§ 156.6     Delay of Discharge: § 522(q)(1) and Pending Proceedings
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 156.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The award for Strangest New Barrier to Discharge in a Chapter 13 Case goes to new § 1328(h):

(h) The court may not grant a discharge under this chapter unless the court after notice and a hearing held not more than 10 days before the date of the entry of the order granting the discharge finds that there is no reasonable cause to believe that—
(1) section 522(q)(1) may be applicable to the debtor; and
(2) there is pending any proceeding in which the debtor may be found guilty of a felony of the kind described in section 522(q)(1)(A) or liable for a debt of the kind described in section 522(q)(1)(B).1
[2]

New § 1328(h) imposes a bizarre new hearing requirement that may conflate into an exception to discharge in Chapter 13 cases in rare circumstances. The court “may not” grant a Chapter 13 discharge unless “after notice and a hearing held not more than 10 days before the date of the entry of the order granting the discharge” the court finds that there is “no reasonable cause to believe” that § 522(q)(1) “may be applicable to the debtor” and that “there is pending any proceeding in which the debtor may be found guilty of a felony . . . or liable for a debt” of the kind described in § 522(q)(1)(A) or (B).

[3]

“May not” in the first sentence is prohibitive, not permissive.2 The new section thus quacks like a new condition on discharge in Chapter 13 cases.

[4]

But new § 1328(h) was added by a section of BAPCPA titled “Delay of Discharge During Pendency of Certain Proceedings.” The House Report states the intent of this section:

to withhold the entry of a debtor’s discharge order if the court, after notice and a hearing, finds that there is reasonable cause to believe that there is a pending proceeding which the debtor may be found guilty of a felony of the kind described in Bankruptcy Code § 522(q)(1) or liable for a debt of the kind described in Bankruptcy Code § 522(q)(2).3

There is no suggestion in the House Report that “delay” means “deny” discharge, only that discharge in a Chapter 13 case should be withheld for an unspecified period.

[5]

Interim Rule 1007(b)(8) may provide some insight into at least what the rules drafters think new § 1328(h) is about. Interim Rule 1007(b)(8) provides:

If an individual debtor in a chapter . . . 13 case has claimed an exemption under § 522(b)(3)(A) in an amount in excess of the amount set out in § 522(q)(1) in property of the kind described in § 522(p)(1), the debtor shall file a statement as to whether there is pending a proceeding in which the debtor may be found guilty of a felony of a kind described in § 522(q)(1)(A) or found liable for a debt of the kind described in § 522(q)(1)(B).4

The new statement required by Interim Rule 1007(b)(8) “shall be filed by the debtor not earlier than the date of the last payment made under the plan or the date of the filing of a motion for entry of a discharge under . . . [§] 1328(b).”5

[6]

The timing of the new hearing mandated in § 1328(h) is problematic. The date of entry of discharge in a Chapter 13 case is not a date certain from which 10 days can be counted. Bankruptcy courts will have to work the counting backward—flagging Chapter 13 cases for entry of discharge not more than 10 days after the new hearing described in § 1322(h). More likely, there won’t be many hearings under this new section because of the convoluted and conjunctive conditions in § 1328(h)(1) and (2).

[7]

The double negative in new § 1328(h) means that this new section is a bar to granting a discharge in a Chapter 13 case only if the bankruptcy court finds “reasonable cause to believe” that § 522(q)(1) “may be applicable to the debtor” and that there is a pending proceeding of the sort described in § 1328(h)(2). A quick look at § 522(q)(1) reveals that § 522(q)(1) only applies when, as a result of “electing” state exemptions under § 522(b)(3)(A), a debtor can exempt property of the sort described in § 522(p)(1)(A), (B), (C) and (D) which exceeds in the aggregate $125,000. There are very few states in which a Chapter 13 debtor can elect state exemptions and then exempt the requisite interests in property under § 522(p)(1) which exceed $125,000. In one of the earliest reported decisions applying BAPCPA, Judge Haines in In re McNabb6 explained that “electing” state exemptions under § 522(b)(3)(A) was a term of art that meant the debtor had to have a choice under state law to “elect” either state or federal exemptions. A state that mandates the use of state exemptions by prohibiting use of the federal exemptions would not be a state in which a debtor can “elect” state exemptions under Judge Haines’s careful reasoning.7 There are contrary decisions.8

