74 CBJ 160. 1998-1999 Bankruptcy Law Survey.

• Author: By CARL T. GULLWER (fn*)

Connecticut Bar Journal

Volume 74.

74 CBJ 160.

1998-1999 Bankruptcy Law Survey

1601998-1999 Bankruptcy Law SurveyBy CARL T. GULLWER (fn*)The total number of bankruptcy petitions in the District of 'Connecticut continued to climb in 1998, and then dropped 15% in 1999. The 1998 total for the District reached a record 13,962, while in 1999 the number fell to 11,860. (fn1) The national total also declined by 8.5% in 1999 but still was the third highest ever.

Business filings in Connecticut continued their downward slide for a fourth successive year. The proportion of total filings that involved primarily consumer debts increased slightly in 1998 to 98.8%, and remained essentially the same in 1999.

Both 1998 and 1999 turned out to be years "needs based" consumer bankruptcy amendments addressing the burgeoning crop of consumer cases twice nearly, but not quite, made it into law. Nonetheless, while such sweeping changes at least were delayed, still a number of important legislative amendments were enacted. In addition, five important decisions were issued by the United States Supreme Court, and as well as about 50 by the appellate courts. The United States Bankruptcy Court for the District of Connecticut addressed a wide array of issues in over 75 reported decisions that were resolved at the trial court level.

In 1999 The Honorable Lorraine Murphy Weil was appointed to the bench of the United States Bankruptcy Court for the District of Connecticut. Bankruptcy Judge Weil sits in New Haven while The Honorable Robert L. Krechevsky, who resigned and was simultaneously appointed as a recalled judge in March 1998, continues to sit and hear all cases in the Hartford Division.

I. Legislative DEVELOPMENTS

The most notable legislative development of these years may be what did not occur. After a monstrous lobbying effort by the banking and credit industry, (fn2) the House of Representa

161tives each year passed by overwhelming majority a comprehensive bill that would turn on its head the basic tenet of 20 years of bankruptcy under the Bankruptcy Reform Act of 1978. (fn3) Instead of allowing almost any debtor to file a liquidation case under Chapter 7, seeking a discharge of all dischargeable personal liabilities, the bill for the first time would require the debtor's counsel, the trustee, and ultimately the Court, to apply a "means" test to force debtors with the apparent ability to repay at least a portion of debt from future income to file a wage earner's plan under Chapter 13. A significantly different and somewhat more debtor-friendly "needs based" bankruptcy amendment was passed by the Senate by a vote of 97-1 only a couple of weeks prior to the close of the session in 1998. In that session the bills were reconciled by a conference committee and while the House passed the conference report by 300-125, the Senate adjourned before considering the report. There the matter rested until the conference report was proposed in the House of Representatives in February 1999 as the Bankruptcy Reform Act of 1999. It passed handily. Nonetheless, the matter was tied up in Senate debate through the close of 1999 with numerous amendments, including hotly controversial matters respecting nondischargeability of claims arising from abortion clinic violence and claims against gun manufacturers. (fn4)

Nonetheless, several significant bankruptcy amendments were enacted in 1998. The Higher Education Amendments of 1998, in Section 97 1, amended Section 523 (a) (8) of the Bankruptcy Code barring discharge under Title I I of any state or federal guaranteed student loan, regardless of the age of the loan. The amendment became effective immediately upon its enactment for all petitions filed after October 7, 1998. Prior to this date state or federal guaranteed student loans which had first become due more than seven years prior to the filing of the bankruptcy petition could be discharged under Title 11. The amendment did not alter the language allowing

162discharge of student loans in the rare circumstance where the liability will impose an undue hardship on the debtor or the debtor's dependents. (fn5)In addition, in the area of student loans, effective November 13, 1998, the Health Professions Education Partnership Act of 1998 amended 42 U.S.C. §292f(g) to make clear that regardless of any other federal or state law, including of course the Bankruptcy Code, only this section of Title 42 shall govern discharge of obligations under the Health Education Assistance Loans, or HEAL, program. (fn6)

