Involuntary Petitions Under BAPCPA

Revised ' 109(h)(1) applies to all debtors under all chapters and states:

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) [11 USCS ' 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.

Additionally, revised '707(b)(1) provides for dismissal:

After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor's consent, convert such a case to a case under chapter 11 or 13 of this title [11 USCS '' 1101 et. seq. or 1301 et. seq.], if it finds that the granting of relief would be an abuse of the provisions of this chapter [11 USCS '' 701 et. seq.]

As with the express changes to ' 303, the above revisions to ' 109 and ' 707 under the BAPCPA have proven to be much more controversial in speculation than in actual application to involuntary petitions. This absence of controversy likely stems from a lack of any expression of Congressional intent to undercut the involuntary petition process coupled with the express terms of the above-cited statutory provisions. In view of these circumstances, courts and practitioners appear to have adopted the conclusion that in fact such provisions are inapplicable to petitions commenced pursuant to ' 303.

Notably, a petition filed under ' 303 is not filed 'by' the debtor and a fair read of the express terms of these statutory provisions reveals them inapplicable to involuntary petitions. As stated above, ' 109 provides that an individual must have received qualified credit counseling during the '180-day period preceding the date of filing of the petition by such individual.' Likewise, ' 707(b)(1) provides grounds for dismissal of 'a case filed by an individual debtor under this chapter whose debts are primarily consumer debts.'

The maxims of statutory construction provide that the plain language of a statute should be enforced according to its terms unless such enforcement would lead to an absurd result. See, e.g., Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S. Ct. 1023, 157 L.Ed.2d 1024 (2004). In this case, unlike many other provisions of the BAPCPA, strict statutory construction of ' 109 and ' 707 leads to a reasonable and sensible conclusion. While it appears that there is a rare alignment between logic, reason, and statutory construction of the BAPCPA, until controlling precedent directs otherwise, alleged debtors under ' 303 continue to have potential defenses at their disposal by means of ' 707 and ' 109, and should raise them at the outset as with any other affirmative defense or may risk waiver of such defenses.

A significant amount of ink has been spilled regarding whether the provisions of ' 109 are jurisdictional or subject to waiver. Such jurisdictional issues are outside of the scope of this article; however, numerous courts have held that ' 109 is not jurisdictional, and, specifically in the context of involuntary petitions have held that eligibility under ' 109 is a defense that may be waived as with other affirmative defenses. Accord-ingly, a prudent approach warrants raising any and all objections to the involuntary petition at the outset. See In re Manland, 2007 Bankr. LEXIS 197 (C.D.CA 2007) (addressing credit counseling requirements and citing numerous cases discussing the jurisdictional issues surrounding ' 109). See also In re Parker, 351 B.R. 790, 799 (Bankr. N.D. Ga. 2006) (Debtor's Motion to Dismiss on the grounds that he is ineligible to be a debtor under Section 109(h) is denied on the grounds that Debtor waived the protections of that statute and he is judicially estopped from arguing his ineligibility at this stage of these proceedings.). But see In re Hawkins, 340 B.R. 642 (Bankr. D.D.C. 2006) (finding the credit counseling requirement of ' 109 jurisdictional).

BAPCPA Sweetens the Pot for Would-Be Petitioning Creditors

As discussed above, the BAPCPA does not appear to have directly affected the ability to prosecute involuntary petitions; however, the expanded remedies afforded to the estate and its creditors under the BAPCPA provide additional incentives for creditors to seriously consider the use of involuntary petitions, especially in the case of creditors whose collection efforts are hampered by a debtor's use of state exemption laws. In particular, BAPCPA's extensive revisions to ' 522 provide three grounds for an estate's recoveries from homestead exempt property which preempt and in many cases exceed those available under state law ' especially in states such as Florida and Texas which maintain a virtually unlimited homestead exemption.