[8]

Without regard to the merits of McNabb, the case illustrates that new § 522(p) and (q) intricately regulate the maximum exemptions that debtors can claim under some state exemption schemes but only in states where aggregate exemptions in excess of $125,000 in the classes of property described in § 522(p)(1) can be elected by the debtor. Only debtors in such states could meet the first condition on application of § 1328(h).

[9]

The second condition in § 1328(h) requires that there be a “pending” proceeding in which the debtor may be found guilty of a felony described in § 522(q)(1)(A) or liable for a debt described in § 522(q)(1)(B). The felonies described in § 522(q)(1)(A) are not actually described in that section but instead are described by incorporation of another section—18 U.S.C. § 3156. Using the felony definition in 18 U.S.C. § 3156, § 522(q)(1)(A) requires that the debtor has been convicted of a felony “which under the circumstances, demonstrates that the filing of the case was an abuse of the provisions of this title.”9 The requirement in § 1328(h)(2) that there is reasonable cause to believe that there is pending a proceeding in which the debtor may be found guilty of a felony described in § 522(q)(1)(A) could thus mean lots of different things—it could refer to a generic felony under 18 U.S.C. § 3156 or it could refer only to a felony which demonstrates abuse of the provisions of title 11.

[10]

This would be fairly simple but for the nested standards of proof: “reasonable cause to believe” that there is pending a proceeding in which the debtor “may be found guilty” of a felony of the kind described in § 522(q)(1)(A). This is not a stringent burden of proof. But the section assigns a difficult negative burden on the debtor: to show the absence of reasonable cause to believe that the debtor may be found guilty of a felony of the kind described.

[11]

Perhaps the most troubling aspect of new § 1328(h) is the possibility that this section will be interpreted as a bar to discharge based merely on “reasonable cause to believe” that the debtor “may” have committed an act that would trigger a limitation on exemptions under § 522(q)(1). Exceptions to discharge in bankruptcy traditionally have required the filing of complaints on strict time schedules, and the burden of proof rested on the party seeking to bar the debtor’s discharge. That burden is a preponderance of the evidence. In a nest of double negatives and incomprehensible cross-references, § 1328(h) could be interpreted to impose on debtors a burden to prove the negative—that there is no reasonable cause to believe that the debtor may have committed any of the described acts under the incorporated circumstances.

[12]

Reasonable cause to believe that the conditions described in § 1328(h)(1) and (2) may be present is such a low standard of proof, proof of its negative by the debtor becomes an especially difficult burden to bear. This is insult to injury: Congress has prescribed a bar to discharge for Chapter 13 debtors who have completed years of payments and are otherwise eligible for discharge; this new bar to discharge is so poorly conceived and so poorly written that bankruptcy lawyers and judges will disagree for years about what it says or what it means; and for the first time, the burden of proof with respect to a barrier to discharge is assigned to the debtor to prove the nonexistence of reasonable cause to believe that something may be true. Perhaps it is understandable why lobbyists for the consumer credit industry would write a law like this. It is difficult to understand why Congress would allow it to become law.

[13]

The pending proceedings in which the debtor may be found liable for a debt of the kind described in § 522(q)(1)(B) include those involving debts arising from violations of the federal securities laws, debts for fraud, deceit or manipulation in a fiduciary capacity in connection with the purchase or sale of registered securities, debts arising from civil remedies for RICO violations under 18 U.S.C. § 1964 and debts arising from criminal acts, intentional torts or willful or reckless misconduct that causes serious physical injury or death to another individual “in the preceding five years.”10 The statute does not reveal from what date the “preceding five years” are counted.

