BAPCPA: Absolute Priority Rule No Longers Applies to Individual Chapter 11 Debtor

As previously mentioned, Chief Judge Paul G. Hyman held in the Gosman case that the retention of exempt property by an individual debtor in a chapter 11 violates the absolute priority rules unless unsecured creditors are paid in full. In re Gosman, 282 B.R. 45 (Bankr. S.D. Fla. 2002). Also as previously noted, some courts disagree with the Gosman decision and hold that the debtor’s retention of his exempt property is not subject to the absolute priority rule. See eg. In re Bullard, 358 B.R. 541 (Bankr. D.Conn. 2007)(the retention of exempt property is not on account of the debtor’s junior interest in property).

Since the passage of BAPCPA and its amendments to 11 USC 1129(b)(2)(B)(ii), there has been some commentary (Hon. Norton, Hon Drake, etc.) that the absolute priority rule is no longer applicable to an individual chapter 11 debtor’s retention of property. Judge Saladino’s decision in In re Tegeder, ___ B.R. ____, 2007 WL 1549067 (Bkrtcy.D.Neb.) is apparently the first decision to end this speculation, at least in his courtroom.

The court in Tegeder held that new 1129(b)(2)(B)(ii) provides an exception to the absolute priority rule for the retention of property by individual chapter 11 debtors and that the “absolute priority requirements imposed by Code 1129(b)(2)(B)(ii) were waived by permitting a debtor to retain property included in the estate under 1115. BAPCPA added the following to 1129(b)(2)(B)(ii) “except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section”. New section 1115 defines property of the estate to include property specified in section 541 as well as property acquired post-petition and earnings from services performed post-petition.

The court states that interpreting new 1129(b)(2)(B)(ii) any narrower would cause the amendment to have little effect.

After Surveying the Major Rationales of Prior Cases, Court Allows Expense Deduction for Paid Off Vehicles for Over-Median Income Chapter 13 Debtors

Judge Pamela Pepper recently issued a lengthly decision involving a hot topic under BAPCPA — the issue of the allowability of the Local Standard’s vehicle ownership deduction in the calculation of the projected disposable income for an above-median income debtor when the vehicle is paid off. In re Sawdy, ___ B.R. ___, 2007 WL 582535 (Banktcy. E.D. Wis.). The debtors contended that they were allowed to take the vehicle ownership deduction while the Chapter 13 Trustee disagreed. Pursuant to the case of In re Mendenahll, 54 B.R. 44 (W.D.Ark. 1985), the Court held that the Trustee as the objecting party held the burden of persuading the Court that the debtors should not be allowed to deduct the ownership expenses.

The Court noted that two distinct lines of decisions have emerged on the presented issue. The Court noted that several courts have held that a debtor cannot deduct an ownership expense for a vehicle he owns free and clear in both the chapter 13 and 7 contexts. See In re Hardacre, 338 B.R. 718 (N.D.Tex.2006), In re McGuire, 342 B.R. 608 (Bankr.W.D.Mo. 2006), and In re Barraza, 346 B.R. 724 (Bankr.N.D.Tex.2006). The Court also noted that a similar number of courts have come to the opposite conclusion in both the chapter 13 and 7 contexts, deciding that regardless of whether a debtor actually has a note or lease payment, that the debtor may deduct the vehicle ownership expense. See In re Wilson, 356 B.R. 114, (Bankr.S.Del.2006) and In re Hartwick, 352 B.R. 867 (Bankr.D.Minn.2006) The Court went on to “attempt to tease from both groups of decisions the major rationales which support them, and to analyze those rationales to determine if they are persuasive in this case.”

The Court first examined the “plain meaning” doctrine, which both lines of cases rely on. The Court noted that if the meaning of the statutes was “plain, clear, and unambiguous, then how could six court have interpreted it one way and five courts have interpreted it in exactly the opposite way?”. The Court noted that it was skeptical of the usefulness of the “plain meaning” doctrine as a tool of statutory interpretation in analyzing the statutory language at issue. The Court further noted that two courts found the statutory language to have the same meaning, but for different reasons. What made the language clear to one court was not what made it clear to the other. The Court noted a similar pattern in the cases that reached the opposite conclusion.

