OVERVIEW OF BAPCPA – WHAT ALL PRACTITIONERS SHOULD KNOW

Frank J. Santoro, Esq. Kelly M. Barnhart, Esq.

Marcus, Santoro & Kozak, P.C. 1435 Crossways Blvd., Suite 300

Chesapeake, VA 23320 fsantoro@mskpc.com

kbarnhart@mskpc.com Disclaimer: The views expressed herein are the opinions only of the authors not and this material is presented for education purposes, and to provoke discussion. Please make sure to conduct your own evaluation of the relevant Bankruptcy Code provisions and, be prudent and use common sense in the presentation of any financial information in connection with a bankruptcy case. Copyright 2006. These materials may not be reproduced without the permission of the authors.

TABLE OF CONTENTS

I. Consumer Cases...........................................................................................................................1

A. Changes to Chapter 1 ..............................................................................................................1

B. Credit Counseling....................................................................................................................3

C. New Duties of the Debtor ........................................................................................................5

D. Domestic Support Obligations................................................................................................6

E. The Not-So-Automatic Stay..................................................................................................10

F. Replacement Value ................................................................................................................15

G. Exemptions.........................................................................................................................15

H. Means Test .........................................................................................................................17

I. Certain Chapter 13 Provisions .............................................................................................19

II. Individual Chapter 11 Cases ................................................................................................20

A. Amendments Focused on Individual Chapter 11 Debtors.................................................20

B. Modifications to Plans ...........................................................................................................21

III. Small Business Chapter 11s ..................................................................................................22

A. Definition ................................................................................................................................22

B. Duties of a Small Business Debtor .......................................................................................22

C. Disclosure Statement and Plan of Reorganization .............................................................23

D. Confirmation Deadline..........................................................................................................23

IV. Business Chapter 11s.............................................................................................................23

A. Critical Vendors.....................................................................................................................23

B. Reclamation............................................................................................................................23

C. Utilities....................................................................................................................................24

D. Retiree/Health Benefits .........................................................................................................24

E. Priority Claims for Wages ....................................................................................................24

F. Taxes .......................................................................................................................................24

G. Treatment of Government Claims ...................................................................................25

H. Key Employee Retention Plans & Severance Packages.................................................25

I. Leases/Executory Contracts .................................................................................................25

J. Creditors’ Committees ..........................................................................................................26

K. Plans....................................................................................................................................26

L. Preferences & Avoidance Actions ........................................................................................26

OVERVIEW OF BAPCPA – WHAT ALL PRACTITIONERS SHOULD KNOW

“The stated purpose of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) is to ‘improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors.”1 The purpose of this discussion is to provide a brief overview of the major impact of BAPCPA in consumer and bankruptcy case, including a discussion of recent court decisions interpreting certain provisions of BAPCPA. I. Consumer Cases

A. Changes to Chapter 1 (1) 11 U.S.C. §101 – Definitions

a. 11 U.S.C. §101(3) – “assisted person” means a person whose debts are primarily consumer in nature and the value of whose nonexempt property is less than $150,000.2

b. 11 U.S.C. §101(4A) – “bankruptcy assistance” means goods or services provided to an assisted person in order to provide information, document preparation or filing, attending a 11 U.S.C. §341 meeting or appearing in a case on behalf of someone or providing legal representation regarding a bankruptcy case or proceeding.

c. 11 U.S.C. §101(10A) – “current monthly income” means average monthly income from all taxable and non-taxable sources derived during the last complete six months preceding the filing. Includes amounts paid by an entity other than the debtor, on a regular basis, for the household expenses of the debtor or the debtor’s dependents, but does not include Social Security benefits or victim compensation.

d. 11 U.S.C. §101(12A) – “debt relief agency” means any person who provides bankruptcy assistance to an assisted person for consideration, or a person who is a bankruptcy petition preparer.

(1) Excluded from the definition is:

(a) Any person who is an officer, employee or agent of a person who provides

such assistance;

(b) A 501(c)(3) non-profit organization;

1 Erwin Chemerinsky, Constitutional Issues Posed in the B.A.P.C.P.A. of 2005, 79 Am. Bankr. L.J. 570,

570 (Spring 2005)(citing H.R. Rep. No. 109-31, pt. I (2005)). 2 Note that a creditor may be an assisted person, under this definition.

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(c) A creditor of an assisted person to the extent the creditor is helping restructure the debt owed to that creditor;

(d) A depository institution or any affiliate or subsidiary thereof;

(e) An author, publisher or seller of copyrighted materials when acting in such

capacity.

e. 11 U.S.C. §101(13) – “debtor” means any person or municipality concerning which a bankruptcy case has been commenced.

f. 11 U.S.C. §101(13A) – “debtor’s principal residence” means any residential structure and incidental property including condo, co-op, trailer or manufactured or mobile home.

g. 11 U.S.C. §101(14A) – “domestic support obligation” (“DSO”) means a debt, no matter when it accrues, and interest on the debt, that is:

(1) owed to or recoverable by a former spouse, spouse, or child of the debtor or such

child’s legal representative or a governmental unit;

(2) in the nature of alimony, support or maintenance;

(3) established at any time by (a) A separation agreement, divorce decree, or property settlement agreement; (b) A court order; or (c) A determination made by a governmental unit (d) Not assigned to a nongovernmental entity unless voluntarily done in order to

collect the debt.

h. 11 U.S.C. §101(39A) – “median family income” means for any year, the median family income both calculated and reported by the Census Bureau in the then most recent year or adjusted annually after such most recent year to reflect the percentage change in the Consumer Price Index for All Urban Consumers during the next most recent period of years and before the current year.

(2) 11 U.S.C. 109 – Who May Be A Debtor

Requires a briefing from an approved credit counseling agency within the previous 180 days for an individual to be eligible unless the United States Trustee determines there are inadequate resources to do so in that district. There are several exceptions to this requirement, which will be discussed below.

(3) 11 U.S.C. §112 – Prohibition of Disclosure of Names of Minor Children

This section restricts the disclosure of the names of minor children required in a case to the court, the United States trustee, the case trustee, and any auditor serving under §586(f).

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B. Credit Counseling

(1) Under 11 U.S.C. §109(h), no individual may be a debtor under any chapter of title 11 of

the United States Code (the “Bankruptcy Code”) unless the individual has, within 180 days before the bankruptcy filing, received credit counseling from a non-profit budget and credit counseling agency approved by the United States Trustee. 11 U.S.C. §109(h)(1) provides:

Subject to paragraphs (2) and (3), and notwithstanding any other provision of this section, an individual may not be a debtor under this title unless such individual has, during the 180-day period preceding the date of filing of the petition by such individual, received from an approved nonprofit budget and credit counseling agency described in section 111(a) an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in performing a related budget analysis.3

(2) Location of Counseling

Briefing may take place in person, over the telephone or on the Internet. Ordinarily, a debtor may not obtain bankruptcy relief if he does not receive such counseling.

(3) Exception to Requirement for Credit Counseling

a. A debtor is not required to receive such counseling before filing if the debtor resides in a district for which the United States Trustee has determined that the approved credit counseling agencies for that district are not reasonably able to provide the required services.4

b. Debtors who submit a certification with the court describing exigent circumstances requiring immediate bankruptcy filing and state that the debtor sought the required briefing at least five days before the bankruptcy filing without being able to obtain such counseling, may file without the required counseling, but are required to complete the counseling within thirty (30) days after the filing.5

c. Debtors who are incapacitated, disabled or on active military duty in a combat zone are also exempt from the credit counseling requirement.

