Bankruptcy Newsletter

"Payment-Focused" Reading for §521(a)(1)(B)(iv)
Addressing for the first time what obligations the Bankruptcy Code imposes upon a debtor with respect to the filing of payment advices, the Second Circuit has ruled that §521(a)(1)(B)(iv) is best given a "payment-focused," rather than a "document-focused," interpretation.

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Addressing for the first time what obligations the Bankruptcy Code imposes upon a debtor with respect to the filing of payment advices, the Second Circuit Court of Appeals has ruled that § 521(a)(1)(B)(iv) is best given a "payment-focused," rather than a "document-focused," reading. Accordingly, a Chapter 13 debtor satisfied the statutory requirement to file copies of all payment advices received within 60 days before the petition filing date, thus precluding automatic dismissal of his case.

The issue arose when a bank moved to confirm the automatic dismissal of the debtors' case for their failure to file copies of all payment advices received by the debtor-husband within 60 days before the date of the filing of the petition. Claiming that all but one of the payment advices received during the 60-day prepetition period had been thrown away, the debtors filed the last payment advice that the debtor-husband received during that period, as well as a "Sales Earnings Report" chart issued by his employer which showed his gross earnings for each pay period during the year. The bankruptcy court denied the bank's motion and, on appeal, the district court affirmed. The bank appealed again.

After determining that it had jurisdiction over the matter, the Court of Appeals turned to a debtor's obligations under § 521(a)(1)(B)(iv) of the Code. Under that section, a debtor must, "unless the court orders otherwise," file "copies of all payment advices or other evidence of payment received within 60 days before the date of the filing of the petition, by the debtor from any employer of the debtor." If a voluntary filer under Chapter 7 or Chapter 13 does not comply with this requirement within 45 days after the filing of the petition, the case is automatically dismissed.

"We have not previously decided what obligations 11 U.S.C.[A.] § 521(a)(1)(B)(iv) imposes upon a debtor, and the statute, to put it mildly, is not a model of syntactical clarity," the Second Circuit observed. "What makes the statute ambiguous is that it is not clear how the participle 'received' functions in context." At least two grammatically valid readings of the statute are possible, the court found, each of which would place a different requirement on the debtor.

On one possible reading of the statute, the "document-focused" interpretation, "the clause 'received within 60 days' could be understood to refer to the compound subject 'all payment advices or other evidence' (with the word 'all' modifying both 'payment advices' and 'other evidence')," the Court of Appeals explained. "Were we to adopt this reading . . . the effect would be to require the debtor to turn over all payment advices that he received in the 60 days leading up to the filing of his bankruptcy petition, or, if he received no such payment advices, all other evidence he received." On this reading, the appellate court found, the debtors failed to comply with the statute, as it was undisputed that the debtor-husband received some payment advices that he did not file.

A second possible reading of § 521(a)(1)(B)(iv) would read "received" to modify "payment," the Second Circuit continued. "This reading would thus treat the phrase 'of payment received' as a unit that: (1) is modified by the phrase 'within 60 days of before the date of the filing of the petition, by the debtor from any employer of the debtor'; and (2) so modified, itself modifies the phrase 'all payment advices or other evidence' (with the word 'all' modifying 'payment advices' but not 'other evidence')." While acknowledging that this approach might feel somewhat more awkward than the first, the court pointed out that it is grammatical, and that it "becomes easily intelligible if one reads 'of' as 'in respect to,' which is among that preposition's definitions." Under this "payment-focused" approach, which had been embraced by the Tenth Circuit's Bankruptcy Appellate Panel (BAP) in In re Miller, 383 B.R. 767 (10th Cir.BAP-Utah 2008), a debtor alternatively must file either (1) all payment advices of payment received within 60 days before the date of the filing of the petition, or (2) other evidence of payment received within 60 days before the date of the filing of the petition. "If we adopt this approach, a debtor will be in compliance so long as he files credible evidence that sets forth all "payment received" from his employer in the 60 days prior to the petition." On this reading, the debtors would prevail because the bankruptcy court found that the documents they filed provided adequate information regarding all payments from the debtor-husband's employer in the required period.

"Although neither reading is perfectly satisfying, we conclude that the payment-focused interpretation is superior," the Second Circuit stated. While the document-focused interpretation may have required less grammatical parsing, it also made less sense according to principles of statutory construction, the court found, as it seemed to render the term "other evidence" meaningless. If "received" were read to modify "payment advices or other evidence," the court explained, then either type of document also must be received "from the employer" to satisfy the statute; if that were the case, however, then it was unclear to the court what type of "other evidence" from the employer would not itself constitute a "payment advice."

