Family Law Section San Fernando Valley Bar Association

June 27, 2005

Presented by Commissioner Patricia Ito

San Fernando

Russell H. Rapoport, Attorney at Law Encino

David R. Hagen, Attorney and Panel Chapter 7 Trustee

Woodland Hills

1. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
1. Signed April 20, 2005, effective October 17, 2005
2. Eight years to pass, veto twice
3. In response to rising credit card losses
4. Overview Issues:
   1. Time between filing ( § 727, 1328)
      • Chapter 7 – 8 years
      • Chapter 13 – 4 years after 7, 2 years after 13
   2. Debtor Education (§ 521(b))
      • Pre-bankruptcy counseling
      • Post-bankruptcy education
   3. Additional Debtor Responsibilities (§ 521)
      • last year tax return
      • last 2 paychecks
   4. Audits
      • by a CPA
      • 1 in 250
   5. Means testing (§ 707(b))
      • Intent was to stop abuse, payment of some, but not all, debts
      • “Presumption of Abuse”
      • Monthly Income (6 months prior)
        • minus expenses (per IRS schedules)
        • minus secured debt (actually incurred and necessary)
      • Minus Priority Debt (divided by 60)
        • IF over $166/ mo, presumed abuse
        • IF over $100/mo, abuse if it will pay 25% of unsecured debt
        • IF less than $100/mo, no presumption
      • Defenses:
        1. Primarily business debt
        2. Under median income
        3. Others
      • Effect on 1 in 10, 1 in 20 , or 1 in 1,000?
      • Sanctions, Rule 9011 or something more?
2. Changes Affecting Spousal Support and Property Division Obligations
   • Spousal and Child Support.
     1. Now within definition of “domestic support obligation.” § 101(14A). “a debt that accrues before, on or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is –
     2. owed to or recoverable by
     • a spouse, former spouse, or child of the debtor or such child’s parent, legal guardian or responsible relative; or
     • a governmental unit
     1. in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;
     2. established or subject to establishment before, on or after the date of the order for relief in a case under this title, by reason of applicable provisions of
     1. a separation agreement, divorce decree, or property settlement agreement;
     2. an order of a court of record; or
     3. a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and
     1. Not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.”
     2. Always was and still is non-dischargeable under all chapters, § 523(a)(5), so long as it is owed to one of the listed payees.
     3. PRACTICE TIP: if the court is going to award attorney fees, have them awarded to your client, not to you. You can then have your client assign it to you for purposes of collection.
     4. Automatic stay does not apply to the establishment or modification of an order for domestic support obligations, or for their collection from property that is not of the estate, or the collection from income, or tax refunds, or the reporting of overdue support to consumer reporting agencies. Stay also doesn’t apply to child custody or visitation issues, or to dissolution of a marriage, except as to property division issues. Those are stayed. § 362(b).
     5. Now given first priority in payment, even ahead of the trustee and his attorneys (with certain exceptions).
     6. DUI damages have also been given a priority status (§ 507(a)(10).
        PRACTICE TIP: So a finding of alcohol or drug intoxication could be extremely valuable to the PI practitioner and client.

• Property Division Obligations
  • Used to always be dischargeable. Only fight was whether the debt was support or property division, and that was an issue of federal law, not state law.
  • Then made non-dischargeable in 1994 if the debtor spouse has the ability to pay it and the balance of the hardships weighs in favor the non-debtor spouse.
  • Now the inability to pay exception has been eliminated and all obligations to a spouse, former spouse or child that is not a domestic support obligation incurred “in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of court of record, or a determination made in accordance with State or territorial law by a governmental unit” is excepted from discharge. § 523(a)(15).
  • Only remaining exception is under Chapter 13 where that portion of the property settlement not to be paid under a confirmed plan will still be wiped out. Consequently the former often litigated question of “is it support or is it property division under federal law” is now only an issue in a chapter 13.
  • PRACTICE TIP: Timing of bankruptcy filing is now more critical than ever. Typically the working spouse will get the business and the stay at home spouse would get an equalization payment and if the equalization payment was determined to be unrealistically high the debt could be wiped out in bankruptcy. Not any more. Must file before that unrealistic award is made.