The Court also found that the “unfair result” rationale can provide support for either line of decisions.

The Court next examined the “ownership/liability” distinction rationale. That is which debtors are entitled to deduct an “ownership expense?” or in other words “what makes a debtor a vehicle “owner”. Does the vehicle actually have to be titled in one’s name or can one take a deduction for a car one uses and pays for even though it is not titled in one’s name? The Court noted that neither the BAPCPA nor the IRS Local Standards Chart provide any guidance in answering this question.

The “policy” rationale was next examined and the Court also found that policy interests can support either line of decisions.

Next, the Court examined the “applicable vs. actual” rationale. Here the Court reviewed the Fowler decision by the Delaware Court that discussed that the expenses for the categories of expense listed in the National and Local Standards are to be the “applicable” monthly expenses specified while for the Other Necessary Expenses, they were to be the debtor’s “actual” expenses. In re Fowler, 349 B.R. 414 (Bankr.D.Del.2006). The point being that where Congress used the word “actual” it meant for the debtor to deduct only the amount the debtor actually paid, but where Congress used the word “applicable”, it meant something other than the “actual” payment the debtor has to make each month. But the Court noted that this begs the question of what Congress mean by the word “applicable?”.

The Court noted that the Fowler court concluded as did Chief Judge Wedoff in his article Means Testing in the New World - that by the use of “applicable”, Congress meant to allow the above-median debtor to claim the Local Standard expenses as “fixed allowances”, whether the debtor made lower-or no-actual payment in those categories. The Court noted that this decision was buttressed for the Fowler court, by the fact that Congress did not import into the involved statute certain language from the referenced Internal Revenue Manual that set the Local Standards as a cap. Judge Pepper stated that this rationale provide compelling support for the debtor’s argument that the above-median income debtor is allowed a flat ownership deduction, regardless of whether they have an actual car payment expense or not.

Finally, the Court review the reliance on IRS materials rationale. That is, several of the Courts which did not allow debtors with paid off vehicles the ownership deduction reached their decisions by referencing certain materials promulgated by the IRS. The Court found that it is not appropriate to look to the IRS materials to interpret the word “applicable.”

The Court concluded that the debtors are entitled to deduct on their Form B22C the IRS Local Standard expense amount for vehicle ownership even though they own their vehicle outright and do not make monthly note or lease payments. The Court based its decision on the use of the word “applicable” instead of the word “actual” and second that Congress considered, but did not import certain language from the IRS materials.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Kibbe 1st Circuit BAP Decision – Chapter 13 "Projected Disposable Income"

On February 20, 2007, the 1st Circuit BAP issued its decision in the Kibbe case. In re Kibbe, ___ B.R. ___, 2007 WL 512753 (1st Cir. BAP (N.H.)). The issue in the case involved the income component of the “projected disposable income” calculation under section 1325(b)(1)(B).

The Debtor’s present income was substantially higher than it was during recent 6 month period prior to filing. This below-median income Debtor sought to calculate the amount required to be paid in her Chapter 13 plan to unsecured creditors based on her Current Monthly Income (“CMI”) as per section 1325(b)(2). CMI is based on the historical earnings during the 6 month period prior to filing for bankruptcy per Section 101(10A). The Chapter 13 Trustee objected and argued that the calculation of the projected disposable income should be determined by the Debtor’s actual income as set forth in Schedule I and that the income should not be irrevocably set in the calculation of CMI as set forth in Form B22C.

The BAP Court noted that the BAPCPA did not define the term projected disposable income. It also noted that the the CMI is based on historical income while the term projected disposable income is forward-looking. It further noted that “disposable income” as used in section 1325(b)(2) is based on CMI which is not necessarily reflected of the current income of the debtor.