3 11 U.S.C. §109(h)(1) (2005). 4 11 U.S.C. §109(h)(2)(A) (2005). 5 11 U.S.C. §109(h)(3)(A) (2005).

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(4) Case Law Involving Credit Counseling

a. In re Hubbard6: In Hubbard, the Bankruptcy Court for the Southern District of Texas considered whether to grant the debtor’s motion to extend the time by which the debtor obtained credit counseling required by section 109(h). Hubbard involved several debtors, none of whom received credit counseling prior to the filing for bankruptcy relief, but all of whom sought an extension of the credit counseling deadline.7 None of the debtors filed the appropriate certifications exempting them from the requirement of obtaining credit counseling prior to filing for bankruptcy relief. While the court in Hubbard noted that certain of the debtors did in fact face exigent circumstances, including foreclosure and repossession of an automobile, none of the debtors was exempt from the credit counseling requirement because none established that they had attempted, but were unable to obtain, the credit counseling services within five days after requesting such services.8 The court ruled that the individuals “were ineligible to be debtors as of their respective petition dates.”9 After determining that the individuals were ineligible to be debtors due to the non-compliance with section 109(h), the Hubbard court next considered the legal effect of non-compliance. “11 Section U.S.C. §109(h) provides that an individual may not be a debtor under title 11 unless that individual received credit counseling from an approved agency within 180 days of the filing of the petition. If an individual does not comply, then the filing of the petition does not commence a bankruptcy case.”10

11 U.S.C. §301 provides that a voluntary case is ‘commenced by the filing with the bankruptcy court of a petition under such chapter by an entity that may be a debtor under such chapter.’ Accordingly, the plain language of section 301 does not provide for the commencement of a voluntary case by an entity that may not be a debtor under the chapter of bankruptcy sought by that debtor.”11

After determining the individuals were not eligible to file for relief and so the filing of the petitions did not commence bankruptcy cases, the Hubbard Court was left with determining whether the cases should be dismissed or stricken from the record.12 The Court reasoned that because the filing of the petitions did not commence cases under

6 2005 WL 3117215 (Bankr. S.D. Tex. November 16, 2005). See also, In re Watson, 332 B.R. 740

(Bankr. E.D.VA 2005). 7 Id. at *2. 8 Id. at *4. 9 Id. 10 Id. at *7. 11 Id. 12 Id.

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section 301, there were no cases to dismiss and therefore the petitions should be stricken.13

C. New Duties of the Debtor

(1) Filing:

The debtor is required to file, in addition to her schedules and statement of financial affairs, the following documents: a. copies of all pay stubs (advices) or other evidence of payment received within sixty days before the date of the filing of the petition (watch out for personal identifiers here);

b. a statement of the amount of monthly net income itemized to show how the amount is calculated and a statement disclosing any reasonably anticipated increase in income or expenditures over the twelve-month period following the date of the filing (this will preclude manipulating the process in the case of a seasonal employee);

c. a statement from the attorney whose name is listed on the petition as counsel for the debtor, indicating that the attorney provided to the debtor the following documents:

(1) the 342 notice, which requires brief description of chapters 7, 11, 12 and 13 and

the general purpose, benefits, and costs of proceeding under each of the chapters;

(2) the types of services available from credit counseling agencies;

(3) statements specifying that a person who knowingly and fraudulently conceals assets or makes a false oath or statement under penalty of perjury in connection with a case is subject to fine, imprisonment or both (the 11 U.S.C. §527(a) disclosure); and

(4) all information supplied by a debtor in connection with a bankruptcy case is

subject to audit by the Attorney General (the 11 U.S.C. §527(b) disclosure).

d. All individual debtors must also file with the court: (1) A certificate from an approved credit counseling agency;

(2) A copy of the debt repayment plan, if any, developed through the credit

briefing/counseling; and

13 Id. See also, In re Rios, 2005 WL 3462728 (Bankr. S.D.N.Y. December 19, 2005). In Rios, the court

considered whether the failure to obtain credit as provided for in section 109(h)(3) “voids the bankruptcy filing completely, or merely renders the case subject to dismissal.” Id. at *1. The Court held that in such circumstances, the case should be stricken rather than dismissed. Id. But see, Watson, supra note 6.

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(3) A record of any interest the debtor has in an educational IRA or a qualified state tuition program.14

(2) Failure to Provide Required Documentation

If the debtor does not file with the court all of his bankruptcy papers and the other documents required pursuant to section 521 within forty-five days from the date of filing, the case will automatically be dismissed on the forty-sixth day. Some courts have local procedures where this forty-five day period is considered an outside window, and will dismiss cases for failure to comply within the forty-five day window. Be careful. The debtor may request an extension to file the documents, but the motion must be filed before the forty five days (or applicable period) has run, and such a motion will only be granted upon a showing of justification by the debtor. The trustee may also seek an extension, but on the trustee’s motion the court must find that the debtor made a good faith attempt to file pay stub information required by 11 U.S.C. § 521(a)(1)(B)(iv).15 What are the due process implications of “automatic dismissal?”

(3) 341 Hearing and Documents Required

A debtor must also provide to the trustee, no later than seven days prior to the date set for the first 341 hearing: a. a copy of the debtor’s federal income tax return for the most recent tax year ending before the commencement of the case and for which the return was filed.16

b. a statement, under penalty of perjury, of the income and expenses of the debtor during the tax year and the monthly income along with a detailed explanation of how the income, expenses and monthly income are calculated.17

D. Domestic Support Obligations

(1) Definition:

The definition of a DSO expands the reach of 11 U.S.C. §523(a)(5)’s exception from discharge by including assistance provided by a governmental unit. Including this type of debt implies that no debt arising from an agreement stemming from a dissolution of marriage or other type of domestic related obligation is dischargeable. Simply put, in the

14 11 U.S.C. §521(c) (2005). 15 11 U.S.C. §521(i) (2005). 16 11 U.S.C. §521(e)(2) (2005). If the debtor fails to provide this information, the case will be dismissed,

unless the debtor can show that the failure to provide the documentation is due to circumstances beyond the debtor’s control. At this stage, the return does not have to be filed with the court, but only provided to the trustee and to any creditor that requests a copy. However, upon the request of the court, the U.S. Trustee or any party in interest, the return must be filed with the court.

17 11 U.S.C. §521(f)(4) (2005).

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vast majority of instances, DSO’s are not affected in any meaningful way by a bankruptcy filing. The holder of the DSO is not required to initiate any proceeding to preclude discharge in bankruptcy.

(2) Notices:

Prior to the enactment and enforcement of BAPCPA, holders of claims related to domestic support obligations received notice of a bankruptcy filing of a current or former spouse the same way as every other creditor, assuming that that holder was listed on the debtor’s schedules. However, to protect holders of DSOs, BAPCPA now requires that bankruptcy trustees provide certain types of notice. Specifically, bankruptcy trustees must provide four types of notices with respect to DSOs.18

(a) Types of Notices

(1) Notice No. 1

If there is a claim for a DSO with respect to the debtor, the trustee must provide written notice to such holder of the existence of the claim and the right of the holder of the claim to use the service of the state support enforcement agency for the state in which the holder resides, for assistance in collecting support both during and after the bankruptcy case. This notice should include the address and telephone number of the state support enforcement agency, and an explanation of the rights of the holder to payment of the claim under whichever chapter the debtor has filed under.

(2) Notice No. 2

The bankruptcy trustee must also provide written notice to the state child enforcement agency advising of the claim for a DSO, and include the name, address and telephone number of the holder of the claim.

