B a n k r u p t c y R e f o r m A c t of 1978; P r o b l e m A r e a s - - A n O v e r v i e w
Independent
Research
ty
Mary Ann Fergus
N o v e m b e r 1 0 , 1982
Supervising
Professor:
D e l i a s W . Lee
00039
T a b l e of C o n t e n t s
I.
II.
J u r i s d i c t i o n of B a n k r u p t c y Courts Constitutionality
R e i m b u r s e m e n t of E x p e n s e s - C r e d i t o r s '
Committees
III.
IV.
V.
VI.
VII.
1
6
F e d e r a l E x e m p t i o n s or S t a t e E x e m p t i o n s ?
A v o i dm ao nn ce ey Sofe c uN ro in tp yo s sIenst se or re ys t, s nboyn pau rDceh ba ts oe rL i m i t a t i o n s on the T r u s t e e ' s
Power
8
10
Avoiding
A b i l i t y of D e b t o r to Cure D e f a u l t on
Home Mortgage
16
G o o d F a i t h R e q u i r e m e n t of §1325(a)
18
00040
I.
J u r i s d i c t i o n of B a n k r u p t c y Courts -
Constitutionality.
P r i o r to 1 9 7 9 , "the p o w e r to d e c i d e b a n k r u p t c y cases w a s
g i v e n to f e d e r a l d i s t r i c t judges w h o h o l d o f f i c e f o r l i f e .
T h i s j u r i s d i c t i o n a l g r a n t w a s c o n s i s t e n t w i t h the d o c t r i n e
of
s e p a r a t i o n of p o w e r s as e n v i s i o n e d b y the f r a m e r s of the Constitution.
1
O v e r the y e a r s it b e c a m e the p r a c t i c e of the
district
judges to a p p o i n t k n o w l e d g e a b l e a t t o r n e y s on a t e m p o r a r y b a s i s
to do m o s t of the w o r k in c o n d u c t i n g p r o c e e d i n g s .
These
w e r e c a l l e d " b a n k r u p t c y r e f e r e e s " and the d i s t r i c t c o u r t
appointees
reserved
the r i g h t to r e v i e w d e c i s i o n s of t h e i r a p p o i n t e d r e f e r e e s .
The
r e f e r e e p r a c t i c e w a s w h o l l y v o l u n t a r y on the p a r t of the d i s t r i c t
judge a n d its c o n s t i t u t i o n a l i t y w a s n e v e r
T h e B a n k r u p t c y Reform A c t of 1978
tested.
(herein r e f e r r e d to as
the " C o d e " ) p r o v i d e s f o r an e n t i r e l y n e w s y s t e m .
The Code n o w
p r o v i d e s t h a t b a n k r u p t c y judges be a p p o i n t e d b y the P r e s i d e n t
and c o n f i r m e d b y t h e S e n a t e f o r a l i m i t e d n u m b e r of y e a r s . ^
The
s c o p e of l i t i g a t i o n is also g r e a t l y e x p a n d e d u n d e r the n e w C o d e .
B e f o r e e n a c t m e n t , m a n y state law claims could n o t be t r i e d in a
bankruptcy proceeding.
The n e w j u r i s d i c t i o n a l g r a n t
g i v e s exclu-
sive j u r i s d i c t i o n to the d i s t r i c t courts o v e r b a n k r u p t c y
cases
and then grants concurrent jurisdiction over proceedings
arising
in b a n k r u p t c y cases w h i c h a r i s e u n d e r the Code or are r e l a t e d to
bankruptcy cases.
A l l of this j u r i s d i c t i o n is t h e n c o n f e r r e d on
the b a n k r u p t c y c o u r t s .
U n d e r the n e w C o d e , the b a n k r u p t c y
00041
judges
10
a r e to b e c o m e courts of "bankruptcy a f t e r 1984.-*
D u r i n g the 1979 -
1 9 8 4 t r a n s i t i o n p e r i o d , the " c o u r t s of b a n k r u p t c y " a c t u a l l y
to be the d i s t r i c t c o u r t s . ^
continue
S i m i l a r l y , d u r i n g t r a n s i t i o n , the
b a n k r u p t c y judges r e m a i n p a r t of the d i s t r i c t c o u r t , b u t a l l
b a n k r u p t c y cases are r e f e r r e d to them as t h e y are i n v e s t e d w i t h
7
a l l the j u r i s d i c t i o n a n d p o w e r of the d i s t r i c t c o u r t s .
Then,
in 1 9 8 4 , a l l of the p o w e r s of the d i s t r i c t c o u r t o v e r b a n k r u p t c y
m a t t e r s w i l l be t r a n s f e r r e dg to the b a n k r u p t c y judges
the new bankruptcy courts.
constituting
In c r e a t i n g t h e s e c o u r t s ,
Congress
a c t e d u n d e r its A r t i c l e I p o w e r f o r the a p p o i n t m e n t of judges is
n o t f o r life n o r is t h e r e a g r a n t of s a l a r y p r o t e c t i o n .
In the r e c e n tQ case of N o r t h e r n P i p e l i n e C o n s t r . C o . v . Marat h o n P i p e l i n e C o . , the S u p r e m e C o u r t d e c l a r e d u n c o n s t i t u t i o n a l so
m u c h o f the n e w Code as v e s t e d the A r t i c l e I b a n k r u p t c y
courts
w i t h j u r i s d i c t i o n to h e a r and d e t e r m i n e c l a i m s a r i s i n g u n d e r state
law.
The c o n t r o v e r s y p r e s e n t e d in M a r a t h o n i n v o l v e d a s t a t e
created right.
The j u r i s d i c t i o n a l c h a l l e n g e , as p r e s e n t e d in that
c a s e , q u e s t i o n e d the c o n s t i t u t i o n a l i t y of the b a n k r u p t c y
judge's
g u a r a n t e e of i n d e p e n d e n c e — s p e c i f i c a l l y life t e n u r e a n d a r e d u c i b l e
salary.
The S u p r e m e C o u r t u p h e l d this c h a l l e n g e in J u n e , 1 9 8 2 .
In a n e f f o r t to a f f o r d C o n g r e s s a n o p p o r t u n i t y to r e c o n s t i t u t e
the b a n k r u p t c y c o u r t s or a d o p t o t h e r v a l i d m e a n s of a d j u d i c a t i o n ,
the h i g h court s t a y e d the j u d g m e n t u n t i l O c t o b e r 4 , 1982
extended until December 24, 1982).
00042
It is the S u p r e m e
(now
Court's
10
f u r t h e r intent t h a t the d e c i s i o n a p p l y o n l y p r o s p e c t i v e l y a n d to
a v o i d a n y i m p a i r m e n t of the i n t e r i m a d m i n i s t r a t i o n of the "bankruptcy
laws-
10
A t f i r s t g l a n c e it a p p e a r s t h a t t h o s e c o u r t s o p e r a t i n g
during
the t r a n s i t i o n p e r i o d are u n a f f e c t e d "by the d e c i s i o n s i n c e t h e y
w i l l n o t "become "bankruptcy courts u n t i l the t r a n s i t i o n p e r i o d h a s
come to a n e n d .
H o w e v e r , this is n o t the c a s e .
Marathon
d a t e s the a s s i g n m e n t to the b a n k r u p t c y judge of the p o w e r s
t a i n e d in § 2 4 1 .
11
invalicon-
B e c a u s e §405(a)(l) i n c o r p o r a t e s §24l, the de-
c i s i o n w o r k s to s t r i k e d o w n the e n t i r e g r a n t of p o w e r to the
12
b a n k r u p t c y judges d u r i n g t r a n s i t i o n as w e l l a s p o s t
transition.
J u r i s d i c t i o n to h e a r b a n k r u p t c y m a t t e r s c o n t i n u e s to be v e s t e d
in the d i s t r i c t c o u r t s as courts of b a n k r u p t c y .
M a r a t h o n p o s e s no
t h r e a t to thi-s c o n t i n u a t i o n since the d i s t r i c t courts are A r t i c l e
13
III c o u r t s .
