In the first published opinion interpreting a provision of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Judge Randolph Haines has held that the limitation on homestead exemption amounts contained in §522(p) is inapplicable in states that do not permit their residents to elect federal exemptions. In re McNabb, 2005 WL 1525101 (Bankr. D. Ariz. June 23, 2005). In the context of an objection to the debtor’s claimed homestead exemption, Judge Haines was called upon to determine the applicability of several new provisions regarding exemptions contained in BAPCPA as well as interpret the $125,000 cap on homestead exemption contained in §522(p).

In this case, the debtor purchased a new home in Arizona just over one year prior to filing his chapter 7 petition there. He had previously lived in the state of California. He listed the residence on his Schedule A with a value of $330,000 and on Schedule D as being subject to a lien in the amount of approximately $205,500. The resulting equity would be completely exempt under Arizona law, which provides for a homestead exemption of up to $150,000. The debtor moved for an order compelling the chapter 7 trustee to abandon the residence as being exempt. Certain creditors objected to that motion on several grounds, as to one of which the trustee joined. The court quickly dispatched the creditor’s contention that, pursuant to §522(b)(3)(A), as amended by BAPCPA, debtor was required to claim exemptions under California law. The court noted that that amendment does not become effective until 180 days after enactment, or October 17, 2005. Accordingly, it did not govern the case before the court. The creditors also contended that the value of the debtor’s homestead was attributable at least in part to certain alleged fraudulent transfers and that §522(o), as added by BAPCPA, required that the homestead claim be adjusted accordingly. The court held that while that provision is one applicable to cases filed on or after the date of enactment, its effect could only be determined after an evidentiary hearing.

The principal focus of Judge Haines’s opinion is the creditor’s contention that pursuant to §522(p), added by BAPCPA, debtor’s claim of homestead was limited to $125,000 in value as it was acquired within 1,215 days of the date of the filing of the petition. The debtor claimed the cap was inapplicable because it applies only “as a result of electing under subsection (b)(3)(A) to exempt property under state or local law.” Section 522(b)(1) generally allows debtors to elect to exempt property pursuant to either paragraph 2 (federal bankruptcy exemptions) or paragraph 3 (state exemptions and federal nonbankruptcy exemptions). The Code also, however, authorizes states to prohibit their residents from claiming federal exemptions, an option selected by a number of states including Arizona. The result, the court observed, is that a debtor in Arizona has no right to “elect” state exemptions, because they are the only exemptions available to such a debtor. The court concluded that because the language of §522(p) applies only as a result of making such an election it can apply only in those states where such an election is available, that is those states that have not elected to opt out.

Applying principles of statutory interpretation, the court held that it could look to the legislative history only if the language was ambiguous or the interpretation adopted would lead to absurd results. In this instance, the court concluded that neither was the case. The election language used in the statute compels the conclusion that if there is no election, there can be no cap. Because the result is consistent with the statutory scheme that has existed under the Bankruptcy Code and its various predecessors for many years (that is, no uniform federal exemption), it is neither absurd nor clearly at odds with congressional intent. (Elsewhere in its opinion, however, the court does concede that the effect of this interpretation is to render this limitation applicable only in Texas and Minnesota—the only two states that have not chosen to opt out of the federal exemptions and permit exemption claims in excess of $125,000.) The court concludes that, even were it appropriate, reference to the limited legislative history available on BAPCPA would not be helpful in its interpretation, as it provides no insight as to the nature of the problem Congress was attempting to address in this section.

The court also reasoned that its conclusion was supported by the language of other provisions of BAPCPA, including another section at issue in the case, §522(o), which simply applies to all state exemption claims made pursuant to §522(b)(3)(A), without reference to an election. The court draws additional support for its conclusion from the interplay between §522(q) and new §727(a)(12), which requires denial of discharge if the court finds that §522(q)(1) “may be applicable” to the debtor and there is a proceeding pending in which the debtor might be found guilty of a felony or liable for a debt of the kind described in §522(q)(1). Specifically, subparagraph A of §727(a)(12) provides that the court must determine whether §522(q)(1) is applicable, indicating that it is applicable to some and not to others. The court concludes that the only function such a hearing might serve would be to permit the court to make a determination that the debtor had elected state exemptions where such election is available. Section 522(q)(2) does, however, offer another potential function for such a hearing in that it provides that §522(q)(1) is not applicable to the extent the amount claimed is reasonably necessary for the support of the debtor and any dependent of the debtor. Presumably, the court would need to hold a hearing to make such a determination.

Two other provisions of §522 may shed light on the court’s conclusions, one of which offers additional support for its holding, the other of which may support a different inference. In §522(b), Congress addresses the choice of exemptions in cases involving debtors who are husband and wife and provides that they may not split exemptions, with one choosing federal exemptions and the other state and nonbankruptcy federal exemptions. It further provides that if they cannot agree on the alternative to be elected, they shall be deemed to have elected the federal exemptions “where such election is permitted under the law of the jurisdiction where the case is filed.” In this provision, Congress clearly appears to use the term in a way that suggests that if such a choice is not permitted, there is no “election.” Another addition made by BAPCPA, to §522(b)(2), provides that if the effect of the new domiciliary restrictions is to render the debtor ineligible for any exemption, the debtor may “elect to exempt property that is specified under subsection (d).” Here, the word “elect” is used in a context in which the debtor essentially has no choice other than the one given by this new provision.

The court’s decision is amply supported by its inferences from statutory language and structure, but is not free from doubt and is sure to be controversial. In concluding, the court invites Congress, as part of the process of technical corrections now underway, to change the language of the statute if the interpretation adopted is inconsistent with its intent.

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    All ye attorneys, lend me your ear
          For tis bad tidings of which I fear
               I am the bearer
                    Beware lest ye be a bankruptcy petition preparer.

One of the little noticed changes wrought by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) was the amendment to §110(a) defining a bankruptcy petition preparer (“BPP”). Under existing law, the definition of a BPP excludes any attorney. As amended, §110(a)(1) defines a bankruptcy petition preparer as “a person other than an attorney for the debtor or an employee of such attorney under the direct supervision of such attorney, who prepares for compensation a document for filing” (added language emphasized). The definition of a document for filing in §110(a)(2) remains unchanged: “a petition or any other document prepared for filing by a debtor in a United States bankruptcy court or a United States district court in connection with a case under [Title 11].”

There is nothing in the legislative history or the Congressional Record addressing the reason for limiting the exclusion to attorneys for the debtor. This limitation first appears in 18 U.S.C. §156, added, as was §110, by the 1994 Bankruptcy Reform Act (“BRA94”) [the legislative history for the BRA94 (H.R. 5116) provides no clue as to the reasoning for difference in language between §110 and 18 U.S.C. §156]. The change to §110 first appears in S. 3186 of the 106th Congress, which was substituted for H.R. 2415 (a totally unrelated bill) by the conference committee on the same day it was introduced, passed by Congress, and vetoed by President Clinton. Eliminating the linguistic difference between §110 and §156 makes sense. Why §110 was amended to conform to §156 and not vice versa is unexplained. Also, unexplained is the reason for limiting the exclusion to attorneys for the debtor. The legislative history for the BRA94 [H.R. REP. 103-835 at 56 (1994)] talks solely in terms of persons providing services beyond the secretarial function of completing the forms unsupervised by an attorney. The 1994 language of §110 excluding attorneys and employees of attorneys addressed that concern quite adequately. The language of §156 and the amended language of §110 do not appear to provide any additional protection to debtors.

