid the

liquidation provisions of chapter 7, while paying

as large a portion to their creditors as their income

stream allows. It is simple, relatively cheap to

administer, and summary in procedure. The

22 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

standing chapter 13 trustee administers the estate.

Chapter 11, on the other hand, is for business

debtors (K-Mart, large airline cases, among

others) and is much more cumbersome. The

debtor acts as a trustee in the capacity of a "debtor

in possession," and proposes a plan for repayment

of debts or restructuring of the business.

Chapter 12 has similarities and differences to

both chapters 11 and 13. The U.S. Trustee

appoints a trustee (this could be the standing

chapter 13 trustee, but not necessarily) who takes

payments and administers the case. In Alabama

and North Carolina, a Bankruptcy Administrator,

whose duties mirror those of the U.S. Trustee,

designates the chapter 12 trustee or trustees. The

plan usually runs three to five years and may

restructure the farm (that is, change the crop or

sell off excess land or equipment), but often

merely restructures the debt, and while paying at

least the value of the assets, discharges some of

the debts. The track record of plans making a

complete payout is low. Another humorous quip

is, "What chapter 12 always works? The one

where the farm becomes a subdivision!"

Farmers have been hit with the proverbial

"double whammy" over the past few years. They

have seen equipment, agricultural chemicals, feed,

and equipment costs soar, while commodity

product prices for their crops have not kept pace.

A rational person asks why someone would work

twelve to eighteen hours a day, seven days a week

to continue to farm. The honest answer is that

family farms are a way of life and not a purely

economic decision. The only salvation for family

farmers in some areas is that the land has

appreciated, but not as farm land. Its new value is

for development or for "ranchettes" (small tracts

sold to baby boomers who want to "hobby" farm).

The problem is that as a farmer sells off land, he

or she is liquidating the business. During the past

year cattle prices have rebounded, despite the

Bovine Spongiform Encephalopathy or "mad

cow" scare, and the relatively mild weather. Again

local factors are critical, for example, ranchers and

farmers in Oklahoma and Texas have been hit

with unprecedented drought.

In the years since Congress first passed

chapter 12, the family farmer has declined in

number, but lately the decline has not been as

rapid as it was during the peak years of 1982 to

1992. C. Bialik, The Numbers Guy, Wall Street

Journal Online, Jan. 12, 2006, available at

http://www.wsj.com. See also, United States

Department of Agriculture (USDA) National

Agricultural Statistics Service, 2002 Census of

Agriculture (USDA 2002), available at

http://www.nass.usda.gov/Census_of_Agriculture/

index.asp (hereinafter "2002 Agriculture

Census"). Depending on the statistics chosen, the

number of family farms has declined by 13,000

from 1997 to 2002, or about fifty farms per week.

See Bialik, supra, noting that this does not

account for the number of non-economic farms

included in that number. The Farm Aid group

asserts that overall family farms have declined by

five million since the 1930s. They contend that

330 farmers leave their land every week. While

statistics are hard to reconcile, it is clear that

family farms are in a state of change and that

larger is the new wave.

This may be due to the aging farm population.

According to the USDA's latest numbers from

2002, half of all farmers were between forty-five

and sixty-five-years old, while only 6 percent

were under the age of thirty-five. 2002

Agriculture Census, supra. Anecdotally, it is clear

that farm communities have aged as younger

farmers have taken "jobs in town" to meet the

ever-rising costs of living and the need for such

things as health insurance. The statistical rise in

farm income is likely due to the influx of off-farm

income. See the USDA Economic Research

Service, Briefing Room, Farm Policy, Farm

Households, and the Rural Economy,

http://www.ers.usda.gov/Briefing/Adjustments/

(page updated Nov. 7, 2005) (hereinafter "ERS

Briefing").

It is clear that with land prices increasing by

50 percent to 200 percent in some areas, buying

land to farm is not feasible. Those who inherit

farm land are likely left as the only possible future

farmers. Certain farm segments (namely small

dairy farms) are being replaced with large,

corporate farms run with non-owner labor, and the

economy of scale in farming overall has grown

substantially. Small family farms produce a large

portion of America's food, but their share of

production fell by a third between 1993 and 2003.

ERS Briefing, supra.

It is with this backdrop that we look at the

changes made by the Bankruptcy Abuse

Prevention and Consumer Protection Act of 2005,

Pub. L. No. 109-8, 119 Stat 23, (BAPCPA). It is

fair to say that the "abuse" addressed by Congress

in this act is not largely farm related. Still some

farmers do suffer from consumer debts and "credit

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 23

carditis." However, many farmers are heavily

indebted to the government for farm loans made

or guaranteed by the U.S. Department of

Agriculture (USDA). Congress has often made

low interest and special provision loans a part of

farm programs. In recent years, USDA began to

make guaranteed loans rather than direct loans,

but those distinctions are beyond the scope of this

article. As a result, the U.S. Attorneys' offices are

often involved in chapter 12 proceedings,

protecting the interest of the USDA as the largest

creditor. USDA loans are designed by Congress to

help farmers who do not qualify for bank loans.

Many of these loans are not fully secured and

result in losses. Farmers also suffer from a lack of

bookkeeping training and resources, and often

have very deficient books and records. Following

is a brief overview of the changes brought on by

BAPCPA and a short outlook for the future.

II. Sunset

Chapter 12 was apparently expected to

remedy a short term problem when it was passed,

and was given an ending date, or so-called

"sunset" provision. After a number of extensions,

some retroactive, BAPCPA eliminated the sunset

provision. (S. 256, 109th Cong. § 1001 (2005)).

The law will now continue unless repealed.

III. Debt limit

Chapter 12 has always been limited by its

terms to "family" farmers and has had a debt limit

tailoring it to smaller farm operators. As inflation

hit the calculation, the limits have been raised.

BAPCPA raised the debt limit from $1,500,000 to

$3,237,000 (S. 256 § 1004), and indexed it to

inflation. (S. 256 § 1002). At first blush this seem

very high, but when one takes into account that a

new tractor or combine may cost well over

$100,000 and that land may cost $2,000 to $4,000

per acre or more, the provisions are more

understandable. The increase in land prices is

exacerbated by the rise in the economy of scale of

most farming operations.

The new BAPCPA added family fishermen

as a class of persons eligible for chapter 12 relief,

but limited the debt balance to $1,500,000.

IV. Nonpriority status for certain

transfer claims

One problem in a chapter 12 bankruptcy that

involves large land holdings is that the land often

has a low basis for tax purposes. Likewise,

equipment may well be depreciated for tax

purposes and, if sold, yield a current tax liability

that would otherwise be a priority tax under 11

U.S.C. § 523. Since these taxes must be paid in

full during the plan, this may well sink the plan

before it starts, because often the only way to

reorganize the farm is to sell assets.

To address this problem, Congress changed

the treatment of the claim and made it unsecured,

which makes the claim subject to "cramdown"

(less than 100 percent paid). See 11 U.S.C.

§ 1222(a). This special benefit inures only if the

farmer completes the plan so as to obtain a

discharge. (S. 256 § 1003).

V. Farming income percentage

redefined

Another common problem with chapter 12 is

the "job in town" and the impact it has on a farmer

qualifying for chapter 12. Pre-BAPCPA, a farmer

had to derive 50 percent of his or her gross

income from farming in the year prior to filing. 11

U.S.C. § 101(A)(18)(a). The new provision

recognizes that the farmer or farmer's spouse may

go to work in town, trying to "save the farm," and

by so doing bring in enough money to surpass the

50 percent test, but not enough to prevent filing.

