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

• Publication year: 2006

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

I. Introduction

Never underestimate the persistence of the credit lobby. In the most significant development in bankruptcy law since last year's Article,¹ Congress finally, after eight years of trying, enacted bankruptcy reform legislation in the form of the Bankruptcy Abuse Prevention and Consumer Protection Act² ("BAPCPA" or the "Act"). At least one judge has stated that "to call the Act a 'consumer protection' Act is the grossest of misnomers."³ Indeed, the Act creates new roadblocks for entrance into bankruptcy, such as the pre-petition credit counseling requirement and Chapter 7 means testing; limiting or eliminating the protection of the automatic stay for repeat filers; substantially reducing the super discharge for Chapter 13 debtors; and limiting the availability of a discharge for repeat filers. As that same judge said in reference to some of these new provisions, "[i]t should be obvious to the reader at this point how truly concerned Congress is for the individual consumers of this country."⁴

All sarcasm aside, whether or not individual judges approve of the Act, they must apply its provisions. This Article will examine the BAPCPA cases decided by courts in the Eleventh Circuit, pertinent non-BAPCPA cases decided from early 2005 through early 2006, and a somewhat surprising decision from the Supreme Court.

II. BAPCPA Cases

A. Debt Relief Agencies on the same date the bulk of BAPCPA⁵ provisions became effective, one judge issued an opinion sua sponte holding that debtors' attorneys practicing in the Southern District of Georgia are not debt relief agencies.⁶ Chief Judge Davis came to this conclusion after applying a "plain meaning" standard to sections 101(12A), 101(4A), 526, 527, and 528 of the Bankruptcy Code.⁷ Most bankruptcy practitioners should be intimately acquainted with those provisions, which impose "significant restrictions on the activities of debt relief agencies" as well as significant duties when such debt relief agencies are interacting with assisted persons.⁸

A "debt relief agency" is defined by section 101(12A) as "any person who provides any bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration, or who is a bankruptcy petition preparer . . . ."⁹ Under this definition, an attorney arguably falls within the purview of providing bankruptcy assistance.¹⁰ Additionally, a petition preparer also seems to fit within the defini-tion.¹¹ Because Congress put petition preparers in a separate category, the scope of "bankruptcy assistance" must be narrower than it first appears.¹² "[I]t is instructive that Congress saw the necessity of expressly including 'bankruptcy petition preparers' (who clearly provide 'bankruptcy assistance') in the definition of debt relief agency, yet omitted any express inclusion of attorneys."¹³ The court further reasoned that the inclusion of "providing legal representation" within the definition of bankruptcy assistance actually refers to the unauthorized practice of law by a debt relief agency.¹⁴

Moving from the definitional sections to the regulatory sections, the court again concluded that the Act targets non-attorneys.¹⁵ "Congress intended to establish regulation of entities who interface with debtors in shadowy, gray areas not already covered by bankruptcy petition preparer regulations and to bolster the existing regulation of bankruptcy petition preparers, but it did not intend to regulate attorneys."¹⁶ In addition, the Act does not preempt states' power to regulate attorneys because the provisions are silent regarding Congress's intent.¹⁷ "It would be a breathtakingly expansive interpretation of federal law to usurp state regulation of the practice of law via the ambiguous provisions of this Act, which in no clear fashion lay claim to the right to do any such thing."¹⁸ In conclusion, the court noted that if Congress wanted to regulate bankruptcy attorneys, it would have done so expressly rather than using the term "debt relief agency."¹⁹ For those reasons, the court held that attorneys practicing before it "are excused from compliance with" any provision covering debt relief agencies "so long as their activities fall within the scope of the practice of law and do not constitute a separate commercial enterprise."²⁰

Perhaps emboldened by Judge Davis's opinion, a debtor's attorney in the Middle District of Georgia filed a motion to determine attorney status, seeking a similar ruling applicable to that district.²¹ His efforts were fruitless because of a jurisdictional problem.²² The United States Constitution only allows courts to hear cases and controversies.²³ A case or controversy only exists if the plaintiff has suffered actual harm or such harm is imminent.²⁴ The attorney in McCartney could show no actual or imminent harm because "no party has threatened to enforce against [the Plaintiff] the debt relief agency provisions of BAPCPA."²⁵ Consequently, the court dismissed the motion due to lack of jurisdiction.²⁶

The same jurisdictional problem may eventually derail Judge Davis's opinion in Attorneys at Law. The United States Trustee filed an appeal, arguing that the court lacked jurisdiction and that the decision was incorrect as a matter of law.²⁷ At the time of this writing, the appeal was still pending.

