Overview of Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
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| Paul M. Hoffman1 |
Jerald S. Enslein1 |
On April 20, 2005, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)2 This statute is the first major reform of the Bankruptcy Code in about 10 years, and creates significant changes for business and consumer bankruptcy cases.
3 Unless otherwise indicated, all of the changes discussed in this article were effective on or before October 17, 2005.
BAPCPA is more than 500 pages long, changes 83 sections of the Bankruptcy Code, and adds 17 new sections and one new chapter to the Bankruptcy Code. In addition, it has resulted in changes to more than 27 rules and the creation of nine new rules.4 Many of the provisions raise more questions than they answer.
This article is not intended to be comprehensive, but rather to assist non-bankruptcy practitioners in identifying key issues and the need to promptly engage the assistance of an experienced bankruptcy attorney for detailed advice. The complexities created by BAPCPA further challenge the ability of an attorney who sporadically practices in the area to effectively advise clients. Even those who specialize in bankruptcy will be required to invest more time to analyze options, and thus may find it appropriate and necessary to increase the rate of remuneration for their services.
Consumer Changes
Debt Relief Agency. BAPCPA introduces a new concept that may affect an attorney, even if she or he does not ultimately represent a debtor or other party in a bankruptcy case. With limited exceptions,5 any person (which “includes an individual, partnership, and corporation”)6 becomes a “debt relief agency” if she, he or it “provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration.”7
An “assisted person” is a “person whose debts consist primarily of consumer debts”8 (“debt[s] incurred by an individual primarily for a personal, family, or household purpose”)9 and “whose nonexempt property has a value less than $150,000.”10 “Bankruptcy assistance” is rendered to that assisted person if “any goods or services [are] sold or otherwise provided . . . with the express or implied purpose of providing information, advice, counsel, document preparation, or filing, or attendance at a creditors’ meeting or appearing in a case or proceeding on behalf of another or providing legal representation with respect to a case or proceeding under this title (title 11 of the United States Code).”11 Thus, the mere providing of information or advice to a prospective debtor or creditor may render an attorney as a debt relief agency. The problems created by becoming a debt relief agency are the requirements that must be satisfied as well as exposure to liability.
“A debt relief agency [that] provid[es] bankruptcy assistance to an assisted person” must make certain written disclosures as well as provide a written statement and, in certain instances, information in writing.12 The deadline for doing so is three “business days after the first date on which a debt relief agency
. . . provide[s] any bankruptcy assistance services to the assisted person.”13 The debt relief agency is also required to maintain a copy of each notice for two years after the date it is given to the assisted person.
The debt relief agency must execute a written contract with the assisted person within five business days after the initial date on which the bankruptcy assistance was provided but prior to the filing of the bankruptcy petition.14 The contract is required to “clearly and conspicuously” state the services to be provided and the fees or charges for the same, as well as the terms of payment.15 A copy of “the fully executed and completed contract” also must be given to the assisted person.16 The failure to comply with any of these requirements will render the contract void and unenforceable except by the assisted person.17
A debt relief agency also is required to make certain disclosures in advertisements “(whether in general media, seminars or specific mailings, telephonic or electronic messages, or otherwise).”18 This is applicable even to advertisements that do not pertain to bankruptcy.19 Specifically, “[a]n advertisement, directed to the general public [that] indicate[s] that the debt relief agency provides assistance with respect to credit defaults, mortgage foreclosures, eviction proceedings, excessive debt, debt collection pressure, or inability to pay any consumer debt” must include: (i) a clear and conspicuous disclosure “that the assistance may involve bankruptcy relief under” the Bankruptcy Code; and (ii) “the following [or a substantially similar] statement: ‘We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.’”20
The “debt relief agency [will] be liable to an assisted person in the amount of any fees or charges in connection with providing bankruptcy assistance” as well as “for actual damages, and reasonable attorneys’ fees and costs if,” “after notice and a hearing,” it is found to have: (i) “intentionally or negligently failed to comply with any [of the above requirements] with respect to a case or proceeding under” the Bankruptcy Code; (ii) “provided bankruptcy assistance to an assisted person in a case or proceeding under [the Bankruptcy Code] that is dismissed or converted” due to the “intentional or negligent failure” of the debt relief agency “to file any required document”; or (iii) “intentionally or negligently disregarded the material requirements of [the Bankruptcy Code] or the Federal Rules of Bankruptcy Procedure [(FRBP)] applicable to [the debt relief] agency.”21 Thus, being in the position of a debt relief agency may prove costly.
Several pending cases are challenging the constitutionality of these provisions of BAPCPA. To date, one court, in Geisenberger v. Gonzales, has declined to address these issues based on standing.22 In Hersh v. United States 23 and Olsen v. Gonzales,24 both courts have held various provisions unconstitutional.