(3) Notice No. 3 and No. 4

At the time of discharge, assuming the debtor receives a discharge, the trustee must provide written notice to both the holder of the DSO claim and the state support enforcement agency of (1) the granting of the discharge; (2) “the last recent known address” of the debtor; (3) the “last recent known name and address” of the debtor’s employer; and (4) the name of each creditor that holds a non-dischargeable debt under 11 U.S.C. §523(a)(2), (a)(4) or (a)(14A) or a reaffirmed debt under 11 U.S.C. §524(c).

(b) When The Notices Should be Provided

Although there are no provisions for when such notices should be provided, it appears clear that the first two notices should be sent out by the trustee shortly after the bankruptcy petition is filed, in order to provide time for the state support

18 11 U.S.C. §704(c)(1) (2005).

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enforcement agency to help the holder of a DSO claim to pursue the claim in the bankruptcy case. In addition, the last two notices must be sent out upon the granting of the discharge to the debtor, although it is not clear how soon therefore the notices must be sent out. Sooner is usually better when giving notice in a bankruptcy case.

(c) Duties of the Trustee

By being responsible for providing the above-described notices to holders of DSOs as well as to the state support enforcement agencies, trustees will now have to keep or have access to: (a) a current list of state support enforcement agencies; (b) current information on the debtor, including the debtor’s address, telephone number, current employment address and telephone number; (c) current information of the holder of a DSO claim, including the address and telephone number of the holder; (d) records of which debts are considered non-dischargeable pursuant to section 523(a)(2), (a)(4) and (a)(14A); and (e) records of which debts have been reaffirmed under section 524(c). Management of this information is an important task of the trustee.

(d) DSOs and Required Certification

Under BAPCPA, chapter 13 debtors must certify that they are current as to any DSO and that all of the debtor’s tax returns have been filed for the four (4) years prior to the bankruptcy filing. An affidavit attesting to the fact that the chapter 13 debtor is current as to any DSO as well as filing of tax returns must be filed no earlier than ten (10) days prior to confirmation of a chapter 13 plan. Again, this requirement supports the premise that one of the main purposes behind BAPCPA is to protect holders of DSOs. If a chapter 13 debtor makes a certification that the debtor is current as to any DSO, and a plan is confirmed, the effect of the confirmation order may be that the issue of whether or not a DSO is current is res judicata and the holder of the DSO claim may then be precluded from relitigating the issue if the holder fails to object to confirmation of the plan and does not appeal the confirmation order. If a chapter 13 debtor makes the certification that he is current as to any DSO and, prior to confirmation, it is established that the debtor is not current and the debtor was aware of this, then the proper remedy would be to dismiss the case for lack of good faith. It could also be the basis for a possible criminal referral.

(e) DSOs and Priority

11 U.S.C. §507(a) defines claims entitled to priority. A hierarchy of claims is necessary because most bankruptcy cases do not generate sufficient proceeds to pay all claims in full and it becomes necessary to allocate insufficient funds among the holders of claims.

Prior to the enactment of BAPCPA, DSOs were a seventh priority pursuant to section 507. BAPCPA established DSOs as the highest priority for distribution in bankruptcy cases. This enhancement shows Congress’s intent that the repayment

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of DSOs is of vital importance. According to the House Report, the change in priority status was meant to:

accord first priority in payment to allowed unsecured claims for domestic support obligations that, as of the petition date, are owed to or recoverable by a spouse, former spouse, or child of the debtor, or the parent, legal guardian, or responsible relative of such child, without regard to whether such claim is filed by the claimant or by a governmental unit on behalf of such claimant, on the condition that funds received by such unit under this provision be applied and distributed in accordance with nonbankruptcy law.19

However, there is one limitation to this. The first priority to DSOs is subject to the trustee’s fees and expenses, but only “to the extent that the trustee administers assets that are otherwise available for payment of these claims.”20 If an administrative expense of the trustee falls into the following categories, and is incurred in administering assets used toward the payment of DSOs, the trustee will be entitled to be reimbursed for allowance of fees and the expenses ahead of holders of claims based on DSOs.

(f) DSOs and Non-Dischargeability One of the most sweeping changes under BAPCPA related to DSOs is new section 523(a)(15). Section 523(a)(15) deals with the nondischargeability of debts that arise during the course of a separation or divorce or arise from a divorce decree or other court order that relates to the division of property, rather than support obligations. Prior to the enactment of BAPCPA, debts that were not support obligations but which were “incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record, a determination made in accordance with State or territorial law by a governmental unit” were nondischargeable unless either (A) the debtor lacks the ability to pay the debt or (B) discharging the debt would result in a benefit to the debtor that outweighs the detrimental consequences to the spouse, former spouse or child of the debtor.21

With the enactment of BAPCPA, Congress has deleted parts (A) and (B) to section 523(a)(15), getting rid of what used to be considered the defenses to exceptions to discharge for support obligations. With the removal of these defenses, the exception to discharge for all support obligations is extremely broad, typically preventing the discharge of any debt not constituting a DSO but arising out of a divorce, property settlement, separation agreement or divorce order. It might be fair to say that all marital property settlement obligations not in the nature of support are considered nondischargeable under new section 523(a)(15). Because of this change to section 523(a)(15), a creditor holding a DSO no longer has the

19 H.R. Rep. No. 109-31 at §212. 20 Id. 21 11 U.S.C. §523(a)(15) (old).

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obligation to file a complaint to determine dischargeability. The bankruptcy court no longer has exclusive jurisdiction with respect to section 523(a)(15) debts. Under the old code, section 523(a)(15) debts were covered by 11 U.S.C. §523(c), which provided that a debtors would be discharged from a debt of a kind described in section 523(a)(15) unless a creditor holding such debt, and after notice and a hearing, the court determined such debt was to be excepted from discharge under section 523(a)(15). This section meant that the federal district and bankruptcy courts had exclusive jurisdiction to determine the dischargeability of debts arising from a divorce but not in the nature of support. State courts shared concurrent jurisdiction over alimony, maintenance and support debts. By amending section 523(c), section 523(a)(15) is removed from the list of exclusive jurisdiction exceptions.

(g) Conversion or Dismissal for Failure to Pay DSOs

The Code provides the court with the authority to convert or dismiss a chapter 11, 12 or 13 case, whichever is determined to be in the best interests of creditors and the estate, for cause. 11 U.S.C. §§ 1112(b)(4)(P), 1208(c)(10) and 1307(c)(11) have been added, which state that cause exists to either dismiss or convert if the individual debtor has failed to pay any DSO “that first becomes payable after the date of the filing of the petition.” There are slight differences between the three statutes. Section 1112(b) provides that while failure to pay any DSO that first becomes payable after the petition date is grounds for conversion or dismissal, it goes on to state that a party may establish “unusual circumstances...that establish that...conversion or dismissal is not in the best interests of creditors and the estate.” There is no equivalent provision in either section 1208 or section 1307. Note, however, that one cannot convert a chapter 12 without the debtor’s consent.

If, at the 341, the trustee learns that a chapter 12 or 13 debtor is not current on a DSO that first became payable after the date the bankruptcy petition was filed, the trustee, or any other party in interest, may move the court for dismissal of the bankruptcy case, or, in the chapter 13 case, seek conversion of the case to one under chapter 7. If the bankruptcy case is dismissed, the debtor loses the protection of the automatic stay pursuant to 11 U.S.C. §362 and creditors may continue to pursue the obligations owed to them.

