z Bankruptcy Abuse Prevention and Consumer Protection Act, Reorganization Lawyer & Attorney Steve Jakubowski : Bankruptcy Litigation Blog : BAPCPA

Yra Harris on How BAPCPA Has "Flown Back in the Banks' Faces Good and Hard"

With little fanfare, Yra Harris, a veteran trader of Chicago's pits, started blogging his Notes From the Underground last December.  I learned about it last month from a good friend of his, and strongly recommend it to you.  Yra is a frequent guest commentator on CNBC, and one of the smarter guys in the room.

Yesterday on CNBC's Squawk Box, Yra commented on how BAPCPA's changes ended up screwing the banks "good and hard." 

He explains (starting at about 2:50 of the clip) that BAPCPA's anti-consumer protection features have had the unintended consequence (see others here, here, and here) of flipping around distressed middle class America's incentives in a way that has multiplied the banks' net consumer losses manyfold.  Pre-BAPCPA, people would file bankruptcy to keep their house and escape their credit card debt.   Now, however, people are instead paying down their credit cards at the expense of their mortgage in order to keep their credit lines available for the inevitable rainy day(s).  Meanwhile, they live mortgage-free for 12-18 months and build up their cash reserves until they're finally forced from their home in foreclosure. 

And so, Yra concludes, the law that has "done more harm to middle class America" than any other single piece of consumer legislation (others concurring here) has "flown back in the faces of the banks and slapped 'em hard," again proving true the old saying, "be careful what you wish for" because, as Yra puts it, "it'll come back at you good and hard!"


Finally, in case you're wondering where I've been of late, I can pretty much lay my absence at the feet of my three adorable children, pictured above, Zachey, Rockey (Rachel), and Davey.  (Davey and Zachey are now three.  Here they are at birth and again two years ago.)  Every day I'm at work, they call and ask "when's 'D' coming home?"  And when I'm home, they run downstairs with big smiles saying they want to "go in 'D's' car" to the park, the mall, the zoo, the ice cream store, the slurpee store, etc. etc.  Obviously, an excellent reason not to blog!

Thanks for reading.

© Steve Jakubowski 2010

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4th Circuit Overrules Judge Small And Holds That Ordinary Commodity Supply Contracts Fall Within BAPCPA's "Swap Agreement" Amendments

In June 2007, I wrote here about Judge Small's opinion that BAPCPA's expanded "safe-harbor" definition of "swap agreement" did not apply to ordinary supply agreements in which a seller and an end-user entered into a contract "for delivery of a product that happen[ed] to be a recognized commodity."  As such, Judge Small held, these contracts were not exempt from avoidance as fraudulent transfers (on the theory that the supply contracts were made for less than market value when the debtor was insolvent).

Well, to the delight of the ISDA, which filed an amicus brief in support of the appellant-purchasers of natural gas under various supply contracts with the debtor, the 4th Circuit yesterday reversed Judge Small and remanded with instructions that the Bankruptcy Court "allow the customers to attempt to demonstrate facutally and legally that their natural gas supply contracts were swap agreements based on the classification included in § 101(53B)."  Hutson v. E.I. du Pont de Nemours and Co. (In re Nat'l Gas Distribs., LLC), 2009 WL 325436 (4th Cir. 2/11/09) (pdf)

In reaching this decision, the 4th Circuit undertook to determine the meaning of "commodity forward agreements," and ultimately concluded that "the bankruptcy court in this case construed 'commodity forward agreements' too narrowly--i.e., by requiring that they be traded on an exchange and not involve physical delivery of the commodity."  In so doing, the 4th Circuit found:

  • First, that "the Bankruptcy Code does not require that a 'forward contract' [which necessarily is narrower in scope than "forward agreements"] be traded on an exchange or in a market";
  • Second, that the contracts at issue were not "simple supply contracts" because "they also were part of a series of contracts in which the customers hedged their risk of future fluctuations in the price of natural gas ... that were only a part of a larger risk management program in which the customers 'regularly use[d] forwards and other derivatives."
  • Third, that while BAPCPA's legislative history, which Judge Small quoted, "does provide support for the notion that traditional supply agreements are not 'swap agreements' ... the conclusion that the contracts in this case are traditional supply contracts overlooks the fact that the contracts in this case contained real hedging elements ... [and thus] Congress did not preclude physical delivery in connection with a 'commodity forward agreement,' as defined in § 101(53B)(A)."

Notably, however, the Court "[did] not direct the bankruptcy court to find that the contracts in this case are 'commodity forward agreements' or 'swap agreements.'"  Recognizing that § 101(53B) "contains its own counterintuitive definitions, as well as inconsistencies," the 4th Circuit would not attempt to provide its own definition.  Instead, it "point[ed] to certain nonexclusive elements that the statutory language appears to require," those being:

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BAPCPA Guru Cathy Vance Untangles the Purpose and Application (So Far) of New Bankruptcy Rule 6003

In advance of her coming to Chicago on May 1 to speak at this upcoming all day symposium sponsored by the CLLA and DePaul's Business & Commercial Law Journal, America's BAPCPA guru, Cathy Vance, Vice President of Research & Policy and Associate General Counsel of Development Specialists, Inc., has graciously agreed to again guest blog.

Last year, in her first guest post, Cathy reflected on BAPCPA's unruly landscape at the close of its "terrible two's." This year, as BAPCPA closes a less rambunctious third year, Cathy looks at a post-BAPCPA bankruptcy rule change enacted on December 1, 2007 to address, in Rule 6003, the potential for overreaching in the blizzard of "first-day" papers filed at the outset of a case. The new rule requires a showing of "immediate and irreparable harm" if an order retaining professionals, using or selling assets outside of the ordinary course, or assuming or assigning executory contracts or unexpired leases is to be entered on less than 20 days' notice after the filing of the case. Cathy surveys the litigation and literary landscape on what constitutes "immediate and irreparable harm" and, because she's a guru, "speculate[s] about the [new rule's] effects until live controversies emerge that are decided by the courts."

Thanks again for blogging Cathy! Your post last year broke this blog's single and three-day records for page views, and hasn't been matched since. May the next year be a good one for you! 

Finally, thanks to Bankruptcy Court Decisions, home of the ever-resourceful Kate Colangelo, for permission to reprint the article of former Chief Judge Spector, cited by Cathy below.

So without further ado, heeeeeeerrrrrreeee's Cathy! ........

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Judge Easterbrook Doesn't Get Hung Up by the Hanging Paragraph of "the 2005 Act"

As noted in the section of my BAPCPA outline of one year ago entitled "The Hanging Paragraph: Section 1325(a)(*) -- The "Car Loan Protection" Provision: The Law of Intended and Unintended Consequences, a pesky little decision by Judge (and former Army captain) Richard Stair, Jr. in In re Ezell, 338 B.R. 330 (Bankr. E.D. Tenn. 2006), caught the attention of auto lenders because it held, for the first time, that an auto lender in a chapter 13 case must accept a surrendered car in full satisfaction of its claim (thus denying the lender its state law right to a deficiency for any shortfall).

Somehow, between then and now, the holding in Ezell became the "majority" rule in the land, much to the sure chagrin of the auto lobby.  After all, as brilliantly documented in a paper by Univ. of Wisconsin's William Whitford entitled A History of the Automobile Lender Provisions of BAPCPA, the auto lobby drafted the "hanging paragraph" and had Michigan Senator Spencer Abraham introduce it in a 1998 amendment to the proposed legislation.  (See Whitford, at pp. 34-36).  Remarkably, the paragraph hung there through BAPCPA's enactment without change.  Now one may wonder why an obvious grammatical faux-pas like a "hanging paragraph" went uncorrected for seven years, but it's hard to attribute the error to sloppy last-minute drafting.

The minority view among bankruptcy courts regarding the auto lender's claim against a surrendering debtor in a chapter 13 case was best articulated in my view by Nevada's Judge Bruce A. Markell (a philosophical wizard who is one of the bankruptcy bench's most capable Code constructionists) in In re Trejos, 352 B.R. 249 (Bankr. D. Nev. 2006), a case that I've wanted to discuss for almost a year now.  In it, Judge Markell ultimately concluded that Ezell was wrongly decided.  Still, as he said, "the basics of how to interpret statutory text such as the hanging paragraph are not unduly complicated, but (as always) the devil is in the details."  [NB: (Judge Easterbrook, concurring.)]

In analyzing the "hanging paragraph," Judge Markell starts with "plain meaning" (as required by Ron Pair), considers the context (as the textualist approach of Justice Scalia and Harvard's Professor John Manning mandates), seeks additional clues in bankruptcy's slang (or "gibberish"), but above all "[will] not condone ... the imputation of a congressional purpose based on materials that cannot or do not reflect a unitary congressional purpose, followed by the use of that purpose to definitively construe straightforward text."  Id. at 258.  Judge Markell concludes:

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Judge Small Rules That Ordinary Commodity Supply Contracts Are Not "Swap Agreements" Under BAPCPA

BAPCPA's least appreciated (and understood) changes, despite their enormous impact on financial markets generally, are the changes designed to strengthen and clarify the enforceability of various types of financial derivatives contracts.  To provide enhanced protection to the financial services industry, Congress added or expanded the Code's definitions for such industry staples as "forward contracts" (§101(25)), "repurchase agreements" (§101(47)), and "swap agreements" (§101(53B)).  Various other Code provisions were amended or added to reflect Congress's desire to enable a nondebtor party–without hesitation–to terminate, liquidate or accelerate its securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements or master netting agreements with the debtor.  (See generally, these few pages of professor, lawyer, Code co-architect, and energy healer Ken Klee's excellent summary of BAPCPA's amendments to the Code's business-related provisions).

Columbia Law professor Edward Morrison, with Columbia GSB economics legend Franklin Edwards, argue in a Winter 2005 article entitled Derivatives and the Bankruptcy Code: Why the Special Treatment? that BAPCPA's extension of the Code's protections for the financial services industry "to include a broader array of financial contracts, all in the name of reducing systemic risk ... is a mistake."  Rather, they argue, "[a] better, efficiency-based reason for treating derivatives contracts differently arises naturally from the economic theory underlying the automatic stay [i.e., derivative contracts are rarely needed to preserve a firm's going-concern surplus]."  Still, they warn (at p.1):

There are, however, downsides to treating derivatives contracts differently (creditors, for example, would like to disguise loans as derivatives contracts).  These downsides are probably not signficant, but they highlight the fragility of the Code's treatment of derivatives contracts, which should worry members of Congress as they consider arguments to expand the Code's exemptions for derivatives contracts.