Pre-Filing Counseling. “[A]n individual may not be a debtor” unless, within “the 180-day period preceding the…filing of the petition” commencing the bankruptcy case, she or he received a briefing “from an approved nonprofit budget and credit counseling agency” “that outlined the opportunities for available credit counseling and assisted” that person in performing a budget analysis and developing a possible debt repayment plan (in lieu of filing bankruptcy).25 However, the briefing is not required if, after notice and a hearing, the court determines the debtor is unable to have one “because of incapacity, disability, or active military duty in a military combat zone.”26
A person may have until 30 days after the filing of the petition within which to receive the briefing (although the court, may, for cause, order an additional 15 days) if she or he submits to the court a certification that, to the satisfaction of the court, “(i) describes exigent circumstances that merit a waiver of the requirements,” and “(ii) states that the debtor requested credit counseling services from an approved nonprofit budget and credit counseling agency but was unable to obtain the services [within] the 5-day period beginning on the date…the debtor made [the] request.”27
If a certificate provided by the budget and credit counseling agency that reflects the requisite services were provided to the debtor (and of the development of a debt repayment plan if one was developed) is not filed within 45 days from the date the petition is filed, the case is subject to automatic dismissal on the 46th day (although Rule 1007(c) of the Interim Rules provides that, in a case under Chapter 13, the documentation must be filed no later than the last payment made under the plan or the filing of a motion for entry of a discharge under 11 U.S.C. § 1328(b)).28 However, an extension of up to an additional 45 days may be granted by the court if it finds justification for extending the period and the motion seeking the extension was filed within the initial 45 days.29
Post-Filing Education. In order to qualify for a discharge under Chapter 7 or 13 of the Bankruptcy Code, and in addition to the above pre-filing counseling, an individual debtor must “complete an instructional course concerning personal financial management” unless the debtor is determined by the court to be unable to do so due to incapacity, disability or active military in a combat zone.30 The course must be approved by the United States Trustee31 (the clerk of the court is required to “maintain a publicly available list of” those that are approved)32 and include an analysis of the “current financial condition” of the debtor, the “factors that caused [that] financial condition, and how [the debtor] can develop a plan” responsive to those problems (“without incurring negative amortization of debt”).33 Further, the debtor must file a statement that he or she has completed the course (in accordance with new Official Form 23) “within 45 days after the first date set for the meeting of creditors” in a case under Chapter 7, or, in a case under Chapter 13, “no later than the last payment made…as required by the plan or the filing of a motion for entry of a discharge.”34
Abuse and the Means Test. One of the most significant changes created by BAPCPA is the establishment of a “means test” for eligibility for the granting of relief under Chapter 7 to an individual whose debts are primarily consumer debts (see, 11 U.S.C. § 707(b)). Thus, “[a]fter notice and a hearing, the court, on its own motion or [that] by the United States trustee, [the] trustee…or any party in interest, may dismiss” the case or, with the consent of the debtor, convert it to one under Chapter 11 or 13 “if it finds that…granting…relief would be an abuse of the provisions of [Chapter 7].”35 A presumption of abuse will arise if the income of the debtor exceeds certain limits.36 The case also can be dismissed even if the presumption either does not arise or is rebutted if the court finds the petition was filed by the debtor in bad faith or “the totality of the circumstances…of the financial situation of the debtor (“including whether the debtor [is] seek[ing] to reject a personal services contract”) demonstrates abuse.37
The filing of a case that is dismissed can prove costly to the attorney for the debtor. Specifically, “[t]he court, on its own initiative or on the motion of a party in interest,…may order the attorney…to reimburse the trustee for all reasonable costs in prosecuting a motion filed under § 707(b)” if the motion was filed by the trustee, the motion is granted, and the action of the attorney “violated rule 9011 of the Federal Rules of Bankruptcy Procedure.”38 A civil penalty may also be assessed against the attorney.39 Likewise, the court “may award a debtor all reasonable costs (including reasonable attorneys’ fees) in contesting a motion filed by a party in interest (other than a trustee or United States trustee…)” if “the court does not grant the motion” and makes certain findings relative to Rule 9011 FRBP or the failings of the attorney for the movant or that the motion was filed for the sole “purpose of coercing a debtor [to] waiv[e] a right guaranteed” under the Bankruptcy Code.40
Exemptions - General. A debtor is entitled to exempt certain property of the estate.41 Whether the exemptions are available under federal or state law is dependent on state law.42 Missouri provides that its exemption statutes are to be used rather than those provided under 11 U.S.C. § 522(d).43 However, whether a debtor is eligible for Missouri exemptions depends upon how long the debtor has lived in Missouri. A debtor may claim exemptions under the laws of the state in which the debtor was domiciled for the 730 days immediately preceding the date of the filing of the petition commencing the bankruptcy case, or, if the debtor was not domiciled in only one state during the 730-day period, then the place in which the debtor was domiciled “for 180 days immediately preceding the 730-day period or for a longer portion of [that] 180-day period than in any other place.”44 If the effect “is to render the debtor ineligible for any exemption,” then he or she may elect to exempt property under 11 U.S.C. § 522(d).45
Exemptions - Tenancy by the Entireties. BAPCPA does not change the exemption available in Missouri for real and personal property held by a husband and wife as tenants by the entireties. Even the homestead limitations noted below do not appear to apply to a homestead held by a husband and wife as tenants by the entireties.46
Exemptions - Homestead.
[A] debtor may not exempt [under state law] any amount of interest [he or she] acquired…during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 in value in – (A) real or personal property that the debtor or a dependent uses as a residence; (B) a cooperative that owns property that the debtor or a dependent…uses as a residence; (C) a burial plot for the debtor or a dependent…; or (D) real or personal property that the debtor or a dependent claims as a homestead.47 (collectively, “Homestead Prop-erty”).
