November 2018: The Arizona Supreme Court established a committee to review the current process authorizing documents preparers to do certain work normally done by attorneys. Administrative Order 2018-111 The following is part of a discussion by fellow attorneys who describe some very expensive mistakes created by document preparers or paralegals (the Arizona Supreme Court does […]
Bankruptcy is a tool. Any tool can be misused which can cause serious damage. Just ask the idiot who sticks a fork in a live electrical socket.
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Warning – some of these references are pre-BAPCPA.
SUPREME CT: WHEN IS A FALSE STATEMENT NONDISCHARGEABLE? 6/2018
Lamar, Archer and Cofrin vs Appling, 16-1215 (Sup. Ct. June 4, 2018) The Supreme Court resolved a split of circuits by holding that a false statement about one asset must be in writing to provide grounds for rendering a debt nondischargeable under Section 523(a)(2). In this case a debtor lied to his attorney about the intended use of his tax refunds – to pay his attorney’s fees.
Supreme Court: The Court holds that a statement about a single asset can be a “statement respecting the debtor’s financial condition” under §523(a)(2) of the Bankruptcy Code. The judgment of the Court of Appeals for the Eleventh Circuit is affirmed. Pp. 4–15.
Lower courts: The Bankruptcy Court found that Appling (the debtor) knowingly made two false representations on which Lamar (the law firm) justifiably relied and that Lamar incurred damages as a result, the court concluded that Appling’s debt to Lamar was nondischargeable under §523(a)(2)(A). The District Court affirmed, but the Eleventh Circuit reversed, holding that a “statement respecting the debtor’s financial condition” may include a statement about a single asset. Because Appling’s statements were not in writing, the court held, §523(a)(2)(B) did not bar him from discharging his debt to Lamar.
The case pitted courts’ aversion to those who lie against the statutory language and its history. This decision is similar to the result in Law v. Siegel, 134 S. Ct. 1188 (2014), where the Supreme Court ruled that the bankruptcy court does not have a “roving commission” to do equity. In Law, the high court barred the imposition of sanctions by invading property made exempt by statute, even though the debtor persistently committed fraud.
While courts may not be favorably inclined toward debtors who lie orally to obtain credit, Congress made a decision in Section 523(a)(2)(B) that a materially false statement “respecting the debtor’s . . . financing condition” must be in writing to provide grounds for nondischargeability of the related debt.
RECOVERING ATTORNEY FEES AFTER NON-DISCHARGEABILITY ACTION
Can debtor pursue creditor for attorney fees in a non-dischargeable claim – see 523(d)
If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney’s fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.
Attorney fees awarded prepetition litigation establishing the fraud claim are nondischargeable under Cohen v. De La Cruz. For the § 523 litigation itself, see In re Dinan and the cases cited in Levitt and Burgueno.
In re Yee, No. 16-11798, 2017 WL 2556933 (Bankr. D. Ariz. June 12, 2017). A bankrupt Arizona woman’s ex-husband is not entitled to an award of attorney fees incurred during his successful effort to prevent her from discharging divorce-related debts through her Chapter 13 case, a Phoenix bankruptcy judge has ruled.
Neither the Bankruptcy Code nor Arizona family law statutes provide for attorney fees to prevailing parties in dischargeability proceedings, U.S. Bankruptcy Judge Daniel P. Collins of the District of Arizona said.
In June and August of 2016 an Arizona state court awarded Martin Yee nearly $60,000 in attorney fees in his divorce from ex-wife Karen Choy Lan Yee. After she sought Chapter 13 protection in October, Martin prevailed in bankruptcy proceedings in which he contended that the fee awards were domestic support obligations and thus nondischargeable under Section 523(a)(5) of the Bankruptcy Code, 11 U.S.C.A. § 523(a)(5).
The Bankruptcy Court also ordered Martin to file an accounting of additional amounts he had claimed were not subject to discharge.
He then filed the accounting as well as an application seeking $34,000 in attorney fees incurred during bankruptcy proceedings, asking the court to recognize these fees as a domestic support obligation.
Debtor objected to the accounting and fee application.
No basis for bankruptcy-related fee award
“Under the ‘American Rule’ a litigant in federal court is not entitled to an award of attorneys’ fees and costs unless an applicable statute or enforceable contract provides for such award,” Judge Collins said, citing Travelers Casualty & Surety Company of America v. Pacific Gas and Electric Co., 549 U.S. 443 (2007).
