Bankruptcy - Hon. James D. Walker, Jr. and Amber Nickell

• Jurisdiction: United States,Federal
• Publication year: 2007
• Citation: Vol. 58 No. 4

Bankruptcyby Hon. James D. Walker, Jr.^* and Amber Nickell^**

"I know no method to secure the repeal of bad or obnoxious laws so effective as their stringent execution."

Ulysses S. Grant¹

I. Introduction

"Stringent execution" may be the watch phrase for implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA").² The bankruptcy bar has lived with BAPCPA for well over a year, and if one common thread arises in the case law, it is judges' dissatisfaction with what may kindly be referred to as "drafting flaws." Many courts have highlighted these flaws—and other perceived inadequacies in BAPCPA—by ruthlessly enforcing the statute's plain language. This has already led to the enactment of one amendment by Congress,³ as well as criticism from some of its members.⁴ Whether further amendments will follow remains to be seen.

Judges sitting in the Eleventh Circuit are no strangers to the frustrations of BAPCPA, as the case law demonstrates. Whether they expressed their vexation in rhyme⁵ or by more conventional means, they have created a wealth of material for this year's Article, which will review significant developments in Eleventh Circuit bankruptcy law from 2006. Although many of those developments involve BAPCPA— particularly the credit counseling requirement and the infamous hanging paragraph in Sec. 1325(a)⁶ —there is other ground to cove as well.

II. Jurisdiction

Among the non-BAPCPA cases decided last year was Marshall v. Marshall,⁷ in which the Supreme Court intervened in a dispute between a widow and her stepson over the extent of the probate exception to bankruptcy court jurisdiction.⁸ The widow, better known as Anna Nicole Smith, was—to her surprise—omitted from her late husband's will. Instead, the will, which was found valid by a Texas probate court, provided for all property to go to the stepson via a trust.⁹

The widow filed for bankruptcy in California. The stepson filed a claim in the bankruptcy case based on defamation. The widow objected to the claim and filed a counterclaim for tortious interference with an expected gift. The bankruptcy court ruled in favor of the widow on her objection and on her counterclaim, awarding her damages in excess of $400 million.¹⁰

The stepson challenged the decision based on subject-matter jurisdiction, contending that the probate exception required the widow's tort case to be heard in the probate court. The bankruptcy court found the stepson had waived the probate exception defense. The district court affirmed on the ground that the probate exception did not apply because the judgment on the tort claim did not require a finding that the testator's will was invalid. The circuit court reversed the district court because the tort claim raised questions about the testator's intent, which are normally answered in probate court.¹¹ The Supreme Court reversed the circuit court.¹²

After discussing the history of the probate exception and its hazy boundaries, the Court noted that the probate exception is limited to "the probate or annulment of a will and the administration of a decedent's estate" and the disposal of "property that is in the custody of a state probate court."¹³ The Court then concluded that the widow's claim fell outside the exception because she was seeking an in personam judgment on a tort claim.¹⁴ She was not seeking to probate a will or to reach property in the custody of the probate court.¹⁵ Furthermore, probate courts have no special expertise over tortious interference claims.¹⁶ on the contrary, state and district courts routinely hear such cases.¹⁷ Thus, the Court ruled in the widow's favor.¹⁸ But, her victory was not decisive because the Court remanded the case for consideration of preclusion issues.¹⁹

III. Debt Relief Agencies

On the date BAPCPA became effective, Judge Lamar W. Davis, Jr., a bankruptcy judge in the southern district ofGeorgia, issued an order sua sponte, holding that attorneys are not "debt relief agencies" ("DRAs")²⁰ subject to the rather onerous regulations set forth in Sec. 526, 527, and 528 of the Bankruptcy Code.²¹ The United States Trustee appealed the decision, arguing lack of jurisdiction and lack of a properly commenced case or proceeding.²² Several bankruptcy attorneys intervened and contended that the trustee lacked standing to appeal.²³ Before the district court could address the trustee's arguments about jurisdiction, it had to decide the standing question.²⁴

The court first noted that a trustee generally has relaxed standing requirements compared to other parties interested in a bankruptcy case because a trustee is not required to have a pecuniary interest in the outcome.²⁵ Instead, the trustee's standing can derive from the need to enforce the bankruptcy law in the public's interest.²⁶ The court then turned the United States Trustee's "case or proceeding" argument against her.²⁷ The trustee complained that the bankruptcy court did not have authority to issue an opinion in the absence of a case or proceeding.²⁸ The district court held that even acting in the public's interest, the trustee did not have standing to appear in the absence of a case or proceeding.²⁹ A case is commenced by the filing of a petition, and proceedings are all things that happen within the case.³⁰ Because even the trustee herself pointed out that no case or proceeding existed, the court determined that the trustee lacked standing to appeal.³¹ As a result, Judge Davis's opinion was untouched.

