The recent amendments to the Bankruptcy Code via the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) have provided a number of significant changes to the Code. This article will examine how the courts have been implementing the changes in the law.
The Lack of Clarity in Many Provisions of BAPCPA
Many bankruptcy judges were initially critical of BAPCPA primarily because they believed Congress had not appeared interested in input from their contemporaries regarding bankruptcy reform. Moreover, many provisions of BAPCPA reduced the discretion of bankruptcy judges. Now that BAPCPA has gone into effect, judges have been getting down to the task of actually applying the law. The problem, of course, is that numerous provisions of BAPCPA are written in such a way as to invite different interpretations. Many provisions of BAPCPA are confusing to say the least. In one of the first cases interpreting BAPCPA, Chief Judge Robert A. Mark in the Southern District of Florida observed:
- After reading the several hundred pages of text in the [new law], one conclusion is inescapable. BAPCPA is not a model of clarity. In re Kaplan, 331 B.R. 483, 484 (Bankr. S.D. Fla. Oct. 6, 2005).
As a result of Congress’ lack of clarity, courts likely will come to different interpretations of various sections of BAPCPA. Two recent cases illustrate this point.
The New Limitation on the Homestead Exemption
While most of the changes to the Code affect cases filed on and after Oct. 17, 2005, certain changes actually became effective for cases filed after the President signed BAPCPA in to law on April 20, 2005. One of the changes effective on April 20 related to the $125,000 cap on the homestead exemption contained in new §§522(o), 522(p) and 522(q). Two of the first published opinions involving BAPCPA looked at the sections related to the homestead cap, but came to completely opposite conclusions. The issue is whether the new $125,000 homestead equity cap is applicable in states that prohibit a debtor from electing federal exemptions (in other words, where a state has “opted out” of the federal exemptions, a debtor does not have the right to make this election, and must choose the exemptions allowed in the state where the case is filed).
The first case examining the homestead issue was In re McNabb, 326 BR 785 (Bankr. D. Ariz. 2005). In McNabb, Judge Randolph J. Haines found the language of §§522(b) and 522(p) related to the homestead cap clear and unambiguous. As a result of what he deemed the clear and unambiguous language of the statute, Judge Haines found he could not look to the legislative history or the “intent of Congress” to interpret the language in the statute. While he noted the result might seem curious, the court found it was bound by the “clear and unambiguous” language of the statute. The court held that the $125,000 cap on the homestead exemption was not applicable in Arizona, and as a practical matter would be applicable in only two states.
Judge Mark of Florida looked at the same sections of the statute and came to the opposite conclusion in In re Kaplan, 331 B.R. 483 (Bankr. S.D. Fla. 2005). Judge Mark rejected Judge Haines’ strict analysis of the statute in In re McNabb, finding that the language in the statute contained sufficient ambiguity to allow him to examine the intent of Congress. Judge Mark then noted that there was no doubt that Congress intended BAPCPA to address the abuses related to the so-called “mansion loophole,” where debtors would move to states with an unlimited homestead exemption, such as Florida, purchase a large house, and then file bankruptcy and keep their house. Based on the ambiguity in the statute and after looking at the clear intent of Congress, Judge Mark held that the homestead exemption limitations imposed by BAPCPA applied to most states, including Florida:
- Looking to the legislative history of the Reform Act, there is no doubt about what Congress intended. Contrary to the assertion in McNabb that the legislative history “is virtually useless as an aid to understanding the language and intent,” the Reform Act is replete with references demonstrating that the new homestead limitations in §522(p) and (q) were intended to apply to all states in which debtors could previously exempt amounts in excess of $125,000.
Judge Mark’s analysis was adopted by another Florida bankruptcy court, In re Wayrynen, 332 B.R. 479 (Bankr. S.D. Fla. 2005) (J. Friedman) and followed by a court in Nevada. In re Virissimo, 332 B.R. 201 (Bankr. D. Nev. 2005) (J. Riegle).
Attorneys May Not Be a Debt-Relief Agency
BAPCPA appears to impose significant new obligations on attorneys representing debtors. These obligations are imposed on any entity defined as a “debt-relief agency," which includes anyone who provides “bankruptcy assistance” to an “assisted person." The conventional wisdom has been that a debt-relief agency includes any attorney representing a debtor. On the first day BAPCPA became effective, however, one judge rejected this conventional view.
