To make technical corrections to title 11, United States Code, and for other purposes. MEMORANDUM
Bankruptcy Law Technical Corrections Act of 1997 (H.R. 120) Written by:
Roger M. Whelan
and Virginia Maxwell Waller
Shaw, Pittman, Potts & Trowbridge
Washington, D.C.
Web posted and Copyright © January 28, 1997, American Bankruptcy Institute
and Shaw, Pittman, Potts & Trowbridge.

---

The Bankruptcy Law Technical Corrections Act of 1997 (the "Act"), introduced in the House on January 7, 1997, seeks to correct technical errors in the U.S. Bankruptcy Code resulting from the Bankruptcy Reform Act of 1994 (Pub. L. No. 103-394, 108 Stat. 4106). For example, colons replace dashes, commas are inserted as needed and incorrect references to other sections and incorrect numbering of Code subsections are corrected. In addition to the technical changes, the Act proposes to clarify certain sections and make other substantive changes. This article focuses on the substantive changes. Unfortunately, the Act also proposes several changes that appear to be unnecessary and will only serve to create more confusion. For example, the Act proposes to arbitrarily delete the word "section" that currently modifies "721, 1202 or 1108" in Section 327(b). It is unclear how a court should interpret this change. Further, the Act proposes that Section 327(c) begin, "In a case under chapter 7, 12 or 12 of this title." This change can only create confusion as to what change, if any, the House intended.

The following is a summary of the proposed changes. Mere technical changes (commas, etc.) that do not affect the Bankruptcy Code provisions are not addressed.

1. Bankruptcy Code Section 101 - Definitions: In addition to numerous technical changes (such as adding "The term" before each defined word, changing semicolons to periods and renumbering the subparagraphs in numerical sequence), the Act proposes to clarify that a family farm does not qualify as a "single asset real estate" case under Bankruptcy Code Section 101(51B).
   The House also seeks to specify that in 1994, when Congress overruled the Deprezio line of cases, Congress intended the new law to apply to transfers of liens in property. Thus, the Act clarifies that the definition of "transfer" in Section 101(54) includes "creation of a lien."
2. Bankruptcy Code Section 104- Adjustment of Dollar Amounts: The Act proposes to include Bankruptcy Code Section 522(f)(3) in the list of Bankruptcy Code sections where dollar amounts are increased every three years.
3. Bankruptcy Code Section 108(c)(2): The Act proposes to replace language in Section 108(c)(2) with identical language -- "922, 1201 or " would be replaced with "922, 1201 or . . . ." It is unclear what the House intends to accomplish.
4. Bankruptcy Code Section 321 - Eligibility to Serve as Trustee: The Act proposes to delete the requirement that a Chapter 7 trustee reside or have an office in the judicial district within which the bankruptcy case is pending. Thus, only Chapter 12 and 13 trustees would be subject to a residency requirement.
5. Bankruptcy Code Section 327 - Employment of Professional Persons: The Act proposes to change subsection (c) from "In a case under chapter 7, 11 or 12 of this title" to "In a case under chapter 7, 12 or 12 of this title." Presumably, the Act seeks to exclude professionals in Chapter 11 cases from the current rule that "a person is not disqualified for employment . . . solely because of such person's employment by or representation of a creditor." The logical inference from the conspicuous absence of Chapter 11 in Section 327(c) is that in a Chapter 11 case, employment by or representation of a creditor precludes employment as a professional of the estate. However, the revised Section 327(c) would undoubtedly create confusion.
   

   The Act also would also expand the ability of a trustee to assist the estate by modifying Section 327(d) to allow a trustee to act as an attorney, accountant appraiser, auctioneer or other professional person. Presently, Section 327(d) only allows the trustee to act as "attorney or accountant for the estate."

   Finally, the Act proposes to delete the word "section" in Section 327(b), such that Section 327(b) would read, "If the trustee is authorized to operate the business under 721, 1202 or 1108 of this title . . . ." It is unclear what the House seeks to accomplish by this proposed change.