The BAP Court further noted that this apparent inconsistency within the term “projected disposable income” has produced two competing interpretations. One camp construes that “projected” simply means that the CMI figure Form B22C must be multiplied (projected out) by the number of months of the proposed plan. See In re Barr, 341 B.R. 181 (Bankr. M.D.N.C. 2006). The second camp holds that the term “projected” was intended to signal a reexamination of income potential over the life of the plan with the consequence that “disposable income” and “projected disposable income” have very different meanings. See In re Hardacre, 338 B.R. 718 (Bankr.N.D. Tex.2006).

In its discussion, the BAP pointed out that Congress intended to exclude certain categories of income when it defined “disposable income” in general and more specifically in the Chapter 13 context. Not to be included are, inter alia, benefits under the Social Security Act per section 101(10A)(B) and child support, foster care, or disability payments for a dependent child to the extent reasonably necessary to be expended for the child per section 1325(b)(2). The Court stated that these “Income Exclusions” are included in the income calculation set forth in Schedule I and that therefore Schedule I, without modification, is not an accurate measure of the new “disposable income” definition of section 1322(b)(2).

The BAP agreed with the Kibbe Bankruptcy Court that “projected disposable income” must be grounded in the Debtor’s anticipated income (less the noted “Income Exclusions”). The Court held that Form B22C must at least be the starting point for the determination of “projected disposable income”. If the debtor’s CMI is substantially the same as the actual current income (less the “Income Exclusions”) at the time of the confirmation of the plan the inquiry begins and ends with Form B22C. But where the CMI amount is not the same as the debtor’s actual current income (less the “Income Exclusions”), the courts should assume that Congress intended that they rely on what a debtor can realistically pay to his creditors through their plan and not on any “artificial measure”. The Court held that the income component of “projected disposable income” is the anticipated actual income of the Debtor, subject to the “Income Exclusions” during the plan commitment period. Where the debtor’s income at confirmation or as reasonably anticipated for the plan commitment period is materially different from the debtor’s “disposable income” the court must depart from the Form B22C calculation.

The Court noted that the figures set forth in Schedule I may also not be determinative as they ignore the new statutory definition of the term “disposable income” and also fail to account for reasonably anticipated changes in the debtor’s circumstances after the petition date. If the circumstances are that neither Form B22C nor Schedules I (less the “Income Exclusions”) and J accurately portray the debtor’s income projected over the plan commitment period, the Bankruptcy Court must make a fact-based determination at the time of confirmation.

The Court noted in footnote 11, that the ambiguities, if any, in the calculation of allowable expenses for the above or below-median income debtors were not before the Court.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Trustee Does Not Have the Ability to Administer Exempt Property for DSO Creditors

In the recent case of Quezada, ___ B.R. ___, 2007 WL 438258 (Bkrtcy. S.D. Fla.), Judge Robert A. Mark issued an important decision explicating the new DSO provision in section 522(c)(1). In this case, the Court denied the chapter 7 trustee’s objection to exemption of the homestead property and overruled the trustee’s motion for authority to sell the property to satisfy a domestic support obligation (“DSO”).

The Court explained that section 522(c)(1) was amended by BAPCPA to provide that property deemed exempt in the bankruptcy case will remain liable for DSO debts even if the exempt property would not be reachable to satisfy these claims under applicable state law.

The first issue disposed of by the Court was whether the trustee or DSO creditor can object to the debtor’s exemption to the extent of the DSO claim. The Court explained that although section 522(c)(1) renders exempt property liable for DSO claim, it does not limit a debtor’s right to claim exemptions otherwise available under section 522. The Court therefore overruled the trustee objection to the exemption of the debtor’s homestead.

The second issue dealt with by the Court was whether a trustee may administer exempt property to pay DSO claims. The Court answered this question in the negative and denied the trustee’s motion for authority to sell the homestead property. The Court reasoned that under section 704(a)(1), the trustee only has the authority to “collect and reduce to money the property of the estate” and once the claim of exemption is allowed, exempt property is no longer part of the estate. Furthermore, section 726 only refers to the distribution of the property of the estate.

