by Jeffrey L. Marks*
By the time that you read this article, the Bankruptcy Abuse Prevention and Consumer Act of 2005 ("BAPCPA"), 11 U.S.C. § 101 et seq., will be in full effect. The substantive and procedural changes set forth in the BAPCPA represent the most sweeping changes to the federal insolvency system in more than 25 years.
The BAPCPA has resulted
in a wide spectrum of changes affecting debtors, creditors, and other parties
in interest, not to mention the bankruptcy court, clerks, and trustees. These
changes are comprehensive and numerous. Below are brief summaries of a few of
the changes affecting real estate practitioners.
I. NEW NOTICE REQUIREMENTS FOR DEBTORS
A. Under § 342 of the BAPCPA, when notice is required to be given to a creditor, the notice must now contain the debtor's name, address, and last four digits of the debtor's taxpayer identification number (social security number).
B. Moreover, the notice is not effective unless:
1. it is served at an address filed by the creditor with the bankruptcy court or at an address stated in two communications from the creditor to the debtor within 90 days of the filing of the bankruptcy case; and
2. The notice includes the account number used by the creditor in the two relevant communications.
II. CHANGES AND LIMITS ON THE DEBTOR'S HOMESTEAD EXEMPTION
A. Any value in excess of $125,000 that is added to a homestead during the 1215 days (approximately 3 years and 4 months) preceding the bankruptcy filing may not be included in a state homestead exemption unless it was rolled over from another homestead in the same state or the homestead is the residence of a farmer.
B. Under a new § 522(q), a hard $125,000 homestead cap applies if the bankruptcy court determines that the debtor has been convicted of a felony demonstrating that the filing of the case was an abuse of the Bankruptcy Code, or the debtor owes a debt arising from a violation of federal or state securities laws, fiduciary fraud, racketeering, or crimes or intentional torts that caused serious bodily injury or death "in the preceding 5 years."
III. THE NEW (AND IMPROVED) AUTOMATIC STAY
A. Under revised § 362(c), frequent-filing debtors do not automatically receive the benefit of the automatic stay.
1. Section 362(c)(3) provides that if a Chapter 7, 11, or 13 case is filed within one year of the dismissal of an earlier case (other than a Chapter 11 or 13 case filed after a means test dismissal under § 707(b)), the automatic stay in the second case terminates 30 days after the filing, unless the debtor or a party in interest demonstrates that the second case was filed in good faith with respect to the creditor sought to be stayed.2. Under revised § 362(c)(4), if a second repeat filing takes place within the one-year period, the automatic stay will not go into effect (and the bankruptcy court is required promptly to enter an order confirming the inapplicability of the stay on request of a party in interest).
B. A party in interest (including the debtor) may move to extend the stay and show that the bankruptcy case was not filed in bad faith.
C. A case is presumed to be in bad faith if (all of the following elements must be present):
1. more than one bankruptcy case was pending in Chapters 7, 11, or 13 in the previous year;
2. at least one of these bankruptcy cases was dismissed for the debtor's failure to comply with a bankruptcy court order to:
a) amend petition or schedules; or
b) provide adequate protection to the creditor(s); and
3. there is no showing that the debtor's financial situation has changed so as to allow a final discharge or completion of a plan.
D. For both second and third filings within one year, there is a general presumption that the new filing was not made in good faith.
1. Such a presumption would be required to be rebutted by clear and convincing evidence.
2. Under a new § 362(i), this presumption would not arise in "any subsequent case" if a debtor's case is dismissed "due to the creation of a debt repayment plan."
E. Under a new § 362(d)(4), the bankruptcy court may issue an order of relief from the automatic stay in cases when the petition is part of a scheme to delay, hinder, or defraud creditors involving either:
1. transfers of real property collateral without the consent of the secured creditor or court approval; or
2. multiple bankruptcy filings involving the same real property.
F. Section 362(a)(20) was added to except from the automatic stay any act to enforce any lien against real property if a relief from stay order was entered in a prior case under new § 362(d)(4).
G. Section 362(b)(18) is amended to broaden the types of property taxes and assessments by governmental units that are excepted from the automatic stay's prohibition of creating post-petition liens.
H. Section 362(b)(21) excepts from the application of the stay any act to enforce a lien or security interest in real property if the debtor was ineligible or filed the case in violation of an order "prohibiting the debtor from being a debtor" in another case under Title 11.
I. In single-asset real estate cases, § 362(d)(3) was amended to permit the debtor to use rents or other income from the property to make monthly payments to the secured creditor, notwithstanding the requirement in § 363(c)(2) of consent or court approval to use cash collateral.
J. Section 362(d)(3) was also slightly amended in attempts to specify more the applicable nondefault contract rate of interest.
K. Under § 362(e)(2), in a bankruptcy case filed by an individual under Chapter 7, 11, or 13, the automatic stay automatically terminates 60 days after a motion for relief under § 362(d) is filed unless a final decision is rendered by the bankruptcy court within the next 60 days; or the 60 day period is extended by agreement of the parties or order of the bankruptcy court.