Under §110(a)(1), as amended by BAPCPA, an attorney who prepares any document for any debtor for filing with the court in connection with a proceeding under any chapter of the Bankruptcy Code falls within one of two categories: an attorney for the debtor or a bankruptcy petition preparer. If an attorney for the debtor, the disclosure requirements of §329(a) and Rule 2016(a) (and, in the case of the attorney for a debtor-in-possession (“DIP”), the application for employment requirements of §327 and Rule 2014) apply. As an attorney for the debtor, unless representation ended prior to the time the petition was filed, an attorney must also enter an appearance for and on behalf of the debtor. As a BPP, each document prepared must be signed by the BPP and include the printed name, address and Social Security number of the preparer [§110(b), (c)]. Either way, even if permissible under otherwise applicable rules of professional conduct, ghost writing on behalf of debtors by attorneys is a virtual impossibility. If that were the only attribute of being a BPP, being classified as such would not be a significant problem. To parrot numerous television ads: “but, wait there is more.” In this case you are not going to like the “more”! The following materials illustrate why an attorney should avoid being characterized as a bankruptcy petition preparer.

Before preparing any document or accepting any payment, a BPP must provide the debtor a written notice in a form prescribed by the Judicial Conference that informs the debtor the BPP is “not an attorney and may not practice law or give legal advice.” [§110(b)(2)] Among the items of legal advice a BPP is specifically prohibited from giving are:

1. whether or not to file a petition;
2. whether commencing a case under a particular chapter is appropriate;
3. whether debts will be discharged;
4. whether the debtor will be able to retain the debtor’s home, car or other property;
5. tax consequences of filing, including dischargeability of taxes;
6. whether the debtor should promise to repay debts or enter in a reaffirmation agreement;
7. proper characterization of property or debts; or
8. bankruptcy procedures or rights. [§110(e)(2)].

Accordingly, if characterized as a BPP, an attorney may not perform the traditional functions of an attorney—advising a client on the law and its application to the client’s situation. As if that were not enough, the maximum fee that may be charged for the services provided by a BPP is subject to regulation by a rule adopted by the Supreme Court or guidelines promulgated by the Judicial Conference. [§110(h)(1)] This may, as several courts have held, be limited to the amount an experienced typist would charge. In addition, a BPP may not use the word “legal” or a similar word in any advertisement or advertise under any category that includes the word “legal” or any similar term. [§110(f)]. Finally, a failure to comply with these provisions subjects the offender to a fine of not more than $500 for each failure. [§110(l)]

It has been suggested that two arguments might be advanced that the “attorney exception” may not be applied solely to attorneys for debtors: however, neither is likely to prevail. First, it may be argued that Congress lacks the authority to prohibit a lawyer from practicing law per se. However, is that really the case here? Section 110 only applies when documents are prepared for filing in bankruptcy proceedings, not to the general practice of law. Congress clearly has the power to regulate practice and procedure in federal courts [Sibbach v. Wilson & Co., 312 U.S. 1, 9–10 (1941)]. Since Congress has exclusive and nearly plenary powers in the area of bankruptcy [see, e.g., Kalb v. Feuerstein, 308 U.S. 433, 439 (1940)], it seems clear that Congress has the power to pass uniform laws it finds reasonably necessary and proper governing those persons who prepare documents for filing with the court during the bankruptcy process. [U.S. CONST., ART I, §8, CL. 4; CL. 18] In the context of §110, Congress is regulating only the qualifications and scope of services that may be provided by those who prepare documents for filing by a debtor in a federal court.

Second, it may be argued that when an attorney is providing legal assistance to certain consumer debtors, he is also a Debt Relief Agency (“DRA”) overriding §110. Section 527(c) requires a DRA to provide certain information that would be prohibited “legal advice” under §110(e)(2), e.g., value assets, compute current monthly income and allowable expenses under the means test, how to list creditors and determine the amounts owed, and determination of exempt property, including valuation. Granted §527(c) not only permits but requires that information be given if not otherwise prohibited by otherwise applicable nonbankruptcy law (which an attorney is certainly not prohibited from doing under nonbankruptcy law), and §110(e)(2) is not nonbankruptcy law. This argument butts its head against the rule of statutory construction that when there is a conflict between a general statute and more specific statute, the more specific governs. [Fourco Glass Co. v. Tranmirra Products Corp., 353 U.S. 222, 228–29 (1957); 2A NORMAN J. SINGER, SUTHERLAND ON STATUTES AND STATUTORY CONSTRUCTION §46.05 (6th ed. 2000)] That is, while a specific statute may permit something otherwise prohibited by a general statute or prohibit that otherwise permitted under a general statute, the reverse is not true. In this situation, the BPP provisions of §110 are more specific than Debt Relief Agency provisions in §§526–528 (a DRA necessarily includes a BPP, but a DRA is not always a BPP). Consequently, §527(c) cannot permit what §110(e)(2) specifically prohibits.

In addition, the Debt Relief Agency provisions apply only if the client is an “assisted person,” defined as one having principally consumer debts and nonexempt property of less than $150,000. Section 110 on the other hand applies to any document prepared for filing by any debtor in a bankruptcy proceeding for which compensation is received. An attorney preparing a document for a business debtor under any chapter runs the risk of being classified a BPP, not the attorney for the debtor. As noted above, if an attorney for the debtor, the attorney must comply with §329 and Rule 2016 in any event (and in the case of the attorney for a DIP, §327 and Rule 2014). If the attorney does not comply with those requirements, is not the attorney a BPP as defined in §110? In its present form, limiting the exception to attorneys for a debtor, §110 is a potential trap for the unwary with potentially disastrous consequences if an attorney inadvertently becomes a BPP.

I am sure that there are fertile minds (and even some imaginations) that will conjure up challenges to §110 as amended by BAPCPA. Whether any of these may eventually prevail remains to be seen. In any event, prudence (or, perhaps more aptly stated in the case of the author, cowardice) should cause most attorneys to decline any invitation to be the guinea pig to test either the authority of Congress to limit the exclusion or whether §527 overrides §110. In the meantime the solution is simple: if preparing documents for debtors to file a bankruptcy proceeding, do as an attorney for the debtor and appear in the case. In short, follow the adage “in for a penny, in for a pound.”

Loophole 1

Section 110 only applies if the attorney is compensated for preparing the document. If the attorney prepares the document on a pro bono basis, §110 does not apply. As long as the attorney is willing to forgo compensation, the “BPP problem” disappears (although if an attorney does this too frequently, the attorney may find the need to seek bankruptcy relief on his or her own behalf).