Nothing in the Bankruptcy Code, including Section 523(a)(5), provides for parties to recover fees, the judge said, citing Heritage Ford v. Baroff (In re Baroff), 105 F.3d 439 (9th Cir. 1997).
The judge rejected Martin’s argument that Arizona family law, Ariz. Rev. Stat. Ann. § 25-324, provided a basis for the fee award.
Section 25-324(A) authorizes “the court” to award costs and expenses incurred “maintaining or defending any proceeding” under Arizona’s divorce and parenting-time statutes, the judge said.
“The court” cannot mean a bankruptcy court because it has no jurisdiction over family law proceedings, he said, also noting that the nondischargeability matter was not a “proceeding” under Arizona law.
Section 25-324(B) authorizes fee awards against a party who filed a petition in bad faith, one that was not factually or legally grounded, or one that was filed for improper purposes.
The fees Martin seeks from the bankruptcy case did not involve a petition under Arizona family law, Judge Collins said.
The judge also rejected Martin’s argument that reasonable fees incurred in dischargeability proceedings are not subject to discharge, which cited In re Carson, 510 B.R. 627 (Bankr. E.D. Cal. 2014), a California case.
“Arizona’s family law statutes are not so broad,” he concluded
JUSTIFIABLE RELIANCE
SUBJECTIVE INTENT TO HARM
Carrillo v. Su, No. 01-55656 (9th Cir. May 20, 2002) In determining nondischargeability of a debt under 11 U.S.C. section 523(a)(6), the proper inquiry is whether the injury underlying the judgment involved either a subjective intent to harm, or a subjective belief that harm was substantially certain.
CRIMINAL RESTITUTION DISCHARGEABLE?
In re Wilson, __ B.R. __ (E.D.Va. 2003) (E.D.Va 2003) Debtor, who disposed of a motor vehicle that was subject to a lien, was charged with a felony under Virginia law. Prior to debtor’s trial on this charge, he entered into a plea agreement under which he pled guilty to the misdemeanor crime of fraud as an accessory after the fact. The Richmond Circuit Court found debtor guilty and additionally entered an order on April 30, 2002, requiring debtor to pay criminal restitution to plaintiff.
Plaintiff, a secured creditor, objected to discharge. The Court looked at split in authority on this issue, and opted for the plain language of the Bankruptcy Code, which makes restitution “payable to or for the benefit of a governmental unit” is nondischargeable.
Note: while criminal restitution is non-dischargeable under section 523, it is not one of the listed priority debts in section 507 (the same problem as with educational loans). Therefore, any attempt to pay that unsecured debt in full in the plan without the same percentage payback to other unsecured creditors would likely cause the trustee to object. Instead, try to get the agency to whom the restitution is owed to agree to a long term payback of the restitution–longer than the Ch 13 plan’s duration. Then, using section 1322(b)(5), pay the restitution outside the plan as a budget expense.
NO REQUIREMENT FOR PRE-PETITION JUDGMENT
Banks v. Gill Distribution CTRS., Inc. (08/15/01 – No. 00-55339) (9th Cir. Ct App) A valid state law claim need not be reduced to a pre-petition judgment to be nondischargeable in bankruptcy.
WILLFUL AND MALICIOUS INJURY
Peklar v. Ikerd (08/09/01 – No. 00-55464) (9th Cir. Ct App) A California state civil court judgment for conversion may be discharged in bankruptcy because it does not involve “willful and malicious injury” under 11 USC 523(a)(6).
Baldwin v. Kilpatrick (05/09/01 – No. 00-15332) Under 11 USC 523(a)(6), a prior state court proceeding that granted default judgment in a battery lawsuit that was previously arbitrated will have preclusive effect on whether judgment is nondischargeable as a “willful and malicious injury”. Default judgment entered in lower court acts as collateral estoppel and granted Movant’s summary judgment in Movant’s nondischargeability action (plaintiff in superior court case).
NOTE: Most Complaints objecting to dischargeability of a debt includes 523(a)(6) include a “catchall” count. Regarding intent and how to prove it, the best advice is to use Kawaauhau v. Geiger, 523 U.S. 57, 140 L.Ed.2d 90, 118 S.Ct. 974 (1998) as your guide. The Supreme Court held that the actor needed to be aware that the conduct was not only wrongful, but also would necessarily cause the injury in question to rise to the “willful and malicious” standard. Since Geiger, most courts have used a subjective approach to determine the intention required for “willfulness.” In re Moore, 357 F.3d 1125 (10th Cir. 2004); In re Su, 290 F.3d 1140 (9th Cir. 2002); In re Markowitz, 190 F.3d 455 (6th Cir. 1999).