After BAPCPA became law, Professor Morrison teamed with Columbia LLM candidate (and now Davis Polk associate) Joerg Riegel to author another article entitled Financial Contracts and the New Bankruptcy Code: Insulating Markets from Bankrupt Debtors and Bankruptcy Judges.  They wrote that BAPCPA did not just "eliminate longstanding uncertainty surrounding the protections available to financial contract counterparties, especially counterparties to repurchase transactions and other derivatives contracts"  Rather, they observed, "the ambit of the reforms is much broader," especially because of the newly expanded definition of "swap agreement," which they termed "so broad that nearly every derivative contract is subject to the Code's protection."  (p.1).  Notably, however, this conclusion was later called into question (though not expressly) by Thompson & Knight's Rhett Campbell in a 2005 article entitled Financial Markets Contracts and BAPCPA.  He wrote that "even though the definitions themselves are often nothing more than a listing of labels with little attempt at a functional definition, the legislative history shows an intent to prevent parties from obtaining the benefits of financial contracts safe harbors merely by the judicious use of labels."  79 Am. Bankr. L. J. 697, 705 (2005).

In commenting on the impact of these reforms on the bankruptcy judiciary, Morrison and Riegel concluded (pp. 4-5):

Equally important, the amendments limit judicial discretion to assess the economic substance of financial transactions, even those that resemble ordinary loans or that retire a debtor's outstanding debt or equity.  The reforms of 2005 direct judges to apply a formalistic inquiry based on industry custom: a financial transaction is a "swap," "repurchase transaction," or other protected transaction if it is treated as such in the relevant financial market.... 
Indeed, if anything is clear from the new Code, it is that judges are strongly discouraged from engaging in functional analysis of financial contracts.  The Code's protections encompass contracts or combinations of contracts that differ little in substance from unprotected transactions, such as secured loans.  They are protected because they are recognized in financial markets as financial contracts.  Any judicial effort to distinguish protected and unprotected contracts based on their "substance" is doomed to failure and can only generate significant uncertainty in the very markets the Code seeks to protect.  By relying on broad market definitions, the Act gets judges out of the (largely futile) business of second-guessing financial contracts.  Absent evidence of intent to defraud a debtor's creditors, which remains ground for denying protection to payments under a financial contract, the new role of judges is to apply industry custom to financial contracts in much the same way that they would apply custom to interpret a contract under the Uniform Commercial Code.

Maybe it's just Professor Morrison's year of clerking for Justice Scalia that has jaded him, but most bankruptcy judges I know don't "apply a formalistic inquiry," especially when it comes to interpreting BAPCPA!  (See also, the opinions of Judge Bruce A. Markell (here and here) and the 60 pages of handouts on principles of statutory construction that the Southern District of Ohio's Chief Bankruptcy Judge, Thomas F. Waldron, penned for last year's NCBJ confab).  In this regard, it's worth considering the words of the Eastern District of North Carolina's Chief Bankruptcy Judge A. Thomas Small in In re Donald, 343 B.R. 524 (Bankr. E.D.N.C. 2006) (pdf), where he had this to say about interpreting BAPCPA:

Unfortunately, the BAPCPA amendments ... are confusing, overlapping, and sometimes self-contradictory.  They introduce new and undefined terms that resemble, but are different from, established terms that are well understood.  Furthermore, the new provisions address some situations that are unlikely to arise.  Deciphering this puzzle is like trying to solve a Rubik's Cube that arrived with a manufacturer's defect.  [Ed. Note:  This one is sure to work.]  Fortunately, after many twists and turns, a few patches of solid color emerge.  Id. at 529.

Judge Small's opinion last week in Hutson v. Smithfield Packing Co. (In re Nat'l Gas Distributors, LLC), 2007 WL 1531616 (Bankr. E.D.N.C. 5/24/07) (pdf) partially resolved BAPCPA's puzzle regarding the scope of the "swap agreement" amendments to the Code surprisingly easily, but not because he "appl[ied] a formalistic inquiry."  Rather, in deciding whether BAPCPA's expanded definition of "swap agreement" to include "forward agreements" would preempt an avoidance action against a nondebtor customer who received natural gas from the debtor under a below-market commodity contract, Judge Small concluded:

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As BAPCPA Enters Its "Terrible Two's," BAPCPA Guru Catherine Vance Surveys Its Unruly Landscape

To me, the greatest benefit of blogging is that it has enabled me to meet and befriend so many in the profession (lawyers, judges, and professionals alike) whom I otherwise likely would never have even met. 

Cathy Vance, Vice President of Research & Policy and Associate General Counsel of Development Specialists, Inc. (DSI), is one such person. 

During BAPCPA's most formative and tumultuous years, starting in 1998, Cathy viewed BAPCPA's development from the unique vantage point of legal writer, analyst, and national education coordinator for the Commercial Law League of America

She has penned numerous articles on BAPCPA, and even published (with Corrine Cooper) a "best-selling" book (hey, #542,995 ranking on Amazon is actually high for a bankruptcy treatise!), which I reviewed briefly in this post of one year ago

In the book's preface, Cathy and her co-author open with the following thought:

We spent much of our time during the period from 2000 to March 2005 fighting the passage of the Bankruptcy Reform Act.  We wish it had not passed.  It is terrible legislation for a whole variety of reasons.

The remaining 350+ pages of the book prove their point!

Cathy is here in Chicago attending the 77th annual spring meeting of the Commercial Law League of America, fresh from her television debut last week on C-Span, which broadcast live on 4/13 the "Bankruptcy Roundtable discussion" at the ABI Spring Meeting (which featured an all-star panel that included Cathy, DSI's head honcho Bill Brandt, Illinois Senator Dick Durbin, Jefferies & Co.'s Bill Derrough, Cliff White, Acting Director of the Executive Office for US Trustees, and Travis Plunkett of the Consumer Federation of America).

Cathy, a BAPCPA guru if ever there was one, has graciously agreed (in what I hope will be an annual undertaking!) to post a few "happy" birthday thoughts and reflections on this, the 2d anniversary of BAPCPA's enactment, regarding some of the surprising results culled from a recently completed survey sponsored by the CLLA.

So without further ado, heeeeeeerrrrrreeee's Cathy! ........

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The Subprime Squeeze Is Looking More Like a Hangman's Noose

A year ago, I voiced my concerns in a post entitled "The Subprime Squeeze" that the dramatic "hockey stick" growth in housing's subprime lending market was "more likely caused by looser adherence to underwriting standards than by increased demand for subprime products among qualified borrowers."  "If, in fact, looser credit standards have driven the current exponential growth since 2000 in subprime lending," I predicted, "then waves of defaults will be 'tsunami-like' in proportion."  Last Memorial Day, I echoed these sentiments in this post.

Well, "the chickens are coming home to roost," as the old saying goes, and the subprime squeeze is looking to some (such as Professor Nouriel Roubini) more like a hangman's noose.

Courtesy of the TPM Cafe Blog, here's a great read from Credit Suisse entitled "The Impact of the 2005 Bankruptcy Law on Subprime HEL [Home Equity Loans]."  Here are the conclusions of the report:

•   We believe that the new bankruptcy law introduced on October 17, 2005 has had a profound impact on subprime borrowers.  Under the new law, we find that bankrupt borrowers are riskier. Under the new law, the means test is more difficult to pass for bankruptcy petitioners, and more subprime mortgagor filers are required to enter Chapter 13 rather than Chapter 7 bankruptcy, even though they might not be able to complete the repayment plan.  Our analysis reveals that a higher percentage of borrowers are failing their bankruptcy repayment plans.

•   The stringent means test also means more delinquent loans have to go into foreclosure directly rather than into bankruptcy.  Therefore, it is directly responsible for the rising foreclosure rate since the end of 2005.

•   We believe that the cash flow from bankrupt filers is lower after the new law, and the cure rate from bankruptcy has declined.

•   The roll rate pattern since October 2005 indicates that roll rate data prior to the bankruptcy law change should be used with caution, as it overstates the cure rate and can have a non-trivial impact on delinquency and trigger projections.

Remember the old maxim, "bad cases make bad law" (cited as a "rule" in this 1845 US Supreme Court opinion)?  Well, when it comes to BAPCPA, the converse is also proving to be true, even for the hard-nosed lenders the law was designed to benefit.

I've discussed here and here the "law of unintended consequences" affecting subprime auto lenders as a result of BAPCPA's "hanging paragraph."  Looks like we can add the subprime home lenders to the list of those to whom BAPCPA's "conventional wisdoms" don't apply.  Regardless, the squeeze continues.

© Steve Jakubowski 2007

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"A Year After BAPCPA": The Slugfest Continues

On December 6, the Subcommittee on Administrative Oversight and the Courts of the Senate Judiciary Committee held a hearing styled as an "Oversight of the Implementation of the Bankruptcy Abuse Prevent and Consumer Protection Act."  Witnesses included Clifford J. White III (acting director, Executive Office of U.S. Trustees), the Honorable Randall Newsome (U.S. Bankruptcy Court for the Northern District of California), Professor Todd Zywicki (George Mason Law School), Steve Bartlett (Financial Services Roundtable), David Jones (Ass'n of Independent Consumer Credit Counseling Agencies), Professor Bob Lawless (U of I College of Law), and Henry Hillebrand, III (chapter 13 standing trustee in Nashville, Tennessee).  [Witness links are to their prepared written statements.]

When it comes to BAPCPA, it's fair to say that "beauty is in the eye of the beholder," as this very old saying goes.  Still, I suppose we should be thankful our legislative rules of order don't comport with those of the Taiwanese, or who knows what the hearing would have degenerated into.

Professor Lawless, no friend of BAPCPA, summarizes the day's events here (U of I Faculty Blog) and here (Credit Slips Blog).  Professor Lawless took Senator Grassley to task for these opening remarks, as well as for openly questioning whether it's unethical for a judge to criticize BAPCPA.  In this regard, it is worth looking at Canon 4 of the Code of Conduct for US Judges, which generally is read to allow judicial commentary on inept laws.  As Professor Steven Lubet (author of Lawyers' Poker:  52 Lessons That Lawyers Can Learn From Card Players and the classic textbook Modern Trial Advocacy) wrote 22 years ago in a monograph published by the American Judicature Society entitled Beyond Reproach: Ethical Restrictions on the Extrajudicial Activities of State and Federal Judges (p.40):**

In the same manner that judges' charitable and civic activities must not detract from their impartiality, so must their personal lives be free from the suggestion that their judging will be tainted by bias.  This is not to say that judges need refrain from forming and expressing opinions.  There is no reason to insulate judges from normal human discourse, and there surely is no way to prevent intelligent human beings from developing what Justice Rehnquist calls "an inclination of temperament or outlook."  Furthermore, in most cases where a judge's life actually has evidenced a "tendency or inclination to treat a particular litigant more or less generously than a different litigant raising the identical legal issue" [again quoting Justice Rehnquist],  the appropriate remedy is recusal, not prohibition of the conduct which gives rise to the favoritism.  It is natural to expect a judge to be "biased" in favor of his or her children; this bias is resolved by disqualifying the judge from sitting in cases involving the children, not by forbidding procreation.