However, the limitation does “not apply to an exemption claimed . . . by a family farmer for [his or her] principal residence,” or any interest transferred from the previous residence of the debtor (if it was acquired prior to the 1,215-day period) into the current residence of the debtor if the prior “and current residences are located in the same State.”48
In addition, a debtor may not exempt any interest in homestead property in excess of $125,000 (except to the extent it is shown to be reasonably necessary to the support of the debtor and any dependent of the debtor) if: (i) he or she has been convicted of a felony and the court determines that, under the circumstances, the filing of the bankruptcy case was an abuse of the Bankruptcy Code; or (ii) he or she owes a debt arising from violations of federal or state securities laws, fiduciary fraud, racketeering, or “any criminal act[s], intentional tort[s], or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding 5 years.”49
The value of an interest in homestead property may also be reduced.50 The reduction will be that amount by which the value is attributable to any non-exempt property having been converted by the debtor during the 10-year period prior to and ending on the date of the filing of the petition with the intent to hinder, delay or defraud a creditor.51
The $125,000 cap is not likely to apply in Missouri because the maximum Missouri homestead exemption is $15,000.52 Nor does this cap appear to apply to tenancies by the entireties.53 However, it may be important for Missouri residents considering moving to another state (such as Kansas) to take advantage of its more liberal homestead exemption.54
Exemptions - IRAs. Assets in individual retirement account plans (under § 408 (other than 408(k) or (p)) or 408A of the Internal Revenue Code) are exempt up to $1,000,000 (“without regard to amounts attributable to rollover contributions” and earnings on them).55 This is applicable in addition to the exemption as to such accounts provided under § 513.430(10)(f), RSMo (however, that exemption is not applicable to the claim of an alternate payee under a qualified domestic relations order).
Exemptions - Trusts. The “transfer of an interest of the debtor in property that was made on or within 10 years” prior to the filing of the petition may be avoided by the trustee in the bankruptcy case.56 Specifically, avoidance is possible if: (i) the “transfer was made by the debtor” “to a self-settled trust or similar device;” (ii) “the debtor is a beneficiary of [the] trust” or device; and (iii) “the debtor made [the] transfer with [the] actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date [the] transfer was made, indebted.”57
Reaffirmation or Redemption of Personal Property Subject to a Lien. An individual in a case under Chapter 7 of the Bankruptcy Code may “not retain possession of personal property” subject to an allowed claim for all or part of the purchase price that is secured by the property unless, within “45 days after the first meeting of creditors,” the debtor (i) “enters into a reaffirmation agreement with the creditor” or (ii) redeems the property.58 The failure to so act within the 45-day period results in the termination of the automatic stay unless, pursuant to the motion of the trustee filed prior to the expiration of the 45-day period, the court, after notice and a hearing, determines that the “property is of consequential value or benefit to the estate,” orders adequate protection of the interest of the creditor, and orders the debtor to deliver the collateral to the trustee.59
If the debtor elects to reaffirm the indebtedness to such a secured creditor (or any other creditor), an agreement must be entered into before a discharge is granted to the debtor that includes certain disclosures and is filed with the court (and, if the debtor is represented by an attorney, a declaration or affidavit from the attorney which states the “agreement represents a fully informed and voluntary agreement by the debtor,” “does not impose an undue hardship on the debtor or a dependent,” and that “the attorney fully advised the debtor of the legal effect and consequences of” the agreement and any default under it).60 The required disclosures are numerous and specific (see, 11 U.S.C. § 548(k)).
Discharge Time Limits. The time which must pass following the granting of a discharge to an individual debtor in a case pursuant to Chapter 7 (11 U.S.C. § 727) or Chapter 11 (11 U.S.C. § 1141) before that debtor is eligible for another discharge under Chapter 7 has been extended from six years to eight years.61 The requisite amount of time if the debtor was previously granted a discharge pursuant to Chapter 12 (11 U.S.C. § 1228) or Chapter 13 (11 U.S.C. § 1328) remains unchanged at “six years [from] the date of the filing of the petition, unless [the] payments under the plan in [the prior] case totaled at least” (i) “100 percent of the allowed unsecured claims in that case” or (ii) 70 percent of the allowed unsecured claims, “the plan was proposed…in good faith, and was the… best effort” of the debtor.62
Domestic Support Obligations. “Domestic support obligation” is now a defined term.63 It constitutes a debt (including interest) “that accrues before, on, or after the” order for relief commencing the bankruptcy case that is “owed to or recoverable by…a spouse, former spouse, or child of the debtor” (or the “parent, legal guardian, or responsible relative” of the child) that is “in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit),” without regard as to whether it is expressly designated as such, “established or subject to establishment before, on, or after the date of the order for relief” by reason of “a separation agreement, divorce decree, . . . property settlement agreement,” court order or a determination made by a governmental unit, and that is “not assigned to a nongovernmental entity” other than “for the purpose of collecting the debt.”64
Domestic support obligations are non-dischargeable.65 Similarly, an indebtedness “to a spouse, former spouse or child of the debtor” that is not a domestic support obligation but was incurred “in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order [,]…or a determination made [by a governmental unit] in accordance with [s]tate or territorial law,” is non-dischargeable (the creditor also is no longer being required to initiate an adversary proceeding seeking such a determination) except in a case under Chapter 13.66
The automatic stay provided under 11 U.S.C. § 362(a) does not apply to certain aspects pertaining to domestic support obligations. Specifically, the following are not stayed: (i) “the commencement or continuation of a civil action or proceeding” to establish or modify “an order for domestic relations support obligations;” (ii) “the collection of a domestic support obligation from property that is not property of the estate;” (iii) “the withholding of income that is property of the estate or property of the debtor for payment of a domestic support obligation” pursuant to an order or statute; and (iv) the reporting to a consumer reporting agency of overdue child support.67
The priority of “[a]llowed unsecured claims for domestic support obligations” was raised from seventh to first under 11 U.S.C. § 507(a).68 However, that ranking is subordinate to certain allowed administrative expenses of a trustee to the extent he or she administered assets that became available for the payment of the domestic support obligation.69
Domestic support obligations also play an important role in cases under Chapter 12 and Chapter 13. In order for a plan to be eligible for confirmation under either Chapter 12 or 13, the debtor must be current on all post-petition domestic support obligations.70 Eligibility for a discharge also requires that the debtor file a certification following the completion of payments under the plan that all amounts payable under the domestic support obligation through the date of the certification (including the amount due pre-petition, “but only to the extent provided for [under] the plan”) have been paid.71 The failure to pay a domestic support obligation that comes due after the filing of the petition also constitutes a possible ground for dismissal of the case or, in the instance of a case under Chapter 13, its conversion to one under Chapter 7.72
The recipient of a domestic support obligation payment is allotted certain further protection. Specifically, so long as the transfer represented by the payment of the domestic support obligation was bona fide, it may not be avoided as preferential under 11 U.S.C. § 547(b).73
Changes to Chapter 12. Chapter 12, which formerly had only temporal status, has been permanently reenacted.74 Various other changes have been made with respect to Chapter 12.
