72 CBJ 146. Bankruptcy Law Survey- Selected 1996 and 1997 Decision of the United States Bankruptcy Court For the District of Connecticut and the United States Court of Appeal for the Second Circuit.

• Author: By CARL T. GuLLWER (fn*)

Connecticut Bar Journal

Volume 72.

72 CBJ 146.

Bankruptcy Law Survey- Selected 1996 and 1997 Decision of the United States Bankruptcy Court For the District of Connecticut and the United States Court of Appeal for the Second Circuit

Bankruptcy Law Survey- Selected 1996 and 1997 Decision of the United States Bankruptcy Court For the District of Connecticut and the United States Court of Appeal for the Second CircuitBy CARL T. GuLLWER (fn*)Total bankruptcy filings jumped in 1996 and 1997 in the District of Connecticut to record levels. Business bankruptcies in all chapters of the Code, however, peaked in 1990 at 445, fell over the next three years, and stagnated at about one-half the 1990 level for the past four years through 1997. The business cases in 1996, for instance, totaled 230, and in 1997, 205.

Consumer cases in all chapters had peaked previously in 1992 at 9,693 in the District of Connecticut, then shot up in excess of 11,000 in 1996 and 13,294 in 1997. Continuing at least a 10-year trend, an annually increasing percentage of the cases filed have been consumer cases, reaching almost 98'/2% in 1997.

Significant precedents in 1996 and 1997 in the United States Court of Appeals for the Second Circuit and the United States Bankruptcy Court for the District of Connecticut logically have dealt increasingly with consumer issues in Chapter 7 and Chapter 13 cases. Other matters of general impact in the bankruptcy field during the period include the report of the National Bankruptcy Review Commission, the institution of a Bankruptcy Appellate Panel Service for the Second Circuit, and the implementation of completely revamped Local Rules of Bankruptcy Procedure for the District of Connecticut.

I. LEGISLATIVE AND ADMINISTRATIVE DEVELOPMENTS

1. National Bankruptcy Revieto Commission

   Title VI of the Bankruptcy Reform Act of 19941 authorized creation of a 9-member commission to review bankruptcy issues and law and make recommendations over a 2-year period. The commission commenced its operations in October

   1995 and issued its 1,300-page report to Congress in October

   1997. Some of the significant proposals include the following:

   Article III status for bankruptcy judges;

   National filing system for debtor identification;

   Financial education programs for Chapter 7 and Chapter 13 debtors;

   Mandatory use of uniform federal exemptions, but for state-law homestead exemptions to be allowed in the range of $20,000.00-$100,000.00;

   Increased general exemption of $20,000.00, or $35,000.00 if no homestead;

   Revision of reaffirmation law (see below);

   Bright-line dischargeability tests on certain Section 523 matters;

   Elimination of student loan exception to discharge;

   Elimination of automatic stay for certain serial filings;

   Enhanced provisions for mass tort bankruptcy;

   Minimum $5,000.00 preference actions in business cases;

   Revision of small business bankruptcy provisions;

   Revision of partnership bankruptcy provisions;

   Numerous tax-related bankruptcy amendments.

   The NBRC report included a "scathing" 100-page dissent which foreshadowed significant debate in Congress. Even tighter restrictions on debtors' rights under bankruptcy law may result. (fn2)

2. Bankruptcy Appellate Panel Service

   Pursuant to provisions of the Bankruptcy Reform Act of 1994, codified at 28 U.S.C. Section 158 (b) (1), the judicial Council of the Second Circuit established a Bankruptcy Appellate Panel Service ("BAP") on May 3, 1996. On July 24, 1996, the United States District Court for the District of Connecticut entered a resolution directing that all appeals from final orders of the United States Bankruptcy Court for the District of Connecticut be referred to the BAP unless a party elects to have such appeal heard by the district court. The resolution further authorizes interlocutory appeals upon leave obtained from the BAR Bankruptcy appeals will be heard by a three-member panel of the BAP, comprising bankruptcy judges from jurisdictions other than the jurisdiction of the bankruptcy court from which the order appealed emanated, unless either 1) the appellant chooses at the time of the filing of the appeal, or 2) any other party to the appeal chooses within 30 days after service of the notice, to have the appeal heard by the United States District Court for the District of Connecticut. (fn3) The BAP also has implemented rules of procedure pursuant to Rule 8018 of the Federal Rules of Bankruptcy Procedure.