The most disparaging remarks concerning the oversight hearing came from the National Association of Consumer Bankruptcy Attorneys (NACBA), which pulled no punches in this press release, calling the hearing the Republicans' "last gasp at one more unbalanced hearing ... before Democrats assume control."  [NB:  Though, as Judge Monroe reminds us here, the vast majority of Democrats weren't exactly hostile to the new law either.]  NACBA President Henry Sommer summed up NACBA's views of the matter by labeling the "Republican witness line-up" as "the financial world equivalent of the Flat Earth Society" who "have been charged with slapping some lipstick on the pig."  Now them's fightin' words!

Overall, however, by far the greatest contribution to the day's proceedings was, naturally, the least publicized: that being, the American Bankruptcy Institute's submission of the entire 247 page transcript of its October 16 star-studded event at Georgetown University Law Center entitled "A Year After BAPCPA."  Thanks to Sam Gerdano and the ABI for making this transcript available to us all!  It is outstanding reading!  At the end of the day, however, the conclusions reached by event's moderator, Judge Dennis R. Dow, Bankruptcy Judge for the Western District of Missouri, surely challenge Senator Grassley's declaration that "[e]arly reports indicate that the law is working well."  As Judge Dow said in closing the meeting, "the one thing we can all agree on is that we want this process to work."  Yet, as his final remarks reveal, the manifest conclusion thus far is that the law is not working quite as well as Senator Grassley would have us believe.  Judge Dow said:

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Minnesota Chief District Judge Rosenbaum Splits with Other District Courts and Holds that BAPCPA Cannot Constitutionally Designate Bankruptcy Lawyers as Federal "Debt Relief Agents"

Last summer, as part of my continuing BAPCPA Consumer Outline series, I posted an outline section entitled Attorneys as 'Debt Relief Agencies' -- Court Decisions and Constitutional Challenges, in which I reviewed various cases winding their way through the federal courts challenging the constitutionality of BAPCPA's "debt relief agency" provisions.  Since then, I added this post on the decision of Dallas District Court Judge David C. Godbey upholding the constitutionality of most of BAPCPA's "debt relief agency" provisions that were applicable to attorneys.  Recent decisions handed down in other cases have been reported in the ABI BAPCPA Blog (here-S.D. Ga., here-Olsen-D.Or., and here-Geisenberger-E.D. Pa.), the Georgia Bankruptcy Blog (here-Zelotes-D.Ct.), and The Bankruptcy Lawyers Blog (here-Zelotes-D.Ct.).  Sadly, none of these reported decisions found BAPCPA's broad "debt relief agency" provisions inapplicable to attorneys, though they did tinker around the edges.

Alas, however, hope is not lost, for as reported at length in this recent post at the Georgia Bankruptcy Blog, the Honorable James M. Rosenbaum, Chief Judge of the Minnesota District Courts (himself a Reagan appointee and outspoken critic of the federal sentencing guidelines), last week broke new ground and declared that attorneys are NOT "debt relief agents" under BAPCPA!  Milavetz, Gallop & Milavetz v. United States, 2006 WL 3524399, (D. Minn. 12/7/06) (pdf) (pleadings - see Sec. III.B.1). 

Unlike the only other court decision reaching the same conclusion (first reported here and recently dismissed based on lack of standing by the US Trustee), this decision finds principled grounds for holding the "debt relief agency" provisions unconstitutional -- and hence inapplicable -- when applied to attorneys.

Stay tuned, as now there is a split among the district courts, and one can only hope that these issues make their way to the US Supreme Court.  Meanwhile, however, rumor has it that consumer bankruptcy lawyers in Minnesota are privately calling Judge Rosenbaum "NEO."

© Steve Jakubowski 2006

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Lindquist & Vennum's George Singer Publishes a 108 Page Tome (with 586 Footnotes) Reviewing BAPCPA's Convoluted First Year in the Courts

Last summer I posted a nine-part outline reviewing BAPCPA's early decisions in the consumer arena.  Recently, Linquist & Vennum's George Singer, former staff attorney for the National Bankruptcy Review Commission, completed his own 108 page tome on significant business and consumer cases decided in BAPCPA's first year.  The article, replete with 586 footnotes, leads the current issue of the North Dakota Law Review.  The complete citation is The Year in Review: Case Developments under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 82 N.D. L. Rev. 297 (2006).

Given the Democrats' recent electoral sweep, I asked George for some thoughts on whether a Democratic-led Congress might  scale back on some of BAPCPA's more onerous provisions.  Here's what he said in response:

I do not see the new Congress tinkering with the revised Bankruptcy Code any time soon. The subject of bankruptcy reform has been on Congress' plate for over 10 years and, in my view, Congress has moved on--at least for now. The BAPCPA had strong bi-partisan support so the shift of power in the houses of Congress will not really be a driver for change. The short history we have had with the new legislation has, however, resulted in unintended consequences. Creditors are not getting all that they bargained for and splits of authority have emerged over a number of important issues. I can imagine the credit industry pushing a "technical amendments" bill in the next couple of years, particularly if we start seeing some circuit-level authority construing the changes to the law in a manner that is less than favorable to the industry.

Thanks to George and the North Dakota Law Review, in whom all rights to the article are reserved, for the privilege of being able to share it with my blog's readers.  In his introduction, George describes his goals for the Article as follows:

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Happy Birthday, BAPCPA? Thoughts on Some of BAPCPA's "Conventional Wisdoms"

Today, glasses in some halls of Congress are probably clinking in honor of BAPCPA's first birthday. But is America really better off? Are creditors really getting paid more because fewer consumers file for bankruptcy? The one major advantage to a bankruptcy case is that it’s a collective proceeding that minimizes the “agency” or collection costs that few unsecured (or deficiency) creditors would reasonably be willing to bear alone. At least in theory, therefore, bankruptcy provided enhanced recoveries for unsecured creditors by minimizing "collective action problems."   Such rational thinking was a prime impetus behind passage of the Bankruptcy Code in 1978, and most practitioners, Judges, and academics would tell you that this reasoning remains valid to this day.  As neatly summed up by Professor Doug Baird in a great article entitled "A World Without Bankruptcy" (published at 50 Law and Contemporary Problems 173 (1987) (We$tlaw Link)):

We may not desire a world without bankruptcy because the self-interest of creditors leads to a collective action problem, and a legal mechanism is needed to ensure that the self-interest of individuals does not run counter to the interests of the group.

In passing BAPCPA, about three-quarters of the members of Congress, fueled by their lobbying pals, disagreed with such rational thinking. Apparently, however, they didn’t really care what practitioners, academics, or Judges thought, observed, or studied (at least that's what many who tried to have their voices heard say). Instead, to these Congressional leaders, bankruptcy had become a den of thieves, and it was time to shut the system down. In large measure, they succeeded, at least in the short-term.  Recently, however, academic scholars are questioning the "conventional wisdom" that the long-term impact of the present law will be dramatically fewer filings, notwithstanding the significantly higher costs to file.

But, does the reduced number of bankruptcy filings really prove that BAPCPA has succeeded, as Senator Grassley likes to gloat? Isn’t the ultimate measure of success determined by aggregate unsecured creditor recoveries? And, has the lot of unsecured creditors as a whole really been improved as a result of BAPCPA? While some individual creditors may benefit in particular cases by winning a "race to the courthouse," Professor Baird's analysis of the "collective action" problem suggests that unsecured creditors as a whole may in fact be worse off in BAPCPA's Hobbesian "world without bankruptcy" where each creditor selfishly pursues its own parochial interests at the expense of the whole.

So today, as we pause to reflect upon BAPCPA's first birthday (which one former judge added in a comment was the “worst single piece of legislation since the Fugitive Slave Law or the Alien and Sedition laws”) our thoughts are drawn to "conventional wisdoms" concerning BAPCPA. In a prior post, I noted how DSI’s BAPCPA guru, Cathy Vance, exposed the fallacies of "conventional wisdom" regarding interpretations of BAPCPA’s new Section 1102(b)(3) (dealing with a Creditors’ Committee's’ obligation to share information with other non-Committee creditors). In this recent piece in Preference Quarterly, she and Nelson Mullins’ Byron Starcher challenge the "conventional wisdom" (pp.10-11) that BAPCPA effected a dramatic change to the law regarding the venue of preference actions. In fact, they conclude, the enacted language effected no change at all, and may have made things even worse!  In sum, BAPCPA doesn't always mean what it says or say what it means.  But, as one Chicago judge said, "it does provide good opportunities for some real creative lawyering" (of course, the client who has to pay for such creativity will be none too thrilled).

In the end, I suspect that unsecured creditors as a whole will suffer from BAPCPA's restoration of "collective action problems."  Time (and some very much needed academic research) will tell.  In the meantime, we’ll instead send our happy birthday wishes to Chicago's own Mae Jemison, who turns 50 today.  As a member of the space shuttle Endeavour's crew in 1992, Dr. Mae was the first African-American woman to become an astronaut.  Now there's a birthday worth toasting!

© Steve Jakubowski 2006

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Texas District Court Rules that BAPCPA's Section 526(a)(4) Unconstitutionally Restricts a "Debt Relief Agent's" Free Speech Rights, But Section 527 Doesn't

A month ago, as part of my continuing BAPCPA Consumer Outline series, I posted an outline section entitled Attorneys as 'Debt Relief Agencies' -- Court Decisions and Constitutional Challenges, in which I reviewed various cases winding their way through the federal courts challenging the constitutionality of BAPCPA's "debt relief agency" provisions.  Yesterday, Dallas' District Court Judge David C. Godbey declared in Hersh v. United States, No. 05-2330-N (N.D. Tex. 7/26/05) (pdf), that BAPCPA did indeed transform consumer bankruptcy lawyers into "debt relief agents."  More significantly, however, Judge Godbey also held that BAPCPA unconstitutionally restricts an agent's free speech rights in certain respects, but not in others.

