Thursday, October 26, 2006

Individual Involuntary Petitions Remain Viable Under BAPCPA

The Bankruptcy Abuse Prevention and Consumer Protection Act requires that an individual filing for relief under Title 11 obtain credit counseling within 180 days prior to filing bankruptcy. 11 U.S.C. Sec. 109(h). Some commentators have questioned whether this requirement would spell the end of involuntary bankruptcy cases against individuals (since they would not have completed credit counseling). Judge Monroe has recently held that involuntary cases are not subject to the credit counseling mandate. In re Sadler, No. 06-10091 (Bankr. W.D. Tex. 10/18/06).

In Sadler, the Cadle Company filed an involuntary petition against the debtor without the joinder of any other creditors. The alleged debtor moved to dismiss the case claiming that he was not eligible for chapter 7 relief because he had not completed credit counseling, that he was generally paying his debts as they came due and that he had more than 11 creditors requiring three petitioning creditors.

Judge Monroe parsed the statutory language of Sec. 109(h) and found that it referred to completing credit counseling within 180 days "preceding the filing of the petition by such individual." Since an involuntary case is not filed by the debtor, then the eligibility provision does not apply. This result seems to be consistent with both the statutory language and congressional intent. BAPCPA is all about shifting control from debtors to creditors. While some have questioned the benefits of credit counseling (See Opinions Regarding Failure to Seek Credit Counseling Underscore Dissatisfaction With Law, 7/18/06), its only efficacy would be in the case of a voluntary filing. If a creditor takes the unusual step of initiating a petition, it is unlikely that credit counseling by the debtor would change the creditor's mind about the need to seek relief.

The rest of the opinion is devoted to creditor counting for purposes of Sec. 303(b). Cadle took the gutsy step of filing the involuntary petition without the joinder of any other creditors. If the debtor could show that he had at least 12 creditors, then the petition would be required to be dismissed unless additional joining creditors could be found. The debtor, who clearly did not want to be in bankruptcy, came up with a list of 24 creditors. However, this was not sufficient to keep him out of bankruptcy.

After an initial pass, Judge Monroe eliminated 11 potential creditors from the calculus, allowed 10 and saved three for further scrutiny. The debts excluded on the first pass included several that were owed by other parties, one which was time barred and eight which were for current, recurring expenses. Judge Monroe excluded the recurring expenses, which included such items as the electric bill and insurance based on an old Fifth Circuit case, Denham v. Shellman Grain Elevator, Inc., 444 F.2d 1375 (5th Cir. 1971).

The court's initial ruling created high drama. If the debtor could include two out of the three remaining debts, then the case could be dismissed and the creditor would face potential sanctions. If the creditor could exclude at least two of the three debts, then the case would proceed. The Court excluded all three remaining debts for three different reasons.

First. the debtor claimed that he owed a judgment to First Financial Resolution for $156,000. Unfotunately, the debtor could not provide a copy of the judgment or even an address for the creditor. Bankruptcy Rule 1003(b) requires that a debtor claiming to owe more than 12 debts file a list of the names and addresses of his creditors. Because the debtor could not provide an address for the creditor or otherwise prove that the debt existed, it did not count.

Second, the debtor relied on a debt owed to company controlled by his wife and brother-in-law. This company loaned him $65,000 to settle a $3 million debt. Judge Monroe classified this creditor as an insider so that they did not count toward the number of creditors.

Finally, the debtor claimed that he owed money to the IRS. Since the debtor had not filed tax returns for several years, it was very likely that he did owe taxes. However, because he could not prove any specific liability, Judge Monroe did not count the debt.

Thus, the creditor count stalled out at 10 and the involuntary was allowed to stand with a single petitioning creditor.

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