The new provision allows a "look back" to the

two prior years, and if the income was more than

50 percent from farming, the farmer qualifies. (S.

256 § 105). It also allows the farmer whose entire

crop failed due to weather or other disaster, and

who had little or no income in the year prior to

filing, to qualify.

VI. Retroactive adjustment of payment

amounts

Section 1225 of title 11 provides that a

chapter 12 debtor must project "disposable

income" and pay that into the plan for the benefit

of unsecured creditors over three or more years.

11 U.S.C. § 1225(b)(1). BAPCPA does not allow

anyone except the creditor to require that a plan

payment be increased so as to exceed disposable

24 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

income or, in the last year of the plan, to be

increased so as to prevent the debtor from being

able to farm after the plan is completed.

VII. Family fisherman added

BAPCPA also added to the list of qualified

persons the "family fisherman." (S. 256 § 1007).

This means that a person (including certain

corporations and partnerships) who catches or

harvests fish, shrimp, and lobsters, among other

things, and who has debts of less than $1,500,000

of which 80 percent (excluding home mortgage

debt) is from that enterprise and who had 50

percent or more of his/her prior year income from

that endeavor, may file as a "family fisherman"

under the other provisions of chapter 12. 11

U.S.C. § 101(19A).

VIII. Bar to refiling

Individuals or family farmers are barred from

refiling a chapter 12 under 11 U.S.C. § 109(g) if

they are dismissed by the court for willful failure

to abide by order of the court, fail to appear in

proper prosecution of their case, or voluntarily

dismiss their case following a request for relief

from the automatic stay. BAPCPA did not add

"family fisherman" to the list of debtors barred

from refiling.

IX. Automatic stay

Under BAPCPA, chapter 7, 11, or 13, debtors

lose protection of the automatic stay for their

encumbered property in cases filed within a year

of a dismissal of a prior case. Family farmers and

family fisherman appear to retain automatic stay

protection in subsequent cases as chapter 12 is

absent from 11 U.S.C. § 362(c)(3).

X. Cheat sheet

Changes under the new Act are set forth

below.

Code § Change? Change Comment

1201 No Stay of action against codebtor.

1202 Yes New section. Trustee has

increased duties in claims

regarding domestic support

obligation. Written notice to state

agencies.

Duties parallel chapter 13 in domestic

support claims.

1203 Yes Added commercial fishing

operation.

Rights and powers of debtor.

1204 No Removal of debtor as debtor in

possession.

1205 No Section 361 does not apply, adequate

protection provided by cash,

replacement lien, reasonable rent,

"other relief."

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 25

1206 Yes Added "property used to carry out

a commercial fishing operation

including a commercial fishing

vessel."

Sales free of interest.

1207 No Property of the estate.

1208 Yes Added as cause: failure of the

debtor to pay any domestic

obligation that first becomes

payable after the date of the filing

of the petition.

Conversion or dismissal.

A"family farmer" who does not meet

the definition of "farmer" could be

converted to chapter 7 without fraud

allegation.

1221 No Filing of a plan in ninety days.

1222 Yes A chapter 12 plan may treat capital

gains from sale of farm assets as a

non-priority unsecured claim.

Percentage provision for domestic

support claims so long as debtor

pledges all projected disposable

income for five years.

Contents of plan. Does not address

capital gain from sale of commercial

fishing boat.

Comment: A claim of a governmental

unit (read "tax" but could arguably be

a sales tax, use tax, income tax, or

penalty,) in a chapter 12 case that

arises as a result of the sale, transfer,

exchange, or other disposition of an

asset used in a debtor's farming

operation will be treated as an

unsecured claim (as opposed to a

priority claim), but only if the debtor

receives a discharge, unless the

creditor agrees to a different treatment.

This section also allows plan

proponents to seek a determination of

certain federal tax issues and makes

these provisions effective on date

enacted for cases filed thereafter.

Domestic support claims are classified

and paid as priority claims.

Post petition interest on non-

dischargeable debts can be

provided for in 100% plan if

debtor has available disposable

income.

Debts nondischargeable under § 1228.

1223 No Modification of plan before

confirmation.

1224 No Confirmation hearing.

26 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

1225 Yes Post petition preconfirmation

domestic support obligations are

paid.

If an objection to the plan, then

value of the property to be

distributed under the plan in a

three year period (or longer) is not

less than the debtor's projected

disposable income for such period.

Requirements for confirmation of

plan.

New provision factors in domestic

support obligation, that first becomes

payable after the date of the filing of

the petition, in determining disposable

income.

1226 No Payments (technical change to reflect

that administrative payments be

made).

1227 No Effect of confirmation.

1228 Yes New provision for domestic

support obligations: Debtor must

certify that all post-petition

domestic support obligations and

pre-petition domestic support

obligation plan payments have

been paid as provided in the plan,

before a discharge can be issued.

New provision requiring the court

to hold a hearing to determine

whether § 522(q)(1)(2) may be

applicable.

Discharge granted after plan payments

are completed or for hardship.

§ 522(q) limits exemption for debtors

who commit securities fraud.

1229 Yes New provision: plan may not be

modified

(1) to increase the amount of any

payment due before the plan, as

modified, becomes the plan,

(2) by anyone except the debtor,

based on an increase in the

debtor's disposable income, to

increase the amount of payments

to unsecured creditors required for

a particular month so that the

aggregate of such payments

exceed the debtor's disposable

income for such month, or

Modification of plan after

confirmation.

1229 Yes (3) in the last year of the plan by

anyone except the debtor, to

require payments that would leave

the debtor with insufficient funds

to carry on the farming operation

after the plan is completed.

No corresponding provision for family

fisherman.

1230 No Revocation of an order of

confirmation.

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 27

1231 Yes Deleted section on taxable period

of estate. Deleted requirement of

trustee to file tax returns.

Special tax provisions.

XI. Conclusion

The new provisions of BAPCPA give some

relief to the struggling farmer. They recognize the

dire conditions in rural America and will allow

some farmers to reorganize and continue to do

what they love best; till the soil and raise

livestock. The long-term outlook for the small

farmer is still dark at best, but as one farmer put it

when asked what he would do if he won a million

dollars in the lottery, replied, "I'll just keep

farming till its all gone."

ABOUT THE AUTHORS

Patricia Allen Conover, has been an Assistant

United States Attorney for the Middle District of

Alabama since 1987. Her farming background

includes fifteen years as a commercial dairyman

and current ownership of a 105 acre pecan farm.

She is a past President of the American

Agricultural Law Association.

M. Kent Anderson is an Assistant

United States Attorney for the Eastern District of

Tennessee, where he has been a civil assistant for

twelve years. He handles the entire range of civil

matters in a seventeen-county area in Southeast

Tennessee from the branch office in Chattanooga.

Most of the area is agricultural. He has published

articles and taught numerous paralegal and

attorney courses for OLE and the local

community college. a

Congressional Changes to Business

Bankruptcy

Tracy Whitaker

Assistant Director of the Corporate/Financial

Litigation Section

Commercial Litigation Branch

Civil Division

I. Introduction

he amendments to the Bankruptcy Code

which took effect on October 17, 2005

were famously directed to consumer,

rather than business, bankruptcies. Yet, a

substantial portion of the 500 page bill, formally

S. 256 and entitled "Bankruptcy Abuse Prevention

and Consumer Protection Act of 2005," Pub. L.

