BANKRUPTCY PRACTICE: The New Practice Under the Amended Bankruptcy CodeAuthor(s): Ned W. Waxman and Homer Drake Jr.Source: ABA Journal, Vol. 71, No. 2 (February 1985), pp. 55-58Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/20757627 .

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BANKRUPTCY PRACTICE

The New Practice Under the

Amended Bankruptcy Code

Once again the rules have been changed in bankruptcy practice. Aiming to im prove the six-vear-old statute. Congress

has enacted signifi cant changes in I Chapters 7, 11 and 13 | for individual and joint debtors, as well as small businesses,

including: A debtor filing a

Chapter 7 petition must aver that he

knows he can pro ceed in a way that allows repayment of

creditors, and a

bankruptcy judge may dismiss a Chap ter 7 case if he finds "substantial abuse"

of the statute.

There are new

exemptions from the

automatic stay.

Changes have

been made con

cerning debts that are non-dischargea ble.

There is a new procedure for busi

nesses reorganizing under Chapter 11 to

reject labor union contracts.

Changes, big and small Title I of the 1984 Bankruptcy Amend

ments and Federal Judgeship Act con

ferred on the federal district courts original and exclusive jurisdiction of all cases under Title 11, with the bank ruptcy courts constituting a unit of each

district court. Bankruptcy judges are

now appointed by the U.S. courts of ap

peal for 14-year terms.

The Title III amendments significantly revised many of the substantive provi sions of the 1978 Bankruptcy Reform Act and also provided a number of tech nical and conforming amendments. For

By Ned W. Waxman and W. Homer Drake Jr.

example, in commencing a voluntary

Chapter 7 case for an individual debtor with primarily consumer debts, lawyers should note the changes in Official Bankruptcy Form No. 1 (the voluntary petition), which now requires a state ment that the debtor is aware that he can proceed under Chapter 7 or Chapter 13, that he understands the relief avail able under each chapter and that he chooses to proceed under Chapter 7.

In addition, the debtor's attorney must attach to the petition a declaration or affidavit indicating that he has ad vised the debtor of eligibility under Chapter 7 or Chapter 13 and has ex

plained the relief available under each chapter. A debtor also must file with his petition a list of creditors, a schedule of assets and liabilities, a statement of his

financial affairs, and a schedule of in come and expenditures. If the debtor owes consumer debts that are secured

by property of the estate, he also must

file within 30 days after the petition or prior to the Section 341 meeting (which ever is earlier) a statement of his in tention to retain,

surrender, exempt, or redeem the collat

eral, or his intention concerning reaffir

mation of the under

lying debt. The debtor must perform his stated intention within 45 days fol lowing the filing of this statement, and it is the affirmative duty of the trustee to ensure that the debtor complies.

The debtor also is required to surrender to the trustee all property of the estate and all relevant recorded information, such as books, documents, records and

papers, whether or not immunity has

been granted under Section 344.

180-day limit When representing a debtor, it is im

portant to be aware of new Section 109(f), which prohibits an individual from filing a petition within 180 days after the dismissal of an earlier petition if the previous case was dismissed by the court for willful failure to obey a court order or to appear before the court, or if the debtor voluntarily ob tained dismissal of the case in response to the filing of a request for relief from the automatic stay.

Another provision aimed at prevent

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ing abuse of the bankruptcy laws per mits the bankruptcy judge on his own motion (and not at the request or sug

gestion of any party in interest) to dis

miss a Chapter 7 case of a consumer

type debtor if he finds that the granting of relief would be a substantial abuse of Chapter 7. Prior to the filing of a volun tary case by an individual debtor with primarily consumer debts, the clerk of the court, pursuant to Bankruptcy Rule

2002(n), must give the debtor written notice of each chapter of the Bank ruptcy Code under which the debtor might proceed and, within 20 days after the filing of the petition, must give the trustee and all creditors (including any holder of a community claim) notice by mail of the order for relief. Should the fact of the debtors bankruptcy petition, pre-petition insolvency, or failure to pay a discharged or dischargeable debt come to the attention of a debtor's private em

ployer, any resultant discrimination

against the debtor or termination of his employment is prohibited.

In regard to the commencement of an

involuntary case. Section 303 now ex

cludes from the $5,000 threshold the claims of a petitioning creditor that are the subject of a bona fide dispute, and these debts will not be considered in de termining whether the debtor is gener

ally not paying his debts as they become due.