Several sections of the Bankruptcy Code were amended by the Religious Liberty and Charitable Donations Protection Act to protect charitable donations from attack as fraudulent conveyances, and to preserve the debtor's rights to make such contributions without prejudicing the debtor's position respecting the disposable income test under Section 1325 and without risking dismissal of a Chapter 7 case for substantial abuse under Section 707(b). In essence the amendments protect charitable contributions to the extent such contributions do not exceed 15% of the debtor's gross annual income in the year in which the contribution is made, regardless of the debtor's prior practice in this connection. The debtor may contribute a greater percentage upon proof of the debtor's usual practice in the past. Similarly, in considering the disposable income test for Chapter 13 purposes, or in considering substantial abuse of Chapter 7 by a consumer debtor, the Court may not discount charitable contributions qualified within the foregoing parameters. These amendments are effective both as to all cases pending on June 19, 1998, and all cases commenced on or after that date. (fn7)

163The law of exemptions and exclusions from the bankruptcy estate of retirement accounts was broadened and clarified by the amendment to Connecticut General Statutes Section 52-321a. The section previously had declared retirement accounts, Keoghs, and the like, even where the plans otherwise might be considered self-settled, to be spendthrift trusts that are excluded from the bankruptcy estate in accordance with the language of Section 541(c)(2) of the Bankruptcy Code. Furthermore, by operation of Connecticut General Statutes Section 52-352b(m), such funds are exempt from the estate when applying state law exemptions. Effective June 8, 1998, P.A. 98-202 added "simple" retirement accounts under Internal Revenue Code Sections 408 (p) and 401 (k) (11), Roth IRAs, Education IRAs, medical savings accounts, and certain others to the list included within the protections of amended Connecticut General Statutes Section 52-321a and Section 52352b(m).

The Internal Revenue Service Restructuring and Reform Act of 1997, which was enacted July 22, 1998, provides for awards to debtors in actions that may be brought against the United States for willful violations by Internal Revenue employees of the automatic stay under Section 362 of the Bankruptcy Code or the discharge injunction under Section 524. But for awards under Section 362(h), the new law amending the Internal Revenue Code at 26 U.S.C. §7433 is the exclusive remedy; the Court cannot invoke Bankruptcy Code Section 105 as a basis for further recovery. The provision applies to any actions by IRS officers or employees after the date of enactment.

Chapter 12, providing special reorganization opportunities for family farmers since its enactment in 1986, had been set to expire by its original terms on October 1, 1993. Previously the law was extended to October 1, 1998, and then, by further amendments, to April 1, 1999 and October 1, 1999. Senate Bill 1606 was signed by President Clinton on October 9, 1999, again briefly extending Chapter 12 retroactively from October 1 to July 1, 2000. (fn8)

164Other laws applicable to bankruptcy proceedings during the 105th and 106th Congresses included two additional sections of the Omnibus Government Spending Bill signed into law on October 21, 1998. Section 603 of the bill makes clear the automatic stay is inapplicable to actions of governmental units exercising their police and regulatory powers under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on their Destruction. Section 801 of the bill restricts the Agriculture Department's granting of loans under the Consolidated Farm and Rural Development Act to borrowers that have received debt forgiveness of prior loans issued under the act, while specifically authorizing loans to borrowers who are current in payments under plans in Chapter 11, 12, or 13. Also, P.L. 105315, 112 Stat. 2993, was enacted October 30, 1998, to require all federal district courts to adopt local rules for alternative dispute resolution procedures in all civil actions including adversary proceedings in bankruptcy. The Local Rules of Civil Procedure of the United States District Court for the District of Connecticut provide for A.D.R. in Rule 36, as do the Local Rules of Bankruptcy Procedure at L.B.R. 9019-2.

The National Defense Authorization Act for Fiscal 2000, (fn9) effective October 5, 1999, added five discharge exceptions. Included were repayment of certain retention bonuses and continuation pay for failure to maintain specified active duty status as agreed, and failure to repay a bonus in the Troops to Teachers Program when teaching certification or employment is abandoned. The Motor Carrier Safety Improvement Act of 1999 (fn10) bans a motor carrier or freight...