Formerly, the only person who could qualify to be a debtor under Chapter 12 was a family farmer with regular annual income. However, that has been expanded to include a “family fisherman with regular annual income.”75 A family farmer/fisherman with regular income is a family farmer/fisherman “whose annual income is sufficiently stable and regular to enable [that family farmer/fisherman] to make payments under a plan under chapter 12.”76 Just as the family farmer must own or operate a farming operation (as defined in 11 U.S.C. § 101(21)), the family fisherman must own or operate a commercial fishing operation (as defined in 11 U.S.C.
§ 101(7)(A)).77
The aggregate debt ceiling to qualify as a family farmer has been raised from $1,500,000 to $3,237,000.78 However, with respect to a family fisherman, the aggregate amount of debts cannot exceed $1,500,000.79 There are further requirements that must be met in order to qualify as a family farmer or family fisherman, and which differ if the debtor is an individual (or individual and spouse) or a corporation or partnership.80
Changes to Chapter 13. The qualifications to be a debtor under Chapter 13 were not changed by BAPCPA. However, whether the period of time over which a Chapter 13 plan may provide for payments may exceed three or five years will be determined by the combined current monthly income of the debtor and spouse of the debtor, the size of the household of the debtor, and the applicable median family income in the state (although the court may allow for a period beyond the three-year limitation if it finds that cause exists to do so, but the period cannot be longer than five years).81
The confirmation of a plan that is not accepted by the holder of an allowed secured claim or that does not provide for the surrender of the collateral is dependent on the treatment of the claim (including the length of time the lien that secures the claim is to be retained by the holder of the claim, the value of the property to be distributed with respect to the claim, and the amount and frequency of periodic payments).82 The amount of the secured claim also cannot be reduced under the plan to the value of the collateral if: (i) the collateral is a motor vehicle for the personal use of the debtor in which the holder of the claim has a purchase money security interest and the debt was incurred within 910 days prior to the date the petition was filed; or (ii) the collateral is anything else of value so long as the debt was incurred within the one-year period preceding the filing of the petition.83
A Chapter 13 plan also may not be confirmed “[i]f the trustee or the holder of an allowed unsecured claim objects” and the plan fails to provide for all of the disposable income of the debtor to be received for the entire “applicable commitment period beginning on the date” the initial payment is due “will be applied to make payments to [such] unsecured creditors.”84 “Disposable income” is defined85 and “applicable commitment period” is determined by factors such as the combined “current monthly income of the debtor and…spouse” of the debtor, the size of the household of the debtor, the applicable median family income in the state, and the period over which “the plan provides for [the] payment in full of allowed unsecured claims.”86
The scope of debts that are dischargeable under Chapter 13 has been reduced.87 Thus, Chapter 13 will no longer afford the debtor a vehicle to achieve the discharge of certain debts that would not be dischargeable under Chapter 7.
Business Changes
Small Businesses. Prior to BAPCPA, any debtor in Chapter 11 with aggregate debts of less than $2,000,000 could “elect” to be treated as a “small business.” Doing so entitled the company to request that a creditors’ committee not be appointed, entitled the debtor to a modified exclusive period to file a plan, and allowed the debtor additional flexibility in getting a disclosure statement approved prior to confirming a plan.
Under BAPCPA, there is no election – a debtor88 in Chapter 11 with aggregate debts of less than $2,000,00089 is deemed a “small business” so long as no unsecured creditors committee has been appointed90 or the court has determined that the committee “is not sufficiently active and representative. . . .”91 Moreover, such debtors are subject to more stringent requirements, including detailed financial disclosures;92 a blanket exception to the automatic stay if the debtor had a prior case dismissed, or a plan confirmed, within two years before the current case was filed;93 increased supervision by the United States Trustee;94 and prompt confirmation of a plan after it is filed.95 On the other hand, such debtors can obtain a potentially unlimited exclusive period to file a plan96 (compared to the 18-month absolute deadline provided for other debtors, discussed below); and have even more flexibility in obtaining approval of a disclosure statement.97
Given the increased difficulty in filing a Chapter 7 case, and the new limitations on Chapter 13 cases, all of which are summarized above, more Chapter 11 cases may occur. To the extent those cases involve individuals or businesses with less than $2 million in debts, a “small business” Chapter 11 case process may develop whereby these cases are processed fairly quickly, much like Chapter 13 cases. Creative counsel may even be able to structure these cases to create a “breathing period” between filing and plan confirmation that may last about 10 months, thus enabling their clients a solid opportunity to improve their financial affairs and make a return trip to the bankruptcy court less likely. At the same time, Chapter 11 also may be used by creative counsel to draw out a case that should be dismissed or converted.