In finding that BAPCPA does unconstitutionally restrict a debt relief agent's free speech rights, Judge Godbey focused on Code section 526(a)(4), which prohibits a debt relief agent from "advis[ing] an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title."  In finding this provision "not sufficiently narrow," and thus an unconstitutional restriction of an agent's free speech rights, Judge Godbey concluded:

Section 526(a)(4), therefore, is overinclusive in at least two respects:  (1) it prevents lawyers from advising clients to take lawful actions; and (2) it extends beyond abuse to prevent advice to take prudent actions.  Gentile, 501 U.S. at 1075; see a/so In re R. M. J., 455 U.S. 191, 203 (1982) (Even under intermediate scrutiny, "[s]tates may not place an absolute prohibition on certain types of potentially misleading information ... if the information also may be presented in a way that is not deceptive."); Conant v. Walters, 309 F.3d 629, 638-39 (9th Cir. 2002) (pdf) (finding that government could not justify policy that threatened to punish a physician for recommending to a patient the medical use of marijuana on ground that such a recommendation might encourage illegal conduct by the patient). Thus, section 526(a)(4) of the BAPCPA imposes limitations on speech beyond what is "narrow and necessary."  Accordingly, the Court finds 11 U.S.C. § 526(a)(4) facially unconstitutional and denies the Government's motion to dismiss Hersh's claim.

Judge Godbey then invited the plaintiff-agent (the humble Princteon undergrad and UT JD-MBA grad, Susan B. Hersh) to "move for summary judgment on that claim once she amends her complaint to assert it explicitly."

Judge Godbey, however, refused to strike down as unconstitutional Code section 527, which requires debt relief agents to provide "assisted persons" with certain mandatory disclosures (also listed at p.9, fn.11) that were designed, on the one hand, to protect consumers from overreaching debt relief agents, while on the other hand, to scare the bejesus out of them when contemplating a bankruptcy filing.  In holding that these mandatory disclosures do not "unconstitutionally compel speech," Judge Godbey concluded:

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Everything Starts Somewhere: DSI's Catherine Vance Unlocks the Mystery Behind the Origin of BAPCPA's Section 1102(b)(3), Which Requires a Creditors' Committee to Provide Creditors with Access to Information and a Ready Ear - Part I

Catherine E. Vance, DSI's research and policy guru, is as steeped in the legislative history of BAPCPA as you'll find. During BAPCPA's most formative and "tumultuous years," starting in 1998, Cathy viewed BAPCPA's development from the unique vantage point of legal writer, analyst, and national education coordinator for the Commercial Law League of America. Clearly then, given BAPCPA's well-known flaws, when Cathy decides to look into the history of BAPCPA's incongruous new Code section 1102(b)(3) (which requires a creditors' committee to "(A) provide access to information for creditors who hold [like] claims" and "(B) solicit and receive comments from [such] creditors"), it's worth reflecting on her comments.

Cathy's latest work, entitled The Origin of Information Sharing Under New § 1102(b)(3) (pdf), however, is not about "the legal problems with these § 1102(b)(3) orders and the motions that underlie them - most notably the absence of a case or controversy and insufficient notice." Rather, she starkly notes, the purpose is "to dispel a myth that permeates them all: that we know nothing about the origin or purpose of § 1102(b)(3)."

So what should we know about the origins of Section 1102(b)(3)? Well, for starters, it's origins were quite inauspicious, resting on a short statement from Representative Nydia Velasquez, then the ranking democratic member of the House Small Business Committee, who "[o]n May 5 ... offered House Amendment 57, making her intention clear: Vel�zquez had small business creditors on her mind, especially those whose claims are large from the creditor's perspective, but small from the debtor's."

Cathy quotes directly from Representative Velasquez's passionate statement in support of the amendment (reported in the Congressional record), where Representative Velasquez said:

Mr. Chairman, while H.R. 833 provides a plan for overhauling our Nation's bankruptcy law, there is one issue that, while seemingly small, will have a great impact on this Nation's small businesses. That is the way that the bankruptcy process leaves small businesses who are creditors on the outside looking in.

To solve this problem, I am offering an amendment that will quickly and fairly address the issue by ensuring more small business involvement and greater communication in the bankruptcy process. My amendment will make two simple changes.

First, it would allow a small business involved as a creditor in a Chapter 11 bankruptcy case to be added to the creditor committee by the court. The court could make such an appointment by comparing the amount of the claim as a proportion of the business' gross annual revenue, thus showing that a business is disproportionately affected.

Second, my amendment will ensure that those small businesses not included on the creditor committee will have access to critical information regarding the credit [sic] committee's actions. This could be achieved by simply making the committee open to comments from and required to provide additional information to those small businesses not included on the committee but who will nonetheless be affected by the outcome.

Cathy notes that no further changes were proposed, and the provision sailed through without much further ado, "save for some unhelpful information included in the various House reports."

To Cathy, however, there is no need to engage in protracted mental anguish in every chapter 11 case over how to handle the most basic of chapter 11 duties (i.e., the sharing of information between the debtor and the committee). In effect, Cathy seems to argue, do what others have done with BAPCPA's more enigmatic provisions -- first, try to limit them; and if that doesn't work, ignore them. She writes:

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BAPCPA and FDCPA: A Consumer Bankruptcy Lawyer's "Bramble Bush"

The famed early English jurist Henry De Bracton (1210-1268), cited in Alden v. Maine, 527 U.S. 706, 764 nn.3-4 (1999) as the "earliest source for the common law immunity of the King," is also the first to have said, "An ounce of prevention is worth a pound of cure."

Bracton's well-worn phrase springs to mind when perusing a new treatise, Attorney Liability in Bankruptcy, co-edited (and co-authored in significant part) by Corrine Cooper and Catherine Vance. Their basic conclusion: there are more hidden traps in BAPCPA than in an Indiana Jones movie. A few of the traps reviewed in the treatise are also previewed here (§ 707(b)(4)), here (§ 521), and here ("9 Traps and One Slap").

Based on this recent decision from the 4th Circuit, it's looking like statutes whose acronyms end with the letters "CPA" portend dark days for attorneys dealing with consumer debtors. As recently explained at length in this blog post by Holland & Knight's Rob Glenn, the Fourth Circuit has recently held (in yet another split decision) that lawyers handling mortgage foreclosures are "debt collectors" who must comply with the provisions of the Fair Debt Collection Practices Act (FDCPA). Wilson v. Draper & Goldberg, 2006 WL 861429 (4th Cir., 4/5/06).

Best of luck to all practicing in BAPCPA's and FDCPA's "bramble bush."

© Steve Jakubowski 2006

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Judge Isgur Holds that the Automatic Stay Doesn't Apply to Ineligible Debtors Under BAPCPA Who Failed to Get Credit Counseling

Houston's Bankruptcy Judge Marvin Isgur again takes the forefront in interpreting BAPCPA's thorny provisions (as he did here, here, and here), this time issuing a controversial opinion on whether the automatic stay applies to ineligible debtors whose cases have been dismissed under BAPCPA for lack of credit counseling. In re Salazar, 2006 WL 827842 (Bankr. S.D. Tex., 3/29/06) (pdf).

Having previously dismissed the debtor's petition because the debtor failed to obtain credit counseling in advance of the filing of the petition, Judge Isgur was then asked to decide whether the automatic stay applied during the period between the time of the filing of the petition and the time the Court declares the debtor ineligible under BAPCPA's Code section 109(h).

What was at stake? A lot, for the debtor's friendly neighborhood subprime lender (Ameriquest Mortgage) had done what most lenders won't do without a court order; that is, proceed wilfully postpetition with a pending foreclosure sale without first obtaining relief from the automatic stay. Because actions in violation of the automatic stay are generally deemed void (not merely voidable), application of the automatic stay to the period between the ineligible debtor's filing and the close of the debtor's case would render the foreclosure a nullity. In dictum, Judge Jeffery A. Deller concluded just that in In re Tomco, 2006 WL 459347 (Bankr. W.D. Pa., 2/27/06) (pdf) (while disagreeing with Judge Cecelia G. Morris's dictum in In re Rios, 336 B.R. 177, 180 n.2 (Bankr. S.D.N.Y. 2005) (pdf) about BAPCPA's "less automatic" stay).

Judge Isgur, however, reached a contrary result. His ruling appears to be the first actual decision on the merits nationwide, and his conclusions couldn't have been clearer. He wrote:

[I]t is implausible to believe that Congress specifically identified people to exclude from the bankruptcy process, yet permitted those same people to benefit from bankruptcy's most powerful protection: the automatic stay. Both logic and the statute dictate that no automatic stay arises on the filing of a petition by an ineligible person�. [T]he relevant statutory language leaves no room for discretion. (Emphasis in original.)

This opinion won't win Judge Isgur much praise from those looking to judges to "subvert" (to use Professor Jean Braucher's framework discussed here) BAPCPA's less palatable provisions. But the result, he ruled, was dictated by applying simple logic to the answers reached on the following three questions:

(1) When does the stay takes effect under Code section 362?

(2) When is a petition filed under Code sections 301 and 302?

(3) Who may be a debtor under Code section 109?

Applying straight-forward, syllogistic logic, Judge Isgur essentially concluded that Congress had so tied his hands that there was nothing he could do to unwind the postpetition foreclosure sale of the hapless debtor's home. He wrote:

[W]hen read together, §§ 109(h), 302, and 362(a) establish that no stay can exist for debtors who fail to obtain the required credit counseling or qualify under an exception. The syllogism is as follows:

  • Individuals who have not received credit counseling and who do not qualify for a waiver are not eligible to be debtors under § 109.
  • Only eligible individuals may file a petition under § 302.
  • Without the filing of a petition under § 302, the automatic stay provisions set forth in § 362 are not invoked.