J
The e f f e c t s of the d e c i s i o n can be v i e w e d in m o r e t h a n one wayThe n a r r o w e s t i n t e r p r e t a t i o n is t h a t A r t i c l e I judges m a y n o t exercise j u r i s d i c t i o n o v e r a n o n - c o n s e n t i n g p a r t y in a suit f o u n d e d on
state law.
On the o t h e r h a n d , b e c a u s e the C o u r t w a s u n a b l e to
s e p a r a t e one p r o v i s i o n from the r e m a i n i n g s e c t i o n w h i c h
confers
j u r i s d i c t i o n , it a p p e a r s that the e n t i r e s e c t i o n w a s s t r u c k d o w n
l e a v i n g the b a n k r u p t c y courts w i t h no j u r i s d i c t i o n at this p o i n t .
In the event C o n g r e s s fails to act b y D e c e m b e r 2 4 , 1 9 8 2 , the
f e d e r a l court s y s t e m is f a c e d w i t h two a l t e r n a t i v e s !
00043
do n o t h i n g
10
a n d a l l o w a l l "bankruptcy m a t t e r s to come "before the d i s t r i c t
c o u r t s , or have the d i s t r i c t c o u r t d e l e g a t e e n o u g h p o w e r to b a n k r u p t c y judges to a l l o w t h e m to c a r r y out as m u c h as p o s s i b l e
their intended function.
W i t h r e s p e c t to t h i s l a t t e r a p p r o a c h ,
§1^71 a p p e a r s to "be c o n t r o l l i n g and it s p e c i f i c a l l y p r o v i d e s
"bankruptcy courts (not d i s t r i c t c o u r t s ) s h a l l e x e r c i s e
that
jurisdiction.
T h i s e f f e c t i v e l y l e a v e s the d i s t r i c t court w i t h o u t p o w e r to m a k e
such a d e l e g a t i o n .
1
§1334 h o w e v e r , is s t i l l i n t a c t ^ and it g r a n t s
exclusive
j u r i s d i c t i o n to the d i s t r i c t courts of a l l m a t t e r s and p r o c e e d i n g s
in b a n k r u p t c y .
If §133^ is c o n t r o l l i n g it w o u l d then be
appropriate
to file a l l b a n k r u p t c y p r o c e e d i n g s in the d i s t r i c t courts-
An
i n c r e a s e d c a s e l o a d a t the d i s t r i c t c o u r t l e v e l is n o t a d e s i r a b l e
approach.
The d i s t r i c t c o u r t d o e s , h o w e v e r , s t i l l r e t a i n the
alternative
of a p p o i n t i n g the b a n k r u p t c y judges as s p e c i a l m a s t e r s p u r s u a n t to
Federal Rule of Civil Procedure 5 3 -
16
While Federal Rule 8 1 ( a ) ( 1 )
p r o v i d e s t h a t the F e d e r a l Rules do n o t a p p l y in b a n k r u p t c y
cases
e x c e p t i n s o f a r as m a d e a p p l i c a b l e t h e r e t o b y the B a n k r u p t c y
Rules,
18
B a n k r u p t c y Rule 5 1 3
m a k e s Rule 5 3 a p p l i c a b l e b y p r o v i d i n g
it g o v e r n s the a p p o i n t m e n t of s p e c i a l m a s t e r s in b a n k r u p t c y
that
cases.
T h e r e is some u n c e r t a i n t y w h e t h e r Rule 5 3 w o u l d b e a l o n g
term workable solution.
Rule 53 o n l y a l l o w s r e f e r e n c e s to a
m a s t e r in e x c e p t i o n a l c i r c u m s t a n c e s .
A very narrow
interpretation
of w h a t c o n s t i t u t e s an e x c e p t i o n a l c i r c u m s t a n c e has a l r e a d y b e e n
00044
17
5
set f o r t h "by the S u p r e m e C o u r t in L a B u y v . H o w e s L e a t h e r C o .
A c c o r d i n g l y , n e i t h e r case c o m p l e x i t y n o r c o u r t c o n g e s t i o n
y
17
are
s u f f i c i e n t j u s t i f i c a t i o n to r e f e r to a s p e c i a l m a s t e r u n d e r Rule
D u r i n g this i n t e r i m p e r i o d of u n c e r t a i n t y a s to
jurisdiction,
s e v e r a l courts h a v e h a d o c c a s i o n to e x p r e s s o p i n i o n s a s to w h a t
t h e y c o u l d and could n o t d o . F o r e x a m p l e , in A r m c o , I n c . v .
20
Cherry Pond Coal Co.
, the c o u r t h e l d t h a t it w a s e f f e c t i v e l y
w i t h o u t p o w e r to e x e r c i s e a n y type of b r o a d j u r i s d i c t i o n
the S u p r e m e C o u r t ' s s t a y .
during
O n the o t h e r h a n d , In re O . P . M .
Leasing
21
Serv., Inc.
c o n c l u d e d t h a t the c o u r t w o u l d e x e r c i s e t h e
b r e a d t h of a u t h o r i t y g r a n t e d b y §1471.
full
The c o u r t t h e r e s t a t e d it
f e l t b o u n d b y the S u p r e m e C o u r t m a n d a t e d i r e c t e d a t o r d e r l y admini s t r a t i o n d u r i n g this time p e r i o d .
Still another court decision
w e n t on to f i n d , as a m a t t e r of l a w , that §1471 a n d §1478 w e r e
u n c o n s t i t u t i o n a l as t h e y a p p l i e d 22
to that c a s e .
S o c i e t a P e r A z i o n i di N a v i g a z i o n e
further constrained by Marathon
In re E g e r i a
c o n c l u d e d t h a t the c o u r t was
J
to c o n t i n u e p r o c e e d i n g s
under
§304 w h i c h i n v o l v e s cases a n c i l l a r y to f o r e i g n p r o c e e d i n g s .
A s can b e o b s e r v e d from t h e s e d e c i s i o n s , t h e r e is no u n i f o r m i t y
of t r e a t m e n t w i t h r e s p e c t to v a r i o u s l i t i g a n t s s e e k i n g to
t h e i r cause of a c t i o n in the b a n k r u p t c y c o u r t s .
establish
It is a n t i c i p a t e d
t h a t the c o n f u s i o n w i l l o n l y b e e x a c e r b a t e d b y the v a r i o u s
e m e r g e n c y r u l e s w h i c h a r e c u r r e n t l y b e i n g c o n s i d e r e d b y the
different jurisdictions.
W e can o n l y w a i t and h o p e t h a t
Congress
w i l l p r o v i d e the a p p r o p r i a t e a n s w e r b e f o r e D e c e m b e r 2 4 , 1 9 8 2 .
00045
10
II.
R e i m b u r s e m e n t of E x p e n s e s - C r e d i t o r s '
Committees.
1 1 u . s . c . §503
In b o t h C h a p t e r 7 l i q u i d a t i o n cases a n d C h a p t e r 1 1 r e o r g a n i z a t i o n c a s e s , it is a d v a n t a g e o u s to p r o v i d e an e f f e c t i v e m e a n s of
c o m m u n i c a t i o n a m o n g the t r u s t e e or d e b t o r in p o s s e s s i o n , the
d e b t o r a n d a m a n a g e a b l e g r o u p of c r e d i t o r s .
C o n t r i b u t i n g to the
a c h i e v e m e n t of this g o a l , the Code p e r m i t s o f f i c i a l l y
c r e d i t o r g r o u p s or " c o m m i t t e e s . "
In C h a p t e r 7 c a s e s , the
m a y e l e c t a c o m m i t t e e of a n y w h e r e from three to e l e v e n
who hold unsecured claims.
recognized
creditors
creditors
This committee may then consult with
the t r u s t e e in c o n n e c t i o n w i t h the a d m i n i s t r a t i o n of the e s t a t e .
T h e c o m m i t t e e is f u r t h e r a u t h o r i z e d to m a k e r e c o m m e n d a t i o n s
to
the t r u s t e e r e s p e c t i n g p e r f o r m a n c e of the t r u s t e e ' s d u t i e s , a n d
to s u b m i t to the c o u r t a n y q u e s t i o n a f f e c t i n g the
of the estate.
administration
The establishment of a Chapter 7 creditors' com24
m i t t e e is n o t m a n d a t o r y .