Changes in stay provisions After the filing of either a voluntary or

an involuntary petition, the automatic

stay of Section 362 is invoked. The amendments expand Section 362(a)(3) to enjoin not only any act to obtain posses sion of property of or from the estate but also any act to exercise control over

property of the estate. On the other hand. Congress also has enlarged the list

of non-stayed acts under Section 362(b). For example, perfection of an interest in

property, to the extent that it is accom

plished within 10 days after the transfer takes effect, now is an excepted act un

der Section 362(b)(3). Other acts that no longer are stayed

include a setoff by a participant in a re purchase agreement, presentment of a

negotiable instrument and the giving of notice of and protesting dishonor, and

any act by a lessor to obtain possession of nonresidential real property from a

debtor under circumstances where the

lease of such property has terminated

according to its stated term before the

commencement of the bankruptcy case

or during the case. In this regard, Sec

tion 541(b) has been amended to exclude

from property of the estate a debtor's in

terest in a lease of non-residential real property that terminated at the expira tion of its stated term prior to the com

mencement of the case or during the

case. Finally, Section 362(h) now provides a remedy for an individual who is injured by any willful violation of the automatic stay, with damages to include

actual loss, costs, attorneys' fees and

punitive damages when appropriate. In a case in which the debtor and his

or her spouse file a joint petition, they now are required to elect the same ex

emption plan, either federal or state. If

they cannot agree, they will be deemed to have opted for the federal exemption, some of which have been altered. One

change is the $4,000 ceiling in aggregate value imposed on a debtor's exemption for particular items (not to exceed $200

for any one) of household furnishings or goods, wearing apparel, appliances, books and other belongings of a per sonal, family or household nature. The

catchall provision of Section 522(d)(5) also has been limited to $400 plus $3,750 of any unused amount of the debtor's

exemption for equity in his residence.

This revision is significant, especially for a non-homeowner debtor, who pre

viously had been able to claim up to $7,500 of unused exemption for his resi dence plus $400, but who now is limited to a maximum of $4,150.

Debt reaffirmation If the debtor desires to reaffirm a debt

that is dischargeable, his attorney should make certain that the reaffirma

tion agreement complies with the new standards set forth in Section 524(c).

More specifically, a reaffirmation agree ment must contain a clear and conspic uous statement advising the debtor of his right to rescind at any time prior to

his discharge or within 60 days after the agreement has been filed, whichever date is later. The agreement must be filed with the court along with a declara tion or affidavit by his attorney stating that the debtor has been fully informed, that he has entered into the agreement voluntarily, and that it would impose no undue hardship on the debtor or a de pendent of the debtor. If these require ments are satisfied, no court approval of

the reaffirmation is necessary; however,

judicial approval is mandatory if the debtor has not been represented by a lawyer during the negotiation of the agreement. In the event that the debt

being reaffirmed is a consumer debt se

cured by real property, the reaffirmation

agreement need not be reviewed by the bankruptcy judge. The code now clearly provides that the debtor is not barred from voluntarily repaying any debt.

Non-discharge rules In regard to debts that are non-dis

chargeable under Section 523(a), the law has been amended in several respects. First, the debtor effectively is precluded from incurring substantial indebtedness

immediately prior to filing his bank ruptcy petition and then obtaining a dis charge on these debts. More specifically, there is a rebuttable presumption of non

dischargeability concerning consumer

debts that total more than $500, which are owed to a single creditor by an indi vidual debtor, which are for luxury goods or services, and which were in

curred within 40 days prior to the filing of the bankruptcy petition. There is also a rebuttable presumption of non-dis

chargeability concerning cash advances

in excess of $1,000 obtained by an indi vidual debtor as extensions of consumer

credit under an open end credit plan within 20 days before the order for re lief.

The non-dischargeability provision concerning alimony and child support also has been broadened to include any order of a court of record and no longer is limited to the divorce decree, separa tion agreement or property settlement.

Section 523(a)(5) now designates as non dischargeable any debt assigned to a federal, state or local subdivision and thus is not restricted to debts assigned under the Social Security Act. A new category of non-dischargeable debts concerns any debt premised on a judg ment or consent decree entered in a

court of record against the debtor wherein liability was a consequence of drunk driving on the part of the debtor. Finally, if a creditor unsuccessfully re

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quests a determination of the non

dischargeability of a consumer debt, a

judgment against him and in favor of the debtor for costs and a reasonable at

torney's fee will ensue only if the cred itor's position was not substantially justified. This language materially alters old Section 523(d), wherein judgment against the creditor was prescribed un less the court found it to be clearly ineq uitable.

Creditors' rights The status of various classes of cred

itors is affected appreciably by the 1984 amendments. With respect to a secured

creditor, if a secured claim is not al lowed only because of the failure by the holder to file a proof of claim, the lien securing that claim is not deemed void under Section 506(d)(2). In regard to pri orities of unsecured claims under Sec

tion 507, farmers who produce grain and American fishermen now enjoy a fifth level priority against grain and fish stor age facilities. Consonant with this

change is the express recognition of cer tain statutory or common law rights in the case of a grain farmer or an Amer

ican fisherman to reclaim goods from an insolvent debtor within 10 days after the debtor's receipt and after having made a demand in writing.