Loophole 2

Section 110 only applies to a person who prepares a document for filing. The definition of “prepares” is a key. One definition of “prepare” is to put together or put in written form [see, e.g., MERRIAM-WEBSTER ONLINE]. Obviously, if the attorney or an employee of the attorney physically prepares (by typing or use of a software program) the document, the attorney has “prepared” the document and is subject to §110. But what if the attorney does not do the actual physical preparation of the document. For example, the debtor merely consults with the attorney and/or requests that the attorney review for correctness documents physically prepared by the debtor or another person, e.g., a “non-attorney“ BPP? This might logically fall within one of the other definitions of prepare: to make ready beforehand for a particular purpose or use; or to work out the details or plan in advance. [Id.] But does it really? If, as several bankruptcy courts, as well as the Ninth Circuit, have held and the legislative history of §110 suggests [H.R. REP 103-835 at 56 (1994)], the only function that a BPP can perform is to transcribe or type information provided solely by the debtor on the appropriate forms; a person who does not perform this secretarial function should not be classified as a BPP. It would be somewhat incongruous to hold that a person who did not perform the sole function permitted to be performed by a BPP, was nonetheless a BPP because the services provided might fall within another common definition of the term “prepare.”

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Assume the following facts:

• At the time the chapter 7 petition was filed, the debtor owned an automobile secured by a PMSI with an outstanding balance of $5,000.
• The car had a “low book value“ of $10,000.
• Concurrently with filing the petition, the debtor filed a statement of intentions indicating an intent to redeem the car.
• The §341 meeting of creditors is initially set for 20 days after the petition is filed but is continued for 30 days.
• 30 days after the conclusion of the creditors’ meeting the debtor, changing his mind, files an amended statement of intentions and notifies the creditor he intends to reaffirm the debt on the terms and conditions of the original contract.
• The creditor declines to enter into a reaffirmation agreement.
• 40 days after the conclusion of the creditors’ meeting, the trustee files a motion under §521(a)(6), which motion comes on for hearing 10 days later.

What are the rights of the trustee, creditor, and debtor at the time of the hearing? The arguments of the parties might go something along these lines.

Trustee Argues:

“I made a timely motion, am able to provide adequate protection to the creditor so the debtor must turn the car over to me.” To support this position, trustee cites §521(a)(6).

Section 521(a)(6) provides that in the case of a PMSI, if the debtor has not performed the stated intentions (reaffirmed or redeemed) within 45 days after the first meeting of creditors, the stay under §362(a) is terminated, the collateral is no longer property of the estate, and the debtor may not retain the property (there is no similar penalty for failure to timely perform a non-PMSI obligation). If the trustee moves within the 45-day period, shows that the collateral is of consequential value and benefit to the estate, provides the creditor adequate protection, and the collateral is turned over to the trustee, the collateral remains property of the estate and the stay remains in effect.

Section 521(a)(6) presents two potential timeliness issues: (1) when the 45-day period starts to run; and (2) when the court must rule on the trustee’s motion.

With respect to the triggering date, the language in ¶(6) differs from that in ¶(2)(B) in that ¶(2)(B) explicitly provides for the date first set for the meeting of creditors while ¶(6) merely refers to the first meeting without mentioning a particular “date.” Using “normal” rules of statutory construction, one must assume that Congress intended a different triggering date because it used different phraseology in different paragraphs within the same subsection. In this case, the triggering date in ¶(6) should be construed as the date the meeting of creditors is concluded. Although the date of the meeting of creditors is a specific date, set by the U.S. Trustee within 20 to 40 days after the petition is filed [FED.R. BANK. P. 2003(a)], it may be adjourned from time to time [FED.R. BANK. P. 2003(e)]. Thus, even if adjourned to a later date, it is still the first meeting of creditors and something cannot occur “after a meeting” until the meeting is concluded. This construction is also supported by practical considerations. The trustee must file a motion before the expiration of the 45-day period if the property is of consequential value or benefit to the estate. If the 45 days starts to run before the 341 meeting is concluded, the trustee may not have sufficient information to file the required motion. Given the draconian result if the trustee does not timely file that motion, to have the 45 days start to run with the date first set places the trustee at a significant disadvantage to the potential detriment of the unsecured creditors.

The language in ¶(6) with respect to the timing of the entry of the order also differs from the language in both ¶¶(2)(A) and (B). Both ¶¶(2)(A) and (B) require the order to be entered before the expiration of the applicable period (“or within such additional time as the court, for cause, within such period fixes”). Paragraph (6) on the other hand only requires that the motion be filed before the expiration of the applicable period (“unless the court determines on motion of the trustee filed before the expiration of such 45-day period, and after notice and a hearing”). It is silent as to when the court must hold the hearing and enter an order. Neither ¶(2)(A) nor ¶2(B) require either notice or a hearing; consequently, unlike the motion under ¶(6), it is assumed that the court may extend the time on an ex parte basis.

Having met the requirements of §521(a)(6), the automobile remains property of the estate and the trustee is entitled to possession.

Creditor Argues:

“Just a minute trustee, the car was no longer property of the estate and the automatic stay terminated before you made your motion. I get the car.” To support this position, creditor cites §§521(a)(2) and 362(h).

Section 521(a)(2), which applies to all secured debts of individual debtors in chapter 7 cases, establishes very strict and short deadlines with respect to both signifying their intentions with respect to secured debts and in performing those intentions. Section 521(a)(2)(A) requires the statement of intentions be filed not later than the earlier of 30 days after the petition is filed or the date of the meeting of creditors. The debtor met this requirement. Section 521(a)(2)(B) requires the debtor perform the stated intentions within 30 days of the first date set for the meeting of creditors. Although the meeting of creditors was not held on the first date set for the meeting, nothing in §521(a)(2)(B) indicates that the meeting must be held or concluded on that day for the 30 days to start to run: it starts to run on the date set. While §521(a)(2)(B) permits the court to extend the time, it must do so before the time expires. No extension was sought or granted within the 30-day period prescribed by §521(a)(2)(B). Therefore, the debtor failed to timely perform.

Section 521(a)(2)(C) provides that the rights of the debtor and the trustee are not affected by the failure to timely perform except as provided in §362(h). Section 362(h)(1) provides that if the debtor fails to file the Statement of Intentions and perform the stated intentions within the time specified in §521(a)(2), the stay is terminated as to the collateral and it is no longer property of the estate.

It is undisputed that debtor failed to perform within the time specified in §521(a)(2), therefore under §361(h) on the 31st day after the first date set for the meeting of creditors the stay was terminated and the property ceased to be property of the estate. The creditor is, therefore, entitled to repossess the car.

Debtor Argues:

“Hold your horses fellas, I am still in this game because I amended my Statement of Intentions offering to reaffirm on the original contract terms and the creditor refused. I get to keep the car.” To support his position, the debtor cites the provision in §362(h)(1)(B) that renders 362(h)(1) inapplicable if the statement specifies the debtor’s intent to reaffirm on the original contract terms and the creditor refuses to agree to reaffirmation on those terms.