A recent article addressed the general issue of discharging debts in bankruptcy and various grounds for excepting debts from discharge in Chapter 7. This article focuses on the discharge exception for debts arising out of willful and malicious injuries by the debtor. The United States Court of Appeals for the Fourth Circuit recently reiterated in TKC Aerospace Inc. v. Muhs that such debts may be dischargeable it the debtor did not intend to cause injury.
UNTIMELY COMPLAINT OBJECTING TO DISCHARGE
Markus v. Gschwend (12/17/02 – No. 01-17279) (9th Cir Ct App) An untimely complaint objecting to discharge of a judgment creditor did not relate-back to a timely motion objecting to debtor’s discharge, and that motion did not comply with the pleading requirements under Bankruptcy Rule 7008(a) or FRCP 8(a). Litigation expenses cannot be shifted when sanctions are imposed under Bankruptcy Rule 9011, on the court’s initiative.
NO NEED TO REOPEN TO FILE NONDISCHARGEABILITY COMPLAINT
Staffer v. Predovich, No. 01-56093 (9th Cir. September 27, 2002) A separate motion to reopen is not necessary when commencing an action for nondischargeability of a debt under Bankruptcy Rule 4007(b). Moving party may simply file a nondischargeability complaint.
DOCTRINE OF LACHES AND NONDISCHARGEABLITY COMPLAINT
Beaty v. Selinger, No. 01-56576 (9th Cir. September 26, 2002) The doctrine of laches may apply as an affirmative defense to nondischargeability complaints brought under 11 U.S.C. section 523(a)(3)(B), where defendant shows extraordinary circumstances and sets forth a compelling reason why the action should be barred.
ISSUES LITIGATED IN STATE COURT
Diamond v. Kolcum, No. 00-16280 (9th Cir. April 04, 2002) Defendants are entitled to a declaration of discharge-ability under 11 U.S.C. section 523(a)(2)(A) and (a)(6) because the state court judgment to which they asked the bankruptcy court to give preclusive effect necessarily implicated issues identical to those implicated in the nondischargeability proceeding, and those issues were therefore actually litigated in the state court proceeding.
DISCHARGE OVER PAYMENT OF SSA or OTHER BENEFITS - INCLUDING UNEMPLOYMENT
Filing a bankruptcy can discharge the overpayment of SSA or insurance benefits, unless there is fraud. SSA or the insurance company has the burden to prove that the recipient committed fraud or misrepresentation in obtaining the benefit, but rarely does so.
However, although the person’s personal liability to the overpayment is discharged, depending on if it is the SSA or insurance and whether or not there is a right to continue to receive such benefits, the ability for “recoupment” may become an option. Recoupment is an “equitable defense” theory that is excluded from the limitations of the bankruptcy laws. As a result the payor has the right to off-set the amount owed from any new benefits received.
The right of recoupment does not apply to overpayments of SSA funds, therefore the recipient will continue to receive the regular payment.
There is a difference result if the overpayment was made by a long-term disability insurance policy. In that case the insurance company has a right to “recoup/off-set” the amount that was overpaid from on-going future payments. End result – the insured is no longer personally liable as a result of the discharge, but the insurance company can off-set the overpayment from future benefits.
In re DeLotto, 2015 Bankr. LEXIS 3846 (Bankr. D.R.I. November 9, 2015) Reduction of Social Security disability benefits to reimburse overpayments did not violate the automatic stay. Conclusion: Liberty Life’s post-petition reduction of Mr. DeLotto’s benefits to recover its pre-petition overpayment in accordance with the Policy terms constitutes permissible recoupment that is an exception to the automatic stay.
