H.R. 764 Bankruptcy Amendments of 1997

H.R. 764 Bankruptcy Amendments of 1997

To make technical corrections to title 11, United States Code, and for other purposes. Comparison of H.R. 764
with the Technical Amendments Title of S.1301 Written by:
Richard F. Weiner

Prepared for the American Bankruptcy Institute
Web posted and Copyright © February 3, 1998, American Bankruptcy Institute.

H.R. 764 passed the House on November 12 and is pending in the Senate Judiciary Committee. S. 1301, introduced October 21 by Sens. Grassley (R-IA) and Durbin (D-IL), is also pending in the committee. This analysis compares the provisions in H.R. 764 to the "technical" provisions proposed in S. 1301, contained in Title IV.

Section 401 of S. 1301, which amends the definitions section under §101, incorporates everything from §2 of H.R. 764 except under H.R. 764, §2 at (5)(B), the secured debt limit for "single asset real estate" is increased from the current $4,000,000 to $15,000,000 (as of the date of the filing of the petition). Section 401 of S. 1301, however, eliminates the current secured debt limit altogether (at Sec 401 (5)(B)). There is however a grammatical error in §401 at (5)(B) of the Senate version; it should read "by striking ‘having aggregate’ and all that follows…" rather than "by striking ‘thereto having aggregate’ and all that follows…." as it reads now.

Section 402 of S. 1301 is identical to §3 of H.R. 764 (dealing with §104, "adjustment of dollar amounts"). Section 403 of S. 1301 is identical to Sec 4 of H.R. 764 (dealing with §108, "extension of time"). Section 404 of S. 1301 does not have a matching provision in the H.R. 764 ; it deletes, in §109, a reference to certain subsections in describing the types of small business investment companies that may be a debtor.

Section 405 of S. 1301 is identical to Section 5 of H.R. 764 (dealing with §110, "petition preparer penalties"); §406 of S. 1301 matches §6 of H.R. 764 (dealing with §328, professional compensation).

Section 7 of H.R. 764 (dealing with §330, "compensation of officers") contains an amendment not set out in S. 1301. S. 1301 should, I believe, contain this provision from H.R. 764 . Besides deleting an ‘(A)’ inadvertently placed next to ‘(3)’ at §330(a), §7 of H.R. 764 places the debtor’s attorney back into the position of being able to seek and obtain fees payable from the estate for his services that benefit the estate, after the clause which allowed this was taken out (maybe by error) of §330(a)(1) under the 1994 Reform Act. There are instances in Chapter 7 cases where the debtor’s attorney can be most helpful to the trustee in the administration of the estate. He or she should, in such instances, be entitled to payment of fees from the estate, in compensation for work in this regard.

Section 407 of S. 1301 matches §8 of H.R. 764 (dealing with §346); §408 of S. 1301 matches §9 of H.R. 764(dealing with §348).

Section 409 of S. 1301 matches §10 of H.R. 764 (dealing with §362); however provision (3) of both these sections, which set forth that the automatic stay is not applicable as to transfers that are not avoidable under §§544 and 549, by way of a proposed addition §362 at (b)(19), may be ill advised. A bona fide purchaser (BFP) of a post petition transfer of real property not avoidable under §549(c) (bankruptcy petition not recorded prior to the transfer) would not be hurt by the automatic stay (i.e. subject to penalty/damages/contempt thereunder) anyway since as a BFP, he was not aware of the pending bankruptcy. Some courts, I believe, take a position that a transfer prohibited under §362 is void but I do not think this position is correct (and certainly §362 could or should not be used to negate the effect of §549(c)). It is §549 that gives the power to the trustee (and the debtor vis-a-vis §522(h)) to avoid post petition transfers, rather than §362. If there is a post petition transfer of real property to a BFP after the petition is recorded the transfer would be avoidable by the trustee under §549 (the provision (3) would not apply) but the transferee should not be liable under §362 (as was not aware of the bankruptcy). As to §544, the only problem as to post petition transfers not avoidable under that provision relates to limitations of avoidance thereunder by way of post petition perfection under §546(b). There is however already in §362 at (b)(3) a provision that the automatic stay does not apply to transfers subject to such perfection under §546(b). This provision (3) needs further discussion and analysis.

Section 410 of S. 1301 basically incorporates the language of §11(a) of H.R. 764 (dealing with §365) but with differences in layout and, importantly, meaning. Under Sec 11(a) of H.R. 764 the trustee has to, as a prerequisite to assumption under a lease/executory contract, compensate or provide adequate assurance of prompt compensation under §365(b)(1)(B) for a failure to perform a non-monetary obligation even though such failure may not be required to be cured as a pre-requisite for such assumption. Under §410 of S. 1301 however, because of the placement of the language (three paragraphs that are identical in both the Senate and House versions), if a non-monetary default need not be cured for such assumption, no compensation or adequate assurance thereof need be given to so assume. Section 11(b) of H.R. 764 (which is not contained in S. 1301) amends and is necessary to keep §1124(2) (impairment exceptions) consistent with the changes under §11(a) but not needed for consistency with the changes proposed under Sec 410 of S. 1301.