The addition of ' 522(o) provides creditors and trustees the ability to recover funds that were fraudulently transferred or converted by a debtor into homestead property. This provision limits the value of a debtor's homestead by the amount of nonexempt property transferred into a homestead within ten years prior to the petition date with the intent to hinder, delay, or defraud creditors. This provision is especially potent for creditors whose state law would not otherwise permit recovery for such transfers. By way of example, Florida's constitutional homestead exemption which allows the debtor to exempt a home of unlimited value is not subject to attack on the grounds that a debtor fraudulently converted assets into the homestead, even if such conversion was done with actual intent to defraud creditors. See, e.g,. Havoco of Am. v. Hill, 790 So. 2d 1018 (Fla. 2001). Many states, including many that have adopted the Uniform Fraudulent Transfer Act, contain similar substantive remedies to those afforded in revised ' 522(o); however, the provisions of ' 522(o) allow creditors to recover transfers occurring up to 10 years prior to the petition, while the bulk of fraudulent transfer statutes reach back four, or at most, six years. BAPCPA's ' 522(o) will likely prove a valuable tool for creditors seeking to collect from debtors who have hidden their assets from creditors within the protective walls of their homes.

Unlike ' 522(o), which provides a remedy to reverse the fraudulent conduct of a particular debtor, ' 522(p) and (q) impose a strict liability standard upon the homestead property of debtors meeting certain criteria. ' 522(p) places a limitation of $125,000 on the homestead exemption of a debtor who purchased a home less than 1215 days prior to the petition. This provision is intended to prevent debtors from avoiding payment to creditors by moving to states with favorable homestead exemptions and placing their assets beyond the reach of creditors. Accordingly, a debtor is permitted to carry the homestead interest from property to property within the same state, making the relevant inquiry whether the source of funds for the homestead purchase was other than from a prior homestead within the same state.

A similar $125,000 limit on the homestead exemption is imposed by ' 522(q) in circumstances where a debtor has a debt arising from: 1) the violation of federal or state securities laws; 2) fraud, deceit or manipulation in a fiduciary capacity or in connection with the purchase or sale of any registered security; 3) a civil remedy in connection with the Racketeer Influenced and Corrupt Organizations Act; or 4) any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding five years.

These subsections apply without discrimination to debtors which meet the criteria set forth therein, and accordingly may provide creditors substantial recovery from a debtor's homestead property even where such debtor did not in fact utilize his homestead as an instrument to defraud creditors. By way of example, the provisions of ' 522(q)(1)(B)(iii) providing for the limitation of the Debtor's homestead when a debtor has a debt arising from 'fraud, deceit or manipulation in a fiduciary capacity,' may provide a potent tool for creditors who have obtained judgments for breaches of fiduciary duty by principals of corporations, partnerships and other business entities.

In light of the above described remedies, creditors whose execution efforts at state law have left them empty handed or only partially satisfied, may be enticed to prosecute an involuntary petition to enable collection pursuant to 11 U.S.C. ' 522 from what would be otherwise exempt homestead property at state law. In addressing abstention under ' 305, and whether dismissal is in the best interest of creditors, courts often examine whether creditors have remedies unique to the bankruptcy process. See, In re Hentges, 351 B.R. 758, 777 (Bankr. D. Okla. 2006); In re Euro-American Lodging Corp., 2007 Bankr. LEXIS 15 (Bankr. S.D.N.Y. 2007). Accordingly, the existence of these new provisions and unique remedies under the Bankruptcy Code, may make it easier for creditors to justify their motives in filing an involuntary petition and in defending against debtors' assertions of bad faith and motions for abstention under ' 305 ' both common grounds for alleged debtors to request dismissal of involuntary proceedings.