In C h a p t e r 1 1 c a s e s , the f o r m a t i o n of a c o m m i t t e e of creditors h o l d i n g u n s e c u r e d claims is m a n d a t o r y .
The25 a p p o i n t m e n t of
m e m b e r s to this c o m m i t t e e is m a d e b y the c o u r t .
J
A n y of the
C h a p t e r 1 1 c o m m i t t e e s m a y , w i t h the a p p r o v a l of the c o u r t , e m p l o y
a t t o r n e y s , a c c o u n t a n t s o r o t h e r a g e n t s to r e p r e s e n t and p e r f o r m
s e r v i c e s on b e h a l f of the c o m m i t t e e .
Such p r o f e s s i o n a l s e r v i 27
ces
a r e e n t i t l e d to c o m p e n s a t i o n a n d r e i m b u r s e m e n t f r o m the e s t a t e .
C e r t a i n l i m i t a t i o n s are i m p o s e d on c o m p e n s a t i o n a n d / o r
00046
fc
reimbursement.
17
73
B a n k r u p t c y Rule 1 1 - 2 9
7
g o v e r n s r e i m b u r s e m e n t of e x p e n s e s
to c r e d i t o r s ' c o m m i t t e e s and c o m m i t t e e m e m b e r s .
U n d e r the old
b a n k r u p t c y act^°, b o t h c o m m i t t e e g r o u p s as w e l l a s
individual
c r e d i t o r s w e r e a l l o w e d r e i m b u r s e m e n t of e x p e n s e s i n c u r r e d .
Under
1
the n e w Code-^ , the c r e d i t o r s ' c o m m i t t e e as a g r o u p is s p e c i f i c a l l y
n o t e n t i t l e d to r e i m b u r s e m e n t as to t h o s e a p p o i n t e d u n d e r §1102.-^
N o t i c e , h o w e v e r , t h a t §503 does a l l o w f o r r e i m b u r s e m e n t to each
creditor
individually.
Two courts h a v e m a n a g e d to c i r c u m v e n t t h i s s o m e w h a t
inconsis-
t e n t a p p r o a c h to r e i m b u r s e m e n t of c r e d i t o r s a n d c o m m i t t e e s .
34
M i l l a r Coffee C o . v . Bckles-^ , the court h o l d s , a f t e r
lengthy
a n a l y s i s , that the p u r p o s e of Rule 11-29 is to p r o m o t e
full,
e f f i c i e n t o p e r a t i o n of a c r e d i t o r s ' c o m m i t t e e in d i s c h a r g i n g
duties.
In
its
The c o u r t h e r e d e t e r m i n e s that Rule 11-29 is p r o c e d u r a l
in n a t u r e a n d n o t s u b s t a n t i v e .
The Rule is t h e r e f o r e b e y o n d the
s c o p e of the r u l e - m a k i n g a u t h o r i t y v e s t e d in the S u p r e m e
b y 28 U . S . C . §2075-
The court t h e r e a l l o w s a c o m m i t t e e to be
r e i m b u r s e d f o r e x p e n s36
e s i n c u r r e d w i t h an a r r a n g e m e n t
In a n o t h e r c a s e
Court
J
, a court h e l d t h a t c r e d i t o r s '
proceeding.
committees
may be reimbursed for necessary and reasonable expenses,
including
t r a v e l as w e l l a s t h o s e r e l a t e d e x p e n s e s of m e m b e r s p e r f o r m i n g
c o m m i t t e e b u s i n e s s . F u r t h e r m o r37
e , the court f o u n d t h a t Rule 11-29
w a s n o t i n c o n s i s t e n t w i t h §503-^ .
00047
10
III-
F e d e r a l E x e m p t i o n s or S t a t e
1 1 U . S . C . §522 (b) and
Exemptions?
(d)
T h r o u g h o u t the U n i t e d S t a t e s there e x i s t s a s y s t e m of u n i f o r m
bankruptcy laws.
H o w e v e r , this u n i f o r m i t y e x t e n d s i t s e l f in a
oo
p u r e g e o g r a p h i c a l s e n s e , n o t in a p e r s o n a l s e n s e .
Non-uniformity
as to p e r s o n a l e f f e c t s w a s m a n i f e s t e d in the v a r i o u s s t a t e
t i o n s t a t u t e s p r i o r to the e n a c t m e n t of the n e w C o d e . ^
7
exemp-
A signi-
f i c a n t d e p a r t u r e f r o m the old a c t n o w p e r m i t s a d e b t o r w i t h a
choice of e i t h e r f e d e r a l or s t a t e e x e m p t i o n s if s t a t e law a l l o w s
40
him to.
M a n y s t a t e s c u r r e n t l y r e q u i r e d e b t o r s to u s e the
exemption scheme.
state
N o t w i t h s t a n d i n g the d i s p a r i t y from s t a t e to
s t a t e as to w h a t p r o p e r t y the d e b t o r w i l l h a v e a v a i l a b l e to m a k e
a fresh s t a r t , s t a t e e x e m p t i o n s h a v e g e n e r a l l y b e e n u p h e l d .
e v e r , the c o n s t i t u t i o n a l i t y of p e r m i t t i n g s t a t e s to " o p t - o u t "
Howof
the n e w f e d e r a l e x e m p t i o n l i s t a n d r e q u i r e d e b t o r s to f o l l o w the
s t a t e e x e m p t i o n s h a s n o t 4 lg o n e w i t h o u t
One I l l i n o i s d e b t o r
challenge.
c o n t e n d e d t h a t u n d e r A r t i c l e I, S e c t i o n
8 , C l a u s e 4 of the C o n s t i t u t i o n , §522(b) w a s an u n c o n s t i t u t i o n a l
d e l e g a t i o n of C o n g r e s s ' a u t h o r i t y and an u n c o n s t i t u t i o n a l
attempt
to e s t a b l i s h n o n - u n i f o r m laws on the s u b j e c t of b a n k r u p t c y .
c o u r t h e r e found t h a t §522 w a s the r e s u l t of p r i o r
of f e d e r a l e x e m p t i o n s .
The
non-uniformity
F u r t h e r m o r e , the s e c t i o n w a s m a d e
available
wt ii to hn perx oi vs it si in go n sc.o42
n c u r rThe
e n t court
state s tl ae tg ei ds l at th ia vt e the
p o w eB ra n kto
exempr u pcreate
t c y Code
was
00048
10
n o t i n t e n d e d to take a w a y the s t a t e s ' p o w e r to e n a c t e x e m p t i o n
l a w s on "bankruptcy.
W i t h r e s p e c t to the d e b t o r ' s a l t e r n a t i v e claim t h a t the
I l l i n o i s s t a t u t e p r e v e n t i n g the §522(d) l i s t w a s a f r u s t r a t i o n
of
C o n g r e s s ' intent of the f r e s h s t a r t t h e o r y , the c o u r t f o u n d t h a t
the d e t e r m i n a t i o n of w h a t is r e q u i r e d "by a d e b t o r f o r a f r e s h
s t a r t is a l e g i s l a t i v e d e t e r m i n a t i o n , n o t a j u d i c i a l o n e .
In
u p h o l d i n g the v a l i d i t y of the o p t - o u t c l a u s e , the S u l l i v a n
court
n o t e d w i t h a p p r o v a l the r e c e n t case of R a g s d a l e v . G e n e s c o
in
w h i c h the o p t - o u t c l a u s e w a s u p h e l d a g a i n s t s i m i l a r
challenge.
1
4)
C o n t r a r y to t h e s e o p i n i o n s , one b a n k r u p t c y c o u r t h a s r u l e d
t h a t the T e n n e s s e e o p t - o u t s t a t u t e e x c e e d e d the a u t h o r i t y
g a v e to the states to e n a c t such l e g i s l a t i o n .
Tennessee
p r o v i d e s d e b t o r s w i t h a h o m e s t e a d e x e m p t i o n of $ 5 , 0 0 0 .
the o n l y e x e m p t i o n f o r r e a l p r o p e r t y a l l o w e d .