IV. CHANGES WITH RESPECT TO REAL PROPERTY LEASES
A. Under § 365(b)(1)(a), the trustee or debtor is not required to cure or provide adequate assurance that the trustee will cure a default that arises from a non-monetary obligation under an unexpired lease of real property, if it is impossible for the trustee to cure such default by performing non-monetary acts.
1. But, if it is due to a failure to operate in accordance with a non-residential real property lease, then such default must be cured by performance and the trustee must compensate the landlord for any pecuniary loss resulting from the default.
2. Under this section, the debtor must provide more detail on the need to cure an existing non-monetary default under an unexpired lease of real property.
B. The current 60-day period under § 365(d)(4) within which to assume or reject unexpired leases of non-residential real property is extended under the Act to 120 days from the petition date. A debtor may now obtain a single 90-day extension of this deadline (for a maximum total of 210 days). Any further extension can be granted only with the adversely impacted landlord's written consent.
C. Section 365 will have a significant immediate impact on retail debtors, by requiring them to quickly decide to assume or reject site and store leases. As a result, the Act limits the administrative claims arising from rejection of previously assumed leases to monetary obligations due in the two years following rejection.
D. Section 503 provides for an administrative priority claim, and the method of computing such a claim, in instances where a nonresidential real property lease is assumed, then subsequently rejected.
E. Under § 503(b)(7), if a non-residential real property lease is assumed and later rejected, the lessor is granted an administrative expense equal to the sum of all monetary obligations due for the two (2)-year period following the later to occur of the rejection date or the date of actual turnover of the property, without reduction or setoff unless sums are received or to be received from an entity other than the debtor by the landlord. Any remaining monetary obligations under the lease are a claim under § 502(b)(6).
V. UNLAWFUL DETAINERS UNDER THE ACT: NOT AN AUTOMATIC SAFE HARBOR FOR TENANTS
A. In residential lease situations, there are two (2) new exceptions to the general rule regarding the automatic stay. In other words, the automatic stay is not in effect and will generally not prevent or halt a detainer action:
1. Section 362(b)(22): the automatic stay does not apply in unlawful detainer actions and the Act allows the continued prosecution of any eviction proceeding in which the landlord obtained a judgment of possession prior to the filing of the bankruptcy petition.
2. Section 362(b)(23): with respect to evictions based on "endangerment" of the rented property or "illegal use of controlled substances" on the property, the Act excludes the eviction proceeding from the automatic stay if it was commenced before the filing of the bankruptcy case and the endangerment or illegal use occurred within the 30 days before the bankruptcy filing.
B. However, the new provisions in § 362(l) and § 362(m) allow a debtor to contest the applicability of the automatic stay exceptions under § 362(b)(22) (possession order already entered) and § 362(b)(23) (endangerment and/or controlled substances) by filing timely certifications under penalty of perjury.
C. As to the (b)(22) lease exception (possession order and eviction in progress), the debtor is able under § 362(1) to retain the automatic stay in effect for an initial 30 days after the bankruptcy petition by filing along with the petition a certificate that applicable nonbankruptcy law allowed the lease to remain in effect upon the debtor's cure of the default and depositing with the Bankruptcy Court clerk the funds necessary to cure the monetary default.
1. If the landlord contests the allegations and position set forth in the debtor's certificate, then the landlord must file an objection to the certificate before the expiration of the thirty (30) day period.
2. The bankruptcy court is required to conduct a hearing within 10 days of the filing of the landlord's certificate filing to determine if the certification filed by the debtor is true and whether the automatic stay will remain in place or be lifted.
D. As to the (b)(23) lease exception (endangerment and/or controlled substances), the landlord (not the debtor) must file a certificate in order to not have the automatic stay take effect. The landlord's certificate must be filed within 15 days and must state that an eviction has been commenced prior to the bankruptcy filing or that during the 30-day period prior to the bankruptcy case filing, the debtor has endangered property or illegally used or allowed to be used a controlled substance on the property.
1. The debtor then must file, within 15 days after the landlord's certificate, an objection and certificate denying the assertions in the landlord's certificate. The bankruptcy court is required to conduct a hearing within 10 days of the filing of the debtor's certificate "to determine if the situation giving rise to the lessor's certification existed or has been remedied."
2. If the debtor does not file the objection to the landlord's certificate within the 15-day time frame, then the bankruptcy court clerk's office will automatically notify the parties of the debtor's failure to contest the landlord's assertions and the automatic stay will be immediately terminated without further action of the bankruptcy court.
VI. REAFFIRMATIONS INVOLVING DEBT SECURED BY REAL PROPERTY
A. Section 524 of the BAPCPA contains extensive new disclosures that detail the debtor's rights and specify the amount of debt to be reaffirmed, the rates of interest, when payments will begin, filing requirements with the bankruptcy court, the right to rescind, and a certification that the agreement does not impose an undue hardship on the debtor.