No. 108-9, 119 Stat 23 (2005) (BAPCPA), in fact,

affects businesses. See S. 256, 109th Cong.

(2005). As its title indicates, the bill was sparked

by the perceived abuses of existing bankruptcy

law. The weight of the changes increases the

burden on the business debtor, particularly with

regard to reorganization under chapter 11. The

degree of that burden is the subject of a lively

debate. An article entitled New Bankruptcy Law

Amendments: The Creeping Repeal of Chapter 11

gives a flavor of the alarmist tone of some.

Richard Levin & Alesia Ranney-Marinelli, New

Bankruptcy Law Amendments: The Creeping

Repeal of Chapter 11,79 AM. BANKR. L.J. 603

(July 2005).

The new amendments, however, are more

accurately described as tweaking rather than

tectonic. Nevertheless, some changes are

important. For example, because of BAPCPA's

hard cap on the debtor's plan exclusivity power,

businesses in chapter 11 will have to reorganize

28 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

faster or risk losing that lever to control the

proceedings. Some debtors must make quicker

lease assumption decisions due to limits on

extensions of time to assume or reject

nonresidential real property leases. Preferences

will be harder to prove. Large businesses will

have less flexibility in retaining the services of

key executives due to limits on compensation.

Some small businesses will be forced into a

procedurally more expedited, but flexible, plan

process with mandatory disclosure requirements

and increased oversight by the U.S. Trustee.

Clearly, some debtors will have greater difficulty

in achieving a successful reorganization. One

change clearly beneficial to the United States

makes federal False Claims Act (FCA), 31 U.S.C.

§ 3729, liability nondischargeable, even under a

chapter 11 reorganization plan.

II. False Claims Act liability saved from

discharge in corporate reorganizations

In an exception to the heretofore unlimited

power of a corporate debtor to discharge debts in

a non-liquidating, corporate chapter 11 plan, false

claims liability owed to a "domestic governmental

unit" is expressly protected. Debt for tax fraud and

tax evasion are also protected. 11 U.S.C.

§ 1141(d)(6)(B). That is, the power of a corporate

debtor to discharge "any debt" in a non-

liquidating, chapter 11 plan under § 1129(d)(1)(A)

is limited by the new § 1141(d)(6)(A), which

saves from discharge those debts saved in

§§ 523(a)(2)(A) and (B), to the extent held by a

"domestic governmental unit" or a relator of an

FCA claim.

Even though the type of debt saved here is

defined in §§ 523(a)(2)(A) and (B), the new

exception does not include in § 1141 an analog to

§ 523(c)(1). Subsection 523(c)(1) makes a debt

which qualifies under § 523(a)(2), nevertheless

dischargeable unless the holder successfully

proves the qualifying character of the debt before

the bankruptcy court. This can be a formidable

task in the case of FCA liability because the claim

often is not ready for litigation, yet the deadline

for initiation of the complaint under § 523(c)(1) is

short; viz., sixty days after the first meeting of

creditors. FED. R. BANKR. P. 4007(c). The lack of

an analog to § 523(c)(1) in the new exception

should mean that it is self executing. Debtors are

likely to argue, however, that the § 523(c)(1)

process is implied for chapter 11. The timely

filing of a protective complaint under FED. R.

BANKR. P. 4007(c), coupled with a request for a

ruling on the issue, seems prudent until the issue

is clarified.

The new protection for FCA claims, while

welcome, does not mean that chapter 11

proceedings of an FCA defendant can safely be

ignored. The assets of the debtor are being divvied

up in chapter 11, and a failure to participate in the

bankruptcy process invites creative stratagems to

leave the government's claim to survive against an

entity with few assets. Furthermore, if the FCA

liability makes a plan impractical, the other

constituencies in the bankruptcy will demand a

settlement of the FCA claim or waiver of

governmental immunity from discharge by

threatening to render the immunity valueless by

forcing a liquidation. The moral is, as before,

timely file the government's claim in the

bankruptcy and actively assert its rights as a

creditor.

III. "Means test" for individuals in

chapter 11

The "means test" in chapter 7, which has

rightfully received most of the attention, is limited

to individuals whose "debts are primarily

consumer debts." 11 U.S.C. § 707(b). Thus, an

individual in chapter 7 whose debts are

"primarily" business related will escape the

"means test" in chapter 7. The same is not true for

chapter 11. An individual in chapter

11—including those with business debts—can be

forced into a chapter 11 plan which must satisfy

the confirmation test of a chapter 13 plan. That is,

BAPCPA makes post-petition wages part of the

estate and modifies chapter 11 to allow an

unsecured creditor, who is not paid in full, to

require that the plan pay out at least the debtor's

disposable income under § 1325(b)(2) for five

years. 11 U.S.C. §§ 1115(a)(2) and 1129(15).

IV. Preference actions—"ordinary

course" defense enhanced

In a change which will, hopefully, help stem

the rising tide of preference litigation, BAPCPA

loosened the standards for proving the "ordinary

course of business" defense. Formerly, to sustain

such a defense, the creditor had to prove that both

the debt and the challenged payment were made in

the ordinary course of business and that the

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 29

payment was made in accord with "ordinary

business terms." BAPCPA changes the

underscored "and" in the last sentence to "or." 11

U.S.C. § 547(c)(2). That is, a creditor need prove

merely that the payment was either in the ordinary

course of business (a function of the parties' actual

practices) or in accord with ordinary business

terms (a function of the industry's usual practices).

The latter test can be troublesome for creditors

because of litigation uncertainty in defining the

relevant industry and the expense of obtaining

expert testimony.

In addition, BAPCPA added limits on smaller

preference claims. For business debts, preference

actions are barred in the case of transfers of less

than $5,000. Id. § 547(c)(9). Also, the trustee

must sue the non-insider, business creditor in the

defendant's home federal district to recover a debt

of less than $10,000. The latter limit applies to

any non-consumer debt, not just preferences. The

comparable consumer debt venue limit is $15,000.

28 U.S.C. § 1409(b).

V. Limits on executive compensation

The new amendments place severe limitations

on the granting of an administrative priority to

proposed payments to induce an "insider . . . to

remain with the debtor's business" and on

severance pay to an insider. See 11 U.S.C.

§ 503(c)(1). Debtors often respond to the

threatened loss of key executives by offering them

compensation inducements, such as salary,

pension, and stock option guaranties. Under

BAPCPA, retention payments are allowed only

where: (1) the executive has a "bona fide offer

from another business at the same or greater rate

of compensation;" (2) he or she is essential to the

business' "survival;" and (3) the payment is

capped at ten times the mean of similar payments

to non-management employees in the same year

of the transfer or, if none, limited to 25 percent of

a prior such payment to him or her in the year

preceding the transfer. Id. The last requirement

implies that no such payments will be allowed to

executives unless the company had a retention

program in place for at least one year prior to the

bankruptcy. Similarly, severance is barred to

executives unless also available to non-

management employees and capped at ten times

the mean of similar payments made to the latter

during the same year. Id. § 503(c)(2).

A word of warning. This change includes a

"wild card" which literally bars any administrative

payment "outside the ordinary course of business

and that is not justified by the facts and

circumstances of the case." Id. § 503(c)(3).

Adding another broad test to the allowance of an

administrative expense seems out of character

with the rest of the changes, so it remains to be

seen how it will be applied.

