Bankruptcy Law Technical Corrections Act of 1997 (H.R. 120)
Roger M. Whelan
and Virginia Maxwell Waller
Shaw, Pittman, Potts & Trowbridge
Web posted and Copyright © January 28, 1997, American Bankruptcy
and Shaw, Pittman, Potts &
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.
- 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."
- 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.
- 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.
- 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.
- 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.
- 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."
- Bankruptcy Code Section 330 - Compensation of Officers: The Act clarifies that
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.
- 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.
- 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."
- 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.
- 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
(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
(B) In the case of any dispute arising out of an election under subparagraph (A),
the court shall resolve the dispute."
(ii) the service of and trustee appointed under subsection (d) shall terminate.
- 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."