Congress
currently
T h i s is
U n f o r t u n a t e l y , the
d e b t o r did n o t own h i s h o m e , b u t he did own a v a c a t i o n
s i t u a t e d in F l o r i d a .
J
condominium
He was therefore denied a homestead
exemption
he w o u l d o t h e r w i s e h a v e b e e n e n t i t l e d to if he h a d p u r c h a s e d a
h o m e i n s t e a d of a c o n d o m i n i u m .
U n d e r the f e d e r a l s t a t u t e s , the
c o n d o m i n i u m could h a v e b e e n e x e m p t u n d e r §522(d)(l) or the g e n e r a l
carryover exemption under §522(d)(5)»
The Rhodes
court held that
" [ f ] o r a s t a t e to e f f e c t i v e l y opt its c i t i z e n s o u t of §522(d) it
m u s t p r o v i d e a scheme of e x e m p t i o n s c o n s i s t e n t " w i t h the p o l i c y of
§522 w h i c h a l l o w s an 46
e x e m p t i o n f o r n o n - h o m e o w n e r s c o m p a r a b l e to
those for homeowners.
The T e n n e s s e e p r o v i s i o n , the c o u r t
concluded
p e r p e t u a t e d the d i s c r i m i n a t i o n a g a i n s t n o n - h o m e o w n e r s w h i c h §522
w a s i n t e n d e d to e l i m i n a t e .
00049
10
Rhodes court f o l l o w e d the r e a s o n i n g of the F o u r t h
Circuit
47
in C h e e s e m a n v . N a c h m a n ' w h i c h u p h e l d a V i r g i n i a o p t - o u t
b y r e a d i n g it in a w a y c o n s i s t e n t w i t h §522.
statute
In R h o d e s . h o w e v e r ,
t h e c o u r t s p e c i f i c a l l y s t a t e d t h a t the T e n n e s s e e s t a t u t e did n o t
l e n d i t s e l f to such an i n t e r p r e t a t i o n .
T h u s , the i n v a l i d i t y of
the T e n n e s s e e p r o v i s i o n w a s n o t due to the u n c o n s t i t u t i o n a l i t y
of
a s t a t e ' s a u t h o r i t y to o p t - o u t , b u t the m a n n e r in w h i c h the state
opted
out.
T h e c o n s t i t u t i o n a l i t y of state i m p o s e d e x e m p t i o n s t a t u t e s as
p e r §522(b) e x t e n d s no f u r t h e r t h a n as to the l i s t items w h i c h m a y
be c l a i m e d .
W h e r e the state o p t - o u t s t a t u t e i t s e l f
includes
p r e s e r v i n g liens on s u c h p r o p e r t y , §522(f) is c o n t r o l l i n g u n d e r
the s u p r e m a c y c l a u s e , A r t i c l e V I , Clause 2 of the C o n s t i t u t i o n , and
w i l l n o t a l l o w such a n e n c r o a c h m e n t b y s t a t e s .4 8
IV.
A v o i d a n c e of N o n p o s s e s s o r y , n o n p u r c h a s e - m o n e y
security
interests by a debtor.
11 U.S.C. 1522(f).
To m o r e fully p r o t e c t the d e b t o r ' s e x e m p t i o n s , he is e m p o w e r e d
to a v o i d the f i x i n g of c e r t a i n liens and m a y a v o i d a n o n p o s s e s s o r y ,
n o n p u r c h a s e - m o n e y s e c u r i t y i n t e r e s t in p r o p e r t y t h a t the d e b t o r
is e n t i t l e d to claim as e x e m p t such as h o u s e h o l d g o o d s and tools
of t r a d e . 49
y
00050
10
S i n c e the e n a c t m e n t of the C o d e , c r e d i t o r s have v i g o r o u s l y
a t t a c k e d the s t a t u t e as an u n c o n s t i t u t i o n a l d e p r i v a t i o n of prop e r t y w i t h o u t due p r o c e s s of law as to t h o s e s e c u r i t y
c r e a t e d "before the Code b e c a m e e f f e c t i v e .
interests
W h i l e the q u e s t i o n m a y
b e c o m e less i m p o r t a n t as there are f e w e r p r e - C o d e liens in exist e n c e , the issue is s t i l l r e l e v a n t w i t h r e s p e c t to t h o s e w h o s e
p r o p e r t y i n t e r e s t s h a v e v i r t u a l l y d i s a p p e a r e d b y v i r t u e of §522(f).
Some l o w e r courts h a v e a l r e a d y d e t e r m i n e d the s e c t i o n to b e
unconstitutional.
In H a w l e y v . A v c o F i n . S e r v . of O r e g o n , I n c . ^ ° the c o u r t h e l d
that a nonpossessory, nonpurchase-money security interest
created
b e f o r e the e n a c t m e n t of the Code ( N o v e m b e r 6 , 1 9 7 8 ) w o u l d n o t be
a v a i l a b l e f o r a v o i d a n c e b y the d e b t o r .
The c o u r t found t h a t such
a p o w e r as e x t e n d e d to the d e b t o r a m o u n t e d to a n u n c o n s t i t u t i o n a l
t a k i n g of p r o p e r t y w i t h o u t due p r o c e s s b e c a u s e of the
of §522(f).
retroactivity
In its d i s c u s s i o n , the c o u r t i n d i c a t e d that the
i m p a i r m e n t of c r e d i t o r s ' r i g h t s w o u l d be p r o s p e c t i v e o n l y as to
t h o s e i n t e r e s t s c r e a t e d a f t e r the e n a c t m e n t of the n e w b a n k r u p t c y
law.-'
1
The H a w l e y c o u r t draws its a u t h o r i t y f o r h o l d i n g §522(f)
as u n c o n s t i t u t i o n a l f r o m the e a r l y S u p r e m e C o u r t d e c i s i o n , Louisv i l l e J o i n t S t o c k Land Bank v . R a d f o r d .
In R a d f o r d an a m e n d m e n t to the B a n k r u p t c y A c t of 1898 w a s
f o u n d to m a t e r i a l l y c h a n g e the s t a t u s of m o r t g a g e debts in exist e n c e b e f o r e the a c t ' s p a s s a g e .
T h i s w a s s t r u c k d o w n as an un-
c o n s t i t u t i o n a l t a k i n g of p r o p e r t y w i t h o u t due p r o c e s s of l a w due
to the r e t r o a c t i v e n a t u r e of the s t a t u t e ' s
00051
application.-^
10
O t h e r r e c e n t d e c i s i o n s have d e t e r m i n e d §522(f) as u n c o n s t i t u t i o n a l on the g r o u n d s of v i o l a t i o n of the due p r o c e s s c l a u s e
of
54
the F i f t h A m e n d m e n t .
One c o u r t ' ' i n an a t t e m p t to r e c e i v e p r o m p t a t t e n t i o n
from
the a p p e a l s c o u r t , f o u n d that a §522(f) a v o i d a n c e of a n o n p o s sessory, nonpurchase-money security interest which was perfected
p r i o r to the Code's e f f e c t i v e date w a s c o n s t i t u t i o n a l l y
permissible.
The c o u r t f u r t h e r f o u n d t h a t §522(f) h a s the a b i l i t y to
impair
c o n t r a c t s in e x i s t e n c e as of O c t o b e r 1 , 1979•
The B o u l t o n
r e a s o n i n g r e s t s , in l a r g e p a r t , o n the p r e s u m p t i o n of
court
constitutionality
of the C o d e ' s p r o v i s i o n s l e a v i n g the a p p e a l s court w i t h the t a s k of
i n t e r p r e t i n g so c r i t i c a l as r e s u l t as §522(f) i m p o s e s on
57
S i m i l a r l y , an I l l i n o i s court-"
held that Congress was acting
r e a s o n a b l y in e n a c t i n g §522(f) a n d t h a t the p r o v i s i o n w a s
constitutional.
creditors.^
therefore
The d e c i s i o n w a s r e n d e r e d in the c o n t e x t of a case
in w h i c h the d e b t o r s o u g h t to a v o i d a s e c u r i t y i n t e r e s t g r a n t e d
b e t w e e n the date of e n a c t m e n t a n d the e f f e c t i v e
date.