VI. Commercial real property leases

Formerly, the Bankruptcy Code required

debtor lessees of nonresidential real property to

assume or reject them within sixty days. The

sixty-day period could be extended only for cause.

Debtors routinely received, however, repeated

extensions resulting in many leases being assumed

or rejected only by the plan itself. BAPCPA

changes the initial sixty-day period to 120 days,

but limits the debtor's power to obtain extensions

for cause to one ninety-day period. Further

extensions require the lessor's prior written

consent. 11 U.S.C. § 365(d)(4).

This change will limit the flexibility of

business debtors with such leases as lessors can

force an assumption or rejection decision without

waiting for the business or reorganization risks to

clarify. For leases which are improvidently

assumed and subsequently rejected by the estate,

BAPCPA limits the lessor's administrative claim

to a maximum of two years' rent. 11 U.S.C.

§ 503(b)(7).

VII. Single asset real estate

bankruptcies expanded

A special exception to the automatic stay

applies to a debtor who generates "substantially

all" its "gross income" from a "single property,"

whether residential or commercial, if the debtor

conducts no business on the premises other than

operating the real property. 11 U.S.C. § 362(d)(3).

Pre-BAPCPA creditors holding security in such

real property were entitled to relief from the stay

within ninety days after the bankruptcy was

commenced if the debtor did not file a feasible

plan or commence monthly payments equal to the

interest due at a fair market rate on the secured

portion of the creditor's claim within that time.

This exception had little play because it applied

only if the total secured debt was less than $4

million. BAPCPA eliminates the debt limitation,

30 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

which greatly expands the exception's potential

application. See 11 U.S.C. § 101(51B).

For those representing federal lenders, like

Housing and Urban Development, whose claims

are secured by mortgages, this exception should

enhance the government's ability to obtain interim

interest payments. In addition to removing the

debt limit, BAPCPA made several other changes.

For example, the ninety-day window was

expanded to be the later of ninety days or thirty

days after the court "determines that the debtor" is

subject to the exception. Therefore, the secured

creditor should move for such a ruling as soon as

practicable to prevent the time limits from

expanding beyond ninety days. Also, BAPCPA

codified the practice of many bankruptcy courts to

allow the debtor to make the mandated payments

from the project's rents without the consent of the

creditor with a lien on the cash collateral. Further,

the interest rate for the payments is measured by

the "non-default contract" rate rather than the

current market rate. The latter change, which is

out of step with the principles governing adequate

protection payments, will be an advantage when

the contract rate is above market and a detriment

when it is below.

VIII. Small business bankruptcies

In return for relaxed procedural requirements,

the small business debtor must meet quicker

deadlines, face added mandatory reporting

requirements, and suffer stricter oversight by the

U.S. Trustee. BAPCPA amended this process and

imposed significant new obligations on small

business debtors.

Formerly, a small business was a person filing

under chapter 11 who was engaged in a

commercial enterprise, other than one owning or

operating real property, and whose liquidated,

accrued debts did not exceed $2 million.

BAPCPA retained that definition, but adapted it to

add the concept of a small business case and of a

small business debtor (SBD). 11 U.S.C.

§§ 101(51C) and (51D). BAPCPA added the

express requirement that the appointment of a

creditors' committee is disqualifying to the SBD.

The SBD regains its status, however, when the

court finds that the appointed committee is "not

sufficiently active and representative to provide

effective oversight of the debtor." Id.

§ 101(51D)(A). This definition allows SBD status

to become an on and off again proposition and,

seemingly, will not synchronize well with the

SBD's time limits. BAPCPA did not exempt the

small business case from the U.S. Trustees' duty

to appoint a committee, although the court may

impose such an exemption upon a request by a

party in interest. 11 U.S.C. §§ 1102(a)(1) and (3).

Hence, the use of SBD status may be limited to

cases in which the U.S. Trustee is unable, as a

practical matter, to formulate a committee. A

business debtor with less than $2 million in debt

does not know whether a committee will be

formed when it files, so the "threat" of SBD status

could force some to prepare for such status. This

increased preparation, if it happens, should have a

salutary impact on the speed and efficiency of

administration of the case, even if SBD status is

avoided. The definition also clarifies that the term

"person" includes an affiliate that is also in

bankruptcy and that the $2 million debt limitation

does not include debts owed to affiliates or

insiders.

Formerly, small business status was strictly by

election. 11 U.S.C. § 1121(e) (superceded).

BAPCPA drops that option and makes SBD status

mandatory for qualifying debtors. Id. This greatly

expands the scope of SBD status since most

debtors opted to avoid it under the former

practice.

IX. Creditors given more power to

dismiss, convert, or appoint a trustee in

chapter 11

BAPCPA makes it easier for a creditor to

force a liquidation or remove the debtor in

possession in chapter 11. First, the bankruptcy

court's discretion to deny such relief is reduced if

the creditor proves a sufficient "cause." 11 U.S.C.

§ 1112(b)(1). Second, the enumerated

circumstances that give rise to such cause expand

from five to sixteen, including the failure of the

SBD to "maintain appropriate insurance,"

"unauthorized use of cash collateral," and "failure

timely to pay taxes." Id. §§ 1112(b)(4)(C), (D),

(H). Third, the court must hear the creditor's

motion within thirty days and rule within fifteen

days unless the creditor consents to a delay or the

court finds "compelling circumstances." Id.

§ 1112(b)(3). The debtor or another party in

interest can stave off relief by showing in rebuttal

a "reasonable likelihood" that a plan will be

timely forthcoming and that, with respect to the

creditor's predicate ground for relief (with one

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 31

exception), the debtor had a "reasonable

justification" and the ground "will be cured within

a reasonable period of time." Id. § 1112(b)(2). The

legislation grouped this change under the heading

of small business changes, however, it applies in

every chapter 11 case.

X. Conclusion

BAPCPA's business changes, while narrowly

focused, are significant for those areas targeted.

This article will, hopefully, help bankruptcy

practitioners identify the areas affected and

anticipate their impact on their cases.

ABOUT THE AUTHOR

Tracy J. Whitaker joined the Department of

Justice in 1970. He has extensive experience

representing federal agencies with claims and

regulatory interests in bankruptcy. He is

frequently consulted by federal attorneys who

have bankruptcy and related issues.a

Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005: New

Provisions

Matthew J. Troy

Trial Attorney

Commercial Litigation Branch

Civil Division

I. The new chapter 15 for ancillary and

other cross-border cases

itle VIII of the Bankruptcy Abuse

Prevention and Consumer Protection

Act, Pub. L. No. 109-8, 119 Stat. 23

(2005) (BAPCPA), adds a new chapter 15 that

incorporates a model law on cross-border

insolvency to the Bankruptcy Code. While

involvement in cross-border cases is rare for

attorneys representing the United States, that is

likely to change due to the increasing international

component of bankruptcies, see, e.g., In re Yukos

Oil Co., 321 B.R. 396 (Bankr. S.D. Tex. 2005),

and chapter 15, itself, which requires its use

before parties can request that United States courts

defer, on comity grounds, from acting in cases in

furtherance of a foreign insolvency proceeding.

The hallmark of chapter 15 is to encourage

cooperation between the United States and foreign

countries with respect to transnational insolvency

cases. The House Judiciary Committee noted in its

report, "comity is raised to the introductory

language [of title VIII] to make clear that it is the

central concept to be addressed." H.R. Rep. No.