Conclusion

As discussed above, the anticipated evisceration of the involuntary petition by virtue of the BAPCPA does not appear to have come to fruition, and even the direct changes to the provisions of ' 303 appear to have done little to resolve inconsistencies in pre-BAPCPA jurisprudence. With the availability of the involuntary petition apparently undisturbed, creditors may find themselves enticed by the unique remedies afforded under the BAPCPA with respect to a debtor's homestead property. The BAPCPA does not appear to have brought an end to the involuntary petition and in many respects appears to strengthen the use of ' 303 for unsatisfied creditors; however, the sanctions, fees, and damages available to debtors in the face of improper involuntary petitions remain in place, undisturbed, and a powerful deterrent for creditors whose motives and claims are less than 'bona fide.' In ELRS Loss Mitigation, LLC, the court noted, 'The sparing use of involuntary bankruptcy by unhappy creditors is not surprising, given the dire consequences that the debtor and creditors may suffer ' Given the consequences to a debtor and the risks of damage awards to the unsuccessful petitioners, the filing of an involuntary bankruptcy can easily turn into a game of economic Russian roulette.' ELRS Loss Mitigation, LLC, 325 B.R. at 623-624 (internal citations omitted).

While the BAPCPA may dangle otherwise forbidden fruit before hungry creditors, it is important that creditors continue to take heed of the consequences of filing an involuntary petition.

Lisa M. Schiller is a partner and Craig A. Pugatch is an associate in the Fort Lauderdale, FL, law firm of Rice Pugatch Robinson & Schiller, P.A. The firm is a business insolvency practice focusing on workouts, bankruptcy and all bankruptcy-related litigation. They may be reached at [email protected] and [email protected].

Last month, we noted that on Oct. 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ('BAPCPA') was implemented without the collapse of the bankruptcy world as we knew it. We discussed the 'changes' to ' 303, and several key cases. This article continues the discussion.

Means Testing, Credit Counseling and Debtor Education

Can an individual render oneself ineligible to be an involuntary debtor? Perhaps the most pervasive, or at least the most widely applicable, provisions of the BAPCPA pertain to requirements and restrictions for individual debtors seeking relief under Title 11. Such changes include modifications to the eligibility requirements for all bankruptcy debtors under ' 109, as well as the means testing requirements for Chapter 7 individual debtors whose debts are primarily consumer debts. Despite the widespread commonsense view that Congress did not intend to remove the teeth from involuntary petitions, the prospect that these requirements would provide grounds for an alleged debtor to defeat an involuntary petition were discussed at length prior to, and in the aftermath of, the BAPCPA. The conjecture was that an alleged debtor would defeat an involuntary petition by rendering himself or herself ineligible for relief under Title 11 by failing to have taken a qualified credit counseling course or, to the extent a course could be completed post petition under ' 109(h)(3)(B), that the alleged debtor would simply refuse to attend such a course. Likewise, it was believed that an involuntary petition under Chapter 7 could be subject to dismissal under ' 707(b)(1) due to a presumption of abuse under
' 707(b)(2) if an alleged debtor did not meet strict income and debt requirements imposed by the 'means test.'

Revised ' 109(h)(1) applies to all debtors under all chapters and states:

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) [11 USCS ' 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.

Additionally, revised '707(b)(1) provides for dismissal:

After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, trustee (or bankruptcy administrator, if any), or any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts, or, with the debtor's consent, convert such a case to a case under chapter 11 or 13 of this title [11 USCS '' 1101 et. seq. or 1301 et. seq.], if it finds that the granting of relief would be an abuse of the provisions of this chapter [11 USCS '' 701 et. seq.]

As with the express changes to ' 303, the above revisions to ' 109 and ' 707 under the BAPCPA have proven to be much more controversial in speculation than in actual application to involuntary petitions. This absence of controversy likely stems from a lack of any expression of Congressional intent to undercut the involuntary petition process coupled with the express terms of the above-cited statutory provisions. In view of these circumstances, courts and practitioners appear to have adopted the conclusion that in fact such provisions are inapplicable to petitions commenced pursuant to ' 303.

Notably, a petition filed under ' 303 is not filed 'by' the debtor and a fair read of the express terms of these statutory provisions reveals them inapplicable to involuntary petitions. As stated above, ' 109 provides that an individual must have received qualified credit counseling during the '180-day period preceding the date of filing of the petition by such individual.' Likewise, ' 707(b)(1) provides grounds for dismissal of 'a case filed by an individual debtor under this chapter whose debts are primarily consumer debts.'