E. The Not-So-Automatic Stay

Another significant change engendered by BAPCPA is to the automatic stay provisions of 11 U.S.C. §362. The filing of a bankruptcy petition under any chapter of the Bankruptcy Code operates as an automatic stay of certain actions. Section 362 provides that the stay applies to all entities. The purpose of the stay is to provide “debtors a breathing spell from creditors during which they could attempt to structure a plan to repay their debts or arrange for relief from the financial pressures that drove them into bankruptcy.”22 The stay is one of the main protections afforded to debtors. Prior to the enactment and application of BAPCPA, the stay

22 Lisa A. Napoli, The Not-So-Automatic Stay: Legislative Changes to the Automatic Stay in a Case filed

by or against an Individual Debtor, 79 Am. Bankr. L.J. 748, 749 (Spring 2005).

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was effective automatically upon the filing of a bankruptcy petition. In addition, the stay protects creditors.23 “Without it, creditors who acted first could obtain payment on their claims in preference to and to the detriment of other creditors.”24

BAPCPA has made considerable changes to the scope of the stay, adding exceptions and types of actions to which the stay does not apply upon the filing of a bankruptcy petition and allowing creditors, under certain circumstances, to get in rem relief from the stay. Further, an individual debtor’s prior bankruptcy filings can determine whether the stay will go into effect in a subsequent case and, if it does, when it will cease to be effective.

(1) Repeat Filers

One of the purposes behind the enactment of BAPCPA was to discourage serial, bad faith and other types of abusive bankruptcy filings. As a means to discourage such filings, BAPCPA provides that the stay now terminates in situations involving debtors who have filed for bankruptcy relief more than once within a given period of time. For example, except in a chapter 11 or 13 case refiled after dismissal under 11 U.S.C. §707(b), the automatic stay with respect to leases, debt and property securing debt ends thirty (30) days after the later filing if the debtor had another case pending within one year and that prior case was dismissed.25 The court may continue the stay, after a hearing that must be held within thirty (30) days after the later filing, if the moving party proves that the later case was filed in good faith with respect to the creditors stayed.26

When seeking the continuation of the automatic stay when the debtor has previously filed a bankruptcy case within one year of the current filing, the debtor must provide adequate notice as to why the automatic stay should be extended against all creditors, if the debtor wants the stay continued to all creditors.27 As to all creditors, there is a rebuttable presumption of a lack of good faith if: (a) the debtor had more than one previous case

23 Id. 24 Id. (citing H.R. Rep. No. 95-595, at 340 (1977), reprinted in 1978 U.S.C.C.A.N. 6296, 6297). 25 In re Johnson, 2006 WL 51210 (Bankr. W.D. Tenn. January 9, 2006). In Johnson, the Bankruptcy

Court for the Western District of Tennessee held that “the plain language of §362(c)(3)(A) dictates that the 30-day time limit only applies to “debts” or “property of the debtor” and not to “property of the estate.” Id. at *1. The court concluded that even in the case of a repeat filer, the automatic stay “continues to protect ‘property of the estate’ as long as it remains ‘property of the estate’.” Id.

26 See, e.g., Johnson, 2006 WL 51210; In re Toro-Arcila, 334 B.R. 224 (Bankr. S.D. Tex. 2005); In re

Elliott, Case No. 05-77946-SCS, Case No. 05-77946-SCS, (Bankr. E.D. Va. January 12, 2006). In Elliot, the Bankruptcy Court for the Eastern District of Virginia denied the debtor’s motion to extend the automatic stay due to the failure to convene a hearing on the motion within 30 days from the date of the filing of the petition, as required by 11 U.S.C. §362(c)(3)(B) (2005).

27 See, e.g., In re Charles, 2005 WL 2897462 (Bankr. S.D. Tex. November 4, 2005). In Charles, the

debtor provided inadequate notice as to why the automatic stay should be continued with respect to all creditors, however the Bankruptcy Court for the Southern District of Texas, Houston Division, noted that the debtor could replead with additional allegations if the debtor believed that the extension of the stay was warranted against additional creditors. Id. at *2.

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pending within one year; or (b) a previous case was dismissed within the preceding year, after the debtor failed to (i) file or amend required documents without substantial excuse; or (ii) provide adequate protection as ordered by a court; or (iii) perform the terms of a confirmed plan; or (c) there has not been a substantial change in the financial or personal affairs of the debtor since dismissal of the last case. This presumption may be overcome if the moving party, typically the debtor, establishes good faith on its part. The evidentiary standard here is clear and convincing.28 This means the presentation of real evidence in a real trial – a proffer may not be enough. While good faith is not defined in the Bankruptcy Code, there is substantial case law dealing with what constitutes good faith, most of which holds that in making such a determination courts must consider the totality of the circumstances.29

In Galanis, the bankruptcy court for the District of Utah considered whether to grant a debtor’s motion to extend the automatic stay when the debtor had one previous case dismissed within the one year preceding the current bankruptcy petition. In making its determination the court applied the totality of the circumstances in determining the good faith on the part of the debtor, and held that:

the following factors are relevant to the analysis of good faith under §362(c)(3)(B): 1) the timing of the petition; 2) how the debt(s) arose; 3) the debtor’s motive in filing the petition; 4) how the debtor’s actions affected creditors; 5) why the debtor’s prior case was dismissed; 6) the likelihood that the debtor will have a steady income throughout the bankruptcy case, and will be able to properly fund a plan; and 7) whether the trustee or creditors object to the debtor’s motion.30

28 See, e.g., In re Havner, 2006 WL 51214 (M.D.N.C. January 4, 2006). In this case, the debtor had one

prior bankruptcy case dismissed within one year of his current case. Upon filing for bankruptcy relief under BAPCPA, the debtor filed a motion to continue the automatic stay with respect to all creditors. The court considered the totality of the circumstances when considering whether the debtor filed the current case in good faith focusing on the following factors: (a) the timing of the bankruptcy petition; (b) how the debt(s) arose; (c) the debtor’s motive in filing for relief; (d) why the debtor’s prior case was dismissed; (e) the likelihood that the debtor will have a steady income during the current case, and will be able to properly fund a plan; and (f) whether the Trustee or creditors object to the motion for an extension of the stay. Id. at *4. After considering each of these factors, the court denied extending the stay, concluding that the debtor failed to “carr[y] his burden to show by clear and convincing evidence that he filed the [p]resent [c]ase in good faith.” Id. See also, In re Phillips, 2006 WL 91311 (Bankr. E.D. Okla. January 6, 2006). Interestingly, in Phillips, the Bankruptcy Court for the Eastern District of Oklahoma noted that if the motion to extend the automatic stay is unopposed, the Court may grant the motion without the necessity of a hearing, under certain circumstances. Id. at *2. In order for this to occur, the proper notice of the motion must be provided, as well as an opportunity to object. Id. In addition, the Court “must find that counsel in [the] [m]otion have properly pled all the elements under §362(c)(3) including rebutting by clear and convincing evidence the presumption that the case was not filed in good faith.” Id. (citing 11 U.S.C. §362(c)(3)(C) (2005). 29 The recent cases dealing with the issue of good faith on the part of a repeat filer for purposes of 11 U.S.C. §362 have applied the totality of the circumstances standard. See, e.g., In re Galanis, 2005 WL 345441 (Bankr. D. Utah December 7, 2005); In re Havner, 2006 WL 51214 (Bankr. M.D.N.C. January 4, 2006).