Single Asset Real Estate Businesses. Prior to BAPCPA, special bankruptcy provisions applicable to “single asset real estate” cases were limited to property with secured debt of up to $4 million.98 Under BAPCPA, the $4 million debt limit has been removed; hence any “single asset real estate” debtor may be subject to these rules.99 Classic examples of such an entity include limited liability entities that own a strip shopping center, a commercial office building, an apartment complex, etc. Note, however, that properties such as a hotel or a nursing home will not qualify under this definition because they generate substantial business outside of operating the real estate.
If a case involves single asset real estate, then any creditor with a lien on that property may obtain relief from the automatic stay on or after the 91st day after the case is filed (subject to extension under certain circumstances) unless, prior to that date, the debtor either (a) “file[s] a plan of reorganization that has a reasonable possibility of being confirmed,” or (b) commenced monthly payments equal to at least the “applicable nondefault contract rate of interest on the [lesser of the fair market] value” of the property or the debt secured by the property.100 Prior to BAPCPA, the Bankruptcy Code only required payment of a “fair market rate” of interest.
Debtors might avoid this provision by modifying their business before filing a Chapter 11 case. For example, the people who control the debtor might combine other properties that they control into the debtor, or they might commence “substantial business” on the property that is unrelated to ownership and operation of the real estate itself. Of course, the timing and motives for doing this may be factored by the bankruptcy court into a variety of remedies, including relief from the automatic stay, conversion, and dismissal of the case.
Health Care Businesses. BAPCPA contains substantial provisions that apply to any “health care business,” defined as “any public or private entity . . . engaged in offering to the general public facilities and services for – (i) the diagnosis or treatment of injury, deformity, or disease; and (ii) surgical, drug treatment, psychiatric, or obstetric care”101 and specifically includes any hospital; “hospice;” “home health agency;” “skilled nursing facility;” “assisted living facility;” “intermediate care facility;” or similar facility.102 Note that this definition requires both facilities and services. Query whether a particular health care provider might avoid it by creating separate entities for each.
Any “health care business” that files a Chapter 7, 9 or 11 bankruptcy case will be subject to appointment of a patient care “ombudsman” within 30 days after the case is filed “to monitor the quality of patient care and to represent the interests of the patients…unless the court finds that the appointment of such ombudsman is not necessary for the protection of patients under the specific facts of the case.”103 Needless to say, the introduction of this party into health care business bankruptcy cases creates an added expense and decision-making factors that need to be incorporated into the overall handling of the case by all relevant parties.
In addition, any such health care business that lacks sufficient funds to store patient care records in accordance with applicable federal or state law must go through a detailed process under BAPCPA.104 Among other things, this process requires publishing a notice allowing patients to pick up their records for up to one year after publication, promptly attempting to directly contact each patient and insurance company for the first 180 days after publication, sending a certified letter to each appropriate federal agency at the end of such one year period requesting permission to deposit any remaining records with such agency, and appropriately destroying any patient records not so picked up or deposited.
If a health care business is “in the process of being closed,” then the trustee is obligated to “use all reasonable and best efforts to transfer patients” to a nearby health care business that provides substantially similar services and “maintains a reasonable quality of care.”105 If a health care business is closed, BAPCPA specifies that “the actual, necessary costs” of closing such “business incurred by a trustee” or a relevant federal or state authority must be allowed as an administrative expense, “including any cost or expense incurred in disposing of patient records” as provided above and transferring patients to another health care business.106 Among the many interpretive issues with these provisions are what constitutes a “closing,” why these expenses are limited to “closed” health care businesses, and why the costs and expenses of a patient care ombudsman are not included.
General Debtor Provisions. Outside of the above provisions applicable to specific business debtors, there are many provisions in BAPCPA applicable to all Chapter 11 debtors. The most notable provisions involve limitations on insider compensation, the deadline to assume or reject nonresidential real estate leases, and the exclusive period to file a plan of reorganization.
General Business Debtor Provisions - Insider Compensation. Prior to BAPCPA, there were no clear provisions of the Bankruptcy Code limiting the compensation paid to an insider after a case was filed.107 This led to many debtors adopting significant severance and related employment agreements for senior management immediately before filing bankruptcy, and other debtors to request court approval of “key employee retention plans” after filing bankruptcy. Many of these provisions were controversial, either in the particular case or in the court of public opinion.
The insider compensation provisions in BAPCPA arguably are intended to put limits on key employee retention plans and severance agreements.108 However, the language of these provisions arguably is much broader and may require that a debtor obtain bankruptcy court approval of virtually any transfer or obligation incurred to an insider or consultant.109 Moreover, the bankruptcy court arguably is prohibited from approving any such transfer or obligation unless, among other limitations, the person “has a bona fide job offer from another business at the same or greater rate of compensation.”110 Counsel for any prospective Chapter 11 debtor should carefully advise all insiders and consultants of the potential scrutiny of their compensation.
General Business Debtor Provisions - Nonresidential Real Estate Leases. Prior to BAPCPA, one of the powerful features of the Bankruptcy Code was the ability of a debtor to assume, assume and assign, or reject unexpired leases of non-residential real property. The deadline to do this was 60 days after the case was filed, unless the debtor got the court to extend the deadline. Such extensions were common and generally lasted until the effective date of a confirmed plan, subject to any party seeking an earlier deadline upon a showing of cause.