Creditor and Trustee Argue (in unison):

“Go away twerp. You were too late.” The creditor and trustee cite the first part of §362(h)(1)(B), which the debtor omitted to mention: “to take timely the action specified in such statement, as it may be amended before expiration of the period for taking action….” That provision restricts the time within which the Statement of Intentions may be amended and does not extend the time within which the debtor must perform. As noted above, the time to perform expired 30 days after the first date set for the creditors’ meeting under §341. When the debtor did not move to extend this time, any rights the debtor had expired.

So who gets the car? This situation illustrates one of several instances of drafting in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that, in the most graceful terms, can be described as something less than careful. In order to get the car, the trustee must establish that §521(a)(6) trumps §521(a)(2), otherwise the creditor is correct that the car had ceased to be property of the estate and the automatic stay had terminated before the trustee made his motion. The trustee’s argument might follow something along this line.

Trustee Counter Argument:

“Hold on creditor. Section 521(a)(2) is applicable to all secured debts while §521(a)(6), applicable only to PMSIs, is a narrower, more specific statute. Under the canons of statutory construction, where two statutory provisions otherwise apply, the specific statute controls, meaning §526(a)(6) trumps §521(a)(2).”

As a rule, when there is an inescapable conflict between general and specific provisions of a statute, the specific will prevail. That is, when there is in the same section a specific provision and also a general one, which in its most comprehensive sense would include matters embraced in the more specific provision, the general provisions must be understood to affect only those cases within its general language, with the result that the specific controls. [2A NORMAN J. SINGER, SUTHERLAND ON STATUTES AND STATUTORY CONSTRUCTION §46.05 (6th ed. 2000)] As the Supreme Court stated in Fourco Glass Co. v. Tranmirra Products Corp., 353 U.S. 222, 228–29 (1957):

However inclusive may be the general language of a statute, it will not be held to apply to a matter specifically dealt with in another part of the same enactment. * * * Specific terms prevail over the general in the same or another statute which otherwise might be controlling. (Internal quotation marks and citations omitted.)

In this case, §521(a)(2) clearly has a broader application than §521(a)(6). That is, all PMSIs fall within the definition of secured debts but not all secured debts are PMSIs. It is also clear that if ¶(a)(2) were applied, because it terminated the rights of the trustee at a point earlier in time, ¶(a)(6) would be rendered inoperative in this situation. In fact, it would be rendered inoperative in any situation in which the debtor failed to perform within 30 days of the first date set for the creditors’ meeting under §341 unless the time is extended by the court under ¶(a)(2)(B). This interpretation violates an elementary canon of statutory construction: “a statute should be interpreted so as not to render one part inoperative.” Department of Revenue of Oregon v. ACF Industries Inc., 510 U.S. 332, 340 (1994). Creditor may argue that a trustee may avoid this result by the simple expedient of moving to extend the time as permitted by ¶(a)(2)(B) or have made a motion under §362(h)(2), which provides for a motion similar to this ¶(a)(6) motion differing only in that the motion under §362(h)(2) must be brought before the time for performance under §521(a)(2) has elapsed. The response to this argument is that nothing in §521(a)(6) or the legislative history indicates that Congress intended to require the trustee to follow such a procedure to preserve the trustee’s rights under ¶(a)(6). Nor is there a canon of statutory construction that would permit a general statute to control simply because optional provisions in the general statute, if exercised, allow both to be operative.

In addition, to give ¶(a)(2) operative effect here would result in a general statutory provision, ¶(a)(2), limiting the effect of a more specific statutory provision, ¶(a)(6). While it is widely recognized that in construing statutes a specific provision may limit the operative effect of a general provision, no canon of statutory construction supports the reverse, i.e., that a general statute may limit the operative effect of more specific statute. See, e.g., Varity Corp. v. Howe, 516 U.S. 489, 511 (1996). A specific statute may make an exception to a general statute, see, e.g., Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 254–55 (1975), but in the absence of clear legislative intent, a general statute may not create exceptions to a more specific statute, Morton v. Mancari, 417 U.S. 535, 550–51 (1974). That is, a specific statute may permit that which a general statute prohibits or prohibit that which the general permits; however, a general statute may not permit that which a more specific statute prohibits or prohibit that which the more specific permits.

Since application of ¶(a)(2), the general statute, in this case would effectively eliminate the rights of the trustee under ¶(a)(6), the more specific statute, it may not be applied.

The Court Rules:

“The court agrees with trustee. To harmonize §521(a)(2) and (a)(6), they must be construed so that ¶(a)(6) applies to PMSIs and ¶(a)(2) applies to all other secured obligations. Debtor shall immediately turn the car over to trustee. The equity cushion in the car provides creditor with adequate protection for its interest; provided, however, that trustee must maintain adequate casualty insurance protection against loss.”

Debtor

[Tossing the keys to trustee and walking away into the sunset] “Aw, shucks.”

Note: if this were not a PMSI, e.g., the debtor refinanced the car to take advantage of better terms, the creditor would win.

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Assume the following facts:

• At the time the chapter 7 petition was filed, the debtor owned an automobile secured by a PMSI with an outstanding balance of $5,000.
• The car had a “low book value“ of $10,000.
• Concurrently with filing the petition, the debtor filed a statement of intentions indicating an intent to redeem the car.
• The §341 meeting of creditors is initially set for 20 days after the petition is filed but is continued for 30 days.
• 30 days after the conclusion of the creditors’ meeting the debtor, changing his mind, files an amended statement of intentions and notifies the creditor he intends to reaffirm the debt on the terms and conditions of the original contract.
• The creditor declines to enter into a reaffirmation agreement.
• 40 days after the conclusion of the creditors’ meeting, the trustee files a motion under §521(a)(6), which motion comes on for hearing 10 days later.

What are the rights of the trustee, creditor, and debtor at the time of the hearing? The arguments of the parties might go something along these lines.

Trustee Argues:

“I made a timely motion, am able to provide adequate protection to the creditor so the debtor must turn the car over to me.” To support this position, trustee cites §521(a)(6).

Section 521(a)(6) provides that in the case of a PMSI, if the debtor has not performed the stated intentions (reaffirmed or redeemed) within 45 days after the first meeting of creditors, the stay under §362(a) is terminated, the collateral is no longer property of the estate, and the debtor may not retain the property (there is no similar penalty for failure to timely perform a non-PMSI obligation). If the trustee moves within the 45-day period, shows that the collateral is of consequential value and benefit to the estate, provides the creditor adequate protection, and the collateral is turned over to the trustee, the collateral remains property of the estate and the stay remains in effect.

Section 521(a)(6) presents two potential timeliness issues: (1) when the 45-day period starts to run; and (2) when the court must rule on the trustee’s motion.