Judge Isgur could have finished there and moved on to another of the 11,000 cases on his docket, as the hard-nosed lobbyists who drafted BAPCPA and crammed it down everyone's throats intended, but Judge Isgur wasn't so easily shaken from his judicial roots and felt compelled to delve into the problematic practical implications of his ruling. He wrote:

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7 BAPCPA Related Papers Available for Downloading from SSRN

The following BAPCPA related working papers can be downloaded from the Social Science Research Network:


Univ. of Wisconsin's Jodi L. Bellovary & Marquette Univ.'s Don E. Giacomino & Michael D. Akers: "A Review of Bankruptcy Prediction Studies: 1930 to Present." (Abstract ID: 892160)


NYU Law School's Karen Gross & Fordham Law School's Susan Block-Lieb: "Empty Mandate or Opportunity for Innovation? Pre-Petition Credit Conseling and Post-Petition Financial Management Education." (Abstract ID: 884487)


Tel Aviv Univ's Buchmann Law School Ron Harris and Einat Albin: "Bankruptcy Policy in Light of Manipulation in Credit Advertising." (Abstract ID: 877053)


William & Mary Law School's Richard M. Hynes and Univ. of Chicago Law School's Eric A. Posner: "The Law and Economics of Consumer Finance." (Abstract ID: 874199)


National Consumer Law Center's Deanne Loonin & Elizabeth Renuart: "Life and Debt: A Survey of Data Addressing the Debt Loads of Older Persons and Policy Recommendations." (Abstract ID: 885398)


UNLV Law School's Judge Bruce Markell: "The Sub Rosa Subchapter: Individual Debtors in Chapter 11 after BAPCPA." (Abstract ID: 893582)


Widener Univ. School of Law's Juliet Moringiello: "Has Congress Slimmed Down the Hogs?: A Look at the BAPCPA Approach to Pre-Bankruptcy Planning." (Abstract ID: 892034)


Abstracts for each of these working papers follow:

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Denver's Judge Sidney Brooks Joins the BAPCPA Bashing Bandwagon as the Litigants Submit Poetic Dirges Lamenting BAPCPA's Incomprehensibility

Add Bankruptcy Judge Sidney Brooks, Chief Judge for the Bankruptcy Court for the District of Colorado, to the growing list of prominent judges (such as those mentioned here (Judge Monroe), here (Judge Markell), here (Judge Isgur), here (Judge Mark), and here (Judge Small)), who have become so exasperated with BAPCPA's reckless disregard of the English language that they wrote an opinion not only deciding an issue of first impression under BAPCPA, but also in the process taking the opportunity to bash Congress for having passed such poorly drafted legislation and having failed to first consult with the frontline judges and bankruptcy professionals who now have to try and make sense out of it.

In In re TCR of Denver, LLC, 2006 WL 626156 (Bankr. D. Colo., 2/17/06) (pdf), Judge Brooks had this to say about Congress's shoddy drafting:

This is a case where the language of BAPCPA passed by Congress tends to defy logic and clash with common sense. This is an example of a specific revision to the Bankruptcy Code, if followed by the Court and applied as Congress seems to intend -- i.e., by way of strict construction -- would result in an absurd decision and totally unworkable legal precedent. These drafting problems have the potential of bringing the bankruptcy system to a halt while debtors, creditors, and the courts try to figure out just exactly what Congress intended. This Court would add that it appears that the largely overlooked changes to the bankruptcy provisions related to non-consumer cases, such as the case presently before the Court, may sometimes equal the poor crafting of the consumer provisions. Moreover, serious and consequential constitutional questions may be looming on the horizon because of inartful drafting.

What problem was Judge Brooks lamenting? Well, most people don't need a course in logic from Judge Markell to know there's a world of difference between items in a list connected by the word "or" and items in a list connected by the word "and." Apparently, however, BAPCPA's scriveners learned no such lesson, and so it was left to Judge Brooks to explain, in principled fashion, why it was that Congress really meant to use the word "or" when it instead wrote "and" in modifying Bankruptcy Code section 1112(b) (which determines when a Court "shall" dismiss a chapter 11 proceeding or convert it to a chapter 7 liquidation).

Before BAPCPA's enactment, Bankruptcy Code section 1112(b) provided that the Court may dismiss or convert a case (but was not required to do so) for "cause." The old law identified 10 possible grounds for dismissal or conversion that may constitute "cause." Notably, these 10 possible grounds for dismissal or conversion were listed in the alternative or "disjunctive," connected only by the word "or," so that any one factor alone could have provided sufficient "cause" for dismissal or conversion.

With BAPCPA, however, Congress made a change to Code section 1112(b) that -- if the "plain meaning" were followed -- would have produced absurd results for it would have required the Bankruptcy Court to dismiss or convert the case "for cause" only upon the confluence of 16 separate factors, all connected by the word "and." As Judge Brooks noted, however, all these factors could never simultaneously exist within a corporate debtor. Indeed, he observed, if all factors were ever applicable to a single individual debtor, criminal prosecution of the individual -- rather than mere dismissal of its bankruptcy case -- would be the most appropriate remedy!

To fix the problem, Judge Brooks pushed plain meaning aside and ruled that "a party in interest does not need to establish [under BAPCPA's new Code section 1112(b)(4)] all of the items constituting 'cause' before a case can be dismissed by the Court." Before doing so, however, he made sure to extend a very well-deserved compliment to the attorneys for both the creditor movant and the debtor. These briefs, he wrote, "might well win prizes for their rhyme." You'll find these simultaneous submissions (which I highly recommend) here (creditor's attorney, Cynthia Kennedy of Lafayette, CO) and here (debtor's attorney, Barry Arrington of Arvada, CO). The US Trustee's brief, which Judge Brooks described as "well-reasoned" (but not poetic), is here.

Here's some more of what Judge Brooks had to say about BAPCPA's butchering job:

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Hope Springs Eternal in Chicago, Even for Bankruptcy Pros Struggling with BAPCPA

As every Cub fan is painfully aware, hope springs eternal around this time every year in Chicago. This year, of course, is notable because -- for the first time in recent memory -- hope is springing (even if not eternally) among White Sox fans (though some label it irrational exuberance).

Baseball, however, isn't all that's providing hope for Chicago's bankruptcy pros this April. Check out the following upcoming three bankruptcy conferences, which offer real hope for those trying to make sense of BAPCPA's senseless provisions. These are:

  • April 7, 2006: The University of Illinois Law School is sponsoring this one-day conference entitled "Consumer Bankruptcy and Credit in the Wake of the 2005 Act," featuring an all-star panel of judges and professors from the US and Canada;
  • April 17, 2006: The DuPage County Bankruptcy Committee is sponsoring this meeting (the 7th in a continuing series) on some important consumer bankruptcy issues spawned by BAPCPA, including requirements imposed by the US Trustee's office on the debtor and its attorney;
  • and

  • April 27, 2006: The Commercial Law League of America, as part of its 76th Annual Meeting, is sponsoring this symposium at DePaul University College of Law (see p.4 of brochure) entitled "BAPCPA Six Months Later," featuring prominent judges, lawyers, professors, and consultants from around the country.

© Steve Jakubowski 2006

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Say What? ... Florida's Judge Jay Cristol Waives Credit Counseling Requirement for Creole-Speaking Debtor Who Couldn't Understand English

A recent comment here asked whether one can get away with getting credit counseling just one day in advance of the bankruptcy filing. The cases answer this question with a resounding NO!

As with most statutory schemes, however, it doesn't take long (as noted here) for a case to come along that gives a judge an opportunity to find an exception to the general rule.

Another judge finding such an exception is Judge A. Jay Cristol, Chief Judge Emeritus of the Bankruptcy Court for the Southern District of Florida (and author of this classic ode (in which he denied his own sua sponte motion) and this highly acclaimed book on the so-called "Liberty Incident").

In In re Petit Louis, 2006 WL 538635, (Bankr. S.D. Fla. 3/1/06) (pdf), the debtor -- who couldn't understand English -- requested a waiver of the credit counseling requirement on the basis that none of the approved counseling agencies could speak to him in his native Creole. In the alternative, he asked the Assistant US Trustee to provide a Creole translator, or decertify the approved counseling agencies for failure to provide Creole speaking counselors. The Assistant US Trustee, for her part, stuck close to the party line and maintained several different reasons as to why she lacked authority to waive the pre-bankruptcy counseling requirement, decertify any counseling agencies approved for the district, or provide a free translator (these rapid-fire, hard-nosed arguments alone make the case worth reading).

In meting out a small -- but significant -- measure of justice, Judge Cristol actually bucked the trend and waived the pre-filing credit counseling requirement for this indigent, Creole-speaking debtor. He wrote:

Now, this is a matter that probably could go either way. You could take the position that since it is the custom of the Court in proceedings not to provide interpreters, that this policy will be carried over to the issue of credit counseling.

On the other hand, since the credit counseling is a new provision and it is provided for a particular purpose, the position could be taken that it should be strictly construed and that, if the credit counseling agency cannot provide the counseling in the debtor's language and the debtor cannot afford to hire a translator, there is no possibility the debtor can get the credit counseling.

Therefore, this Court grants the waiver of the credit counseling requirement in this case because of the inability of any of the certified credit counseling agencies to provide pre-bankruptcy counseling in Creole.

Expect to soon see a request for waiver of the credit counseling requirement that combines Judge Cristol's reasoning with the "BAPCPA is incomprehensible" reasoning (reported here, here, and here) and argues that since BAPCPA is the legislative equivalent of Creole, the credit counseling requirement should be waived for that hapless debtor too.

For those interested, here are a few other classic quips from Judge Cristol's bankruptcy opinions and proceedings that will surely make you laugh (and please don't hesitate to contribute your own references or personal memories in the comments below):

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Judge Markell Invokes Justice Antonin Scalia's Canons of Statutory Construction Over the Philosophical Theories of Ludwig Wittgenstein in Resolving the Judicial Debate Over How to Close BAPCPA's New "Mansion Loophole"

Bankruptcy Judge Bruce Markell, whose courtroom is in Las Vegas, has written extensively on bankruptcy law topics. His first article, written in 1988 following his becoming a partner in Sidley & Austin's LA office, was entitled Toward True and Plain Dealing: A Theory of Fraudulent Transfers Involving Unreasonably Small Capital, 21 Ind. L. Rev. 469 (1988). This extensively researched article was a major contribution to bankruptcy scholarship as it was the only one out there that hit every case you'd ever want to read on the topic back through the enactment in 1571 of the "Statute of Elizabeth" (a penal statute that prohibited conveyances made with "intent to delay, hinder or defraud creditors and others of their just and lawful actions"). I vividly recall this article because I was then a third year associate responsible for writing -- from scratch -- a comprehensive memo on the meaning of "unreasonably small capital" in fraudulent transfer law. The results of my research obviously were no match for Judge Markell's essay, so I could only marvel at the timely publication of this providential article that saved me and others hundreds of hours of painstaking research into cases well over 100 years old.