"The payment-focused interpretation, on the other hand, has the benefit of consistency with the other requirements listed under § 521(a)(1)(B), each of which demands information about the finances of the debtor at the time of his bankruptcy petition that might be relevant to the petition." To the extent that the text of the provision is ambiguous, the context of surrounding provisions suggested that subsection (iv) "also should be read to focus on relevant information – the actual compensation received by the debtor from his employer immediately prior to his petition – rather than specific documents," the court reasoned. In addition, the fact that § 521(i)(1) of the Code mandates automatic dismissal only in the event of a failure to file "all of the information required" (emphasis added) suggests a statutory emphasis on the filing of relevant information rather than specific documents.

"With the 'plain language' of the statute being anything but, we are guided by the foregoing canons to reach the most sensible interpretation," the Court of Appeals concluded. "The canons favor a conclusion that § 521(a)(1)(B)(iv) is better interpreted to require disclosure of certain relevant information than to require production of specific pieces of paper." Therefore, the Second Circuit joined the Tenth Circuit's BAP in holding that: "(1) the word 'received' in § 521(a)(1)(B)(iv) modifies the word 'payment,' and thus it is the date of receipt of any relevant payment, not the date of receipt of any particular document, that establishes the debtor's obligations under the subsection; and (2) a debtor may satisfy the subsection's requirements by filing either (a) 'copies of all payment advices . . . of [such] payment received . . . by the debtor from any employer' or (b) 'copies of . . . other [credible] evidence of [such] payment received . . . by the debtor from any employer.'"

Accordingly, "by presenting the September 14, 2007 payment advice, which included [the debtor-husband's] earnings and deductions for that pay period, and identified his year-to-date earnings and payroll deductions for various categories, and by submitting the 'Sales Earnings Report,' which showed his gross earnings for each pay period from January 5, 2007 through August 31, 2007, [the debtors] 'create[d] a very clear picture as to the amount of income [the] [d]ebtor[s] received in the sixty days prepetition,' . . . and thus met their obligations under § 521(a)(1)(B)(iv)." Community Bank, N.A. v. Riffle, 2010 WL 3079307 (C.A.2-N.Y.).

A California bankruptcy court has held, in a case of apparent first impression, that a bankruptcy court may exercise its power to issue any "necessary or appropriate" order, process, or judgment in order to appoint counsel to represent a patient care ombudsman. Moreover, appointment of counsel for a patient care ombudsman previously appointed in the Chapter 11 case of a financially troubled health care business was appropriate to answer the patient care ombudsman's questions about his duties under bankruptcy law and to assist him in the filing and service of documents. In re Synergy Hematology-Oncology Medical Associates, Inc., 2010 WL 28537 (Bkrtcy.C.D.Cal., Judge Bufford)

A bankruptcy statute providing for the avoidance of a lien that does not secure any allowed secured claim, 11 U.S.C.A. § 506(d), did not provide a basis for a Chapter 7 debtor to strip off even a junior mortgage lien that was wholly unsupported by any value in the mortgage property in excess of the amount of the senior mortgage debt. The Dewsnup prohibition against lien-stripping, on the theory that any claim that is, first, allowed, and, second, supported by a lien, qualifies as an "allowed secured claim" without regard to the value of the underlying collateral, was equally applicable in the "strip off" and "strip down" context. A Florida bankruptcy court disagreed with a contrary decision out of New York. In re Hoffman, 2010 WL 2940811 (Bkrtcy.M.D.Fla., Judge Jennemann)

A debtor failed to maintain books and records in a condition that enabled the Chapter 7 trustee and parties in interest to ascertain his financial condition and business transactions, warranting the denial of the debtor's discharge. The debtor, who was engaged in both a law practice and a mortgage foreclosure rescue business, commingled the receipts and disbursements from the mortgage transactions with his law practice and his personal affairs using multiple accounts, resulting in a "paperwork jungle." The debtor also prepared false settlement statements that did not reflect his fees for the mortgage transactions and did not accurately reflect the funding for the transactions. Professionals required more than 400 hours of work to make sense of the debtor's books and records. In re Sohmer, 2010 WL 2891688 (Bkrtcy.D.Mass., Judge Feeney).