With respect to the triggering date, the language in ¶(6) differs from that in ¶(2)(B) in that ¶(2)(B) explicitly provides for the date first set for the meeting of creditors while ¶(6) merely refers to the first meeting without mentioning a particular “date.” Using “normal” rules of statutory construction, one must assume that Congress intended a different triggering date because it used different phraseology in different paragraphs within the same subsection. In this case, the triggering date in ¶(6) should be construed as the date the meeting of creditors is concluded. Although the date of the meeting of creditors is a specific date, set by the U.S. Trustee within 20 to 40 days after the petition is filed [FED.R. BANK. P. 2003(a)], it may be adjourned from time to time [FED.R. BANK. P. 2003(e)]. Thus, even if adjourned to a later date, it is still the first meeting of creditors and something cannot occur “after a meeting” until the meeting is concluded. This construction is also supported by practical considerations. The trustee must file a motion before the expiration of the 45-day period if the property is of consequential value or benefit to the estate. If the 45 days starts to run before the 341 meeting is concluded, the trustee may not have sufficient information to file the required motion. Given the draconian result if the trustee does not timely file that motion, to have the 45 days start to run with the date first set places the trustee at a significant disadvantage to the potential detriment of the unsecured creditors.

The language in ¶(6) with respect to the timing of the entry of the order also differs from the language in both ¶¶(2)(A) and (B). Both ¶¶(2)(A) and (B) require the order to be entered before the expiration of the applicable period (“or within such additional time as the court, for cause, within such period fixes”). Paragraph (6) on the other hand only requires that the motion be filed before the expiration of the applicable period (“unless the court determines on motion of the trustee filed before the expiration of such 45-day period, and after notice and a hearing”). It is silent as to when the court must hold the hearing and enter an order. Neither ¶(2)(A) nor ¶2(B) require either notice or a hearing; consequently, unlike the motion under ¶(6), it is assumed that the court may extend the time on an ex parte basis.

Having met the requirements of §521(a)(6), the automobile remains property of the estate and the trustee is entitled to possession.

Creditor Argues:

“Just a minute trustee, the car was no longer property of the estate and the automatic stay terminated before you made your motion. I get the car.” To support this position, creditor cites §§521(a)(2) and 362(h).

Section 521(a)(2), which applies to all secured debts of individual debtors in chapter 7 cases, establishes very strict and short deadlines with respect to both signifying their intentions with respect to secured debts and in performing those intentions. Section 521(a)(2)(A) requires the statement of intentions be filed not later than the earlier of 30 days after the petition is filed or the date of the meeting of creditors. The debtor met this requirement. Section 521(a)(2)(B) requires the debtor perform the stated intentions within 30 days of the first date set for the meeting of creditors. Although the meeting of creditors was not held on the first date set for the meeting, nothing in §521(a)(2)(B) indicates that the meeting must be held or concluded on that day for the 30 days to start to run: it starts to run on the date set. While §521(a)(2)(B) permits the court to extend the time, it must do so before the time expires. No extension was sought or granted within the 30-day period prescribed by §521(a)(2)(B). Therefore, the debtor failed to timely perform.

Section 521(a)(2)(C) provides that the rights of the debtor and the trustee are not affected by the failure to timely perform except as provided in §362(h). Section 362(h)(1) provides that if the debtor fails to file the Statement of Intentions and perform the stated intentions within the time specified in §521(a)(2), the stay is terminated as to the collateral and it is no longer property of the estate.

It is undisputed that debtor failed to perform within the time specified in §521(a)(2), therefore under §361(h) on the 31st day after the first date set for the meeting of creditors the stay was terminated and the property ceased to be property of the estate. The creditor is, therefore, entitled to repossess the car.

Debtor Argues:

“Hold your horses fellas, I am still in this game because I amended my Statement of Intentions offering to reaffirm on the original contract terms and the creditor refused. I get to keep the car.” To support his position, the debtor cites the provision in §362(h)(1)(B) that renders 362(h)(1) inapplicable if the statement specifies the debtor’s intent to reaffirm on the original contract terms and the creditor refuses to agree to reaffirmation on those terms.

Creditor and Trustee Argue (in unison):

“Go away twerp. You were too late.” The creditor and trustee cite the first part of §362(h)(1)(B), which the debtor omitted to mention: “to take timely the action specified in such statement, as it may be amended before expiration of the period for taking action….” That provision restricts the time within which the Statement of Intentions may be amended and does not extend the time within which the debtor must perform. As noted above, the time to perform expired 30 days after the first date set for the creditors’ meeting under §341. When the debtor did not move to extend this time, any rights the debtor had expired.

So who gets the car? This situation illustrates one of several instances of drafting in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that, in the most graceful terms, can be described as something less than careful. In order to get the car, the trustee must establish that §521(a)(6) trumps §521(a)(2), otherwise the creditor is correct that the car had ceased to be property of the estate and the automatic stay had terminated before the trustee made his motion. The trustee’s argument might follow something along this line.

Trustee Counter Argument:

“Hold on creditor. Section 521(a)(2) is applicable to all secured debts while §521(a)(6), applicable only to PMSIs, is a narrower, more specific statute. Under the canons of statutory construction, where two statutory provisions otherwise apply, the specific statute controls, meaning §526(a)(6) trumps §521(a)(2).”

As a rule, when there is an inescapable conflict between general and specific provisions of a statute, the specific will prevail. That is, when there is in the same section a specific provision and also a general one, which in its most comprehensive sense would include matters embraced in the more specific provision, the general provisions must be understood to affect only those cases within its general language, with the result that the specific controls. [2A NORMAN J. SINGER, SUTHERLAND ON STATUTES AND STATUTORY CONSTRUCTION §46.05 (6th ed. 2000)] As the Supreme Court stated in Fourco Glass Co. v. Tranmirra Products Corp., 353 U.S. 222, 228–29 (1957):

However inclusive may be the general language of a statute, it will not be held to apply to a matter specifically dealt with in another part of the same enactment. * * * Specific terms prevail over the general in the same or another statute which otherwise might be controlling. (Internal quotation marks and citations omitted.)

In this case, §521(a)(2) clearly has a broader application than §521(a)(6). That is, all PMSIs fall within the definition of secured debts but not all secured debts are PMSIs. It is also clear that if ¶(a)(2) were applied, because it terminated the rights of the trustee at a point earlier in time, ¶(a)(6) would be rendered inoperative in this situation. In fact, it would be rendered inoperative in any situation in which the debtor failed to perform within 30 days of the first date set for the creditors’ meeting under §341 unless the time is extended by the court under ¶(a)(2)(B). This interpretation violates an elementary canon of statutory construction: “a statute should be interpreted so as not to render one part inoperative.” Department of Revenue of Oregon v. ACF Industries Inc., 510 U.S. 332, 340 (1994). Creditor may argue that a trustee may avoid this result by the simple expedient of moving to extend the time as permitted by ¶(a)(2)(B) or have made a motion under §362(h)(2), which provides for a motion similar to this ¶(a)(6) motion differing only in that the motion under §362(h)(2) must be brought before the time for performance under §521(a)(2) has elapsed. The response to this argument is that nothing in §521(a)(6) or the legislative history indicates that Congress intended to require the trustee to follow such a procedure to preserve the trustee’s rights under ¶(a)(6). Nor is there a canon of statutory construction that would permit a general statute to control simply because optional provisions in the general statute, if exercised, allow both to be operative.