3. Local Rules of Bankruptcy Procedure

   On May 15, 1997, the United States Bankruptcy Court for the District of Connecticut put into effect new Local Rules of Bankruptcy Procedure, including use of a uniform national numbering system which logically relates to that of the Federal Rules of Bankruptcy Procedure. While allowing the continuance of differing local procedures of practice in each seat of the United States Bankruptcy Court for the District of Connecticut, the rules replaced the prior Local Bankruptcy Rules which had been dated by various changes to the Code and the Federal Rules.

   II. CASE Law

1. Sovereign Immunity - Section 106

   The Bankruptcy Reform Act of 1994 completely overhauled Section 1064 of the Code, substituting some 60 sections of the Code as to which sovereign immunity was specifically abrogated in place of the prior general waiver of Section 106(a). Congress intended, among other things, to overrule a United States Supreme Court decision of 1989 which had its genesis in a bankruptcy proceeding in Hartford, Hoffman v. Conn. Dept. of Income Maintenance. (fn5) Nonetheless, the effort was for little purpose due to the bankruptcy ramifications of A Seminole Tyibe of Florida v. Florida, (fn6) a Supreme Court decision holding unconstitutional sovereign immunity relating to Native American gaming laws. The decision has repeatedly been held applicable to Section 106 of the Bankruptcy Code.

   In the case of In re Charter Oak Associates, (fn7) for instance, the bankruptcy court determined that the Seminole case dictates the conclusion that the Bankruptcy Clause in Article I of the United States Constitution provides no authority for Congress to abrogate state sovereign immunity under 11 U.S.C. Section 106(a). In the case of In re Lewis; Harris, (fn8) judge Robert L. Krechevsky was called upon to determine the applicability of the Ex Parte Young exception to sovereign immunity under the Eleventh Amendment in a federal court action against an individual state officer to ensure the officer's conduct complies with federal law. (fn9) The claim at issue in Lewis; Harris was whether the infirmity of Section 106 of the Code barred the individual debtor from collecting damages from state officials for violation of the automatic stay. The court ruled that the Ex Parte Young doctrine "permits a federal court to provide prospective relief only, and does not permit a suit, like the present one, which seeks a compensatory award to be met from the state's general revenues." (fn10) Hence, the court determined it had no subject matter jurisdiction to enter any money judgment against the several individual officers who were defendants in the action unless Connecticut specifically waived its sovereign immunity or consented to the entry of judgment in the action.

   In the In re Charter Oak Associates (fn11) decision, judge Krechevsky also ruled that the provisions of Section 106(b) of the Bankruptcy Code, waiving immunity for transactions arising out of the same matter giving rise to a proof of claim filed by the governmental unit, and Section 106(c), allowing offset against a claim of a governmental unit, are valid and enforceable despite the impact of the Seminole case. Significantly in this connection, the court also ruled that all public agencies of a state are a single governmental unit for Eleventh Amendment immunity purposes and setoff purposes under Section 106, and thus a proof of claim filed by the Connecticut Department of Revenue Services waives sovereign immunity for all agencies of the state.

2. Chapter 11 Qualification - Section 109(d)

   The United States Court of Appeals for the Second Circuit in In re C-TC 9th Avenue Partnership (fn12) determined that a partnership in dissolution was not qualified to be a debtor under Chapter 11. The entity was prohibited under New York partnership law from new business and thus could not seek reorganization and a fresh start under Chapter 11.

3. Chapter 13 Qualification - Section 109(e)

   The United States District Court for the District of Connecticut overruled a bankruptcy decision which had caused great consternation among the bankruptcy bar with respect to potential limitation of the use of "Chapter 20s." A debtor may find it strategically appropriate to obtain a discharge of unsecured debts, and personal liability on secured debts, in Chapter 7 prior to commencing a Chapter 13 proceeding. One reason such procedure is necessary is that Section 109 of the Code includes debt limitations for Chapter 13 debtors which, although extended to $250,000.00 for unsecured and $750,000.00 for secured debts by the Bankruptcy Reform Act of 1994, still will bar certain debtors from Chapter 13. In addition, in Chapter 13 the debtor is empowered under current law to bring motions to void certain mortgages and liens which cannot be voided under provisions applicable in Chapter 7.

   In the case of In re Cavaliere (fn13) the bankruptcy court had ruled that where a Chapter 13 petition followed a Chapter 7 discharge and the debtor sought in Chapter 13 the avoidance of liens that secured previously...