California Creditor's Rights & Business Bankruptcy Lawyer & Attorney : Robert Eisenbach : Business Bankruptcy Blog

Although it hasn't gotten much publicity, certain dollar amounts in the Bankruptcy Code will be increased for cases filed on or after April 1, 2007. You can find a chart listing all of the changes on this Federal Register page, which printed last month's official notice from the Judicial Conference of the United States. 

Among the most meaningful for business bankruptcy cases:

• The total amount of claims required to file an involuntary petition increases to $13,475 from $12,300;
• The employee compensation priority under Section 507(a)(4) increases to $10,950 from the $10,000 level established by the Bankruptcy Abuse Prevention and Consumer Protection Act (known as BAPCPA);
• The consumer deposit priority under Section 507(a)(7) increases to $2,425 from $2,225;
• The dollar amount in the bankruptcy venue provision, 28 U.S.C. Section 1409(b), that requires actions for non-consumer, non-insider debt to be brought against defendants in the district in which they reside, has increased to $10,950 from $10,000.

Other adjustments will affect consumers more than business debtors. For example, the debt limit for an individual to qualify to file a Chapter 13 bankruptcy case will top $1,000,000 of secured debt for the first time, and certain exemption amounts will also rise. 

Although the changes aren't large, be sure to keep them in mind when evaluating cases after April 1st. 

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On Wednesday the U.S. Supreme Court issued its decision in Marrama v. Citizens Bank of Massachusetts. The Supreme Court answered the question of whether an individual has an absolute right to convert a Chapter 7 bankruptcy case to a Chapter 13 "wage earner" bankruptcy case or whether that right can be conditioned on the absence of bad faith. This blog is focused on business bankruptcy issues, but knowing how the Supreme Court interprets the Bankruptcy Code on one issue can sometimes help in understanding how the Court may approach other issues.

The Core Issue. In Marrama, the Supreme Court interpreted the following language in Section 706(a) of the Bankruptcy Code:

The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not be converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.

Many courts had read this language to give a debtor an absolute right to convert a case from Chapter 7 to another bankruptcy chapter, even if the case might thereafter be reconverted back to Chapter 7. (Grounds for such reconversion could include previous bad faith or other misconduct of the debtor while in Chapter 7.)  The ability to convert can make a big difference to debtors because Chapter 7 cases always involve the appointment of a trustee to take possession of the debtor's non-exempt assets for liquidation, unlike cases under Chapters 11, 12, and 13 in which the debtor can often retain property and pay creditors over time.  

The Court's Reasoning. The Supreme Court decided that another provision, Section 706(d), limited this right to convert by requiring that the debtor must be able to be a debtor under the other chapter of choice. Section 706(d) provides: "Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.” In Marrama, the Supreme Court held that a debtor who had acted in bad faith by concealing assets while in Chapter 7 could not qualify as a debtor under Chapter 13 because the Chapter 13 case would be dismissed "for cause" under Section 1307 of the Bankruptcy Code. The Supreme Court summarized its reasoning this way:

In practical effect, a ruling that an individual’s Chapter 13 case should be dismissed or converted to Chapter 7 because of prepetition bad-faith conduct, including fraudulent acts committed in an earlier Chapter 7 proceeding, is tantamount to a ruling that the individual does not qualify as a debtor under Chapter 13. That individual, in other words, is not a member of the class of ‘honest but unfortunate debtor[s]’ that the bankruptcy laws were enacted to protect. See Grogan v. Garner, 498 U. S., at 287. The text of §706(d) therefore provides adequate authority for the denial of his motion to convert.

A "Plain Language" Dissent. Interestingly, Justice Alito, joined by Chief Justice Roberts and Justices Scalia and Thomas, dissented. He found the majority's interpretation of these sections to be strained and inconsistent with the plain meaning of the statutory language. As such, he believed that a debtor had an absolute right to convert out of Chapter 7 even if the case were subject to being reconverted after further proceedings.

Impact On Business Bankruptcy? It's hard to see much direct impact on business bankruptcy cases from the decision, except perhaps in the very rare circumstance when a corporate debtor files a Chapter 7 but later seeks to convert the case to Chapter 11. However, the fact that four justices dissented on a "plain language" basis may be noteworthy. Many of the changes made by the recent Bankruptcy Abuse Prevention and Consumer Protection Act (also known as BAPCPA), including to business provisions, added language that appears to limit the exercise of discretion by bankruptcy judges. Perhaps the more interesting question, then, is whether the Marrama decision signals that the Supreme Court might consider loosening, if only slightly, the prevailing "plain language" interpretation of the Bankruptcy Code and allow judges to exercise more discretion than might otherwise be indicated by the language of the statute alone. Given that BAPCPA is less than 18 months old, we'll probably have to wait a few years for an answer to that one.