Since that very auspicious start, Judge Markell (who tutored logic in his four years of college, graduated 1st in his class at UC-Davis Law School, and clerked for then 9th Circuit Judge -- now Supreme Court Justice -- Anthony M. Kennedy) has written, taught, and lectured extensively on bankruptcy law and practice. He was appointed Bankruptcy Judge for the District of Nevada in July 2004 to fill a vacancy on the Court, and was again appointed for a full 14 year term in October 2004.

Judge Markell's latest scholarly contribution, however, is not about bankruptcy, but about that famed enigmatic philosopher, Ludwig Wittgenstein (don't go to sleep yet!), about whose works Judge Markell wrote a thesis in college entitled Grice's Recursive Definition of Truth and Wittgenstein's View on Meaning in Tractatus Logico Philosophicus and in the Philosophical Investigations. In his latest article, entitled Bewitched by Language: Wittgenstein and the Practice of Law, 32 Pepp. L. Rev. 801 (2005), Judge Markell asks a question few would dare to posit (and many more would not care to posit). He asks:

Have courts considered Wittgenstein's philosophy when deciding cases?

Judge Markell answers yes, but clearly he's not impressed by the overall level of judicial scholarship in the forty opinions of record that cite to Wittgenstein. Notably, even Judge Easterbrook's references to Wittgenstein fall short in Judge Markell's eyes. He writes:

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Judge Monroe Tells It Like It Is: BAPCPA Is a Fiasco Because Congress Sold Out Individual Consumers to Special Interest Groups

Remember back in October 2005, in the week before BAPCPA became effective, when about 500,000 Americans from every race, color, and creed decided they'd be better off filing bankruptcy than risking the possibility they'd have to enter BAPCPA's inferno at some later time? Back then I wrote here that "BARF" (Bankruptcy Abuse Reform Fiasco) was rapidly becoming the preferred acronym for the new bankruptcy legislation among many bankruptcy professionals.

Since then, as reported here, here, and here, exasperated bankruptcy judges have wrestled mightily with a few of BAPCPA's plainly irreconcilable provisions. Indeed, as noted here, one judge went so far as to quote Lincoln's Gettysburg Address to prove that one can't just ignore 278 words in BAPCPA (which coincidentally was the length of the Gettysburg Address) even though a "first blush" look (i.e., the plain meaning) demanded it.

Tom Kirkendall of Houston's Clear Thinkers blog yesterday wrote this post, pointing us to a recent decision by Austin Bankruptcy Judge Frank Monroe, who became so fed up with BAPCPA's senseless, disorienting, and often menacingly complex (i.e., "kafkaesque") world that he finally lashed out at Congress, calling the legislation's adoption in its title of the words "consumer protection" the "grossest of misnomers." In re Sosa, 2005 WL 3627817 (Bankr. W.D. Tex. 12/22/05).

To put this opinion in its context, you need to know something about Judge Monroe, former member of the great Houston-based bankruptcy firm of Sheinfeld, Maley & Kay, which dissolved in 2001 (ironically, according to one partner, "because of the resurgence of bankruptcy as a very hot practice area"). Judge Monroe practiced at SM&K continuously starting fresh out of the University of Texas law school in 1969, even serving as its managing partner for several years. His investiture as bankruptcy judge occurred in 1989, and he was reappointed in 2002 (hat tip to Mike Baumer for the clarification).

Clearly, then, Judge Monroe is no ranting anti-BAPCPA loon, so when he ascends the bully pulpit, it's worth listening. In fact, I think it's fair to say that Judge Monroe spoke for most of us bankruptcy professionals when he wrote, after playing "Judge Scrooge" and having to dismiss on Christmas eve the bankruptcy petition of another hapless consumer who failed to seek pointless credit counseling in advance of an emergency filing on the eve of foreclosure (an emergency apparently occasioned in part by the bank's own assurances of cooperation):

Those responsible for the passing of [BAPCPA] did all in their power to avoid the proffered input from sitting United States Bankruptcy Judges, various professors of bankruptcy law at distinguished universities, and many professional associations filled with the best of the bankruptcy lawyers in the country as to the perceived flaws in the Act. This is because the parties pushing the passage of the Act had their own agenda. It was apparently an agenda to make more money off the backs of the consumers in this country....

It should be obvious to the reader at this point how truly concerned Congress is for the individual consumers of this country. Apparently, it is not the individual consumers of this country that make the donations to the members of Congress that allow them to be elected [House vote] and re-elected [Senate vote] and re-elected and re-elected.

Looks like Judge Monroe would concur that BAPCPA looks more like BARF to those, like him, in the thick of it.

You'll find here, in a post dated 1/16/06, another take on Judge Monroe's decision at the American Bankruptcy Institute's BAPCPA Blog.

2/6/06 Update: Another hat tip thanks to Mike Baumer for pointing us to an earlier case where Judge Monroe similarly blasted Congress, this time in connection with the insanely harsh and unfair treatment of student loans in bankruptcy. Judge Monroe labeled this standard for discharging such loans the "let's make it as tough as humanly possible to discharge a student loan" standard. In re Speer, 272 B.R. 186 (Bankr. W.D. Tex. 2001) (pdf). He called Congress's squeezing of such debtors with the nearly impossible burden of proving "undue hardship" under Bankruptcy Code section 523(a)(8) in order to get the student loan discharged "a complete and total abdication of any scintilla of responsibility."

In another well-crafted exhortation against Congress's treating defaulting student loan debtors like "bums" and "putting the fox [i.e., the schools who liberally dispense loans to beef up their bottom lines] in charge of the hen house [i.e., the gullible students who believe the school's advertising about the supposed value of an education there] and not only blaming the students if they get eaten, but also charging them for the cost of the meal!"

Most notably, perhaps, Judge Monroe wrote this the year before he was reappointed to the bench, showing he's not afraid of the "big bad wolf" [i.e., Congress]. He wrote:

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Georgia's Bankruptcy Courts Split on Whether to Hold Sua Sponte that Attorneys Are Not "Debt Relief Agencies" under BAPCPA

As reported here, on October 17, 2005, the day BAPCPA went effective, Judge Lamar W. Davis, Chief Bankruptcy Judge of the Bankruptcy Court for the Southern District of Georgia, ruled sua sponte that attorneys who are members of the bar of that court, as well as those admitted pro hac vice, are not "debt relief agencies" within the meaning of BAPCPA so long as their activities fall within the scope of the practice of law and do not constitute a separate commercial enterprise. In re Attorneys at Law and Debt Relief Agencies, 332 B.R. 66 (Bankr. S.D. Ga. 2005).

As then reported, Judge Davis's surprise ruling raised interesting "case or controversy" issues, as it wasn't clear what specific situation the Court was addressing, other than the obvious theoretical one. It also left many wondering whether the Court's proactive style would catch on elsewhere.

Well, about 165 miles up the road from Judge Davis sits Judge Robert F. Hershner, the Chief Bankruptcy Judge for the Bankruptcy Court for the Middle District of Georgia. Two weeks after Judge Davis issued his ruling, a local bankruptcy attorney, John K. James, presented Judge Hershner with this "Motion to Determine Attorney Status" following his post-petition employment by joint pro se chapter 7 debtors. In the motion, Mr. James asked the court to hold -- as Judge Davis had -- that attorneys who practice in the Middle District of Georgia are not "debt relief agencies" under Section 101(12)(A) of the Bankruptcy Code.

The US Trustee filed this objection to the attorney's motion, but did not object on the basis that no "case or controversy" existed. Mr. James filed this excellent reply brief.

According to the Court, James raised three grounds justifying relief:

(1) the debt relief agency provisions of BAPCPA, as applied to attorneys who practice before this Court, violate the First Amendment of the United States Constitution;

(2) the statutory structure of BAPCPA indicates that an attorney is not a debt relief agency; and

(3) the legislative history indicates that Congress did not intend the term debt relief agency to include an attorney.

Judge Hershner denied the motion on the basis that no "case or controversy" existed, yet remarkably didn't even once cite to Judge Davis's opinion. In re McCartney, 2006 WL 75306 (Bankr. M.D. Ga. 1/12/06). He wrote:

A fundamental jurisdictional consideration for any federal court, including Article I courts, is whether the plaintiff has constitutional standing. The inquiry is a reflection of the concern that there be an actual "case or controversy" before the court. The litigant must show, "first and foremost, 'an invasion of a legally protected interest' that is 'concrete and particularized' and 'actual or imminent.' " In the absence of standing the court has no jurisdiction to decide the merits of a claim.

Three elements must be present for a plaintiff to satisfy the "case or controversy" requirement of constitutional standing. First, the plaintiff must demonstrate "actual injury." Second, the plaintiff must establish a casual link between the injury and the challenged conduct. Third, it "must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision."

In the case at bar, no party has threatened to enforce against Movant the debt relief agency provisions of BAPCPA. Movant has not sustained any real, actual, or direct harm or injury. Movant has not shown that he is in danger of sustaining any immediately impending harm or injury.

The Court can only conclude that Movant has failed to satisfy the case or controversy requirement. The Court is persuaded that Movant's motion must be dismissed.

If you're a front-line attorney representing consumer debtors in BAPCPA's austere world, you'll surely agree that the most alarming part of this entire matter is the US Trustee's hardline position that attorneys are "debt relief agencies" under BAPCPA's "plain meaning" and that Congress intended to treat them as such (even if BAPCPA's onerous provisions regarding "debt relief agencies" extend well beyond what's professionally required of them under state rules of professional responsibility). Presently, the top slot of the Executive Office for the US Trustees is vacant. Whoever is nominated to serve as Executive Director should be asked his or her views on this important issue. Should the views of the US Trustee for the Middle District of Georgia come to represent the official position of the Executive Office for the US Trustees (and hence the position of all US Trustees nationwide), then a lot of consumer bankruptcy attorneys may soon wish they had become doctors or professional musicians instead.