The maxims of statutory construction provide that the plain language of a statute should be enforced according to its terms unless such enforcement would lead to an absurd result. See, e.g., Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S. Ct. 1023, 157 L.Ed.2d 1024 (2004). In this case, unlike many other provisions of the BAPCPA, strict statutory construction of ' 109 and ' 707 leads to a reasonable and sensible conclusion. While it appears that there is a rare alignment between logic, reason, and statutory construction of the BAPCPA, until controlling precedent directs otherwise, alleged debtors under ' 303 continue to have potential defenses at their disposal by means of ' 707 and ' 109, and should raise them at the outset as with any other affirmative defense or may risk waiver of such defenses.

A significant amount of ink has been spilled regarding whether the provisions of ' 109 are jurisdictional or subject to waiver. Such jurisdictional issues are outside of the scope of this article; however, numerous courts have held that ' 109 is not jurisdictional, and, specifically in the context of involuntary petitions have held that eligibility under ' 109 is a defense that may be waived as with other affirmative defenses. Accord-ingly, a prudent approach warrants raising any and all objections to the involuntary petition at the outset. See In re Manland, 2007 Bankr. LEXIS 197 (C.D.CA 2007) (addressing credit counseling requirements and citing numerous cases discussing the jurisdictional issues surrounding ' 109). See also In re Parker, 351 B.R. 790, 799 (Bankr. N.D. Ga. 2006) (Debtor's Motion to Dismiss on the grounds that he is ineligible to be a debtor under Section 109(h) is denied on the grounds that Debtor waived the protections of that statute and he is judicially estopped from arguing his ineligibility at this stage of these proceedings.). But see In re Hawkins, 340 B.R. 642 (Bankr. D.D.C. 2006) (finding the credit counseling requirement of ' 109 jurisdictional).

BAPCPA Sweetens the Pot for Would-Be Petitioning Creditors

As discussed above, the BAPCPA does not appear to have directly affected the ability to prosecute involuntary petitions; however, the expanded remedies afforded to the estate and its creditors under the BAPCPA provide additional incentives for creditors to seriously consider the use of involuntary petitions, especially in the case of creditors whose collection efforts are hampered by a debtor's use of state exemption laws. In particular, BAPCPA's extensive revisions to ' 522 provide three grounds for an estate's recoveries from homestead exempt property which preempt and in many cases exceed those available under state law ' especially in states such as Florida and Texas which maintain a virtually unlimited homestead exemption.

The addition of ' 522(o) provides creditors and trustees the ability to recover funds that were fraudulently transferred or converted by a debtor into homestead property. This provision limits the value of a debtor's homestead by the amount of nonexempt property transferred into a homestead within ten years prior to the petition date with the intent to hinder, delay, or defraud creditors. This provision is especially potent for creditors whose state law would not otherwise permit recovery for such transfers. By way of example, Florida's constitutional homestead exemption which allows the debtor to exempt a home of unlimited value is not subject to attack on the grounds that a debtor fraudulently converted assets into the homestead, even if such conversion was done with actual intent to defraud creditors. See, e.g,. Havoco of Am. v. Hill , 790 So. 2d 1018 (Fla. 2001). Many states, including many that have adopted the Uniform Fraudulent Transfer Act, contain similar substantive remedies to those afforded in revised ' 522(o); however, the provisions of ' 522(o) allow creditors to recover transfers occurring up to 10 years prior to the petition, while the bulk of fraudulent transfer statutes reach back four, or at most, six years. BAPCPA's ' 522(o) will likely prove a valuable tool for creditors seeking to collect from debtors who have hidden their assets from creditors within the protective walls of their homes.