The trustee may yet have her day in court on this issue if she decides to appeal In re Reyes:³² In Reyes the debtor's attorney was working pro bono. The attorney sought a ruling that she was not a DRA because she did not receive "payment of money or other valuable consideration."³³ The United States Trustee agreed that under the circumstances, the plain language of the Bankruptcy Code excluded the attorney from the definition of a DRA.³⁴ While the court concurred with the parties, it chose to delve deeper into the murky waters of BAPCPA.³⁵

First, the court considered whether the provisions regulating DRAs—Sec. 526, 527, and 529—are constitutional as applied to lawyers.³⁶ With little ado, the court adopted the opinion of Milavetz, Gallop & Milavetz, P.A. v. United States³⁷ to hold that the provisions violate the First Amendment.³⁸ Milavetz held that Sec. 526(a)(4) unconstitutionally restricts speech by forbidding attorneys from advising their clients about taking certain legal actions in contemplation of bankruptcy.³⁹ With respect to Sec. 528(a)(4) and (b)(2), which regulate advertising by bankruptcy attorneys, the court declared the provisions unconstitutional because they neither advanced a government interest, nor were they narrowly drawn.⁴⁰ The court reasoned that rather than clarifying bankruptcy advertisements, the provisions are more likely to create confusion for consumers.⁴¹ The court in Milavetz further agreed with Judge Davis that Sec. 526, 527, and 528 do not apply to attorneys.⁴²

Second, the court in Reyes held that even if the provisions were constitutional, they do not apply to lawyers.⁴³ Not only do they "infringe on the State's traditional role of regulating attorneys," they also deter lawyers from representing debtors.⁴⁴ The court declined to

assume that Congress was mean-spirited and intended sections 526, 527 and 528 to provide a chilling effect on lawyers' willingness to represent persons who have suffered financial misfortune, in most cases through no fault of their own, because of lack of health insurance, loss of employment or other tragedy.⁴⁵

Instead, the court noted that Congress intended to protect consumers by regulating non-attorneys who would take advantage of debtors facing bankruptcy, while leaving attorneys free of these regulations so they can provide debtors with the full benefit of competent legal counsel.⁴⁶

Third, even if the provisions were constitutional and they applied to attorneys, they would not apply to attorneys working pro bono.⁴⁷ The assistance provided by a DRA is done "'in return for the payment of money or other valuable consideration.'"⁴⁸ Because the attorney in Reyes was receiving nothing from the debtor in exchange for her services, she cannot be a DRA regulated by Sec. 526, 527, and 528.⁴⁹

IV. Entering and Exiting Bankruptcy

A. Credit Counseling

The courts have been very clear that debtors who fail to obtain a credit briefing in the 180 days prior to filing for bankruptcy will have their case dismissed (or, in some jurisdictions, their petition stricken). In the spirit of "stringent enforcement" of BAPCPA, the courts generally have held firm against even the most sympathetic debtors.⁵⁰ But, two cases show that the requirements of Sec. 109(h)⁵¹ are not absolute.

In In re Petit-Louis,⁵² a debtor, fluent only in Creole, sought an exemption from the credit counseling requirement due to his inability to obtain the counseling in Creole. The debtor had contacted every approved credit counseling agency to no avail and written to the United States Trustee seeking a waiver of the requirement. The debtor attached the letter to his petition, which the court considered a certification of exigent circumstances.⁵³ The trustee's office refused to provide an interpreter or to waive the credit counseling requirement. The office argued that because a trustee is not required to provide translators to people who have filed bankruptcy, it is not required to provide translators to people who have not yet filed and who may never file.⁵⁴ The court was unpersuaded.⁵⁵ As the administrator of the credit counseling program, the trustee is required to provide meaningful access to debtors, which includes approving agencies that can provide counseling in multiple languages.⁵⁶ Because the debtor was unable to obtain credit counseling in Creole and could not afford to hire his own translator, the court granted the exemption pursuant to Sec. 109(h)(3).⁵⁷

Usually, the debtor is fighting...