B. Credit Counseling

Section 109 of the Bankruptcy Code²⁸ sets forth the debtor eligibility requirements. The BAPCPA added a new requirement for individuals: they must receive credit counseling within 180 days prior to filing a petition, with a few very narrow exceptions.²⁹ The court in In re Davenport,³⁰ recognized waiver as one of the narrow exceptions.³¹ Waiver is available if "(1) exigent circumstances merit a waiver of pre-petition credit counseling; (2) the individual requested, but was unable to receive, credit counseling within five days of the request; and (3) the court is satisfied" with the debtor's request for waiver.³² In Davenport, the court was satisfied that the imminent repossession of the debtor's car constituted exigent circumstances.³³ However, the debtor did not request counseling prior to filing, although she did obtain counseling two days after filing.³⁴ "The statute is clear: the Court can only excuse compliance if the debtor satisfies all three requirements of Section 109(h)(3)."³⁵ Consequently, the court dismissed the case.³⁶

Davenport did not address the effect of its dismissal on a subsequent case filed by the debtor, with respect to new provisions of section 362³⁷ that limit or eliminate the automatic stay for repeat filers.³⁸ In In re Valdez,³⁹ the court dismissed the debtor's petition for failure to satisfy the credit counseling requirement.⁴⁰ However, the court stated that because it considers section 109 jurisdictional, the dismissal would not be treated as a dismissal for purposes of section 362(c) if the debtor filed a subsequent case.⁴¹ Courts in other circuits have reached a similar result by striking the petition and treating the case as void ab initio rather than dismissing the case.⁴² on the other hand, the court in In re Ross⁴³ concluded that section 109 is not jurisdictional.⁴⁴ Thus, the court reasoned that failure to complete credit counseling requirements results in a dismissal of the case—a dismissal that counts as a dismissal for purposes of section 362(c).⁴⁵ The court relied on cases considering other eligibility requirements to determine that eligibility is not jurisdictional.⁴⁶ It also noted that the protection afforded a debtor by treating the case as void ab initio may be illusory.⁴⁷ In order to protect the automatic stay in a later case, the court must void the original case, meaning no stay was in effect.⁴⁸ Thus, any actions taken by a creditor in violation or ignorance of the stay in the original case cannot be remedied.⁴⁹ In addition, treating a case as void for failure to receive credit counseling creates uncertainty for all nondebtor parties with an interest in the case, and would require them to engage in a level of due diligence not presently necessary.⁵⁰

It is important to note that the automatic stay problems caused in subsequent cases by a section 109(h) dismissal will probably disappear for all debtors except pro se debtors. Debtors' attorneys will likely establish procedures to obtain immediate credit counseling for debtors in imminent danger of foreclosure or other financial distress.

C. Homestead Exemption Cap

The BAPCPA is not all gloom and doom for debtors. Wealthy debtors who have lived for a substantial time in a state with a generous homestead exemption, Florida⁵¹ for example, can still shelter enormous sums from their creditors. BAPCPA limits the available homestead exemption to $125,000 for debtors who acquired their residences within 1,215 days prior to filing their bankruptcy petitions.⁵² However, this new provision has some tricky language in that it applies when the debtor has "elect[ed] under subsection (b)(3)(A) to exempt property under State or local law."⁵³ Here's the problem: some states allow a debtor to choose (or to elect) either state or federal exemptions. Other states, such as Florida, require the debtor to use state exemptions; thus, the debtor makes no election.

It did not take Florida debtors long—at least those with fewer than 1,215 days in residence—to grasp the significance of these circumstances.⁵⁴ Florida debtors argued that because they made no election, the cap on the homestead exemption should not apply to them.⁵⁵ The debtors relied on an Arizona bankruptcy case⁵⁶ to support their view; however, the Florida bankruptcy courts were not persuaded.⁵⁷

Acknowledging that a strict, plain reading ofthe statute would render the exemption cap ineffective in Florida, the courts determined that principles of statutory construction required them to look to congressional intent.⁵⁸ In Kaplan, the court found that section 522(p)(1) was ambiguous and...