On Oct. 17, 2005, Judge Lamar W. Davis Jr., Chief Bankruptcy Judge for the Southern District of Georgia, entered an order declaring that attorneys are not debt-relief agencies under new Code §§101(12A), 526, 527 and 528. See 332 B.R. 66 (Bankr. S.D. Ga. 2005). Interestingly, the court’s order was not entered in a case, but stated it would apply to all cases in Davis' court. Among other reasons, Judge Davis observed that “it is hard to imagine that the language which...conspicuously omits the word ‘attorney’ really requires an attorney to tell an assisted person that he/she has the right to hire an attorney....” This order is now on appeal. Judge Davis’ order has been criticized by those who point out that, among other things, “bankruptcy assistance” by a debt-relief agency includes “providing legal representation,” which certainly should include attorneys. Nevertheless, Judge Davis’ order points out that the courts will play a large role in how BAPCPA is interpreted and implemented.
Debtors Are Not Complying with the BAPCPA Requirements
While much of the information is anecdotal, in the few bankruptcy cases that have been filed since Oct. 17, 2005, it appears that debtors have failed to follow many of the BAPCPA requirements. For example, debtors have failed to include the calculation of the means test, or file a certificate of completing the required pre-petition credit counseling. Many of the cases filed since Oct. 17 have been dismissed by the courts as a result of these filing deficiencies. In the Tampa Division of the Middle District of Florida, for example, 89 of the 200 cases filed since Oct. 17 were dismissed. The majority of these cases were filed by pro se debtors, who many people speculated would be most likely to not follow the BAPCPA requirements. Of course, a case dismissal now has more significant consequences for a debtor who later re-files bankruptcy. In that event, the automatic stay may either be limited to 30 days (in the event there was one prior pending case dismissed within one year) or may never go into effect at all (in the event two prior cases were dismissed that were pending in the prior year).
Interestingly, the early published cases under BAPCPA have shown that courts will not rewrite the statute in order to give the debtor a “break” contrary to the law. For example, in In re Gee, 332 B.R. 602 (Bankr. W.D. Mo. 2005), a case involving the new credit counseling requirement, the debtor failed to obtain credit counseling prior to filing bankruptcy. The debtor moved the court to extend the time to obtain the credit counseling certificate. Judge Dennis R. Dow found that the debtor had failed to follow the specific requirements of BAPCPA in requesting an extension of time, and dismissed the case:
- Debtor requests that under the circumstance of this case, and because of the need for an immediate filing, the court waive the requirements contained in paragraphs (1) through (3) of §109(h), including the requirement of 109(h)(3)(A)(ii). The statute grants the court the authority to postpone the credit counseling requirement, but only if each of the stated conditions is satisfied. Debtor is essentially asking the court to ignore one of the plainly stated requirements for granting such a waiver. However, the court cannot rewrite the statute and declines the debtor’s invitation to do so.
Judge Dow’s reasoning position was followed in In re Davenport, 2005 W.L. 3292700 (Bankr. M.D. Fla. Dec. 6, 2005) (J. May) (similar post-Oct. 17 cases cited in footnote 2).
In a case involving a debtor’s request to extend the automatic stay, which had expired based on the debtor’s prior case dismissal, the court would not extend the stay without sufficient evidence and compliance with the statute. Judge Isgur found that the court “is obliged to implement Congress’ intent. Taken in context, Congress intended to direct the court to conduct an early triage of re-filed cases. Debtors whose cases are doomed to fail should not get the benefit to an extended automatic stay.” In re Charles, 332 B.R. 538 (Bankr. S.D. Tex. 2005).
Is Anything Really Going to Be Different?
The McNabb and Kaplan decisions illustrate how two judges can look at the same section of BAPCPA and come up with completely different interpretations. Bankruptcy judges will struggle to harmonize the language of the statute with the intent of Congress. As Judge Mark mused in Kaplan, “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 Oct. 17, 2005....”
It is too soon to tell whether the practice and results in consumer bankruptcy cases will change significantly in light of BAPCPA. Many had speculated there would be minimal real changes in practice, or at best, the changes made by BAPCPA would be followed as an exception rather than the rule. The first published cases under BAPCPA discussed above, however, indicate that bankruptcy judges are ready to view the statute narrowly and follow the pro-creditor congressional intent expressed throughout BAPCPA – even where the court may feel that the intent of Congress is flawed or misguided.