In a case of apparent first impression on an appellate basis in the First Circuit, the Bankruptcy Appellate Panel (BAP) addressed the issue of what qualifies as "circumstances for which the debtor should not justly be held accountable" under §1328(b) in order to receive a hardship discharge. In In re Bandilli, 231 B.R. 836 (1st Cir. BAP 1999), in a per curiam decision, the court rejected the standard used by most bankruptcy courts that has allowed a hardship discharge "only when the debtor has suffered from catastrophic circumstances that directly caused the debtor to be unable to complete plan payments." Comparing the language in §1328(b) to that of §707(b), which refers to substantial abuse, and §523(a)(8), which refers to undue hardship, the court noted that the word "accountable" is "comparatively mild to the emotionally laden term 'catastrophic'." The BAP held that a bankruptcy court should treat the request for a hardship discharge as a matter of "some gravity" and consider that granting unjustified requests will likely disparage efforts by some debtors to meet plan obligations when financial strain "inevitably intrudes into their post-confirmation lives." Such a determination is necessarily fact-driven and the emphasis should "properly be focused on the nature and quality of the intervening event or events upon which the debtor relies." The court set forth certain factors that can be considered, including 1) whether the debtor has presented substantial evidence as to ability and intention to perform under the plan at the time of confirmation, 2) whether the debtor materially performed under the plan from the date of confirmation until the date of the intervening event(s), 3) whether the intervening event(s) were reasonably foreseeable at the time of confirmation, 4) whether the intervening event(s) are expected to continue in the reasonably foreseeable future, 5) whether the debtor had control (direct or indirect) of the intervening event(s), and 6) whether the intervening event(s) constituted a sufficient and proximate cause of the failure to make the required payments.

Grounds for Bad Faith Dismissal

In In re Fox, 232 B.R. 229 (Bankr. D. Kan. 1999), Bankruptcy Judge Julie A. Robinson addressed the issue of whether the filing of a chapter 11 petition as a substitute for an appeal bond constitutes "bad faith" such as to permit dismissal. The court noted that, as a general rule, when lack of good faith is raised as a basis for dismissal of a bankruptcy case, the debtor bears the burden of proving the filing was made in good faith. The court recognized that there is a split of authorities on the issue of whether a bankruptcy filing is in bad faith if it was done to circumvent the statutory requirements of posting a bond. The court reviewed such authorities and then declined to adopt a per se rule that such a filing always constituted bad faith and instead followed the cases that looked to the circumstances of the case, including whether the debtor could afford to post such a bond without losing the ability to stay in business. However, as evidenced by Epic Metals Corp. v. Condec Inc., 232 B.R. 806 (M.D. Fla. 1999), the issue is very much unresolved. In this case, the court held that where a petition was filed to seek protection from the superseding bond requirement, the plan was not proposed in good faith and thus could not be confirmed.

Determining Solvency During the Preference Period

In In re Dack Industries Inc., 170 F.3d 1197 (9th Cir. 1999), the court addressed the issue of how to determine whether a corporate debtor was insolvent during the preference period. The court held that in order to make that determination, it must first determine whether the debtor was a "going concern" or "on its death bed," and then the value of the debtor's assets depending on that status. Under the asset valuation step, if the debtor is a going concern, the court should determine the fair market value of the debtor's assets as if they had been sold as a unit, in a prudent manner and within a reasonable period of time. However, if the debtor was "on its death bed," then the court should determine the liquidation value of the assets—the price expected at a foreclosure sale. The third step of the process is then to apply that valuation to a simple balance sheet test, i.e., comparing the valuation to the liabilities of the debtor for determination as to whether or not the debtor was solvent.

Good Faith Under §109(g)(2)

In In re Sole, 233 B.R. 347 (Bankr. E.D. Va. 1998), the chapter 13 trustee filed a motion to dismiss the case pursuant to §109(g)(2), which bars the filing of a bankruptcy case within 180 days after a voluntary dismissal of a prior case if the dismissal follows a creditor's filing for a motion for relief. Bankruptcy Judge David H. Adams noted that courts have interpreted §109(g)(2) in three ways. The first approach considers the equities of the situation and attempts to avoid results that would lead to absurd, inequitable or unfair results. The second approach is a strict application of §109(g)(2) using the plain meaning of the words of the statute and asserts that §109(g)(2) is triggered anytime a voluntary dismissal follows the filing of a motion for relief. The third approach also applies the plain meaning of the statute, but conditions its application upon a causal connection between a motion for relief from the automatic stay and a debtor's voluntary dismissal of its case. The court, having considered the various approaches, found that the third approach reflects both congressional intent and the most natural and obvious reading of the statute. Applying that interpretation to the facts of the case, the court found that the chapter 13 trustee had failed to demonstrate any causal connection between the prior motion for relief from stay and the voluntary dismissal and denied the motion.