30 Galanis, 2005 WL 345441 at *5. See also Havner, 2005 WL 51214 at *43; In re Collins, 2005 WL 316962 (Bankr. D. Minn. 2005); In re Montoya, 333 B.R. 449 (Bankr. D. Utah 2005). The Galanis decision involved separate chapter 13 case filed by repeat filers, all of whom sought the extension of the stay. One couple, the Vehikites, had previously filed for chapter 13 relief in 2004. Their case was dismissed for failure to make chapter 13 plan payments. Id. at *1. The Vehikites tried to cure the deficiency and file an objection to the trustee’s motion to dismiss, but their attorney refused to help them. Id. The Vehikites paid the majority of their arrearage

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(2) Multiple Repeats

Other than in a case refiled under section 707(b), no automatic stay will arise if the debtor had two or more cases pending within the preceding year that were dismissed.31 Upon request of any party, the court will enter an order confirming that no stay is in effect. In In re Parker32, a creditor filed an application with the Bankruptcy Court for the Southern District of New York for determination that no stay had gone into effect upon the filing of the debtors’ joint chapter 13 case. In Parker, the debtor wife had no prior bankruptcy cases, but the debtor husband had two prior chapter 13 cases pending within one year of the petition date. The Court held that the stay did not go into effect only as to the debtor husband, but that the debtor wife had the benefits of the automatic stay, despite her husband’s bankruptcy history. The court concluded that, “in a joint bankruptcy case, the application of Section 362(c)(3) and (4) to each debtor must be analyzed separately.”33

If a debtor, or other party in interest, wishes the stay to go into effect, then that party must seek relief from the bankruptcy court and, as is the case with one-time repeat filers, establish that the petition was filed in good faith.

An attorney meeting with a client regarding potential bankruptcy relief needs to determine whether the individual has filed for relief before and, if so when, where, and how many times. The answer to these questions will affect the kind and scope of relief the individual may receive once the case has been filed. If the client is facing a foreclosure but has filed for bankruptcy relief two times in the prior year, filing for bankruptcy relief may not stop the foreclosure from occurring and thus may not be the ideal solution for the client. Attorneys should not only ask the client whether he has filed for relief before, but should also run the name and social security number of the client on the national PACER website to determine the client’s past filing history. If it is established that the debtor has filed either once or more than once within the year, but the attorney is satisfied that the bankruptcy case is necessary, the attorney should file either a motion to continue the stay past the thirty days (in the case of a filer who has only filed once before in the preceding year) or a motion or complaint to impose the stay (in the case of a filer who has filed more than once within the preceding year).

one day after the deadline for filing objections to the motion to dismiss. The case was dismissed on October 18, 2005 and they refiled on November 1, 2005. The Galanises filed their first chapter 13 case in 2002, and in 2003 their plan was confirmed. In May 2005, the chapter 13 trustee moved to dismiss the 2002 case, based on a five month arrearage in plan payments. The motion was granted and the case was dismissed in July 2005. None of the debtors' income was subject to garnishment in either the first or second case. Mrs. Galanis had broken her hip in the first case which created an inability to make plan payments. On November 1, 2005, the Galanises refiled. Id. at *2.

31 11 U.S.C. §362(c)(4) (2005).

32 2006 WL 62568 (Bankr. S.D.N.Y. January 4, 2006). 33 Id. at *2.

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(3) Real Property

The automatic stay may be terminated as against real property securing an obligation owed by the debtor if the court finds that the bankruptcy filing by the debtor was part of a scheme to hinder, delay or defraud the creditor, that involved either: (a) the transfer of an ownership interest without the approval of the creditor or a court order; or (b) multiple bankruptcy filings involving the property. In such circumstances, the court may order that relief from the stay remain binding in any bankruptcy case filed by the debtor for the next 2 years. If such an order is in effect, BAPCPA provides that no stay is in effect to prevent enforcement of any lien against, or security in the real property.

(4) Leased Residential Real Estate

11 U.S.C. §362(b)(22) provides for the continuance of any eviction proceedings in which the landlord obtained a judgment of possession prior to the filing of the bankruptcy petition. However, 11 U.S.C. §362(l) provides the debtor an opportunity to contest the application of section 362(b)(22) lease exception to the stay. By timely filing a certificate, under penalty of perjury, the debtor can ensure the stay remains in effect for 30 days. The certificate must allege that, pursuant to state law, the debtor has the right to cure the default and must also certify that the cure amount has been paid within 30 days of the bankruptcy filing.

(5) Personal Property

The automatic stay will terminate as to personal property financed or leased if the debtor fails timely to file a proper statement of intent or fails to take action to implement the statement of intention within the time prescribed in 11 U.S.C. §521(a)(2). If the debtor fails to reaffirm or redeem within forty-five days, the stay terminates automatically and the property is no longer considered property of the estate. “The court may extend the stay upon the motion of a trustee if the property is of value to the estate and adequate protection is afforded to the creditor.”34It is very important for the attorney to review with the client, prior to filing, what secured debt the client has and whether the client wants to retain the personal property and continue paying the secured debtor. It is important to determine whether the client has the ability, assuming he wants to retain the property and continue paying on the debt, to continue with such payments. This has more relevance in chapter 7 cases, as the chapter 13 plan will typically address many of these issues. The debtor’s attorney now is required to complete a declaration or affidavit that he represented the debtor during the course of negotiating the reaffirmation agreement and that:

(a) the agreement represents a fully informed and voluntary agreement;

(b) the agreement does not impose an undue hardship on the debtor; and

34 25 Changes to Personal Bankruptcy Law, Am. Bankr. Institute, p.3, available at

http://abiworld.net/bankbill/changes.html.

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(c) the attorney advised the debtor of the legal effect and consequences of a reaffirmation agreement and of any default under the agreement.35

F. Replacement Value

The law requires debtors to utilize a concept known as “replacement value.” Replacement value is what a debtor could replace an item for a similar item. It is not what would be paid for the item brand new, and it is not what would be paid for the item under the most distressed circumstances, such as a garage sale. Usually, replacement value takes into account wear and tear, visual appeal, and other similar common sense notions.

Debtors should use replacement value when listing the value of their items on schedule b, and replacement value should also be used when valuing an allowed claim secured by personal property is now to be determined based on the replacement value of such property as of the date of filing without subtracting the costs of sale or marketing.36

With respect to property acquired for personal, family or household use, “replacement value” is defined as the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.37

G. Exemptions BAPCPA contains a number of changes to 11 U.S.C. §522, the code section that provides debtors the power to exempt certain property and keep such property from the hands of the trustee and creditors, and to allow the debtor to retain the property post-petition.

Prior to BAPCPA, a debtor was permitted to utilize the exemption laws of the state where the debtor had been domiciled for 180 days prior to the filing of the bankruptcy petition.38 Under BAPCPA, the applicable state law for exemptions is now the law of the state in which the debtor has been domiciled for 730 days prior to the filing of the bankruptcy petition.39

One of the major changes to section 522 by BAPCPA involves the limitations on homestead exemptions claimed under state law. The changes to the homestead exemptions are only truly felt, however, in states with large-to-unlimited homestead exemptions.

35 11 U.S.C. §524(c)(3) (2005). 36 11 U.S.C. §506(a)(2) (2005). 37 Id. 38 11 U.S.C. §522(b)(2)(A) (2000). 39 11 U.S.C. §522(b)(3)(A) (2005).