109-31, at 109 (2005). Chapter 15 replaces § 304

of the Bankruptcy Code, "Cases ancillary to

foreign proceedings," which is repealed.

Debtors eligible for relief under § 109 of the

Bankruptcy Code will also be eligible for relief

under chapter 15. Foreign banks will not be

eligible if they have a branch or agency in the

United States. Foreign insurance companies doing

business in the United States, however, will be

eligible. 11 U.S.C. § 1501(c)(2).

Chapter 15 divides "incoming" foreign

proceedings into: (1) foreign main proceedings,

which are pending in the country where the debtor

has its center of main interests; and (2) foreign

non-main proceedings, which are themselves

ancillary proceedings pending in a country where

the debtor has an establishment. A case under

chapter 15 is commenced by a petition filed by a

"foreign representative" (11 U.S.C. § 101(23)) of

a "foreign proceeding" (11 U.S.C. § 101(24)),

accompanied by documents evidencing the

foreign proceeding and appointment and authority

of the foreign representative. 11 U.S.C. § 1515.

The minimal document requirements of § 1515

and evidentiary presumptions regarding those

documents, 11 U.S.C. § 1516, were "designed to

32 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

make recognition as simple and expedient as

possible. . . ." H.R. Rep. No. 109-31, at 112. The

order granting "recognition" of the foreign

proceeding specifies if the foreign proceeding is

main or nonmain.

Unlike § 304 of the Bankruptcy Code, where

all relief was dependent on court approval based

on satisfaction of a statutory list of criteria,

chapter 15 provides that, upon recognition of a

foreign main proceeding, the automatic stay (and

its exceptions) and selected other provisions of the

Bankruptcy Code take effect. 11 U.S.C. § 1520

(incorporating §§ 361, 362, 363, 549 and 552 of

the Bankruptcy Code). While a foreign, non-main

proceeding can be recognized, it does not receive

the benefit of the automatic stay or other

Bankruptcy Code sections listed in § 1520(a), and

United States' assistance with requested relief in a

non-main proceeding is specifically limited. 11

U.S.C. §§ 1521(c) and 1523(b). A foreign

representative of either a main or non-main

proceeding may also seek relief not enumerated in

§ 1520. 11 U.S.C. § 1521. This could include

additional injunctions, discovery, and the turn

over of assets for distribution in a foreign

proceeding. Chapter 15 also specifically bars a

court from enjoining the exercise of a

governmental unit's police or regulatory action,

including a criminal action or proceeding. 11

U.S.C. § 1519(d).

The recognition procedure is the sole entry

point for a foreign representative to the state and

federal court systems in the United States. In the

past, a foreign representative could move any

United States court, in the interests of comity, to

stay a case when advised of a foreign proceeding

in the home country of one of the parties. Now,

the foreign representative must use chapter 15 to

stay the case, and deferral for comity purposes is

not authorized without using chapter 15. 11

U.S.C. § 1509(c), (d); see also United States v.

J.A. Jones Construction Group, LLC, 333 B.R.

637 (E.D.N.Y. 2005). Venue of chapter 15

proceedings is narrowed to a single entry point

where the debtor has its principal place of

business or assets in the United States. If the

debtor does not have a place of business or assets

in the United States, the entry point is where there

is litigation pending against the debtor. If there is

no such litigation pending, the entry point is

where venue will be consistent with the interests

of justice and the convenience of the parties. 28

U.S.C. § 1410.

Chapter 15 requires courts to cooperate, to the

maximum extent possible, with foreign courts and

foreign representatives and entitles courts to

communicate directly with, or to request

information or assistance directly from, foreign

courts or foreign representatives. 11 U.S.C.

§§ 1525, 1526. Courts may implement this

cooperation through "any appropriate means,"

including the appointment of a person to act at the

direction of the court and the use of coordination

agreements or protocols. 11 U.S.C. § 1527.

Chapter 15 centralizes all aspects of cross-

border insolvencies. For United States Attorneys,

the key component of this centralization might be

the use of chapter 15 as the sole means for

obtaining a stay of an action based on a party's

foreign insolvency proceeding. Without

"recognition" of a foreign proceeding via chapter

15, United States courts are not free to stay

actions involving a foreign insolvent party, J.A.

Jones, 333 B.R. at 639 ("In the absence of

recognition under chapter 15, this Court has no

authority to consider [the foreign receiver's]

request for a stay"), and any requests for a

United States court to do so in cases involving the

United States should be resisted.

II. BAPCPA's impact on health care

bankruptcies

While BAPCPA focuses on consumer

bankruptcies, it enacts for the first time in the

Bankruptcy Code specific health care bankruptcy

provisions. The thrust of these provisions provides

greater rights and protections to patients in a

bankruptcy. This article will highlight the most

significant of these provisions, as well as the

related interim bankruptcy rules implementing

BAPCPA (the "Interim Rules").

A. New definitions

BAPCPA creates a broad definition for a

"health care business" in § 101(27A) that

includes, among others, hospitals, emergency

treatment facilities, hospices, home health

agencies, skilled nursing facilities, and assisted

living facilities. 11 U.S.C. § 101(27A). BAPCPA

also adds specific definitions for "patient" and

"patient records." Id. §§ 101(40A), 101(40B).

Under the Interim Rules, if a petition states

that the debtor is a health care business, the case

shall proceed as such unless the court orders

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 33

otherwise. INTERIM FED. R. BANKR. P. 1021(a),

available at Interim Rules and Official Forms

Implementing the Bankruptcy Abuse Prevention

and Consumer Protection Act of 2005,

http://www.uscourts.gov/rules/interim.html. The

United States Trustee, or a party in interest, may

file a motion for a determination as to whether a

debtor is a health care business. Fed. R. Bankr. P.

9014 shall govern the motion. INTERIM FED. R.

BANKR. P.1021(b).

B. Automatic stay exception

BAPCPA provides a new exception to the

automatic stay for the Secretary of Health and

Human Services (HHS) to exclude a debtor from

participation in the Medicare program or any

other federal health care program, as defined in

the Social Security Act, 49 Stat. 620 (1935). 11

U.S.C. § 362(b)(28). Hence, reliance on the

police/regulatory power exception to the

automatic stay (11 U.S.C. § 362(b)(4)) for

exclusion should no longer be necessary. Courts

were split on applicability of that exception to

Medicare exclusion. Compare In re

Psychotherapy & Counseling Ctr., Inc. 195 B.R.

522, 533 (Bankr. D.D.C. 1996) ("[I]f HHS had

determined that the debtor should be excluded

from the program by reason of some improper

action, such as fraud or other criminal activity,

then the court should not prevent HHS's exclusion

of the debtor. In that circumstance, HHS would be

properly exercising its regulatory authority over

property of the estate.") with In re Rusnak, 184

B.R. 459, 466 (Bankr. E.D. Pa. 1995) (holding

that HHS' exclusion for debtor's default on Health

Education Assistance loans did not fall within

section 362(b)(4)); In re Richmond Paramedical

Servs., Inc., 94 B.R. 881 (Bankr. E.D. Va. 1988),

(relying on 11 U.S.C. § 105 to stay criminally

convicted debtor's exclusion for sixty days to

permit sale of debtor's assets).

BAPCA says nothing about the suspension of

Medicare payments, 42 C.F.R. § 405.371, and

courts are split on whether suspension falls within

11 U.S.C. § 362(b)(4). Compare In re Orthotic

Center, Inc., 193 B.R. 832, 834 (Bankr. N.D.