6. Bankruptcy Code Section 328 - Limitation on Compensation of Professional Persons: Consistent with the expansion of the trustee's role in Section 327(d), the Act proposes to modify Bankruptcy Code Section 328(b) to read as follows:
   

   "If the court has authorized a trustee to render professional services for the estate under section 327(d) of this title, the court may allow compensation for the trustee's services as a professional person who renders such services only to the extent that the trustee performed services as such professional person for the estate and not for performance of of any of the trustee's duties that are generally performed by a trustee without the assistance of such a professional person for the estate."

   The Act also provides that fixed fee arrangements are permissible: Section 328(a) would provide that a professional may be employed on "any reasonable terms and conditions of employment, including on a retainer, on an hourly basis, on a fixed or percentage fee basis, or a contingent fee basis."

7. Bankruptcy Code Section 330 - Compensation of Officers: The Act clarifies that the debtor's attorney may be compensated from estate assets by amending Section 330(a)(1) to include the debtor's attorney in the list of entities to whom a court may authorize payment of fees and reimbursement of expenses.
8. Bankruptcy Code Section 346 - Special Tax Provisions: The Act proposes to amend Bankruptcy Code Section 346(g)(1)(C) to delete the exception that currently allows recognition of a gain or loss on a transfer under Internal Revenue Code of 1986 section 371 in Chapter 11 or 12 cases.
9. Bankruptcy Code Section 348 - Effect of Conversion: The Act inserts clarifying language in Section 348(f)(2) as follows: "If the debtor converts a case under chapter 13 of this title to a case under another chapter under this title in bad faith, the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion."
10. Bankruptcy Code Section 362 - Automatic Stay: The Act inserts the following language in Section 362(b)(3) such that a bankruptcy does not operate as a stay: "of the collection of alimony, maintenance, or support from property that is not property of the estate or is taken with respect to a security interest that is created by a transfer to which section 547(c)(3) of this title applies."
    The Act also replaces "individual" in Section 362(h) with "entity," thereby clarifying that a debtor that is an individual, corporation, partnership or other entities may recover punitive damages and shall recover actual damages for willful violations of the automatic stay. Thus, the Act eliminates the construction of Section 362(h) that prevents non-individual debtors from recovering for willful stay violations.
11. Bankruptcy Code Section 365 - Executory Contracts and Unexpired Leases:

    A. Section 365(b): The 1994 amendments to the Bankruptcy Code amended Section 365(b) to provide that a trustee need not cure "a penalty rate or provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under the executory contract or unexpired lease." The amendment was intended to allow a trustee to assume a contract without curing penalty rates or penalty provisions. However, case law interpreted the word "penalty" in the 1994 amendments to modify only "rate," thereby allowing assumption of contracts without curing any nonmonetary defaults, regardless of whether the nonmonetary defaults were penalty provisions. See, e.g., In re Claremont Acquisition Corp., 186 B.R. 977, 989-90 (C.D. Cal. 1995). The Act seeks to overrule this interpretation.
    However, it is unclear that the proposed modifications in the Act will accomplish this goal. The Act would replace Section 365(b)(2)(D) with the following two provisions:

    (D) the satisfaction of any penalty rate in any executory contract or unexpired lease; or

    (E) the satisfaction of any provision relating to a default arising from any failure by the debtor to perform nonmonetary obligations under any executory contract or unexpired lease other that an unexpired lease of personal property."

    Subsection (E) does not artfully accomplish the House's expressed intent of allowing a trustee to assume a contract without curing penalty provisions. Rather, the proposed language could be interpreted as supporting the holding of Claremont Acquisition and its progeny. B. Air Carriers: The Act strikes Section 365(c)(4), Sections 365(d)(5) through (9), and the portion of Section 365(f)(1) beginning with "except that," which each relate to air carriers. These amendments merely reflect the fact that air carrier rejection provisions were repealed by prior "sunset" laws.