[14]

There is a further ambiguity with respect to the reference in § 1328(h)(2) to a debt “of the kind described in § 522(q)(1)(B).” Section 522(q)(1)(B)(iv) addresses debts arising from “any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding five years.” Does the five-year look-back apply to the reasonable cause determination under § 1328(h)(2) or is it only a debt “of the kind” described in § 522(q)(1)(B)—without regard to when the debt arose? If the five-year provision in § 522(q)(1)(B) does apply under § 1328(h), the statute does not reveal from what date to measure the five-year period. Remember that the § 1328(h) inquiry occurs at the very end of a Chapter 13 case that may be five years old already. Is the five years counted from the filing of the Chapter 13 case or from the date on which the debtor claimed the offending homestead exemption? Or is it the date that the debtor completed payments under the plan? The nested incorporation of unrelated considerations required by new § 1328(h) creates a long list of unanswerable questions.

[15]

The requirement in § 1328(h)(2) that there must be a pending proceeding in which the debtor may be found guilty of the felonies described in § 522(q)(1) or liable for a debt described in § 522(q)(1)(B) clearly contemplates that the criminal action or civil action is pending during the Chapter 13 case. This means that the action must have been filed before the Chapter 13 case or during the Chapter 13 case and has been pending for some or all years in which the debtor made payments under the plan.

[16]

Is § 522(q)(1) “applicable” to the debtor if years earlier during the Chapter 13 case the debtor claimed exemptions to which either no objections were filed or all objections were resolved? Once the debtor’s claims of exemptions are beyond further attack under § 522(c) and Bankruptcy Rule 4003(b),11 is § 522(q)(1) still applicable to the debtor?

[17]

Who is the protagonist at a § 1328(h) hearing? Does somebody file a motion or a complaint objecting to the discharge of the debtor? Does it make any sense at all that new § 1328(h) seems not to apply if the debtor’s guilt or responsibility under § 522(q)(1) has already been determined and there is no longer any “pending” proceeding?

[18]

The new statement required by Interim Rule 1007(h) prompts the debtor to confess whether the debtor “may be found guilty of a felony of a kind described in § 522(q)(1)(A) or found liable for a debt described in § 522(q)(1)(B).” What does “may” mean in this context? If the debtor believes that the debtor is innocent of any felony misconduct, then what kind of statement does the debtor file? Does the debtor have to file the statement described in new Interim Rule 1007(b)(8) if the debtor claimed an exemption under § 522(b)(3)(A) to which no timely objection was filed? What if the debtor claimed an exemption under § 522(b)(3)(A) in excess of the $125,000 set out in § 522(q)(1) and that exemption was denied or reduced? Is § 522(q)(1) still “applicable” to the debtor?

[19]

As of what point in time is “pending” determined for purposes of § 1322(h)(2)—at the time the discharge would be entered or at some other time? Can the debtor delay submission of the new statement in Interim Rule 1007(b)(8) until a “pending” criminal or civil action is resolved and thus avoid § 1328(h) altogether?

[20]

New § 1328(h) is simply a dysfunctional mess. At the big-picture level, it is not clear whether this is simply intended to delay entry of discharge in a Chapter 13 case or to act as a wholesale bar to discharge when the conjunctive circumstances in subparagraphs (1) and (2) are present. Loss or even delay of discharge in a Chapter 13 case after the debtor has spent years completing payments under a plan is a serious consequence. New § 1328(h) is an incomprehensible barrier to the efficient conclusion of Chapter 13 cases that are paid in full. Interim Rule 1007(b)(8) makes a game effort to dispel some of the fog in new § 1328(h) but at the cost of requiring Chapter 13 debtors to give evidence against themselves or refuse to file the new statement that is prerequisite to discharge. This is not a fair choice given the layers of uncertainty in § 1328(h).