R e s e a r c h in this a r e a r e v e a l s the a v a i l a b i l i t y of a n y n u m b e r
of o p i n i o n s w h i c h e i t h e r u p h o l d the s e c t i o n ' s c o n s t i t u t i o n a l i t y
d e c l a r e it to b e i n v a l i d .
or
T h e s e i n c o n s i s t e n t r u l i n g s of §522(f)
h a v e r e s u l t e d , in large p a r t , in u n e q u a l t r e a t m e n t to d e b t o r s a n d
creditors throughout all
jurisdictions.
A v e r y i n t e r e s t i n g and r e c e n t case d e a l s w i t h the n o n - a v a i l a b i l i t y of a l i e n a v o i d a n c e u n d e r §522(f).
00052
In M c M a n u s v . A v c o F i n .
10
Serv. of L o u i s i a n a , t h e
"bankruptcy court a n d l a t e r the F i f t h
C i r c u i t i n t e r p r e t e d a L o u i s i a n a e x e m p t i o n s t a t u t e as e x c l u s i v e
of t h o s e h o u s e h o l d i t e m s w h i c h are s u b j e c t to a c h a t t e l m o r t g a g e .
In o t h e r w o r d s , the L o u i s i a n a o p t - o u t scheme d e f i n e d e x e m p t p r o p e r t y in a w a y w h i c h t o o k e n c u m b e r e d p r o p e r t y out of t h e e x e m p tion list.-^
A c c o r d i n g l y , c e r t a i n h o u s e h o l d p r o p e r t y w h i c h the
d e b t o r s o u g h t to e x e m p t a n d thus a v o i d a n y l i e n s t h e r e o n w a s
d i s a l l o w e d b y the c o u r t .
The F i f t h C i r c u i t a f f i r m e d the l o w e r
c o u r t ' s d e c i s i o n a n d s e t forth its a n a l y s i s as d e s c r i b e d
above.
W h i l e T e x a s is n o t a n o p t - o u t s t a t e , s h o u l d the d e b t o r
e x e r c i s e h i s p r i v i l e g e to u t i l i z e the s t a t e ' s e x e m p t i o n
statutes,
h e m a y f i n d h i m s e l f in a s u r p r i s i n g l y s i m i l a r p o s t u r e .
The T e x a s
exemption statute^
0
c o n t a i n s l a n g u a g e s i m i l a r to t h a t of L o u i s i a n a .
T o d a t e , t h e r e are no k n o w n b a n k r u p t c y cases w h i c h c o n s t r u e
T e x a s s t a t u t e as e x c l u d i n g such p r o p e r t y from
the
exemption.
O n the q u e s t i o n of w h e t h e r d e b t o r s m u s t a v a i l t h e m s e l v e s
t h e i r §522(f) r i g h t p r i o r to d i s c h a r g e , In re A d k i n s . ^
they must.
1
of
held that
The Code d o e s n o t e x p r e s s l y p r o v i d e t h i s r e s u l t a n d
the b a n k r u p t c y court l o o k s to §524(c) w h i c h r e q u i r e s
reaffirmation
a g r e e m e n t s to be e n t e r e d into b e f o r e a d i s c h a r g e w i l l b e g r a n t e d .
It s h o u l d be n o t e d t h a t §522(f) o n l y a l l o w s d i s c h a r g e u p to the
a m o u n t of e x e m p t p r o p e r t y .
T h o s e w i t h c o l l a t e r a l in e x c e s s of
the e x e m p t a m o u n t s h o u l d a c t p r o m p t l y as to r e a f f i r m a t i o n
d e b t in e x c e s s of t h i s a m o u n t .
00053
of
10
V.
L i m i t a t i o n s on the T r u s t e e ' s A v o i d i n g P o w e r .
11
u.s.c.
1546(c)
It is a g e n e r a l p o l i c y u p o n w h i c h the law of b a n k r u p t c y is
"based to d i s a l l o w c e r t a i n t r a n s f e r s of the d e b t o r ' s p r o p e r t y on
the eve of b a n k r u p t c y .
A large n u m b e r of such t r a n s f e r s
would
n o t b e w i t h i n the r e a c h of the t r u s t e e without" the v a r i o u s
p o w e r s as set out in the
Code.
S e c t i o n 5 4 6 ( c ) p l a c e s a s p e c i a l l i m i t a t i o n on the
62
avoiding power.
avoiding
trustee's
T h i s s e c t i o n s p e c i f i e s t h a t the t r u s t e e ' s
rights
a n d p o w e r s u n d e r the a v o i d i n g p r o v i s i o n s a r e s u b j e c t to a n y statut o r y or c o m m o n law r i g h t of the s e l l e r , in the o r d i n a r y c o u r s e of
b u s i n e s s , to r e c l a i m s u c h g o o d s w h i l e the d e b t o r is i n s o l v e n t .
The s e c t i o n also i n c l u d e s a r e q u i r e m e n t t h a t a l l such d e m a n d s be
in w r i t i n g a n d s u b m i t t e d to the d e b t o r b e f o r e t e n d a y s a f t e r rec e i p t of the g o o d s .
One of the p u r p o s e s b e h i n d §546(c) is to
r e c o g n i z e the v a l i d i t y of §2-702 of the U n i f o r m C o m m e r c i a l
Code.
It s h o u l d also be n o t e d t h a t the r i g h t is s u b j e c t to the p o w e r
of the court to d e n y r e c l a m a t i o n and p r o t e c t the s e l l e r b y g r a n t i n g
h i m a p r i o r i t y as a n a d m i n i s t r a t i v e e x p e n s e f o r h i s claim
arising
out of the sale of g o o d s .
W h i l e one of the p u r p o s e s of the s e c t i o n is to g i v e
credence
to U . C . C . §2-702, t h e r e seems to be u n c e r t a i n t y as to 64
h o w this
s h o u l d be a c c o m p l i s h e d .
In U n i t e d B e e f P a c k e r s v . Lee
d e l i v e r e d an o r d e r of b e e f to the d e b t o r on c r e d i t t e r m s .
00054
the
seller
After
10
d e l i v e r y , the s e l l e r b e c a m e c o n c e r n e d as to t h e b u y e r ' s
to p a y t h e p u r c h a s e p r i c e of $ 5 3 * 5 5 8 . 6 4 .
The seller
made an oral demand for the return of the b e e f .
m a d e w i t h i n ten d a y s o f d e l i v e r y .
ability
thereupon
The demand w a s
T h e d a y a f t e r the
seller's
d e m a n d , t h e b u y e r f i l e d a p e t i t i o n in b a n k r u p t c y u n d e r C h a p t e r 7T h e s e l l e r ' s c o n t e n t i o n , in h i s a c t i o n a g a i n s t t h e t r u s t e e , w a s
t h a t c o m p l i a n c e of the S o u t h C a r o l i n a Code of L a w s
§36-2-702(2
had been met and thus the seller had perfected his rights
to the f i l i n g of t h e b a n k r u p t c y p e t i t i o n .
prior
The court ruled
that
t h e s e l l e r ' s r i g h t to r e c l a i m the b e e f w a s e f f e c t i v e as i t w a s
e x e r c i s e d p r i o r to the t i m e the t r u s t e e a c q u i r e d h i s s t a t u s as
66
a judicial lien creditor.
In r e c o g n i t i o n o f the c o m m o n
right of reclamation, this court thus creates a judicial
law
exception
to the w r i t i n g r e q u i r e m e n t o f §546(c)(l).
In a t o t a l l y o p p o s i t e d e c i s i o n , B e r g e r v . C o n t r a c t
Interiors.
67
Inc.
a s e l l e r of g o o d s i n s t i t u t e d a n a d v e r s a r y p r o c e e d i n g
against
the d e b t o r c o n t e n d i n g i t w a s i n d u c e d to s h i p g o o d s in r e l i a n c e
false financial statements.