Ohio 1996) (reversing bankruptcy court and

holding suspension of provider's payments exempt

from stay under § 362(b)(4)); In re Univ. Nursing

Care Ctr., Inc., Case No. 92-00199 (Bankr. N.D.

Fla. Jan. 16, 1996) (same) with In re Medicar

Ambulance Co., 166 B.R. 918, 926-27 (Bankr.

N.D. Cal. 1994) (holding suspension of payments

for fraud was not exempted from stay); In re

Allied Home Health Nursing Servs., Inc., Case

No. 96-51232 (Bankr. W.D. Tex. Apr. 2, 1996)

(granting temporary restraining order against

Medicare fraud suspension); First Am. Health

Care v. Dep't. of Health and Human Servs., 208

B.R. 985 (Bankr. S.D. Ga.), vacated, 1996 WL

282149 (Bankr. S.D. Ga. 1996); In re

Healthmaster Home Health Care, Inc., 1995 WL

928920 (Bankr. S.D. Ga. Apr. 13, 1995) (same);

In re Community Hospice Inc., Adv. Proc. No. 93-

1158 (Bankr. D. Ariz. Dec. 6, 1993) (granting

temporary restraining order against termination of

provider agreement for standard of care

problems).

C. Patient care ombudsman

Section 333 is added to require the

appointment of a patient ombudsman in the

bankruptcy of a health care business, to monitor

the quality of patient care, and to represent

patients' interests. 11 U.S.C. § 333(a)(1). The

court may decline to appoint an ombudsman if it

finds the appointment unnecessary for the

protection of the patients. The United States

Trustee chooses a disinterested person to be the

ombudsman, and in the bankruptcy of a long-term

care facility, may choose the state's Long-Term

Care Ombudsman, appointed under the Older

Americans Act of 1965, 42 U.S.C. §§ 3001-3002,

3011-3058ee. The ombudsman's duties include:

(1) monitoring patient care, including

interviewing patients and physicians; (2) reporting

to the court regarding the quality of patient care

within sixty days of its appointment and in sixty-

day intervals thereafter; and (3) filing a report or

motion with the court if patient care is "declining

significantly or otherwise being materially

compromised." 11 U.S.C. § 333(b). BAPCPA

does not, however, establish any standards by

which an ombudsman is to evaluate the quality of

patient care. An ombudsman shall have access to

patient records consistent with the authority of an

ombudsman under the Older Americans Act and

under applicable non-federal law. The

ombudsman shall maintain patient information as

confidential information and may not review

patient records absent court approval. Id. § 333(c).

Section 330(a)(1) is amended to include a

patient care ombudsman as a professional person

entitled to reimbursement from the estate. There

is, however, no specific provision allowing the

ombudsman to hire counsel or other professionals.

34 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

The Interim Rules provide that the court shall

order the appointment of the ombudsman under

§ 333 unless the court, on motion of the

United States Trustee or a party in interest filed

within twenty days of the commencement of the

case, finds that the appointment is not necessary

under the section. INTERIM FED. R. BANKR. P.

2007.2(a). If the court orders the appointment of

an ombudsman, the United States Trustee must

file a notice of appointment, including the name

and address of the person appointed and a verified

statement setting forth the person's connections to

the debtor, creditors, patients, any party in

interest, their respective attorneys and

accountants, and the United States Trustee. Id.

2007.2(c). On motion of the United States Trustee

or a party in interest, the court may terminate the

appointment of an ombudsman if it finds that the

appointment is not necessary for the protection of

patients. Id. 2007.2(d). Similarly, the court may,

upon motion of the United States Trustee or a

party in interest, order the appointment at any

time in the case, if the court finds that

appointment is necessary to protect patients. Id.

2007.2(b).

The Interim Rules require that the

ombudsman give ten days' notice to the debtor,

the trustee, the United States Trustee, all patients,

any committee, and if there is no committee of

unsecured creditors, to the creditors listed under

FED. R. BANKR. P. 1007(d), before making a

report to the court under 11 U.S.C. § 333(b)(2).

The ombudsman must also conspicuously post the

notice at the health care facility that is the subject

of the report. INTERIM FED. R. BANKR. P.

2015.1(a).

Regarding an ombudsman's review of patient

records under § 333(c), the ombudsman must

make a motion governed by FED. R. BANKR. P.

9014 and serve it on the patient and any family

member or other contact person whose name and

address has been given to the trustee. 11 U.S.C.

§ 333(c). A hearing on the motion may be

commenced no earlier than fifteen days after

service. Id. 2015.1(b).

D. Disposal of patient records

BAPCPA addresses the disposal of patient

records in new 11 U.S.C. § 351. If a health care

business does not have sufficient funds to pay for

the storage of patient records under applicable

law, the trustee is obligated to: (1) publish notice,

in one or more appropriate newspapers, indicating

the trustee's intent to destroy the records one year

later; (2) during the first 180 days of that one year

period, the trustee must attempt to contact each

patient and insurance carrier with notice of the

claiming or disposing of the records; (3) if the

records are not claimed during the one year

period, the trustee must mail a request to each

appropriate federal agency requesting that they

take possession of the records, although no agency

is required to take possession; and (4) if no one

claims the records, the trustee is obligated to

destroy them by shredding, burning, or

obliterating them (if electronic), 11 U.S.C.

§§ 351(1)(A), (1)(B), (2), (3).

The Interim Rules specify the information that

must be included in the published notice under

§ 351(1)(A) and the notice under § 351(1)(B).

INTERIM FED. R. BANKR. P. 6011(a) and (b). The

trustee must file a report within thirty days of

destruction certifying the destruction and the

method used. Id. 6011(d).

E. Duty to transfer patients and

administrative expense status for the costs

of closing a health care business

BAPCPA adds 11 U.S.C. § 704(a)(12) to the

duties of a chapter 7 trustee for a health care

business. The section requires a trustee to "use all

reasonable and best efforts" to transfer patients

from a health care business being closed to one

that: (1) is in the vicinity of the closing facility;

(2) provides substantially similar patient care to

the closing facility; and (3) maintains a reasonable

quality of care. 11 U.S.C. § 704(a)(12).

The Interim Rules provide that the trustee

may not transfer patients under § 704(a)(12)

unless the trustee gives ten days' notice of the

transfer to the patient care ombudsman and to the

patient and any family member or other contact

person whose name and address has been given to

the trustee. INTERIM FED. R. BANKR. P. 2015.2.

BAPCPA adds 11 U.S.C. § 503(b)(8) to create an

administrative expense for the "actual necessary

costs and expenses of closing a health care

business incurred by a trustee or by a Federal

agency," including the cost of disposing of patient

records and the transfer of patients. 11 U.S.C.

§ 503(b)(8). Prior to BAPCPA's enactment, at

least one court held that the costs of closing a

health care business were not entitled to

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 35

administrative priority. In re Allen Care Centers,

Inc., 96 F.3d 1328 (9th Cir. 1996).

III. Conclusion

The principal governmental agency involved

in health care bankruptcies is the HSS, Centers for

Medicare & Medicaid Services (CMS), which

administers the Medicare program. Each of the

above changes in some way touches upon CMS'

administration of Medicare and may, in certain

circumstances, directly affect CMS' duties under

Medicare laws and regulations. For that reason,

United States Attorneys should become familiar

with them.