[21]

The Interim Rules do not reveal what procedure applies once the debtor files the new statement in Interim Rule 1007(b)(8). There is no provision for notice of this statement to any party in interest nor is there a clue whether a hearing is automatic or scheduled only if some party in interest takes further action with respect to the debtor’s statement. If the debtor states that there is no pending action in which the debtor could be found guilty of a felony or liable for a debt of the sort described in § 522(q)(1)(A) or (B), is that the end of the § 1328(h) inquiry? If a party in interest wishes to “object” to the debtor’s statement, is that a response, a motion or a complaint?

[22]

The first three conditions in Interim Rule 1007(b)(8) do not necessarily mean that § 522(q)(1) is applicable to the debtor. Interim Rule 1007(b)(8) speaks that the debtor has “claimed an exemption” without reference to whether the debtor could “elect” exemptions other than under state law. The debtor is required to file the statement described in Interim Rule 1007(b)(8) even if a “claimed” exemption in excess of the amount set out in § 522(q)(1) was denied and a lesser exemption resulted. Interim Rule 1007(b)(8) suggests that claiming an exemption that would implicate § 522(q)(1) irrevocably creates “reasonable cause to believe” that § 522(q)(1) “may be applicable” without regard to whether that claim of exemption was resolved in an amount that is not in excess of the amount set out in § 522(q)(1). In other words, there is a fundamental ambiguity in § 1328(h) and in Interim Rule 1007(b)(8) whether the applicability of § 522(q)(1) at some point in the Chapter 13 case irrevocably establishes reasonable cause to believe the first element in § 1328(h)(1).

[23]

Neither § 1328(h) nor Interim Rule 1007 provides other remedies or penalties in the event that the debtor fails to file the new statement or fails to prove that there is no reasonable cause to believe the conjunctive conditions are present in § 1328(h)(1) and (2). That the court may not grant the debtor a discharge is the only outcome mandated by new § 1328(h). The Chapter 13 case is not converted or dismissed. Presumably, the bankruptcy court would, at some point, close the case without entry of discharge.

[24]

If the debtor fails to file the statement described in Interim Rule 1007(b)(8), it is likely that the clerk’s office will eventually close the case without entry of discharge. Creditors are then free of the automatic stay under § 362(c)(2)(A). Inspired by collection action, the debtor might try to reopen the Chapter 13 case—after paying the appropriate fee—to then file the statement required by Interim Rule 1007(b)(8) and receive a discharge. At that point, the discharge injunction would apply and the parties would have to address the consequences of whatever creditor action occurred during the interim.

[25]

New § 1328(h) is fundamentally misconceived. Whatever its goals, it is crippled by poor draftsmanship that cries out for further legislative attention. Perhaps the only good news here is that because the section only applies to Chapter 13 debtors with exemptions in excess of $125,000, there are likely to be resources available to the debtor to pay lawyers to unravel the mysteries of this new section.


 

1  11 U.S.C. § 1328(h).

 

2  See 11 U.S.C. § 102(4).

 

3  H.R. Rep. No. 109-31, at 64.

 

4  Interim Bankr. R. 1007(b)(8).

 

5  Interim Bankr. R. 1007(c).

 

6  326 B.R. 785 (Bankr. D. Ariz. 2005).

 

7  David A. Samole & David L. Rosendorf, Homestead Exemption No Longer “Debtor’s Paradise,” 24-Jan. Am. Bankr. Inst. J. 6 (2006).

 

8  See In re Virissimo, 332 B.R. 201 (Bankr. D. Nev. 2005); In re Kaplan, 331 B.R. 483 (Bankr. S.D. Fla. 2005).

 

9  11 U.S.C. § 522(q)(1)(A).

 

10  11 U.S.C. § 522(q)(1)(B).

 

11  See § 49.2 [ Timing and Procedure ] § 48.4  Timing and Procedure.