In re Terry, No. 08-43123, Adv. No. 09-3031 (Bankr. W.D. Mo 2010) (affirming In re Caldwell, theory of recoupment applies to long-term disability)
In re Beaumont, No. 09-7006 (10th Cir. 2009) (Theory of recoupment does apply to VA overpayment)
In re Caldwell, 350 B.R. 182 (Bankr. E.D. Pa. 2006)(distinguishing Lee v. Schweiker, 739 F.2d 870 (3d. Cir. 1984))(SSA is a govern by a “social welfare” statute that is an “entitlement” compared to the case in hand where the benefit is governed by a “contract” between the parties”)) (note – pre-BAPCPA)
Kozlowski v. Michigan Unemployment Insurance Agency Dockets: 16-2680, 16-2383 (US Court of Appeals for the Sixth Circuit, May 29, 2018)
Two individuals obtained unemployment benefits from the Michigan Unemployment Insurance Agency to which they were not entitled because they were being paid wages. Each was ordered to pay restitution and a penalty; each subsequently filed for Chapter 13 bankruptcy. The debtors argued that the penalties assessed were dischargeable in a Chapter 13 bankruptcy. Each district court disagreed. The Sixth Circuit affirmed, finding the penalties nondischargeable under 11 U.S.C. 523(a)(2). That section reflects a congressional decision that those who commit fraud are not to be given the same “fresh start” as “honest but unfortunate debtor[s].” A finding that the debt here arises from fraud perpetrated against the Agency makes section 523(a)(2) applicable, regardless of whether the debt could also fit under section 523(a)(7), which applies to government penalties.
COLLATERAL ESTOPPEL PRINCIPLES
The Supreme Court held that “collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to §523(a).” Grogan v. Garner, 498 U.S. 279, 285 fn. 11, 111 S.Ct. 654 (1991). In the Ninth Circuit, collateral estoppel principles are applied in nondischargeability litigation to the extent that they would apply were the litigation being held in a court of the state where the original judgment was entered. In re Nourbakhsh, 67 F.3d 798, 800 (9th Cir. 1995), citing, Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380 (1985) This is true, in the Ninth Circuit, even in default cases. Nourbaksh, supra, 67 F.3d at 800.
It appears that most states find collateral estoppel should be applied where (1) there is indentity of the parties, (2) the issues are identical, and (3) the matter has been litigated to final conclusion. See, e.g., Trucking Employees of North Jersey Welfare Fund, Inc. v. Romano, 450 So.2d 843, 845 (Fla. 1984); Mobil Oil Corp. v. Shevin, 354 So.2d 372, 374 (Fla. 1977). Other states sometimes add that the issue must be “necessarily” decided in the prior litigation, and also be “decisive.” See, e.g., Buechel v. Bain, 97 N.Y.2d 295, 303, 740 N.Y.S.2d 252, 766 N.E.2d 914 (2001).
Griffin v. Wardrobe, No. 07-16635 U.S. 9th Circuit Court of Appeals, March 16, 2009
In an action to declare a state judgment for fraud non-dischargeable in bankruptcy, summary judgment for Plaintiff is reversed, where the state court improperly allowed Plaintiff to amend her complaint in violation of the automatic stay under the Bankruptcy Code. The stay had been lifted for the sole purpose of the Movant pursuing the Debtor’s bond.
Lockerby v. Sierra, No. 06-15928 U.S. 9th Circuit Court of Appeals, August 07, 2008
In the bankruptcy context, an intentional breach of contract cannot give rise to nondischargeability under 11 U.S.C. section 523(a)(6) unless it is accompanied by conduct that constitutes a tort under state law.
CHAPTER 13 - CREDITOR WITH NONDISCHARGEABLE DEBT and COLLECTING INTEREST
In re Foster, ___ F.3d ___ (9th Cir. 2003) – Feb. 8, 2003 Debtor’s chapter 13 plan provided for full payment of delinquent non-dischargeable child support. Debtor completed the plan and was granted a discharge. Subsequently, Ventura County District Attorney went after debtor for the accumulated interest that was not paid through the plan. Held, plan could not provide for payment of interest, and creditor could collect unpaid interest following discharge. This is the majority rule.
A claim for post-petition interest on a debt not dischargeable in Chapter 13 under 11 U.S.C. § 1328(a) is not part of the bankruptcy estate because such unmatured interest was not part of the debt as of the date of filing the petition. Thus, a creditor cannot insist on interest being paid through the plan. And, the Code does not explicitly prohibit collection of post-petition interest after a debtor completes a confirmed chapter 13 plan.
CAN ONE SPOUSE BE LIABLE FOR THE OTHER SPOUSE’S ACTIONS?
Question: If a creditor files a non-dischargeability complaint against a debtor couple under 523(a)(2),(4),(6), but only the husband-debtor’s alleged wrongful conduct is at issue (the wife-debtor had nothing to do with the debt), can you dismiss the non-dischargeability complaint with respect to the wife? Or does the wife still inherit liability from the husband’s potential fraud because of community property laws?