Relying on the common law right
a d e f r a u d e d s e l l e r to r e c l a i m h i s g o o d s , t h e s e l l e r
contended
t h a t it h a d c o m p l i e d w i t h §546(c)
68 a n d w a s t h e r e b y i m m u n e
the trustee's avoiding p o w e r s .
The court, however, was
p e l l e d to r e j e c t t h i s a r g u m e n t a n d r u l e d t h a t c o m p l i a n c e
the §546(c) r e q u i r e m e n t s w e r e the s e l l e r ' s e x c l u s i v e
of
from
comwith
remedies.
T h e s e two c a s e s i l l u s t r a t e t h e c o n t i n u o u s l i t i g a t i o n
sur-
r o u n d i n g t h e c o n f l i c t of i n t e r p r e t a t i o n g i v e n to U . C . C . §2-702
a n d §546(C) a s to the s e l l e r ' s r i g h t o f r e c l a m a t i o n .
00055
on
10
VI.
A b i l i t y of D e b t o r to Cure D e f a u l t on Home M o r t g a g e .
1 1 u . s . c . §1322
In g e n e r a l , a C h a p t e r 13 p l a n m u s t p r o v i d e f o r the
submission
of a l l o r a n y p a r t of the d e b t o r ' s f u t u r e i n c o m e to the t r u s t e e
a s w i l l b e n e c e s s a r y to m e e t p a y m e n t s u n d e r the p l a n .
Furthermore,
the p l a n m u s t p r o v i d e f o r f u l l p a y m e n t of a l l p r i o r i t y
claims
u n l e s s the h o l d e r of the claim o t h e r w i s e a g r e e s .
If the p l a n
c l a s s i f i e s c l a i m s , it m u s t p r o v i d e f o r e q u a l t r e a t m e n t to m e m b e r s
69
within a particular class.
One v a l u a b l e f e a t u r e of §1322 is the p r o v i s i o n w h i c h
allows
70
f o r the curing or w a i v i n g of a n y d e f a u l t .
T h i s a b i l i t y of the
d e b t o r to cure d e f a u l t s is a p p l i c a b l e to both s e c u r e d a n d unsecurec
claims.
A l t h o u g h a p l a n cannot m o d i f y the r i g h t s of a h o l d e r of
a claim s e c u r e d o n l y b y a l i e n in the d e b t o r ' s p r i n c i p a l
residence,
the s e c t i o n w i l l a l l o w f o r the cure of a n y d e f a u l t and m a i n t e n a n c e
of p a y m e n t s so long as the last7 1 p a y m e n t is due a f t e r the
final
p a y m e n t u n d e r the p l a n is d u e .
W h e r e a p r e - p e t i t i o n a c c e l e r a t i o n clause h a s b e e n i n v o k e d b y
a c r e d i t o r , s e r i o u s q u e s t i o n s are r a i s e d as to the a b i l i t y of the
d e b t o r to cure such d e f a u l t .
One s i t u a t i o n i n v o l v e s a s t a t e law p r o v i s i o n w h i c h r e s u l t s
in a m e r g e r of the m o r t g a g e into a j u d g m e n t . In U n i t e d C o s . F i n .
72
Corp. v . Brantley,'
the court s t a t e d that if a m o r t g a g e ceases to
e x i s t a n d m e r g e s into a j u d g m e n t t h e n it c a n n o t b e c u r e d of defaul
00056
-
17
b e c a u s e t h e r e no l o n g e r w o u l d b e a n y m o r t g a g e to c u r e .
73
1 J
However,
t h i s p a r t i c u l a r d e b t o r w a s a b l e to cure h i s d e f a u l t in the m o r t g a g e
s i n c e the court f o u n d t h a t it r e m a i n e d in e x i s t e n c e due to a
s t a y of the f o r e c l o s u r e
sale.
nh
In re L a P a g l i a ,
d e a l t w i t h a s i m i l a r s i t u a t i o n w h e r e b y the
d e b t o r m i s s e d seven m o n t h l y p a y m e n t s a n d the m o r t g a g e e l e c t e d to
a c c e l e r a t e the d e b t b y g i v i n g the r e q u i r e d n o t i c e .
Subsequently,
the d e b t o r filed C h a p t e r 13 a n d t h e r e i n p r o p o s e d to cure the mortgage arrears.
The court found t h a t it w o u l d be u n a b l e to
the d e b t o r ' s p l a n s t a t i n g that u n d e r the a p p l i c a b l e s t a t e
§1322(b)(5) w a s i n a p p l i c a b l e .
confirm
law
The r e a s o n the c o u r t s t a t e d w a s
t h a t the due date of the last p a y m e n t w a s no l o n g e r s u b s e q u e n t to
the date on w h i c h nf ic n a l p a y m e n t u n d e r C h a p t e r 13 w a s d u e .
In re P e a r s o n
J
c o n c e r n s a s i t u a t i o n w h e r e b y the
bankruptcy
c o u r t h e l d t h a t state a c c e l e r a t i o n laws left the e n t i r e a m o u n t of
a n u n p a i d m o r t g a g e loan b a l a n c e due and n o t m e r e l y the
a m o u n t in d e f a u l t .
original
The court t h e r e r e c o g n i z e d the d e b t o r ' s §1322
r i g h t s b u t w a s u n a b l e to go so f a r as to give such a l i b e r a l
c o n s t r u c t i o n to C h a p t e r 13 w h i c h h a d the e f f e c t of v o i d i n g a state
court
judgment.
A totally different result was reached by a bankruptcy
court
in the same j u d i c i a l d i s t r i c t as t h a t of L a P a g l i a a n d P e a r s o n .
7 f>
Taddeo v . Cullen'
gage indebtedness.
a l l o w e d the d e b t o r to " d e a c c e l e r a t e " h i s mortIt is this c o u r t ' s o p i n i o n t h a t an e v e n t of
a c c e l e r a t i o n can be r e v e r s e d in a C h a p t e r 11 case as p e r §1124(2)(B).
00057
10
T h e c o u r t t h e n p r o c e e d s to a n a l o g i z e §1124 s i t u a t i o n s to t h o s e
u n d e r §1322 and can f i n d no j u s t i f i c a t i o n f o r the u n e q u a l t r e a t m e n t t h a t each s e c t i o n m i g h t p o t e n t i a l l y i m p o s e .
Furthermore,
t h e court f i n d s t h a t a d e b t o r m a y in e f f e c t b e d e n i e d a c c e s s to
C h a p t e r 13 r e l i e f if the p a y m e n t s c h e d u l e on a d e f a u l t e d m o r t g a g e
c o u l d n o t be r e v i v e d .
VII.
Good F a i t h R e q u i r e m e n t of 8 1 3 2 5 ( a ) .
11 U.S.C. 01325(a).
S e c t i o n 1 3 2 5 ( a ) i m p o s e s as one of the c o n d i t i o n s f o r confirm a t i o n the r e q u i r e m e n t t h a t a p l a n b e p r o p o s e d in " g o o d faith."
B e c a u s e the "best i n t e r e s t " t e s t s e t f o r t h in t h a t same
section
is so e a s i l y m e t and b e c a u s e d i s c h a r g e u n d e r C h a p t e r 13 is i n t e n d e d
b y C o n g r e s s to be b r o a d , b a n k r u p t c y courts in a l l j u r i s d i c t i o n s are
f o c u s i n g on the c o n c e p t of "good faith" in d e t e r m i n i n g w h e t h e r such
p l a n s are w o r t h y of c o n f i r m a t i o n .
" g o o d faith" d e f i n e d .
N o w h e r e in the Code is the term
O f a l l of the p r o b l e m s r a i s e d b y the 1978
C o d e , c o n f i r m a t i o n of p l a n s w h i c h p r o p o s e n o m i n a l p a y m e n t s in g o o d
f a i t h h a v e b e c o m e the m o s t h o t l y d i s p u t e d .