The Court went on to explain though that the exempt property may be subject to execution by a DSO creditor pursuant to a newly created “federal right” under section 522(c)(2) even though those assets would otherwise be protected from execution under state law. The Court suggested that the bankruptcy court has the jurisdiction to enforce a DSO claim against exempt property in its forum. The Court stated that Section 522(c)(1) grants DSO creditors a “federal right of action” against exempt propeorty. This federal right trumps state law which may otherwise shield the asset from execution. Since this federal right is provided in the Bankruptcy Code, a proceeding to enforce that right would be a proceeding “arising under” title 11, therefore creating non-exclusive jurisdiction in the bankruptcy court under 28 USC 1334 (b).

The Court noted that a state court judge is capable of applying this federal right of action, but in practical terms, it may appear awkward for a DSO creditor to seek relief in state court to pursue assets which are exempt from execution under state law.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Debtor Died Post-Petition, Not Required to Complete Instructional Course

The Court in In re Tembulak, ___ B.R. ___ (2007 WL 420188 (Bankr. D.N.J.) held that a debtor who died after filing chapter 7 bankruptcy was exempted from BAPCPA’s requirement to complete an instructional course concerning peronal financial management after the filing of the petition in order to obtain a discharge. The Court based its decision on section 109(h)(4) which allows a bankruptcy court to waive the requirement of a personal financial management course for debtors who are incapacited, disabled, or on active military duty in a military combat zone.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

BAPCPA’s Exemption Provisions Do Not Violate Uniformity Requirement

In the recent case of In re Urban, ___ B.R. ___, 2007 WL 431570 (Bkrtcy. D. Mont.), Judge Kirscher held that BAPCPA’s exemption provisions, which may require a debtor to claim the exemptions of a state other than that in which is he presently domiciled under certain circumstances, do not violate the US Constitution’s Bankruptcy Clause’s uniformity requirement.

The Court’s inquiry focused on whether the amendments made to section 522(b)(3) by BAPCPA, which in some circumstances requires the extraterritorial application of the exemption laws of a state other than that of the debtor’s present domicile, violate the uniformity requirement that appears in the US Constitution at Article I, Section 8, Clause 4. The Court noted that it was previously well-settled that the right of the states to opt out of the federal exemptions does not violate the uniformity requirement. In re Sullivan, 680 F.2d 1131 (7th Cir. 1982). The Court also noted that it was held early on that the uniformity requirement is “georgraphic”, that is the laws passed on the subject must be uniform throughout the United States but that uniformity is geographical and not personal. Hanover National Bank of the City of New York v. Moyses, 186 US 181 (1902).

The Supreme Court in Moyses applied this requirement by holding that a bankruptcy statute passes constitutional muster if the bankruptcy law treats the trustee, as a hypothetical judicial lien creditor, in the same fashion in the bankruptcy case as he would be treated outside of the case under state law. The Moyses Court also provided “additional language” that the general operation of the law is uniform although it may result in certain particulars differently in different states.

Judge Kirscher found that section 522(b)(3) as amended by BAPCPA does not violate the uniformity requirement. The Court based its holding on the “additional language” in Moyses coupled with language contained in later US Supreme Court decisions which held that Congress has the power to take into account differences that exist between different parts of the country and to fashion legislation to resolve geogrphically isolated problems.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Sections 526, 527, and 528 Held Not to Apply to Attorneys

In the recent case of In re Reyes, ___B.R. ___, 2007 WL 136934 (Bkrtcy.S.D. Fla.), Judge A. Jay Cristol of the Bankruptcy Court of Southern District of Florida issued an important decision as to the “debt relief agency” provisions of BAPCPA as applied to attorneys. Judge Cristol adopted the recent decision of Milavetz v. United States, 355 B.R. 758 (D. Minn. 2006) and held that 11 U.S.C. section 526, 527, and 528 are unconstitutional as applied to attorneys.

But following the doctrine of constitutional avoidance, the Court addressed the other issues raised to resolve them on other than constitutional grounds. The Court found that sections 526, 527, and 528 infringe on the State’s traditional role of regulating attorneys and therefore should not apply to attorneys. The Court reasoned that these sections were directed at bankruptcy petition preparers and not attorneys.