In addition, to give ¶(a)(2) operative effect here would result in a general statutory provision, ¶(a)(2), limiting the effect of a more specific statutory provision, ¶(a)(6). While it is widely recognized that in construing statutes a specific provision may limit the operative effect of a general provision, no canon of statutory construction supports the reverse, i.e., that a general statute may limit the operative effect of more specific statute. See, e.g., Varity Corp. v. Howe, 516 U.S. 489, 511 (1996). A specific statute may make an exception to a general statute, see, e.g., Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 254–55 (1975), but in the absence of clear legislative intent, a general statute may not create exceptions to a more specific statute, Morton v. Mancari, 417 U.S. 535, 550–51 (1974). That is, a specific statute may permit that which a general statute prohibits or prohibit that which the general permits; however, a general statute may not permit that which a more specific statute prohibits or prohibit that which the more specific permits.

Since application of ¶(a)(2), the general statute, in this case would effectively eliminate the rights of the trustee under ¶(a)(6), the more specific statute, it may not be applied.

The Court Rules:

“The court agrees with trustee. To harmonize §521(a)(2) and (a)(6), they must be construed so that ¶(a)(6) applies to PMSIs and ¶(a)(2) applies to all other secured obligations. Debtor shall immediately turn the car over to trustee. The equity cushion in the car provides creditor with adequate protection for its interest; provided, however, that trustee must maintain adequate casualty insurance protection against loss.”

Debtor

[Tossing the keys to trustee and walking away into the sunset] “Aw, shucks.”

Note: if this were not a PMSI, e.g., the debtor refinanced the car to take advantage of better terms, the creditor would win.

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When an irate creditor comes to bankruptcy court in a chapter 7, 12 or 11 case in which an individual debtor is holding a check issued by the debtor that was dishonored by the debtor’s bank, she often expects a quick and easy finding that the debt is not dischargeable. Unfortunately, the debt based on a bad check is not automatically and not even usually held to be nondischargeable. To succeed, the creditor usually bears a heavy burden of proof of fraud.

Where the underlying debt for which the check was issued is based on fraud, the court may hold the debt to be nondischargeable based on the underlying fraud without reference to any fraud directly related to the issuance of the check. A claim of fraud in connection with a check intentionally written on a closed account is also an easier proposition to deal with. In this case the debtor can have little or no basis to assert that the dishonor of the check was inadvertent or beyond his/her control. In re Feldman, 111 B.R. 481 (Bankr. E.D. Pa. 1990).

Not every NSF (insufficient funds) check can result in a nondischargeable debt. A bad check will only be nondischargeable to the extent that it was “obtained by… false pretenses or representations or by means of actual fraud.” Printy v. Dean Witter Reynolds Inc., 110 F.3d 853, 857 (1st Cir. 1997). A check issued for a pre-existing debt does not result in any new loss, merely failure to pay an old debt. The only time the mere issuance of a check, without other accompanying fraud, can result in the denial of the dischargeability of the debt is when the check is tendered for the purchase of goods or services. Cowans, Daniel R., Bankruptcy Law and Practice, §6.21 at 2 (6th ed. 1994); Forbes v. Four Queen Enterprises, Inc., 210 B.R. 905, 912 (D. R.I. 1997)

The nondischargeability of a debt relating to a dishonored check must be determined under Bankruptcy Code §547, which provides that the discharge does not relieve “an individual debtor from any debt for money, property, services or an extension, renewal or refinancing of credit to the extent obtained by false pretenses, a false representation or actual fraud…” 11 U.S.C. §523(a)(2)(A).

The bankruptcy court cannot apply and will not be bound by local statutes that provide that the failure of the drawer of the check to pay the amount of a returned check constitutes “prima facie evidence of fraudulent intent,” such as the Code of Laws of South Carolina 1976, §34–11–70, or Indiana Criminal Code, §35–43–4–4(e), or that create other presumptions because this kind of imputed or implied fraud is insufficient for the purposes of denial of dischargeability of the debt in bankruptcy. Matter of Allison, Id. at 483; In re Fitzgerald, 109 B.R. 893 (Bankr. N.D. Ind. 1989).

The relevant question is whether the issuance of a check for goods or services, as a matter of law, constitutes a “representation” of a material fact or of an intent to pay the amount of the check.

There is a longstanding split of authority on whether delivery of a check constitutes a representation of intent to pay. Many courts hold that the mere issuance of a check that is ultimately dishonored, without more, does not constitute a “representation” that, if false, would constitute grounds to deny the dischargeability of the debt. In re Elibuyuk, 163 B.R. 75 (Bankr. E.D. Va. 1993). Goldberg Securities v. Scarlata, 979 F.2d 521 (7th Cir. 1992); In re Alvi, 191 B.R. 724 (Bankr. N.D. Ill. 1996); In re Anderson, 181 B.R. 943 (Bankr. D. Minn. 1995); In re Miller, 310 B.R. 185, (Bankr. C.D. Cal. 2004).

Another line of cases holds that tendering a check for goods or services constitutes an implied or actual representation that the maker’s account has or will have sufficient funds to cover the check. In re Kurdoghlian, 30 B.R. 500 (9th Cir. BAP 1983); In re Miller, 112 B.R. 937 (Bankr. N.D. Ind. 1989); In re Almarc Mfg., Inc., 62 B.R. 684, 689 (Bankr. N.D. Ill. 1986); Matter of Perkins, 52 B.R. 355 (Bankr. M.D. Fla. 1985); In re Mullin, 51 B.R. 377 (Bankr. S.D. Ind. 1985); In re Newell, 164 B.R. 992, 995 (Bankr. E.D. Mo. 1994); In re Anderson, 181 B.R. 943, 949 (Bankr. D. Minn. 1995).

An agreement between the parties to hold post-dated checks will likely contradict any assertion that the debtor represented that her account contained sufficient funds to cover the checks at the time she wrote them and defeat a claim of misrepresentation upon delivery of the check. Capital Chevrolet v. Bullock (In re Bullock), 2004 Bankr. LEXIS 1915 (Bankr. M.D. Ala. Dec. 7, 2004).

Some courts that have examined the presentment of a credit card in the context of proceedings seeking to deny the dischargeability of the debt have held that the use of a credit card constitutes an implied representation that the debtor in good faith intends to repay the credit card debt and that the debtor affirmatively believes in good faith that such credit card debt will be repaid. In re Mercer, 246 F.3d 391, 37 Bankr. Ct. Dec. 178, Bankr. L. Rep. P 78, 383 (5th Cir. (Miss.) 2001); Citibank (South Dakota) N.A. v. Parker, 2001 WL 1453933 (4th Cir. (Va.) 2001) (not selected for publication in the Federal Reporter); In re Widner, 285 B.R. 913 (Bankr. W.D. Va. 2002); In re Rembert, 141 F.3d 277, 281 (6th Cir. 1998), cert. denied, 525 U.S. 978, 119 S.Ct. 438, 142 L.Ed.2d 357 (1998).