Other Commentators On The Decision. Finally, when the Supreme Court issues a bankruptcy decision, a number of commentators write to share their perspectives. Scott Riddle of the Georgia Bankruptcy Law Blog was one of the first to report on the decision. Steve Jakubowski of The Bankruptcy Litigation Blog has an interesting post. In addition, John Pottow, a professor at the University of Michigan Law School, has an insightful post on the Credit Slips blog, as does Todd Zywicki, a professor at the George Mason University School of Law, over on The Volokh Conspiracy.

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Usually, businesses have claims against other businesses.  Still, you may occasionally have a claim against an individual and it's good to know what can happen in that situation. 

The "no asset" case. Unfortunately, most individuals who file bankruptcy, especially those who file the more common Chapter 7 liquidation case, do not have any significant assets that can be sold to pay creditors.  What's more, the assets they do have -- such as IRAs, 401(k) accounts, etc. -- are usually exempt from creditors' claims.  Cases in which no non-exempt assets are available to pay creditors are known as "no asset" cases.  (Bankruptcy lawyers love imaginative names.)  In a no asset case, the bankruptcy court's notice will actually instruct you not to file a proof of claim unless later notified to do so. 

The "asset" case.  Sometimes there are enough non-exempt assets to produce at least some distribution to unsecured creditors.  While not very common in Chapter 7 cases, it could be that the individual has filed a Chapter 13 "wage-earner" case or a Chapter 11 personal reorganization case and expects to pay creditors some amount over time.  If so, a claims filing deadline known as a "bar date" will be set.  If you file a proof of claim form by the bar date, you may eventually receive a check, although typically this will be months or even years after the bankruptcy was filed.  In most cases involving individuals, the distribution to unsecured creditors is painfully small.

The bankruptcy discharge. In general, when individuals file bankruptcy, they will get discharged, or excused, from their pre-filing debts.  This is especially true in Chapter 7 and 11 cases and also in Chapter 13 cases if the individual debtor makes all of the payments required under his or her plan.  The discharge is part of what is often referred to as the "fresh start" that bankruptcy offers. 

Nondischargeable debts. Although recent changes to the bankruptcy laws have made it harder for individuals to file bankruptcy and get a discharge, many people are still able to do so.  That said, the law does call out certain kinds of debts and makes them "nondischargeable," meaning that they can be excluded from the scope of the bankruptcy discharge. These include debts arising from the debtor's fraud or other intentional bad acts, including when he or she obtained credit, and also to obligations for alimony, child support, student loans, and many taxes.  (So it's clear, the concept of a debt being nondischargeable applies only to individuals, not to corporations or other business entities.) 

Action is required. With rare exceptions, if you are owed one of these nondischargeable debts, the bankruptcy law forces you to take prompt action to preserve your rights -- or the debt will be discharged anyway.  To stop an individual debtor from getting a discharge of such a debt, you must sue the debtor in his or her bankruptcy case for a declaration that your debt is nondischargeable. If the bankruptcy court declares the debt nondischargeable, it will not be discharged by the bankruptcy and you would have the right to attempt to collect the debt outside of bankruptcy.  

Be careful of deadlines. There are strict deadlines for filing such "nondischargeability" actions. Although the bankruptcy court should notify you of these deadlines, the burden is on you to figure out when the deadline will pass and to file a lawsuit before the deadline.  Usually, the deadline is 60 days after the first date scheduled for the official meeting of creditors listed on the bankruptcy court's notice of the case (whether or not the meeting takes place as scheduled), but you should be certain to confirm the precise deadline in the debtor's case.  This is critical because if you fail to file your complaint before the deadline, the debtor's discharge will cover your debt too. 

Call a bankruptcy attorney. It probably goes without saying, but if you believe your debt against an individual debtor might be nondischargeable, contact a bankruptcy attorney immediately upon learning of the debtor’s bankruptcy filing.  Of course, bringing the required lawsuit costs money.  Unless you think the debtor will be able to pay back your debt from his or her post-bankruptcy earnings, you may decide that it doesn't make economic sense to get the debt declared nondischargeable.

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