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(1) Property Acquired Within 1,215 Days of Filing 11 U.S.C. §522(p) was added by BAPCPA, and it places certain limitations on the use of state exemptions to protect homestead property acquired by the debtor within 1,215 days prior to the bankruptcy filing. Specifically, section 522(p)(1) prohibits an exemption for property in excess of $125,000 in value acquired within 1,215 days before the filing. a. Case Law

(1) In re McNabb40:

The first case interpreting section 522(p)(1) was In re McNabb, decided by the Bankruptcy Court for the District of Arizona. In McNabb, the debtor filed a motion seeking abandonment of his house, arguing that the claimed exemption was less than that allowed under state law. Certain creditors objected, arguing that the exemption was subject to the $125,000 cap because the debtor moved to Arizona and bought the house within 1,215 days prior to the bankruptcy filing. The court considered what “as a result of electing under subsection (b)(3)(A) to exempt property under State or local law” meant, and concluded that subsection 522(p)(1) was inapplicable because it applied only in states that have not opted out of the federal bankruptcy scheme. The court reasoned, “[i]n Arizona, a debtor does not get to ‘elect’ state exemptions. Rather, they are the only exemptions available to a debtor, so there is no election made.”41 This cap is imposed when the debtor “elect[s] under subsection (b)(3)(A) to exempt property under State or local law.”42 In reaching its decision, the court noted that the language of section 522(p) was unambiguous and therefore the court was bound by the language used by Congress.

(2) In re Kaplan43: In In re Kaplan, the Bankruptcy Court for the Southern District of Florida reached the opposite decision from the McNabb decision, holding that the section 522(p) limitation applied to the Florida homestead exemption even though Florida is an opt-out state. The court reasoned that the language of section 522(p) is ambiguous and, therefore, legislative history of the section should be considered.44 Based on the legislative history, the court concluded that “as a

40 326 B.R. 785 (Bankr. D. Arizona 2005). 41 Id. at 788. 42 11 U.S.C. §522(p)(1) (2005). 43 See, e.g., In re Kaplan, 331 B.R. 483 (Bankr. S.D. Fla. 2005); In re Wayrymen, 332 B.R. 479 (Bankr.

S.D. Fla. 2005). 44 Kaplan, 331 B.R. at 482. Accord, In re Virrissimo, 322 B.R. 201 (Bankr. D. Nevada 2005). In In re

Virrissimo44, the Bankruptcy Court for the District of Nevada concluded that the phrase “as a result of electing” did not limit the $125,000 cap to only those debtors residing in states which have not opted out of federal bankruptcy exemptions. However the Court also noted that there is an ambiguity in the statute, so as to allow consultation of the

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result of electing” could be interpreted to mean as a result of “utilizing state law exemptions under §522(b)(3), whether they have a choice or not.”45

(3) In re Blair46:

In In re Blair the Bankruptcy Court for the Northern District of Texas was faced with interpreting what “interest” meant as used in section 522(p)(1). In Blair, the debtors filed for chapter 7 relief and elected the Texas exemptions. They bought their house 1,773 days prior to the filing and on Schedule C listed the equity in their house in the amount of $688,606 as exempt. An unsecured creditor objected to the claimed exemption, arguing “the equity in the homestead in excess of $125,000 and the increase in the equity position in the house during the 1,215 period above $125,000 is subject to this statutory cap and not exempt.”47

The court reasoned that a person does not “acquire equity” in a home and that any interest acquired by the debtors occurred at the time of the purse of the house, which occurred outside of the 1,215 days before filing.48 The court concluded “that the increase in the value of the equity in the debtor’s homestead, which was acquired over 1215 days prior to the [p]etition [d]ate, is not subject to the $125,000 cap in section 522(p).”49

H. Means Test

Possibly the most discussed feature of BAPCPA is the means test. The purpose behind the means test is “to measure the ability of chapter 7 debtors to repay debts and then, if they have sufficient debt-paying ability, to make them repay at least some their debt – likely through chapter 13 – in order to receive a bankruptcy discharge.50

(1) Current Monthly Income

In determining what chapter an individual should file under, it must be first determined whether the person’s current monthly income is more than the median income in the state in which the person resides. As previously discussed, current monthly income is a newly-

legislative history in order to conclude that the homestead cap applied both in opt-out states and non opt-out states. The Court has certified the decision for direct appeal to the Ninth Circuit Court of Appeals. Id. at *2.

45 Kaplan, 331 B.R. at 487. 46 2005 WL 3101837 (Bankr. N.D. Tex. 2005). 47 Id. at *2. 48 Id. 49 Id. at *4. 50 Eugene A. Wedoff, Means Testing in the New §707(b), 79 Am. Bankr. L.J. 231, 231 (Spring 2005).

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defined term, meaning the average monthly income of a debtor over the six months prior to filing. Current monthly income does not include Social Security benefits and unemployment compensations, but does include any payments paid on behalf of the debtor by any other entity. If the debtor is married, the income of the spouse (even if a non-debtor) will usually be included in the calculations.

(2) Average Median Income

After determining the individual’s current monthly income, the next step is to determine the average median income for a similarly situated person in the state where the individual resides. Once the individual’s income is compared to the applicable median income, the attorney for the individual “can then determine whether the debtor is protected by the two different safe harbors in §707(b).”51 These safe harbors preclude the use of the means test for debtors below the median income and do not permit §707(b) motions to be brought by anyone but the court or the United States Trustee.

If the debtor’s income is greater than that of the median income for someone similarly situated, then individual may not file under chapter 7. If that person does file for chapter 7, then a rebuttable presumption of abuse arises and the court must notify creditors within 10 days of the filing of the petition that the presumption of abuse exists. If a debtor’s current monthly income is greater than the median income, the means test must be applied, as long as the debt is primarily consumer in nature.

(3) Means Test

In applying the means test, an individual’s monthly expenses need to be calculated and the deducted from the debtor’s current monthly income. The deductions from current monthly income allowed under the means test are set out in 11 U.S.C. §707(b)(2)(A)(ii) – (iv) and include: (a) living expenses specified in the IRS National Standards, including such items as food; (b) living expenses specified in the Local Standards, including transportation and housing costs; (c) necessary health insurance, disability insurance and health savings plans, as long as there is evidence to support these items; (d) continuing care of nondependent family members, if there is evidence to support this; (e) actual expenses of administering a chapter 13 plan (to be determined by the Office of the United States Trustee); (f) expenses for grade and high school children, up to $1500 annually, per minor child; (g) additional home energy costs, if there is evidence to support this; (h) 1/60 of all secured debt becoming due in the next five years after filing; (i) 1/60 of all priority debt; and (j) contributions to tax-exempt charities, up to 15% of the debtor’s gross income.

If the individual’s net monthly income, after applying the means test, is greater than $166.6752, the individual is not eligible for chapter 7 and must file under chapter 11 or 13.

51 Henry J. Sommer, Trying to Make Sense Out of Nonsense: Representing Consumers Under the

“Bankruptcy Abuse Prevention And Consumer Protection Act of 2005”, 79 Am. Bankr. L.J. 191, 196 (Spring 2005). 52 This number is derived from application of the means test set out in 11 U.S.C. §707(b)(2)(A).

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If after doing the calculations, the annualized current monthly income of the individual is greater than the applicable median family income, the individual must not only be in a chapter 13, but must propose a plan of 5 years; if, on the other hand, the annualized current monthly income is less than the applicable median family income, the chapter 13 plan may be for 3 years.

I. Certain Chapter 13 Provisions

(1) Cramdown

Prior to the enactment of BAPCPA, debtors could bifurcate claims under 11 U.S.C. §506(a) into secured and unsecured portions. A creditor was secured to the extent of the debtor’s interest in the collateral securing the obligation and any amount in excess was treated as unsecured. Now, however, the debtor’s ability to treat secured claims in a chapter 13 plan has been limited. 11 U.S.C. §1325(a)(5) has been amended to provide that section 506 does not apply to claims secured by a purchase money security interest (“PMSI”) to buy a car for personal use if it was bought within 910 days (2 days less than 2.5 years) of the filing for bankruptcy relief. Note that this does not apply to a PMSI in a vehicle used for business. In addition, section 506 does not apply to any other item subject to a PMSI that was purchased by the debtor within one year of the filing. As a result, a debtor must pay the full amount of the loan, regardless of the actual value of the asset.53 There will be no strip-down for the items described above. For example, department stores that take a security interest in everything purchased with their store card may have an entirely secured claim if the debtor used the card at all within the one year period prior to the filing, subject to the ability to perfect a security interest in the goods purchased.