    Bankruptcy Code Section 503 - Allowance of Administrative Expenses: The Act amends Section 503(b)(4) to provide that the expenses of an attorney or accountant retained by a member of a committee appointed under Bankruptcy Code Section 1102 are not recoverable as administrative expenses. The Act inserts "subparagraph (A), (B), (C), (D) or (E) of" before "paragraph (3)" in Section 503(b)(4).

    Bankruptcy Code Section 507 - Priorities: The Act clarifies that only unsecured claims for alimony, maintenance or support of a spouse, former spouse or child of the debtor may receive priority treatment under Section 507(a)(7).

    Bankruptcy Code Section 522 - Exemptions: The Act replaces the language in Section 522(f)(1)(A)(ii)(II) to provide that the debtor may not avoid a judicial lien that secures a debt for alimony, maintenance or support of a spouse, former spouse or child of the debtor to the extent such debt

    (II) is for a liability that is designated as, and is actually in the nature of, alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support.

    Bankruptcy Code Section 523 - Exceptions to Discharge: The Act proposes to make technical changes, corrections and clarifications to Bankruptcy Code Section 523, such as amending Section 523(a)(3) to include subsection (15) in the list of applicable sections and changing "a insured" to "an insured" in subsection (e). However, the Act is also somewhat confusing in proposing to move subsection (a)(15) to follow subsection (a)(14), which it already does.

    Bankruptcy Code Section 524 - Effect of Discharge: The Act proposes to replace language in Section 524(a)(3) with identical language -- "523, 1228 (a)(1), or 1328(a)(1) of this title, or that" would be replaced with "523, 1228 (a)(1), or 1328(a)(1) of this title, or that." It is unclear what the House seeks to accomplish with this change.

    Bankruptcy Code Section 525 - Protection Against Discriminatory Treatment: The Act provides that the 1994 amendments to Bankruptcy Code Section 525(c) apply only to bar discrimination concerning student loans and grants because of prior bankruptcies.

    Bankruptcy Code Section 541 - Property of the Estate: The Act would amend Section 541(b)(4)(B)(ii), which relates to the interest of a debtor in liquid or gaseous hydrocarbons, by inserting "365 or" before "542."

    Bankruptcy Code Section 550 - Liability of Transferee of Avoided Transfer: The Act would modify section 550(c) as follows: "If a transfer made between 90 days and one year before the filing of the petition (1) is avoidable under section 547 of this title; and (2) was made for the benefit of a creditor that at the time of such transfer was an insider; the trustee may not avoid under section 547 such transfer, to the extent that such transfer was made for the benefit of a transferee that was not an insider at the time of such transfer, or recover under subsection (a) from a transferee that was not an insider at the time of such transfer.
    Section 547(b) is amended to conform by providing that "[e]xcept as provided in subsection (c) of this section or section 550(c) of this title, the trustee may avoid any transfer of an interest of the debtor in property . . . ."

    Bankruptcy Code Section 1104 - Appointment of Trustee or Examiner: The Act clarifies the procedure for electing private trustees in Chapter 11 cases. Thus, the Act would renumber Section 1104(b) as Section 1104(b)(1) and add the following as Section 1104(b)(2):
    

    "(A) If an eligible, disinterested trustee is elected at a meeting of creditors under paragraph (1), the United States trustee shall file a report certifying that election. Upon filing of a report under the preceding sentence --
    

    (i) the trustee elected under paragraph (1) shall be considered to have been selected and appointed for purposes of this section, and

    (ii) the service of and trustee appointed under subsection (d) shall terminate.

    (B) In the case of any dispute arising out of an election under subparagraph (A), the court shall resolve the dispute."

    Bankruptcy Code Section 1328 - Discharge: The Act amends Section 1328(a)(2) to allow discharge of debts except those: "of any kind specified in paragraph (5), (8), or (9) of section 523(a) [this is struck out: or 523(a)(9)] of this title." While the technical deletion of "or 523(a)(9)" is needed, it is unclear what change (if any) the House intends by replacing "the kind" with "any kind."

    Tuesday, January 7, 1997