BAPCPA changes these deadlines by extending the initial 60-day deadline to 120 days, allowing a debtor to obtain one 90-day extension, and requiring any further extension to be granted “only upon prior written consent of the lessor in each instance.”111 This may force some debtors to assume some non-residential real estate leases before they otherwise are ready to sell their assets or confirm a plan. In an apparent effort to mitigate this risk, BAPCPA also provides that a debtor may reject such a lease after it is assumed and that (a) any administrative claim arising from such rejection is capped at “all monetary obligations due, excluding those arising from or relating to a failure to operate or a penalty provision” for two years after the later of rejection or surrender of possession “without reduction or setoff for any reason whatsoever except from sums actually received or to be received from an entity other than the debtor,” and (b) the balance of any claim is a general unsecured claim in the case.112
General Debtor Provisions - Exclusive Period to File a Plan. Prior to BAPCPA, a debtor enjoyed the exclusive right to file a plan for 120 days after the case was filed, subject to one or more unlimited extensions upon a showing of “cause.” This caused some debtors with cooperative judges to remain in control of their bankruptcy cases for many years.
BAPCPA limits any extension of this deadline to 18 months after the case was filed.113 Note, however, that expiration of this period simply allows other parties to file their own plan – it does not obligate a debtor to file a plan. Moreover, it says nothing about what the court should do if a third party files a plan and the debtor does not, or both the debtor and a third party file a plan.
Trade Creditor Claims. Two new provisions of BAPCPA significantly increase the potential for unsecured trade creditors to get paid in full (and thereby lower the benefits, and raise the costs, of filing bankruptcy to a debtor and other parties). As described in more detail below, the first provision appears to give trade creditors a 45-day reclamation right.114 And the second provision appears to entitle a trade creditor to an administrative expense claim for any goods delivered within 20 days before the bankruptcy case is filed.115
Prior to BAPCPA, reclamation rights were limited to goods delivered within 10 days prior to the filing of the bankruptcy case.116 In addition, the court had the discretion to deny reclamation (i.e., return of the goods) and substitute an administrative claim or a lien on assets. However, most reclamation claims were not paid in full because of proof problems,117 and because most courts held that reclamation claims were subordinate to a lender with a prior perfected security interest in inventory. Moreover, the availability of an administrative claim in lieu of reclamation allowed the debtor to defer any payment on reclamation claims until confirmation of a plan.
BAPCPA appears to change much of this. First, it expands the reclamation period to all goods delivered within 45 days prior to the filing of the bankruptcy case.118 Second, it deletes the alternative remedies of an administrative claim and a lien, thus suggesting that the court needs to allow the creditor to pick up the goods subject to reclamation.119 Although most creditors probably will not want to do this as long as they can get paid the value of the goods, the threat of possibly doing this could be significant. Third, it does not clearly require that the reclaiming creditor prove that the goods were in the debtor’s possession when the case was filed (although that may be implicit if the only remedy is to order return of the goods). At a minimum, these provisions give trade creditors much more leverage at the beginning of a case.
However, BAPCPA also contains some potentially significant limits on this new reclamation remedy. First, it now explicitly makes reclamation subject to the prior rights of a secured creditor in the goods.120 Presumably this makes reclamation rights subordinate to a prior secured claim, but debtors and secured lenders might argue that it eliminates reclamation claims if there is a prior secured claim. Second, it requires proof that the debtor was “insolvent” during the 45-day period. Debtors can be expected to dispute this for the primary purpose of negotiating settlements for less than the full amount of reclamation claims. Last, debtors may try to use the deletion of the administrative claim and lien options, and the threat of allowing the creditor to pick up the goods, as leverage for negotiating a compromise involving an administrative claim or lien.
In addition to these new reclamation rights, BAPCPA also allows an administrative claim for “the value of any goods received by the debtor within 20 days before [the case is filed] in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.”121 This is completely new, and it raises a number of issues. First, it is limited to the value of the goods, not necessarily the invoice amount (although most courts are likely to presume that the invoice amount represents the value of the goods). Second, it is limited to goods and not other items such as services. This may lead to disputes and negotiations over allocation of invoice amounts. Third, debtors can be anticipated to assert any available argument that the sale was not in the ordinary course of such debtor’s business for the purpose of negotiating a compromise. Last, its relationship to the reclamation provision above is unclear. Is this an alternative remedy? Is it primary or secondary to reclamation? Could a creditor seek a double recovery (reclamation and an administrative claim for the same goods)? On this last point, the only clue is that § 546(c)(2) provides that a seller who fails to give a reclamation notice “still may assert” this administrative claim.
These provisions also probably will further erode the preference provisions of the Bankruptcy Code, discussed below. For example, even if a creditor fails to assert either a reclamation right or an administrative claim for payment, the creditor may assert them as a defense to a preference complaint. For example, a creditor that was paid in full via a transfer that is potentially avoidable as a preference may now defend a lawsuit to recover the preference by asserting that the creditor would have otherwise had a reclamation or administrative expense claim that would have been paid in full, thus negating the requirement that the preference result in the creditor recovering more than if the creditor had not been paid.122
Preferences. Prior to and after BAPCPA, a debtor can sue unsecured creditors to recover certain transfers made within the 90 days before the debtor filed bankruptcy.123 One of the primary defenses to such an action is that the transfer was “in the ordinary course of business.”124 Prior to BAPCPA, this defense required proof that the transfer was “ordinary” between the creditor and debtor and for the relevant “industry.” This created a difficult challenge for most defendants – if they had a history of doing business with a debtor and the payment terms changed in any material way during the 90-day preference period, they might lose the defense. Alternatively, any defendant with a consistent history of payments from a debtor may lose the defense if they could not produce an appropriate expert to testify that the payments were “ordinary” for the relevant industry. This led to most preference cases being settled on terms favorable to the debtor.