III. Chapter 13 Issue – Requirements for Confirmation of Plan (§ 1325)

• Debtor must be current on post-petition support to confirm a plan
  • Chapter 13 Issue – Grounds to Dismiss (§ 1307)
  • Debtor must be current on post-petition support to complete a plan
  • Exemption Issues (§ 522)
  • Additions to Homestead w/in 10 years with intent to “hinder and delay” B. Need residency for 2 years
  • Retirement plans completely exempt, except IRA and SEP IRA over $1 mill.
  • Landlord/Tenant Issue (§ 362(b)
  • No stay if judgement for possession already entered

VII.      Fraudulent Transfer Issues

1. Reach-back for attacking fraudulent transfers under § 548 has been extended from one year to two years generally and 10 years for intentionally fraudulent self settled trusts.
2. Benefits to insiders under employment contracts can be attacked as a fraudulent transfer if not made in the ordinary course of business, and no showing of insolvency is necessary.
3. Mejia v. Reed, 31 Cal.4th 657 (2003). Transfers under marital settlement agreements are subject to avoidance under fraudulent transfer law.
4. QUERY: If the Trustee avoids transfers from one spouse to another under a property settlement agreement as being a fraudulent transfer, is the transferor spouse liable to the transferee spouse to replace it? If so, is that debt excepted from discharge as noted above?

VIII.     Selected Business Issues

• Preference ordinary course defense is made more liberal. Instead of having to prove the transfer was both ordinary in relationship between the debtor and the creditor and that it was within industry standards, you only have to prove one or the other. There is a $5,000 minimum for a preference claim in a business case, and if the amount is under $10,000 the suit must be filed in the district where the defendant resides.
• Creditor reclamation rights are expanded to include goods which the debtor received while insolvent within 45 days before the bankruptcy filing and the creditor’s time to make the demand is extended from 10 days after filing to 20 days after filing. If the goods were received within 20 days before filing and sold by the debtor in the ordinary course and as a result can’t be reclaimed, the creditor gets a priority claim, 503(b)(9).
• Chapter 11
  1. The debtor has an exclusive right to file a plan for 120 days and then has 60 days to get it confirmed under existing law. But those deadlines could be extended indefinitely. Now there will be an 18 month limit on filing and 20 month limit on obtaining confirmation.
  2. Expanded grounds for the appointment of a trustee on motion of the U.S.

  Trustee if the officers, or the persons who control the selection of the officers, participated in fraud or dishonest conduct.

  3. Protections are included in § 363(b)(1)(B) for “personally identifiable information” to prohibit the sale of such information until approval after a hearing where a U.S. Trustee appointed consumer privacy ombudsman, 332, has had input
• Small Business Chapter 11
  1. Under $2 million in “aggregate non-contingent liquidated secured and unsecured debt” not counting debt to insiders, no effective Creditors Committee, not a real estate case.
  2. Increased filing burdens: must attach to petition most recent balance sheet, statement of operations, cash flow, and state and federal tax returns.
  3. New Section 308 adds reporting requirements including projections of operations and comparisons of actual versus projected performance.
  4. Must allow U.S. Trustee representative to inspect business premises, books and records on reasonable notice.
  5. A plan can be confirmed without a disclosure statement if the court finds that the Plan contains adequate information. Alternately there may be conditional approval of a disclosure statement subject to final approval after notice and a hearing.
  6. Plan must be filed within 300 days, debtor exclusivity for 180 days, and to get the deadlines extended the debtor must prove by a preponderance of the evidence that it is more likely than not that the court will confirm a plan within a reasonable period of time. § 1121.
• Expanded Grounds for Dismissal or Conversion. § 1112.
  1. “absent unusual circumstances specifically identified by the court that establish that the requested conversion or dismissal is not in the best interests of creditors and the estate, the court shall convert” or dismiss if the movant establishes cause.
  2. “Cause” undefined, but 10 examples are enumerated in the statute.
  3. Hearing no later than 30 days after filing the motion. Ruling must be within 15 days “after commencement of such hearing” unless there is consent from the movant or “compelling circumstances prevent the court from meeeting the time limits”.
• Creditor Committees:
  1. Court given greater discretion to control the size and constituency of creditor committees
  2. More rights for creditors not on committee. The committee “shall” provide access to information for creditors who they represent that are not on the committee, and “solicit and receive comments from the creditors”.
• Executory Contracts, § 365
  1. Under current law a commercial real property lease is rejected if not assumed within 60 days of filing, but that deadline can, and usually is, extended multiple times, often until plan confirmation. New law gives 120 days initially, but only permits one 90 days extension unless the landlord consents to additional extensions.
  2. Cases that held that leases cannot be assumed where there is a non-curable non-monetary breach by filing to be open for business have been overruled, making assumption possible, and penalty interest rates resulting from non- monetary defaults don’t have to be paid.
• Executive Compensation
  1. Retention bonuses prohibited unless the person is essential to the reorganization and has a bonafide job offer from another business at the same or greater compensation, and it is limited to either 10 times the mean of bonuses given to nonmangagement employees during the calendar year, or if there are no such bonuses, then not to exceed 25% of the year’s compensation.
  2. Severance payments can not be made to insiders unless part of a program that is generally applicable to all full time employees and insiders can’t get more than 10 times what nonmanagement employees get.
• Conclusions / Questions
  1. New law, subject to much interpretation
  2. Bankruptcy much more complex
  3. Increased fees for Debtors
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