ABOUT THE AUTHOR

Matthew J. Troy is a trial attorney in

Washington, DC in the Commercial Litigation

Branch of the Civil Division where he has worked

for more than eight years. He handles principally

bankruptcy matters on behalf of various federal

agencies. He can be reached at 202-307-0488 or

matthew.troy@usdoj.gov.a

Treatment of Unexpired Leases:

Post-Bankruptcy Abuse Prevention

and Consumer Protection Act of 2005

Wendy Tien

Trial Attorney

Commercial Litigation Branch

Civil Division

I. Introduction

he Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005, Pub.

L. No. 109-8, 119 Stat 23 (2005)

(BAPCPA), made a number of changes to the

treatment of unexpired residential and commercial

leases. Except as otherwise specified, these

changes relate only to real property leases, not

personal property leases or executory contracts.

II. Section 365(d)(4): Time to assume or

reject

Before the amendments to the Bankruptcy

Code took effect, a debtor had sixty days within

which to assume or reject an unexpired lease of

nonresidential real property. 11 U.S.C.

§ 365(d)(4). The court could, however, extend

that period of time "for cause." The Bankruptcy

Code did not define "cause" for purposes of § 365,

but took into account a number of factors,

including: (1) whether the debtor was "paying for

the use of the property"; (2) whether "the debtor's

continued occupation could damage the lessor

beyond the compensation available under the

Bankruptcy Code"; (3) whether the lease was the

debtor's primary asset; (4) whether the debtor had

sufficient time to formulate a plan of

reorganization; (5) the complexity of the case

facing the debtor; and (6) the number of leases

that the debtor had to evaluate. See, e.g., In re

Burger Boys, Inc., 94 F.3d 755 (2d Cir. 1996); In

re Service Merchandise Co., Inc., 256 B.R. 744

(Bankr. M.D. Tenn. 2000); In re Resource

Technology Corp., 254 B.R. 215 (Bankr. N.D. Ill.

2000). In practice, extensions of time were

granted routinely–often up to the date of plan

confirmation–provided the debtor remained

current on all its post-petition obligations to the

lessor.

The amendment to § 365(d)(4) extends the

initial assumption period to 120 days, or the date

of plan confirmation, whichever occurs first. 11

U.S.C. § 365(d)(4)(A). Upon the motion of the

debtor in possession (DIP) or trustee, the court

may extend the period only once, for ninety days.

36 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

Id. § 365(d)(4)(B)(i). The court lacks any

discretion to grant additional extensions without

the prior written consent of the landlord, even if

"cause" sufficient to justify an extension

pre-BAPCPA exists. Id. § 365(d)(4)(B)(ii).

Accordingly, without the landlord's cooperation, a

debtor has, at most, 210 days to assume or reject a

nonresidential lease.

§ 365(d)(4) Provides that if the trustee does

not assume or reject an

unexpired lease of

nonresidential real property

under which the debtor is the

lessee within sixty days after the

date of the order for relief (or

such other period as the court

orders), then such lease is

deemed rejected, and the trustee

shall immediately surrender

such nonresidential real

property to the lessor.

Extends time to assume or reject

a lease from 60 days to 120

days, or plan confirmation,

whichever is earlier.

Permits the court to extend this

time for an additional ninety

days (for a total of 210 days),

for cause.

Subsequent extensions of time

can only be authorized by the

lessor; the court has no

discretion to make subsequent

extensions.

Assumption or rejection must

take place before plan

confirmation (no post-

confirmation assumptions or

rejections).

Applies to non-residential real

property leases.

Applies to all debtors.

Under prior law, once the bankruptcy estate

assumed a lease, a subsequent breach or rejection

gave rise to an administrative expense claim for

the full amount of the rent for the entire balance of

the lease term. Because BAPCPA will require

debtors to make a decision to assume or reject

commercial leases within a shorter time frame

than previously (absent lessor consent), a new

§ 503(b)(7) provides that for non-residential real

estate previously assumed under § 365, but

subsequently rejected, the lessor's administrative

expense claim is limited to

a sum equal to all monetary obligations due,

excluding those arising from or relating to a

failure to operate or a penalty provision, for

the period of 2 years following the later of the

rejection date or the date of actual turnover of

the premises, without reduction or setoff for

any reason whatsoever except for sums

actually received or to be received from an

entity other than the debtor.

11 U.S.C. § 503(b)(7).

Claims for rejection damages for the

remaining portion of the lease term are unsecured,

and subject to the limitations set forth in 11

U.S.C. § 502(b)(6).

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 37

§ 503(b)(7) N/A Provides that where non-

residential lease is assumed but

subsequently rejected, lessor's

administrative claim is limited

to two years following rejection

of the lease or turnover of the

leased premises, less sums

received from other parties.

Previously, there was no limit

and lessor could make

administrative claim for balance

of lease term.

Claims for amounts beyond that

time are unsecured and subject

to the § 502(b)(6) cap.

Excludes penalties for failure to

operate.

Applies to all debtors.

Applies to non-residential real

property leases.

The likely effect of these new provisions,

taken together, will be to mandate closer

communication and more negotiation between

debtors and landlords. Although the amendment

to § 365(d)(4) appears to benefit commercial

landlords, as it requires a debtor to assume a

commercial real estate lease within 210 days

unless the landlord consents, the addition of

§ 503(b)(7) confers bargaining power on debtors

in negotiating extensions of the time to assume or

reject. Commercial landlords who refuse to

negotiate such extensions of time with debtors

who are current on all their lease obligations run

the risk that the debtors will assume long-term

commercial leases before having an adequate

amount of time to evaluate their ongoing ability to

make lease payments, or the true benefit of such

leases to the estate. In that event, their ability to

recover lease rejection damages may be severely

curtailed. Additionally, § 365(d)(4)(A)(ii) appears

to answer the question if an unexpired commercial

real estate lease may be assumed or rejected after

plan confirmation, in the negative.

III. 11 U.S.C. § 365(b): Curing defaults

Generally, the DIP or trustee may assume or

reject any executory contracts and unexpired

leases. Prior to BAPCPA, if there was a default in

an executory contract or unexpired lease, the

debtor or trustee could not assume the contract or

lease unless the following steps were taken.

• Cured or provided adequate assurance that it

would promptly cure the default.

• Compensated or provided adequate assurance

of compensation for any actual pecuniary loss

resulting from the default.

• Provided adequate assurance of compensation

for any actual pecuniary loss resulting from

future defaults.

BAPCPA introduces a limitation on debtors'

obligation to cure defaults in unexpired real estate

leases. Section 365(b)(1)(A) now makes it

unnecessary for the debtor to cure a default that is

a breach of a provision relating to

the satisfaction of any provision (other than a

penalty rate or penalty provision) relating to a

default arising from any failure to perform

nonmonetary obligations under an unexpired

lease of real property, if it is impossible for

the trustee to cure such default by performing

nonmonetary acts at and after the time of

assumption, except that if such default arises

from a failure to operate in accordance with a

38 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

nonresidential real property lease, then such

default shall be cured by performance at and

after the time of assumption in accordance

with such lease, and pecuniary losses resulting

from such default shall be compensated in

accordance with the provisions of this

paragraph.

11 U.S.C. § 365(b)(1)(A).

The purpose of this convoluted provision

apparently was to address a dispute over a debtor's

right to assume an unexpired lease when a non-

monetary default had taken place that could not be

cured because of the passage of time. The most

common instance of this type of non-monetary

default was a failure to operate in accordance with

lease terms requiring a business to maintain

continuous operations. In such cases, some courts

have held that the lease could not be assumed,

provision does not apply to personal property

leases or executory contracts.