(2) Adequate Protection

Before BAPCPA, creditors with a security interest often had to wait for payment on their secured claims until after payment of administrative claims and mortgage arrearage claims. BAPCPA has modified this structure and now provides that adequate protection applies both pre- and post-confirmation to a chapter 13 case.54 Debtors are now required to make or provide for adequate protection payments to secured creditors before confirmation in chapter 13 cases. The plan must provide for periodic payments in equal monthly installments and must be sufficient to provide adequate protection to secured creditors during the life of the plan.55 This means that if the value of collateral decreases by $50 per month, the debtor will be required to pay at minimum the $50 reduction in value plus an interest factor to ensure that the secured creditor is compensated in equal monthly installments for the reduction in the value of the collateral.56 In the pre-

53 While the debtor may not be able to alter the amount of the loan to be repaid, the debtor may be able to

modify the repayment term and the interest rate pursuant to 11 U.S.C. §1322(b)(2), which was not amended. 54 11 U.S.C. §1325(a)(5)(B)(iii)(II) (2005). 55 Richardo I. Kilpatrick, Selected Creditor Issues Under the Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005, 79 American Bankruptcy L.J. 816, 836 (2005). 56 Id.

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confirmation situation, debtors will have to calculate how much the payments to secured creditors should be, then transmit such payments to the chapter 13 trustee, who will send the payments to the secured creditors. In order for adequate protection payments to be made, however, secured creditors will have to file claims with the court and the creditors will have to determine the amount of depreciation that occurs on a monthly basis.

Debtors are also required to make adequate protection payments to creditors for lease obligations that become due after the order for relief, reducing proposed lease payments under the plan by the amount of the pre-confirmation payments, and debtors are required to provide trustees with evidence that such payments were made.57

(3) Good Faith Requirement

In addition to the above, section 1325 now expressly includes a requirement that the court find that the chapter 13 petition was filed in good faith in order for a proposed plan to be confirmed.58 Prior to the enactment of BAPCPA, courts sometimes considered whether the petition was filed in good faith, although section 1325 contained no such requirement.

II. Individual Chapter 11 Cases

A. Amendments Focused on Individual Chapter 11 Debtors (1) Property of the Estate

11 U.S.C. §1115 expands property of the estate of an individual debtor in chapter 11 to include property specified in 11 U.S.C. §541, property acquired after commencement of case and future earnings until the closing, dismissal or conversion of the case.

i. This change is significant since future earnings were previously excluded from the definition of “property of the estate”;

ii. Individual Chapter 11 debtors will still be entitled to the use and enjoyment of their future earnings, provided that no trustee is appointed (11 U.S.C. §1115(b)). There is no exception to future wages’ being property of the estate after appointment of a trustee. Moreover, 11 U.S.C. §1104(a)(3) states that where there are grounds to convert a case, the Court may nevertheless appoint a trustee instead. There is, of course, a question as to whether a trustee could take wages of an individual debtor consistent with the United States Constitution.

57 11 U.S.C. §1326(a) (2005). 58 11 U.S.C. §1325(a)(7) (2005).

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(2) Plan Payments

11 U.S.C. §1123(a)(8) has been added, which requires that payments to creditors under a chapter 11 plan shall be made from post-petition earnings or future income “as is necessary for the execution of the plan.”

(3) Best Efforts Test

11 U.S.C. §1129 now contains a “best efforts” test so that when an unsecured creditor objects to confirmation, the value of property, as of the effective date of the plan, to be distributed under the plan on account of such claim must not be less than either the amount of such claim or the debtor’s projected disposable income to be received during the five year period beginning on the date that the first payment is due under the plan or during the plan’s term, whichever is longer.

(4) Absolute Priority Rule

11 U.S.C. §1129 has been amended with respect to the absolute priority rule under the cramdown provision to provide that an individual chapter 11 debtor may keep estate property even though unsecured creditors may not be paid in full as long as the debtor has paid all required domestic support obligations due post-petition

B. Modifications to Plans

(1) Expanded ability to modify plans pursuant to 11 U.S.C. §1127(e) so that an individual chapter 11 debtor may modify his or her plan up until completion of payments under the plan regardless of whether substantial consummation has occurred.

(2) Following confirmation, only the following parties may move to modify a plan:

a. Debtor

b. Chapter 11 trustee

c. The United States Trustee

d. Holders of unsecured claims

(3) Types of Modifications

a. Increase or decrease the amount of payments on claims in a particular class

b. Extend or reduce the time period for payments

c. Alter plan payments to a creditor based on payments made outside of the plan

(4) Limitations on Modifications

a. Modified plans are subject to the same standards as original plans

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b. Modification requires disclosure under 11 U.S.C. §1125

c. Notice and hearing on the modification is required

d. Court approval is necessary for modifications III. Small Business Chapter 11s

A. Definition

The old definition of “small business” has been replaced with two new definitions (1) A “small business case” in 11 U.S.C. §101(51C) is a chapter 11 case filed by a “small

business debtor.” (2) A “small business debtor” as defined in 11 U.S.C. §101(51D) means

a. a person or is affiliate engaged in commercial or business activities, other than the business of owning or operating real property or activities incidental thereto;

b. neither of whom, as of the date of the order of relief, has an aggregate noncontingent liquidated secured and unsecured debts of not more than $2,000,000, excluding debt owed to any affiliates or insiders.

B. Duties of a Small Business Debtor

(1) File with its petition: a. Its most recent balance sheet, statement of operations, cash-flow statement, and Federal Income Tax Return; or

b. A statement, under penalty of perjury, that no balance sheet, statement of operations, cash-flow statement has been prepared and no Federal tax return has been filed.

(2) Attend any meetings scheduled by the Court or the United States Trustee;

(3) Timely file all schedules and statement of financial affairs;

(4) File all post-petition financial and other reports required by the Bankruptcy Rules or by

local rule;

(5) Maintain insurance appropriate to the industry;

(6) Timely file all tax returns and other required filings;

(7) Timely pay all administrative expense taxes, subject to any limitations on the use of cash collateral; and

(8) Allow the United States Trustee to inspect the debtor’s business premises, books and

records.

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C. Disclosure Statement and Plan of Reorganization

Under new 11 U.S.C. §1125(f), the bankruptcy court may:

(1) determine that a separate disclosure statement is not necessary if the plan provides

adequate information;

(2) Approve a disclosure statement submitted on standard forms;

(3) Conditionally approve a disclosure statement, subject to final approval;

(4) Allow the debtor to solicit acceptances and rejections of the plan based on a conditionally approved disclosure statement; and

(5) Combine the hearing on the disclosure statement with the hearing on the confirmation of

the plan of reorganization.

D. Confirmation Deadline Deadline for confirmation in small business cases is 45 days after the filing of a plan that complies with the applicable provides of the Bankruptcy Code.59

IV. Business Chapter 11s A. Critical Vendors

11 U.S.C. §503(b)(9) – administrative expense claim for value of goods received within 20 days of bankruptcy filings, as long as in ordinary course of business. This section appears to serve two purposes: (i) it is a small/partial codification of the doctrine of necessity and critical vendor payments; and (ii) it circumvents the restrictions in the Uniform Commercial Code on a vendor’s right of reclamation.