In t h e i r c o n t i n u i n g e f f o r t to p i n d o w n the m e a n i n g of g o o d
f a i t h , courts have e n g r a f t e d w h a t t h e y c o n s i d e r is a m o r e
standard:
"best e f f o r t . "
objective
The b e s t e f f o r t c o n c e p t is n o t a d o p t e d
b y the C o d e , y e t the c o u r t s ' c o n t i n u a l r e f e r r a l to the
standard
r e p r e s e n t s an a c k n o w l e d g m e n t of the d i f f i c u l t b a l a n c e t h a t is
20
19
n e c e s s a r y to p r e v e n t u n d u e c r e d i t o r a b u s e .
On the o t h e r h a n d ,
i m p o s i t i o n of v a r y i n g d e g r e e s of the s t a n d a r d h a s p r o d u c e d a n
u n e v e n a p p l i c a t i o n to b o t h d e b t o r s a n d
77
creditors.
F o r e x a m p l e , one M i s s o u r i c a s e ' ' i n v o l v e d s u b m i s s i o n of a
C h a p t e r 13 p l a n w h e r e i n the d e b t o r w o u l d p a y at l e a s t t e n p e r c e n t
of h i s take h o m e p a y o v e r the f u l l t h r e e y e a r p e r i o d .
The court
f o u n d t h a t the p l a n w a s f i l e d in g o o d f a i t h e v e n t h o u g h the a g g r e g a t e t e n p e r c e n t p a y m7 e8 n t w o u l d r e t u r n o n l y a n o m i n a l a m o u n t to
unsecured
creditors.
In some i n s t a n c e s , courts h a v e b e e n a d v e r s e to g o i n g b e y o n d
the l a n g u a g e s e t forth in C h a p t e r 13 f o r f e a r of j u d i c i a l overreaching. ^
T h e s e c o u r t s are of the o p i n i o n t h a t n o m i n a l or e v e n
no payment plans should be confirmed where proper compliance with
a l l r e q u i r e m e n t s of C h a p t e r 13 h a v e b e e n m e t .
E a c h of t h e s e
f e l t t h a t a n y c o n t r a r y r e s u l t w o u l d be a n i m p e r m i s s i b l e
of j u d i c i a l
opinions
exercise
legislation.
O t h e r courts h a v e f e l t c o m p e l l e d to go b e y o n d l i t e r a l
compliance
w i t h C h a p t e r 13 g u i d e l i n e s a n d i n s e r t w h a t is p e r c e i v e d to be a
f a i r e r s t a n d a r d in d e t e r m i n a t i o n of c o n f i r m a t i o n s .
80
courts
One o f t h e s e
r e f u s e d c o n f i r m a t i o n of a f i f t e e n p e r c e n t p l a n
stating
t h a t b o t h s u b s t a n t i a l p a y m e n t s as w e l l as " b e s t e f f o r t s " m u s t b e
r e a d into §1325(a) in o r d e r f o r t h a t s e c t i o n to m a k e s e n s e w i t h
the o t h e r p r o v i s i o n s of C h a p t e r 13•
The c o u r t f u r t h e r f i n d s t h a t
a t l e a s t s e v e n t y p e r c e n t of a l l o w e d u n s e c u r e d claims w o u l d f i t the
81
a l . s e Av te n tlye a ps et r cone
hd ae sf i ne ix tp ir oe ns s lof
y as du ob pst eadn t ithe
e n t o ts hu eb rs t ba an nt ik ar lu p tp ca y m ecourt
nt rule.
00059
10
Op
The B u r r e l l d e c i s i o n w a s a p p e a l e d to the d i s t r i c t
and was remanded for further consideration.
court
The d i s t r i c t
court
h e l d t h a t the "bankruptcy court c o r r e c t l y c o n c l u d e d t h a t s u b s t a n t i a l p a y m e n t s be m a d e to u n s e c u r e d c r e d i t o r s .
The district
court
f o u n d t h a t such p a y m e n t s w e r e i n c l u s i v e in the e l e m e n t s of the
g o o d f a i t h r e q u i r e m e n t of §1325(a)(3)»
H o w e v e r , the
district
court f o u n d t h a t the r e q u i r e m e n t of s e v e n t y p e r c e n t of a l l o w e d
u n s e c u r e d claims w a s e r r o r .
The r e v i e w i n g c o u r t s t a t e d t h a t the
c o r r e c t a p p r o a c h w o u l d be to t r e a t " s u b s t a n t i a l i t y "
e f f o r t s " as e l e m e n t s of g o o d f a i t h .
and "best
The b a n k r u p t c y c o u r t m u s t
c o n s i d e r the d e b t o r ' s c i r c u m s t a n c e on a case b y case b a s i s in its
d e t e r m i n a t i o n w h e t h e r a p l a n p r o p o s e s m e a n i n g f u l p a y m e n t s to unsecured
creditors.
The d i s t r i c t court o p i n i o n in B u r r e l l is c o n s i s t e n t w i t h the
p o s i t i o n t a k e n in m a n y b a n k r u p t c y c o u r t d e c i s i o n s w h i c h
§1325 c o n f i r m a t i o n
discuss
standards.
One court f o u n d t h a t the e x c e p t i o n a l c i r c u m s t a n c e s of the
d e b t o r w o u l d a l l o w a p p r o v a l ofo o a p l a n w h i c h p r o v i d e d f o r no paym e n t s to u n s e c u r e d c r e d i t o r s .
The d e b t o r w a s p e r m a n e n t l y
disablei
a n d h a d a n income of s o c i a l s e c u r i t y , a l i m o n y a n d o t h e r p u b l i c
assistance funds.
The o p i n i o n e x a m i n e s the d e b t o r ' s h o n e s t
to p a y c r e d i t o r s .
T h u s , u n d e r e x c e p t i o n a l c i r c u m s t a n c e s , the
h a s the a b i l i t y to d e p a r t from a m o r e r e s t r i c t i v e
of g o o d
effort
court
definition
faith.
A t p r e s e n t there is p r o p o s e d l e g i s l a t i o n
00060
Oh
in C o n g r e s s w h i c h
21
w o u l d c h a n g e the g o o d f a i t h r e q u i r e m e n t of §1325 to a h i g h e r
standard.
Both the S e n a t e a n d H o u s e "bills w o u l d r e q u i r e a "bona
fide e f f o r t on the p a r t of the d e b t o r w h i c h w o u l d "be c o n s i s t e n t
w i t h the a b i l i t y to r e p a y d e b t s a f t e r s u p p o r t f o r d e b t o r and
d e p e n d e n t s are t a k e n into
consideration.
In s u m m a r y , the p o s i t i o n t a k e n b y m o s t b a n k r u p t c y
courts
is t h a t g o o d faith does n o t a l w a y s e n c o m p a s s s o m e m i n i m a l p a y m e n t .
H o w e v e r the d e b t o r ' s s i n c e r i t y a n d h o n e s t y , s t a n d i n g a l o n e , is
n o t e n o u g h to m e e t the g o o d f a i t h r e q u i r e m e n t .
T h e r e a p p e a r s to
be a t r e n d which r e q u i r e s some l e v e l of m e a n i n g f u l p a y m e n t a b o v e
t h o s e a m o u n t s w h i c h w o u l d o t h e r w i s e be r e c e i v e d in l i q u i d a t i o n .
G0U61
ENDNOTES
-""Hamilton, M a d i s o n & J a y , The F e d e r a l i s t , N o . 7 8 , 4 8 9 - 4 9 6
(1888).
^ B a n k r u p t c y R e f o r m A c t of 1 9 7 8 , P u b . L . N o . 9 5 - 5 9 8 , 92 S t a t .
2 5 4 9 (codified a t 1 1 U . S . C . a n d p a r t s of 28 U . S . C . ) .
3
2 8 U . S . C . §152 and §153(a)(Supp. II 1 9 7 8 ) .
^28 U . S . C . §1471(Supp. I I 1 9 7 8 ) .
5
2 8 U . S . C . §151(Supp. II 1 9 7 8 ) .
^Bankruptcy Reform Act, supra note 2, at §404(a).
7
8
I d . a t §405(a)(l).
I d . a t §241.
9
U.S.
, 102 S . C t . 2 8 5 8 , 50 U . S . L . W . 4 8 9 2
(Nos.
81-150 and 81-546, June 28, 1982).