As with credit card cases, when these implied representations are acknowledged as a matter of law, there remain the highly fact-intensive questions of whether those representations were knowingly false. By parallel analysis to the credit card cases, at least one court has adopted these non-exclusive factors to be considered when examining the asserted falsity of the implied representation of the intent to pay a check:

1. the time between delivery of the check and the bankruptcy filing;
2. whether, prior to delivery of the check, an attorney was consulted about bankruptcy;
3. the number of checks;
4. their amount;
5. the debtor’s financial condition at delivery of the check;
6. whether multiple checks were delivered on the same day;
7. whether the debtor was employed;
8. the debtor’s employment prospects;
9. the debtor’s financial sophistication;
10. whether the debtor’s buying habits changed suddenly; and
11. whether luxuries or necessities were purchased.

In re Paul, 266 B.R. 686 (Bankr. N.D. Ill 2001); Matter of Mercer (AT&T Universal Card Services v. Mercer), supra.

The courts in the bad-check cases should also hold that “hopeless insolvency” or inability to pay at the time the check was issued may support finding that the debtor did not intend to pay, but only if the debtor was aware of her financial condition and knew she could not (and therefore did not intend to) make the payment to the merchant or provider. Id.; In re Paul, 266 B.R. 686 (Bankr. N.D. Ill. 2001).

The Seventh Circuit, the Sixth Circuit BAP and other courts in those circuits have adopted an alternative approach to analysis of objections to dischargeability of credit card debt that may also be useful in the context of presentment of a check. McClellan v. Cantrell, 217 F.3d 890, 892-93 (7th Cir. 2000); In re Green, 296 B.R. 173, 179 (Bankr. C.D. Ill. 2003); In re Brobsten, 2001 WL 34076352, at *3–4 (Bankr. C.D. Ill. Nov. 20, 2001); In re Kendrick, 314 B.R. 468, 471–72 (Bankr. N.D. Ga. 2004); In re Bungert, 315 B.R. 735, 739 (Bankr. E.D. Wis. 2004). Instead of relying on “misrepresentation/reliance” and “implied representation,” these cases adopt an “actual fraud” analysis. The McClellan court defined “actual fraud” as “any deceit, artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another.” Id. See, also, 4 Resnick, Alan N. and Sommer, Henry J., Collier on Bankruptcy 15th Rev. Ed. ¶523.08[1][e] (2004). The factors listed above are useful in determining whether such credit card use was made with intent to defraud, but creditors should be warned against relying too extensively on them. In re Green, 296 B.R. 173, 180 (Bankr. C.D. Ill. 2003); In re Alvi, 191 B.R. 724, 732–34 (Bankr. N.D. Ill. 1996). This “actual fraud” approach has been applied to hold that a check kiting scheme was nondischargeable. In re Vitanovich, 259 B.R. 873, 876–77 (6th Cir. BAP 2001).

Once a court finds that a debt based on presentment of a check is nondischargeable under any of the theories discussed above, the next question is the extent of the resulting nondischargeable debt. The few cases that have considered the nondischargeability of other amounts rated to the nondischargeable debt, such as penalties and attorneys’ fees have relied on U.S. Supreme Court authority and hold that the Bankruptcy Code “prevents the discharge of all liability arising from fraud” and “bars discharge of debts ‘resulting from’ or ‘traceable to’ fraud.” Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) and Field v. Mans, 516 U.S. 59, 61, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). This includes “compensatory damages actually sustained by plaintiff as a consequence of defendants’ fraud.” In re Dobrayel, 287 B.R. 3, 12 (Bankr. S.D.N.Y. 2002) The court in a bad-check adversary proceeding should therefore hold that, in addition to the amount of the check interest, court costs, check service charges, bank charges, other actual damages, penalties where provided by statute and attorneys fees when allowable by law, are all also not dischargeable.

Debts arising from the presentment of certain checks payable to one creditor aggregating more than $1,150 within the 60 days prior to the filing of a bankruptcy case give rise to a rebuttable presumption that those debts are nondischargeable. 11 U.S.C. §523(a)(2)(C). This only applies when the check or checks were issued for “luxury goods or services” not including “goods or services reasonably acquired for the support or maintenance of the debtor or a dependent of the debtor.” Where the issue is carrying the burden of proof in a close case, the debtor’s failure to rebut this presumption may save the day for the objecting creditor.

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It happens every Friday afternoon, usually around 2 p.m.

“My client filed chapter 13 today and you have to give the car back or you’re in contempt.” Then, the most persuasive argument of all: “They really need the car for the weekend.” Bankruptcy can be magic. File an electronic image of a piece of paper and the time moves backwards; the world stops at your convenience, and you get back a repossessed vehicle. But the Bankruptcy Code also provides the creditor with the right to protect its interests. So, to what extent may a perfected lienholder condition return of properly repossessed property?

Bankruptcy Code §362(a)(3) prohibits the “exercise of control over property of the estate.” How long of “exercising control” constitutes contempt? There are no cases specifically addressing the issue, as it gets subsumed in the larger issues of conditioning return of the vehicle in the first place. Most debtor attorneys have the sense and good humor to understand that, given the logistics of a late Friday afternoon, their clients might plan for a quiet weekend at home. However, expect the car to be used for the work commute the following week.

What, under these circumstances, is “property of the estate,” as defined in Code §541(a), over which the creditor may not exercise control? Upon lawful repossession in all states the ostensible owner no longer has the right to possess the property, but only a “right to recover” it, by either reinstating the purchase contract, or by redemption with full payment of the debt, either under the Uniform Commercial Code, or more likely, a specific motor vehicle financing law. It is this right to recover that is property of the estate. See, Motors Acceptance Corporation v. Rozier (In Re: Rozier), 376 F3d 1323 (11th Cir. 2004); Tidewater Finance Co v. Moffett (In re: Moffett), 288 B.R. 721 (Bankr. E.D. Va. 2002). Much depends on particular state laws as to the point at which a debtor loses all rights in a repossessed vehicle. See, Hall Motors v. Lewis (In re: Lewis), 137 F3d 1280 (11th Cir. 1998); In Re Fox, 274 B.R. 909 (Bankr. M.D. Fla. 2002)

A bit of Bankruptcy Code prestidigitation transforms the ugly duckling of “right to recover” into the swan of possession. The simple act of filing a petition for relief—no schedules required—is considered by the courts a sufficient substitute for all state law and contractual obligations of a debtor to retrieve the vehicle. Code §542(a) grants the bankruptcy estate a possessory interest in property not actually held by the debtor at the commencement of the case, subject to a right of the creditor to adequate protection of its interests. See, United States v. Whiting Pools, 462 U.S. 168, 103 S. Ct. 2309, 76 L.Ed2d 515 (1983), 76 L.Ed2d at 2313.