BAPCPA has changed this significantly. Now a defendant can establish the ordinary course of business defense by proving either that it was ordinary between the parties or that it was ordinary for the industry.125 This alone should significantly decrease the settlement amounts debtors can obtain from creditors. Further assisting in this process are two other changes in BAPCPA.
First, BAPCPA creates a new defense in non-consumer cases if “the aggregate value of all property that constitutes or is affected by such transfer is less than $5,000.”126 Note that this provision appears to apply to each transfer – a creditor that receives a series of transfers, each of which is less than $5,000, may have a complete defense under this provision. Alternatively, this provision may not apply at all if the transfers in question exceed $5,000 in the aggregate.
Second, BAPCPA changes the venue provisions applicable to preference cases to require that suit be brought where the defendant “resides” in actions to recover (i) “a money judgment of or property worth less than $1,000,” (ii) “a consumer debt of less than $15,000,” and (iii) “a debt (excluding a consumer debt) against a noninsider for less than $10,000.”127 As with the $5,000 defense noted above, this provision might be interpreted to apply to any transfer for less than $10,000, even if the aggregate amount of all transfers exceed $10,000.
Committees. Two new provisions in BAPCPA should help unsecured creditors get more information about debtors from any unsecured creditors’ committee. First, BAPCPA makes it easier for unsecured creditors to pursue a seat on an unsecured creditors' committee by allowing the court to “order the United States trustee to [(a)] change the membership of a committee
. . . if the court determines that the change is necessary to ensure adequate representation of creditors,” and (b) “increase the number of members of a committee to include… a small business concern (as [defined in] the Small Business Act), if the court determines that the creditor[‘s]…claims” are “disproportionately large” “in comparison to the annual gross revenue of that creditor.”128 While helpful, most unsecured creditors do not have the time or inclination to serve on such committees.
Second, BAPCPA requires a committee to “(A) provide access to information for the creditors” it represents, “(B) solicit and receive comments from [such] creditors,” and “(C) be subject to a court order that compels any additional report or disclosure.”129 These provisions arguably might require the disclosure of material non-public information, invade the attorney-client privilege, or otherwise undermine the relationships among a debtor, a committee, and the parties represented by the committee. However, most debtors and committees probably will seek court orders clarifying when and how information should be shared. The most direct beneficiaries of these provisions may be third parties that buy claims in bankruptcy cases. However, unsecured creditors may then benefit from being able to sell their claims more easily and possibly for a higher price.
Footnotes
1 Paul M. Hoffmann is a partner in the Bankruptcy & Creditors Rights Practice Division of Stinson Morrison Hecker, LLP. He is certified in business bankruptcy law by the American Board of Certification, and has focused his practice on business bankruptcy cases for more than 20 years.
Jerald S. Enslein is an attorney with Gallas & Schultz in Kansas City, whose concentration is in the areas of bankruptcy, workouts and creditors’ rights. He is a member of the panel of bankruptcy trustees in the Western District of Missouri and certified in business bankruptcy law by the American Board of Certification.
The views expressed herein are solely those of the authors and not their law firms.
2 Pub. L. 109-8, 119 Stat. 23 (2005)(current version at 11 U.S.C. § 101 et. seq.). All future citations will be to the Bankruptcy Code, 11 U.S.C. §§ 101 et. seq., as amended by BAPCPA.
3 See, e.g., Headnote, Senate Passes Major Bankruptcy Overhaul, 24 American Bankruptcy Institute Journal 1 (April 2005).
4 See the proposed interim rules based on BAPCPA (“interim rules”), available at http://www.uscourts.gov/rules/interim.html.
5 Those persons who do not constitute a debt relief agency are specifically denoted in 11 U.S.C. § 101(12A) (2005), including “any person who is an officer, director, employee, or agent of a person who” constitutes a debt relief agency. See, 11 U.S.C. §§ 101(12A)(A) through (E).
6 11 U.S.C. § 101(41) (2005).
7 11 U.S.C. § 101(12A) (2005).
8 11 U.S.C. § 101(3) (2005).
9 11 U.S.C. § 101(8) (2005).
10 11 U.S.C. § 101(3) (2005).
11 11 U.S.C. § 101(4A) (2005).
12 11 U.S.C. § 527 (2005).
13 11 U.S.C. § 527(a)(2) (2005).
14 11 U.S.C. § 528(a)(1).
15 Id.
16 11 U.S.C. § 528(a)(2).
17 11 U.S.C. § 526(c)(1).
18 11 U.S.C. §§ 528(a)(3), (a)(4) and (b).
19 11 U.S.C. § 528(b)(2).
20 Id.
21 11 U.S.C. § 526(c)(2)(A-C) (2005).
22 2006 WL 1737405 (E.D. Pa. June 19, 2006).
23 2006 WL 2088270 (N.D. Tx. July 26, 2006).
24 Case No. 05-6365-HO (D. Ore. Aug. 11, 2006).
25 11 U.S.C. § 109(h)(1).
26 11 U.S.C. § 109(h)(4).
27 11 U.S.C. § 109(h)(3).
28 11 U.S.C. § 521(i)(1).
29 11 U.S.C. § 521(i)(3) ; Rule 1007(b)(3) of the interim rules.
30 11 U.S.C. §§ 727(a)(11) and 11 U.S.C. § 1328(g)(1).
31 Id. and 11 U.S.C. § 111.
32 Id.
33 11 U.S.C. § 111(c)(2)(E).
34 Rules 1007(b)(7) and (c) of the interim rules.
35 11 U.S.C. § 707(b)(1).
36 11 U.S.C. § 707(b)(2).