Trustees' rights and powers While the laws pertaining to both

debtors and creditors have been revised, the rights and powers of the trustee also have been modified. For example, under

the strong-arm provision of Section 544(a)(3), which now excludes fixtures from the definition of real property, the trustee has been accorded the status of a bona fide purchaser who has perfected the transfer in question at the time the case was commenced. In endeavoring to

avoid preferential transfers under Sec tion 547, the trustee no longer needs to prove that an insider who is the alleged recipient of a preferential transfer be tween 90 days and one year before the filing of the petition had reasonable cause to believe that the debtor was in solvent when the transfer was made.

The trustee, however, must prove the

debtor's insolvency at the time of the transfer.

There are also several changes regard

ing the exceptions to preferences de scribed in Section 547(c). A new

provision allows a creditor to retain what previously would have been a pref erential transfer of less than $600 if the debtor is an individual with primarily consumer debts. The exception for pay

ment of a debt incurred by the debtor in the ordinary course of business of the debtor and the transferee no longer re

stricts the payment to a period of 45 days after the debt was incurred. Lastly, the exception concerning the creation of a security interest that secures new

value now mandates that the security in

terest be perfected within 10 days after the debtor receives possession of the property instead of within 10 days after the security interest attaches.

The 1984 amendments also assign the respective burdens of proof involving al leged preferential transfers. Thus, the trustee must prove the avoidability of the transfer under Section 547(b) while the creditor or transferee has the burden of proof concerning the non-avoidability of the transfer under Section 547(c). Within the trustee's rights is the use,

sale or lease of property of the estate pursuant to Section 363, which likewise has undergone both change and clar

ification. An important aspect of the trustee's power under this section is the use of cash collateral, which now is de fined to include proceeds, products, off spring, rents and profits of property subject to a security interest whether the cash collateral existed prior to or subse quent to the commencement of the case.

Also addressed is the allocation of the burden of proof of adequate protection, which now requires that the trustee prove the existence of adequate protec tion and that the entity asserting an in terest in the property bear the burden of proof as to the validity, priority or ex tent of its interest. In this regard, when the trustee is required to prove adequate protection, his options under Section 361 have been enlarged to include the making of a single cash payment. (The

old law referred to "periodic cash pay ments.")

In addition to his Section 363 pre rogatives, the trustee is entitled to as

sume or reject executory contracts or

unexpired leases of the debtor under Section 365. However, following the amendments, a trustee who assumes and

assigns a shopping center lease must

provide adequate assurance that the fi

nancial condition and operating perfor mance of the potential assignee will be similar to that of the debtor and any guarantors as of the time the debtor originally became the lessee, that there

is no breach of the shopping center lease terms (as opposed to "substantially" no

breach, under the former law), and that

there will be no disruption of tenant mix or balance in the shopping center.

Leases and contracts The provisions of Section 365 affect

ing the trustee's assumption or rejection of an unexpired lease of non-residential

real property have been modified to pre clude the trustee from assuming any lease if it was terminated under applica ble non-bankruptcy law prior to the

order for relief. The trustee further is

bound to perform all obligations of the debtor under an unexpired lease of non

residential real property arising from and after the order for relief until the as

sumption of rejection occurs. If the debtor is the lessee under this type of unexpired lease, the trustee is limited to a period of 60 days subsequent to the order for relief (or within additional time as the court permits for cause) to elect whether to assume or reject, and the

trustee's failure to choose within this

time results in a rejection of the lease under Section 365(d)(4), requiring the trustee to surrender the property to the

lessor immediately. When the subject matter of the unex

pired lease or executory contract is resi

dential real property or personal property of the debtor, the trustee must decide to assume or reject within 60

days after the order for relief in a Chap ter 7 case, and at any time prior to con

firmation of a plan in a case under Chapter 9, 11 or 13. The time period may be extended by the court for cause in a

Chapter 7 case and may be reduced to a

specified duration on the request of any party to the contract or lease in a case

under Chapter 9, 11 or 13. A new aspect of Section 365 is sub

section (1), which permits a lessor to re

quire a deposit or other security for performance of the debtor's obligations from an assignee of an unexpired lease

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as if the landlord initially had leased the property in question to a similar tenant. When the debtor is the lessor pur

suant to an unexpired lease of real prop

erty rejected by the trustee, or the debtor is the timeshare interest seller under a rejected timeshare plan (as de fined in Section 101(47)), revised Section 365(h)(1) provides certain rights to the lessee under such a lease and to the pur chaser of the timeshare interest. Rejec tion by the trustee results in an option to the lessee or the timeshare interest pur chaser either to treat the lease or time share plan as terminated or to remain in

possession for the balance of the term and for any renewal or extension of such term that is enforceable under applicable non-bankruptcy law.