Property of the Estate

In In re Rangel, 233 B.R. 191 (Bankr. D. Mass. 1999), Chief Bankruptcy Judge William C. Hillman addressed the apparent conflicts between §1306(a) and §1327(b) in that the vesting of the property of the estate in a debtor upon confirmation of a chapter 13 plan contravenes the statutory provisions, which provide that post-petition assets are included in the property of the estate until the case is closed, dismissed or converted. The issue arose when a chapter 13 debtor, who was in default in payments under his plan, filed a nunc pro tunc application seeking to employ a broker who had found a buyer for a partially exempt homestead. The debtor intended to use the non-exempt portion of the proceeds to make a lump-sum distribution to the creditors. The chapter 13 trustee objected to the employment of the broker on an ex post facto basis as the debtor did not file the application until after a contract had been signed to sell the property. Judge Hillman reviewed the three approaches taken by courts to attempt to harmonize §1306(a) and §1327(b), noting that all of them must take into account the stricture that statutes should be construed so as not to render any statute superfluous. The first line holds that property of the estate ceases to exist after confirmation of the plan. Consequently, the effect of re-vesting is that the property is no longer subject to the automatic stay and may be subject to the claims of post-petition creditors. Judge Hillman noted that under this line of cases, which gives greater weight to the effect of §1327(b), various statutes are rendered meaningless and superfluous, including §1304, which provides the grounds under which a post-confirmation creditor can file a proof of claim; §1306, which provides that property of the estate remains such until the case is closed, dismissed or converted; §704(9), which provides the trustee is to administer the estate; and §1329, which provides the trustee and an unsecured creditor can seek to amend the plan. The second line of cases holds that the chapter 13 estate continues after confirmation of the chapter 13 plan—in essence, giving greater weight to §1306(a). Judge Hillman noted that under this approach, debtors would be potentially inhibited from obtaining post-petition credit and post-petition creditors may be inhibited from collecting on such a debt until the case is closed, dismissed or converted except as provided under §1305. Further, §1327(b) would be rendered superfluous, and arguably, §348(f), which deals with what is property of the estate after conversion from a chapter 13 to 7, would also be rendered meaningless. The third line of cases (the so-called middle ground) provides that all but the property of the estate that the debtor needs to fund the chapter 13 plan vests in the debtor post-confirmation. The court noted that while this approach seems equitable, it nullifies both §1327(b) and §1306(a) and leaves unclear what would constitute post-confirmation property of the estate. Judge Hillman then noted that in In re Fisher, 203 B.R. 958 (N.D. Ill. 1997), the court claimed to have adopted a middle-ground approach, but, in effect, presented a fourth approach. In Fisher, the court concluded that the property of the estate that vests in a debtor at confirmation is that which is property of the estate as of the date of confirmation. Section 1306(a) then operates to replenish the estate post-confirmation until the case is closed or dismissed. Judge Hillman found that this approach reconciles §1306(a) and §1327(b) without rendering any statute superfluous. The court then found that it agreed that remedial legislative drafting "would more appropriately solve the conundrum over which all of the above authorities have labored so long with varying results" but, absent such remedial revisions, the court concluded the approach suggested by the court in Fisher was the best way to harmonize the statute. As such, the property, including the equity above the mortgage and the debtor's exemption, vested in the debtor on confirmation and was no longer property of the estate as the plan never contemplated that such excess would be used to fund the plan. As such, the debtor was not required to file an application to employ the broker and the order granting the same was vacated. The court also required the debtor to file an amended plan so as to be allowed to use the proceeds of the sale to make a lump sump payment to satisfy the plan and the counsel was required to file a fee application to the extent required under local rules.

Miscellaneous

• In re Overland Park Financial Corp., 232 B.R. 215 (Bankr. D. Kan. 1999) (priority granted under §365(o) to commitment to maintain the capital of an insured depository institution is not limited to commitments pursuant to enforceable executory contracts, but extends to any net worth maintenance commitment, stipulation or agreement);
• In re Independent Engineering Co., 232 B.R. 529 (Bankr. 1st Cir. 1999) (failing to disclose post-petition draws against retainer is grounds for disqualification and disgorgement);
• In re D'Amboise, 232 B.R. 540 (Bankr. D. Me. 1999) (statutory presumption of non-dischargeability under §523(a)(2)(c) is not triggered when debtor uses unrestricted cash or loans to purchase luxury goods or services);
• In re Mackey, 232 B.R. 784 (Bankr. 9th Cir. 1999) (as long as Rule 8004 mandates that service of notice of an appeal be only by mail, the three-day extension provided for in Rule 9006(f) will always apply and the deadline will always be 33 days after the service of the notice of appeal); and
• Jardine's Professional Collision Repair Inc. v. Gamble, 232 B.R. 799 (D. Utah 1999) (the willful standard for award of punitive damages for violation of the automatic stay requires "a deliberate and intentional violation of the stay, not just a deliberate and intentional act that leads to a violation of the stay").