Answers: “The Arizona rule is that the community is liable for the intentional torts of either spouse if the tortious act was committed with the intent to benefit the community, regardless of whether in fact the community receives any benefit” Selby v. Savard, 134 Ariz. 222, 655 P.2d (1982). Cited by J. Nielsen in In re LeSueur, 53 B.R. 414 (1985) and J. Case In re Oliphant, 221 B.R. 506 (1998). See also In re Rollinson, 322 B.R. 879 (2004) issued by Judge Haines.
Fraud cannot be imputed to an individual spouse based on a theory of community liability. See In re LeSueur, 53 B.R. 414 (1985). Rather, fraudulent conduct must be shown from an individual’s actions for the debt to be rendered non-dischargeable as to that individual. Id. In LeSueur, the court stated:
Fraud for purposes of a bankruptcy dischargeability complaint cannot be imputed to a spouse based on a theory of Arizona community property law. In re Norton, 34 B.R. 666, 668 (Bankr.Ariz.1983); In re Bursh, 14 B.R. 702, 705-06 (Bankr.Ariz.1981) (dismissing complaint and cause of action as to spouse).
…
“(F)raud, which is never presumed, was not shown as to her.” Id, citing Matter of Benedict, 15 B.R. 671, 675 (Bankr.W.D.Mo.1981) (finding fraud as to husband, dismissing as to wife); Matter of Curry, 12 B.R. 421, 424-25 (Bankr. M.D. Fla.1981).
…
In re LeSueur, 53 B.R. at 415.
A nondischargeability judgment should only be entered against a marital community’s community property where the evidence presented proves that both the husband and wife were involved in the transactions or occurences which lead to the nondischargeability judgment. See In re Clark, 179 B.R. 898, 902 (Bankr.D.Ariz. 1995); see also In re Bursh, 14 B.R. 702 (Bankr.D.Ariz 1981) (granting summary judgment where there was no evidence that wife participated in or had knowledge of husband’s fraud); In re Norton, 34 B.R. 666 (Bankr.D.Ariz. 1983) (dismissing nondischargeability complaint as to wife in absence of showing that she made misrepresentations to plaintiff).
In Clark, the court found that no evidence was presented to demonstrate that the wife took part in the acts which gave rise to the nondischargeability complaint. In re Clark, 179 B.R. at 902. Accordingly, the court found that the wife was an innocent spouse and that the debtors’ community property was not liable for the nondischargeabilty judgment entered against the husband. Id.
The Ninth Circuit has held that the proper test is a partnership or business relationship, not a spousal relationship. See In re Tsurukawa I, 258 B.R. 192, 198 (9th Cir. BAP 2001) (“we hold that a marital union alone, without a finding of a partnership or other agency relationship between spouses, cannot serve as a basis for imputing fraud from one spouse to the other.”); see also In re Carbray, 2006 WL 2559849 (Bankr.D.Ariz. 2006) (“Where no agency relationship exists, courts do not generally impute the wrongdoing of one spouse to an ‘innocent’ spouse in holding a debt nondischargeable. The marital status alone does not create an agency relationship.”).
BREACH OF CONTRACT
Daily v. Garrett EC-16-1265-HKuB (9th Circuit, Aug 24,2018)
FACTS: Chapter 71 debtor Garrett agreed to build a new home for Plaintiffs Daily, and executed a written agreement with Garrett who began building Dailys’ home but did not complete the home, and Dailys sued for breach of contract, negligence and fraud. Dailys filed an adversary under § 523(a)(2)(A), alleging that Garrett induced them to enter the agreement with a series of false and fraudulent representations. RULING:Ninth Circuit BAP affirmed order from bankruptcy court finding Plaintiffs did not prove a claim under § 523(a)(2)(A) when they failed to provide evidence supporting allegations that the Debtor made a misrepresentation, fraudulent omission, or engaged in deceptive conduct. Evidence only showed Plaintiffs may have had a breach of contract action, but nothing more.
ATTORNEY SANCTIONS - NONDISCHARGEABLE
In re Albert-Sheridan BAP No. CC-18-1222-LSF (9th Circuit, Apr 11, 2019) Not Published
Ruling : Debtor’s sanctions and costs ordered paid by the California Supreme Court as a condition of reinstatement of her law license were nondischargeable.
Discovery sanctions to be paid as part of state bar disciplinary proceedings are nondischargeable under Section 523(a)(7), even though the debtor-attorney was directed to pay the sanctions to the adversary, according to the Ninth Circuit Bankruptcy Appellate Panel.
The BAP also ruled that costs incurred by the state bar are similarly nondischargeable.