Union contracts Congress also has reformed the law

relating to business reorganizations un

der Chapter 11, including the addition of Section 1113 concerning rejection of col lective bargaining agreements. This amendment requires that prior to filing an application for rejection of a collec tive bargaining agreement, the debtor in possession or the trustee must propose to the authorized representative of the employees any modifications of the con tract that are necessary to permit

reorganization of the debtor and also must supply to the authorized represen tative any relevant information required to evaluate the proposal. Thereafter,

any application for rejection of the col lective bargaining agreement will be ap proved by the court only if it finds that the trustee or debtor in possession has satisfied these prerequisites, the autho

rized representative of the employees has refused to accept the proposal with out good cause, and the balance of equi ties clearly favors rejection of the agreement. The court must schedule a

hearing within 14 days after the filing of the application for rejection, and the court must rule on the application within 30 days following the commencement of the hearing.

Finally, the trustee or debtor in pos session expressly is prohibited from uni laterally terminating or altering any provisions of a collective bargaining agreement without first complying with these provisions; however, the court, after notice and a hearing, may autho

rize the trustee or debtor in possession to implement interim changes in the agreement if essential to the con

tinuation of the debtor's business or the prevention of irreparable harm to the es

tate.

Other amendments concerning Chap ter 11 include modification of Section 1108 to the extent that a party in interest

may request that the court, after notice

and a hearing, "order[s] otherwise" con

cerning the trustee's authorization to op erate the debtor's business. Section

1126(f) now provides for a conclusive presumption of acceptance of the Chap ter 11 plan by a class that is not impaired under the plan and by each holder of a claim or interest of such class. In regard to confirmation of the Chapter 11 plan, the test of Section 1129(a)(7) now applies only to each impaired class of claims or interests. Section 1129(a)(10) dictates that if a class of claims is impaired under the plan, at least one impaired class, ex

clusive of insiders, must have accepted the plan in order for confirmation to oc

cur.

Changes in Chapter 13 Chapter 13 of the Bankruptcy Code

also has undergone revision. First, new

Section 1301(d) provides for termination of the co-debtor stay 20 days after the filing of a request for relief from the stay under Section 1301(c)(2) if no written ob jection is filed by the debtor or co debtor. Section 1326 now requires, un

less the court orders otherwise, that the debtor commence payments into the

proposed plan within 30 days after the plan is filed, and Section 1302 obligates the trustee to monitor the plan. The im

portance of the debtor's beginning his payments within this period is empha sized in Section 1307, which establishes the debtor's failure to commence making

timely payments as a basis for dismissal or conversion of the Chapter 13 case.

Section 1322 describes the contents of the Chapter 13 plan, and as amended specifically permits the plan to treat claims for consumer debts differently

from other unsecured claims if there is an individual co-debtor liable on the consumer debts. Confirmation of the

plan can be opposed successfully by the trustee or by the holder of an allowed unsecured claim, under Section 1325(b), if the objecting party will not receive the full value of his claim under the plan or if the plan does not propose to utilize all of the debtor's projected disposable in come to be received within a three-year

period beginning on the date that his first payment is due under the plan. Lastly, Section 1329 allows for the plan to be modified after confirmation upon the request of the debtor, the trustee or the holder of an allowed unsecured claim.

Ethical issues In addition to altering the substantive

rights and duties of the parties under Ti tle 11, Congress also clarified certain po tential ethical issues. In a case under

Chapter 7 or 11, a professional person (such as a lawyer or an accountant) em

ployed by the trustee pursuant to Sec tion 327 is not disqualified from employment solely because he repre sents a creditor in the same case. But on

objection by another creditor, the court will disapprove a lawyer's or accoun

tant's employment if it finds an actual

conflict of interest.

Similarly, Section 1103(b), which here tofore precluded a person employed by the creditors' committee in a Chapter 11

case from representing any other entity in connection with the case, has been re

written to prohibit an attorney or ac

countant employed by a creditors'

committee from representing any other

entity having an adverse interest in con

nection with the case. Moreover, the

statute indicates that representation of one or more creditors of the same class as represented by the committee will not per se be deemed representation of an

adverse interest.

The 1984 Amendments to the Bank ruptcy Code undoubtedly will affect not

only debtors and creditors but also the daily practice of their attorneys. A basic understanding of the new provisions will facilitate effective representation on the part of the bankruptcy bar. , i

(Ned W. Waxman is an assistant pro

fessor in the School of Business Ad ministration at the College of William and Mary. He formerly practiced law in

Atlanta. W. Homer Drake Jr. is a U.S.

bankruptcy judge for the Northern Dis trict of Georgia.)

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