37 11 U.S.C. § 707(b)(3).
38 11 U.S.C. § 707(b)(4)(A).
39 11 U.S.C. § 707(b)(4)(B).
40 11 U.S.C. § 707(b)(5)(A).
41 11 U.S.C. § 522(b)(1).
42 11 U.S.C. § 522(b)(2).
43 Section 513.427, RSMo Supp. 2005.
44 11 U.S.C. § 522(b)(3)(A).
45 11 U.S.C. § 522(b)(3).
46 Compare 11 U.S.C. § 522(b)(3)(A) and (B).
47 11 U.S.C. § 522(p); this provision became effective upon passage of BAPCPA.
48 11 U.S.C. § 522(p)(2)(A).
49 11 U.S.C. § 522(q).
50 11 U.S.C. § 522(0).
51 Id.
52 Section 513.475, RSMo Supp. 2005.
53 See fn. 44 above.
54 Kan. Stat. Ann. § 60-2301 (2005).
55 11 U.S.C. § 522(n).
56 11 U.S.C. § 548(e)(1).
57 Id.
58 11 U.S.C. § 521(a)(6).
59 11 U.S.C. § 521 (a)(7).
60 11 U.S.C. § 524(c).
61 11 U.S.C. § 727(a)(8).
62 11 U.S.C. § 727(a)(9).
63 11 U.S.C. § 101(14A).
64 Id.
65 11 U.S.C. § 523(a)(5).
66 11 U.S.C. §§ 523(a)(15), (c)(1) and 1328(a).
67 11 U.S.C. § 362(b)(2).
68 11 U.S.C. § 507(a)(1).
69 11 U.S.C. § 507(a)(1)(C).
70 11 U.S.C. §§ 1225(a)(7) and 1325(a)(8).
71 11 U.S.C. §§ 1228(a) and 1328(a).
72 11 U.S.C. §§ 1208(c)(10) and 1307(c)(11).
73 11 U.S.C. § 547(c)(7).
74 BAPCPA § 1001(a)(1).
75 11 U.S.C. § 109(f).
76 11 U.S.C. §§ 101(19) and (19B).
77 11 U.S.C. §§ 101(18) and (19A).
78 11 U.S.C. § 101(18).
79 11 U.S.C. § 101(19A).
80 11 U.S.C. §§ 101(18) and (19A).
81 11 U.S.C. § 1322(d).
82 11 U.S.C. § 1325(a)(5).
83 11 U.S.C. § 1325(a)(9).
84 11 U.S.C. § 1325(b)(1).
85 11 U.S.C. § 1325(b)(2).
86 11 U.S.C. § 1325(b)(4).
87 11 U.S.C. § 1328(a).
88 Excluding any member of a group of affiliated debtors with aggregate debts in excess of $2,000,000. 11 U.S.C. §101(51D).
89 Excluding debts to affiliates or insiders. 11 U.S.C. §101(51D).
90 The debtor and other parties may still request that such a committee not be appointed. 11 U.S.C. § 1102(a)(3).
91 11 U.S.C. § 101(51D)(A).
92 11 U.S.C. §§ 308(b) and 1116.
93 11 U.S.C. § 362(n).
94 11 U.S.C. § 1116(7) and 28 U.S.C. § 586(a)(7).
95 11 U.S.C. § 1129(e).
96 11 U.S.C. § 1121(e) (note: extensions beyond 300 days require proof of specified circumstances in the statute).
97 11 U.S.C. § 1125(f) (allows the plan itself to potentially be considered a disclosure statement, and use of “standard forms”).
98 11 U.S.C. § 101(51B).
99 Id.
100 11 U.S.C. § 362(d)(3).
101 11 U.S.C. § 101(27A).
102 Id.
103 11 U.S.C. § 333(a).
104 11 U.S.C. § 351.
105 11 U.S.C. § 704(a)(12). Note that this provision is incorporated by reference in the duties of a chapter 11 trustee or debtor in possession via 11 U.S.C.
§§ 1106(a)(1) and 1107(a).
106 11 U.S.C. § 503(b)(8).
107 The bankruptcy court in the Western District of Missouri used to have a local rule that required court approval of insider compensation, but that has not existed for several years.
108 11 U.S.C. § 503(c).
109 See 11 U.S.C. § 503(c)(1) and (3).
110 11 U.S.C. § 503(c)(1)(A).
111 11 U.S.C. § 365(d)(4).
112 11 U.S.C. § 503(b)(7).
113 11 U.S.C. § 1121(d)(2).
114 11 U.S.C. § 546(c).
115 11 U.S.C. § 503((b)(9).
116 If the 10-day period had not expired prior to the filing of the case, then the period for submitting a reclamation notice was extended to 20 days after receipt of the goods by the debtor.
117 Among other things, the creditor needed to prove that the goods were still in the debtor’s possession when the bankruptcy case was filed.
118 11 U.S.C. § 546(c)(1)(A) and (B). Note that a demand for reclamation may be sent up to 20 days after commencement of a case if the 45 days includes the filing date.
119 This is inferred from the deletion of the administrative claim and lien provisions in the prior version of § 546 of the Bankruptcy Code.
120 11 U.S.C. § 546(c)(1).
121 11 U.S.C. § 503(b)(9).
122 See 11 U.S.C. § 547(b)(5).
123 11 U.S.C. § 547(b).
124 11 U.S.C. § 547(c)(1).
125 Id.
126 11 U.S.C. § 547(c)(9).
127 28 U.S.C. § 1409(b).
128 11 U.S.C. § 1102(a)(4).
129 11 U.S.C. § 1102(b)(3).