Title 11 U.S.C. § 1124(2) has been amended

as well, apparently to conform to the changes to

§ 365(b). New § 1124(2)(D) now provides that a

claim is not impaired under a chapter 11 plan if

the plan, with respect to a claim or interest arising

from any failure to perform a nonmonetary

obligation, other than a default arising from

failure to operate a nonresidential real property

lease subject to section 365(b)(1)(A), compensates

the holder of such claim or such interest (other

than the debtor or an insider) for any actual

pecuniary loss incurred by such holder as a result

of such failure.

§ 365(b)(1)(A) Provides that if there has been

any default (whether monetary

or nonmonetary) in an

unexpired lease of the debtor,

the DIP or trustee may not

assume such contract or lease

unless, at the time of

assumption of such contract or

lease, the trustee/DIP cures the

default, compensates the lessor

for actual pecuniary loss, and

provides adequate assurance of

future performance.

Amends statute by permitting

debtor to assume unexpired

lease notwithstanding non-

curable non-monetary default

(other than a penalty rate or

penalty provision).

Lessor entitled to compensation

for actual pecuniary loss

resulting from default.

If default is caused by failure to

operate nonresidential lease,

default must be cured by

resuming operation at and after

date of lease assumption.

Applies to all debtors.

Applies to residential and

nonresidential real property

leases.

regardless of the absence of monetary defaults,

because there was an incurable nonmonetary

default. See, e.g., Worthington v. General Motors

Corp., 113 F.3d 1202 (9th Cir. 1997) (holding that

a franchise agreement could not be assumed

because the non-monetary default resulting from

closing operations could not be cured). Under

§ 365(b)(1)(A), as amended, such a default can be

cured by resuming operations at the time of

assumption and continuing such operations. This

New § 1124(2)(D) raises more questions than

it answers. First, the revisions to § 365(b)(1)(A)

concerning non-monetary defaults do not apply to

executory contracts or personal property leases,

meaning that under § 365(b)(1)(A), an executory

contract or personal property lease arguably may

not be assumed if there has been an incurable non-

monetary default. See, e.g., In re Claremont

Acquisition Corp., Inc., 113 F.3d 1029 (9th Cir.

1997) (holding that non-monetary defaults in an

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 39

executory contract must be cured before

assumption). Unlike § 365(b)(1)(A), however,

§ 1124(2)(D) is not limited to unexpired real

property leases. Accordingly, in the event a

chapter 11 plan proposes to assume an executory

contract or personal property lease in which there

has been an incurable non-monetary default and to

compensate the non-debtor party for its actual

pecuniary losses, § 1124(2)(D) suggests that the

non-debtor party to such a contract or lease is

unimpaired and deemed to have accepted the plan.

Id. § 1126(f). It remains open to question whether

a debtor may assume such contracts and leases

pursuant to a plan where the non-debtor party is

unimpaired, even if the debtor would not have

been able to assume such contracts and leases

under § 365 in the absence of a plan, due to

incurable nonmonetary defaults.

Additionally, § 1124(2)(D) excludes defaults

resulting from the failure to operate a commercial

real estate lease from the general rule that a claim

arising from an incurable non-monetary default is

unimpaired under a plan that provides

compensation for actual pecuniary loss. The effect

of this exclusion is unclear. One sensible reading

of the statute suggests that such a claim is

unimpaired only if, in addition to providing

compensation for actual pecuniary losses, the plan

provides that the debtor will resume operations at

the time of lease assumption. Another plausible

reading of the statute, however, suggests that the

holder of a claim arising from the debtor's failure

to operate in accordance with the terms of a

commercial real estate lease is considered

impaired under the plan, and that this impairment

cannot be remedied, even by resumption of

operations at the time of lease assumption.

IV. Section 365(b)(2)(D): Treatment of

penalty rates and penalty provisions

Before passage of BAPCPA, the extent to

which a DIP or trustee was required to cure

provisions relating to non-monetary defaults

under an executory contract or unexpired lease

was unclear. Pre-BAPCPA § 365(b)(2)(D)

provided that the trustee was not required to cure

a default arising from "the satisfaction of any

penalty rate or provision relating to a default

arising from any failure by the debtor to perform

nonmonetary obligations under the executory

contract or unexpired lease." Because the word

"penalty" arguably modified the word "provision"

as well as "rate," the majority of courts held that

the trustee did not have to pay penalty rates or

other penalty provisions regarding non-monetary

defaults. See, e.g., Claremont Acquisition, 113

F.3d 1029 (9th Cir. 1997); In re Williams, 299

B.R. 684 (Bankr. S.D. Ga. 2003); In re Walden

Ridge Dev., 292 B.R. 58 (Bankr. D.N.J. 2003); In

re New Breed Realty Enterprises, 278 B.R. 314

(Bankr. E.D.N.Y. 2002). A minority of courts

held that the trustee was obliged to satisfy all

other, non-penalty rate provisions relating to the

nonmonetary default.

The amendment to § 365(b)(2)(D) adds the

word "penalty" before "provision," adopting the

majority view.

40 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

§ 365(b)(2)(D) Provides that the cure

provisions of § 365(b)(1) do not

apply to a default that is a

breach of a provision relating to

the satisfaction of any penalty

rate or provision relating to a

default arising from any failure

by the debtor to perform non-

monetary obligations under the

unexpired lease.

Amends statute to provide that

§ 365(b)(1) does not apply to a

default that is a breach of a

provision relating to the

satisfaction of any penalty rate

or penalty provision relating to

a default arising from any

failure by the debtor to perform

non-monetary obligations under

the unexpired lease.

Clarifies that trustee is not

required to pay contractual

penalty interest rates or pay

penalty provisions applicable to

non-monetary defaults.

Applies to all debtors.

Applies to all leases and

executory contracts.

V. Conclusion

Although most of the BAPCPA amendments

to the Bankruptcy Code favor creditors, the

changes relating to treatment of unexpired leases,

particularly commercial real estate leases, provide

some real advantages to debtors. Client agencies

should exercise caution in structuring long-term

leases to avoid giving rise to large general

unsecured claims for lease rejection damages, and

should attempt to renegotiate the terms of any

commercial lease before the lessee enters

bankruptcy, in order to avoid protracted

arguments over assumption under § 365.

ABOUT THE AUTHOR

Wendy Tien has been with the Corporate and

Financial Litigation section since 2000. Before

coming to the Department of Justice, she worked

in both the Corporate and Litigation departments

at Pillsbury Winthrop Shaw Pittman LLC and as a

tax attorney with the Internal Revenue Service.a

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 41

NOTES

42 UNITED STATE S ATTORNEYS' BULLETIN JULY 2006

JULY 2006 UNITED STATES ATTORNEYS' BULLETIN 43

Request for Subscription Update

In an effort to provide the UNITED STATES ATTORNEYS' BULLETI N to all federal law enforcement

personnel who wish to receive it, we are requesting that you e-mail Nancy Bowman

(nancy.bowman@usdoj.gov) with the following information: Name, title, complete shipping address,

telephone number, number of copies desired, and e-mail address. If there is more than one person in your

office receiving the BULLETIN, we ask that you have one receiving contact and make distribution within your

organization. If you do not have access to e-mail, please call 803-705-5659. Your cooperation is appreciated.