B. Section 524(J)(i) does not require bankruptcy court approval for the reaffirmation agreement of a consumer debt secured by a mortgage on the debtor's real property.
VII. OTHER NEW PROVISIONS UNDER THE BAPCPA AFFECTING REAL ESTATE PRACTITIONERS
A. Various provisions of the BAPCPA place greater burdens on the debtor to prepare, file, and provide copies of their tax returns. Also, additional duties are placed on the trustees to mandate that the debtor comply with these requirements.
B. New § 101(54) defines transfer of a debtor's interest in property as the creation of a lien, the retention of title as a security interest, foreclosure of the debtor's equity, and redemption of the property.
C. The Act improves the ability of recipients of preferential transfers to defend against avoidance actions brought by debtors and trustees.
1. The Ordinary Course of Business Defense under § 547(c)(2) has been greatly strengthened for defendants by providing that the defendant only satisfy a two-prong test (it was a three-prong test under the old Code):
a) The transfer was in payment of a debt incurred in the ordinary course of business between the debtor and the transferee.
b) The payment was in the ordinary course of both parties (subjective) or according to ordinary business terms in the industry (objective). Under the old Bankruptcy Code, the defendant had to prove both the subjective and objective elements.
2. Under newly revised § 547(c)(3) of the Act, a secured creditor now has 30 days instead of 20 days to perfect a security interest after the debtor receives the goods.
3. Under newly revised § 547 (e)(1), the relevant time periods were increased from 10 days to 30 days. Therefore, the perfection of a security interest can relate back to the date that the transfer (i.e., the signing and execution of the security agreement) was effectuated between the debtor and the transferee if it is perfected within 30 days.
D. Section 1129(a)(9)(C) is pertinent to priority tax claims under § 507(a)(8) and provides that holders of claims under § 507(a)(8) must receive installment payments in cash over a period ending not later than five years after the order for relief in the case. Moreover, the holders of those claims cannot receive treatment under the plan that is less favorable than the most favored non-priority unsecured class of claims (other than a convenience class under 1122(b)).
E. Small Business and Single-Asset Cases are re-characterized under the BAPCPA. Under § 101(51), the $9 million cap on the value of the real estate was deleted and a "Small Business Debtor" is now more or less defined as a person engaged in commercial or business activities whose noncontingent liquidated debts do not exceed $2 million, excluding any debts to insiders or affiliates.
F. Section 366 of the BAPCPA provides that utility companies are now entitled to "adequate assurance" because a debtor is now required to make a payment of cash or a similar deposit.
1. Unlike with the old Bankruptcy Code, the BAPCPA provides that prior payment history, proof of post-petition financing, and allowance of an administrative claim cannot alone constitute adequate assurance.
2. Rather, a debtor with a large number of locations or heavy energy needs will have to expressly budget for substantial deposits or letters of credit.
3. Section 366(c) provides that if the debtor does not provide assurance of payment that the utility believes is satisfactory, the utility may refuse, alter, or discontinue service 30 days after the petition date.
G. The BAPCPA changes the composition of creditors' committees by providing under § 1102(a)(4) that a party in interest may request that the court order the U.S. Trustee to change the make-up of a creditors' committee if the bankruptcy court determines that it is necessary to ensure adequate representation of creditors or equity holders. As a result, a small business creditor holding a large claim against the debtor that is disproportionate in relation to the small business' gross income can be added to the creditors' committee and thereby play an active role in the bankruptcy case. This committee participation will also enable the small business creditor to limit its direct costs in the bankruptcy case.
H. Finally, there are three major changes to the bankruptcy process under the BAPCPA that affect not only real estate practitioners, but all attorneys dealing with individuals having filed or considering filing for bankruptcy protection.
1. First, before an individual may avail themselves of the benefits of bankruptcy protection under the BAPCPA, the person must undergo credit counseling both before the petition filing and before receiving the discharge.
2. For a chapter 7 debtor, a debtor must satisfy a "means test" if the debtor's family's income level is above the gross median income for a similar family size in the Commonwealth of Virginia (or whatever state in which the debtor is located). If the debtor fails the means test, then the debtor may theoretically only file under chapter 13 (or 11), or under a state insolvency statute.
3. Debtors under the BAPCPA will receive fewer discharges over their lifetime because there is now an extended time period between allowed discharges.
a) A discharge will not be granted to a Chapter 13 debtor if that debtor obtained a discharge in Chapter 7, 11 or 12 within the 4 years prior to the date of filing of the pending case, or in a Chapter 13 case filed within 2 years of the pending case. As a result, there is now an expressed prohibition against "chapter 20" filings.
b) A Chapter 7 debtor cannot receive a discharge if a prior discharge was received within 8 years (rather than 6) of the new filing.
*Jeffrey L. Marks practices bankruptcy and creditors' rights law in the Virginia Beach office of Kaufman & Canoles.