Although likely not intended, this provision may require that a debtor pay twice for the same goods. To the extent that goods received within 20 days are encumbered by a floating lien, the value will have to be paid to a secured creditor as part of its claim. Presumably, the debtor will also have to pay for the goods as an administrative expense to the vendor. However, this is so only if there is enough collateral to support a claim of the undersecured creditor.

B. Reclamation

11 U.S.C. §546(c)(1) provides that now notice of reclamation demand must be made within 45 days after receipt of goods by the debtor or 20 days after the filing, whichever is later. Expansion of time to make reclamation demands may displace the UCC rules for reclamation.

59 11 U.S.C. §1129(e) (2005).

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Section 546(c)(1) makes reclamation rights subject to the prior rights of a secured creditor of such goods or proceeds and provides that even if the seller fails to make a demand in writing for the goods, the seller still has the right to assert an administrative claim under 11 U.S.C. §503(b). However, new 11 U.S.C. §503(b)(9) provides for an administrative claim for reclaiming creditors; the claim is limited to the value of the goods received by the debtor in the ordinary course of the debtor’s business within 20 days before the commencement of the case.60

Because administrative claims must be paid at or before confirmation, this change in the treatment of reclamation claims may have an adverse effect on chapter 11 debtor’s ability to reorganize successfully.

C. Utilities

11 U.S.C. §366 now provides greater protection to utility creditors. There are new requirements for providing adequate assurance on the part of the debtor. The debtor is now required to provide cash or cash equivalent to the provider within 20 days. See U.S.C. §366(b). If the debtor fails to do so, the provider may cut off service. It is expressly prohibited to assert administrative expense status as adequate assurance.61

D. Retiree/Health Benefits

Parties may now undo modifications made to these types of benefits if such modifications were made within 6 months prior to filing for bankruptcy relief, if debtor was insolvent at the time, unless the court finds such modifications acceptable after balancing the equities.

In addition, the United States Trustee now has the authority to appoint a committee of retired employees if the court orders the formation of such a committee.

E. Priority Claims for Wages

There has been an increase in the amount of administrative expenses for wages earned by employees of the debtor to $10,000 and the look-back period has been expanded to 180 days before filing.

F. Taxes

(1) 11 U.S.C. §507(a) states that the interest rate for tax claims is the rate determined by

applicable non-bankruptcy law.

(2) 11 U.S.C. §1129(a) provides that back tax claims have to be paid in full within 5 years from the date the order for relief was entered by the court and must be treated in the same manner as the best treated unsecured claims under a plan of reorganization of the debtor.

60 See Section IV.A., above. 61 11 U.S.C. §366(c)(1)(B) (2005).

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(3) 11 U.S.C. §362(b)(26) provides for the offset of taxes against refunds.

G. Treatment of Government Claims

There is now an exception to discharge related to governmental claims if related to misrepresentations, etc. made by the debtor. (Keep in mind misrepresentations made to the SBA.) In order to bring this issue before the court, a party needs to file either a discharge complaint pursuant to 11 U.S.C. §523(a)(2) or an objection to discharge under §727.

H. Key Employee Retention Plans & Severance Packages

(1) Beware of changes to management compensation provisions. 11 U.S.C. §503(c) now

limits ability to make retention payments to management. All payments must be essential to keep the manager, there must be a bona fide offer to the manager from a third party at a certain amount, and the manager must be essential to the management of the debtor in order for retention payments to be approved.62

(2) Limits on severance packages as well. Section 503(c) also limits the payment of

severance payments to an insider of the debtor to the amount of payment that is part of a program that is generally applicable to all full-time employees and the amount of such payment may not be greater than 10 times the amount of the mean severance pay given to non-management employees during the calendar year in which the payment is made.63

(3) Treatment of incentive compensation plans have not been modified and such plans is still

permitted, and, therefore these types of plans may replace retention plans.

I. Leases/Executory Contracts

(1) 11 U.S.C. §365(d)(3) remains the same (60 days to perform under non-residential real property lease).

(2) 11 U.S.C. §363(d)(4) has been modified to provide that an unexpired lease for non-

residential real property under which the debtor is the lessee is deemed rejected and requires immediate surrender if lease is not assumed or rejected by the end of the earlier: (a) 120 days from the date of filing; or (b) after entry of order confirming plan. The debtor is permitted one extension of the time period in which to assume or reject but the extension is limited to an additional 90 days. This is an extremely important change for debtors whose businesses are seasonal, especially retailers with multiple locations. Decisions to assume or reject all leases may have to be made much earlier than was formerly the case and, in any event, before the debtor would prefer to do so. Possible unintended consequence: forcing early decision to assume or reject could kill off debtors whose reorganizations might otherwise have been viable.

(3) 11 U.S.C. §503(b)(7) limits damages for assumed leases that are later rejected to 2 years

of rent payments.

62 11 U.S.C. §503(c)(1) (2005). 63 11 U.S.C. §503(c)(2) (2005).

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(4) Now allowed to assume leases despite the inability to cure non-monetary defaults that

occurred in the past, as long as on a going forward basis no such defaults occur. See 11 U.S.C. §365(b)(1)(A).

J. Creditors’ Committees

(1) 11 U.S.C. §1102 makes it easier to replace members of creditors’ committees.

(2) May have a small business creditor on the committee even if not a significant debt of the

debtor as long as it is significant to that creditor.

(3) Information obtained by the committee has to be shared now with other creditors. This may have a chilling effect on disclosures by the debtor-in-possession.

(4) Attorneys representing individual committee members may not be paid by the estate

pursuant to 11 U.S.C. §503(b)(3)(F).

K. Plans

11 U.S.C. §1121(d) does not allow the extension of the exclusivity period beyond 18 months from the date of the filing of the bankruptcy case.

L. Preferences & Avoidance Actions

The exceptions to preference avoidance actions have been expanded, making it harder to recover.64 Now, it is sufficient to prove that the payment received was made in either the ordinary course of business between the parties or based on ordinary business terms.65 Pursuant to 11 U.S.C. §547(c)(9), payments in the aggregate amount of less than $5,000 to creditors in business cases may not be recovered.66 In addition to the above, actions to avoid preferences not exceeding $10,000 in non-consumer cases, must be brought in the district where the defendant resides, rather than in the court where the bankruptcy case is pending.67 The changes in venue provisions will impact trustees in cases involving large numbers of avoidance actions.

64 11 U.S.C. §547(c)(2) (2005). 65 Samuel K. Crocker & Robert H. Waldschmidt, Impact of the 2005 Bankruptcy Amendments on Chapter

7 Trustees, 79 Am. Bankr. L.J. 333, 343 (Spring 2005). 66 11 U.S.C. §547(c)(9) (2005). 67 28 U.S.C. §1409(b) (2005). In consumer cases, a trustee suing to recover on payments of less than

$15,000 must bring it in the district where the defendant resides, rather than in the court where the bankruptcy case is pending.

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One defense that will no longer be available to state agencies, however, is sovereign immunity.68

68 Central Virginia Community College et al. v. Katz, ___ U.S. ____, 2006 WL 151985

2008249421 (January 23, 2006). In this case, a proceeding was brought by the bankruptcy trustee under 11 U.S.C. §§547(b) and 550(a) to avoid and recover preferential transfers by the debtor to certain state agencies. The state agencies argued that the proceeding was barred by sovereign immunity. The Supreme Court disagreed with the state agencies, affirming the decision of the Sixth Circuit Court of Appeals, and holding that a trustee’s proceeding brought to set aside preferential transfers to state agencies is not barred by sovereign immunity.