Unlike ' 522(o), which provides a remedy to reverse the fraudulent conduct of a particular debtor, ' 522(p) and (q) impose a strict liability standard upon the homestead property of debtors meeting certain criteria. ' 522(p) places a limitation of $125,000 on the homestead exemption of a debtor who purchased a home less than 1215 days prior to the petition. This provision is intended to prevent debtors from avoiding payment to creditors by moving to states with favorable homestead exemptions and placing their assets beyond the reach of creditors. Accordingly, a debtor is permitted to carry the homestead interest from property to property within the same state, making the relevant inquiry whether the source of funds for the homestead purchase was other than from a prior homestead within the same state.

A similar $125,000 limit on the homestead exemption is imposed by ' 522(q) in circumstances where a debtor has a debt arising from: 1) the violation of federal or state securities laws; 2) fraud, deceit or manipulation in a fiduciary capacity or in connection with the purchase or sale of any registered security; 3) a civil remedy in connection with the Racketeer Influenced and Corrupt Organizations Act; or 4) any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding five years.

These subsections apply without discrimination to debtors which meet the criteria set forth therein, and accordingly may provide creditors substantial recovery from a debtor's homestead property even where such debtor did not in fact utilize his homestead as an instrument to defraud creditors. By way of example, the provisions of ' 522(q)(1)(B)(iii) providing for the limitation of the Debtor's homestead when a debtor has a debt arising from 'fraud, deceit or manipulation in a fiduciary capacity,' may provide a potent tool for creditors who have obtained judgments for breaches of fiduciary duty by principals of corporations, partnerships and other business entities.

In light of the above described remedies, creditors whose execution efforts at state law have left them empty handed or only partially satisfied, may be enticed to prosecute an involuntary petition to enable collection pursuant to 11 U.S.C. ' 522 from what would be otherwise exempt homestead property at state law. In addressing abstention under ' 305, and whether dismissal is in the best interest of creditors, courts often examine whether creditors have remedies unique to the bankruptcy process. See, In re Hentges, 351 B.R. 758, 777 (Bankr. D. Okla. 2006); In re Euro-American Lodging Corp., 2007 Bankr. LEXIS 15 (Bankr. S.D.N.Y. 2007). Accordingly, the existence of these new provisions and unique remedies under the Bankruptcy Code, may make it easier for creditors to justify their motives in filing an involuntary petition and in defending against debtors' assertions of bad faith and motions for abstention under ' 305 ' both common grounds for alleged debtors to request dismissal of involuntary proceedings.

Conclusion

As discussed above, the anticipated evisceration of the involuntary petition by virtue of the BAPCPA does not appear to have come to fruition, and even the direct changes to the provisions of ' 303 appear to have done little to resolve inconsistencies in pre-BAPCPA jurisprudence. With the availability of the involuntary petition apparently undisturbed, creditors may find themselves enticed by the unique remedies afforded under the BAPCPA with respect to a debtor's homestead property. The BAPCPA does not appear to have brought an end to the involuntary petition and in many respects appears to strengthen the use of ' 303 for unsatisfied creditors; however, the sanctions, fees, and damages available to debtors in the face of improper involuntary petitions remain in place, undisturbed, and a powerful deterrent for creditors whose motives and claims are less than 'bona fide.' In ELRS Loss Mitigation, LLC, the court noted, 'The sparing use of involuntary bankruptcy by unhappy creditors is not surprising, given the dire consequences that the debtor and creditors may suffer ' Given the consequences to a debtor and the risks of damage awards to the unsuccessful petitioners, the filing of an involuntary bankruptcy can easily turn into a game of economic Russian roulette.' ELRS Loss Mitigation, LLC, 325 B.R. at 623-624 (internal citations omitted).

While the BAPCPA may dangle otherwise forbidden fruit before hungry creditors, it is important that creditors continue to take heed of the consequences of filing an involuntary petition.

Lisa M. Schiller is a partner and Craig A. Pugatch is an associate in the Fort Lauderdale, FL, law firm of Rice Pugatch Robinson & Schiller, P.A. The firm is a business insolvency practice focusing on workouts, bankruptcy and all bankruptcy-related litigation. They may be reached at [email protected] and [email protected].