© Steve Jakubowski 2006

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Seven BAPCPA-Related Working Papers Available for Downloading from SSRN

The following seven BAPCPA-related working papers can be downloaded from the Social Science Research Network:


University of Arizona Law School's Jean Braucher, Rash and Ride-Through Redux: The Terms for Holding on to Cars, Homes and Other Collateral under the 2005 Bankruptcy Act


University of Arizona Law School's Jean Braucher, Theories of Over-Indebtedness: Interaction of Structure and Culture


New England School of Law's Russell Engler, And Justice for All-Including the Unrepresented Poor: Revisiting the Roles of the Judges, Mediators and Clerks


FDIC's Michael Krimminger, Adjusting the Rules: What Bankruptcy Reform Will Mean for Financial Market Contracts


Univ. of Illinois Law School's Charles Jordan Tabb, The Brave New World of Bankruptcy Preferences


Univ. of Illinois Law School's Charles Jordan Tabb, Consumer Bankruptcy After the Fall: United States Law Under S.256


Georgia State Law School's Jack F. Williams and St. John's Univ. Law School's Jacob L. Todres, Tax Consequences of Postpetition Income as Property of the Estate in an Individual Debtor Chapter 11 Case and Tax Disclosure in Chapter 11


Abstracts for each of these working papers follow:

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Judge Isgur Cites to the Gettysburg Address as Basis for Rejecting "First Blush" Interpretation of BAPCPA's Multiple Serial Filer Stay Provisions

Houston's Bankruptcy Judge Marvin Isgur, the leading author of opinions of first impression interpreting BAPCPA's provisions as they relate to consumer debtors (see here, here (Charles case), here, and here), tackles another thorny issue of first impression in In re Toro-Arcila, 2005 WL 3370045 (Bankr. S.D. Tex., 12/12/2005). By way of background, BAPCPA's provisions distinguish between "multiple serial filers" (2 or more cases were dismissed in year before the present case filed) and "single serial filers" (only 1 case dismissed in year before the present case filed). Single serial filers get the benefit of the automatic stay for the first 30 days of the case, but the filing is presumed in bad faith and can be rebutted only by clear and convincing evidence that the filing was not in bad faith. Judge Isgur recently developed two handy charts to guide judges and lawyers through the thicket of rules addressing the issues that must be examined in determining whether the stay should be extended as to a single serial filer (see here).

In this case, Judge Isgur addresses a separate issue: if the single serial filer fails to get the stay extended under Code section 362(c)(3), can the debtor move under Code section 362(c)(4)(B) for reimposition of the stay despite the fact that this Code section appears "at first blush" to be for the benefit only of multiple serial filers?

In concluding that what appears to be true "at first blush" is actually incorrect, Judge Isgur rejects the statute's apparent "plain meaning." To do otherwise, he concludes, would effectively render exactly 278 words in BAPCPA superfluous, a result Congress could not have intended. Judge Isgur then somehow remarkably divines that, "coincidentally," the Gettysburg Address (which he quotes in its entirety, and is always worth rereading) of President Abraham Lincoln was also 278 words. From this coincidental fact, Judge Isgur concludes, tongue-in-cheek:

Although the meaning of this subsection [of BAPCPA] cannot be compared to the importance of the Gettysburg Address, the Court presumes that Congress did not codify words of comparable length with no meaning whatsoever.

As to the statutory provisions of BAPCPA in question, in concluding that "the 'first blush' intepretation is incorrect," Judge Isgur draws not only upon the Gettysburg Address, but upon well developed countervailing principles of statutory construction to avoid rendering whole sections of the statute superfluous. Given that, per Bankruptcy Judge Robert Mark, BAPCPA "is not a model of clarity," and per Judge Isgur, BAPCPA can be "particularly difficult to parse and, at worst, virtually incoherent" (see here), Judge Isgur's dance around the "plain" or "first blush" meaning provides the bankruptcy judge and practitioner with some important tools for preventing BAPCPA from becoming the statutory nightmare it has the potential to be. He writes:

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Judge Isgur Provides Benchmark Analysis of a Serial Filer's Rights under BAPCPA to Obtain an Extension of the Automatic Stay Beyond 30 Days

Houston's Bankruptcy Judge Marvin Isgur, who's rapidly establishing himself as the "go to" judge on BAPCPA's hot issues, delivered another strong opinion (see references here and here for his other BAPCPA-related decisions), this time on the right of a serial filer to obtain an extension of the automatic stay beyond the 30 day statutory limitation imposed on serial filers under BAPCPA's new section 362(c)(3)(A). In re Charles, 2005 WL 3288182 (Bankr. S.D. Tex., 11/30/05).

As reported here, Judge Isgur in early November 2005 granted this serial filer's motion to extend the automatic stay's protections to the primary secured lender, but he was unwilling to even consider extending the stay to "all creditors" without a good explanation in the debtor's motion of why it should be. The debtor subsequently filed an amended emergency motion for continuation of the stay as to all creditors and the Court held a hearing on the matter 16 days later.

In ruling on this amended motion, Judge Isgur said that "the Court has the discretion to extend the stay if Ms. Charles proves that the filing of this case is in good faith as to the creditors to be stayed." However, the Court added,

[b]efore the Court analyzes the applicable factors for determining whether the case was filed in good faith as to the creditors to be stayed, the Court must determine the nature of the burden of proof on the debtor.

The Court then provided a tidy three column, four row chart analyzing who has the burden of proof on each of the following four issues:

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More BAPCPA Decisions from November 2005

Below you'll find more case summaries on the following BAPCPA-related decisions from bankruptcy courts around the nation:


BAPCPA - Automatic Stay - Serial Filers: In re Collins, 2005 WL 3163962 (Bankr. D. Minn., 11/29/05).

BAPCPA - Automatic Stay - Stay Termination - Failure to File Statement of Intention: In re Schlitzer, 2005 WL 3072791 (Bankr. W.D.N.Y., 11/17/05).

BAPCPA - Chapter 15 - Commencement of an Ancillary Case: US v. J.A. Jones Constr. Group, LLC, 2005 WL 3199053 (E.D.N.Y., 11/29/05).

BAPCPA - Credit Counseling - Exigencies: In re Cleaver, 2005 WL 3099686 (Bankr. S.D. Ohio, 11/17/05).

BAPCPA - Credit Counseling - Exigencies: In re Sukmungsa, 2005 WL 3160607 (Bankr. D. Utah, 11/23/05).

BAPCPA - Homestead Exemption - Statutory Cap: In re Blair, 2005 WL 3108495 (Bankr. N.D. Tex., 11/21/05).


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Some BAPCPA Decisions from October/November 2005

Below is a roundup of recent cases interpreting BAPCPA's new additions to the Bankruptcy Code. Judge Mark recently noted (referenced here) that BAPCPA "is not a model of clarity." Similarly, Judge Isgur recently said (see below) that BAPCPA can be "particularly difficult to parse and, at worst, virtually incoherent." We hope that these periodic BAPCPA decisional updates don't suffer from the same malady and help you sort through BAPCPA's legal thicket.

Below you'll find case summaries on the following BAPCPA-related decisions from bankruptcy courts around the nation:


BAPCPA - Automatic Stay - Serial Filers: In re Montoya, 2005 WL 3160532 (Bankr. D. Utah, 11/23/05).

BAPCPA - Automatic Stay - Serial Filers: In re Charles, 332 B.R. 538 (Bankr. S.D. Tex., 11/4/05).

BAPCPA - Bankruptcy Petition Preparers: Martini v. We the People Forms and Service Centers, USA, Inc. (In re Barcelo), 2005 WL 3007104 (Bankr. E.D.N.Y., 10/24/05).

BAPCPA - Credit Counseling - Exigencies: In re LaPorta, 2005 WL 3078507 (Bankr. D. Minn., 10/27/05).

BAPCPA - Homestead Exemption - "As a Result of Electing" Debate: In re Virissimo, 332 B.R. 208 (Bankr. D. Nev., 10/31/05).

BAPCPA - Homestead Exemption - Fraudulent Intent: In re Maronde, 332 B.R. 593 (Bankr. D. Minn., 11/8/05).

BAPCPA - Utilities - Adequate Assurance: In re Lucre, Inc., 2005 WL 3111078 (Bankr. W.D. Mich., 11/9/05).


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Professors Warren and Zywicki Clash on BAPCPA's Effects on the Rights of "Support Claimants"

Professor Elizabeth Warren provides a cup of bitter coffee at the TPM Cafe Blog in her post entitled "The Bankruptcy Wars Continue." Here, she summarizes current attacks on BAPCPA's harsher anti-consumer provisions, including a citation to an article from the Yale Law Journal in support of the proposition that "despite the claims of the bill's supporters that the bankruptcy laws would help those trying to collect child support, no one has been fooled by the rhetoric; the new law undermines the relative position of support claimants."

Professor Warren's conclusion surely will not sit well with Volokh's Professor Todd Zywicki's, whose recent post strongly disagreed with the conclusions drawn in that same student note (and made elsewhere, including recent updates to bankruptcy casebooks).

In Professor Zywicki's post, he first describes the argument that BAPCPA's provisions will disadvantage those seeking to collect domestic support obligations from their divorced spouses or parents as "going something like this":

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BAPCPA in the News

Below are some news articles referencing BAPCPA-related topics we thought you'd find interesting.


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BAPCPA in the Blogs

Below are some notable BAPCPA-related blog posts that have caught our eye as of late.


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On Second Thought... Texas Bankruptcy Court Reverses Its "Don't Mess With Texas" Stance Based on Lack of Proof of Availability of Credit Counseling

In a prior post, I wrote:

The old phrase "Don't Mess with Texas" rings true in today's ruling from the Bankruptcy Court of the Southern District of Texas, In re Hubbard, 2005 WL 2847420 (Bankr. S.D. Tex., 11/2/05), where the Court denied a chapter 13 debtor's request to extend the time to provide verification of credit counseling.... This case makes clear that lawyers and debtors should expect bankruptcy judges to hold a debtor's feet to the fire and require it to follow BAPCPA's rigid credit counseling guidelines. In sum, a tighter squeeze.

Six days later, the Hubbard court changed its mind, sua sponte, advising that it was reconsidering its prior order. In re Hubbard, 2005 WL 3061939 (Bankr. S.D. Tex., 11/08/05). Notably, however, Judge Isgur did not change his mind about the "plain meaning" of the statute, saying he "sees no ambiguity in the statute." He also didn't change his view that
"[t]he applications filed by the debtors do not constitute certifications under the law, stating that "[u]ntil certifications are filed, the Court will not consider whether the factual allegations made in the applications satisfy the requirements of § 109(h)(3)."

Instead, the court focused on the availability of credit counseling in the Houston area, and the debtor's allegation that credit counseling was not available. Seizing this hook, the Court found grounds for dispensing justice to the poor debtor caught in BAPCPA's imperfect transitional world. The Court stated:

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BAPCPA's "Plain Meaning" Requires That a Consumer Debtor's Feet Be Held to the Fire

The "don't mess with Texas" attitude described earlier regarding a Texas bankruptcy court's hard-nosed reading of the credit counseling requirements of BAPCPA's new "bankruptcy abuse" provisions seems to be sweeping the land, as recently demonstrated in bankruptcy court decisions from Missouri and Virginia addressing another aspect of BAPCPA's new "bankruptcy abuse" provisions: a debtor's request for extension of time to obtain credit counseling services. See In re Gee, 2005 WL 2978962 (Bankr. W.D. Mo., 10/26/05), and In re Watson, 2005 WL 2990902 (Bankr. E.D. Va., 11/3/05).

