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Technical Corrections to Bankruptcy Code

posted by Bob Lawless

On December 23, President Obama signed a bill that made technical corrections to the Bankruptcy Code. As the term "technical corrections" suggests, this is a topic of interest probably only to the bankruptcy geeks in the crowd. The bill was not intended to make any substantive changes but only to correct drafting mistakes from the 2005 changes to the bankruptcy law.

It only took five years and even the technical corrections are too few for a horribly drafted law. Maybe there is a nugget for the persons who have a more general interest in bankruptcy. In addition to being a huge policy mistake, the 2005 law created a lot of problems for lawyers and judges because of its poor drafting. As a service to our readers, here is a copy of the enrolled bill. The public law version is not available as of this writing.

As with any technical correction bill, there is little in the bill meriting comment. Only two things jumped out to me.

First, Congress has fixed the double negative in section 1112(b)(2). If "cause" was established, the original wording required the court not to dismiss or convert a chapter 11 unless unusual circumstances existed showing that dismissal or conversion was not in the best interests of creditors. The double negative meant dismissal should happen only when it was bad for creditors. To the best of my knowledge, no one ever applied the original language in its literal, nonsensical form. Whenever I covered chapter 11 dismissals in class, the language was good stuff with which to torture upper-level law students. I will miss those days.

The second thing actually is somewhat substantive. Section 308 imposes reporting requirements on "small business debtors," which are business debtors with less than about $2.2 million in debt. The bill changes the term "small business debtor" to "small business case," which are small business debtors in chapter 11. As originally drafted, section 308's reporting requirements could have applied to small business debtors outside of chapter 11, even to self-employed individuals in chapters 7 or 13. The original language made a careful distinction between "debtors" (everyone) and "cases" (chapter 11s), and Congress chose to locate the section in the generally applicable provisions of chapter 3. The change now clearly limits section 308's application only to chapter 11.

Because outside of chapter 11 the section 308 reporting requirements would have little purpose other than to harass a debtor, this change is definitely for the better. It does make one wonder (even more) about the 2005 drafting process which now Congress admits put a chapter 11 provision amidst the general provisions of chapter 3. No bankruptcy expert would have made that mistake. The change also leaves the statutory term "small business debtor" fairly pointless except as a predicate to define "small business case." The term "small business debtor" appears in two other spots (sections 362 and 1102) in a way that could only have meaning in a chapter 11.

Is there anything else in the technical corrections bill, even by the low standards I have set above, worth noting?

Comments

As far as I can tell, the Hanging Paragraph is still unnumbered (or lettered). My, what a thorough job they did cleaning up the drafting errors....

/sarcasm

One additional amendment relates to the issue of the pre-filing credit counseling. The purpose of the amendment was to deal with those cases holding that the counseling had to be completed the "day before" and not the "day of" the filing. The amendment while clearing up this point makes it unclear if the credit counseling must be completed "before" the filing or any time on the "day of the filing" even if it is after the actual filing. I submit that the poor drafting did not stop with the 2005 amendments.

Nice information on bankruptcy code... thanks

Two amendments caught my eye. First, prior to BAPCPA, the Code did not define the term “debtor’s principal residence.” BAPCPA amended the Code to define the term, in part, as “a residential structure, including incidental property, without regard to whether that structure is attached to real property.” With this definition, Congress wrote the use limitation (i.e., principal) out of the statute. On a plain meaning approach, section 1322(b)(2) would preclude a Chapter 13 debtor from cramming down a mortgage on a second home. The technical corrections have fixed this problem by revising the definition to “a residential structure if used as the principal residence by the debtor, including incidental property, without regard to whether that structure is attached to real property.”

The second amendment relates to the distribution of estate property in Chapter 7 to priority unsecured claims. Section 726(b) instructs that the distribution be made pro rata to the identified claims. Prior to the technical amendments, the problem was that section 726(b) identified only 507(a)(1)-(8) priority unsecured claims without mentioning the other two classes of priority unsecured claims (i.e., 507(a)(9) and 507(a)(10)). This raised the question, for example, of how one would distribute to multiple 507(a)(10) claimants if there were insufficient assets to pay the class of 507(a)(10) claims in full. The technical amendments bill solves the problem by adding paragraphs (a)(9) and (a)(10) to the list of claims set forth in section 726(b).

Another point is the other changes in Section 726(b). The BAPCPA intended to provide that administrative expenses in Chapter 11 (except wages and benefits) would not be able to take priority over secured tax claims, but that got confused when the domestic support obligations were moved up to Section 507(a)(1). The provision in Section 2(b)(26) of the bill correct the cross-references so it now does what was intended.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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