Section 411 (dealing with §556), §412 (dealing with §503), §413(dealing with §507), §414 (dealing with §522) of S. 1301 are respectively in sequence identical to §§12 through 15 of H.R. 764 .

Section 415 of S. 1301 is the same as Sec 16 of H.R. 764. These sections add language to §523(a)(15) to make sure it is understood that not only are debts to debtor’s spouse subject to being declared non-dischargeable thereunder but also debts to debtor’s children. There are a number of substantive problems and uncertainties with provision 523(a)(15) of the Bankruptcy Code that need to be addressed at some point but are too complex and time consuming to be dealt with here.

Sec 416 of S. 1301 is the same as §17 of H.R. 764 . The provisions attempt to substitute wording in §524(a)(3) but effect no difference to the wording therein. I would, however, suggest a technical correction to §524(a)(3) by inserting ‘against debtor’s spouse after ‘allowable community claim.’ That subsection of §524 is only concerned with the community claims against the debtor’s spouse and a permanent injunction (subject to exceptions) against collection thereon from community property. The §524 injunction as to claims against the debtor is set out at §524(a)(1) and (2).

Section 417 (dealing with §525), §418 (dealing with §541), §419 (dealing with §546) of S. 1301 are respectively in sequence identical to §§18 through 20 of H.R. 764 .

Section 420 of S. 1301 is the same as §21 of H.R. 764 (dealing with §547) except §420 of the Senate Bill calls for an insertion of a proposed new (i) provision while §21 of the House Bill calls for an insertion of the same provision but designated (h) instead of (i). There would be no (h) under the Senate version; thus the (i) designation in the Senate version should be changed to (h).

As to the merits of the proposed changes to §547 under §§420 and 21 of S. 1301 and H.R. 764 respectively: §550 of the Bankruptcy Code was amended in 1994 (by way of 550(c)) for the purpose of overruling the Deprizio decision by limiting preferential transfer ‘recovery,’ in such a setting, to be effective as against the insider guarantor only. There was however no matching amendment to §547 where ‘avoidance’ is the issue (rather than recovery thereafter). In the usual Deprizio-type situation, only the return of money was being sought and this might be thought of more in terms of recovery than by way of avoidance. These current bills seek (but only with respect to a security interest) to clarify that avoidance in a Deprizio setting by way of §547 of the Bankruptcy Code can only be as to the insider guarantor. Although the interplay between §§547 and 550 is not perfect, most in the bench and bar understand what is really meant under these Code sections taken together in a pertinent situation without implementation of the changes sought.

The proposed changes to §547 mentioned above only address avoidance of a security interest in a Deprizio setting. This is most likely because a security interest might represent a typical occurrence of a debtor giving a lending institution a pre petition transfer of security (i.e. a mortgage) in lieu of money on account of a pre-existing debt, and 550(c) of the Bankruptcy Code might not be looked at by analogy in disallowing avoidance of the security interest as against the lender which is not now specifically set out in §547 thereof. Section 550(c) would prevent recovery of the security instrument itself from the lender so surely avoidance thereof under §547 against the lender would not be proper (at least that’s the argument- one has to look at both §§547 and 550 taken together to get the correct picture). A transfer of real property by deed deals with an intangible like a security interest (e.g. a mortgage) and the avoidability of same against a lender in a Deprizio setting (where a deed is conveyed to the lender rather than a security interest) is subject to the same problem (addressed above) as with the security interest transfer, except that situation is not addressed by the proposed changes to §547 of the Bankruptcy Code. Perhaps the correct way to proceed is for the wording ‘security interest given’ and ‘security interest,’ in the proposed §547(h) or (i), to be replaced at both places with the word ‘transfer.’ In such instance §550(c) is made redundant and should be deleted.

Section 421 of S. 1301 is the same as §22 of H.R. 764 (deals with §549). Section 422 of S. 1301 has no counterpart in H.R. 764 . Section 423 (dealing with §553), §424 (dealing with §726), §425 (dealing with §901), §426 (dealing with §1104), §427 (dealing with §1170), §428 (dealing with §1172), §429 (dealing with §1228), §430 (dealing with §1322), and §431 (dealing with §1328) of S. 1301 are respectively in sequence identical to §§23 through 31 of H.R. 764 .

Section 432 of S. 1301 is not contained in H.R. 764 and deals with a ten-year time extension relative to §302(d)(3) of the Bankruptcy, Judges, U.S. Trustees and Family Farmer Bankruptcy Act of 1986.

Section 433 of S. 1301 is the same as §32 of H.R. 764 (dealing with §1334), §434 of S. 1301 is the same as §33 of H.R. 764 (dealing with §156(a) of Title 18), and §435 of S. 1301 is the same as §34 of H.R. 764 (dealing with effective dates of the Amendments).