If these early cases are any guide, then the future sure looks bleak for the poor consumer. Both these cases address the new BAPCPA requirement that permits a debtor who failed to comply with the onerous pre-filing debt counseling requirements to still be eligible to file a bankruptcy petition as long as it files a "Certification of Exigent Circumstance to Waive Debt Counseling Prior to Filing." In this certification, the debtor requests that the Court, pursuant to § 109(h)(3), temporarily waive the requirement contained in § 109(h)(1) that Debtor receive credit counseling in order to be eligible to file a petition.

In the Missouri case, the certification alleged that a foreclosure sale of debtor's residence was scheduled on the date of filing and that "Debtor's counsel could not be assured a certificate could be supplied prior to the foreclosure."

In the Virginia case, the debtor claimed he was engaged in negotiations with his landlord regarding a dispute concerning the continued occupancy of the business premises, was served with an unlawful detainer action ten days prior to filing, and was involved in mediation concerning this dispute until the afternoon prior to filing. This debtor filed his bankruptcy petition approximately twenty minutes prior to the hearing on the unlawful detainer.

The Bankruptcy Courts in both cases adopted the "plain meaning rule" of statutory interpretation and rejected each of the respective debtor's certifications for failing to strictly comply with all the requirements of Bankruptcy Code section 109(h). This section requires, at a minimum that the debtor make a request for credit counseling services during the five-day period preceding the filing, and then certify its inability to obtain those services. Because in each case, the debtor failed to comply with the strict requirements of Section 109(h), the Courts dismissed the petitions, notwithstanding the clear exigencies facing the debtors.

In the Missouri case, the court stated:

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BAPCPA's Homestead Exemption: A Third Judge Weighs In on the Debate

In In re Virissimo, 2005 WL 2854341 (Bankr. D. Nev., 10/31/05), Judge Linda B. Riegle of the Bankruptcy Court for the District of Nevada sided with Judge Robert Mark, Chief Bankruptcy Judge of the Bankruptcy Court for the Southern District of Florida, in the debate (referenced here) between Judge Mark and Arizona's Judge Haines regarding whether BAPCPA's limitation on the homestead exemption, as set forth in § 522(p) to the Bankruptcy Code, limits the amount that a resident debtor can claim as exempt as "homestead" property under state law if the debtor has not owned the property for more than 1215 days and did not previously own property in the state.

Judge Riegle summarized the debate between Judge Haines and Judge Mark as follows, ultimately concluding that Judge Mark had the winning argument:

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Don't Mess with Texas: Texas Bankruptcy Court Denies Request for Extension of Time to Provide Verification of Credit Counseling

The old phrase "Don't Mess with Texas" rings true in today's ruling from the Bankruptcy Court of the Southern District of Texas, In re Hubbard, (2005 WL 2847420) (Bankr. S.D. Tex., 11/2/05), where the Court denied a chapter 13 debtor's request to extend the time to provide verification of credit counseling.

This mandatory requirement that consumer debtors seek the advice (in all but emergency situations) of credit counseling firms in advance of their filing for bankruptcy is a slithering outgrowth of BAPCPA, and is embodied in new section 109(h) of the Bankruptcy Code. Being the first opinion on the matter, the Court said it "will interpret § 109(g) in accordance with traditional principles."

This case makes clear that lawyers and debtors should expect bankruptcy judges to hold a debtor's feet to the fire and require it to follow BAPCPA's rigid credit counseling guidelines. In sum, a tighter squeeze.

Here's what the Court said, uncensored:

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Bankruptcy Court Affirms Constitutionality of BAPCPA's Deprizio Amendment

While I've spent quite of bit of time bashing BAPCPA, it's not all bad. One change, for example, that was long overdue was an amendment to the Bankruptcy Code that addressed the so-called "Deprizio problem," a problem the drafters of the Code's amendments in 1994 thought they had resolved once and for all.

In In re ABC-Naco, (2005 WL 2649305) (Bankr. N.D. Ill., 10/13/05), Judge Wedoff, Chief Judge of the Bankruptcy Court for the Northern District of Illinois, in addressing a challenge to the constitutionality of BAPCPA's Deprizio amendment, first succinctly summarized the purpose of the amendment, and then affirmed its constitutionality.

For those contemplating constitutional challenges to BAPCPA based on violations of the Takings and Due Process Clauses of the US Constitution, this case is worth reading as it well demonstrates the challenges facing the litigant who contests garden variety amendments to BAPCPA like the "Deprizio amendment." (See also, Erwin Chemerinsky, Constitutional Issues Posed in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 79 Am. Bankr. L. J. 571 (2005) ("identify[ing] the constitutional issues most likely raised by BAPCPA")).

Excerpts from the Court's opinion follow:

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Georgia Bankruptcy Court Rules Sua Sponte that Attorneys Admitted to Practice in the District are Not "Debt Relief Agencies" Under BAPCPA

In the first case to address who is (or is not) a "debt relief agency" under BAPCPA, an important question given the "new and significant restrictions on the activities of debt relief agencies," Judge Lamar W. Davis, Chief Bankruptcy Judge of the Bankruptcy Court for the Southern District of Georgia, ruled sua sponte on October 17, 2005, BAPCPA's effective date, that attorneys who are members of the bar of that court, as well as those admitted pro hac vice, are not "debt relief agencies" within the meaning of BAPCPA, so long as their activities fall within the scope of the practice of law and do not constitute a separate commercial enterprise. In re Attorneys at Law and Debt Relief Agencies, (2005 WL 2626199) (Bankr. S.D. Ga. 10/17/05). The matter raises interesting "case or controversy" issues, as it's not exactly clear what specific situation(s) the Court was addressing, other than the obvious theoretical ones. Still, it's hard to imagine anyone challenging or disagreeing with this opinion and order. You have to wonder whether this Court's proactive style will catch on elsewhere.

Without explicitly casting aside "plain meaning" canons of statutory construction, the Court drew support from a wealth of current critical commentary on the topic in rejecting the plain meaning of BAPCPA's relevant provisions (which seemingly include attorneys within BAPCPA's definition of "debt relief agencies"), stating:

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BAPCPA Looks More Like BARF to Those in the Thick of It

Something's very wrong when an estimated 500,000 Americans felt compelled in the last week to file for bankruptcy in order to avoid the chance that if they do have to file in the future, they'll regret not having done so now. As most know, these filings were precipitated by BAPCPA (the "Bankruptcy Reform and Consumer Protection Act of 2005"), which goes effective at midnight on October 17, 2005.

What a misnomer that Act is proving to be! Doubt any consumers who recently filed for bankruptcy relief would say the new law made them feel protected. Some have suggested that the new legislation should have been called BARF (Bankruptcy Abuse Reform Fiasco), not BAPCPA.

The unprecedented crush of pro se consumer filings in Chicago (where electronic filings are mandatory) was so great on Friday that it overwhelmed the servers, shutting them down until around midnight the next day. Stories from NY, Denver, DC, Fresno, and Montana show that no section of the country was spared from the onslaught of bankruptcy filings. Many creditors will feel pain too as hundreds of thousands of debtors walk from debts they may have paid absent the new law.

In the end, the new legislation has spawned a pathetic mess for poor and middle America, as well as for bankruptcy's machinery, though I suppose some will benefit. I suspect that bankruptcy judges will show up a bit tired and ornery at this year's NCBJ, rightly feeling overworked, underpaid, and ignored on policy and drafting issues. Ask, for example, Judge Robert Mark, Chief Bankruptcy Judge of the Bankruptcy Court for the Southern District of Florida, who opined last week in only the second reported BAPCPA opinon (where he categorically disagreed with the first reported BAPCPA opinion that reached an intuitively wrong result based on the "plain meaning" of one of BAPCPA's raison d'etres, the provision purporting to eliminate the "Mansion Loophole" whereby the wealthy in states like Florida and Texas shirked their debts while keeping their mansions):

After reading the several hundred pages of text in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "Reform Act"), one conclusion is inescapable. The new law is not a model of clarity. Implementing the changes will present a daunting challenge to judges, clerk's offices, attorneys and the parties who seek relief in the bankruptcy court after October 17, 2005, the date most of the provisions become effective.

In re Kaplan (2005 WL 2508151) (Bankr. S.D. Fla., 10/6/05).

Not a good start for this legislation, and it sure looks downhill from here.

© Steve Jakubowski 2005

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NYT Reports on Concerns Regarding Potential Conflicts Spawned by BAPCPA's Pre-Filing Credit Counseling Requirement

This New York Times story reports on the potential conflicts of interest at credit counseling firms, whose advice must (in all but emergency situations) be first sought by consumer debtors in advance of their filing for bankruptcy following BAPCPA's October 17, 2005 effective date.

The NYT reports that "critics say that the new counseling requirement, part of the law that takes effect on Monday, increases the risk that people will be improperly steered away from the courts and into debt management plans, for which the counseling agency often receives part of any debts repaid."

The story also quotes NYU's Professor Karen Gross (who is also president of the Coalition for Consumer Bankruptcy Debtor Education) as saying, "Lots of people see the opportunity to make lots of money off the backs of consumer debtors, and that should make people extremely cautious about this."

The Offices of the US Trustee for each district are responsible under BAPCPA for approving credit counseling agencies. We can only hope that they figure out how best to avoid this potential problem before it explodes in everyone's face.

© Steve Jakubowski 2005

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Guess Who Might Benefit Most from BAPCPA?

With the effective date of the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" (BAPCPA) fast approaching (October 17, 2005), this recent article from The National Law Journal provides some helpful hints on BAPCPA's changes to the law, practice, and procedure, as well as the assured wave of litigation that will follow in its wake. But don't say we didn't warn you about the loopholes and gaping holes in the legislation that was pushed through Congress! Now we all get to fight about them for a while.

Guess who benefits from all that litigation? Probably not the client. It's said that tax lawyers benefit the most from every change to the tax code. I wonder if the same will be true for bankruptcy litigators in this round of bankruptcy law changes? Reminds me of a sadly entertaining book by Sol Stein, A Feast for Lawyers, in which he bitterly recounts the demise of his genteel old-line publishing house at the hands of "feasting" bankruptcy lawyers at one of NY's finest (caution: shield eyes before viewing).

© Steve Jakubowski 2005

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