10
B a n k r u p t c y R e f o r m A c t , s u p r a n o t e 2 , at §241.
i:L
1 2
l 4
1 5
l 6
1 ?
I d . at §405(a)(l).
I d . at 8405(a)(2).
a t §405(a)(2) g o e s on to p r o v i d e t h a t " a n y p r o c e e d i n g in
a court of b a n k r u p t c y t h a t is n o t b e f o r e the U n i t e d S t a t e s
B a n k r u p t c y judge s h a l l be b e f o r e the judge of the c o u r t
of b a n k r u p t c y . . . "
2 8 U . S . C . §1471 ( S u p p . I I 1 9 7 8 ) .
2 8 U . S . C . §1334 ( S u p p . II 1 9 7 8 ) .
F e d . R . C i v . P . 53F e d . R. Civ. P . 81(a)(1).
00062
1 8
1 9
20
21
2 2
2
F e d . B a n k r . Rule 5 1 3
3 5 2 U . S . 2 4 9 , 259
(1957)•
B a n k r . L. R e p . (CCH) p a r a . 6 8 , 7 5 5 ( B a n k r . S . D . W . Y a . 1 9 8 2 ) .
B a n k r . L . R e p . (CCH) p a r a . 6 8 , 7 5 3 ( B a n k r . S . D . N . Y . 1 9 8 2 ) .
2 0 B . R . 6 2 5 , 626 ( B a n k r . E . D . V a . 1 9 8 2 ) .
-^Marathon, s u p r a n o t e 9-
2 4
2 5
2 6
2 7
2 8
2 9
1 1 U . S . C . §705(a) a n d
(b).
1 1 U . S . C . §1102(a)(l) (Supp. Ill 1 9 7 9 ) .
1 1 U . S . C . §1103 ( S u p p . Ill 1 9 7 9 ) .
1 1 U . S . C . §230 ( S u p p . Ill 1 9 7 9 ) .
1 1 U . S . C . §328 ( S u p p . Ill 1 9 7 9 ) .
F e d . B a n k r . Rule l l - 2 9 ( a ) and
(c).
^ B a n k r u p t c y R e f o r m A c t of I 8 9 8 .
^ B a n k r u p t c y R e f o r m A c t of 1 9 7 8 , s u p r a n o t e 2 .
3 2
3 3
1 1 U . S . C . §1102 ( S u p p . Ill 1 9 7 9 ) .
1 1 U . S . C . §503 ( S u p p . Ill 1 9 7 9 ) .
B . R . 997 ( B a n k r . C o l o . 1 9 8 0 ) .
3 5
3 6
3 7
I d . at 1001.
I n re F i r e s i d e O f f i c e S u p p l y , Inc., 17 B . R . 4 3
Minn. I98I).
1 1 U . S . C . §503 ( S u p p . Ill 1 9 7 9 ) .
00063
(Bankr.
38
H a n o v e r N a t i o n a l B a n k v . M o y s e s , 186 U . S . 1 8 1 , 188
3 9
4
(1902).
1 1 U . S . C . §24 ( 1 8 9 8 ) .
°11 U . S . C . §522("b) ( S u p p . Ill 1 9 7 9 ) .
4 l
I n re S u l l i v a n , 11 B . R . 4 3 2 ( B a n k r . 1 1 1 . 1 9 8 1 ) .
2
^ I d . a t 4354 3
I d . at 433.
^ 9
B.R. 991 (Bankr. E . D . V a . 1981).
^ R h o d e s v . S t e w a r t , 14 B . R . 6 2 9 ( B a n k r . T e n n . 1 9 8 1 ) .
4 6
I d . at 634.
^ 6 5 6 F . 2 d 60 (4th C i r . 1 9 8 1 ) .
4 8
I n re H i l l , 4 B . R . 3 1 0 , 316 ( B a n k r . N . D . Ohio 1 9 8 0 ) ; In re
C o x , 4 B . R . 2 4 0 , 242 ( B a n k r . S . D . Ohio 1 9 8 0 ) .
4 9
5
1 1 U . S . C . §522(f) ( S u p p . Ill 1 9 7 9 ) .
°4 B . R . 147 ( B a n k r . O r . 1 9 8 0 ) .
5 1
I d . at 150.
2
5 2 9 5 U.S. 555 (1935).
3
^ I d . at 601-602.
^ I n r e J a c k s o n , 2 C o l l i e r B a n k r . Cas.2d (MB) 90 ( B a n k r . C o l o .
TOftO^. H o o d s v . F r e e d o m F i n . & S e c . I n d u s . B a n k , 1 C o l l i e r
B a n k r . Cas.2d (MB) 983 ( B a n k r . C o l o . 1 9 8 0 ) .
55
B o u l t o n v . G e n . F i n . L o a n C o r p . Of I o w a , 4 B . R . 498
S . D . Iowa 1 9 8 1 ) .
00064
(Bankr.
5 6
I d . a t 499-
7
^ I n re B e c k , 4 B . R . 6 6 1 ( B a n k r . 1 1 1 . 1 9 8 0 ) .
5 8
5 9
6
6 8 1 F . 2 d 3 5 3 (5th C i r .
1982).
I d . a t 357-
°Tex. Rev. Civ. S t a t . A n n . art 3836 (Vernon I98I) "Personal
p r o p e r t y . . . is e x e m p t f r o m a t t a c h m e n t , e x e c u t i o n a n d
e v e r y type of s e i z u r e f o r t h e s a t i s f a c t i o n o f l i a b i l i t i e s ,
e x c e p t f o r e n c u m b r a n c e s p r o p e r l y f i x e d t h e r e o n . . ." (emphasis added).
6 l
7
6 2
B . R . 325 ( B a n k r . S . D . C a l . 1 9 8 0 ) .
1 1 U . S . C . §5^6(c) ( S u p p . Ill 1 9 7 9 ) .
6 3
1 1 U . S . C . § 5 4 6 ( c ) ( 2 ) ( A ) a n d (B) ( S u p p . Ill
14 B . R . 27 ( B a n k r . S . C . I 9 8 O ) .
65
u.c.c.
66
6 7
6 8
6 9
? 0
7 1
7 2
7 3
7
§2-702.
U n i t e d B e e f P a c k e r s . 14 B . R . a t 2 9 .
l 4 B . R . 670 (Bankr. E . D . M i c h .
I98I).
I d . at 672.
1 1 U . S . C . §1322(a)(2)-(3) (Supp. Ill 1979).
1 1 U.S.C. 11322(b)(5)
( S u p p . Ill 1 9 7 9 ) .
1 1 U . S . C . §1322(b)(2) a n d (5) ( S u p p . 1 9 7 9 ) .
6
B . R . 178 ( B a n k r . N . D . F l a .
1980).
I d . a t 189•
^ 8 B . R . 937 ( B a n k r . E . D . N . Y .
1981).
00065
1979).
7 5
1 0 B.R. 189 (Bankr. E.D.N.Y. 1 9 8 1 ) .
?69
7 7
I n re Curtis, 2 B . R . 43 (Bankr. W . D . M o . 1979)-
7 8
I d . at 45.
7 9
I n re S a d l e r , 1 C o l l i e r B a n k r . C a s . 2d (MB) 935 (Bankr. E . D .
A r k . 1980); In re T h e b e a u . 1 C o l l i e r B a n k r . C a s . 2d 940
(Bankr. E . D . A r k . 1980); In re Jenkins.. 4 B . R . 278 (Bankr.
Colo. 1980).
8 0
8 1
I n re B u r r e l l . 2 B . R . 650 (Bankr. N . D . Cal. 1 9 8 0 ) .
I n re R a y b u r n , 4 B . R . 624 (Bankr. G a . 1 9 8 0 ) .
8 2
83
B . R . 299 (Bankr. E . D . N . Y . 1 9 8 1 ) .
6 B . R . 360 (N.D. C a l . A u g . 1 9 , 1 9 8 0 ) .
M a t t e r of B e l l g r a p h . 4 B . R . 4 2 1 (Bankr. W . D . N . Y .
1980).
84
Senate and House B a n k r u p t c y Improvement B i l l s , S 2 0 0 0 and
HR4786.
00066