Case law is quick to acknowledge the right of a secured creditor to adequate protection of its interests, Code §§363(b)(1) and 363(e), even when penalizing a creditor for refusing to turn over a vehicle. (See, In re: Patterson, 263 B.R. 82, at 90 fn 15 [Bankr. E.D. Pa. 2001], which details everything a creditor should never demand in exchange for the car, e.g., a new loan application.) Repayment of repossession costs, in cash, as a condition of or turnover is generally not permitted. See, In re: Ratliff, 318 B.R. 579 (Bankr. E.D. Okla. 2004).

Still, courts have not set forth an objectively standard minimum level of adequate protection that can be demanded as a condition of return of the property. A creditor is entitled to adequate protection, courts note, only upon specific request, as in Code §363(e). Thus, a lienholder cannot itself determine what constitutes sufficient adequate protection as a condition of returning the vehicle. The burden of proving the sufficiency of adequate protection is going to be on the debtor, whether the property had been leased [Code §365(b)(1)] or subject to a security interest. See, Code §362(g)(2). The courts, however, jealously guard the right to determine just what is sufficient adequate protection.

Compared to the creditor’s right to adequate protection upon request in Code §363(e), the prohibition against exercising control over property of the estate in Code §362(a)(3) appears absolute. There are cases that suggest that return of a repossessed vehicle must be “automatic.” See, Knaus v. Concordia Lumber Co., Inc. (In re Knaus), 889 F2d 773 (8th Cir. 1989); Ratliff, supra. That is, the duty to turn over property of the estate is self-effectuating; the right to adequate protection is the creditor’s to have only upon request to the court. See, Knaus, supra, at 889 F2d at 775. Other cases hold that retaining the vehicle is merely maintaining the status quo and, therefore, is not automatically a violation of Code §362. In re: Albro, 307 B.R. 523 (Bankr. E.D. Va. 2004); In re: Young, 193 B.R. 620 (Bankr. D. D.C. 1996); In re Patterson, supra. Even in these cases, where the obligation to cease exercising control is not automatic, a court hearing on adequate protection is ultimately necessary in the absence of agreement by counsel.

Nonetheless, “automatic” is not synonymous with “unconditional.” A towing company was allowed to retain possession of a vehicle picked up at the direction of state police until it was provided adequate protection. In re: Hayden, 308 B.R. 428 (BAP 9th Cir. 2004). Most cases, do not involve the authority of a state. They are simply repossessions as a result of financial defaults. Creditors, however, appear to have a free pass to demand proof of casualty insurance (not just state mandated liability insurance), with properly designated loss payees, as a condition of returning a vehicle. There is no specific case law explanation of this common sense requirement. Perhaps it is protection of the driving and pedestrian public, or that the purchase contract which requires the insurance is now being revived (see, Albro, supra at 525), or because continued use by the debtor can result in loss of the collateral even at the fault of someone other than the debtor. Aside from demanding insurance, there is little support for refusing turnover of a vehicle in ordinary circumstances. In re: Williams, 316 B.R. 534 (Bankr. E.D. Ark. 2004) (Assertion of a lack of adequate protection is not a defense to a turnover complaint.) The creditor’s remedy is to immediately file for relief from the stay and/or adequate protection and, in appropriate circumstances, seek expedited relief under Code §362(f).

Curiously, the cases generally involve first-time bankruptcy filers for whom the magic and palliative effects of the Bankruptcy Code are most appropriate. What happens when there are multiple repossessions, bankruptcy filings and turnovers? The creditor should probably stand tougher, but had better file for that expedited hearing.

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Creditors in the consumer credit industry face many challenges in managing bankrupt accounts. Five components to the successful management of bankruptcy cases are:

1. instituting operational procedures to increase recoveries and minimize risk,
2. a sound management plan,
3. staff training,
4. utilizing a sophisticated computer system and
5. hiring outside counsel.

Procedures to Increase Recovery and Minimize Risk

Strategies to increase recoveries and minimize risk include:

• Assure continuing education of collectors and managers regarding the automatic stay.
• File proofs of claims in chapters 13 and 7 asset cases.
• Defend objection to claims.
• Defend preference actions; file proofs of claim where funds are returned to the trustee in preference cases.
• Pursue debtors in dismissed cases.
• Pursue nonfiling codebtors in chapter 7 proceedings post-discharge.
• File non-dischargeability actions under 11 U.S.C. §523 where facts and case law support non-dischargeability.
• File motions to pursue nonfiling codebtors in pending chapter 13 cases on high account balances not being paid in the chapter 13 plan.
• Audit internal procedures and outside attorneys.
• If you sell bankrupt accounts, retain accounts that offer a higher return of revenue such as non-filing codebtors and potential fraud claims.

Planning

The next component to managing an effective bankruptcy operation is planning. The bankruptcy department’s management plan should include the following:

• Establish core and non-core responsibilities for all department employees.
• Define each bankruptcy initiative with tactical and strategic planning.
• Forecast recoveries and expenses for every bankruptcy initiative.
• Track recoveries and expenses to analyze the success of each initiative.
• Communicate plans and actual recoveries and expenses to senior management.
• Allow for changes in operations to be implemented quickly.
• Monitor the status of proposed changes in bankruptcy laws for planning purposes.
• Track recoveries to allow you to negotiate the best price if you sell bankrupt accounts.

When forecasting recoveries, consider dismissal rates and conversion rates. Statistical information on events in bankruptcy cases is available from ABI, the Administrative Office of the U.S. Courts (AOUSC) and the Executive Office of the U.S. Trustee (EOUST). Also consider that if a chapter 13 case is not converted or dismissed, in most cases payments to unsecured creditors will begin approximately 25 months after the chapter 13 case filing date.

Training and Development of Staff

Tasks in your bankruptcy department may include handling pending bankrupt accounts, processing bankruptcy petitions and post-bankruptcy notices, fielding consumer counseling offers, managing litigation cases, preparing reports and auditing. Standards of measuring performance for each task should be defined, and continuing training regarding bankruptcy laws should be conducted. Managers should have the opportunity to attend seminars and conferences for educational purposes, and managers should relay this information to the staff.

Computer System

The bankruptcy department should utilize its computer system to process and manage information in bankruptcy cases. The bankruptcy system should perform the following functions:

• Ability to print proofs of claim and other documents.
• Filing electronic proofs of claim.
• Ability to track bar dates on proofs of claim.
• Ability to forecast recoveries.
• Ability to track recoveries and costs for each bankruptcy initiative.
• Multiple balance tracking per account for monitoring of payments on settled accounts.

Hiring Outside Counsel

To defend preference actions, motions for sanctions and objections to claims, you may need to hire attorneys. In addition, you may wish to hire attorneys in various jurisdictions to pursue non-dischargeability actions, objections to chapter 13 plans or chapter 13 co-debtor cases. Creditors should track expenses and results on every bankruptcy initiative taken, audit each firm’s cases and change firms if results are not obtained. ABI can provide lists of bankruptcy attorneys in each of the federal jurisdictions.

Success in managing bankruptcy cases requires commitment to your goals, the tracking of recoveries and expenses, and establishing appropriate policy, procedures and training to comply with Code provisions.

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