The Court further held on the doctrine of constitutional avoidance, that even assuming that the
sections were constitutional and that they applied to attorneys, that since the involved attorney did not receive “money or other valuable consideration”, that the attorney does not fit within the statutory definition of a debt relief agency as set forth in section 101(12A).

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Exempt Entireties Property not Subject to 522(p) Limitation

Judge Williamson of the Middle District of Florida issued his decision in the case of In re Buonopane, ___ B.R. ____, 2007 WL 247888 (Bkrtcy. M.D. Fla.) on January 26, 2007 in which he held that the cap imposed by the BAPCPA on the state homestead exemption that a debtor can claim in residential property acquired within 1,215 days of the petition date applied only to the Florida homestead exemption that the debtor could claim under 522(b)(3)(A) and not to the separate entireties exemption available under section 522(b)(3)(B). Section 522(b)(3)(B) provides for the exemption of property held as a tenant by the entireties. This decision is in accord with Judge Olson’s recent decision in the Southern District of Florida in the case of In re Schwarz, __ B.R. ___, 2007 WL 247649 (Bkrtcy. S.D. Fla.).

The Court stated while its ruling would appear to provide a way for a debtor to “end run” the $125,000 cap contained in section 522(p), that its ruling is consistent with the legislative history of section 522(p)(1) which was directed to close the “mansion loophole” and not against a state’s common law on tenancy by the entireties property.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

The Two Schools of Thought Construe BAPCPA

The Court in In re Grydzuk, 353 B.R. 564 (Bankr. ND Ind. 2006) submitted that there are two major schools of thought now prominent among bankruptcy scholars and bankruptcy judges as to the manner in which the BAPCPA is to be construed.

The first school of thought is the “literalist” movement which holds that “it says what is says it says” even though if it does not make any sense. Under the literalist movement, the law must be construed in strict accordance with the statutory language.

The other school of thought is the “common sense” approach which accepts the fact that the BAPCPA in many instances makes no sense whatsoever and that it must be construed against the background of what it is presumed the drafters intended to change from the prior law.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983

Florida Bankruptcy Filing, Maryland Exemptions, Real Property Exempt under Florida Tenants by Entireties Law

The January 30, 2007 case of In re Schwarz, __ B.R. ___, 2007 WL 247649 (Bankr. SD Fla. Olson) held certain real property as exempt from administration in the estate under 11 USC 522 (b)(3)(B) which allows for the exemption of any interest in property which the debtor held as tenants by the entireties to the extent that it is exempt from process under applicable nonbankruptcy law.

In this case, the debtor was unable to exempt his real property under the Florida homestead provision of Art. X Section 4 (a)(1) of the Florida Constitution as the new provisions of BAPCPA of 11 USC 522 (b)(3) required the debtor to use the Maryland exemptions as the debtor had not been a domiciliary of Florida for the entire 730 day period prior to filing of the bankruptcy case. The parties agreed that Maryland does not provide for a specific homestead exemption. Nonetheless, the debtor was able to exempt his entire interest in the real property in Florida as he held it as tenants by the entireties on the date of filing pursuant to section 522 (b)(3)(B).

It is significant that the Court looked to Florida tenants by the entireties law as the “applicable nonbankruptcy law” for such determination and not Maryland law.

Property held by a debtor in a tenancy by the entireties is exempt from the claims of individual creditors in bankruptcy under Florida common law with certain exceptions for joint creditors or fraudulent conveyances. In this case, there were no joint creditors nor any indication of a fraudulent conveyance.

Interestingly enough, section 522 (b)(3)(B) does not require the debtor to be residing in the property on the date of filing, but only requires that the debtor hold an interest in the property as a tenant by the entireties immediately before the commencement of the case. In this case, the debtor did not move into the property until after the filing of the case but held an interest in the property as a tenant by the entireties before the commencement of the case.

Jordan E. Bublick, Attorney at Law, Practice Limited to Bankruptcy Law, Board Certified Specialist in Consumer Bankruptcy Law (American Board of Certification), Member of the Florida Bar since 1983